Rosolino A. Candela

Rivalry, Polycentricism, and Institutional Evolution

We argue that the future of Austrian political economy rests on the study of how institutional entrepreneurs discover and implement alternative institutional arrangements conducive to economic growth. This requires a dual level of analysis in spontaneous order studies. How such institutional arrangements manifest themselves is ultimately an empirical question. As a progressive research program, Austrian political economy will entail cross-fertilization with other empirical branches of political economy that illustrate its own central theoretical contributions to political economy, namely economic calculation, entrepreneurship, and spontaneous order by having applied to the constitutional level of analysis. Accordingly, we argue that such cross-fertilization with the work of Ronald Coase and Elinor Ostrom will further expound the institutional counterpart of “rivalry” in the market process, namely polycentricism and its empirical manifestation. Understanding the distinct relationship between rivalry and polycentricism will provide the central theoretical underpinning of institutional evolution.

The Liberty of Progress: Increasing Returns, Institutions, and Entrepreneurship

This paper argues that liberty and progress arose due to the generalized increasing returns to economic activity. These increasing returns follow from the gradual, cumulative process of institutionalizing liberties. As a society adopts an institutional framework from accumulated liberties, there is greater scope for productive specialization and social cooperation under the division of labor. Greater scope for market exchange also delivers social norms and commercial values that tolerate experimentation and innovation. Taken together, the accumulation of liberties, the institutionalization of liberty, and the generalized increasing returns to economic activity unleash the creative powers of a free civilization to deliver societies from poverty and subjugation.

What Is Old Should Be New Again: Methodological Individualism, Institutional Analysis and Spontaneous Order

In this paper we revisit the case for methodological individualism for the positive analysis of political economy. We argue that the basis of methodological individualism implies neither a necessary commitment to atomistic reductionism in explaining social phenomena nor philosophical individualism resulting in a laissez-faire policy. The point of engaging in spontaneous order analysis on methodologically individualist grounds is not to make precise predictions per se, but instead to render the purposive actions of individuals and the meaning of such actions intelligible. Once individuals can be understood as purposive actors whose social interactions generate patterns of institutions, such as language, money and law, which coordinate their self-interest, then the mystery of how self-interest coincides with social cooperation under the division of labor, i.e. Paris getting fed, can be understood through the consistent and persistent application of the economic way of thinking.

Milton Friedman, James Buchanan, and Constitutional Political Economy

This chapter argues that the ambiguous bifurcation in Frank Knight’s understanding of economics would manifest itself through the divergent paths in the earlier writings of his students Milton Friedman and James Buchanan. It argues that despite Friedman’s stature in the scientific elite of the profession of economics, the stronger argument for the classical liberal order is found in Buchanan’s work. Moreover, we argue that in the later part of Friedman’s career as a classical liberal political economist, his arguments for the free market society moved away from his earlier emphasis on efficiency claims to the broader claims about the institutional framework within which the game of life is played. In short, Friedman came to stress more the arguments of Buchanan concerning the positive analysis of the politics of economic policy, and the constitutional level of analysis for reform.

The Institutional Justice of the Market Process: Entrepreneurship, Increasing Returns, and Income Distribution.

We argue in this chapter that the transformation in the vision of economics from one in terms of processes to one in terms of equilibrium would in turn yielded public policy implications regarding the role of government and distributive justice. Although classical political economists had made a case regarding the institutional justice of the market process, this argument became overshadowed in the late 19th century and early 20th century by early neoclassical economists, who defended the market in terms of the equilibrium pricing of factor payments. Justice according to the early neoclassical economists was defined in terms of market outcomes that approximate the marginal valuation of the productive contribution of each factor of production. The persistence of this equilibrium paradigm today, among both proponents and critics of the market, has led to the notion that income equality is a substitute, not a complement to economic prosperity.

