Austrian Economics in the Wild West

I’ve just come back from a sojourn at PERC (the Property and Environment Research Center) in Bozeman, Montana – a retreat away from the buzz of the office to work on a new project of mine. My stay at PERC was made possible by P.J. Hill who kindly offered some office space. As often in such cases, the situation turned out to be extremely fruitful from an intellectual perspective. Aside from that earthquake experience, which reminded me of my former life in New Zealand, I got to know many of the PERC team: not only P.J. Hill, but also Terry Anderson, Ross Emmett (who was one of the PERC Julian Simon Fellows), Rick Stroup (co-author of the well-known textbook and fine-wine connoisseur) and his wife Jane Shaw, Nick Parker, Donald Leal, Daniel Benjamin, Holly Lippke Fretwell, and Laura Huggins.

P.J. Hill, a Chicago economist, has over the years come to familiarize himself with the work of Israel Kirzner. As he explained it to me, his interest for the work of Kirzner was born out of his struggle to understand social change using the Chicago view of the world. In the last decade or so, Hill and his acolyte Terry Anderson have incorporated many Kirznerian insights into their work, trying to provide an open-ended view of the world. It is most striking in a recent paper, “Cowboys and Contracts,” published in The Journal of Legal Studies in 2002, and a book chapter “Rents from Amenity Resources: A Case Study of Yellowstone National Park,” published in The Political Economy of the American West (unfortunately out of print). It is also in their latest book: The Not So Wild Wild West.

In “Cowboys and Contracts,” Anderson and Hill respond to those who claim that the process of establishing property rights in the American West, which often was a “race,” led to a the dissipation of the very “rents” that owners were hoping to capture through the definition of rights. In other words, “how can rights ever be created without the rents that they convey being competed away in the property rights production process?” p. 490. The traditional approach assumes everyone cognizant of the existence of these rents, even if some have better abilities than others. Instead, the more powerful explanation is that some ranchers came to discover the profits associated with defining property rights: they were entrepreneurs. In which case, the profits were captured by the first entrepreneurs and not dissipated in the race that followed once others became aware.

Anderson and Hill have gone beyond the transaction costs explanation of institutions by providing a vivid and compelling account of the role of entrepreneurship and the discovery process in the emergence of contractual agreements over resources. The American West provides a mine (no pun intended) of cases that the economic historian or any one interested in the evolution of institutions can study. Anderson and Hill shed a new light on the evolution of institutions by using the entrepreneurial framework.

This kind of work illustrates one of the most fruitful avenues for economists interested in the role of institutions and the way they have evolved to help individuals capture gains from trade. I recommend to anyone interested in that theme to read Anderson and Hill's latest book. Also, P.J. and I are about to embark on a project further exploring this theme.