Advances in Austrian Economics
vol. 2, Part A, 1995, pp. 67-78
Equilibrium and Entrepreneurship
Roger W. Garrison*
In his "Tale of Two Worlds" Israel Kirzner (1994) draws inspiration
from a paper by Stephen Shmanske (1994) and provides us with a low-keyed
contrast between neoclassical and Austrian modes of thought. In the neoclassical
world, explanations of economic phenomena consist of applications of cost-benefit
calculus. Maximization subject to constraint is the whole story. The purest
of the neoclassicals, such as Shmanske himself, refuse to corrupt their
analyses with considerations lying outside this deterministic framework
and even wear their refusal as a badge of honor. Some ingenuity may be
required in identifying the binding constraint, which underlies supply,
and the relevant maximand, which underlies demand. But once the problem
is conceived as the metaphorical fence on a hillside, there is no problem
in determining just how high the maximizers can and do climb.
In the Austrian world, there
is a healthy recognition of supply and demand, of means and ends, and of
underlying economic realities, but in the final analysis the market process
is driven by entrepreneurs. Following Mises, Kirzner reminds us that we
are entrepreneurs all. The very essence of entrepreneurship as conceived
by the Austrians—and particularly by Kirzner himself—is that it cannot
be bottled and sold alongside the other beverages in the marketplace. Contrary
to the spirit of the Shmanske paper and to the theme of an earlier paper
by T. W. Schultz (1975), entrepreneurship correctly understood is not to
be analyzed by applying of the techniques of constrained maximization.
There is a story that circulates among cosmologists about ill-informed
resistance to the idea that the earth is round. The earth is actually flat,
according to this retrograde view, and rests on the back of a gigantic
turtle. Going for the Achilles' heel of this rather bizarre conception,
the learned cosmologist questions a proponent of the turtle theory: "What,
exactly, is the turtle standing on?" To the true believer, the answer is
obvious: "It is standing on back of an even more gigantic turtle." The
follow-up question almost asks itself: "And what is the even more gigantic
turtle standing on?" Having had experience with other cosmologists, the
believer decides to cut the debate short: "I'm sorry, sir. I've heard this
line of questioning before, but it'll do you no good; it's turtles all
the way down."
What causes the price of
a good to become adjusted to supply and demand? The adjustment process
is brought about through entrepreneurial ability, for which there also
is a supply and demand. And what adjusts the price of this entrepreneurial
ability to supply and demand? That process is brought about through a higher-order
entrepreneurial ability, for which, again, there is a supply and demand.
"But, then, what ...?" "I'm sorry, sir. I've heard this line of questioning
before, but it'll do you no good; it's supply and demand all the way through.
We don't have to claim that
Professor Kirzner is the Nicolaus Copernicus of economic science to appreciate
his conception of genuine entrepreneurship and his rejection of the notion
that the ability of the entrepreneur is just like any other ability for
which there is a ready market. This is not to say, of course, that no service
whose purpose it is to bring buyers and sellers together can be analyzed
in terms of supply and demand. Real estate agencies, employment agencies,
and computer dating services can all usefully be conceived as Marshallian
firms. At some point in the analysis, however, an entrepreneurial function
lying outside the supply-and-demand framework is necessary and even central
to our understanding of the market process. Denying such a role to the
entrepreneur is not the recipe for a purified conception of the market
economy; it is, instead, the recipe for turtle soup.
To focus on the issues raised
in Kirzner's "Tale of Two Worlds" is to tell only half of the tale. The
other half is a contrast between the Austrian view and the view of those
who deny any meaning to the notion of "underlying economic realities."
Where the neoclassicals go all the way with supply and demand; the radical
subjectivists, as epitomized by G. L. S. Shackle, go virtually none of
the way. Entrepreneurs do not discover opportunities, they create them.
Kirzner's notion of entrepreneurial alertness to profit opportunities embedded
in existing economic reality is supplanted by entrepreneurial imagination
that creates its own reality. A tale of three worlds would have the Austrians
located on a defensible "middle ground"—an idea that Kirzner (1992, p.
3) graciously attributes to me. The Austrians go part of the way with supply
and demand: There are turtles all around, but the weight of the economic
world rests ultimately on the shoulders of the entrepreneurs. A full appreciation
of the intellectual war between these worlds and a defense of the Austrian
turf would have to recognize simultaneous challenges from opposite directions
by Shmanske and Shackle. While Kirzner (1992, p. 7) himself deals effectively
with the "double-exposure of the middle ground," as he calls it, my immediate
concern is with the neoclassical position as set out by Shmanske. This
particular challenge has merit because of its "unsurpassed consistency
and starkness" (Kirzner, 1994, p. 226). It allows the Austrians to identify
the problems with neoclassical purism while allying themselves with those
who hold more moderate neoclassical positions.
