Posted by David in Economics, Politics, Reflections, The Social Sciences.
Tags: Jerry Z. Muller, Schumpeter
If Schumpeter should be summed up with one adjective, “creative” is the most suitable one. And this is why he ranks higher than Kirzner in my view. While Kirzner is by-and-large right about most things, his creativity is more incremental and his interests more limited. Schumpeter, on the other hand, was wrong about a lot of things, although sometimes it is difficult to tell whether he was just plain wrong or if he drew erroneous conclusions for ironic purposes.
I think that what most characterizes creative people is their ability to combine apparently distant ideas, theories, or approaches. Schumpeter was a master of such creative combinations. If one looks at his two most famous works-The Theory of Economic Development and Capitalism, Socialism, and Democracy – it is clear that there are four recurring components that are combined in different proportions in Schumpeter’s thinking: dynamic Austrian economics; Walrasian equilibria; Nietzschean notions of ubermenschen; and Weberian sociology. To this stew, Schumpeter added his own brands of ironic pessimism.
Needless to say, I’m skeptical – to say the least – about some of these components. But all are actually needed to produce a coherent theory. Without entrepreneurial heroes, it is difficult to see how the “circular flow” can be rescued from the destruction of a continuous swarm of local entrepreneurs; it is also difficult to see how anything approaching equilibrium can ever be approximated in an industrialized economic system. Likewise, the supposed “efficiency” of bureaucratic, large-scale entrepreneurship depends on the existence of a superior class of innovating supermen who can be put in charge of corporate decision-making.
But even though I don’t believe in supermen or circular states (in a post-agricultural economy) or share the Weberian faith in bureaucracy, I still think that Schumpeter’s contributions represented real progress. He was the first one to give us a coherent theory of entrepreneurship, where entrepreneurs are (correctly) understood as the creative-destructive agents that cause economic development and introduce innovations into the economy. The theory is both evolutionary and based on the implicit recognition that individuals have to interpret economic data; they are not simply given as unambiguous and universally recognized bits of information. Indeed, it is Schumpeter’s focus on innovation and suboptimal equilibria – rather than arbitrage and optimal equilibria – that makes his theory more satisfying than Kirzner’s later attempt, in spite of also having more blatant shortcomings.
Another fascinating aspect of Schumpeter’s writings is that he reveals himself both as a conservative and as a pessimist. His most well-known conclusion is that socialism is inevitable. But unlike socialists with this belief, Schumpeter thought that the inevitability of socialism is as inspiring as the inevitability of death. The historian Jerry Z. Muller (The Mind and the Market , 2002, p. 294) points to Pareto’s influence on Schumpeter:
“In attempting to account for the appeal of socialism, Schumpeter … borrowed from … Pareto. Pareto’s 1901 essay … conveys two themes to which Schumpeter would return time and time again: the inevitability of elites, and the importance of nonrational and nonlogical drives in explaining social action. Pareto suggested that the victory of socialism was “most probable and almost inevitable.” Yet he predicted [that] the reality of elites would not change. It was almost impossible to convince socialists of the fallacy of their doctrine … since they were enthusiasts of a substitute religion. In such circumstances, arguments are invented to justify actions that were arrived at before the facts were examined, motivated by nonrational drives.”
Schumpeter considered the capitalist system superior to its alternatives, as Muller (2002, p. 306) also explains:
“Schumpeter was skeptical of … antitrust … What those who criticized monopoly in the name of free competition failed to understand was that it was in the very nature of dynamic capitalism to produce high, “monopoly” profits for those who were the first to innovate successfully, [thus] large firms had to continue to innovate or face decline …. the interpretation of the Depression by intellectuals had led to a “radicalization” of the public mind in the United States, which in turn had resulted in policies that left capitalism in shackles.”
A very interesting assertion of Schumpeter’s was that even if the proponents of capitalism manage to succesfully defend capitalism against one of the charges raised against it – for example that decentralized planning is less efficient than central planning – it is inevitable that the critics will find some other argument that becomes as important as the refuted argument had been previously. According to Schumpeter, the fact remains that intellectuals and many others do not like capitalism on the basis of their unexamined and irrational subjective judgments.
Although I am not as pessimistic as Schumpeter, I think we can now agree that he was prescient about the difficulties faced by the defenders of free markets. There is now a general agreement that markets work better than Soviet-style central planning. But there is no shortage of people who (erroneously, in my view) believe that the current financial crisis was caused by free markets rather than government regulations and subsidies, and an even greater number of people who think that markets are bad for the environment (in spite of the positive correlation between air/water pollution and the absence of clearly defined private property rights).
Posted by David in Economics.
Tags: Brian Loasby, Hayek, Israel Kirzner, Lachmann, North, Oliver Williamson, Schumpeter
This semester I’m leading a seminar course on institutional, economic, and social change. One of the topics that we’re covering is entrepreneurship. Last week the theme was Schumpeter’s Theory of Economic Development and this week it’s Kirzner’s turn.
Our seminar format is for one of the students to give a two-hour interactive “lecture” on the relevant book, followed by a discussion led by one of the other students. The lecturing student also has to write a 20-page term paper that consists of a summary and a critique, if possible with references to related papers in the literature. For example, the term paper on Schumpeter (by Vincent Bata) referred to papers by Geoffrey Hodgson, Ulrich Witt, Murray Rothbard, and Michio Morishima.
