Posts filed under ‘Austrian Economics’
Opportunities and Entrepreneurship Research: A Critique
| Peter Klein |
The notion of economic “opportunities,” and their discovery or creation, is one of the core concepts of contemporary entrepreneurship research. But the use of opportunities as the unit of analysis poses several problems. The opportunity-discovery or opportunity-recognition perspective tends to treat economic opportunities as objective phenomena, while, under Knightian uncertainty, profit opportunities are always subjective, existing only in the imagination of economic actors. In an alternative view that Nicolai and I have elaborated in several papers, entrepreneurship is best understood not as perception, but as action, the investment of resources under uncertainty in anticipation of uncertain rewards.
In a new paper, “Opportunity Discovery, Entrepreneurial Action, and Economic Organization,” I critique the opportunity-discovery perspective in more detail. In particular, I argue that the literature has misunderstood Israel Kirzner’s concept of “discovery,” the theoretical basis of much of the research on opportunity discovery. Kirzner’s explanandum is not entrepreneurship per se, but equilibration. He invokes the entrepreneur, and his “alertness” to exogenously determined profit opportunities, as a metaphor, to explain the tendency of markets to clear. It is not meant as a positive account of the entrepreneurial function, but rather an instrumental explanation of the market process. Hence a research program based on operationalizing “opportunities,” exploring thow they can be “discovered without search,” and so on, is unlikely to bear fruit.
The paper is forthcoming in the Strategic Entrepreneurship Journal. Comments welcome. Abstract below the fold. (more…)
V for von Mises
| Dick Langlois |
My Father’s Day present this year was something unusual: issue number 11 (Winter 1998) of something called The Batman Chronicles. (My sons are both into comics and graphic novels, though it was apparently my wife who stumbled onto this on the web.) The issue is a slim comic book featuring “The Berlin Batman,” wherein the story of Batman is reimagined as having taken place in pre-war Nazi Germany. The hero is Baruch Wane, wealthy Jewish socialite and decadent cubist painter, who becomes Batman by night after his parents are killed not by a robber but by anti-Semitic violence. His mission, of course, is to fight the tyranny of Nazism, which in this issue involves — and here’s the punch line — trying (in the end without success) to save the papers of Ludwig von Mises, which have been confiscated by the Nazis. The episode goes into great detail about why the work of von Mises was a threat to the Nazis and to authoritarians of all stripe.
This comic may be old news to many readers, but I found it amusing. The author, Paul Pope, is apparently well respected in comics/graphic novel circles for, among other things, a more elaborate reimagining of Batman in a totalitarian future.
Sudha R. Shenoy (1943-2008)
| Peter Klein |
I’m saddened to report the death yesterday of Sudha Shenoy, the distinguished Australian economic historian and important contributor to the “Austrian revival” of the 1970s. Her father, the eminent Indian economist B. R. Shenoy, was a student at the London School of Economics in the 1930s when Hayek gave his famous “Prices and Production” lectures and both father and daughter were deeply influenced by Hayek. Sudha too studied at the LSE and eventually took a position at the University of Newcastle, where she taught until her retirement in 2004. Sudha was writing a book on Hayek and would have given a week-long lecture series on Hayek at the Mises Institute this fall. Here is a 2003 interview, here are some audios and videos, and here are some materials collected by Google Scholar. Some obituaries and personal remembrances are here, here, and here.
Suhda was a regular reader and occasional commentator here at O&M. You can get a sense of her erudition from this blog post, one of our most popular, which was basically a cut-and-paste job from one of her emails.
Suhda was a quiet, kind, and gentle person. This may be hard for our younger American readers to comprehend but she didn’t know how to drive. I once had the pleasure of chauffeuring her around Auburn, Alabama at an Austrian Scholars Conference. Spending time with her was a real treat.
Turgot and What Might Have Been
| Peter Klein |
As a Francophile and Turgot enthusiast I direct you to Frédéric Sautet’s remarks on today’s anniversary of Turgot’s dismissal by the French crown:
May 12, 1776 was one of the saddest days for France. It was the day Louis XVI removed A.R.J. Turgot from office. Turgot was the Minister of Finance of France, the greatest French economist of the 18th century, and a key figure of the French enlightenment (he was a close friend of Condorcet, and Voltaire came to his rescue). He had a great sense of duty, freedom, and civilization. Turgot was too successful, so to speak, in his economic reforms and in the fiscal discipline he imposed on the finances of the French Crown. He fell because he wanted to go too far in the removal of confiscatory taxes (la taille and la corvée), the deregulation of commerce and industry, and the abolition of privileges many guilds and others possessed at the time (e.g. les droits féodaux). Turgot is perhaps the greatest reformer the world has ever seen. If Louis XVI had trusted his Minister of Finance to the end, it is likely that the French Revolution would not have taken place.
