Academic journal article Review of Social Economy

Information, Knowledge and Agency: The Information Theoretic Approach and the Austrians

Academic journal article Review of Social Economy

Information, Knowledge and Agency: The Information Theoretic Approach and the Austrians

Article excerpt

Abstract Both the Information Theoretic Economics and Austrian Economics investigate the impact on market activity of problems of information and knowledge. The conceptions of information and knowledge they employ, however, as we]l as their respective views on and treatment of economic agency, are quite different. The purpose of this paper is to examine these differences, not primarily from an abstract philosophical point of view, but by looking at substantive examples of the economics offered by the two approaches. An attempt is made to explain the Austrian preference for non-formalist approaches to economic analysis.

Keywords: Economics of Information, Austrian Economics, Agency Theory, Asymmetric Information, Economic Explanation.

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It is often remarked that various themes that have emerged under the banner of the Information Theoretic Approach (ITA) to economic analysis are reminiscent of Austrian Economics (AE). Both schools portray themselves as critics of a mainstream they associate with competitive equilibrium analysis. Both see the main shortcoming of this approach that it sidesteps problems of information or knowledge that characterize market economies. And both have taken positive steps to analyze various aspects of the fact that economic decisions are often made on the basis of information or knowledge that, at least from the perspective of some omniscient observer, is deficient in some way.

On the occasions they have actually engaged, however, the two sides have tended to be highly critical of each other's contributions (e.g. Boettke 1996; Stiglitz 1994, 24--26; Kirzner 1997). A key point of contention here is the role of formal modeling: whereas the ITA embraces it, AE, for the most part, rejects it. Discussions of this issue tend to be regarded with impatience by economists, the usual view being that it is better to get on with the job rather than to waste time arguing over what methods might be employed to do so. Nevertheless, the fact remains that AE represents a mode of analysis that is at once sharply distinct from the ITA and that illuminates aspects of the economy that the ITA, at least in its present form, does not. My aim in this paper is to justify this claim, not primarily by making abstract philosophical arguments, but by examining some substantive aspects of the models and theories offered by the two sides.

I begin with brief sketches of the ITA and AE. I shall argue that many of their views on how markets actually work are complementary rather than competing, and that the more important differences between them lie in the way that they choose to convey these views. These differences are particularly evident in their treatment of information, knowledge and agency. Proponents of the ITA hold that the proper theorisation of economic phenomena requires their being deduced as equilibrium outcomes in well-specified rational choices models, and attribute the marginalization of AE to its failure to having done just this. I shall argue that while this view may well explain why AE has lost ground in academic economics, the Austrian project would be emasculated by adopting the standard model of the economic actor along the lines of the ITA. Finally, [shall attempt to show why retaining and advancing the insights of AE will almost inevitably demand a non-formalistic approach to economic explanation.

COMMONALITIES AND DIFFERENCES: THE ITA AND AE IN A NUTSHELL

It is tempting to attribute the mutual antipathy between the ITA and AE to their respective stances on the efficacy of markets. Very roughly, whereas the ITA has concentrated on showing how the performance of particular markets may fall short of the competitive equilibrium ideal, AE has typically been more interested in explaining how the market system could ever come as close as it does to approximating that ideal (or at least the Smithian invisible hand hypothesis that is often said to inform it). …

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