II. Newtonian Notions of Equilibrium
The concept of equilibrium is fundamental to economic reasoning. The
specific meaning of this term, however, is hardly self-evident. As one
of the most useful transplants from the physical sciences, equilibrium
must take on some stipulative definition spelled out by the economist employing
it or derive its meaning from the context in which it is used. With two
exceptions, open-mindedness dictates that no stipulated or contextual definition
be dismissed out of hand. The two exceptions are the degenerate ones in
which equilibrium is defined vacuously such that either equilibrium itself
or its cognate disequilibrium is inconceivable. Arguments purporting to
show that the economy as a whole is in a continuous equilibrium or that
it is in continuous disequilibrium (and devoid of equilibrating tendencies)
have the flavor of metaphysical disputes about whether the universe is
orderly or disorderly. Clearly, the terms order and disorder can have no
meaning except as they refer to contrasting aspects of the universe. Similarly,
the terms equilibrium and disequilibrium are of little use to economists
unless they refer to contrasting aspects of economic phenomena.
Let me identify viable and degenerate conceptions of Newtonian equilibrium
by considering the plight of a tight-rope walker. A Newtonian extremist
with a comparative-statics bent of mind might insist that the tight-rope
walker is in equilibrium only in the just-barely-conceivable case in which
he is balanced motionlessly atop the rope such that a line drawn from his
center of gravity to the center of the earth passes exactly and continuously
through the center of the rope. A moderate would augment the strict sense
of comparative-statics equilibrium with the more relevant concept of equilibrating
tendencies, which allows for minor deviations of the center of gravity
to one side of the rope or the other so long as the deviations are effectively
and continuously countered by movements of the tight-rope walker. This
conception gives meaning to the notion that some tight-rope walkers are
better than others. A second extremist, one with tendencies toward metaphysics,
might claim that the tight-rope walker is always in equilibrium. If not
in equilibrium in one of the two senses already mentioned, the tight-rope
walker will be in another equilibrium some distance below the rope—or he
will be accelerating toward that equilibrium at an equilibrium rate!
The tight-rope walker might
be genuinely concerned about "losing his equilibrium"—but only if this
term is understood in the moderate sense. His concern would not be lessened
by pedantic instruction from the first extremist to the effect that he
was unlikely ever actually to achieve equilibrium and therefore need not
worry about losing it or by equally irrelevant instruction from the second
extremist to the effect that losing equilibrium is definitionally impossible
since any eventuality can be described in the language of equilibrium.
The tight-rope walker is not worried about losing something he could never
have or having something he could never lose; he is worried that he might
fall off the rope.
The concept of equilibrium
that underlies the tight-rope walker's concerns also allows for an evaluation
of actual or proposed changes in the environment faced by our master of
the rope. Consider, for example, the question of a safety net. Should one
be installed? What if the supports for the safety net had to be fabricated
out of materials that formerly helped to support the rope? What if the
safety net had a negative effect on the tight-rope walker's concentration—or
on his "alertness," to put things in Kirznerian terms? What if the tight-rope
walker perceived the safety net as a hammock? Neither of the two extreme
and degenerate conceptions of equilibrium is of any help in answering these
questions. In fact, the questions themselves—Just like the tight-rope walker's
concerns—have relevance only when equilibrium is understood in the middle-ground,
or tendencies, sense.
The concept of equilibrium
as imported from Newtonian physics into neoclassical economics has been
put to various uses. Shmanske sets out and defends his own equilibrium
theorizing in the context of a comparison between neoclassicism as developed
in the UCLA tradition and a certain aspect of Austrianism as detailed by
Kirzner. My own perspective on the issues derives from three points. First,
to the extent that we are searching for a concept of equilibrium that reflects
the concerns of market participants and has policy relevance, the dispute
is not strictly between neoclassicism and Austrianism; moderate neoclassical
theorists would readily team up with the Austrians to oppose Shmanske's
neoclassical purism. Second, to the extent that Shmanske's and Kirzner's
alternative formulations are separated by a critical point of logic, Kirzner's
view wins out. And finally, Shmanske makes some progress toward a reconciliation
of the two views he contrasts; he solves some riddles about Kirznerian
alertness but leaves unsolved—and unrecognized—some riddles about his own
view of the world.
