The Use of Knowledge in Comparative Economics

Abstract

The application of rational choice to non-market decision making has revolutionized comparative economics. A fruitful methodological symmetry now prevails in the analysis of economic systems, emphasizing how their underlying institutions affect individual incentives. Most importantly, comparative work now includes traditionally non-economic spheres, such as politics, legal systems, and culture. While this approach represents a huge step forward from the institutional vacuums of earlier models, it has inherited the faulty economic anthropology of the market socialists that created those vacuums in the first place. Failure to account for differences in knowledge-generating properties between institutions has created several blind spots in this new literature. These essays examine the implications of taking knowledge seriously in modern comparative economics. The first argues that a pure rational choice approach that endogenizes institutions leaves no theoretical space for inefficiency, and that Hayekian knowledge problems must be the root cause of unrealized gains from trade. The second makes the case that market institutions provide tighter epistemic feedback than do democratic political institutions. The result is that markets generate the gains from trade automatically, while politics is reliant on mental models to substitute for institutional feedback. The third essay explores the relationship of this Austrian approach to heterodox social ontology. It makes the case that Austrians, by holding rational choice and knowledge problems side by side, get the best of both the heterodox and mainstream approaches to understanding social reality.