Roger W. Garrison*
 

I. Introduction
In his "Tale of Two Worlds" Israel Kirzner (1994) draws inspiration from a paper by Stephen Shmanske (1994) and provides us with a low-keyed contrast between neoclassical and Austrian modes of thought. In the neoclassical world, explanations of economic phenomena consist of applications of cost-benefit calculus. Maximization subject to constraint is the whole story. The purest of the neoclassicals, such as Shmanske himself, refuse to corrupt their analyses with considerations lying outside this deterministic framework and even wear their refusal as a badge of honor. Some ingenuity may be required in identifying the binding constraint, which underlies supply, and the relevant maximand, which underlies demand. But once the problem is conceived as the metaphorical fence on a hillside, there is no problem in determining just how high the maximizers can and do climb.
        In the Austrian world, there is a healthy recognition of supply and demand, of means and ends, and of underlying economic realities, but in the final analysis the market process is driven by entrepreneurs. Following Mises, Kirzner reminds us that we are entrepreneurs all. The very essence of entrepreneurship as conceived by the Austrians�and particularly by Kirzner himself�is that it cannot be bottled and sold alongside the other beverages in the marketplace. Contrary to the spirit of the Shmanske paper and to the theme of an earlier paper by T. W. Schultz (1975), entrepreneurship correctly understood is not to be analyzed by applying of the techniques of constrained maximization.
        There is a story that circulates among cosmologists about ill-informed resistance to the idea that the earth is round. The earth is actually flat, according to this retrograde view, and rests on the back of a gigantic turtle. Going for the Achilles' heel of this rather bizarre conception, the learned cosmologist questions a proponent of the turtle theory: "What, exactly, is the turtle standing on?" To the true believer, the answer is obvious: "It is standing on back of an even more gigantic turtle." The follow-up question almost asks itself: "And what is the even more gigantic turtle standing on?" Having had experience with other cosmologists, the believer decides to cut the debate short: "I'm sorry, sir. I've heard this line of questioning before, but it'll do you no good; it's turtles all the way down."
        What causes the price of a good to become adjusted to supply and demand? The adjustment process is brought about through entrepreneurial ability, for which there also is a supply and demand. And what adjusts the price of this entrepreneurial ability to supply and demand? That process is brought about through a higher-order entrepreneurial ability, for which, again, there is a supply and demand. "But, then, what ...?" "I'm sorry, sir. I've heard this line of questioning before, but it'll do you no good; it's supply and demand all the way through.
        We don't have to claim that Professor Kirzner is the Nicolaus Copernicus of economic science to appreciate his conception of genuine entrepreneurship and his rejection of the notion that the ability of the entrepreneur is just like any other ability for which there is a ready market. This is not to say, of course, that no service whose purpose it is to bring buyers and sellers together can be analyzed in terms of supply and demand. Real estate agencies, employment agencies, and computer dating services can all usefully be conceived as Marshallian firms. At some point in the analysis, however, an entrepreneurial function lying outside the supply-and-demand framework is necessary and even central to our understanding of the market process. Denying such a role to the entrepreneur is not the recipe for a purified conception of the market economy; it is, instead, the recipe for turtle soup.
        To focus on the issues raised in Kirzner's "Tale of Two Worlds" is to tell only half of the tale. The other half is a contrast between the Austrian view and the view of those who deny any meaning to the notion of "underlying economic realities." Where the neoclassicals go all the way with supply and demand; the radical subjectivists, as epitomized by G. L. S. Shackle, go virtually none of the way. Entrepreneurs do not discover opportunities, they create them. Kirzner's notion of entrepreneurial alertness to profit opportunities embedded in existing economic reality is supplanted by entrepreneurial imagination that creates its own reality. A tale of three worlds would have the Austrians located on a defensible "middle ground"�an idea that Kirzner (1992, p. 3) graciously attributes to me. The Austrians go part of the way with supply and demand: There are turtles all around, but the weight of the economic world rests ultimately on the shoulders of the entrepreneurs. A full appreciation of the intellectual war between these worlds and a defense of the Austrian turf would have to recognize simultaneous challenges from opposite directions by Shmanske and Shackle. While Kirzner (1992, p. 7) himself deals effectively with the "double-exposure of the middle ground," as he calls it, my immediate concern is with the neoclassical position as set out by Shmanske. This particular challenge has merit because of its "unsurpassed consistency and starkness" (Kirzner, 1994, p. 226). It allows the Austrians to identify the problems with neoclassical purism while allying themselves with those who hold more moderate neoclassical positions. 

