Well Put My Friend

Israel Kirzner spent an entire career trying to convince a majority of the economics profession they were wrong. Economists have failed to incorporate uncertainty, which Kirzner tries to correct in his magnum opus Competition and Entrepreneurship.

He also attempted this mighty task in academic journals. In a 1997 article in the Journal of Economic Literature called "Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach", Kirzner tries again to explain the errors of standard Samuelsonian models and why the Austrians (Kirzner) are at least aiming correctly.

At the individual level Austrians have taken sharp exception to the manner in which neoclassical theory has portrayed the individual decision as a mechanical exercise in constrained maximization. Such a portrayal robs human choice of its essentially open-ended character, in which imagination and boldness must inevitably play central roles. For neoclassical theory the only way human choice can be rendered analytically tractable, is for it to be modeled as if it were not made in open-ended fashion, as if there was no scope for qualities such as imagination and boldness. Even though standard neoclassical theory certainly deals extensively with decision making under (Knightian) risk, this is entirely consistent with absence of scope for the qualities of imagination and boldness, because such decision making is seen as being made in the context of known probability functions. In the neoclassical world, decision makers know what they are ignorant about. One is never surprised. For Austrians, however, to abstract from these qualities of imagination, boldness, and surprise is to denature human choice entirely.

When Austrians talk about uncertainty with Samuelsonian economists, they are talking past each other. Samuelsonian economists call Knighting risk uncertainty. Austrians follow Knight in his definition of uncertainty.

A Samuelsonian model, even a stochastic one, will never be able to include true uncertainty. Never is a bold word, but it appears impossible given present knowledge. However, I cannot account for uncertainty about the future, so we truly do not know.


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