Abstract

This chapter presents a narrative about the evolution of market theory, which can be divided into two lines of thinking: the genetic-causal and the instrumental-causal traditions. The difference between the two views became clear around 1920, when prices came to be considered as parameters. This evolution had wide-ranging implications, as it drove the entire corpus of perfect competition and rejected the classical notion of the market as a dynamic, entrepreneurial system. Ludwig von Mises and Friedrich Hayek criticized the instrumental-causal view of market theory, arguing that its focus on equilibrium precluded an explanation of the way the market process unfolds. But it was Israel Kirzner who offered a theory of entrepreneurial discovery based on the alertness to hitherto unnoticed profit opportunities. It is argued that Kirzner’s market theory is the most accomplished theory of its kind in the genetic-causal tradition.