II. Newtonian Notions of Equilibrium
The concept of equilibrium is fundamental to economic reasoning. The specific meaning of this term, however, is hardly self-evident. As one of the most useful transplants from the physical sciences, equilibrium must take on some stipulative definition spelled out by the economist employing it or derive its meaning from the context in which it is used. With two exceptions, open-mindedness dictates that no stipulated or contextual definition be dismissed out of hand. The two exceptions are the degenerate ones in which equilibrium is defined vacuously such that either equilibrium itself or its cognate disequilibrium is inconceivable. Arguments purporting to show that the economy as a whole is in a continuous equilibrium or that it is in continuous disequilibrium (and devoid of equilibrating tendencies) have the flavor of metaphysical disputes about whether the universe is orderly or disorderly. Clearly, the terms order and disorder can have no meaning except as they refer to contrasting aspects of the universe. Similarly, the terms equilibrium and disequilibrium are of little use to economists unless they refer to contrasting aspects of economic phenomena.
        Let me identify viable and degenerate conceptions of Newtonian equilibrium by considering the plight of a tight-rope walker. A Newtonian extremist with a comparative-statics bent of mind might insist that the tight-rope walker is in equilibrium only in the just-barely-conceivable case in which he is balanced motionlessly atop the rope such that a line drawn from his center of gravity to the center of the earth passes exactly and continuously through the center of the rope. A moderate would augment the strict sense of comparative-statics equilibrium with the more relevant concept of equilibrating tendencies, which allows for minor deviations of the center of gravity to one side of the rope or the other so long as the deviations are effectively and continuously countered by movements of the tight-rope walker. This conception gives meaning to the notion that some tight-rope walkers are better than others. A second extremist, one with tendencies toward metaphysics, might claim that the tight-rope walker is always in equilibrium. If not in equilibrium in one of the two senses already mentioned, the tight-rope walker will be in another equilibrium some distance below the rope�or he will be accelerating toward that equilibrium at an equilibrium rate!
        The tight-rope walker might be genuinely concerned about "losing his equilibrium"�but only if this term is understood in the moderate sense. His concern would not be lessened by pedantic instruction from the first extremist to the effect that he was unlikely ever actually to achieve equilibrium and therefore need not worry about losing it or by equally irrelevant instruction from the second extremist to the effect that losing equilibrium is definitionally impossible since any eventuality can be described in the language of equilibrium. The tight-rope walker is not worried about losing something he could never have or having something he could never lose; he is worried that he might fall off the rope.
        The concept of equilibrium that underlies the tight-rope walker's concerns also allows for an evaluation of actual or proposed changes in the environment faced by our master of the rope. Consider, for example, the question of a safety net. Should one be installed? What if the supports for the safety net had to be fabricated out of materials that formerly helped to support the rope? What if the safety net had a negative effect on the tight-rope walker's concentration�or on his "alertness," to put things in Kirznerian terms? What if the tight-rope walker perceived the safety net as a hammock? Neither of the two extreme and degenerate conceptions of equilibrium is of any help in answering these questions. In fact, the questions themselves�Just like the tight-rope walker's concerns�have relevance only when equilibrium is understood in the middle-ground, or tendencies, sense.
        The concept of equilibrium as imported from Newtonian physics into neoclassical economics has been put to various uses. Shmanske sets out and defends his own equilibrium theorizing in the context of a comparison between neoclassicism as developed in the UCLA tradition and a certain aspect of Austrianism as detailed by Kirzner. My own perspective on the issues derives from three points. First, to the extent that we are searching for a concept of equilibrium that reflects the concerns of market participants and has policy relevance, the dispute is not strictly between neoclassicism and Austrianism; moderate neoclassical theorists would readily team up with the Austrians to oppose Shmanske's neoclassical purism. Second, to the extent that Shmanske's and Kirzner's alternative formulations are separated by a critical point of logic, Kirzner's view wins out. And finally, Shmanske makes some progress toward a reconciliation of the two views he contrasts; he solves some riddles about Kirznerian alertness but leaves unsolved�and unrecognized�some riddles about his own view of the world. 

