The Market As A Process Of Discovery

With the benefit of hindsight, we now understand that, in the Austrian view of the market, its most important feature is (and was) the dynamic entrepreneurial-competitive discovery process. We know now that, for Mises, the idea of a price that does not reflect and express entrepreneurial judgement and hunch is virtually a contradiction in terms. (It is for this reason that Mises rejected Lange's contention that socialist managers may be able to take their bearings from - and to calculate on the basis of - centrally promulgated non-market prices. ) We know now that for Mises the description of states of market equilibrium is mere byplay (1966: 251) - the description of something that will never in fact occur and that provides us with little of direct relevance to real world conditions (conditions that at all times display the characteristics of markets in disequilibrium). We know now that for Mises competition is an entrepreneurial process, not a state of affairs (1966: 278f). We know these matters because they have formed a central theme in Misesian economics since the publication of Nationalökonomie in 1940. And we have every reason to agree with Lavoie and others that these insights were, at least implicitly, an integral element in the Austrian heritage from before the First World War. (Surely it is for this reason that Schumpeter's views on competition are so similar to those of Mises and Hayek.)

But, despite all this, it must be acknowledged, after a careful study of Mises' 1920 paper, that a first reading of that paper might easily lead to a quite different conclusion. It might easily be concluded from a reading of that paper (and of the corresponding passages in Mises' 1922 original German edition of Socialism) that the central feature in Mises' appreciation for markets was their continual ability to generate prices that, to a reasonable extent, approximated their equilibrium values. In his discussion of how market values of commodities enter into economic calculation, it does not seem important to Mises to point out that such market values may be seriously misleading (1920: 97ff). He does at several points emphasize that 'monetary calculation has its limits', its 'inconveniences and serious defects' (pp. 98, 109), but the weaknesses that Mises identifies seem to consist almost exclusively in the inability of money prices to capture the significance of non-pecuniary costs and benefits and in the measurement problems arising out of the fluctuations in the value of money. He does not draw attention to the possibility that disequilibrium money prices may inspire market participants to make responses that are mutually inconsistent (e.g. an above-equilibrium price may inspire producers to offer goods that buyers will not buy at that price) or that cause them to overlook opportunities for mutually gainful trade (e.g. where a commodity is being sold at different prices in different part of the same market). It might easily appear to the superficial reader that Mises was satisfied that market prices are (subject to the limitations to which he refers) reasonably accurate expressions of relative social importance; and that it is this that constitutes the achievement of markets that could not be duplicated under socialism. Under 'the economic system of private ownership of the means of production', Mises asserts, 'all goods of a higher order receive a position in the scale of valuations in accordance with the immediate state of social conditions of production and of social needs' (1920: 107).

It is true that Mises already in his 1920 paper drew attention to the special problems generated by changes in the basic data, with respect to which economic calculation is called for. Thus, it might be argued that for Mises in 1920, a central achievement of the market is its ability to inspire entrepreneurial alertness to such changes, so that, perhaps, his appreciation for the market did, after all, recognize it as 'discovery procedure'. But it seems difficult to make this claim. Certainly, we can feel confident that Mises in 1920 would have accepted the insight that markets inspire entrepreneurial discovery; but he did not, in his 1920 paper, refer to the problems raised by changing data in a way that presented markets as being essentially on-going processes of discovery. His references to change were merely in order to point out that, although a newly socialized economy might well usefully take its bearings from the patterns of production that had characterized the previously prevailing market economy, changes in underlying conditions and goals would rapidly render those patterns obsolete and inefficient (1920: 109). These brief references by Mises would not prevent a reader from concluding that Mises believed that markets are continuously close to equilibrium, even in the face of changing data. This failure to draw attention to the market as a process of discovery seems to exist in all of Mises' writings published before Nationalökonomie.

But in his 1940 Nationalökonomie (later to be translated and revised to become Human Action), Mises emphasized the importance of seeing the market as an entrepreneurial process with unsurpassable clarity. By that year, Hayek, too, had drawn explicit attention to the problems of equilibration that are somehow, to some degree, apparently successfully overcome in the course of market processes (1949c). Moreover, by 1940, Hayek, like Mises, was pointing out that some of those who were arguing in the 1930s for the possibility of socialism based on centrally promulgated non-market prices were guilty of 'excessive preoccupation with problems of the pure theory of stationary equilibrium' and failed to understand how real world markets are likely to have the advantage in regard to the rapidity of 'adjustment to the daily changing conditions in different places and different industries' (1949d: 188).