III. Two Neoclassical Traditions
Shmanske's arguments, with their "unsurpassed consistency and starkness,"
constitute a polar and degenerate position, one in which equilibrium always
prevails. This extreme view is not representative of (moderate) neoclassicism.
The neoclassical theory taught at the University of Virginia in the 1960s
and 1970s, for instance, lies at some intermediate point on the spectrum
that spans from the Austrian view to the Shmanske pole. Shmanske's notion
of "equilibrium always," then, is disputed within neoclassicism and can
most effectively be countered without drawing on the unique features of Austrianism.
The two traditions within neoclassicism having the most direct relevance
to the issue of useless and useful concepts of equilibrium are, in fact,
the ones commonly associated with UCLA and UVA. Clearly identified by Shmanske,
the UCLA tradition has it that the world is in continuous equilibrium.
By way of contrast, those working in the tradition of Virginia Political
Economy recognize the possibility of disequilibrium. They look for equilibrating
tendencies and report their findings in the form of comparative-institutions
I cannot resist noting the irony involved in these two particular orientations
toward equilibrium and disequilibrium. Southern California seems actually
to experience continuous and increasing disequilibrium economically, culturally,
and even seismologically. It is amusing to contemplate the scene at Westwood
where nearby real-estate bubbles, urban unrest, and even earthquakes fail
to jar the economic theorists loose from their equilibrium-always mode
of thought. Virginia, by contrast, is a place where change is dreaded,
tradition is cherished, and calm prevails. There is even a light-bulb riddle
that captures the essence of the Virginia world: How many Virginians does
it take to change a light bulb? It takes three—one to change the bulb and
two to reminisce about how nice the old one was. I'll leave it to others
to explain this mismatch of analytical framework and cultural ambience.
In the interest of traditions,
I am simply accepting Shmanske's association of continuous equilibrium
with the UCLA tradition, and I am offering as contrast the comparative-institutions
analysis of equilibrating tendencies that underlies the UVA tradition (Goetz,
1991). Further reflection, I suspect, would reveal that we are actually
talking about Earl Thompson, who epitomizes the equilibrium-always thinking
at UCLA, and Ronald Coase, who gave the UVA tradition its comparative-institutions
roots. And we should recognize, of course, that traditions do not translate
into mutual exclusivity of ideas. After all, there is Harold Demsetz at
UCLA who identified the fallacy of the Nirvana approach; there are Robert
Clower and Axel Leijonhufvud, who have had plenty to say about disequilibrium;
and there is Jim Buchanan who spent time and had influence at both institutions.
Substantively, the distinction
I want to highlight is that between an analytical framework that facilitates
a straightforward comparison of alternative institutional arrangements
in terms of the corresponding equilibrating tendencies and one that does
not. A useful equilibrium concept in this regard is one that excludes from
the underlying costs and benefits to be brought into equilibrium, such
as those ordinarily represented in supply and demand curves, those costs
and benefits associated with the equilibrating process itself. This is
not to say that the costs and benefits of equilibration should be ignored
but rather that, in comparing alternative equilibrating processes, the
costs and benefits of achieving coordination must be kept separate form
the costs and benefits of activities to be coordinated. Let me consider
two substantive questions to illustrate the difference between UCLA and
UVA conceptions of equilibrium. The first is a question about the market
for education; the second is a question about the unemployment caused by
labor legislation and the unemployment that characterizes a slack economy.
In the market for education,
which sector of the economy, private or public, more effectively brings
costs and benefits in line with one another? That is, in which sector is
there a more effective tendency toward equilibrium? If we answer in the
UCLA tradition, we have to say that the price of education as well as the
wage rate of educators is always in equilibrium in both sectors. Could
anyone doubt this categorical claim? Suppose some doubter were to suggest
that the wage rate of public-sector educators should be raised in order
to bring the quality of education into line with underlying consumer preferences
and resource constraints. The UCLA approach inspires the equilibrium-always
theorist to ask: "If the wage rate should be higher, then why isn't it?
