Author Archive for Matt McCaffrey

Do Incentives Really Matter?

7214510228_fa7685186d_bThe phrase “incentives matter” is ubiquitous in economics, from undergraduate teaching to economic policy debates. The mantra is especially popular in the growing literature targeted at the general public, which I’ve criticized before for its undue focus on incentives (see here and here). My point is that while it’s good to see economic ideas reaching a larger audience, it doesn’t help much if the ideas aren’t sound to begin with. Such is often the case with the concept of incentives.

To answer the question posed in the title, yes, incentives matter, in the sense that individuals have motivations, and it’s important to think about what those motivations are if we want to know how people act in the real world. For example, in the words of Steven Kerr, ignoring incentives often leads to “the folly of rewarding A, while hoping for B,” which produces managerial chaos.

Nevertheless, emphasizing incentives too much glosses over several problems: economic laws can make incentives irrelevant; incentives are in any case too narrow a concept to be the defining characteristic of economics; focus on incentives sometimes leads to a paternalistic view of economic policy.

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The Economics of Perpetual War

Cyprian_WarThe 100th anniversary of the beginning of World War I seems like an ideal opportunity to spread a message of peace and economic cooperation; sadly, 2014 has so far been a year of new and renewed conflict far more than one of reconciliation.

By now, talk of the horrors of war is nothing new. Everyone knows about the total destruction war brings; in fact, we’ve known for millennia. As Lew Rockwell points out, “just about everyone makes the perfunctory nod to the tragedy of war, that war is a last resort only, and that everyone sincerely regrets having to go to war”—but war continues all the same. Even classical military strategists like Sun Tzu believed war should only be used only as a last resort, and argued that military campaigns could bankrupt states and ultimately, destroy them. Art of War actually states that “no country has ever profited from protracted warfare,” and cautions generals to “fight under Heaven with the paramount aim of ‘preservation.’” Yet as far back as we have historical records, these sorts of ideas have fallen on deaf ears among governments and military organizations alike.

Economics offers many insights into war making and why it persists, but the most fundamental explanation is an institutional one. It’s tragically simple: warnings about the horrors of war go unheeded because the power to make war—as well as “justify” it in the eyes of those forced to fight and finance it—lies in the hands of the state and its business and intellectual allies. States are monopolists of organized force, and as such decide when and how to use their power on a grand scale, especially when they wish to confront other monopolists.

In fact, economic reasoning tells us that conflict is an integral part of the logic of states, which are inherently prone to warfare and imperialism. That war is an essential and practically inevitable behavior of government has been known since ancient times: for instance, Art of War begins by stating that “War is the greatest affair of state, the basis of [its] life and death, the Tao to survival or extinction.” Read More→

Malaysian Airlines Opts for (Complete) State Ownership

300px-Malaysia_Airlines_Svg_Logo.svgBeleaguered Malaysian Airlines is opting for a government buyout in the wake of recent disasters. The company is already 69% state-owned, but a new deal will allow the Malaysian government to acquire the remaining shares, completing the nationalization. The airline has been in a downward financial spiral for years, plagued with union difficulties and loss-making state-management decisions, and the blows suffered in the last five months have only compounded its troubles.

Malaysia’s state investment company claims the goal of the buyout is to “revive our national airline to be profitable as a commercial entity and to serve its function as a critical national development entity.” The reality is that Malaysian Airlines is unable to compete in the airline industry—which is already a poster child for corporate welfare across the world—and is surrendering any of its remaining burden of market entrepreneurship.

Bluntly, the buyout looks like textbook rent-seeking and political entrepreneurship. At about eight cents per share, the buying price for the minority stake in the company is 29% higher that its average share price over the last three months, and higher than the share price prior to the disappearance of Flight 370 in March. The inflated value will act as a subsidy to the shareholders, who will make out far better than they would in a market that genuinely reflected the airlines’ inability to allocate resources effectively.

Of course, the transfer of the remaining ownership to government will not save the struggling firm, and if anything we should expect its fortunes to decline even further. More state ownership will only complete Malaysian Airlines’ insulation from anything resembling genuine markets, and eliminate any entrepreneurial drive toward satisfying consumers.

Guess Who Built the Roads?’s a great story in the news this week about Mike Watts, a British entrepreneur who’s found a creative solution to one of economics’ most clichéd questions: “Who will build the roads?” Ever since a landslide in February, a section of the A431 roadway between Bath and Bristol has been closed to traffic. The closure has been making life very difficult for commuters—who face dramatically increased fuel costs, driving times, and pollution—and it will take until Christmas before local government will be able to repair the road.

