Market Theory and the Price System

Israel M. Kirzner wrote Market Theory and the Price System, published by D. Van Nostrand in 1963, as an intermediate textbook whose organizing claim is that a market is a sequence of adjustments. Buyers, sellers and producers act on partial knowledge, discover that some plans fail to mesh with the plans of others, and revise them. Prices carry the news of those mismatches, and equilibrium becomes a limiting case where the process would have nothing left to do. The coverage is familiar, while the purpose of each tool changes. That shift is the reason to read it: a student who knows the standard curves learns to ask how a market arrives at its prices, and to stop judging every imperfection against a snapshot of perfect competition.

The method is deductive and conditional. Kirzner compares an economic theorem to one in geometry: it states what follows if given changes occur under given conditions. His proposition linking a restricted supply of ice to a higher price, other things unchanged, establishes neither that such a restriction occurred nor that other things held still. Explaining events or forecasting a policy's effects therefore requires thorough factual and statistical description, which he treats as indispensable.

The coordination chapter sets the frame. Efficiency is judged relative to the goals individuals adopt, since a society has no single mind whose satisfactions could be summed. Markets rank production by the pecuniary sacrifice consumers will make, and Kirzner states that this ranking cannot necessarily claim ethical excellence; its merit lies in offering participants better alternatives than they would otherwise have. One price-setting process, driven by entrepreneurs, decides which goods come first and how they are made; it also assigns rewards. Profit is won where something sells for more than it costs to buy or to produce, provided someone notices the discrepancy. That discrepancy persists while sellers willing to take less and buyers willing to pay more remain unaware of each other. Each trader needs only the local comparison relevant to his plans.

The cost chapter carries this reasoning into time. Because production takes time, an entrepreneur decides repeatedly whether to build, continue, alter or abandon a process, and the relevant cost differs at each decision. Outlays already paid or irrevocably committed drop out of the comparison of expected revenue with remaining cost, though Kirzner notes that past commitments still constrain cash, and equipment with resale or rental value keeps an opportunity cost. Hence an old, technically inferior plant can remain economical to run, since replacing it requires a fresh outlay, while a new technique can make a sound plant obsolete before it wears out. Viewpoint changes the comparison too: in his taxicab example the driver's wage must outbid other employers and so registers the uses forgone; a payment that looks like rent to an industry is a cost to the competing firm. Specificity and indivisibility of equipment spread adjustments along a continuum of speeds. Under uncertainty, a footnote adds, a plant with higher expected unit cost can be worth choosing for adaptability.

The treatment of monopoly shows the book's main departure, its reduced reliance on perfect competition. Competition means freedom to offer others better opportunities than they find elsewhere; the number of firms and the slope of a demand curve settle little by themselves. Monopoly requires exclusive control of a resource, whether nature or law confers it, and even then withholding output pays only when demand and cost conditions favor it. The resulting gain is a return to the resource owner, distinct from entrepreneurial profit. A sole producer who controls no essential resource faces potential entrants. Differentiation may rest on a monopolized resource such as a brand name or a favored location; it can also be a way rivals compete, where a higher price can reflect a better product. Cartels tempt members to cheat, though Kirzner grants that a few owners can sustain collusion. He finds buyer power over labor possible under stated short-run and long-run conditions. The reader learns to ask which resource is controlled and whether withholding it pays.

His account of entry carries an important limitation. When economies of scale leave one large plant, Kirzner treats the plant as a resource its owner monopolizes only in the short run, because in the long run any newcomer expecting to do better can raise the capital for a rival plant. The capital-raising claim enters as a premise of the model; whether lenders fund such plans, and whether outsiders learn enough to try, are questions about financing and information that his own first chapter assigns to factual inquiry. Applying the argument to a concentrated industry requires that evidence.

The final chapter appraises the market as an error-correcting process, measured by existing prices and endowments. A misallocated resource implies an unexploited profit opportunity, and prices convey only the part of the information needed to act on it. Kirzner makes the speed of correction depend on whether those financially able and willing to bear risk are competent; if they are inept, discrepancies can persist and grow, and their losses mark wasted resources. He counts a worker's attachment to job, friends and surroundings, along with moving expenses, as real costs that slow adjustment legitimately. Even a pure market is no Utopia and guarantees nobody against hunger. Each control must be weighed on its merits against the efficiency it sacrifices, and he leaves citizens free to accept that loss for purposes they judge overriding.

An appendix extends the mostly single-period model toward dated plans, sketching time preference, storage, speculation, interest and capital goods. In his oranges illustration, speculators who correctly foresee a scarce season store supplies for it, a pattern requiring current prices, expected prices and interest to fit together. Kirzner keeps the outline short and points to uncertainty as a complication without examining it further. His main text also sets aside international trade, public finance, monetary institutions and business cycles.

The book suits readers who have finished an introductory course; the preface presents an intermediate undergraduate text, with diagrams kept subordinate to verbal reasoning. Those who want monetary, cyclical or empirical analysis need other books. Read it to trace how unrealized plans keep markets moving, through the Mises Institute's official text.