Note that Turgot even had his own castle. Ricardo was almost certainly wealthier, though. Böhm-Bawerk was also a fine Minister of Finance.
Hayek on Intellectuals
| Peter Klein |
It’s Hayek-Klein Day, and bloggers are sharing their favorite Hayek quotes (Boudreaux, Horwitz). Here’s one of mine:
The typical intellectual . . . need not possess special knowledge of anything in particular, nor need he even be particularly intelligent, to perform his role as intermediary in the spreading of ideas. What qualifies him for his job is the wide range of subjects on which he can readily talk and write, and a position or habits through which he becomes acquainted with new ideas sooner than those to whom he addresses himself.
That’s from “The Intellectuals and Socialism,” published in 1949. (See this for an elaboration of Hayek’s argument.) Substitute “blogger” for “intellectual” and the passage could have been written today!
2008 Kauffman Data Symposium
| Peter Klein |
Next Tuesday, 13 May, is the proposal deadline for the 2008 Kauffman Symposium on Entrepreneurship and Innovation Data. I participated in the 2007 version and got a lot out of it. This year’s event takes place in Washington, DC instead of Kauffman headquarters in Kansas City.
Documents from the 2007 symposium can be reviewed at SSRN.
A personal note: While driving to last year’s symposium I found myself on Kansas City’s Volker Boulevard, named for the great philanthropist William Volker, whose support was instrumental in the rebirth of Austrian economics in the US during the 1950s and 1960s. The Volker Fund paid all or part of the salaries of Mises at NYU and Hayek at Chicago and employed Murray Rothbard as a consultant, book reviewer, and talent scout while he was writing Man, Economy, and State and America’s Great Depression. Wikipedia has some background information on the Volker Fund; you can find more in Hülsmann’s Last Knight (pp. 867-68 and passim) and Brian Doherty’s Radicals for Capitalism (pp. 181-87 and passim). In Kansas City Volker is remembered as a generous philanthropist who supported schools and hospitals, developed a program for prison reform, and was a major benefactor of the University of Kansas City (now the University of Missouri – Kansas City).
It would be nice to have a full-scale Volker biography. Anybody up to the task? Volker’s company and foundation records are housed at UMKC. Herb Cournelle wrote a short biography in 1951, Mr. Anonymous: The Story of William Volker, but I haven’t been able to locate a copy.
The Sphere of Economic Calculation
| Peter Klein |
Today’s Weekend Article from the Mises Institute is “The Sphere of Economic Calculation,” an excerpt from chapter 12 of Mises’s Human Action. (Check out the super-cool graphic!) The article expands on Mises’s pathbreaking 1920 paper on the need for prices in any system that aims at a rational allocation of resources.
Mises’s theory of factor pricing and its role in cost accounting — what he calls the problem of “economic calculation” — is near and dear to my heart, having written one of my first published articles on the subject. It’s also received a bit of attention here at O&M (1, 2, 3, 4, 5).
Langlois Paper on the Theory of the Firm and Austrian Economics
| Nicolai Foss |
Former O&M guest blogger Dick Langlois is IMHO one of the most original thinkers in the field of economic organization. He is also one of the best writers in management and in economics. So I try to keep track of his writings and usually succeed. However, this paper, “The Austrian Theory of the Firm: Retrospect and Prospect,” written for a conference at the George Mason Law School last May, had escaped my attention until today.
Dick develops a number of related arguments. One is that Hayek (of the 1945 essay, “The Use of Knowledge in Society”) developed richer insights in economic organization than Coase. Moreover, by pointing out the importance of dispersed knowledge, the coordination problem this raises, and the importance of “change” for “economic problems,” Hayek anticipated the capabilities theory of the firm. In a parallel argument, Dick links his own work on the capabilities theory of the firm to Austrian capital theory (see also here and here). He ends by speculating on the future of Austrian arguments in the theory of the firm, noting various manifestations, particularly in strategic management, of these arguments (he notes that “Some work in this literature is close in spirit to my own, in some cases extremely close (Jacobides and Winter 2005)” — one agrees). Definitely worth a read!
Hayekian Knowledge Arguments: An Epistemic Fallacy?
| Nicolai Foss |
A small handful of papers have become highly influential in economics as well as in management and organization research. One such paper is Friedrich Hayek’s 1945 essay, “The Use of Knowledge in Society,” a paper that emerged in the context of the debate on the viability and efficiency of planned resource allocation on the societal level (i.e., socialism) that raged among academic economists in (particularly) the inter-war period. Hayek famously argued that planning confronts inherent knowledge-based constraints, and these constraints are certainly binding at a scale of activity that makes comprehensive overall management/planning of economy-wide resource allocation deeply inefficient. Many modern management thinkers have echoed this argument, arguing that “traditional” authority relations are increasingly challenged by the (increasingly) dispersed nature of knowledge.
