Chapter 54: Entrepreneurship vs. Equilibrium

Gary North - August 09, 2017
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Updated: 1/13/20

Christian Economics: Teacher's Edition

The secret things belong to the Lord our God, but the things that are revealed belong to us and to our children forever, that we may do all the words of this law (Deuteronomy 29:29).

Love never ends. As for prophecies, they will pass away; as for tongues, they will cease; as for knowledge, it will pass away. For we know in part and we prophesy in part, but when the perfect comes, the partial will pass away. When I was a child, I spoke like a child, I thought like a child, I reasoned like a child. When I became a man, I gave up childish ways. For now we see in a mirror dimly, but then face to face. Now I know in part; then I shall know fully, even as I have been fully known (I Corinthians 13:8–12).

Since the equilibrium economy is by definition a changeless and unending round of robotic behavior, everyone on the market has perfect knowledge of the present and the future, and the pervasive uncertainty of the real world drops totally out of the picture. Since there is no more uncertainty, profits and losses disappear, and every business firm finds that its selling price exactly equals its cost of production. — Murray Rothbard, “Breaking Out of the Walrasian Box: The Cases of Schumpeter and Hansen” (1987)

Analysis

God is the Creator. Man is the creature. There is a fundamental distinction between them. Man is made in God’s image, so there are attributes of God that are possessed by mankind. But there is an unbridgeable separation. Theologians refer to the incommunicable attributes of God. Three of these are His omnipotence, omnipresence, and omniscience. God is all-powerful, present everywhere, and all-knowing.

Christianity assumes the existence of a God who has comprehensive knowledge of all laws and all facts: past, present, and future. God is omniscient. Nothing comes as a surprise to Him. In His grace, He sometimes chooses to reveal the future to people. He revealed to Joseph the seven fat years and the seven lean years. This information was based on God’s omniscience. Christianity marks as a heresy any doctrine that teaches that a person or mankind as a whole can ever possess any of these attributes. The quest to attain any of them is inherently satanic.

Political science does not use the idea of the absolute power of God as its conceptual model for the state. On the contrary, conservatives identify totalitarianism as a perverse attempt of tyrants to attain total power. A favorite phrase of conservatives is Lord Acton’s 1887 quip in his letter to Bishop Creighton: “Power tends to corrupt and absolute power corrupts absolutely.” In fact, absolute power is perfectly righteous, since only God possesses it or can ever possess it. Acton of course knew this, but he could not resist a good quip. (Such is our Adamic nature.) Similarly, telecommunications theory does not use as its conceptual model the ideal of man’s hypothetical omnipresence. Such a view has been destroyed forever by quantum physics.

In stark contrast, academic economists rely heavily on the concept of mankind’s perfect knowledge as the primary conceptual model of economic science. Israel Kirzner was not exaggerating in 1974 when he wrote this: “Still central to much of contemporary price theory is the model of perfect competition. Despite all criticisms showered on the model during the past forty years, it still occupies the center of the stage, both in positive and in normative discussions.” (Competition and Entrepreneurship, p. 8). This is as true today as it was in 1974. In the latest entry on Wikipedia for “General equilibrium theory,” we read this:

Although modern models in general equilibrium theory demonstrate that under certain circumstances prices will indeed converge to equilibria, critics hold that the assumptions necessary for these results are extremely strong. As well as stringent restrictions on excess demand functions, the necessary assumptions include perfect rationality of individuals; complete information about all prices both now and in the future; and the conditions necessary for perfect competition.
It is worth noting that the entry does not begin with the standard warning of questions about the acceptability of the article. This is accepted doctrine within the economics profession.

In his 1963 textbook for upper division economics students, Kirzner wrote about the assumptions of economists regarding the use of equilibrium as an explanatory model. They use it to describe the system of feedback that the price system provides the market place. “The state of equilibrium should be looked upon as an imaginary situation where there is a complete dovetailing of the decisions made by all the participating individuals.” This means not only perfect knowledge of available economic opportunities, but also men’s universal willingness to cooperate with each other. In short, it conceives of men as angels in heaven, with fallen angels having conveniently departed for hell and its constant disequilibrium, where totalitarian central power is needed to co-ordinate their efforts. “A market that is not in equilibrium should be looked upon as reflecting a discordancy between the various decisions being made.” The heart of free market economic analysis is the concept of monetary profits and losses as feedback devices that persuade people to cooperate with each other in order to increase their wealth. “But the theorist knows that the very fact of disequilibrium itself sets into motion forces that tend to bring about equilibrium (with respect to current market attitudes)” (Market Theory and the Price System, p. 23). Presumably, even devils cooperate on this basis. They, too, prefer profits to losses.