Seeing the trouble caused by the closure, Watts stepped in to solve the problem by building his own toll road to provide a cheaper and more direct route for motorists. The Telegraph reports that “The route, which opened on Friday, is believed to be the first privately-run toll road built in more than 100 years.”

Watts and his wife have been truly entrepreneurial in their venture, which cost £150,000 to build and will require another £150,000 to maintain over the next five months (compared to an estimated £1.5 million to repair the damaged road). But they’re confident they’ve made the right decision both for themselves and local drivers. Unlike the “patrons” of public roads, Watts’ customers know up front how much they have to pay and what to expect for their money. He’s charging £2 per vehicle, and already has 1,250 customers daily. Shockingly, his road is somehow serviceable and drivers are using it even though it hasn’t received approval from local safety inspectors.

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The Trouble with Pop Economics

FreakonomicsJohn Lott writes in Barron’s that we should be sceptical of the populist economics trend that’s been prevalent in the past few years. Specifically, Lott criticizes Steven Levitt and Stephen Dubner, authors of Freakonomics, for peddling a kind of “naïve economics” that fascinates readers, but doesn’t hold up to serious scrutiny (rather than “naïve economics,” maybe “economics for the naïve” would be better).

I’ve been working through some similar ideas myself, especially in a new paper criticizing aspects of the pop econ literature. I should point out that these books—including Freakonomics and its many imitators—do have a reasonable goal, namely, to bring the economic point of view to the general public. Now, the fact that economics needs a special literature to explain its ideas to the public is telling, and to some extent an indictment of how the profession has developed (e.g. into an abstract and often excessively technical discipline). Still, as writers like Hazlitt show, it’s a great advantage to be able to communicate economic ideas simply and powerfully. But while in general we should welcome economic writing for non-economists, too often pop econ forgets to stop when descending the ivory tower, and ends up on the intellectual parking sublevel.

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The Flourishing of Libertarian Literary Writing

B946Although libertarians and Austrian economists have been interested for a long time in the relationship between art and liberty, there’s been relatively little effort to develop a distinctly liberty- or market-oriented form of literary theory; critical theory is a playground for myriad “isms,” but libertarianism isn’t often counted among them. Fortunately, this situation is beginning to change, as there’s a lot of exciting work being done in the field of literary studies, which isn’t usually known for its sound economics or liberal political philosophy.

Much of the creative energy behind this new research can be attributed to Paul Cantor, who has devoted an impressive career to exploring the relation between markets, art, and popular culture. If you want an overview of the topic, you can listen to Cantor’s fascinating lecture series from 2006 on Commerce and Culture. Especially important is the book he edited with Stephen Cox, Literature and the Economics of Liberty: Spontaneous Order in Culture, which helped lay the foundations of a libertarian literary criticism.

There are many other writers who are pushing the boundaries as well, especially those at the Austrian Economics and Literature blog. To name only one contributor, Sarah Skwire frequently covers neglected classics like the operettas of Gilbert and Sullivan, along with unfairly-maligned works like Thoreau’s Walden.

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IKEA’s “Minimum Wage”

200px-Ikea_logo.svgIKEA has announced it will be raising the “minimum wage” of its US employees to $10.76 per hour, an increase of about 17% from the current minimum. The news comes in the midst of another “national discussion” (often code for anti-economic hysteria) about minimum wage “reform” (always code for an increase).

Economic criticisms of the public minimum wage are readily available, but IKEA’s decision is different. It does have some interesting economic implications, but there are a lot of other issues in this story worth discussing, not the least of which is the language used to report it. That is, I have to wonder why people use the term “minimum wage” to refer to the internal policy of a private firm. Maybe it’s just a convenience of language, but regardless of its true cause, this usage gives a rhetorical advantage to proponents of government-mandated minimum wages.

That is, using “minimum wage” to describe both entrepreneurs’ decisions and government regulation obscures the distinction between them, i.e. that one is chosen by employers and the other forced on them under penalty of law (often through the influence of larger competitors). Using the same term opens the door to falsely conflating policies, making it seem like private and political decision making are the same or similar. If private firms declare their own minimum wages, a government minimum wage loses its distinctiveness, and seems like just another benign entry on a long list of possible wage policies. It’s all too easy—as news outlets reporting this story demonstrate—to compare IKEA’s minimum wage to the federal minimum wage, as if each is just a different but harmless way to improve people’s welfare.