Is it because of the bureaucratic costs of monitoring performance and adjusting
wage rates?—and because of the political costs of raising taxes or running
deficits to finance a higher wage bill? Well, these costs are just like
any other costs and are part of the explanation of why the wage rate is
what it is." Suppose the doubter were to suggest that we should move toward
the privatization of education precisely to avoid such bureaucratic and
political costs. Again, the UCLA-based response would have to be: "If we
should have more—or even complete—privatization, then why don't we? Evidently,
there are some relevant costs standing in the way, tipping the scales in
favor of what we do have over what we don't have. And if we don't know
just what those relevant costs are, well, it must be that the cost of knowing
about those costs is prohibitively high."
Economists adopting the
UVA approach, which maintains instinctively a sharp separation between
the costs that help to define an equilibrium and the costs of moving toward
that equilibrium, are led straightforwardly to a comparison of the market-driven
and bureaucracy-driven processes that equilibrate the markets for education
and for educators. All the arguments for private over public provision
of education, such as those made by Adam Smith, James Buchanan, and F.
A. Hayek, come into play. The focus is on the institutional arrangements
themselves and, more pointedly, on the extent to which they (1) facilitate
the discovery of information about consumer preferences and resource availabilities
(2) create incentives for market participants to act on the basis of the
information so discovered. Kirzner's (1985) views on regulation and his
emphasis on entrepreneurial alertness have a relevance here that is simply
not to be found in the UCLA tradition.
Do minimum-wage laws cause
unemployment, and is there such a thing as involuntary unemployment? The
answers from UCLA would have to be: "No" and "No." These answers, of course,
are not substantive claims but reflect a certain methodological purity.
In the UCLA-style understanding of minimum-wage laws, the wage floor becomes
part of the supply curve: Even though this legislated wage rate attracts
a number of willing workers far in excess of the number of minimum-wage
jobs, the all-things-considered costs of actually hiring additional workers,
which include the costs of repealing the legislation, are equal to or greater
than the corresponding benefits. The minimum wage, then, is an equilibrium
wage. George Stigler (1992, p. 459) offers a similar argument to the effect
that the fifty-year-old program in which the federal governement supports
the price of sugar has "met the test of time" and is therefore "efficient."
cannot be a problem in the continuous-equilibrium framework because, strictly
speaking, the term itself has no clear meaning. During a recession, all
non-working individuals are voluntarily declining to work for some low
wage rate that they could actually have. And as in the case of the fallen
tight-rope walker in a Shmanske equilibrium, this is where the UCLA analysis
ends. But to save this view from challenges involving references to specific
historical periods, such as the depths of the Great Depression when jobs
were not to be had at even the lowest wage rate, it might be necessary
to specify that the all-things-considered market-clearing wage rate might
be zero or even negative. Such methodological purism does violence to the
concept of "employment" by distinguishing, for instance, between the worker
who runs a ski lift and the "worker" who rides the ski lift only in terms
of their receiving a positive and a negative wage, respectively.
The concept of involuntary unemployment as introduced by Keynes makes sense
in a comparative-institutions framework. Interpreting Keynes, we can say
that unemployment is likely to be greater in circumstances where market
forces, which often involve the dominance of short-run speculation over
long-run enterprise, determine the volume of employment than under an alternative
arrangement where government, which is in a position to take the long view,
augments private investment with public investment so as to maintain employment
at a high and stable level. The difference in the unemployment rate attributable
to the difference between market and government direction is involuntary
in that the unemployed workers are in no position to choose between the
two alternative institutional arrangements. Here, I am recasting the stipulative
definition of involuntary unemployment that Keynes (1936) presented in
Chapter 2 of his General Theory in the context of the substantive
claims he made in Chapter 12. Keynes did not actually provide a comparative-institutions
analysis, but his uncritical presumption that a wise and benevolent central
authority is the preferable alternative to decentralized decisionmaking
underlay many of his arguments.
Macroeconomists in the Austrian
tradition or in the tradition of Virginia Political Economy would have
no reason to quarrel with a comparative-institutions notion of involuntary
unemployment. They have many reasons, however, to quarrel with Keynes's
substantive claims favoring the socialization of the investment sector.
Actually engaging in comparative institutions analysis reveals that central
direction is likely to be characterized neither by wisdom nor by benevolence.
Knowledge problems and political perversities inherent in central direction
combine to reverse the conclusion suggested by Keynes. It is the demand-managed
or centrally directed economy that has the more serious problems of involuntary
unemployment—or of involuntary underemployment. As Mises and Hayek have
shown, the politically popular policies of deficit spending and inflationary
finance misallocate resources and create conditions in which labor markets,
as well as markets for other factors of production, cannot quickly find
an equilibrium. More generally, the economics of knowledge, which was pioneered
by Hayek (1937 and 1945), yields the strong conclusion that the equilibrating
tendencies of the market are greater than the equilibrating tendencies
IV. Kirznerian Alertness as a Critical Point of Logic
In the context of autarky, where a Robinson Crusoe formulates some
plan and occasionally alters it as circumstances require, the distinction
between the UCLA tradition and the UVA tradition loses its significance.
