The Austrian school faces a true ambiguity concerning its ability to develop a positive theory of the firm. Although it never really forms the subject of specific studies, the enterprise nevertheless implicitly appears both in Austrian theories of entrepreneurship—which deal with the market behavior of enterprises facing the problem of knowledge—and in their writings on the microeconomic analysis of the production structure. Both works are important in the Austrian school’s research program. But while in the first case the enterprise is unavoidably interwoven with the concept of the entrepreneur, it represents at best, in the second case, nothing more than one of the potential bases for the implementation of a capital structure. It therefore seems fair to label the Austrian view of the enterprise “residual”. 1 This anomaly must be considered in relation to another particularity of the Austrian school, which is the relative separation between the two veins around which Austrian thought has developed, even though both deal with the same problem of coordination. One can only be struck by the few connections between the works dealing with the problem of knowledge coordination with those devoted to the coordination over time of the different stages that compose the production process in an Austrian perspective. It all looks as if Menger’s legacy had been strictly shared out within the Austrian family, some authors developing the cognitive and entrepreneurial dimension of Menger’s thought through a theory

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Pushed along by the failures of socialism, the idea that a market economy provides the foundation for prosperity has gained widespread acceptance in recent years. Many countries have moved toward an environment more consistent with economic freedom and the smooth operation of a market economy. Trade barriers have been reduced, monetary systems have become more stable, marginal tax rates have been lowered, and various price controls—including exchange and interest rate controls—have been liberalized or eliminated. 1 Yet in one critical dimension—the size of government—most nations have moved in the other direction. Over the past several decades, government expenditures as a share of GDP have been rising, resulting in more resource allocation through government. Table 1 illustrates the growth of government in countries that are members of the Organization for Economic Cooperation and Development (OECD). Data for the 1960–96 period are shown for all 23 nations that have been members throughout the period. Measured as a share of GDP, total government expenditures have grown substantially in every one of the OECD countries. In 1960 government

We discuss contract theory from a combined Austrian/new institutional view. In the latter view, the world is seen as shot through with ignorance and transaction costs, but, as a tendency, entrepreneurial activity responds to the problems caused by these. All modeling must critically reflect this. This ontological commitment is contrasted to various isolations characteristic of contract theory, specifically the modeling strategy of introducing often ad hoc and unexplained constraints that suppress margins and possibilities of entrepreneurial actions that would be open to real-world decision-makers. We illustrate this by means of, for example, the treatment of asymmetric information under complete contracting and the notion of control rights under incomplete contracting.

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I discuss the merits and drawbacks of game theory in economics from the perspective of Austrian economics. I begin by arguing that Austrians have neglected game theory at their peril, and then suggest that game theoretic reasoning could be one way of modelling key Austrian insights. However, admittedly some aspects of game theory dont square easily with Austrian economics. Moreover, a major stumbling block for an Austrian acceptance of game theory may lie in the traditional Austrian resistance to formal methods.

ABSTRACT Many writers argue that economic organization is undergoing major transformation in the emerging knowledge economy; authority relations are withering; legal and ownership-based definitions of the boundaries of firms are becoming irrelevant and there are increasingly few constraints on the set of feasible combinations of coordination mechanisms. The present paper critically deals with these claims, beginning from the basic idea that they may be analysed as turning on the implications for the Coasian firm of the Hayekian notion that the distributed knowledge is a strong constraint on the use of planned coordination. It argues that there are efficiency reasons for the existence of authority under Hayekian distributed knowledge; that the increasing importance of knowledge in production does not render legal and ownership-based notions of the boundaries of the firm irrelevant; and that coordination mechanisms will also cluster in certain, predictable combinations in the emerging knowledge economy. Thus, Coasian firm organization is consistent with Hayekian knowledge conditions.

When commuting workers compensation reinsurance claims, the standard method is to project the future value of the claims using stated assumptions for future medical usage, medical inflation, cost-of-living adjustments, and investment income. The actuary selects a best estimate for each variable, and assumes this deterministic number will be realized in the future. To account for the date of death being stochastic, a mortality table is used to model the future lifetime. By assuming deterministic values for future medical usage, medical inflation, cost-of-living adjustments, and investment income, the calculation ignores the possibilities of higher or lower values. It is shown that these do not generally balance out, and that the standard method produces biased results. In low reinsurance layers, the 1 2

The “entrepreneurial spirit ” is something that has long been associated with the driving force behind economic progress and growth. Joseph Schumpeter (1942) stated that the key to the success of markets lies in the spirits of entrepreneurs who persist in developing new products and technologies, through a process he termed as “creative destruction. ” Kaiser (1990) modeled the entrepreneur on the basis of many historical characterizations, including the Schumpeterian innovator, and concluded that the major characteristics of the entrepreneur—innovator, risk taker, and resource allocator—are complementary and inseparable facets of entrepreneurship. Kirzner (1997) argues that the entrepreneurial discovery process is vital to the effectiveness of markets, where discovery entails entrepreneurs discovering profit opportunities by trial and error. In this same respect, Jenner (1998) models the Schumpeterian entrepreneurial process as a dynamic process in which entrepreneurs search for new combinations of products and production techniques that will lead to increased productivity and economic growth. Knight (1921) views the entrepreneur as the bearer of the uninsurable uncertainty present in the marketplace, with the profit earned being the compensation for bearing this uncertainty. Recently, the conceptual link between entrepreneurship and economic growth has received renewed interest by economists. As argued by Minniti (1999), entrepreneurs are the catalysts for economic growth because they create a networking externality that promotes the creation of new ideas and new market formations. The finding

705–10) argued that the market socialists failed to understand the role of financial markets in an industrial economy. Even with markets for consumer goods, he explained, socialism would fail because it substituted collective ownership of the means of production for private capital markets. Through these markets, owners of financial capital decide which firms, and which industries, receive resources to make consumer goods. In a modern economy, most production takes place in publicly held corporations. Of prime importance, then, is the problem of corporate governance: How do owners of financial capital structure their agreements with those who receive that capital, to prevent its misuse? Unfortunately, there exists little research in this area from an Austrian perspective. In this article, I focus on the financial-market entrepreneur—what Rothbard (1962, 1985) calls the capitalist–entrepreneur—to outline some features of an Austrian theory of corporate governance. I begin by reviewing the traditional, production-function theory of the firm and suggesting two alternative perspectives: that of the entrepreneur and that of the capitalist. I next discuss the Coasian,