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The Intellectuals’ Hostility to the Market Economy

Joseph_Schumpeter_ekonomialariaFurther to Joe Salerno’s post on “Hayek and the Intellectuals,” it’s worth adding that Hayek was not alone in thinking of the intellectual class as naturally hostile to the market economy. In particular, there are many similarities between Hayek’s ideas and those found in Schumpeter’s “Sociology of the Intellectuals.”

Schumpeter famously argued in Capitalism, Socialism, and Democracy (1942; three years before Hayek’s essay) that the entrepreneurial economy creates wealth and improves social conditions to such an extent that it eventually undermines itself and is replaced with socialism. Entrepreneurs are so successful that people take them for granted; in fact, people resent entrepreneurship and innovation, because the constant transformation of the economy gives them feelings of instability and uncertainty.

[T]he ever-rising standards of life and particularly the leisure that modern capitalism provides for the fully employed workman…well, there is no need for me to finish the sentence or to elaborate one of the truest, oldest and most stodgy of all arguments which unfortunately is but too true. Secular improvement that is taken for granted and coupled with individual insecurity that is acutely resented is of course the best recipe for breeding social unrest.

However, this “hostility” to the market economy is insufficient to produce a full-blown transition to socialism. In addition, “For [a revolutionary] atmosphere to develop it is necessary that there be groups to whose interest it is to work up and organize resentment, to nurse it, to voice it and to lead it.” Enter the intellectuals.

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Do Video Games Teach Economics?

GalagaMany teachers know that encouraging interest in the dismal science can be difficult because students often find economics abstract and, well, dismal. It’s basically a truism then that if economists want to engage students, we should use interesting and relatable examples. And more often than not, this means mining pop culture for teaching moments from music, TV, and film. Along these lines, I suggest economists begin to look to video games for inspiration as well.

In the last few years, there has been an explosion of interest in the economics of the video game industry, and especially in the digital economies that emerge within games. Whether we look at social interaction and trade, or money and inflation, it’s obvious that as games become more complex, they increasingly illustrate the principles of economics. The most common examples come from Massively Multiplayer Online (MMO) titles like World of Warcraft and EVE Online, but I think games incorporate economic ideas in more fundamental ways as well.

I’ve discussed in a recent article how games imply economic behavior, and how making decisions within a game highlights the fundamentals of human action. The basic idea is that virtual worlds, like the real world, present us with a series of choices. Games impose digital scarcity, obliging players to weigh the benefits of different courses of action, make tradeoffs, and incur costs.

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The True Costs of War

B242Memorial Day provides as good an opportunity as any to reflect on the horrendous and irreversible costs of war. For most people—and rightly so—the clearest costs are those in terms of human life, which is shattered both physically and psychologically. As John Denson writes, “In looking at the costs of war we must always keep in mind the reality experienced by soldiers in actual combat. The tallies of the dead and wounded soldiers cannot carry the full meaning of the terror of actually experiencing war… [and] the very real horror and violence known by those on the front lines who actually do the fighting.” The destruction of life, civilian and soldier, is usually the goal and always the result of warfare in any age.

Yet in addition to the human costs, which are themselves staggering, there are others as well. Denson further explains:

In the war-torn [21st] century, we rarely hear that one of the main costs of war is a long-term loss of liberty to winners and losers alike. There are the obvious and direct costs of the number of dead and wounded soldiers, but rarely do we hear about the lifetime struggles of combat veterans to live with their nightmares and injuries. Nor do we hear much about the long-term hidden costs of inflation, debts, and taxes. Other inevitable long-term costs of war which are not immediately obvious are damages caused to our culture, to our morality, and to civilization in general.

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Lean Startups and Capital Ownership

6719452305_78383ce4e3_zIn the last few years, there has been a big emphasis in entrepreneurship on “lean” startups. Being lean basically means avoiding unnecessary costs early in the development of a new venture, thus minimizing waste and reducing the negative effects of uncertainty. For example, a common lean strategy involves using consumers to test a limited run of an unfinished product in order to furnish data before going to market. This allows the firm to gauge the likelihood of success before committing resources to full-scale production, which is expensive and uncertain.