Biblically speaking, this theory of equilibrium is wrong. It is not just wrong; it is evil. It adopts the idea of man as God as its foremost conceptual tool to explain people’s economic behavior. It explains the market process as man’s move in the direction of divinity. Economists are not content to explain the price system as a useful arrangement that rewards people with accurate knowledge who voluntary cooperate with each other. They explain the economic progress of man and the improvement of man’s knowledge as a pathway to divinity, however hypothetical. The science of economics in its humanist framework rests on the divinization of man as a conceptual ideal. I do not think this is in any way self-conscious on the part of this mostly atheistic profession. They know not what they do. This is understandable. I myself did not spot the theological nature of the error for decades. I was a slow learner.

We have been down this pathway before. “But the serpent said to the woman, ‘You will not surely die. For God knows that when you eat of it your eyes will be opened, and you will be like God, knowing good and evil’” (Genesis 3:4–5).

The Bible teaches that mankind’s knowledge will increase and improve over time. Paul was clear about this. This is why I quoted him at the beginning of this chapter. We see in a mirror darkly today. Things will get clearer over time. But this does not negate the fundamental fact regarding all knowledge: the Creator-creature distinction. “The secret things belong to the Lord our God, but the things that are revealed belong to us and to our children forever, that we may do all the words of this law” (Deuteronomy 29:29).

As our knowledge increases, we find that there is far more that we do not know. Our lack of knowledge always dwarfs our addition of knowledge. This is built into the creation. The creation reflects God. God is infinite. The creation is immense. Over the last forty years, the number of estimated galaxies has increased at least ten-fold. This is unlikely to cease. The accepted truths of one era are modified or even scrapped by the next. There are too many anomalies to explain successfully by means of the older theories. The new data overwhelm the old theories.

As market output increases as a result of successful entrepreneurship, people get richer. This means they have more choices at the same prices. With more choices, there will be greater complexity in society. A medieval farm family on the fringes of a village had few major problems to solve, other than not starving. There were practically no unexploited opportunities from which to profit. This is what poverty offers: few unexploited opportunities. With greater complexity, there are more unexploited opportunities to coordinate. Were there such a thing as equilibrium, successful entrepreneurship would inevitably decrease it, not increase it. Success in life involves increased disequilibrium per capita. Think “choices.” As I say, there is no such thing as a movement toward divinity: omniscience. There is therefore no such thing as equilibrium. But a humanistic free market economist who, because of appalling theological ignorance, takes seriously equilibrium as a theoretical model should argue that an increase in disequilibrium is an advantage when it arises as a result of rising per capita wealth. Conclusion: profitable entrepreneurship moves away from equilibrium, so called. I am making two arguments. First, there is no theological case for the market process moving man in the direction of divinity: omniscience. Second, there is no sensible theoretical case for arguing that the free market tends toward textbook equilibrium. It tends away from it.

There is historical continuity. There is also progress. Progress assumes improvement over time. This improvement is visible. Here is the confession of progress: “Things are better today than before. Things were better before than way before.” There is a system that lets us assess economic change: double-entry bookkeeping. This has nothing to do with the textbook theory of economic equilibrium. Omniscience for man is not a valid epistemological concept. It is a revolt against God.

In the article that I cited in opening this chapter, Rothbard made a number of important points. First, the concept of equilibrium theory goes back to Léon Walras, the French economist teaching in Switzerland who was a contemporary of Carl Menger. Menger’s Principles of Economics appeared in 1871. It revolutionized economic thought by explaining economic value in terms of subjective imputation by consumers. Three years later, Walras’ book appeared: Éléments d'économie politique pure. It was highly mathematical. Rothbard comments:

Since World War II, mainstream neoclassical economics has followed the general equilibrium paradigm of Swiss economist Leon Walras (1834–1910). . . . It is surely no accident that the rise to dominance of Walrasian economics has coincided with the virtual mathematization of the social sciences. Mathematics enjoys the prestige of being truly “scientific,” but it is difficult to mathematize the messy and fuzzy uncertainties and inevitable errors of real world entrepreneurship and human actions. Once one expunges such actions and uncertainties, however, it is easy to employ algebra and the tangencies of geometry in analyzing this unrealistic but readily mathematical equilibrium state.

The sophisticated mathematical formulas that fill professional economics journals today look impressive, but most of them they apply only to general equilibrium conditions, which have nothing to do with the real world. These formulas are useless except for getting tenure at a research university. They convey an illusion, namely, that economic science is as intellectually rigorous as physics. Establishment academic economics is as mathematically rigorous as physics, but applied physics is useful in producing commercial products that improve people’s lives. General equilibrium theory is not.

