The Economics of Ignorance and Coordination Subjectivism and the Austrian School of Economics Thierry Aimar Assistant Professor of Economics, Sciences Po Paris, University of Nancy 2 and Paris 1 Pantheon-Sorbonne, France and ESSEC Business School, France NEW THINKING IN POLITICAL ECONOMY Edward Elgar Cheltenham, UK Northampton, MA, USA
Contents General Introduction xi PART 1: FOUNDATIONS Introduction 1. Mises and the Austrian Tradition 1 1.1 1.2 2 2.1 2.2 2.3 3 3.1 3.2 Positivism and Historicism: Specificity of the Social Field The Vienna Circle and the Positivist Theories: A Critical View The Refusal of Epistemological Relativism: Opposition to Historicism Analysis of the Social Field: Theory and History Apriorism, the Foundation of Theory History, Field of Understanding Practical Complementarity, Epistemological Subordination Mises and His Predecessors: Contentions and Continuities Fidelity to a Methodological Approach An Epistemological Rift 3 5 5 6 9 10 11 12 13 15 16 18 2. Praxeology, Axiomatic System of Economics 25 1 1.1 1.2 1.3 2 2.1 2.2 3 3.1 3.2 3.3 The Praxeological Model's Structure Characters Conditions Implications Praxeological Subjectivism The Reign of Wertfreiheit The Rationality of Human Action Praxeology and Psychology Preference and Indifference Action, Creator of Preference The Tendency Towards Equilibrium: A Praxeological Definition 25 26 27 28 29 29 31 32 32 33 34
vi The Economics of Ignorance and Coordination 3. Action and Interpersonal Exchange: The Limits of the A Priori Approach 41 1 Varying Forms of Interpersonal Exchange: From Barter to Money 41 1.1 Barter, a Product of Theory and History 42 1.2 Indirect Exchange, the Money Price Generator 43 2 Epistemological Problems with Market Exchange 46 2.1 The Question of Subsidiary Hypotheses: The Constraints of Ignorance 46 2.2 What Theoretical Bases for Market Economics? 49 PART 2: CATALLAXY, A RESPONSE TO IGNORANCE Introduction 57 4. Market Formation 59 1 The Sensory Order: Hayek's Contribution 60 1.1 The Mind as Classifying Structure 61 1.2 Psychological Foundations of Subjectivity 61 2 Market and Society 62 2.1 The Map and the Model: The Role of Pre-Sensory Experience 62 2.2 Cultural Representations 64 3 Prolegomena and Prolongations 65 3.1 Ideal Types: Hayek, Schiitz and the Austrian Tradition 66 3.2 Abstract Rules and Spontaneous Order 68 5. A World of Discovery 73 1 Markets, Equilibrium and Disequilibrium 73 1.1 Information Is Not the Same as Knowledge 73 1.2 Disequilibrium Prices 74 1.3 Ignorance, Errors and Processes 76 2 The Entrepreneur-Promoter 78 2.1 From the Praxeological Entrepreneur to the Market Promoter 78 2.2 Alertness as Ability of Perception 79 2.3 The Nature of Learning 81 2.4 From Ignorance to Knowledge: The Role of Profit 84 3 The Institutional Dimension of Entrepreneurship 87 3.1 Competition as a Discovery Process 88 3.2 Free Entry Competition 91 3.3 The'Increment of Freedom' 92 3.4 The Myth of Social Justice 94
Contents vii 6. Tendency towards Equilibrium 103 1 Analytical Framework 104 1.1 Statics and Dynamics 104 1.2 'Exogenous Changes'and Entrepreneurship 104 1.3 'Equilibration'and Periods 105 2 Forming Expectations 107 2.1 Speculation and Understanding 108 2.2 The Contribution of Cognitive Psychology 111 2.3 The Subjectivism of Expectations 113 3 Succeeding In Expectations 118 3.1 The Entrepreneur as Creator of the Future 118 3.2 Austrian Economics of the Firm 123 3.3 The Hayekian View: Spontaneous Orders as Pattern Predictions 128 3.4 Plans and Prices 133 PART 3: APPLICATIONS AND DEBATES Introduction 151 7. The Debate on Collectivism 153 1 The'Irrationality'of Collectivism 155 1.1 Monetary Calculation 155 1.2 The'Chaos'of Collectivism 156 1.3 A Procedural Conception of Economic Systems 158 2 Neo-Austrian Theory versus General Economic Equilibrium 158 2.1 The Quantity of Information 159 2.2 The Change in Information 162 2.3 Computing And Mathematics: Linear Programming 167 3 The Nature of Knowledge 169 3.1 Tacit Knowledge 169 3.2 Incentives 170 3.3 Institutions 173 4 An Alternative Reading: The Rothbard Argument 175 4.1 Knowledge and Calculation 176 4.2 The Systemic Impossibility of Centralized Economic Calculation 178
viii The Economics of Ignorance and Coordination 8. Austrian Theory of the Business Cycle 187 1 First Steps of the Approach ^ 188 1.1 Capital as Structure, Roundabout ProductibrTProcesses 188 1.2 The Two Interest Rates 192 2 The Monetary Logic of the Cycle 196 2.1 A Monetary Mirage: The Boom 197 2.2 The Constraint of Subjectivism: The Crisis 199 3 Monetary Stability: A Default Solution 202 3.1 Monetary Neutrality and its Limits 202 3.2 From Gold Standard to Private Currencies 203 4 The Great Debates 207 4.1 Savings, Investment and Money: The Hayek Keynes Collision 207 4.2 'Equilibrium'and'Equilibriums': Hicks'Critique 209 4.3 Real Economies versus Monetary Economies: The Hayek-Sraffa Debate 212 9. Welfare Economics: Workable Definitions 219 1 The Market and Satisfaction: A Procedural Approach to Welfare 220 1.1 Exchange Producing ' Social Utility' 221 1.2 The Kirzner Alternative: Coordination as Process 222 1.3 Private Property as a Condition of Forming Plans: 'Catallactic Efficiency' 225 2 Neo-Austrian Welfare Economics and Normativity 227 2.1 The Argument of 'Demonstrated Preference' 227 2.2 From Wertfreiheit to Free Market Normativity 228 2.3 The Pre-eminence of Value Judgements 3 An Open Question: The Argument of Survival 233 3.1 Survival and Coordination 233 3.2 A Praxeological View of the Survival-Normativity Relation 237 3.3 Unprescribed Normativity 241
Contents ix Appendix: Schumpeter and the Austrian Tradition 247 General Conclusion 255 Bibliography 257 Analytical Index 291 Index of Names 299