The conventional wisdom, which in some ways is just economic common sense, is that a new firm should stay lean for as long as possible. Yet one implication that is sometimes drawn from the lean approach is that capital ownership is a negative for early-stage entrepreneurs, because in some ways owning capital narrows a firm’s strategic options, both economically and geographically. Lean ideas are especially popular in high-tech industries (where they originated), which are more likely to be driven by ideas and lines of code than intensive investment in plant and equipment.

The lean philosophy may then hint at some interesting questions for Austrian economists. For instance, if it is true, as many Austrians have emphasized, that entrepreneurship requires resources (and especially capital goods), how would economists respond to the claim that successful entrepreneurship doesn’t or shouldn’t require capital assets (at least in its early stages)?

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Game of Thrones and the Politics of Fantasy

Game_of_Thrones_title_cardThe internet is filled with talk of the fourth season of HBO’s Game of Thrones. This is welcome news, as Game of Thrones probably offers economists more teachable moments than any show currently on the air (even House of Cards). Fans are probably familiar with its economic themes and strongly critical view of government, which have attracted the attention of many libertarians, including yours truly. But the show’s “politics without romance” approach has been catching on in other circles as well, and (shameless self-promotion) my own economic take has been featured by CNBC and

But instead of using this post to explore themes from the show, I want to talk more generally about why I think it’s so effective in portraying the devastating reality of war, power, and government. The secret, in my opinion, is the fantasy setting. While it might seem counter-intuitive that an elaborate fictional world with so much supernatural activity could actually describe the real world, Game of Thrones works well because it seems so removed from our own experience.

There are many ways we could think about this, so I’ll stick to just a couple. First, fantasy worlds give us a place for our ideas to play. Maybe if we can’t yet make the real world more to our liking, we can create a fictional world to act as a kind of thought experiment in which to develop our ideas and share them. The possibility to create new worlds is one reason sci-fi and fantasy have long been home to ideas about liberty.

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The Surveillance State in Socialist Romania

800px-Flag_of_Romania_(1965-1989).svgThe BBC is running a tragic but fascinating article about political oppression under the Ceausescu regime in socialist Romania. The article tells the story of Carmen Bugan, whose father, Ion Bugan, was repeatedly spied on, arrested, and tortured for political dissent. Since 1999, the files of the Romanian secret police, the Securitate, have been available to those who were investigated during the socialist period, and Carmen has uncovered the files kept on her family. In the process, she has revealed publicly the true extent of the surveillance and suffering her family (and many other Romanians) endured.

Like every socialist country, Romania under Ceausescu failed economically. As Carmen Bugan describes it, “This was a Romania of food shortages, frequent power cuts, and ferocious reprisals for any form of dissent… Evening bread queues often ended in fist fights.” In order to quell any calls for reform, his government brutally suppressed any opposition, including that of Ion Bugan. Bugan agitated for political reform and attempted to flee the country, but more than once was arrested and sentenced to hard labor.

Part of the sentence was a five-month period of torture by solitary confinement and starvation while wearing 45kg of chains day and night, in the “special” wing of the prison at Alba Iulia… My father’s own account of this period is hair-raising: he was fed once every two days, and allowed to wash three times in the entire period he was held there.

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Entrepreneurship without Romance

3279740532_d4105eb4fa_oJames Buchanan’s work on the economics of public choice has been called “politics without romance,” because it looks beneath the glossy exterior of government and reveals the underlying reality of political behavior. Unfortunately, the “romantic” view of politics is shared by supporters of all types of political power, who seem to don rose-colored hazmat suits in order to promote their particular candidates, parties, or ideologies. As I’ve mentioned elsewhere, from the perspective of economics, politics looks less like romance and more like an abusive marriage.

Entrepreneurship also attracts a kind of mistaken romanticism, although in a different way than politics. A couple of weeks ago, Isaac Morehouse wrote an insightful post on the Praxis blog warning that we should take care to avoid glamorizing creativity too much. His point is that creative success, especially in entrepreneurship, can derive from relatively straightforward decision making. Creativity is often simply an attempt to solve a problem while avoiding harm to oneself, as opposed to the flashy, dramatic, and heroic struggle against the odds we sometimes imagine it to be.

In other words, we often place undue emphasis on the personal magnetism and economic “heroism” of entrepreneurs. Yet despite being the “driving force of the market,” entrepreneurship is often quite mundane. Taking a romantic view can be misleading if we end up thinking in terms of only the most dramatic cases of disruptive innovation or personal entrepreneurial charisma (or lack thereof!), and less on the pervasive and vital role of entrepreneurial calculation and judgment.