By the way, the whole thing is an academic game. Harvard economist John Kenneth Galbraith blew the whistle in his book, The Economics of Peace and Laughter (1971).

The layman may take comfort from the fact that the most esoteric of this material is not read by other economists or even by the editors who publish it. In the economics profession the editorship of a learned journal not specialized to econometrics or mathematical statistics is a position of only moderate prestige. It is accepted, moreover, that the editor must have a certain measure of practical judgment. This means that he is usually unable to read the most prestigious contributions which, nonetheless, he must publish. So it is the practice of the editor to associate with himself a mathematical curate who passes on this part of the work and whose word he takes. A certain embarrassed silence covers the arrangement (paperback edition, p. 41n).

Of all the major schools of economic thought, the Austrian School is the least dependent on general equilibrium theory. Mises did use a version of it, which he called the Evenly Rotating Economy, or ERE. As I hope to show, wherever he used it, and wherever Rothbard used it, there we have an area of Austrian School economics that needs a reformulation. The concept is deeply flawed.

The entrepreneur is a real-world figure. For Christian economic theory, he is by far the most important real-world figure. He is an owner of resources, including knowledge, who seeks to make a profit by satisfying the market-registered demand of future customers. He is the crucial link between today’s economy and tomorrow’s. He seeks to buy low and sell high. He can do this only because he sees an opportunity that his competitors do not see: ignored future demand. His competitors have therefore not bid up the prices of production goods. He buys these goods, reworks them, and sells them in finished form for more than he paid.

I will now discuss the Bible’s foundation of entrepreneurship. I will contrast this with mainstream economics’ theory of equilibrium. I will show how the theory of equilibrium is not only completely hypothetical, it is self-contradictory. Not only does it not explain human action, it negates it. It is not a theory of human action. It is a theory of human inaction. Yet it is the foundation of almost all academic economic theory. The higher up the educational screening system a student goes, the more that equilibrium theory fills the monographs, and the less relevant the material is to the real world. Timeless abstraction replaces historical decision-making. It offers no valid insights into decision-making.

A. Purpose

We live in a changing world. We have to get from here to there. We must do this in between now and later. We are constantly dealing with change, which is at bottom a matter of time.

Economics offers a theory of predictable change. The central figure in this process is the entrepreneur. He buys low and sells high. He buys production goods and services, and then he allocates these resources in order to create consumer goods. This process was first discussed in a comprehensive way by Frank H. Knight in Risk, Uncertainty, and Profit (1921). Mises adopted Knight’s outlook in Human Action. Kirzner has developed it even further. Knight was a founding figure of the Chicago School of economics. Mises and Kirzner are Austrians. The theory of entrepreneurship is one of those areas in which the two schools do agree on the basics.

1. Entrepreneurship

God is omniscient. We are not. This is the starting point of the Christian theory of entrepreneurship.

Entrepreneurship begins with a universal command from God: be fruitful and multiply (Genesis 1:28). This is an aspect of common grace: life itself, an unearned gift. Grace precedes law. Another command extends to covenant keepers. “But seek first the kingdom of God and his righteousness, and all these things will be added to you” (Matthew 6:33). This is an aspect of special grace: redemption, an unearned gift. Grace precedes law. What are “all these things”? Food and clothing (v. 31). They are available in response to kingdom-building. They are necessary for life, but seeking God’s kingdom is more important as a goal of life.

The Bible’s theory of entrepreneurship rests on the assumption of man’s lack of knowledge about the future. We are to seek the kingdom of God. We do not know exactly what is required of us. This is a discovery process. This was Hayek’s phrase. He used it in a 1968 essay, “Competition as a Discovery Procedure.” It applies to kingdom-building.

What is the kingdom of God? It refers to God’s reign. He is omnipotent. It therefore applies to everything. The kingdom of God is the civilization of God. We are to seek it. In doing so, we are to build it. There is a division of labor in the church (Romans 12; I Corinthians 12). There is a division of labor in the economy. We must specialize. We seek to participate in the building of a corporate structure, God’s kingdom. We receive benefits as individuals: “all these things.” There is coherence between the many who seek God’s kingdom and the collective endeavor. There is coherence between the one and the many. This project is analogous to God, who is a Trinity: one and many. We seek our individual goals, but we place God’s kingdom first. We thereby acknowledge our faith in a theocentric universe. We should not worship mammon: “more for me in history.”

There is uncertainty in our assignment. We do not know the future perfectly. We seek. Then we find. “Ask, and it will be given to you; seek, and you will find; knock, and it will be opened to you. For everyone who asks receives, and the one who seeks finds, and to the one who knocks it will be opened” (Matthew 7:7–8). We do not live in a random world. It is governed by the providence of God. There is ethical cause and effect in history.