Market Theory and the Lighthouse System

In this chapter, we point out that Kirzner’s focus on the market process and entrepreneurial alertness to profit opportunities that come from improving allocative efficiency (or pushing back the frontiers of production possibilities) is universal in that it can be applied to what appears to be the most unassailable “bailey” of market failure theory. To do so, we consider the historical case of lighthouses which, because the light they produced to guide ships in the age of sail was non-rivalrous and non-excludable, is considered the textbook example of a “pure” public good. We point to recent research that show that the market process could have led to the production of efficient maritime safety services but that it was prevented from operating by state-mandated monopolistic guilds. As such, we argue that even this seemingly impregnable bailey of market failure theory fails to withstand Kirzner’s argument.

Das Milton Friedman Problem?: A Reassessment of Friedman's Contributions to Economic Methodology

In terms of economic methodology, Friedman’s most well-known contribution is his 1953 essay, “The Methodology of Positive Economics.” This important contribution has overshadowed his earlier contribution to economic methodology, entitled “Lerner on the Economics of Control” (1947). Whereas Friedman (1953) argued that economic theory can be built upon unrealistic assumptions, ironically, what has been almost forgotten is that Friedman (1947) attacked the theory of market socialism precisely for its unrealistic assumptions. This irony presents an interesting puzzle, which we adjudicate in this essay. We argue that in each case, Friedman was making an immanent critique of his intellectual opponents that was rhetorically consistent, yet methodologically inconsistent. This methodological inconsistency is irreconcilable, since Friedman (1953) contradicts the analysis of Friedman (1947).

Is the Market Wage the Just Wage? A Reassessment of Factor Pricing and Distributive Justice

Do markets generate a “just” wage? The answer to this question will depend upon the particular theory of the market that the political economist employs. By comparing actual labor markets with the neoclassical theory of competitive equilibrium as its normative benchmark, Joseph Heath (2018) argues that factor pricing is orthogonal to normative issues such as distributive justice. We argue that Heath’s conclusion, though not invalid, is misplaced since it is directed towards a model of the market rather than the market itself. Though indeed classical political economists and early neoclassical economists failed to deliver an explicit theory of distributive justice, what Heath overlooks is that implicit to their understanding of the market process was an institutional theory of distributive justice. From this theory, distributive justice is evaluated on the degree to which institutions generate the conditions necessary for individuals to not only realize, but also increase their marginal product of labor. By arguing in terms of an equilibrium, Heath avoids the more relevant question of a comparative institutional nature, which is to understand under which institutional conditions a just wage can be discovered. Therefore, Heath evaluates factor pricing without taking into account the institutional conditions within which factor prices emerges in the first place.

Gordon Tullock, Praxeology, and the Qualities of a Natural Born Misesian

James Buchanan argued that Tullock was a “natural born” economist. In this paper, we explore the notion that Tullock, more appropriately, was a “natural born Misesian.” Characterizing Tullock as such, we ask the following question: was Gordon Tullock also an economic imperialist, relentlessly applying the logic of homo economicus to all walks of life? Tullock, like Mises, understood homo economicus to be homo agens, or acting man, an individual who makes decisions in an open-ended world of uncertainty. For the natural born Misesian, homo economicus already exists outside the realm of markets, but the role of the economist as a social scientist is to understand the institutional constraints within which the infinite variations of homo economicus manifests itself.

Vilfredo Pareto's Theory of Action: An Alternative to Behavioral Economics

In recent years the term behavioral economics has arisen in consequence of the growing effort of a significant set of economists to import psychological methods and findings into economics. This body of work issues strong challenges to the use economists have made of rationality in economics. Unfortunately, this recent work illustrates unnecessary and misguided creativity. Vilfredo Pareto explored the same analytical territory nearly a century ago, and to superior analytical effect. Pareto recognized that the substantive content of action depends on the environment in which action occurs. Some environments elicit logical action while other environments elicit non-logical action. Both types of action are species of rationality, only they are recognizably different. In this paper we explain why Pareto’s approach to human action points toward a superior analytical agenda than does the present orientation of behavioral economics.