Tomorrow it’s Nolan Boulanger’s turn, who will be presenting Kirzner’s theory of entrepreneurship. Reading his term paper gave me a feeling of déjà vu, in that Nolan’s reaction to Kirzner is very similar to my first reaction, that is, a very positive assessment. Since I have been criticizing certain aspects of Kirzner’s theory lately – especially his asset neutrality assumption and the lack of genuine Knightian uncertainty in the theory - it was good to be reminded of how much more interesting the theory is than sterile depictions of equilibrium states. And indeed, I still think that had mainstream economists integrated Kirznerian theory as the out-of-equilibrium part of mainstream theory, then the resulting fusion would have represented a major improvement, with Kirzner as the key theorist rather than Walras.
So my partial disillusionment with Kirzner should not blot out his achievement. And, yes, I think Kirzner is more deserving of the big Swedish prize than most laureates to date, and especially compared with the 2008 one (the ones I have personally benefited from reading are Hayek, Coase, Buchanan, North, V. Smith, Schelling, and Sen; Kirzner belongs in that same category).
So my disagreements with Kirzner’s conceptualization of the entrepreneur are diametrically opposed to mainstream criticisms of Austrian economics; I’m no Sherwin Rosen. The problem as I see it is that Kirzner only goes part of the way in rejecting artificial general equilibrium constructs and rational expectation assumptions. True, he does not start out with a “circular flow” and he does not assume that entrepreneurship is the prerogative of a small innovative minority. That is indeed one of the strengths of the theory. But the impossibility of unchanging knowledge in a dynamic economy is something that Kirzner simply assumes away. Now, if unchanging knowledge is an impossibility, then the assumption of unchanging technology, preferences, and resources during the process of innovative or speculative entrepreneurial equilibration turns the theory into a rather artificial construct; not as artificial as Walrasian equilibrium theory, but still counterfactual in relation to real-world market processes.
In many ways Kirzner reminds me of some new institutional economists: a big improvement on mainstream theory, but still curiously attached to some of its rather unhelpful assumptions. Oliver Williamson is a good example of an NIE economist in a “Kirznerian” position vis-a-vis the mainstream. So while Austrian and new institutional economics in my opinion amount to the two most productive and fascinating research programs in economics, many of the associated economists still cling to a greater chunk of their shared neoclassical heritage than seems to make sense to me when I attempt to play the role of “impartial external observer.”
I’m however not implying that I mostly prefer self-described heterodox economists. A smaller chunk of neoclassicism does not equal a non-existing chunk. We still need to think about changes at the margin. It is still useful to assume profit-seeking producers and utility-seeking consumers. Imperfect rationality is still a more useful tool than complete irrationality. And so forth. It’s a balancing act at which very few economists have been entirely successful. Hayek and North spring to mind, but only after they had reached normal retirement age. Definitely Loasby, but unfortunately he has been better at discussing the work of others than at developing anything as substantial as Kirzner’s theory. Lachmann is also an obvious candidate, but unfortunately he didn’t write as much as one could have hoped for — and he had the problem of clinging to the methodological individualism prescription at least as desperately as the others have clung to the equilibrium construct. It’s no doubt difficult to find — and keep — an approproiate balance between Occam’s razor, conceptual clarity, and open-ended complexity.
Posted by David in The Social Sciences.
Tags: Hayek, Schumpeter
While this is an era of increasing specialization, I believe that there are dangers to specialization at any level of sophistication. These dangers were first noted in Adam Smith’s discussion of factory production, but they would seem to apply equally to the scientist and scholar who specializes in a specific sub-field of a sub-discipline. The danger is that she loses sight of the big picture while knowing everything about almost nothing. Of course there is also the opposite danger; generalists who never more than scratch the surface of any problem. Most journalists and politicians would seem to illustrate the dangers of generalism, but then again journalists specialize in word manipulation and lots of politicians specialize in manipulating the electorate (especially here in Taiwan). The right balance between specialization and general or interdisciplinary knowledge is a difficult one to strike.
I sometimes say that I like eclectic approaches or a fusion of ideas from different sources. In economics, Joseph Schumpeter, Frank Knight, and Friedrich Hayek are examples of great synthesizers of ideas. But note that all of them also mastered two or more specialized research programs. For example, Schumpeter studied both Mengerian and Walrasian economics, while Hayek delved into Austrian economics, cognitive psychology, and evolutionary theory. So finding the right balance is not only a question of “input proportions,” it is also a question of devoting a lot of time to intellectual pursuits and having less time for the recreational pleasures that most relatively affluent people take for granted. And so a narrow specialization may be the logical choice for those who want to support a conventional lifestyle.
A compensating feature of reading both widely and narrowly is that knowledge often builds upon itself in a way that both enhances productivity and learning-as-consumption. The more you read in a field, the more you enjoy it, as the finer points become increasingly comprehensible. This is something I have discovered in my middle age, and which sometimes makes me regret how much time I wasted on dead-end activities in my past, and especially in my twenties and early thirties (such regret is of course completely futile). Also, more than one “reading plan” may – if you’re lucky – enable you to discover connections that are not at all obvious to specialists in the narrow sense of the word.
The good thing about all this is that aging is by-and-large a positive experience for the aspiring scholar or scientist. There is no limit to what you may still learn, and there may be a series of delightful and surprising discoveries waiting for you. Your hypotheses and explicit or implicit theories may in the end be heading in the wrong direction, but it is still likely that you will have picked up a lot of understanding and useful insights along the way.