The insights of comparative institutions analysis can be given no play
in an institutionless setting. Further, the distinction between the neoclassical
construction as articulated by Shmanske and the Austrian construction as
formulated by Kirzner is, in this context, mostly semantic as opposed to
substantive. When the only coordination being discussed is that between
an isolated individual's plans and his or her own perceptions of the relevant
constraints and alternatives, there simply isn't much scope for differences.
In fact, there isn't much scope for discussion.
Kirzner writes of alertness,
or entrepreneurial discovery, that lies outside the cost-benefit calculus
and changes the parameters of the optimizing equation; Shmanske writes
of the costs of discovery, which have evidently fallen below the benefits
of discovery at the precise point the discovery is made. The process of
adjusting plans to a new reality—or to a new perception of an old reality—is
a fast-working one in both the neoclassical and the Austrian view. But
in identifying the nature of the adjustment process, Shmanske follows Newton
while Kirzner follows Menger.
According to Shmanske (1994,
p. 208), the individual formulates a new plan in an instant—or, at least,
the individual starts to think about formulating a new plan in an instant.
Acknowledging the application of turtle theory here, we might carry the
logic a step or two further and say that the individual is preparing to
start to think about formulating a new plan—or, at least, will be preparing
start in an instant or so. However many turtles are actually involved,
optimality prevails continuously: There is an optimal rate of adjustment
to the post-discovery situation, an optimal acceleration toward the optimal
rate, an optimal surge toward the optimal acceleration, and so on.
Kirzner (1982, p. 146) discusses
the dynamics of the immediate post-discovery period in terms of Menger's
Law. According to this law, the value of ends attaches itself to the means
for achieving those ends. But at the instant of discovery, the individual's
evaluation of available means, which reflects his or her prediscovery ends,
is out of line with the new postdiscovery ends. Menger's Law reasserts
itself, however, "once the old means-ends framework has been completely
and unquestionably replaced by the new one." The use of the phrase "completely
and unquestionably" hints that the adjustment following the "instant of
... entrepreneurial discovery" might itself not be instantaneous. But the
lack of further discussion of the rate of adjustment suggests either that
it is sufficiently rapid that further analysis is unwarranted or, perhaps,
that further investigation of the actual adjustment speed is the business
of cognitive psychology rather than of economics: Is the individual "hit"
by the idea that the means now have a new value? Does the idea "dawn" on
him or her, or does it "eventually soak in"? Any of these phrases and implied
speeds of adjustment can be accommodated by Kirzner's formulation.
When the context of this
discussion is changed from autarky to a market economy, the continual reassertion
of Menger's Law—and of Jevons' Law of One Price—in the face of continual
changes in economic realities and in perceptions of them is no longer a
matter of cognitive psychology alone. The economist must explain how the
prices of goods here and goods there, the prices of goods now and goods
later, and the prices of producers' goods and corresponding consumers'
goods are brought into conformity with one another. Kirzner posits a certain
entrepreneurial alertness to price discrepancies and to the implied profit
opportunities as the ultimate basis for our claim of a tendency toward
Positing alertness, the
sine qua non of entrepreneurship which lies outside the cost-benefit
framework, involves more than a stipulative definition of entrepreneurship
or an empirical claim about the behavior of entrepreneurs. It entails a
fundamental point of logic. Considerations of costs and benefits that have
been packed into the supply and demand curves which define market conditions
cannot at the same time be the basis for adjusting the relevant price to
conform to those market conditions. Alternatively stated, if the costs
of adjusting a price to reflect conventionally defined costs and benefits
are themselves incorporated into the cost-benefit calculus, then the unadjusted
price is simply conceived to be an adjusted price. Conflating the costs
a price adjustment and costs requiring a price adjustment is, in
fact, precisely what gives rise to convoluted UCLA-style arguments in which
disequilibrium is inconceivable.
