Professor Choi's Response

Abstract

I Introduction to the Response I find the following characterization of the book as indicative of the Prof. Pressman's attitude toward it: "Worshipping the entrepreneur, and believing that any restrictions placed on the entrepreneurial spirit . . . have undesirable consequences, Choi remains blind to alternative explanations of entrepreneurship, and stretches his arguments to satisfy this preconceived conclusion." Before I respond to specific criticisms many of which concern, among other things, my treatment of entrepreneurship and envy, I will try to provide an overview of the book, to aid the reader of this exchange who may not have read the book. Along the way, I will try to address the criticisms. II What is the Book About? It is an attempt to develop a theory to deal with a range of frequently observed economic phenomena, X-inefficiency, invidious comparisons, and entrepreneurship, that are important yet are ignored, or not adequately treated, in the dominant tradition in economics. As they are much neglected in economics, however, one risks losing other economists' respect even for mentioning them. But each of these are perceived to be significant by some prominent economists. X-inefficiency is estimated by Harvey Leibenstein to be more than 25% of GNP, compared to no more than 0.1% of GNP for allocative inefficiency. Invidious comparisons have important impact on savings and consumption behavior (Veblen and Duesenberry), on the flexibility of wages (Keynes), and on competition in the market place (Veblen and Knight). And, of course, entrepreneurship is conceived as the engine of economic development (Schumpeter). I am not in shabby company. I am glad that Prof. Pressman at least agrees with me that the object of exercise is worthy: "a rational reconstruction of the function of the entrepreneur is long overdue and much needed." III Why Do I Aim to Develop a New Theory? The reason why the phenomena are neglected in economics is because the core theory of the dominant tradition in economics - Maximization and Equilibrium - leaves no room for many phenomena of great interest. The concept of production function does not admit the possibility of X-inefficiency. The concept of competitive equilibrium leaves no room for entrepreneurship, and invidious comparisons threaten the optimality of competitive equilibrium. The core of economic theory, maximization, idealizes the market tendency. With all the necessary conditions, competition among wealth maximizing agents will leave no opportunity for gain unexploited, with the Pareto optimal result. Recent attempts to discuss invidious comparisons using traditional economic theory (S. Jones and R. Frank) are not satisfactory because they are ad hoc, only restating what we already know in language officially sanctioned by the economics profession, by introducing arguments for status into the utility function, for example. The critics of orthodox economics have tried in a number of different ways, but have not succeeded in developing a theory that can account for a broad range of phenomena. IV How Do I Aim to Develop It? What we really need is an understanding of the process through which various socio-economic phenomena emerge. For this, I take individual decision making as the starting point. I start with the observation that individual decision making involves two distinct elements: an understanding of a given situation and the logic of choice. According to a common (but mistaken) interpretation in Neoclassical economics, maximization is the mechanism of rational individual decision making: the agent chooses a course of action from which he expects the greatest gain given his objectives and resources. If it sounds somehow reasonable, and many find it reasonable, it is because we routinely take so many things for granted in our daily lives that it appears that the central task of decision-making is how to pick the best course of action given all that we take for granted. …