Sunday, March 26, 2017

On Kirzner's Decision-Making Room and the Nature of Questions

By Robert Wenzel

During a lecture at the Mercatus Center Academic & Student Programs, the Austrian school economist Israel Kirzner brought up in contrast dynamic decision making versus the economic mainstream view of decision making.

He correctly points out that mainstream decision making is largely calculation from known facts. He said it is as if all the facts are known which you can deliver to a "decision-making room" and the answer will be provided to you.

Kirzner is correct here, much of modern day mainstream economics is this view that we are searching for equilibrium.

He then contrasted this with what he saw as the Misesian view of decision making. However, the examples he used to portray Misesian decision making I believe fall short of the true richness of the Misesian view. He used examples I have seen him use before in other lectures.

He used as an example a man considering whether he should marry a particular woman. And then speculated that such a man might wonder what the woman might look like in 10 years time. He suggested this question is one that can not be solved in the decision-making room, but I wonder if this is fully the case. Many a man has looked at a mother to get a sense for what a daughter might look like down the road, and there are certainly computer programs these days that can age a picture of someone to give us a rough idea of what they will look like in the future.

So Kirzner's example here could be put into the decision-making room and a rough answer could be provided.

I believe the Misesian view rests more on the idea that we may not know what questions to ask in the first place, not the degree to which they can be satisfactorily answered once we have the question.

Approximately 45% of marriages in the United States end in divorce, I would venture to guess that a majority of those divorces come as a result of the couple not asking the correct questions about the future spouse in the first place.  "Oh, you had me several years ago. When I was still quite naive."

This is the Mises and Hayekian problem with simply solving for equilibrium. Further, Mises and Hayek would recognize that the distribution of knowledge is such that not everyone would have the same series of questions in front of them to know what to ask. How many of us have not seen a couple about to get marry where we know full well "It won't last." In this case, we are operating (when we are correct) with a greater knowledge spectrum than the couple actually getting married.

Kirzner goes on to use as an example of  a decision about a dining room set, and talks about the inability to take into the "decision-making room" the answer to the question, "What will this dining set look like in 10 years?"

But again, the question is understood here, There may be some vagueness about the answer (although I doubt much) but the real problem can be much more complex if we do not know the questions to ask.

Consider this situation, the dining set is being bought by a single woman living in a studio apartment in New York City. She knows enough to contemplate the question, "What will this set look like in 10 years?' The set is made out of sturdy wood, is a type of wood she has always loved and so she buys the set,

A month later she learns she is pregnant and decides she will keep the baby and raise it herself but because of the expense of apartments in New York City, she has decided to stay in the studio apartment she has and the crib will have to go in the spot where the new dining set now is. In 8 months, up on Craig's List goes the dining set at a discount.

Clearly, she did not think to ask when she bought the set, "What happens if I get pregnant next week?"

Kirzner uses a third example of a student considering whether to be a heart surgeon and he brings up more complex questions where estimates need to be made, but again,the bigger point should be that we don't always know what questions to ask.

It's the questions we are not aware that we should ask that make Mises and Hayek suspicious of equilibrium models. Further, Mises and Hayek are fully aware that some people have better, more thorough, questions for different situations.

In other words, Mises and Hayek understand that the world is  a very complex place and a central planner, with a whiz-bang computer, who thinks he knows all the answers is way off. He may have answers for the limited questions he asks but it is impossible to have all the questions.

One very important secret about free markets is that there are many people asking all kinds of different questions.The more different people we have asking different questions the better the shot that we have at different problems being solved.

The lecture by Kirzner is here. His discussion of the decision-making room starts at 32:30.

Robert Wenzel is Editor & Publisher of and Target Liberty. He also writes EPJ Daily Alert and is author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics, on LinkedIn and Facebook. The Robert Wenzel podcast is on  iphone and stitcher.

-Robert Wenzel  

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