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Thursday, November 1, 2001

The Driving Force of the Market: Essays in Austrian Economics by Israel M. Kirzner

Routledge · 2000 · 320 pages · $100.00

Reviewed by Frederic Sautet

A new book by Israel Kirzner is like a new movie by a great director whose work and style are familiar, but who always surprises his viewers with new ways of exploring his lifelong themes.

In fact, “exploring” is a word that describes Kirzner’s work well. As he explains in The Driving Force of the Market, the proper approach to economics should be based on an “essentialist understanding of actual social phenomena.” This essentialist approach, which is a distinguishing mark of the Austrian school, is what Kirzner pursues in his work by exploring the essence of human action in the context of uncertainty.

The book gathers 14 essays and three obituaries (for Ludwig von Mises, F. A. Hayek, and Ludwig Lachmann), which cover many of the most fundamental ideas of Austrian economics: subjectivism, the ethics of competition, the institutional structure of the market economy, the market process, and entrepreneurship.

Kirzner’s account of the subjectivist approach in economics deepens our understanding of the sense in which Austrian subjectivism holds a “middle of the road” position between neoclassical economics and radical subjectivism. His defense is fundamental, as it allows Austrian economists to explain human action in an open-ended context through the notion of entrepreneurial alertness.

Questions of ethics (relating to economic concepts), explains Kirzner, should be answered with the best possible knowledge of the underlying economic issues. Thus ethical valuations of competition and profit, for instance, should be built on the knowledge that economics provides regarding the roles of entrepreneurial competition and pure profit. This relates to Kirzner’s position regarding institutions. The institutions of the market economy (for example, property rights) cannot be determined by economic theory per se. The issue of their existence belongs to the realm of ethics. In other words, there is no endogenous explanation of market institutions in Kirzner’s analysis. While economics can explain the existence of profit, it cannot explain the existence of the institutions that make profit possible. However, economics is necessary to pass a judgment on the usefulness of the market institutions that make profit possible. Whether one agrees or disagrees with Kirzner on the exogeneity of institutions, it is valuable to be reminded that “ethics and economics are intertwined.”

In the essay that gave its title to the book, Kirzner reaffirms what makes market-process theory so different from the neoclassical understanding of competition. Fundamentally, he explains, “there is no market process other than the competitive one,” even when the market brings about monopoly prices. In the absence of privileges (given to some market actors), the universality of the market process prevails and the interests of consumers are in line with those of producers. Since the case of true monopoly pricing is extremely rare in practice, the overwhelming majority of situations that neoclassical economists deem uncompetitive are in fact part of the discovery process of the market and cannot be improved on.

Economists such as Kirzner understand competition as a rivalrous process among market participants; that’s how businessmen, if not “modern” economists, understand it. The problem is that when modern economists talk about competition outside their journals, they sound like Austrians, but when they discuss the subject among themselves, they don’t. As a result, Austrian economists appear to the non-economist as if they were just giving a nonformal exposition of principles seriously explored by others. This, of course, overlooks the huge differences that only careful (essentialist) analysis can establish, which is why Kirzner’s work is important.

One could criticize Kirzner for not providing a realistic-enough account of entrepreneurial change. Indeed, the replacement of the horse-drawn carriage industry by the automobile industry discussed in chapter 13 lacks realism, as the new pattern of technological possibilities came only gradually into existence. In most cases, changes are not made up of one single big discovery by one entrepreneur but of a series of interdependent discoveries by many entrepreneurs. However, the issue is not so much the realism of his example, but the essence of entrepreneurial change. The automobile revolution, far from destroying an established order, “brought the pattern of resource allocation into a higher degree of coordination.”

At a time when a lot of what economists produce is not useful to the understanding of reality, Kirzner’s work is a great lesson in the way economics can contribute to the understanding of actual market phenomena. While being analytical and somewhat abstract, his work often offers direct policy implications. Kirzner has immensely contributed to the resurgence of Austrian ideas in the last decades, and this book is another instance of his invaluable contribution.

Frederic Sautet is senior analyst at the New Zealand Treasury.

  • Frederic Sautet is an Associate Professor in the School of Business and Economics at The Catholic University of America in Washington, DC. He specializes in studying market processes and entrepreneurship. He is a member of the FEE Faculty Network.