Externalities and Modern Austrian Theories of Economic Welfare: Problems and Promises

  • Roy E. Cordato


Although modern Austrians have moved away from the preoccupation with value theory attributed by Myrdal to the early Austrians, little attention has been devoted to developing an Austrian theory of welfare economics. In the case of externalities, the Austrian approach discussed in Chapter 1 is not explicitly based on any clearly defined efficiency or welfare criteria.


Welfare Economic Market Participant Plan Coordination Positive Externality Market Process 
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  1. 1.
    Unlike Samuelson, Rothbard rejects the entire indifference curve framework for analyzing preferences and also rejects any assumption that preferences remain constant over time.Google Scholar
  2. 2.
    Rothbard has always been a strict advocate of a Lockean natural rights approach to private property. This implies a concept of voluntarism that is inextricably tied to the use of one’s own body and “justly acquired” property (Rothbard, 1982b and 1973A).Google Scholar
  3. 3.
    The implications of Kirznerian efficiency theory for externalities were first discussed in Cordato, 1980, pp. 400–402.Google Scholar
  4. 4.
    Kirzner describes “utter ignorance” as a non-rational kind of ignorance. It does not refer to knowledge unaquired because the costs of acquisition are too high, i.e., rational ignorance. It refers to knowledge where no rational choice with respect to its acquisition can be made. It is knowledge that “you don’t know you don’t know.” (Kirzner, 1986).Google Scholar
  5. 5.
    These, in the terminology of orthodox externalities theory, would be referred to as “pecuniary” externalities and are typically not considered Pareto relevant.Google Scholar
  6. 6.
    This discussion should not be interpreted as an indictment or rejection of general equilibrium in all economic analysis. My focus here is strictly on its use in normative, welfare economics.Google Scholar
  7. 7.
    Unlike High, I am making a distinction between coordination and equilibration. High, like Kirzner, associates the two, arguing that because the entrepreneurial process is both coordinating and discoordinating that it is therefore both equilibrating and disequilibrating. But since the entrepreneurial process is always knowledge enhancing, even though at different stages it may be discoordinating, my conclusion is Kirznerian in that, I believe entrepreneurship is always equilibrating but may not always be coordinating.Google Scholar

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© Springer Science+Business Media New York 1992

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  • Roy E. Cordato

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