There is nothing inherently
objectionable about treating some aspects of price adjustment in terms
of costs and benefits. Quite to the contrary, such cost-benefit analysis
is to be recommended if it can shed light on some particular aspect of
equilibration such as the special difficulties of adjusting prices or wages
appropriately during episodes of inflation or deflation or during periods
of large federal budget deficits, when credit and asset markets tend to
be unstable. But, in general, a cost-benefit analysis of price adjustment
does not substitute for the notion of entrepreneurial alertness. It merely
pushes the positing of alertness one step back in the overall argument
(Kirzner, 1979, p. 142). What forces in the market bring the costs of adjusting
price into line with the benefits of adjusting price? If a cost-benefit
answer is given to this question, then the positing of alertness is pushed
still another step back.
There may appear to be a
certain formal similarity, here, between Mises' regression theorem, which
links the current value of gold-based money to the non-monetary value of
gold in some bygone era, and what we might call the Schultz-Shmanske regression
theorem, which envisions an infinite cascading of markets for entrepreneurship.
But the very essence of Mises' argument is that the regression is not infinite;
the most gigantic turtle in his theory actually has something to
stand on. By virtue of its having a use value as well as a monetary value,
gold serves as anchor and allows monetary theorists to establish the relationship
between tomorrow's expected prices and today's observed prices without
getting caught in an infinite regress. The Schultz-Shmanske regression,
however, is infinite and can be truncated only by eventual recourse to
Kirznerian alertness or some effectively similar notion.
V. Riddles in Both Worlds
Kirzner's concept of alertness has application in both an absolute
and a relative sense. Fundamental methodological questions about the science
of economics and fundamental socio-political questions about the organization
of society can be asked in terms of the general quality of entrepreneurship.
Is entrepreneurial alertness sufficiently pervasive and effective in a
market economy to produce equilibrating tendencies? This issue, sometimes
posed in the form of a riddle, has haunted classrooms and conferences for
many years. The question itself, however, is so fundamental that a negative
answer is inconsistent with the claim that economics has a subject matter.
As Hayek (1955, p. 39) has taught us, only if there actually exists some
effective tendency toward order is there any order to study. Economic inquiry,
then, presupposes entrepreneurial alertness.
The more policy-relevant
questions are couched in terms of comparative institutions. Is entrepreneurial
alertness more characteristic of a market-oriented economy than of a centrally
directed economy? Does the level of taxation have an effect on the alertness
of entrepreneurs? Economists who pay due attention to the entrepreneur
in their theorizing are inclined to answer these questions in the affirmative.
But attempts to articulate the answer in terms of Kirznerian alertness
not always successful or persuasive. Alertness, according to Kirzner, is
exercised costlessly, and so any after-tax profits at all or other gains
of any kind should suffice to call it forth. Why should costless alertness
not be always exercised to the fullest? This and related questions are
appropriately identified by Shmanske as "riddles" in Kirznerian theorizing.
Shmanske has provided an
insightful answer to these riddles by distinguishing between developing
the capacity to be alert to profit opportunities and actually exercising
the alertness. Cost-benefit analysis applies to the developing but not
to the exercising. Let me note here, though, that this reconciliation,
which will likely be accepted by Kirzner as a friendly amendment and fruitful
development, is itself the result of an act of intellectual entrepreneurship
and is better understood as Kirznerian alertness than as still another
instance of continuous (intellectual) equilibrium. On the basis of Shmanske's
amendment to the Kirznerian framework, it follows straightforwardly that
the very capacity for alertness will be greater in a market-oriented, low-tax
Shmanske's own approach
to normative inquiry, about which he provides only a hint (Shmanske, 1994,
p. 221), turns on the identification of "artificial," or "unnecessary,"
costs, such as those associated with license requirements and (presumably)
minimum-wage legislation. He expresses a preference for institutional arrangements
that minimize these costs. But this approach creates some riddles for Shmanske.
If "genuine" costs would have to be incurred in the process of eliminating
"artificial" costs, then continuing to incur the artificial costs may,
all things considered, be the cost-effective option. Also, is the widespread
unemployment associated with a depression attributable to a genuine or
an artificial cost of equilibration? And just how—and at what cost—would
the element of artificiality be removed? Answering these and similar questions
would seem to require Shmanske to abandon the UCLA tradition in favor of
the comparative-institutions analyses that underlie the moderate neoclassical
and Austrian traditions.
*The author thanks Thomas J. McQuade and Mario J. Rizzo
for their helpful comments. This paper is based upon a formal commentary
invited by the Smith Center for Private Enterprise Studies, Hayward, CA
and delivered in a session at the 67th annual conference of the Western
Economic Association in San Francisco in July 1992.
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