2. Equilibrium

In the hypothetical realm of equilibrium, there is no providence. There is no command from God or anyone else. There is no grace. There is no kingdom of God. There is no seeking. This is the fundamental fact of equilibrium: there is no seeking. Put in the language of textbook economics, there are no unexploited opportunities. As Rothbard summarized it:

Economic analysis now consists of the exegesis and elaboration of the Walrasian concept of general equilibrium, in which the economy pursues an endless and unchanging round of activity—what the Walrasian Joseph Schumpeter aptly referred to as “the circular flow.” Since the equilibrium economy is by definition a changeless and unending round of robotic behavior, everyone on the market has perfect knowledge of the present and the future, and the pervasive uncertainty of the real world drops totally out of the picture. Since there is no more uncertainty, profits and losses disappear, and every business firm finds that its selling price exactly equals its cost of production.

In this hypothetical world, there is no uncertainty. Everyone knows what is coming next. There is human omniscience. There is no unanticipated change. There is no action. Mises adopted equilibrium analysis in Human Action for explanatory purposes. He called it the Evenly Rotating Economy. This was a strategic mistake. But his description of the equilibrium realm was accurate: there is no uncertainty.

Action is change, and change is in the temporal sequence. But in the evenly rotating economy change and succession of events are eliminated. Action is to make choices and to cope with an uncertain future. But in the evenly rotating economy there is no choosing and the future is not uncertain as it does not differ from the present known state. Such a rigid system is not peopled with living men making choices and liable to error; it is a world of soulless unthinking automatons; it is not a human society, it is an ant hill (Human Action, Ch. XIV:5).

This is not the realm of responsible men who face uncertainty. It is not a realm of human action or human responsibility. There are no seekers. There are no finders. Then of what possible value is such a concept? None.

This is a world without surprises. E. H. Phelps writes in The New Palgrave dictionary, which is the economics profession’s standard: “Economic equilibrium, at least as the term has traditionally been used, has always implied an outcome, typically from the application of some inputs, that conforms to the expectations of the participants in the economy.”

Kirzner was correct in Market Theory and the Price System: “In a general market, as we shall see, equilibrium conditions can exist only when there is, in effect, nothing left for entrepreneurs to do” (p. 247).

B. Planning

The future is uncertain. For anyone to seek the kingdom of God or the kingdom of any would-be divinity, he must plan for the future. He must deal with unexpected events. To implement his own personal mission statement, he has to allocate scarce resources. There are no free lunches in the market place.

All forms of planning must deal with personal responsibility: point two of the biblical covenant. Everyone answers to someone. Everyone is an agent of someone. No one is autonomous.

1. Entrepreneurship

In the parable of the talents, Jesus dealt with God’s final judgment. The parable appears in the chapter on the final judgment. The parable tells of a man who delegates control over money to stewards. Then he returns for an accounting. He compares their rates of return. He also compares the amount of money he entrusted to each of them. He acted as an entrepreneur. He transferred control over his money. He made estimates of their rate of profit. They in turn acted as entrepreneurs. Two invested the money. One buried the coin. He refused to deal with the uncertainties of investing. He preferred safety. He came under condemnation.

There is no escape from planning. There is no escape from responsibility before God. Men may try to escape, but they will fail. They must adopt plans. They must then implement these plans or else revise them, whether systematically or randomly. These plans are based on their concept of hierarchy.

We are all entrepreneurs. We all deal with an uncertain future. We all deal with a dark mirror. We rely on specialists who have the ability to foresee future events more accurately than the rest of us. In the Bible, Joseph is the great example. God revealed to him the seven fat years and the seven lean years. Then Joseph organized production to meet the future demand. These people produce profits for themselves or their employers. They buy low (seven fat years) and sell high (seven lean years).

The primary goal of buying low and selling high is to be a good steward of God’s capital. The way to make a profit is through profitable service to future customers. You use your specialized information to bid up underpriced resources on behalf of your customers. You then make them offers they choose not to refuse. They buy your output at the prices you guessed.

2. Equilibrium

Mainstream economists argue that the best way to understand the real world of economic change is to begin with an assumption of a hypothetical world where men are omniscient. People are gods. They are functionally omniscient regarding supply and demand. Everyone knows the economic future perfectly. There are no unexploited opportunities. There are no traces of uncertainty in the economy. Furthermore, no known process has led to this theoretical condition. It just is. That is where mainstream economists begin to analyze the real world.

