Austrian Economics and the Market Test Reexamined

Abstract

The efficacy of the decentralized market process is perhaps the foremost contribution of Austrian economics. But if Austrians are correct about the performance of spontaneous order processes, the paucity of Austrian economists in academic positions seemingly undermines their methodological critique of neoclassical economics. Whether Austrian economics has faced a valid market test remains an issue of continuing controversy, as the exchange between Rosen (1997) and Yeager (1997) illustrates. 1 In this paper I examine when a market can be appropriately said to offer a “test” of products and whether Austrian economics has faced a meaningful market test. In essence this paper explores the question of inefficiency in spontaneous orders. Do all spontaneous order processes perform well? Economics catalogues causes of “market failure,” but the catalogue is based on end state or equilibrium theorizing, that is, comparing the end state attained by the market with Pareto efficient states. The theory of market failure has been criticized by many; from an Austrian perspective, end state welfare economics is irrelevant when the economy does not reach an equilibrium. But this leaves unanswered whether all spontaneous order processes perform well. If spontaneous orders necessarily perform well, the conclusion that the profession has judged Austrian economics inferior to neoclassical economics seems unavoidable. I begin by discussing when markets offer a test, since as Yeager (1997) points out, markets have never been defended as arbiters of truth or beauty. 2