III. Two Neoclassical Traditions
Shmanske's arguments, with their "unsurpassed consistency and starkness," constitute a polar and degenerate position, one in which equilibrium always prevails. This extreme view is not representative of (moderate) neoclassicism. The neoclassical theory taught at the University of Virginia in the 1960s and 1970s, for instance, lies at some intermediate point on the spectrum that spans from the Austrian view to the Shmanske pole. Shmanske's notion of "equilibrium always," then, is disputed within neoclassicism and can most effectively be countered without drawing on the unique features of Austrianism. The two traditions within neoclassicism having the most direct relevance to the issue of useless and useful concepts of equilibrium are, in fact, the ones commonly associated with UCLA and UVA. Clearly identified by Shmanske, the UCLA tradition has it that the world is in continuous equilibrium. By way of contrast, those working in the tradition of Virginia Political Economy recognize the possibility of disequilibrium. They look for equilibrating tendencies and report their findings in the form of comparative-institutions analysis.
        I cannot resist noting the irony involved in these two particular orientations toward equilibrium and disequilibrium. Southern California seems actually to experience continuous and increasing disequilibrium economically, culturally, and even seismologically. It is amusing to contemplate the scene at Westwood where nearby real-estate bubbles, urban unrest, and even earthquakes fail to jar the economic theorists loose from their equilibrium-always mode of thought. Virginia, by contrast, is a place where change is dreaded, tradition is cherished, and calm prevails. There is even a light-bulb riddle that captures the essence of the Virginia world: How many Virginians does it take to change a light bulb? It takes three�one to change the bulb and two to reminisce about how nice the old one was. I'll leave it to others to explain this mismatch of analytical framework and cultural ambience.
        In the interest of traditions, I am simply accepting Shmanske's association of continuous equilibrium with the UCLA tradition, and I am offering as contrast the comparative-institutions analysis of equilibrating tendencies that underlies the UVA tradition (Goetz, 1991). Further reflection, I suspect, would reveal that we are actually talking about Earl Thompson, who epitomizes the equilibrium-always thinking at UCLA, and Ronald Coase, who gave the UVA tradition its comparative-institutions roots. And we should recognize, of course, that traditions do not translate into mutual exclusivity of ideas. After all, there is Harold Demsetz at UCLA who identified the fallacy of the Nirvana approach; there are Robert Clower and Axel Leijonhufvud, who have had plenty to say about disequilibrium; and there is Jim Buchanan who spent time and had influence at both institutions.
        Substantively, the distinction I want to highlight is that between an analytical framework that facilitates a straightforward comparison of alternative institutional arrangements in terms of the corresponding equilibrating tendencies and one that does not. A useful equilibrium concept in this regard is one that excludes from the underlying costs and benefits to be brought into equilibrium, such as those ordinarily represented in supply and demand curves, those costs and benefits associated with the equilibrating process itself. This is not to say that the costs and benefits of equilibration should be ignored but rather that, in comparing alternative equilibrating processes, the costs and benefits of achieving coordination must be kept separate form the costs and benefits of activities to be coordinated. Let me consider two substantive questions to illustrate the difference between UCLA and UVA conceptions of equilibrium. The first is a question about the market for education; the second is a question about the unemployment caused by labor legislation and the unemployment that characterizes a slack economy.
        In the market for education, which sector of the economy, private or public, more effectively brings costs and benefits in line with one another? That is, in which sector is there a more effective tendency toward equilibrium? If we answer in the UCLA tradition, we have to say that the price of education as well as the wage rate of educators is always in equilibrium in both sectors. Could anyone doubt this categorical claim? Suppose some doubter were to suggest that the wage rate of public-sector educators should be raised in order to bring the quality of education into line with underlying consumer preferences and resource constraints. The UCLA approach inspires the equilibrium-always theorist to ask: "If the wage rate should be higher, then why isn't it? Is it because of the bureaucratic costs of monitoring performance and adjusting wage rates?�and because of the political costs of raising taxes or running deficits to finance a higher wage bill? Well, these costs are just like any other costs and are part of the explanation of why the wage rate is what it is." Suppose the doubter were to suggest that we should move toward the privatization of education precisely to avoid such bureaucratic and political costs. Again, the UCLA-based response would have to be: "If we should have more�or even complete�privatization, then why don't we? Evidently, there are some relevant costs standing in the way, tipping the scales in favor of what we do have over what we don't have. And if we don't know just what those relevant costs are, well, it must be that the cost of knowing about those costs is prohibitively high."
