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Where are the big bills? Escaping the endogenizer’s dilemma

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Abstract

The continual expansion of rational choice theory to a greater range of social phenomena—from markets to politics and institutions—is a testament to its success. Each further application, however, simultaneously forecloses a potential source of inefficiency in economic systems. Abdicating efficiency considerations impairs economics’ explanatory power as much as its normative relevance. In this paper I explore the interconnected roles of subjectivism and knowledge problems in accounting for inefficiency. I conclude that the knowledge-generating properties of institutions allow for efficiency comparisons, but only in the embrace of a thoroughgoing subjectivism.

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Notes

  1. For ease of exposition, I will only refer to costs rather than “costs and benefits,” but the logic is identical.

  2. It is beyond the scope of this paper to address the argument that political power abrogates the standard rational choice results and allows for inefficiency. This argument has been put forward in slightly different forms by both Olson (2000, Ch. 3) and Acemoglu (2003).

  3. This position comes into play not just for consistent subjectivists, but any time the costs across institutional contexts are treated as incommensurable on efficiency grounds. Demsetz makes just such a move, arguing that neoclassical analysis assumes—and does not apply outside of—well-defined and enforced property rights (Demsetz 2003, p. 295).

  4. Dubbing cost a subset of tradeoffs is a simplification for ease of exposition. Costs can of course be misperceived, as is the case when a relevant option is omitted. Nonexistent costs may also be imagined.

  5. “Relevance” should be construed relative to the agents’ desire to satisfy other ends.

  6. Also, absent some error correction mechanism, there is no reason to believe that beliefs about the knowledge-generating properties of institutions converge to a correct picture. And even further, once we admit “sheer ignorance,” there is no reason to believe that beliefs about the knowledge-generating properties of institutions even exist in the first place!

  7. See also Becker (1983) and Mitchell (2001).

  8. Demsetz’s aforementioned insistence that neoclassical economics necessarily assumes private property rights is another example (c.f. footnote 3 above).

  9. I will not deal extensively with competition, but simply point to Demsetz (1982) and O’Driscoll (1982), who show that, respectively, both the objective and subjective logic of choice leave no room for the inefficiencies of monopoly. From the perspective of the logic of action, competition is more dynamic, and freedom of entry is its only essential condition (Kirzner 1973). Barring freedom of entry bars the exploitation of potential profit discoveries, resulting in inefficiency.

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  1. Department of Political Economy, King’s College London, 22 Kingsway, Strand Campus, London, UK, WC2B 6NR

    Adam G. Martin

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Martin, A.G. Where are the big bills? Escaping the endogenizer’s dilemma. Rev Austrian Econ 27, 81–95 (2014). https://doi.org/10.1007/s11138-013-0231-y

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