Kirzner on Social Evolution, Menger, etc.

In "Knowledge Problems and Their Solutions," Kirzner makes the important distinction between type A and type B knowledge problems.

Type A problems involve undue optimism, and are self-correcting: if I think I can sell my programming services for $1 million per hour, I surely will be disappointed, and, if wise, I will lower my price. My very attempt to act on my over-optimistic beliefs reveals their falsity.

Type B problems, on the other hand, involve undue pessimism, and are not self-correcting. I may believe that my current boss, who is paying me $50 per hour, is the best employer I can find. But, unbeknownst to me, just down the block is someone who would happily pay me $100 per hour, if he knew of my existence. And I would happily go work for him, if I knew of his. For type B problems to be "corrected" requires entrepreneurial action, perhaps, say, a job placement firm that will alert both the potential new employer and me to each other's presence in the market, for a fee.

The broader theme under discussion in this essay is to what extent Hayek's move from confidence in the error-correcting properties of markets to the error-correcting properties of "social evolution" is justified. Kirzner argues that Hayek is on solid ground in believing that spontaneous social processes  will correct type A errors, but on much shakier ground if he wishes to contend (and perhaps it is not clear that he does so wish to contend) that such social processes can correct type B errors. And the reason for this, Kirzner contends, is that the correction of type B errors in the market depend upon the lure of entrepreneurial profit, while no similar attractant exists in non-market social contexts.

Hayek cites the evolution of law, language, and money as examples of spontaneous social processes: let us grant, for the moment, that he is correct about this, something Kirzner is willing to do. But, Kirzner contends, such processes exhibit that social agents can spontaneously correct type A problems in non-market settings, and, at the best, that their self-interested actions might accidentally correct a type B problem. (And Kirzner notes the many cases in which spontaneous social processes might create an ever-worsening situation, such as those highlighted in the work of Thomas Schelling.) He offers an analysis of the Mengerian story of the evolution of a medium of exchange as an example: the entrepreneurial alertness to trade for a more liquid commodity, even if it is not the one ultimately wants to consume, "is never alertness to prospects of further increasing that liquidity... No entrepreneur could, by himself, discover opportunities for pure profit by attempting to move the barter society towards the use of money" (p. 102). But... why couldn't he? Whether or not any such thing ever actually happened, isn't it conceivable that some entrepreneur saw, say, silver being traded more-and-more, and so decided to become a market-maker in silver, so as to facilitate further increases in the liquidity of silver, to his own profit?

Comments

  1. I've been thinking lately about how the process by which our current global corporate leviathans consolidated their position, and the extent to which this process is reversible.

    Our governments will likely continue to help rather than impede this kind of growth for the foreseeable future, though the possibility that it would be best for their citizens to reverse their position is an easy case to make.

    But even with robust enforcement of existing anti-trust law or a bias against massive corporate mergers, the path back towards a human-scaled economy seems difficult to find, and I think this post highlights part of the reason why.

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