Adam Smith: Proto-Austrian?
| Peter Klein |
Austrian economists have mixed views on Adam Smith and classical economics. Mises and Hayek admired Smith as a social theorist and system builder while rejecting much of his technical apparatus, especially the labor theory of value. Menger taught Smithian political economy to his most famous pupil, Crown Prince Rudolf. Rothbard considered Smith grossly overrated. More generally, Austrian economists have tended to distance themselves as much from the classical system as from its neoclassical descendant. (Kirzner’s review of George Reisman’s Capitalism, which tries to synthesize Austrian and Ricardian economics, is worth reading in this regard.)
A new paper by Michael Bradley argues that the distinction between classical and Austrian analysis is overdrawn, at least with regard to competition theory.
In “Adam Smith’s System of Natural Liberty: Competition, Contestability and Market Process” Bradley characterizes Smith’s system of “perfect liberty” as an ancestor of the Austrian model of the competitive market process, not the neoclassical model of perfect competition. “[F]or the classical economists from Smith to Cairnes, the only explicit properties of ‘perfect liberty’ are resource mobility and freedom of entry and exit. The other assumed properties of perfect competition [perfectly elastic demand and supply curves, complete and perfect information, identical products, etc.] are either implicit in, or absent from the classical literature.” In short:
Perfect liberty is implicit in the Austrians’ emphasis on the freedom of capitalists and entrepreneurs to reallocate resources in response to new information and changes in the economic information on which they base their choices. Mises’ arguments that the freedom of entrepreneurs to compete with and undersell each other, and their goal to earn the most they can from their resources, will eliminate excess profit and drive price toward average cost and profit toward zero. It doesn’t generate equilibrium by solving demand and supply equations, but it captures the essence of the kind of competition implied by the classical economists, as well as Marshall and the early neoclassical economists.
I think this characterization of Mises’s understanding of competition glosses over some important distinctions between Mises and later “market-process” theorists, but the overall point is well taken. Incidentally, the best general history of competition theory remains, as far as I know, Frank Machovec’s Perfect Competition and the Transformation of Economics (Routledge, 1995), which should be on every economist’s bookshelf.