Mainstream economists have no coherent theory of entrepreneurship in the world of equilibrium. When they write their formula-filled mathematical jargon, they start with equilibrium conditions: a world of omniscient people. How did this hypothetical entity come into being? They do not offer a theory. They say that the system is hypothetical. It does not faze them that have no theory of economic change from inside the economy: endogenous. They ignore this question: “How does the economy lose equilibrium?” Most important, they ignore this one: “How does society get back equilibrium after it is lost?” From omniscience to discoordination to omniscience: they have no coherent theories to explain this. When you start theorizing from the logic of an omniscient society, you are in a real bind. Somehow, it got non-omniscient: change. Now the poor society is staggering around in a daze, trying to get back its lost omniscience. What’s a society to do? My suggestion: it should try to get tenure. That’s what academic economists do to reduce unexpected change in their lives.

Roger Leroy Miller wrote in his Economics Todaytextbook: "Equilibrium in any market is defined as a situation in which the plans of buyers and the plans of sellers exactly mesh, causing the quantity supplied to equal the quantity demanded" (5th edition, 1985, p. 49). It is perfection based on perfect knowledge. James Gwartney and Richard Stroup agreed in their textbook, Economics: “When a market is in equilibrium, there is a balance of forces such that the actions of buyers and suppliers are consistent with one another. In addition, when long-run equilibrium is present, the conditions will persist into the future” (4th ed., 1982, p. 186). How can such a meshing of plans occur? Through perfect forecasting: “In summary, an output rate can be sustained into the future only when the prior choices of decision-makers were based on a correct anticipation of the current price level” (p. 187). Edwin Dolan wrote: “The separately formulated plans of all market participants may turn out to mesh exactly when tested in the marketplace, and no one will have frustrated expectations or be forced to modify plans. When this happens, the market is said to be in equilibrium” (Basic Economics, 2nd ed., 1980, pp. 44–45). It is perfection based on perfect knowledge.

The real world is filled with uncertainty. It is also filled with responsibility. There is no way to get richer without increasing your responsibility. Successful planning increases profits. Profits increase personal wealth. This increases life’s complexity. It increases responsibility. The process continues.

Austrian School economists offer a theory of entrepreneurship that is tied to price discovery. Above all, they rely on an undefined something that Kirzner calls alertness. No one can define it. It cannot be marketed. It may not be able to be taught. Austrian School economists do not discuss the possibility that God reveals accurate information about future market conditions to certain people. So, they do not know what to call this skill. It is an X-factor. It is the ability to buy low and sell high, decade after decade. It is the Warren Buffett factor. It cannot be explained. He does not use graphs. He does not use arcane formulas. He speaks coherently. He has not received tenure. He is worth $80 billion. He has given away $30 billion.

It is not good enough to know what future prices will be. You have to put up money or capital to profit from your knowledge. An entrepreneur without money or a partner with money is like a race track tout who does not buy a ticket. He does not affect the odds. He does not affect prices. He is the male version of Cassandra. He knows the future, but no one listens. Every time his horse comes in first, he wails, “I knew! I knew!” So what?

C. Standards

How does the entrepreneur make his profit? He buys low and sells high. How does he do this? He sees that production goods are available today at prices that do not reflect the future accurately. How does he know? The rest of us do not know. Salaried economists surely do not know.

Society needs people who can buy low and sell high. They reduce waste. They serve customers well. As long as they do not steal, they are doing nothing wrong.

1. Entrepreneurship

The profit of an entrepreneur rests on a system of private ownership. He owns money. He wants to invest it in some business. He may own the business. He may simply buy capital on markets. He knows that he will be allowed to keep his profits if there are any.

Others in the society want people to make available their best ideas about the future. By enforcing the Bible’s private property social order, people make it possible for those people with specialized information to profit from this information. These specialists are willing to put their information to effective public use in the market. They seek their own ends, but the information they use is put to customer-satisfying purposes. The legal order makes this possible. So does social custom.

There is no compulsion in these transactions. There is no theft. The buying and selling of information is part of an overall structure of law. People who are willing to pay for this information can hire the services of people with reputations for forecasting accurately.

If envy is widespread, there will be less entrepreneurship. Envy is a sin. It seeks to tear down successful people, especially rich people who are not celebrities or sports stars. These envy-driven people may know that they cannot profit from such tearing down. They do not care. They want the successful person “put in his place.” They may use politics to tear down the rich. They vote for politicians who vote for high taxes in top income brackets. This makes society worse off when these rich people decide not to put their money at risk to deal with uncertainty. The envious do not care.

2. Equilibrium

What are the standards under equilibrium? There has to be private property. There also has to be universal perfect knowledge of economic opportunities for exchange. Men possess God’s omniscience. People know exactly what will happen next in the economy. There are no surprises.