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Venezuela’s Ongoing Economic Crisis

download (1)A few months ago, Carmen Dorobăţ and I wrote an article discussing Venezuela’s rapidly deteriorating economic situation. Since then, conditions in Venezuela have worsened, and in the last week political unrest has escalated quickly, with large protests of the Maduro government taking place in Caracas and elsewhere around the country. Maduro and his supporters have responded by violently cracking down on the protests and censoring media outlets covering the events.

The protests do not appear to be guided by a specific ideological movement or set of political goals, but are instead a more general reaction to the country’s economic turmoil. As one protester explained, “I’m here because I’m tired of the crime, of the shortages, tired of having to stand on line to buy anything. I’m tired of the politicians of both sides.” In the last few years, Venezuela has become a classic and tragic case of Mises’ argument that systematic government intervention leads to socialism. The country has had a pseudo-socialist government for some time, but the logic of economic planning has gradually eroded what few economic freedoms there once were. In particular, the current system of price controls (which Maduro has expanded) has caused shortages of sugar, toilet paper, and many other essential goods. It is always easier and more tempting for government to increase control than relinquish it, and the increasing economic disorder resulting from the initial shortages has only resulted in more price controls, just as Mises predicted.

Venezuela’s monetary policy has also played an important role in this process. Its rate of inflation has been rising rapidly, and is now 56% per year. Mises emphasized that price controls are governments’ natural response to inflationary price increases. When faced with the choice of stopping the printing press or expanding price controls, governments tend to choose the latter. As is often the case, bad monetary policy is driving the broader increase in socialist policies.

Price controls and inflationary policy are both recipes for social disintegration, which is what the protests in Venezuela seem to be struggling against. It’s not clear to what extent Maduro’s government is actually threatened by these events, but we can only hope that the protests will help set Venezuela on the path to peace and economic and social freedom.

Science Fiction, Fantasy, and Entrepreneurial Alertness

downloadFor fans of the science fiction and fantasy genres, Stephen R. Donaldson probably needs no introduction. For those not so familiar, Donaldson has penned numerous novels and short stories, many to critical acclaim, and is the author of the recently-concluded Chronicles of Thomas Covenant, widely regarded as one of the best fantasy series of the last forty years.

I’m currently reading Donaldson’s novel The Real Story, which is the first of five volumes in his sci-fi epic The Gap Cycle. In an afterword to the book, Donaldson explains in great detail how the idea for The Gap Cycle was conceived and, through various twists and turns, eventually completed. What strikes me most is the way Donaldson describes the writer’s creative process:

Most writers hate the question, “Where do you get your ideas?”

This is because the answer tends to be at once ineffably mysterious and excruciatingly mundane. We are all in love with the magic of the imagination—otherwise we wouldn’t be able to survive as creative artists—but none of us can explain how it works. In a sense, writers don’t get ideas: ideas get writers. They happen to us. If we don’t submit to their power, we lose them; so by trying to control or censor them we can make the negative choice of encouraging them to leave us alone. But we can never force ourselves to be truly creative. The best we can do is to teach ourselves receptiveness—and trust that ideas will come…

For some reason, a fair number of my best stories arise, not from one idea, but from two. In these cases, one idea comes first; it excites me enough to stay with me; yet despite its apparent (to me) potential, it stubbornly refuses to grow. Rather than expanding to take on character, event, and context, it simply sits in my head—often for many years—saying over and over again, “Look at me, you idiot.” If you just looked at me, you would know what to do with me. Well, I do look; but I can’t see what I need—until the first idea is intersected by the second.

What I find intriguing about this passage is that in describing his inspirations, Donaldson seems to capture the essence of Israel Kirzner’s theory of entrepreneurship as alertness to opportunities. The key feature of Kirzner’s theory is that opportunities tend to be discovered spontaneously by entrepreneurs who are not actively looking for them. Instead, the lure of a pure profit opportunity creates a special incentive for entrepreneurs that causes them to notice the opportunity. I read Donaldson as taking very much the same approach; he even goes so far as to say that when he actively looks at ideas (searching for meaning) they end up revealing nothing. For him then, artistic creativity is also spontaneous.
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Mises and Schumpeter: Friendly Rivals?

