The science of economics is born out of the puzzle that the coordination of economic activities presents to our imagination. The solution to that puzzle is the entrepreneurial market process. Israel Kirzner has argued that the market economy operates with ruthless efficiency to coordinate economic activities and realize the gains from social cooperation under the division of labor because of the institutional framework within which it operates, namely private property rights. Kirzner, however, is suspicious of economic analysis that doesn't limit its analysis to an examination of processes within that framework, but instead attempts to apply that analysis to the evolution of the framework itself. These are the two-levels of analysis in spontaneous order studies. This paper presents Kirzner's arguments for maintaining a strict dichotomy between the levels of analysis, and then challenges his argument with a discussion of the positive political economy of endogenous rule formation.
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What constitutes the framework is of course a critical question and not as easily answered as one may think given the ‘nested’ nature of institutions and policy choices. For example, it seems non-controversial to say “legal institutions” are part of the framework. However, would the “monetary system” be part of the framework or subject to economic analysis as in the evolution of indirect exchange out of system of barter? As I will explain, in Kirzner’s analysis explicitly does not deny long-run social evolution. His criticism of some variants of spontaneous order study are limited to the efficiency claims made on behalf of those long run social evolutionary processes.
We are primarily limited in our discussion to the positive analysis of the market process and spontaneous order studies rather than the normative implications for political economy, but it is important to stress that the positive understanding of market forces does put parameters on utopian aspirations. As Simons (1983, 3) put it: “Academic economics is primarily useful, both to the student and to the political leader, as a prophylactic against popular fallacies.” To see Kirzner’s nuanced discussion of the relationship between positive economic analysis of the market economy and policy advice see his essays “The Anatomy of Economic Advice”. (2006a, 2006b, 2006c)
In Living Economics, I argue that the embracing of this intellectual heritage is the defining characteristic of “mainline” economics. (see Boettke 2012, xv–xx; 383–388)
For an appreciation of the central insights of Buchanan and Kirzner to the intellectual tradition of “mainline” economics see my discussion of their work in Living Economics (Boettke 2012, 42–65; 213–225; 241–261).
On the Ostroms’ contributions to political economy of self-governance see Boettke (2012, 139–158; 159–171).
See, e.g., Kirzner (1997) for an example of his subtle, yet straightforward, presentation of how the entrepreneurial market process works to bring about a peaceful and prosperous order.
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Paper prepared for the Fund for the Study of Spontaneous Order Lifetime Achievement Award to Israel M. Kirzner. February 7, 2013.
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Boettke, P.J. Entrepreneurship, and the entrepreneurial market process: Israel M. Kirzner and the two levels of analysis in spontaneous order studies. Rev Austrian Econ 27, 233–247 (2014). https://doi.org/10.1007/s11138-014-0252-1
- Market process
- Spontaneous order