With this theoretical structure in place, economists begin theorizing about how the free market would work. This theoretical model becomes the standard for judging the real-world market. Markets that do not possess these features are called “imperfect markets.” Keynesian economists call in the state to correct deviations from perfect markets.

There are a series of theoretical problems here. One has to do with the hypothetical market’s arrangements for adjusting to new information. There has to be change in life. This fact raises questions. How do people adjust to change under the assumption of perfect knowledge? What does economic theory have to say about this, meaning economic theory based on the perfect market hypothesis? How can it deal with decision-making?

People are said to know what the limits of their wealth are. They have made subjective imputations of value. So, they economize. They buy exactly those goods in exactly those quantities that satisfy their wants, with no assets left over. There is no waste. But there is also no freedom of action. All of them know what all the others will do. Machines predict machines. The logic of liberty produces a denial of liberty. (In philosophical terms, the phenomenal realm of totally predictable scientific causation, as hypothesized by Immanuel Kant, swallows up the realm of contingency: Kant’s noumenal realm of human action.)

The other problem has to do with the subjective imputation of value and objective pricing in an economy without money.

D. Imputation

The imputation of economic value is subjective. Such imputation by many people leads to competitive bids in an open market. In a modern economy, these bids are usually made in the form of money. These multiple bids produce an array of objective prices. The value behind these bids is subjective.

This view of market order was first proposed by Carl Menger in 1871. He was the founder of the Austrian School of economics. Four years later, a rival approach was offered by Walras, who explained the market process in terms of a complex of simultaneous equations. This was a rival methodology. Menger did not assume human omniscience. Walras did, but he did not admit this openly. Neither do his followers.

1. Entrepreneurship

Only God has perfect knowledge. Everyone else faces uncertainty. Economics rests on this fact operationally. Economic theory should never depart from this assumption.

The Austrian School of economics rests on a theory of entrepreneurship. This is the practice of making plans for the future. These plans are burdened by uncertainty. Men make plans in the hope of making profits. Profits are what is left over after the entrepreneur has paid all costs of his plans, including the rate of interest. Profits are economic residuals. They are the result of having bought low and sold higher.

Austrian School economists explain this ability by invoking an unknown something that the successful entrepreneur possesses. The entrepreneur is like Joseph in Egypt. He knows the future. He makes plans to deal with the future profitably. Humanist economists do not invoke God’s revelation to explain this ability. They invoke “unexplainable factor x,” which entrepreneurs possess at least occasionally. Why unexplainable? Because its presence is itself uncertain. It cannot be purchased in a free market. No one knows where it comes from. It is uncertainty seeking profitable solutions to uncertainty.

2. Equilibrium

Mainstream economists use equilibrium to explain the production and distribution of goods and services. They have no concept of the entrepreneur that is consistent with the assumption of universal omniscience. The entrepreneur offers no benefit to the economy. There are no unexploited opportunities. There is no way to buy low and sell high. The related concepts of profit and loss have to do only with imperfect knowledge. The concepts are meaningless in the framework of equilibrium, where there are no unexploited opportunities.

There is another crucial theoretical problem. If all people know what is coming next, they do not need money. People hold money because it is the most marketable commodity. In time of unexpected change, people want money either to take advantage of opportunities or else to avoid disasters. But in a world of perfect foreknowledge, there are no unexpected events. Under such conditions, the demand for money would fall to zero. Prices would become infinite. There would be no monetary prices. This would eliminate monetary accounting. This would bring back barter. There are no prices in barter that are expressed in a common numerical format, i.e., money prices. In short, the assumption of perfect markets is self-contradictory.

Mises discussed the demand for money.

It has been pointed out already that in the imaginary construction of an evenly rotating economy the very notion of money vanishes into an unsubstantial calculation process, self-contradictory and devoid of any meaning. It is impossible to assign any function to indirect exchange, media of exchange, and money within an imaginary construction the characteristic mark of which is unchangeability and rigidity of conditions.

Where there is no uncertainty concerning the future, there is no need for any cash holding. As money must necessarily be kept by people in their cash holdings, there cannot be any money. The use of media of exchange and the keeping of cash holdings are conditioned by the changeability of economic data. Money in itself is an element of change; its existence is incompatible with the idea of a regular flow of events in an evenly rotating economy (Human Action, Ch. XVII:5)

There is zero demand for money in a world with perfect foreknowledge. Money is held to compensate for imperfect knowledge. There is no imperfect knowledge in equilibrium. Here is how Rothbard put it.

