On Thursday, the Mercatus Center celebrated the 40th anniversary of the Nobel Prize awarded to F. A. Hayek.¹. The keynote speaker was Israel Kirzner, who Thomson Reuters predicts may this year’s Nobel Prize in economics. The question he posed for the talk was what role the Prize played in reviving the Austrian school of economics, but the more interesting aspect of his talk was the way he described what it means to be an Austrian.

The central thesis Kirzner proposed was that, following the socialist calculation debate, Mises and Hayek (the leaders of the Austrian school) made important original refinements to the theory of how markets work, but that these contributions were only recognized after Hayek’s Nobel Prize—awarded for earlier and quite separate work—gave younger economics newfound reason to examine Hayek’s entire career.

The socialist calculation debate, for those not versed in economic history, was a high-profile argument in the 1920s and 1930s about whether socialism—defined as state ownership of the means of production—could actually work.

Mises and Hayek argued that when the state owned the whole structure of production from raw materials to consumer goods, there would be no way to know which uses for goods—say, iron—were most valued. In a private property system, this task is accomplished by prices, but prices don’t exists when the state simply distributes resources to other parts of the state.

A decade and half after the first formulation of that argument, socialist economist Oskar Lange came up with what would be considered the final answer. Lange argued that you could just simulate free floating prices by assigning them randomly and then adjusting based on how quickly different resources are consumed.

Lange’s answer, with some revisions, won the debate as far as the economics profession was concerned. For this and a few other reasons, the Austrians lost their reputations in the economics field, and fell into obscurity until the Hayek won the Nobel.

Kirzner argued that, during that interlude, Mises and Hayek made important refinements to and elaborations on the theory of market processes that demonstrated why Lange’s answer—and the direction of the economics profession as a whole—missed the point. He called the key idea of this period open-ended thinking.

Lange’s problem was that, like the now-mainstream of economics, he relied on the assumption that every part of the economy was at equilibrium—that supply and demand was perfectly balanced at every point in the economy, and that this state of affairs simply needed to be replicated within socialism. This assumption entails others—perfect competition in every market, for example, and perfect knowledge of all individuals in the economy. Economists know that these assumptions are not true, but they will generally say that they are close enough to true as to not make a difference.

The problem, from the Austrian perspective, is that there are no new products, no new ideas, no opportunities for improvement anywhere. There are a fixed, closed set of choices—and all by initial assumption! The Austrian insight was that the set of choices in a market system is constantly in flux; competition and entrepreneurship allowed for the discovery of entirely new possibilities. And these possibilities are beyond the reach of normal research and development, because in many cases no-one knows to look for them. They are unknown unknowns.

In Lange’s model and all equilibrium model these possibilities disappear, and with them goes the tether to the real economy. That’s not to say that such models have no place—the mistake in mainstream economics was to give them the only place, and set aside all consideration of the process of markets.

It is this belief, according to Kirzner, that makes one an Austrian. This bar is far more ecumenical than some might like. You do not have to believe in Austrian business cycle theory, you don’t have to throw out GDP with the bathwater, and you don’t have to worry about radical a priori reasoning. Using this criterion, Kirzner was happy to label Julian Simon an Austrian even though he was also firmly in the Chicago school. Similarly, he absolved Russ Roberts, who confessed to finding equilibrium models helpful. The point, said Kirzner, is to remember that your models are tools and not reality, and that there are more things in heaven and earth than are dreamt of in your graduate economics seminar.

By this bar I can consider myself a Austrian, and even remember the sentence that turned me into one. It’s in Arnold Kling and Nick Shultz’s book, From Poverty to Prosperity. Kling and Shultz describe mainstream economics by saying that they can explain why it makes more sense to have your shirts ironed by a laundry than to do it yourself—specialization, trade, and so on. An open-ended economist says that all of that’s true. But have you heard of permanent press? Innovation completely changed the terms of the question, and I don’t have to iron my shirts at all.

I don’t know why, but when I read that example, it clicked. The world expands in unexpected ways, and our analyses are only related to the real world when they account for that.

Kirzner says that belief makes me an Austrian, and that’s an Austrianism I’m quite happy to be a part of.