Jim Devine wrote:
that familiar assertion is what's what's called an Austrian critique of the mainstream/neoclassical approach. The mainstream is into imperfect info these days, by the way. But it (unlike the Austrians) has not dropped the fatal marriage to equilibrium.
The Austrians have not dropped the equilibrium concept. They are critical of the type of equilibrium analysis found in Walrasian models, that is, drawing policy conclusion from equilibrium states. Modern welfare economics investigates alternative policy scenarios by using equilibrium prices as a proxy for a measure of utility (i.e. a demand curve is a marginal utility curve). The Austrians challenge this.
When Samuelson describes a perfect market by comparing it to a frictionless pendulum or when Friedman compares market equilibrium to the acceleration of a body dropped in a vacuum, they are, according to the Austrians, employing the method of idealized abstraction. Rothbard, and his followers, pride themselves as being Aristotelean. They employ the method of simplifying abstraction rather than idealized abstraction. On this point they are not alone. Critical realists, Post-Keynesians, Old institutionalist and many Marxists (and I believe Marx) employ assumptions to simplify rather than to define ideal types.
Yet this difference does not mean that the Austrians reject equilibrium. For example, Peter Lewin writes: "For Hayek equilibrium was never understood as a state that could ever actually be said to exist, although its logical existence is clearly implied. He was more concerned with the question of whether or not it could be shown or argued that a tendency toward equilibrium ('a greater degree of plan coordination') characterized the actual market process." And of course, Hayek's concept of "spontaneous order" is an equilibrium concept.
In the 1980s there was a significant debate within the Austrian camp on this subject, with Kirzner arguing in favor equilibrium tendencies and Lachmann arguing against them. The debate was never resolved (and this fact, I believe, reveals a fundamental contradiction in their paradigm; or at least their view of uncertainty), but it is hard to find current Austrians who reject Kirzner and preach Lachmann. (It was this contradiction that I believe was the reason Shackle left the Austrian camp and called himself a Keynesian.)
(The Austrian and Schumpeterian conceptions of market competition seems very similar to that of Marx. Some say they learned it from him, via Böhm-Bawerk.)
There are some similarities, but there are some important differences. For Marx "the bourgeoisie cannot exist without constantly revolutionising the instruments of production." For Mises and Kirzner the market process tends "continually towards equilibrium, as the consequence of continually-stimulated entrepreneurial discoveries. These discoveries are discoveries of earlier errors made in the course of market exchanges."
Kirzner's idea of entrepreneurial discovery is illuminating. After all, discovery is about learning; about finding what is already out there. Mountains are discovered; but I'm not convinced that capital accumulation is discovered. (Joan Robinson remarked in the 1968 introduction to The Economics of Imperfect Competition that her use of "trial and error" for the discovery of demand was a "shameful fudge" because it assumed the continuity of future with the past.)
Anyway, my point is that the Austrians hold a natural law view of the economy; they are essentially Panglossian.
Another non-price solution ...
This is an important issue when in the company of a libertarian. They see the world (or the economy) only in terms of markets and governments. This is why they have no "theory of the firm." (Those who don't ignore it altogether rely on some variation of the "nexus of contracts" crap.)
GMU types love the value judgment implicit in the phrase "creative destruction," the _a priori_ presumption that the benefits of creation exceed the costs of destruction. Why don't they call it "destructive creation"? Because that sounds bad, not fitting with their hidden value judgments.
Although these guys like to write blog postings about creative destruction, it is not a central part of their theory. "Schumpeter’s entrepreneur, I [Israel Kirzner] pointed out, was essentially disruptive, destroying the pre-existing state of equilibrium. My entrepreneur, on the other hand, was responsible for the tendency through which initial conditions of disequilibrium come systematically to be displaced by equilibrative market competition."
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