What is the usefulness of keeping or adding to a cash balance? This question will be explored in later chapters, but here we may state that the desire to keep a cash balance stems from fundamental uncertainty as to the right time for making purchases, whether of capital or of consumers’ goods. Also important are a basic uncertainty about the individual's own future value scale and the desire to keep cash on hand to satisfy any changes that might occur. Uncertainty, indeed, is a fundamental feature of all human action, and uncertainty about changing prices and changing value scales are aspects of this basic uncertainty (Man, Economy, and State, Ch. 4:5:A).

He was even more explicit in his chapter on the structure of production.

The evenly rotating state, for example, would be incompatible with the existence of money, the very medium at the center of the entire exchange structure. For the money commodity is demanded and held only because it is more marketable than other commodities, i.e., because the holder is more sure of being able to exchange it. In a world where prices and demands remain perpetually the same, such demand for money would be unnecessary. Money is demanded and held only because it gives greater assurance of finding a market and because of the uncertainties of the person's demands in the near future. If everyone, for example, knew his spending precisely over his entire future—and this would be known under the evenly rotating system—there would be no point in his keeping a cash balance of money. It would be invested so that money would be returned in precisely the needed amounts on the day of expenditure. But if no one wishes to hold money, there will be no money and no system of money prices. The entire monetary market would break down. Thus, the evenly rotating economy is unrealistic, for it cannot actually be established and we cannot even conceive consistently of its establishment. But the idea of the evenly rotating economy is indispensable in analyzing the real economy; through hypothesizing a world where all change has worked itself out, we can analyze the directions of actual change (Ch. 5:2).

He did not pursue this as far as I have. The logical conclusion of this line of reasoning is that there can be no array of objective prices as denominated in one currency unit. If there is zero demand for money, prices cannot be expressed in monetary terms. This eliminates every equation that relies on a single price for a good. This also eliminates every graph that has P (price) as the vertical axis. Why? Because there is no single price for anything. There is no common denominator. There are as many prices for a single item as there are items offered for sale for that single item. Again, citing Rothbard:

In barter, every good had only its ruling market price in terms of every other good: fish-price of eggs, horse-price of movies, etc. In a money economy, every good except money now has one market price in terms of money. Money, on the other hand, still has an almost infinite array of “goods-prices” that establish the “goods-price of money” (Ch. 4:1).

A wise student of economics should look at every equilibrium-based graph and every equilibrium-based equation that is offered to explain economics, and he should think this: “Fake!” “Cheat!” “I want my money back.”

I am not arguing merely that the assumptions of equilibrium are not conformable to the real world. Economists who use this model are willing to admit this. I am arguing something far more fundamental. I am arguing that the logic of equilibrium is self-contradictory on its own terms. It does not allow a coherent discussion of economic cause and effect if the discussion in any way relies on monetary pricing, which it always does. If you want a graphic image of what is involved here, think of a head-on collision between two large trains, the Neo-Classical Zephyr, lurching slowly to the right, its brakes still on, and the Neo-Keynesian Express, racing blindly to the left. Each was carrying high-priced freight of the economics profession. “Is the loss total?” “Yes.” In this case, the shippers had taken out no insurance—as if there had been no risk. There was risk. Lots.

There is a reason for this fundamental incoherence. All logic that hypothesizes man as possessing divine knowledge is inherently incoherent. It does not make sense. It cannot be made to make sense. It will not lead to accurate knowledge. It should not be invoked. It should not be trusted.

E. Inheritance

Every theory of society has a doctrine of succession. Without historical continuity, whirl would be king. We could not predict anything accurately about the world around us. There would be no social theory. There would be only chaos. This is not the real world.

1. Entrepreneurship

For Christian social theory, there is a transfer of wealth to the next generation. It is governed by this principle: “A good man leaves an inheritance to his children’s children, but the sinner’s wealth is laid up for the righteous” (Proverbs 13:22). Economic causation is ethical. This has long-term implications: the expansion of the kingdom of God at the expense of the kingdom of mammon. There is an increase of capital over time (Deuteronomy 28:1–14). This is used by covenant-keepers to increase the realm of the kingdom of God in history. In short, there are corporate effects of capital accumulation by individuals.

Entrepreneurship is imposed on all people because of the uncertainty of the future. This uncertainty imposes limits on covenant-keepers and covenant-breakers. The Bible says that covenant-keepers are specially favored by God. They are supposed to acknowledge this. “Beware lest you say in your heart, ‘My power and the might of my hand have gotten me this wealth.’ You shall remember the Lord your God, for it is he who gives you power to get wealth, that he may confirm his covenant that he swore to your fathers, as it is this day” (Deuteronomy 8:17–18). Covenant breakers refuse to acknowledge the divine source of their wealth.

