In my first year of grad school in 1964 I was assigned to read some of Böhm- Bawerk’s theory of capital, though without getting much out of it. Otherwise my first training was purely Samuelsonian and Keynesian and Chamberlainian— though when writing my dissertation on economic history I started to see that competitive supply-and-demand economics was more useful, and tilted that way. The progression was Prince-Kropotkin left anarchism (discovered at the local Carnegie library in 1956 at age 14), Joan-Baez socialism (age 16), Keynesian eco- nomics (age 19), engineering economics (age 21), supply-and-demand economics (age 25), fully Chicago-School economics down to MV = PT (age 30), Austrian economics (age 48), and finally, age 68, humanomics, an economics for complete humans. Notice the slowing down.
Lavoie persuaded me at least that hermeneutics was the listening side of the speech that a rhetor gives. Don and I were postmodernists together, and chatted amiably with pomo Marxist economists such as Jack Amariglio and Stephen Cul- lenburg about our belief held in common that facts in science do not speak for themselves (Amariglio and McCloskey 2008; Lavoie 1991). All of the rhetorical/ hermeneutic economists, left and right, including my old ally in rhetorical stud- ies of economic science, Arjo Klamer, kept saying to me: “You know, McCloskey, rhetoric has to do with the economy, too.” I couldn’t see it.Max U does not explain the modern world! But discovery does!
A Max U (utility maximization) model, as much as I have loved such a Sam- uelsonian-Beckerian idea, and have written numerous books and scores of articles in its praise, cannot work to explain real innovation. Routine maximizations, such as by the extension of foreign trade or by investment in routine projects of swamp drainage or canal digging, do not explain the modern world. What explains it, as the Austrian economists would put it, is discovery. And, as they (such as Kirzner) argue correctly, a real discovery, Mokyr’s “macro invention” (1990), is never an outcome of methodical investment, but always an accident in the prepared mind and in the open conversation. There is no U to max and no constraint to obey if real discovery is at issue, as against routine exploration for, say, oil. About oil, the startling macrodiscovery was that you could get it in bulk from the ground and then use it to make kerosene and then gasoline. By contrast, investing an optimal amount in drilling for additional oil, after the discovery of the idea, is a project of rational search. The difference (I speak again to economists) is the same as between Knightian risk (which is calculable, and therefore often insurable and therefore partially avoidable in a world of Max U) and uncertainty (which is not). No one would have bet on Europe in 1500, or on England in 1600, or on the factor of one hundred in 1800. It was uncertain—as in “astounding.”
Institutional economists of an older variety often claim that Samuelsonian eco- nomics is, say, bourgeois, and suitable therefore only to the Bourgeois Era. You will hear them claiming that an African economics suits Africa, and an Indian economics India. The Samuelsonian economist merely smiles and carries on tak- ing a first partial derivative.
But real innovation, Kirzner is saying, entails real ignorance, that is, “knowledge about which nothing is known” (1979: 144).
It can be put economically: known knowledge (shades of Donald Rumsfeld) earns its normal reward. If you know how to read a balance sheet you do not on that account alone become Warren Buffett, because so many other people know how to read a balance sheet. Unknown knowledge, on the other hand, generates supernormal profits. When sometime before 1211 an anonymous Florentine in- vented the idea of a double-entry balance sheet, then he, or his Italian imitators, could pick up the profit from the innovation, and did (Origo, 19571 : 109). Once the reading of balance sheets was widely known, however, the supernormal profits fell to zero.
But national income will not rise unless the innovation is Kirznerian.
“The ease of calculation provided by money,” writes Kirzner, “is thus not merely a device for lowering transaction costs relevant to deliberate search,” as the Samuelsonians claim when trying to understand sheer information (Kirzner, 1979: 150). “It represents a social arrangement with the ability to present existing overlooked opportunities in a form most easily recognized and noticed by spon- taneous learners.” Kirzner makes a parallel point in his writings on entrepreneur- ship.
To put it another way, the Mute Max U model fits smoothly with the metaphor of speech as a conduit, which would be good news if human communication were largely a matter of transmitting preformed messages between minds. But Mute Max U does not fit at all with a rhetorical (or Wittgensteinian or Burkean or Austinian or Habermasian or MacIntyrish) theory of language. And it does not fit with Austrian economics, when properly extended to the persuasive role of the entrepreneur.
[McCloskey definitely knows how to persuade!]
Very interesting article.
HT: Marginal Revolution and Peter Boettke