Joseph_Schumpeter_ekonomialariaLudwig von Mises and Joseph Schumpeter are the most famous economists trained by the older Austrian School, although generally Schumpeter has received the lion’s share of attention.[1] This is especially true, for example, in the field of entrepreneurship. To this day, the term entrepreneurship is almost synonymous with Schumpeter, whose fame was built on the success of his Theory of Economic Development (1911) and Capitalism, Socialism, and Democracy (1942). In particular, the 1911 book defined much of the theoretical framework for entrepreneurship research in economics for decades to come. Unfortunately, it also overshadowed numerous other economists in the Austrian tradition who were writing about the entrepreneur at the time, including Herbert Davenport, Frank Fetter, and Viktor Mataja. I’ve argued in a recent paper that Mises too has been unduly neglected, as he was already beginning to think seriously about the problems of entrepreneurial calculation and judgment in The Theory of Money and Credit (1912).

While plenty has been written about the theoretical differences between the Mises and Schumpeter (for example here and here), I want to comment on their personal relationship. We don’t have a great deal of information about their interactions over the years, but we do have a few intriguing hints regarding how they felt about each other. What is most interesting is that despite serious differences on economic issues that endured throughout their respective careers, they seem to have been reasonably friendly, especially in their Vienna years.

The two presumably met at the University of Vienna, where both participated in Böhm-Bawerk’s seminar. Although they drew on different economic traditions in their own works, they shared common research interests, and each showed a certain amount of respect for the other’s early work. In fact, as late as 1933 Mises described Theory of Economic Development as one of the top four German-language contributions to economics (Hülsmann, 2007, p. 172). In turn, Schumpeter applauded The Theory of Money and Credit, saluting “its ‘power and originality,’ [and] noticing that ‘as usual’ the critics had overlooked these qualities in their discussion of unsubstantial side issues” (Hülsmann, 2007, p. 208).

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Bridging the Gap between Entrepreneurship Teaching and Economics

Starting with Menger, Böhm-Bawerk, and Wieser, Austrians have always emphasized the importance of the entrepreneur in economics. The role of entrepreneurship also featured prominently in the works of earlier economists such as the French liberals, and Chris Brown and Mark Thornton have even argued that the notion of the entrepreneur was a key to the founding of modern economics. At the same time though, Austrians (along with other scholars such as William Baumol) have also lamented the serious neglect of the entrepreneur in contemporary economics, which has led, among other things, to an underestimation of the welfare-enhancing power of markets, and an undue faith in the power of governments and regulators to tinker with the market process.

It should come as welcome news then that entrepreneurship studies is one of the fastest-growing fields among the business disciplines (along with related fields such as strategic management and strategic entrepreneurship). But sadly, these fields have sparked less attention than they probably should. One possible reason is that there is often a gap between the economic theory of the entrepreneur and the business practice of entrepreneurship. One way to think about it is that business research tends to focus on the practical aspects of new venture creation, whereas economists are usually interested in the economic function of entrepreneurship—the underlying (or perhaps overarching) economic and social significance of entrepreneurs. (Peter Klein makes this point by distinguishing between “occupational entrepreneurship” and “functional entrepreneurship.” Business scholars and practitioners focus mainly on the former, economists on the latter.)

A problem then is to bridge this gap and to bring economic insight to the field of practical business. This is especially important in teaching courses in entrepreneurship, which often focus so much on the business trees that they miss the economic forest. It’s true that entrepreneurship textbooks usually include something about Schumpeterian “creative destruction,” and repeat some well-worn facts about the importance of small business in the economy. But beyond these brief nods to economic ideas, many entrepreneurship courses don’t have much to say about the bigger picture of entrepreneurial behavior. The unfortunate result is that a lot of the richness of the economic point of view gets lost amongst (nevertheless important) details of new venture creation.

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Is Strategy a Branch of Praxeology?

In popular writings on Austrian economics, the terms “praxeology” and “economics” are sometimes used interchangeably, although economics is only one branch of the broader logic of human action. However, in The Ultimate Foundation of Economic Science (1962), Mises did observe that economics is the best developed branch of praxeology, and this has certainly remained true over time. But the question often arises what the other branches of praxeology might be.