There seems to be little doubt that what led Mises and Hayek to emphasize these dynamic aspects of markets at the close of the 1930s was the position taken up by their opponents such as Lange, Lerner and Dickinson in the calculation debate. Where Mises' original statements were directed at those who were completely innocent even of the most fundamental level of economic understanding (involving at least an appreciation for the implications of scarcity), his challenge had now been picked up by competent economists - but economists whose understanding of the market was limited by 'preoccupation with equilibrium theory'. It was in restating their case in the face of the arguments of these economists that the Austrians were led to make explicit some of the 'process' elements in their understanding of markets which they had hitherto not been impelled to emphasize.

This developing process of greater self-awareness among the Austrians continued during the 1940s. Mises' contribution in this period consisted of his revision and translation of Nationalökonomie into Human Action. It was the latter statement of his vision of the market process that was to have the most far-reaching influence on the further development of the Austrian view. It was this magisterial work that presented a dynamic interpretation of the market process in a manner so emphatic and clear as to render it henceforth impossible to overlook the profound differences between the Austrian and the mainstream neoclassical perspectives.

But it was Hayek who, in two celebrated papers during the 1940s, articulated certain key elements in the Austrian view in an exceptionally lucid and seminal fashion. In the first of these papers, 'the use of knowledge in society' (1945), Hayek drew attention to the role of the market in communicating information. In doing so, he explicitly linked his discussion with the socialist calculation debate. (I shall return later to further consideration of the part this paper has played in the crystallization of the modern Austrian position.) In the second of these two papers, 'The meaning of competition' (1946), Hayek was able to enunciate with great clarity the Austrian understanding of what competition really means and how the contemporary mainstream developments in treating competition in terms of the perfectly competitive state of affairs must be deplored as obscuring understanding of how markets work.

To treat competition exclusively as the perfectly competitive state of affairs, Hayek pointed out, is to confine attention exclusively to states of complete adjustment, to states of equilibrium. But to do this is already to assume 'the situation to exist which a true explanation ought to account for as the effect of the competitive process' (1949e: 94). In other words, Hayek was in this second paper attributing to dynamic competition the central role in providing a true explanation of how markets generate tendencies towards mutual adjustment of decentralized decisions.

There seems no doubt that Hayek was led to these insights concerning the severe limitations surrounding the usefulness of the notion of perfect competition by his experience with the proposals of the proponents of 'competitive socialism' during the 1930s. It became very clear that the illusion of transplanting competition to the environment of the socialized economy could have made its appearance only as a result of the mistaken belief that the role of competition in markets is best portrayed by the model of perfectly competitive equilibrium. Indeed, there are rather clear signs that Hayek's insights concerning the competitive processes were developed as a result of the calculation debate. Thus, in his 1940 essay, 'Socialist calculation III: the competitive "solution" ', Hayek pointed out that preoccupation with equilibrium analysis had led the socialist economists to misunderstand the role of competition. Apparently, Hayek wrote, 'the concept of perfect competition . . . has made them overlook a very important field to which their method appears to be simply inapplicable'. This important field includes much 'machinery, most buildings and ships, and many parts of other products [that] are hardly ever produced for a market, but only on a special contract. This does not mean that there may not be intense competition in the market for the products of these industries, although it may not be "perfect competition" in the sense of pure theory' (1949d: 188f.). This passage is not as explicit in its understanding of the problems of the perfectly competitive model as Hayek's 1946 paper, but it is clearly pointing towards the latter paper - and it has clearly been motivated by the effort to dispel the misunderstandings of the proponents of 'competitive socialism'. And from the 'Meaning of competition' (1946) to 'Competition as a discovery procedure' (1968) was but a small step for Hayek (1978a: Ch. 12). Thus, the linkage between the unfolding of the calculation debate and Hayek's most advanced statement concerning the market as a process of discovery seems not merely eminently plausible, but quite unmistakable.

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