How can private governance in innovation commons Allen and Potts a, b be reconciled with the mainstream conception of innovation and entrepreneurship as suffering a market failure requiring state intervention? This paper situates the private collective action governance of entrepreneurial discovery within its political economy context using the methods of new comparative economics. The institutional possibility frontier IPF — a framework for understanding comparative institutional choice as a trade-off between the costs of disorder and dictatorship Djankov et al.
Subjective costs are incorporated into the IPF and thereby into the political economy choice of the governance of innovation resources. The result is a subjective innovation institutional possibility frontier. Keywords: Innovation policy, Institutional Possibility Frontier, subjective political economy, Austrian economics.
1. Introduction: What is Economics?
Suggested Citation: Suggested Citation. There will be advantages—economy, precision, rigor—only if the symbols will be used repeatedly in the course of some logical analysis. The economy is achieved by omitting repeated verbal identification of the symbols. Mathematical symbolism is indeed economical in this case, if only the final deduced proposition is held to be important.
Many academic journal articles are precisely of this form: a few words at the beginning and end, pages of symbolic mathematics in the middle. To evaluate the process of symbolic analysis outlined above, we must consider the epistemological significance of language. Words are concrete audiovisual representations of the abstractions called concepts, in which form all knowledge is retained.
If they are merely translatable then they are merely potentially meaningful. Thus, the long sequence of intermediate steps in a logical derivation must be expressed verbally if it is to be related to human experience. But without subsidiary hypotheses about how people learn, these intermediate steps are not meaningful as guides to the comprehension of behavior and cannot be related directly to human experience. Equilibrium theorists who make extensive use of mathematical symbolism are, in fact, saving a great deal of paper and time. The fact that causality is lost is irrelevant to one Edition: current; Page: [ 30 ] concerned only with descriptions of equilibria.
Those who perceive economic theory as a set of propositions which are logically implied by initially hypothesized preference sets and production possibilities understandably find symbolic logic and mathematics a powerful tool: economical, precise, rigorous. But the analysis of the conditions specific to an equilibrium presupposes that the conditions necessary for equilibrium exist. If one sees the central purpose of economics as the analysis of action, however, the relevant equilibrium is the dynamic one, and its preconditions—interpersonally consistent future plans or expectations—cannot be merely hypothesized.
One must attempt to examine the ways in which this interpersonal consistency of expectations can be brought about. The introduction amidstream of unexpected developments thus requires the use of words. Symbolism is economical only when one can draw on it for a long time.
Process analysis, however, by requiring the continual specification of non-deduced empirical hypotheses about learning and expectation revision, and hence about causality, can make little use of this economy. Of course, if one looks upon the process of plan revision and movement toward a dynamic equilibrium as a series of discrete jumps, one can associate a static equilibrium price vector with each discrete set of preferences as they emerge throughout the process. This would seem to enhance the role of pure logical Edition: current; Page: [ 31 ] deduction and symbolic technique, rather than to minimize it.
But the meaning of these sets of price vectors is not clear. They are still unrelated to the consistency of the expectations on which the preferences supporting them are based. The logic used by physicists is the same as that used by biologists and by economists. What differentiates physics from biology from economics is the nature of the empirical links between the objects studied and the abstract logical rules the analyst employs. The relative-frequency concept of probability 30 is not applicable to human action with its unique events. Modern analyses using this approach are, like their deterministic counterparts, inevitably static.
Economics - Wikipedia
Essentially, a hypothetical and certain alternative is manufactured—one which has the same value as the uncertain state—and preferences are constructed on the basis of this hypothetical alternative. It is simply not one of the possible outcomes. As a consequence, the uncertainty models are by their nature static: perfectly sufficient for the analysis of market-clearing prices, but no more capable of incorporating learning and the removal of plan inconsistency than the deterministic static analyses. Static uncertainty analysis has contributed to our understanding of price determination under uncertainty, but it does not permit us to analyze a process of action and learning.
What implications do the foregoing comments have for methodology? How are propositions about economics to be developed? The study of consistent plans, and how inconsistencies in interpersonal expectations are eliminated through learning, requires a technique if it may be so Edition: current; Page: [ 33 ] called different from the abstract symbolism of mathematics. The fact that these propositions about learning cannot be logically derived from other accepted statements may make the analysis appear unscientific, because of course it renders the conclusions dependent upon the accuracy of the empirical hypotheses.
Rather than being simply empirical assertions presented as part of the statement of a problem from which logical implications are then deduced e. One is not allowed to follow through with his logic: the smooth workings of the logical derivation are interrupted by the discovery and revision of inconsistent plans. If different inconsistencies are brought to light when they proceed to act on these revised expectations, some further changes in plans perhaps, this time, the plans of the other people will be required. It is always possible to advance some reasonable hypothesis about the nature of the plan changes.
