Imagination, boldness, and modeling human choice

Israel Kirzner on entrepreneurial discovery:

For neoclassical theory the only way human choice can be rendered analytically tractable, is for it to be modeled as if it were not made in open-ended fashion, as if there was no scope for qualities such as imagination and boldness. Even though standard neoclassical theory certainly deals extensively with decision-making under (Knightian) risk, this is entirely consistent with absence of scope for the qualities of imagination and boldness, because such decision-making is seen as being made in the context of known probability function. In the neoclassical world, decision-makers know what they are ignorant about. One is never surprised. For Austrians, however, to abstract from these qualities of imagination, boldness, and surprise is to denature human choice entirely.

Misusing “perfect competition”

From Peter Boettke’s 1997 paper Where did Economics Go Wrong? Modern Economics as a Flight from Reality:

Previously, the model of a perfectly competitive market was primarily used in thought experiments designed to be contrasted with real-world market institutions. Such counterfactual thought experiments illuminated the positive function of those institutions. In a world of complete information, for example, neither firms nor profits would logically exist. Therefore, the contrast of this imaginary world against the real world of firms and profits showed that such institutions may have some functional significance in coping with imperfect and incomplete information.

This counterfactual use of the theory of perfect competition was reversed by the formalist revolution in economics. The departures of reality from the model of perfect competition were now thought to highlight interventions in the market ecnomoy that would be necessary to approximate equilibrium. Competitive equilibrium and the maximizing behavior that would ideally produce it represented the hard core of the research program f economists from 1950 on. As this happened, economics as a discipline was transformed.