The transfer of wealth to the next generation is supposed to be through ethics. Those with capital are supposed to leave an inheritance to covenant keepers. This is how they are supposed reduce the likelihood of their capital funding the kingdom of mammon. They cannot escape uncertainty. They are to use ethical standards to reduce this uncertainty.

2. Equilibrium

There is no learning process in the hypothetical realm of equilibrium. There is no ethical causation imposed from outside of the self-contained, autonomous realm of equilibrium. All members of the economy possess equal knowledge: perfect. No group can gain an advantage. There is no motivation for self-sacrifice in order to promote any group’s interest. There is a constant circular flow of wealth, which is somehow beyond the constraints of the second law of thermodynamics: entropy. This model is analogous to a perpetual motion machine. There is no progress. There are no setbacks.

The concept is inherently timeless. It is therefore useless. This is just one more example of the tradition of Parmenides, who sought timeless logic as a way to avoid Heraclitus’ world of ceaseless flux. Pre-Socratic Greek dualism is with us still.

There is a biblical model for equilibrium: the lake of fire. “Then Death and Hades were thrown into the lake of fire. This is the second death, the lake of fire. And if anyone's name was not found written in the book of life, he was thrown into the lake of fire" (Revelation 20:14–15). There will be no progress in the lake of fire. There will be no unforeseen changes. There will be no prices. There will be no profit opportunities. There will be no human action. The lake of fire is the world of equilibrium—literally. This is the biblical view of eternity for covenant breakers.

Conclusion

I will now summarize the textbook concept of equilibrium.

Equilibrium is the condition of the world economy which occurs whenever all three billion market participants on earth (not counting their non-participating children) have perfectly forecasted the supply-and-demand effects of all of the economic decisions of all of the other three billion, so that their plans mesh perfectly without error. This is why there is no incentive for plan-revision. No one has anything more to sell at the existing prices, and everyone has purchased all that he wants at the existing prices, so prices will not change as a result of anyone's changing his mind. Equilibrium requires that every market participant forecast perfectly the economic future, which has therefore ceased to be uncertain. In short, equilibrium occurs whenever everyone on earth has previously attained what Christian theologians refer to as one of God's incommunicable attributes: omniscience.
This is not how textbooks present it. This would be far too open, far too accurate, and far too preposterous for students to believe. So, the authors refuse to come clean. Nevertheless, the entire foundation of mainstream economics rests on the acceptance of my definition as the proper way to explain the free market social order. This is perfect competition, yet it offers no explanation of competition. This is perfect knowledge, yet it is knowledge that cannot increase, being perfect. This is the science of human decision-making in which there is no decision-making. It is, in short, nutty. It begins with this nuttiness: the assumption that economics is best studied as if people were God. Economics was the first self-consciously atheistic social science, beginning in the seventeenth century, and it has not departed from its theological roots. As it gets more intellectually consistent with its confession of faith, it gets more incoherent and more irrelevant. In this sense, it is the model humanistic social science.

It is clear that I have no use for the model of equilibrium to explain anything in the realm of change. This is not simply because it is timeless. The laws of physics are timeless. We can use timelessness to explain a great deal of physics, i.e., physics without either entropy or quantum mechanics. We can then move from timelessness to predictability. But this is not true of any aspect of humanity. This is because man is made in God’s image. He must render judgment in history, for he is under judgment in history. He is trapped in history until the final judgment. This is the essence of his being. He is a covenantal creature.

The error of the model of equilibrium is this: it rests on the idea of man as divine—omniscience. There is zero explanatory value in any model that sees human knowledge as equal with God’s. Human knowledge cannot approach divine knowledge as a limit. These are two kinds of knowledge. “For my thoughts are not your thoughts, neither are your ways my ways, declares the Lord. For as the heavens are higher than the earth, so are my ways higher than your ways and my thoughts than your thoughts” (Isaiah 55:8–9). This is because of the Creator-creature distinction.

Human knowledge expands. Human responsibility therefore expands. There is no possibility of reduced entrepreneurship in a world of increasing knowledge, which leads to an increase in wealth. This means there must be an increase in uncertainty due to an increase in complexity. There is a growing supply of unexploited opportunities. Thus, the model of equilibrium is inherently wrong both technically and ethically. It provides no accurate explanatory value. It confuses our understanding of economics.

In 1991, Kirzner wrote this: “For the Austrian view, on the other hand, entrepreneurship emerged not as the foe, but has the indispensable friend, of the notion of equilibration” (“Market Process Theory.”) I hope I have made it clear that I am in total opposition to his assessment. The idea of equilibration, like equilibrium, is bad theology and bad economics.

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For the rest of this book, go here: https://www.garynorth.com/public/department193.cfm

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