The role of symbolic mathematical analysis consists of the determination of the specific conditions which would exist Edition: current; Page: [ 34 ] under plan consistency.
But the process by which it is approached must be analyzed with unfailing sensitivity to what the acting individual finds in the course of his actions and how he is likely to revise his expectations when he learns these things. As an example of what difference all this makes, we could consider literally any process in time, especially a process we could consider evolutionary. Starting with a set of preferences based upon use values alone although of course it is irrelevant to the mathematics what they are based upon , we can logically derive a consistent static set of relative prices.
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Now suppose one individual learns or guesses that he can use a certain good as a trading medium and thereby acquire goods he could not otherwise have obtained. Once again we can logically derive a new static price vector, based this time on his higher valuation the cause of which, once again, is irrelevant. Now we can hypothesize that others observe this intermediate trading, or get the same idea independently, or observe that our initial individual is now more willing to accept the trade good than before, so their valuations of it rise for this reason. Once again, we can derive a new static price vector, this one revealing again the higher relative price of the traded good.
As the learning process proceeds, the good becomes money. The whole approach, which provides such fruitful insight into monetary evolution, is rooted in the question: why do individuals pay more for a good than its use value? The answer is: they have learned, through observation and experience, of its acceptability in trade. However rigorous symbolic logical deduction may be, it can tell us very little about such everyday evolutionary processes. The differentia of the Austrian School is its focus upon the plans—the action-relevant plans—of the individual rather than upon his preferences.
Preferences can be treated in an abstract fashion, as the preponderance of contemporary economic theory demonstrates, and such analyses make correct and beneficial use of mathematical symbolism.
Friedrich August von Hayek (Littérature secondaire en anglais)
But the study of plans and how they are brought into interpersonal consistency requires a much more sensitive reading of the nature of human thought and action. What of the big issues on which the School seems to offer special insight? Time preference and opportunity cost are now part of conventional economics. A price is paid for all of these insights, and that price is the purely deductive method. Since Austrians are not willing to restrict their viewpoint to the abstract logic of preferences, they must be willing to admit nondeduced hypotheses about plan revision into their analyses.
So which is better—neoclassical and mathematical economic theory, or Austrianism? It is simply not true that all of the advantages are on one side: mathematical symbolism offers decided advantages when the problem is one of pure and complex logical deduction, but the Austrian approach must be used when the problems are not of this sort. And they never are, in any real application—business cycles, planning, monetary policy, they are all dynamic issues, swept under a rug in contemporary economics by a methodological bias for pure deduction and against any hypotheses having to do with thinking.
Which is better? Each of us must answer. But Edition: current; Page: [ 37 ] we must answer first: to what extent is economics a study of man? Nevertheless, the general points raised in that essay were not new even at the time, but were an ingenious adaptation of some of the positivist arguments of the s, and the somewhat revisionist work of Sir Karl Popper. From the positivist epistemological viewpoint, is the opening quotation to be taken as an a priori or an empirical statement?
Modern Applications of Austrian Thought
As such, one might equally well choose to stipulate some other meaning. If empirical i. But then for a long time the Darwinian theory of evolution yielded no predictions and yet was considered scientifically acceptable. In fact, there are many theoretical frameworks which generate no testable predictions but are, nonetheless, considered part of economics. For example, it is frequently unclear what predictive relevance discussions on the existence and stability of equilibrium under many special assumptions the empirical significance of which is unknown have for a world which is never actually in equilibrium.
There is, however, no escape here, for it merely leaves unanswered the question: Why is nonpredictive economics bad science? Another possible escape might be to claim that, while nonpredictive theories may be scientific, they do not qualify as positive science. In that case, we are back where we started: Why must prediction be our goal? The goal of prediction might well obscure what has in fact been considered a worthwhile aim of science: the explication and apprehension of necessary connections.
But the nature of that relation may be unknown. The relation is characterized by an arbitrary givenness. However, we have already implicitly refuted this assertion by showing that within a positivist epistemological framework such necessity can be derived only from an essentially arbitrary prior stipulation.
The emphasis on prediction as the aim of science has its roots in a positivist criterion for the meaningfulness of a statement. To be meaningful, it has been said, a statement must be in a form such that it is in principle falsifiable by any observer. For now, let us say it is. Hence, the positivist would claim that this is a genuinely scientific statement. In fact, the meaning of a hypothesis is identified with the relevant test of its veracity.