As a follow up to my post on the Nobel Prize, let me give my two overwhelming reasons why Israel M. Kirzner should be honored with this recognition.
1. From the time of Joan Robinson neoclassical economists should recognize the fundamental gap in equilibrium theorizing. Equilibrium theory had no explanation of how the system could move from disequilibrium to equilibrium with the assumptions used in equilibrium theorizing. In other words, she pointed out you could only get into equilibrium if you were already in equilibrium. Her argument, however, did not fix the theoretical lacuna she identified, but instead argued for a reorientation of economics. In a certain sense, Robinson gave up on economics as a theoretical social scientific enterprise. Kenneth Arrow working inside the general competitive framework also pointed out the fundamental lacuna again in his Theory of Price Adjustments published in 1959 ---- in a world of price takers how can price ever adjust to clear the market? Arrow didn't propose a solution to this problem either.
Enter Israel Kirzner, first in his Market Theory and the Price System (1963) and then in his 1967 Il Politico paper "Methodological Individualism, Market Equilibrium and Market Process", Kirzner lays out the beginnings of a theory of the entrepreneurial market process that fills the theoretical lacuna in price theory. How do prices move to clear markets? The entrepreneur is the prime mover in the economic system and as such he is alert to gaps in the market and enticed by the lure of pure profit closes those gaps through arbitrage. Kirzner would develop his argument further in his classic Competition and Entrepreneurship (1973), and then in a series of essays and books published since that time --- Perception, Opportunity and Profit (1979), Discovery and the Capitalist Process (1985) and The Meaning of Market Process (1992). The lead essay in this last book is in my opinion his best work as it explains the relationship between the induced variables on the market (prices and profit/loss) and the underlying variables of the market (tastes and technology). Ricardian theories fail to help us understand the market process because they postulate that the induced variables perfectly reflect the underlying variables at any point in time. Keynesian theories, on the other hand, fail to help us as well since they tend to postulate that there is a insurmountable break between the underlying and induced variables and that economic activity is only explained by reference to the induced variables. Kirzner postulates a systemic relationship between the induced and underlying variables of the market. The market is an unending process of the entrepreneurial discovery of opportunities for mutual gain from exchange. At any given point in time, the underlying variables of tastes and technological possibilities exhibit a strong pull on the induced variables of prices and profit/loss, and in the absent of any intervening change the lure of gains from exchange would be enough to lead to an alignment of the induced and underlying variables. But the market process is one of ceaseless change, and thus the induced variables while forever moving in the direction of underlying variable never quite perfectly map them due to the constantly changing nature of tastes and technological possibilities.
Why is all this important? Well as Franklin Fischer pointed out in his very important book The Disequilibrium Foundations of Equilibrium Economics (1983) that unless we have good reasons to believe in the systemic tendency toward equilibrium we have no justification at all in upholding the welfare properties of equilibrium economics. In other words, without the sort of explanation that Kirzner provides the entire enterprise of neoclassical equilibrium is little more than a leap of faith. We could simply embrace this conclusion -- which is one way to interpret what Joan Robinson did. Or we could realize that the defense of the free market system is intimately tied to the exposition of the systemic forces of the market that tends to enable individuals to realize the gains from trade and to utilize scarce resources in a cost effective manner, and to continually pursue new opportunities for exchange and least cost alternative methods of production. Kirzner's IEA work How Markets Works explains all of this as clearly as in any piece of economics every written.
Without Kirzner's theory of the market process and our belief in the market is unjustified. For this Kirzner deserves the Nobel Prize in Economic Science.
2. Several Nobel Prizes have been awarded to scholars who not only made fundamental contributions, but also generated a research program in economics and a community of scholars around them. Kirzner is the signal most important individual in modern Austrian economics. Obviously, Mises and Hayek and their shared research program forged in the 1930s and 40s provided the foundations of the research program, but it was Kirzner in the 1970s and 1980s that cultivate a new research community in Austrian economics and the theory of the competitive market process. Murray Rothbard was a major galvanizing figure in the movement, but unfortunately Rothbard never taught at a PhD granting institution. NYU in the 1980s emerged as a top 20 department in economics, and Kirzner developed in the mid 1970s an Austrian Economics Program. PhD students and post-doctoral students all made their way through Kirzner's program: Don Lavoie, Sanford Ikeda, George Selgin are a few of the PhD students; Roger Garrison, Bruce Caldwell, Richard Langlois, Stephan Boehm, Uskali Maki, Frederic Sautet, and David Harper are a few of the post-doctoral students; and Mario Rizzo, Gerald O'Driscoll, Lawrence White and myself are faculty members who had the great opportunity to work with Kirzner at the leading center for advanced study in Austrian economics in the post-Mises period.
Kirzner was instrumental in organizing major conferences that rallied intellectual interest in Austrian economics --- South Royalton is probably the most famous of these. Book series were established --- most notably Mario Rizzo and Lawrence White's Foundations of the Market Economy with Routledge. Dissertations were supervised --- most notably Don Lavoie's Rivarly and Central Planning (published later by Cambridge University Press in 1985) and George Selgin's The Theory of Free Banking (published later by Rowman and Littlefield in 1988). Kirzner directed the Austrian Colloqium for two decades before handing it off to the able hands of Mario Rizzo. And he also developed and directed for years the summer seminar in Austrian economics which enabled scores of students to study with some of the leading figures in Austrian economics and be exposed to classic and contemporary scholarship in the school.
For these two reasons --- his own theoretical contribution and his work to cultive a community of research scholars --- Kirzner deserves the recognition in October that has to date eluded him. If he has to share it with William Baumol so be it, but it will be a travesty of intellectual justice if Baumol is awarded the prize and Kirzner is overlooked.