Market Process Theory Rejects Both Mainstream Perfect Knowledge Assumptions and Radical Uncertainty

Mainstream economics, Garrison pointed out, has gravitated to one polar position on knowledge. ‘Perfect knowledge — or perfect knowledge camouflaged beneath an assortment of frequency distributions — has been the primary domain of standard theory for several decades now’ (Garrison 1982). (We may add that, in multiperiod models of general equilibrium incorporating intertemporal exchange, this perfect knowledge assumption has been extended, in principle, to knowledge of all future time.) Much of the criticism, from post-Keynesians, Shackle and others, of mainstream economics has taken its point of departure to be the radical uncertainty which shrouds the future. This uncertainty is seen as so impenetrable as to render absurdly irrelevant all those neoclassical theories built up from individual optimizing decisions, assumed to be made between well-defined alternative future possibilities. As Shackle (1972) put it, the ‘gaps of knowledge’ which arise from an uncertain future ‘stultify rationality’. Knowledge is not, of course, completely absent but, the critics would maintain, there is no way, within a theory of markets, that existing ‘open-ended’ (Shackle 1972) ignorance can be systematically eliminated. (Search is no solution because the ‘worth of new knowledge cannot begin to be assessed until we have it. By then it is too late to decide how much to spend on breaching the walls to encourage its arrival’). Thus the brute circumstance of ignorance concerning the future actions of other people makes it impossible for markets to induce consistency among individual decisions (Lachmann 1986a).

It is here that the Austrian theory of market process takes a position concerning knowledge and possible market equilibration which avoids both these extremes. On the one hand the perfect knowledge assumption makes it pointless to ask how the market process can induce co-ordination among decisions; such co-ordination is already implied in the perfect knowledge assumption. On the other hand the assumption of invincible ignorance places the possibility of a systematic market process of systematic co-ordination entirely beyond reach.

For Austrians, however, mutual knowledge is indeed full of gaps at any given time, yet the market process is understood to provide a systemic set of forces, set in motion by entrepreneurial alertness, which tend to reduce the extent of mutual ignorance. Knowledge is not perfect; but neither is ignorance necessarily invincible. Equilibrium is indeed never attained, yet the market does exhibit powerful tendencies towards it. Market co-ordination is not to be smuggled into economics by assumption; but neither is it to be peremptorily ruled out simply by referring to the uncertainty of the future.

—Israel M. Kirzner, “Market Process Theory: In Defence of the Austrian Middle Ground,” in The Meaning of Market Process: Essays in the Development of Modern Austrian Economics, Foundations of the Market Economy (London: Routledge, Taylor and Francis e-Library, 2001), 4-5.