Ending crony capitalism – how markets work

Crony capitalism — businesses capturing the state for commercial advantage, serving politicians and officials instead of the public — ought to be brought to an end. A prerequisite to that is a good understanding of how social cooperation in the market works.

Israel Kirzner’s, How Markets Work: Disequilibrium, Entrepreneurship and Discovery (PDF) provides a brief and readable explanation. From the book’s page at the IEA:

Human action consists of ‘grappling with an essentially unknown future’, not being confronted with clearly-specified objectives, known resources and defined courses of action as mainstream theory assumes.

Critics of the market economy find ammunition in neo-classical theory: they ‘merely need to tick off the respects in which real world capitalism departs from the requirements for perfectly competitive optimality’.

An entrepreneurial act of discovery consists in ‘realising the existence of market value that has hitherto been overlooked’. Scope for entrepreneurial discovery occurs in a world of disequilibrium – which is quite different from the equilibrium world of mainstream economics where market outcomes are foreordained.

Entrepreneurial profit, far from generating injustice, is a ‘created gain’. It is not ‘sliced from a pre-existing pie it is a portion which has been created in the very act of grasping it’.

The book is a wonderful rebellion against the over-simplifications of mainstream economics. It teaches us that politicians and officials should not tinker with the complex, dynamic, creative process that is life in society. Entrepreneurship is the creative search to help other people. Profit seeking is the attempt to produce those goods and services which people value using the minimum of resources. Ironically, those who have faith in state power act to spite themselves: they would do better to let the forces of social cooperation work.

See also:

Learn Liberty, The Price System, Part 1: Information

Learn Liberty, The Price System, Part 2: Profits & Losses

And also Jesús Huerta de Soto, The Austrian School: Market Order and Entrepreneurial Creativity and Socialism, Economic Calculation and Entrepreneurship.

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Comments & Responses

4 Responses so far.

  1. Catherine in Athens says:

    Steve, thank you for this little series on crony capitalism. I’ve recommended it to quite a few friends. Keep up the good work!

  2. Matthew Newton says:

    “Entrepreneurship is the creative search to help other people.” If that’s not an oversimplification, nothing is.