Subjectivism and Economic Analysis: Essays in memory of Ludwig ...

CARLO ZAPPIAallocation through prices is not only compatible with Austrianthought, but has also been strongly supported by Hayek (1948 and1968). I have argued elsewhere (Zappia 1997) that a superficialdenial of the relevance of many recent microeconomic developmentsto understanding the market as an institution is inconsistent withHayek’s insights into the matter. 7Here a paradox seems to emerge: following Vaughn’sreconstruction of Austrian thought, it might be argued (as in Bowlesand Gintis 1993) that new developments of what Vaughn considersneoclassical theory have done more than the Austrians for providingan individualistically based explanation of those elements—such ashabits and customary business procedures—which characteriseeconomic institutions. But this is of course untrue, as Vaughn herselfstresses in her reassessment of Hayek s theory of knowledge and therelated efforts by O’Driscoll and Rizzo to develop an economics oftime and ignorance in which ‘the existence of private and tacitknowledge implies that nonprice signals can contain importantmarket information’ (136).A similar issue arises as regards the application of game theory tothe explanation of spontaneous orders (see Sudgen 1989) and theevolution of institutions. The Austrian explanation of economicinstitutions is essentially a causal-genetic theory, taking Menger’stheory of money as exemplar. This explanation describes thedevelopment of institutions as the outcome of a sequence of actionsby individual agents, where the aggregate outcome of these actionsis not necessarily the intended outcome. Indeed, what distinguishesAustrian theory from the ‘pure’ methodological individualism ofneoclassical theory is that it necessarily involves the explanation of acomposition principle. It might thus be argued that to represent theprocess of composing the effects of distinct individual plans bymeans of the theory of games is a valuable complement to theevolutionary theory of institutions (see Langlois 1992; Bianchi1994). Furthermore, this approach attributes a primary role to thedecisions of individuals, which is contrary to the interpretationsuggested by Vaughn.Concluding remarksIn this assessment of Karen Vaughn’s Austrian Economics inAmerica, I have stressed that her call for a definitive shift in Austrianthought away from the search for equilibrium constructs andtowards the analysis of those institutions that favour ordered138