        Economists adopting the UVA approach, which maintains instinctively a sharp separation between the costs that help to define an equilibrium and the costs of moving toward that equilibrium, are led straightforwardly to a comparison of the market-driven and bureaucracy-driven processes that equilibrate the markets for education and for educators. All the arguments for private over public provision of education, such as those made by Adam Smith, James Buchanan, and F. A. Hayek, come into play. The focus is on the institutional arrangements themselves and, more pointedly, on the extent to which they (1) facilitate the discovery of information about consumer preferences and resource availabilities (2) create incentives for market participants to act on the basis of the information so discovered. Kirzner's (1985) views on regulation and his emphasis on entrepreneurial alertness have a relevance here that is simply not to be found in the UCLA tradition.
        Do minimum-wage laws cause unemployment, and is there such a thing as involuntary unemployment? The answers from UCLA would have to be: "No" and "No." These answers, of course, are not substantive claims but reflect a certain methodological purity. In the UCLA-style understanding of minimum-wage laws, the wage floor becomes part of the supply curve: Even though this legislated wage rate attracts a number of willing workers far in excess of the number of minimum-wage jobs, the all-things-considered costs of actually hiring additional workers, which include the costs of repealing the legislation, are equal to or greater than the corresponding benefits. The minimum wage, then, is an equilibrium wage. George Stigler (1992, p. 459) offers a similar argument to the effect that the fifty-year-old program in which the federal governement supports the price of sugar has "met the test of time" and is therefore "efficient."
        Involuntary unemployment cannot be a problem in the continuous-equilibrium framework because, strictly speaking, the term itself has no clear meaning. During a recession, all non-working individuals are voluntarily declining to work for some low wage rate that they could actually have. And as in the case of the fallen tight-rope walker in a Shmanske equilibrium, this is where the UCLA analysis ends. But to save this view from challenges involving references to specific historical periods, such as the depths of the Great Depression when jobs were not to be had at even the lowest wage rate, it might be necessary to specify that the all-things-considered market-clearing wage rate might be zero or even negative. Such methodological purism does violence to the concept of "employment" by distinguishing, for instance, between the worker who runs a ski lift and the "worker" who rides the ski lift only in terms of their receiving a positive and a negative wage, respectively.
        The concept of involuntary unemployment as introduced by Keynes makes sense in a comparative-institutions framework. Interpreting Keynes, we can say that unemployment is likely to be greater in circumstances where market forces, which often involve the dominance of short-run speculation over long-run enterprise, determine the volume of employment than under an alternative arrangement where government, which is in a position to take the long view, augments private investment with public investment so as to maintain employment at a high and stable level. The difference in the unemployment rate attributable to the difference between market and government direction is involuntary in that the unemployed workers are in no position to choose between the two alternative institutional arrangements. Here, I am recasting the stipulative definition of involuntary unemployment that Keynes (1936) presented in Chapter 2 of his General Theory in the context of the substantive claims he made in Chapter 12. Keynes did not actually provide a comparative-institutions analysis, but his uncritical presumption that a wise and benevolent central authority is the preferable alternative to decentralized decisionmaking underlay many of his arguments.
        Macroeconomists in the Austrian tradition or in the tradition of Virginia Political Economy would have no reason to quarrel with a comparative-institutions notion of involuntary unemployment. They have many reasons, however, to quarrel with Keynes's substantive claims favoring the socialization of the investment sector. Actually engaging in comparative institutions analysis reveals that central direction is likely to be characterized neither by wisdom nor by benevolence. Knowledge problems and political perversities inherent in central direction combine to reverse the conclusion suggested by Keynes. It is the demand-managed or centrally directed economy that has the more serious problems of involuntary unemployment�or of involuntary underemployment. As Mises and Hayek have shown, the politically popular policies of deficit spending and inflationary finance misallocate resources and create conditions in which labor markets, as well as markets for other factors of production, cannot quickly find an equilibrium. More generally, the economics of knowledge, which was pioneered by Hayek (1937 and 1945), yields the strong conclusion that the equilibrating tendencies of the market are greater than the equilibrating tendencies of bureaucracy.

