The Economics of Ignorance and Coordination

The Economics of Ignorance and Coordination

Subjectivism and the Austrian School of Economics

New Thinking in Political Economy series

Thierry Aimar

This book clarifies the specific nature of the Austrian theory and restores the unity and open-mindedness of the Austrian school in general. The intention is not to offer a collection of different or parallel ideas, but rather to retrace, from a pedagogical and constructive perspective, the various stages of the construction of a well-founded theoretical edifice: from Ludwig von Mises to Murray Rothbard, from Friedrich Hayek to Israel M. Kirzner and from Lachmann to Lavoie. The book is a reconstitution of the way Austrian ideas and concepts organize themselves in a common structure.

Chapter 9: Welfare Economics: Workable Definitions

Thierry Aimar

Subjects: economics and finance, austrian economics

Extract

___________________________________________________ … a business deal is always advantageous for both parties. If both the buyer and the seller were not to consider the transaction as their most advantageous action they could choose under the prevailing conditions, they would not enter into the deal (Mises, The Ultimate Foundations of Economic Science, 1962a, p. 90). Myrdal (The Political Element in the Development of Economic Theory, 1953) was right to claim, ‘The Austrians were preoccupied with value theory and never elaborated a detailed theory of welfare economics’ (1953, p. 128). This was rapidly corrected, however, as if in reply by Rothbard (‘Toward a Reconstruction of Utility and Welfare Economics’, 1956), which was the start of an abundance of Austrian literature on the question of welfare. This writing should not be confused with traditional welfare economics, various versions of which are riddled with theoretical weaknesses that the Austrians have continually condemned. The subjectivist paradigm obviously prevents interpersonal comparisons of utility between agents and so excludes any use of utilitarist criteria as valueless. 1 Pareto’s version, which avoids this kind of comparison, is faced with the impossibility of a priori knowledge of agents’ indifference curves and therefore of considering it as data for the theorist. More contemporary approaches, notably Coase’s (‘Social Cost’, 1960) are based on a criterion of welfare centred on reducing transaction costs. But the mistake of believing in a fictitious ‘Nirvana’ (Kirzner, Competition and Entrepreneurship, 1973) where transaction costs would be eliminated, is obvious. Moreover, this situation would in any case not be the...

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