The Use of Knowledge in Comparative Economics

The application of rational choice to non-market decision making has revolutionizedcomparative economics. A fruitful methodological symmetry now prevails in theanalysis of economic systems, emphasizing how their underlying institutions affectindividual incentives. Most importantly, comparative work now includes traditionallynon-economic spheres, such as politics, legal systems, and culture. While this approachrepresents a huge step forward from the institutional vacuums of earlier models, it hasinherited the faulty economic anthropology of the market socialists that created thosevacuums in the first place. Failure to account for differences in knowledge-generatingproperties between institutions has created several blind spots in this new literature.These essays examine the implications of taking knowledge seriously in moderncomparative economics. The first argues that a pure rational choice approach thatendogenizes institutions leaves no theoretical space for inefficiency, and that Hayekianknowledge problems must be the root cause of unrealized gains from trade. The secondmakes the case that market institutions provide tighter epistemic feedback than dodemocratic political institutions. The result is that markets generate the gains from tradeautomatically, while politics is reliant on mental models to substitute for institutionalfeedback. The third essay explores the relationship of this Austrian approach toheterodox social ontology. It makes the case that Austrians, by holding rational choiceand knowledge problems side by side, get the best of both the heterodox and mainstreamapproaches to understanding social reality.