IV. Kirznerian Alertness as a Critical Point of Logic
In the context of autarky, where a Robinson Crusoe formulates some plan and occasionally alters it as circumstances require, the distinction between the UCLA tradition and the UVA tradition loses its significance. The insights of comparative institutions analysis can be given no play in an institutionless setting. Further, the distinction between the neoclassical construction as articulated by Shmanske and the Austrian construction as formulated by Kirzner is, in this context, mostly semantic as opposed to substantive. When the only coordination being discussed is that between an isolated individual's plans and his or her own perceptions of the relevant constraints and alternatives, there simply isn't much scope for differences. In fact, there isn't much scope for discussion.
        Kirzner writes of alertness, or entrepreneurial discovery, that lies outside the cost-benefit calculus and changes the parameters of the optimizing equation; Shmanske writes of the costs of discovery, which have evidently fallen below the benefits of discovery at the precise point the discovery is made. The process of adjusting plans to a new reality�or to a new perception of an old reality�is a fast-working one in both the neoclassical and the Austrian view. But in identifying the nature of the adjustment process, Shmanske follows Newton while Kirzner follows Menger.
        According to Shmanske (1994, p. 208), the individual formulates a new plan in an instant�or, at least, the individual starts to think about formulating a new plan in an instant. Acknowledging the application of turtle theory here, we might carry the logic a step or two further and say that the individual is preparing to start to think about formulating a new plan�or, at least, will be preparing start in an instant or so. However many turtles are actually involved, optimality prevails continuously: There is an optimal rate of adjustment to the post-discovery situation, an optimal acceleration toward the optimal rate, an optimal surge toward the optimal acceleration, and so on.
        Kirzner (1982, p. 146) discusses the dynamics of the immediate post-discovery period in terms of Menger's Law. According to this law, the value of ends attaches itself to the means for achieving those ends. But at the instant of discovery, the individual's evaluation of available means, which reflects his or her prediscovery ends, is out of line with the new postdiscovery ends. Menger's Law reasserts itself, however, "once the old means-ends framework has been completely and unquestionably replaced by the new one." The use of the phrase "completely and unquestionably" hints that the adjustment following the "instant of ... entrepreneurial discovery" might itself not be instantaneous. But the lack of further discussion of the rate of adjustment suggests either that it is sufficiently rapid that further analysis is unwarranted or, perhaps, that further investigation of the actual adjustment speed is the business of cognitive psychology rather than of economics: Is the individual "hit" by the idea that the means now have a new value? Does the idea "dawn" on him or her, or does it "eventually soak in"? Any of these phrases and implied speeds of adjustment can be accommodated by Kirzner's formulation.
        When the context of this discussion is changed from autarky to a market economy, the continual reassertion of Menger's Law�and of Jevons' Law of One Price�in the face of continual changes in economic realities and in perceptions of them is no longer a matter of cognitive psychology alone. The economist must explain how the prices of goods here and goods there, the prices of goods now and goods later, and the prices of producers' goods and corresponding consumers' goods are brought into conformity with one another. Kirzner posits a certain entrepreneurial alertness to price discrepancies and to the implied profit opportunities as the ultimate basis for our claim of a tendency toward equilibrium.
        Positing alertness, the sine qua non of entrepreneurship which lies outside the cost-benefit framework, involves more than a stipulative definition of entrepreneurship or an empirical claim about the behavior of entrepreneurs. It entails a fundamental point of logic. Considerations of costs and benefits that have been packed into the supply and demand curves which define market conditions cannot at the same time be the basis for adjusting the relevant price to conform to those market conditions. Alternatively stated, if the costs of adjusting a price to reflect conventionally defined costs and benefits are themselves incorporated into the cost-benefit calculus, then the unadjusted price is simply conceived to be an adjusted price. Conflating the costs of a price adjustment and costs requiring a price adjustment is, in fact, precisely what gives rise to convoluted UCLA-style arguments in which disequilibrium is inconceivable.
