Where are the Big Bills? Escaping the Endogenizer's Dilemma

Abstract

The continual expansion of rational choice theory to a greater range of social phenomena — from markets to politics and institutions — is a testament to its success. Each further application, however, simultaneously forecloses a potential source of inefficiency in economic systems. Abdicating efficiency considerations impairs economics' explanatory power as much as its normative relevance. In this paper I explore the interconnected roles of subjectivism and knowledge problems in accounting for inefficiency. I conclude that the knowledge-generating properties of institutions allow for efficiency comparisons, but only in the embrace of a thoroughgoing subjectivism.

Keywords: Coase theorem, Economic efficiency, Knowledge problem, Rational choice, Subjectivism, Public Choice, Austrian Economics

JEL Classification: A11, B21, B53, O12, P51