Kirzner, Ludwig M. Lachmann, and Murray N. Ludwig Lachmann had studied with F. Hayek at the London School of Economics in the s, and went on to challenge the Keynesian misconception that the economy should be viewed and treated as one single aggregate lump of economic output. He subtly showed that the market is an intricate web of multitudes of individual supplies and demands interconnected in ways that could have no harmonious order to them other than through the free competitive actions of people, themselves, in a dynamic world of unexpected change.
The first day of the conference was highlighted by an opening evening banquet. The noted anti-Keynesian economist, W. Hutt, talked about the contributions that Mises made to economics And Murray Rothbard related some of the amusing anecdotes Mises would tell during the graduate seminars that Mises taught at New York University from until his retirement in at the age of Milton Friedman, who had a summer home in Vermont and who had been invited to the dinner, was asked to make a few comments.
But for those of us attending that conference that week, we considered that Austrian Economics was a good economics for understanding the nature and workings of the real world of the free market place. Rothbard and Kirzner laid the foundation by explaining the implications of the Austrian theory of human action and choice.
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The study of economics, Rothbard pointed out, begins with the fundamental axiom that man acts, that conscious action is taken to achieve chosen goals. This also implies that all action is purposeful and rational from the point of view of the actor. All action, besides which, occurs through time. Action is taken now with the expected attainment of some result in the future. It also means that man acts without omniscience, for if an individual knew what the future would be in all its rich detail, then his action to replace one state of affairs with another would be pointless.
With a guaranteed and certain future, action becomes worthless, because nothing can be changed in that future and the idea of people making their free choices becomes meaningless. The fact that action is purposeful, chosen, and personally subjective also means that any statistical or historical studies that attempt to measure or predict human activity must be seen as having limited usefulness.
Kirzner used the example of a man from Mars looking down at the earth through a telescope. The Martian observes that out of a box every day comes an object that enters another rectangular box that then moves away through a maze of canals and intersections. The Martian notices that on certain days the object that comes from the first box moves rapidly to catch up to the second, rectangular box.
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What has been totally overlooked by this method is that the first box happens to be an apartment building out of which comes an individual who goes to the street corner to catch the morning bus to work. The fact that on occasion the individual in question oversleeps and has to rapidly chase after the bus, so as not to miss it, does in no way guarantee that he may not get a better alarm clock, go to sleep earlier, or in the future, oversleep even more often.
The inability of the economics profession to grasp the mainsprings of human action has resulted from their adoption of economic models totally outside of reality. In the models put forth as explanations of market phenomena, equilibrium — that point at which all market activities come to rest and all market participants possess perfect knowledge with unchanging tastes and preferences — has become the cornerstone of most economic theory.
Men, lacking omniscience, integrate within their plans the information provided by a constant stream of knowledge about changes in resource availabilities, the relevant actions of other men, and unexpected occurrences. The unknowability of the future means that individuals draw conclusions based upon expectations of what will happen over time. Divergent expectations and unexpected change, therefore, results in potential inconsistency of interpersonal plans. When errors become visible to individuals, each market participant will learn different lessons from the revised, available information.
And, thus, we are again faced with the possibility of inconsistency of different market plans.
But if the plans of market participants can never be expected to smoothly and automatically mesh, what forces in the market tend toward an equilibrating, or coordinating, of the actions of multitudes of human actors? Alertness to previously unseen opportunities serves as the key to the equilibrating market forces.
This human capacity for alertness, said Kirzner, is the entrepreneurial role. It is not merely the difficult task of knowing when to hire and where to place the worker. The chance to profit from information about market opportunities that others have failed to see acts as the incentive for people to keep their eyes open for inconsistencies and opportunities in human plans.
Lachmann and Kirzner continued this train of thought the following day with lectures on the Austrian theory of capital. Capital is the intermediate product — often the tool or machine — used to produce a finished good for consumption. That object that may be seen as a capital good in one instance may become totally worthless or shift to a consumer good tomorrow, depending upon the changing subjective valuations and judgments of the individuals interacting in the market. Rothbard delivered an interesting and comprehensive lecture on the Austrian theory of money. It was Ludwig von Mises, Rothbard pointed out, who first applied the principles of marginal utility to money, showing how money originated and how exchange values were established on the market.
Professor Rothbard suggested three areas for possible future research: 1 how to separate the state from money; 2 the question of free banking vs.
Lachmann finished his series of lectures with critiques of macroeconomics and its recent controversies. He argued that the market is a complex and ever-changing network of multitudes of individual actions and reactions to what everyone else is attempting to do in the pursuit of their desired goals and ends. The Keynesian attempt to reduce all the rich complexity of human activity to a few simple statistical aggregates for government manipulation and control not only misunderstand the real and true nature of a dynamic and competitive market system, but was likely to lead to government policy mishaps that would create far more instability and disorder than if the political authorities simply left the market alone.
As an economist, the Austrian theorist does not make judgments on ends chosen by people in the market. While admitting this, Rothbard wondered if the economist could be totally value-free in all instances. What if a politician has as his goal the economic impoverishment of the nation so as to use demagoguery for gaining political power? Thus, Rothbard concluded, it may often be necessary to have certain value-laden principles to judge ends as well as means.
The evenings during the week were partly spent with the participants discussing the topics lectured about that day. He would tell funny stories, and relate an unending stream of hilarious anecdotes about famous people alive and dead. And he optimistically argued for the importance of Austrian Economics and a political philosophy of liberty if the human race was to free itself from the dangers of oppressive and harmful government.
The rustic appearance and the somewhat antiquated facilities and features of the town of South Royalton led Ludwig Lachmann to observe at the end of the week that he could now say that he knew what life had been like in the nineteenth century! The slanted floor in the room I was staying in required me to spend the night holding on to the sides of the bed so I would not slide out the window behind the low headboard. But last night was the first time in my life that I slept with the light on! The organizers at the Institute for Humane Studies had sensed the rightness of the time for arranging such a conference as a catalyst for expanding interest in the Austrian School of Economics.
And with that goal in mind it can only be said, forty years later, that it was a resounding success. And without money prices reflecting the relative scarcities of the means of production, economic planners would be unable to rationally calculate the alternative use of the means of production. Many economists see competition as a state of affairs. If competition were a state of affairs, the entrepreneur would have no role.
But because competition is an activity, the entrepreneur has a huge role as the agent of change who prods and pulls markets in new directions. The entrepreneur is alert to unrecognized opportunities for mutual gain. By recognizing opportunities, the entrepreneur earns a profit. The mutual learning from the discovery of gains from exchange moves the market system to a more efficient allocation of resources.
Entrepreneurial discovery ensures that a free market moves toward the most efficient use of resources. In addition, the lure of profit continually prods entrepreneurs to seek innovations that increase productive capacity. Money is defined as the commonly accepted medium of exchange. If government policy distorts the monetary unit, exchange is distorted as well.
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The goal of monetary policy should be to minimize these distortions. Any increase in the money supply not offset by an increase in money demand will lead to an increase in prices. But prices do not adjust instantaneously throughout the economy. Some price adjustments occur faster than others, which means that relative prices change. Each of these changes exerts its influence on the pattern of exchange and production. Money, by its nature, thus cannot be neutral. The quantity theory of money stated, correctly, that printing money does not increase wealth.
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