        There is nothing inherently objectionable about treating some aspects of price adjustment in terms of costs and benefits. Quite to the contrary, such cost-benefit analysis is to be recommended if it can shed light on some particular aspect of equilibration such as the special difficulties of adjusting prices or wages appropriately during episodes of inflation or deflation or during periods of large federal budget deficits, when credit and asset markets tend to be unstable. But, in general, a cost-benefit analysis of price adjustment does not substitute for the notion of entrepreneurial alertness. It merely pushes the positing of alertness one step back in the overall argument (Kirzner, 1979, p. 142). What forces in the market bring the costs of adjusting price into line with the benefits of adjusting price? If a cost-benefit answer is given to this question, then the positing of alertness is pushed still another step back.
        There may appear to be a certain formal similarity, here, between Mises' regression theorem, which links the current value of gold-based money to the non-monetary value of gold in some bygone era, and what we might call the Schultz-Shmanske regression theorem, which envisions an infinite cascading of markets for entrepreneurship. But the very essence of Mises' argument is that the regression is not infinite; the most gigantic turtle in his theory actually has something to stand on. By virtue of its having a use value as well as a monetary value, gold serves as anchor and allows monetary theorists to establish the relationship between tomorrow's expected prices and today's observed prices without getting caught in an infinite regress. The Schultz-Shmanske regression, however, is infinite and can be truncated only by eventual recourse to Kirznerian alertness or some effectively similar notion. 

V. Riddles in Both Worlds
Kirzner's concept of alertness has application in both an absolute and a relative sense. Fundamental methodological questions about the science of economics and fundamental socio-political questions about the organization of society can be asked in terms of the general quality of entrepreneurship. Is entrepreneurial alertness sufficiently pervasive and effective in a market economy to produce equilibrating tendencies? This issue, sometimes posed in the form of a riddle, has haunted classrooms and conferences for many years. The question itself, however, is so fundamental that a negative answer is inconsistent with the claim that economics has a subject matter. As Hayek (1955, p. 39) has taught us, only if there actually exists some effective tendency toward order is there any order to study. Economic inquiry, then, presupposes entrepreneurial alertness.
        The more policy-relevant questions are couched in terms of comparative institutions. Is entrepreneurial alertness more characteristic of a market-oriented economy than of a centrally directed economy? Does the level of taxation have an effect on the alertness of entrepreneurs? Economists who pay due attention to the entrepreneur in their theorizing are inclined to answer these questions in the affirmative. But attempts to articulate the answer in terms of Kirznerian alertness are not always successful or persuasive. Alertness, according to Kirzner, is exercised costlessly, and so any after-tax profits at all or other gains of any kind should suffice to call it forth. Why should costless alertness not be always exercised to the fullest? This and related questions are appropriately identified by Shmanske as "riddles" in Kirznerian theorizing.
        Shmanske has provided an insightful answer to these riddles by distinguishing between developing the capacity to be alert to profit opportunities and actually exercising the alertness. Cost-benefit analysis applies to the developing but not to the exercising. Let me note here, though, that this reconciliation, which will likely be accepted by Kirzner as a friendly amendment and fruitful development, is itself the result of an act of intellectual entrepreneurship and is better understood as Kirznerian alertness than as still another instance of continuous (intellectual) equilibrium. On the basis of Shmanske's amendment to the Kirznerian framework, it follows straightforwardly that the very capacity for alertness will be greater in a market-oriented, low-tax economy.
        Shmanske's own approach to normative inquiry, about which he provides only a hint (Shmanske, 1994, p. 221), turns on the identification of "artificial," or "unnecessary," costs, such as those associated with license requirements and (presumably) minimum-wage legislation. He expresses a preference for institutional arrangements that minimize these costs. But this approach creates some riddles for Shmanske. If "genuine" costs would have to be incurred in the process of eliminating "artificial" costs, then continuing to incur the artificial costs may, all things considered, be the cost-effective option. Also, is the widespread unemployment associated with a depression attributable to a genuine or an artificial cost of equilibration? And just how�and at what cost�would the element of artificiality be removed? Answering these and similar questions would seem to require Shmanske to abandon the UCLA tradition in favor of the comparative-institutions analyses that underlie the moderate neoclassical and Austrian traditions.
 

*The author thanks Thomas J. McQuade and Mario J. Rizzo for their helpful comments. This paper is based upon a formal commentary invited by the Smith Center for Private Enterprise Studies, Hayward, CA and delivered in a session at the 67th annual conference of the Western Economic Association in San Francisco in July 1992.

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