However, at least when applied to authority in firms the Hayekian knowledge argument arguably misconstrues the nature of managerial authority, because it is based on an epistemic fallacy. (more…)
Upcoming Events: A Busy June
| Peter Klein |
June is an exciting month for O&Mers looking for research conferences. First up is ACAC 2008, 12-14 June in Atlanta. ACAC, which has received high marks on this blog, is an annual workshop organized by Rich Makadok emphasizing the “big issues” in strategic management. Next is the DRUID 25th Anniversary Conference, 17-20 June in Copenhagen, with the theme of “Entrepreneurship and Innovation.” The distinguished participant list includes Rajshree Agarwal, Carliss Baldwin, Bo Carlsson, Kathy Eisenhardt, Maryann Feldman, Bronwyn Hall, Steve Klepper, Anita McGahan, Joanne Oxley, Olav Sorenson, Scott Stern, Sid Winter, and some Foss guy. Immediately afterward is ISNIE’s 12th annual meeting, 20-21 June, in Toronto. I am on the program committee, working with president-elect Scott Masten, and we got a bunch of great submissions this year. Barry Weingast and Robert Ellickson are keynoters. The preliminary program should be up on the ISNIE website soon.
Also, for graduate students in economics, history, philosophy, political science, business administration, and related disciplines there’s the Rothbard Graduate Seminar, 13-18 June in Auburn, Alabama. The RGS is an intensive workshop and research seminar on Austrian economics that uses Murray Rothbard’s Man, Economy, and State as its core text. I am one of the discussion leaders.
If I could teleport I’d attend all four!
More on Opportunity Discovery and Entrepreneurial Judgment
| Nicolai Foss |
Peter and I (well, mostly Peter) have often contrasted the Knightian notion of entrepreneurial judgment with other notions of entrepreneurship, mainly Kirzner’s concept of alertness (here). In “Entrepreneurship: From Opportunity Discovery to Judgment” (download from this page), we provide what is no doubt the definitive statement on the issue. The paper is a draft of chapter 2 in our forthcoming book, Entrepreneurial Judgment and the Theory of the Firm, and constructive criticism is most appreciated. Here is the abstract:
Entrepreneurship has become a fast-growing subfield in management research, and is increasingly appearing in economics, finance, and even law. We survey a number of approaches to entrepreneurship in the economics and management literatures, and argue that modern research in this area need to be focused around ideas from Austrian economics and Frank Knight on entrepreneurial judgment. We critically discuss the recent opportunity discovery literature in management, and argue that it has partially misunderstood the Austrian origins of the theory, and fails to adequately distinguish between opportunity identification and opportunity exploitation.
UPDATE: You can also download the paper from SSRN.
Entrepreneurship and Capital Theory
| Nicolai Foss |
Suppose all capital were what Robert Solow called “Shmoo” (after a Lil’ Abner cartoon; check this for some Shmoo info), that is, a homogenous substance. In such a world, the (intertemporal) coordination problem deals only with selecting the intensity of the input services that must be supplied over time to match consumer preferences. All capital assets are substitutes, so there is no path-dependence. Asset prices are presumably instantaneously equilibrated. In such a world, there are no coordination problems and no Misesian “calculation” problems. Many decision problems disappear as there are no costs of inspecting, measuring, and monitoring the attributes of capital assets. Decision makers do not reach the bounds of their rationality. In sum, a world of homogeneous capital is a world where there nothing (or very little) for entrepreneurs to do. (more…)
Austrian Economics Study Guides
| Peter Klein |
Jérémie Rostan has produced a study guide for Menger’s Principles of Economics, a nice complement to Bob Murphy’s study guides for Man, Economy, and State and Human Action (see the study guide links after each chapter title). And there’s always Percy Greaves’s Mises Made Easier.
When will someone write Foss Made Easier? I would buy a Foss Companion.
Hayek, Habermas, and the Blogosphere
| Peter Klein |
Cass Sunstein asks if the blogosphere is more like Hayek’s spontaneous market order or Habermas’s noisy “bourgeois public sphere,” concluding that it isn’t quite either:
The rise of the blogosphere raises important questions about the elicitation and aggregation of information, and about democracy itself. Do blogs allow people to check information and correct errors? Can we understand the blogosphere as operating as a kind of marketplace for information along Hayekian terms? Or is it a vast public meeting of the kind that Jurgen Habermas describes? In this article, I argue that the blogosphere cannot be understood as a Hayekian means for gathering dispersed knowledge because it lacks any equivalent of the price system. I also argue that forces of polarization characterize the blogosphere as they do other social interactions, making it an unlikely venue for Habermasian deliberation, and perhaps leading to the creation of information cocoons. I conclude by briefly canvassing partial responses to the problem of polarization.
