Where are the Big Bills? Escaping the Endogenizer’s Dilemma

Originally published in The Review of Austrian Economics

The continual expansion of rational choice theory to a greater range of social phenomena—from markets to politics and institutions—is a testament to its success. Each further application, however, simultaneously forecloses a potential source of inefficiency in economic systems.

The continual expansion of rational choice theory to a greater range of social phenomena—from markets to politics and institutions—is a testament to its success. Each further application, however, simultaneously forecloses a potential source of inefficiency in economic systems. Abdicating efficiency considerations impairs economics’ explanatory power as much as its normative relevance. In this paper I explore the interconnected roles of subjectivism and knowledge problems in accounting for inefficiency. I conclude that the knowledge-generating properties of institutions allow for efficiency comparisons, but only in the embrace of a thoroughgoing subjectivism.

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