In a 1951 article in the American Economic Review, Rothbard listed several types of praxeological theory:

A. The Theory of the Isolated Individual (Crusoe Economics)

B. The Theory of Voluntary Interpersonal Exchange (Catallactics, or the Economics of the Market)

1. Barter

2. With Medium of Exchange

a. On the Unhampered Market

b. Effects of Violent Intervention with the Market

c. Effects of Violent Abolition of the Market (Socialism)

C. The Theory of War—Hostile Action

D. The Theory of Games (e.g., Von Neumann and Morgenstern)

E. Unknown

Recently, Jakub Wiśniewski has developed the following diagram to further explain not only the different parts of praxeology, but also their relation to what Mises calls thymology, or the study of the precedents and causes of action.

Praxeology and Thymology

The relations between the different branches are often complex, as they often overlap, and there are numerous grey areas. There are also controversies about whether certain branches, such as praxeological ethics, can be developed (see here for one take). What is certain though is that there is relatively little research on the non-economic branches of praxeology.

I’ve been exploring some of these branches in my own research, especially regarding the fields of strategy and war making. I recently had the opportunity to talk about some of these ideas at the Ludwig von Mises Institute Romania, in a lecture titled “From the Science of Praxeology to the Art of War.” You can find a video of the seminar here.

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Luck vs. Entrepreneurial Judgment at the Horse Track

1926WhyBeUnluckyMany readers might have missed HBO’s short-lived series Luck, which debuted in 2012. It was a project of David Milch, creator of the brilliant Deadwood, another show unfortunately abandoned in its prime. Despite an all-star cast and A-list directing, Luck was cancelled after only one season due to concerns about animal safety. Short as it is though, it’s still a pretty riveting cross-section of the hidden world of horse racing, shining a spotlight on everyone from the Mafioso owners of the horse track down to the stable boys.

What interests me though is the eponymous theme of luck running through the show. One of my current research projects involves exploring the role luck plays in entrepreneurial success. There are some thorny issues involved in conceptualizing luck and making it operational within economic theory, but there are also some interesting problems in entrepreneurship that we may be able to answer by doing so. For instance, one criticism that has been raised against Israel Kirzner’s theory of entrepreneurship is that the idea of entrepreneurial alertness can be reduced to good luck. If this is true, then the entrepreneurial alertness to opportunities doesn’t explain much about how entrepreneurship happens in the real world. But if entrepreneurship is about more than just luck, then we can in fact think about why entrepreneurs succeed and fail.

One of the few economists to think about luck and entrepreneurship in detail is Frank Fetter. Fetter makes an important point about how prescient entrepreneurial judgment is very often mistaken for simple luck:

Chance therefore has its part [in determining profits]; but the temptation is to exaggerate its importance. Many cases said to be due to chance are found on closer knowledge to be due to superior judgment. They result from the union of happy chance with deliberate choice. The adventurer who, on the discovery of gold, goes at once to California or to Alaska, may stumble upon a gold-mine. It is luck; but he has gone to a place where gold-mines are comparatively plentiful. If he stays at home it is more likely that he will stumble over an ash-heap. Throughout life there is constant opportunity, but it must be sought. One who has the good judgment to be ever at the right time at the place where he has the best chance of finding a good thing, usually gets the advantage, and men call it luck. The more the causes of success in general are studied, the larger is found the element of choice, the smaller that of luck. (Fetter, 1915, p. 360)

In other words, it’s easy to observe a good outcome (such as the profit of an entrepreneur) and dismiss it simply as luck. But any such good fortune can always be thought of in terms of judgmental decision making. “Luck” doesn’t just happen: there is always an element of choice in creating the conditions for what we call good fortune.

Returning to the track, I think it provides an intriguing illustration of the idea that “luck” is often a reflection of entrepreneurial judgment; that is, speculative decision making about the use of valuable resources in the face of uncertainty. Sure, everyone at the track wants good luck, meaning the ability to correctly anticipate the winning horses. But everyone also understands that their own decisions partly determine the meaning of the outcome for them. What matters is effective judgment about the uncertain future: horse owners can hire the wrong trainers or jockeys, bettors can rely on the wrong touts, and even the owners of the track have to be careful to bribe the right officials to keep the track running smoothly. All of these decisions intertwine or conflict as different individuals try to adjust their behavior to the expected outcome. And each plays a significant role in determining the profits and losses of those involved, which are about far more than the mysterious notion of luck. As Fetter points out, it’s only when we look deeper that we see the true causes of success and failure in the economy.

Maybe the best way to put it is to quote the words of Professor Kenobi: “In my experience, there’s no such thing as luck.”