The paper is in the January 2008 issue of Public Choice, a special issue edited by Daniel Drezner and Henry Farrell on the social and political aspects of blogging. (Thanks to Greg Ransom for the link.)
Open Source and Spontaneous Order
| Peter Klein |
Open-source software is often cited as an example of what Hayek termed spontaneous order, the organic, bottom-up, decentralized form of organization that characterizes the market system. Giampaolo Garzarelli, in an explicitly Hayekian analyis, says open-source projects are defined by “no hierarchy, self-organization, self-regulation, and no ownership structure.” Is this an accurate characterization?
Commercial law, manifest in the medieval law merchant or lex mercatoria, is another important example of spontaneous order in the literature (see Harold Berman and Bruce Benson). Fabrizio Marrella and Christopher Yoo use the law merchant as a benchmark, asking “Is Open Source Software the New Lex Mercatoria?”They think not, arguing that focal firms, individuals, and groups play a more important role in guiding the evolution of open-source projects than is usually recognized. As a result, “[o]pen source has not achieved the type of universality or uniformity of principles envisioned by proponents of the lex mercatoria.” (more…)
A False Dichotomy?
| Steve Phelan |
John Mathews recently sent me a conference paper on Kirznerian, Schumpeterian, and Ricardian approaches to entrepreneurial dynamics.
Aside from questioning the resource-based theory of entrepreneurship, the paper also attempts to resolve the Kirznerian/Schumpeterian schism in entrepreneurship — namely whether entrepreneurs drive the economy towards equilibrium (Kirzner) or disequilibrium (Schumpeter). (more…)
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. (more…)
Austrian Economics and Pictograms: A Connection?
| Nicolai Foss |
Here is a possible research subject for a historian of ideas. The invention of pictograms is very often ascribed to Otto Neurath, Austrian philosopher (hardcore positivist) and political economist. Of course, pictograms go back much longer. For example, “A” is essentially a pictogram, namely the inverted head of a cow. Still, Neurath contributed very significantly in coming up with new designs for pictograms, designs that are still with us, codifying the art of the pictogram, disseminating and propagandizing for their use, etc.
Now, Neurath was a participant in the Böhm-Bawerk seminar, and a contemporary of Ludwig von Mises whom he clearly knew. Mises didn’t symphatize with Neurath’s view, and this lack of sympathy may have been reciprocated by Neurath. Still, it is at least conceivable that Mises’ views on prices as necessary for rational economic action may have influenced Neurath-the-inventor-of-the-pictogram (Mises’ views were formed and published before Neurath’s work on pictograms). Prices summarize information and provide direction in a complex world. Pictograms do the same. A possible connection?
Pure Inflation and Nominal Interest Rates
| Steve Phelan |
Can someone with a solid macro background tell me if this paper supports Austrian monetary theory (or not)?
Relative Goods’ Prices and Pure Inflation, by Ricardo Reis and Mark W. Watson, NBER WP 13615, November 2007 [open link]:
Abstract: This paper uses a dynamic factor model for the quarterly changes in consumption goods’ prices to separate them into three components: idiosyncratic relative-price changes, aggregate relative-price changes, and changes in the unit of account. The model identifies a measure of “pure” inflation: the common component in goods’ inflation rates that has an equiproportional effect on all prices and is uncorrelated with relative price changes at all dates. The estimates of pure inflation and of the aggregate relative-price components allow us to re-examine three classic macro-correlations. First, we find that pure inflation accounts for 15-20% of the variability in overall inflation, so that most changes in inflation are associated with changes in goods’ relative prices. Second, we find that the Phillips correlation between inflation and measures of real activity essentially disappears once we control for goods’ relative-price changes. Third, we find that, at business-cycle frequencies, the correlation between inflation and money is close to zero, while the correlation with nominal interest rates is around 0.5, confirming previous findings on the link between monetary policy and inflation.
(HT: Mark Thoma at Economist’s View)
JMS Special Issue on the Entrepreneurial Theory of the Firm
| Peter Klein |
In the Spring of 2005 I attended a terrific workshop on “The Entrepreneurial Theory of the Firm,” organized by Sharon Alvarez and Jay Barney and held at Ohio State University. Participants included Mark Casson, Dick Langlois, Sid Winter, Ulrich Witt, Ivo Zander, Simon Parker, Todd Zenger, Steve Michael, Bill Schultze, and several others. The papers and discussions explored a variety of approaches for linking the theory of entrepreneurship to the economic and strategic theory of the firm, a subject near and dear to our hearts here at O&M.
The workshop papers have now been published as a special issue of the Journal of Management Studies (volume 44, number 7, November 2007), edited by Sharon and Jay. A special contribution from Brian Loasby, who wasn’t able to attend the workshop, is included. And don’t miss this paper from an unusually structured joint-spousal team.
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