A modern classic of Austrian economic theory
Mainstream neo-classical economics focusses on already attained states of equilibrium. It is silent about the processes of adjustment to equilibrium.
Human action consists of ‘grappling with an essentially unknown future’, not being confronted with clearly-specified objectives, known resources and defined courses of action as mainstream theory assumes.
Critics of the market economy find ammunition in neo-classical theory: they ‘merely need to tick off the respects in which real world capitalism departs from the requirements for perfectly competitive optimality’.
The theory of entrepreneurial discovery allows economists to escape from the ‘analytical box’ in which ‘choice’ simply consists of computing a solution implicit in given data.
An entrepreneurial act of discovery consists in ‘realising the existence of market value that has hitherto been overlooked’. Scope for entrepreneurial discovery occurs in a world of disequilibrium – which is quite different from the equilibrium world of mainstream economics where market outcomes are foreordained.
Entrepreneurial discovery explains why one price tends to prevail in a market. Through new causes of price differences continually appear, entrepreneurs exploit the resulting profit opportunities and produce a tendency towards a single price.
Only with the introduction of entrepreneurship is it possible to appreciate how markets work. Without entrepreneurship, there would be not market co-ordination.
So-called ‘imperfections’ of competition are often ‘crucial elements in the market process of discovery and correction of earlier entrepreneurial errors’.
Advertising expenditures, for example, are means of alerting consumers to ‘what they do not know that they do not know’. Anti-trust laws may hamper market processes and prevent competitive entry to markets.
Entrepreneurial profit, far from generating injustice, is a ‘created gain’. It is not ‘sliced from a pre-existing pie it is a portion which has been created in the very act of grasping it’.
1997, Hobart Papers 133, ISBN 978 0 255 36404 1, 80pp, PB
‘How Markets Work’ is available in Korean here.
The Austrian School by Jesus Huerta de Soto.
Economic Freedom and Representative Government by F. A. Hayek.
Choice in Currency: A Way to Stop Inflation by F.A. Hayek.
Denationalisation of Money by F.A. Hayek
A Tiger by the Tail: The Keynesian Legacy of Inflation by F.A. Hayek