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Further Reflections on Austrian Economics

Oddly enough, the appearance of Major Freedom in the comments section of my last post has got me wondering if I have got Austrians all wrong.  I used to see that guy comment on other blogs and always completely miss the point and go on and on about stuff that made no sense.  Some people would always agree with him and they would go down some “Austrian” rabbit hole and everyone else, including me, learned to just skip those long blocks of text.  But since I felt obliged to respond, at least initially, on my own blog I had to go through the ordeal of trying to make counter-arguments to arguments that barely grazed the issues I had tried to address in the first place and it was very frustrating.  And then I started wondering: is this the type of person who has shaped my view of Austrian economics?

The short answer is no but the long answer, I think, is kind of nuanced.  The short answer is that a lot of it comes from Mises.org and people talking on TV like Peter Schiff.  And yes, I have read some Hayek and some Rothbard and some stuff like that.  I though Hayek had some interesting ideas.  I though Rothbard was mind-numbing.  I don’t really know what Mises thought, I just know what they say about what he thought on the afore-mentioned Mises.org.  So it’s not just Major Freedom and company.  Although, I am sure that to a lot of people, that is they account for the vast majority of their run-ins with so-called “Austrians.”  And I think, ironically, that this accounts for much of the severe disdain most “mainstream” economists have for all things “Austrian.”

So I think I have dug one layer deeper than most because I am a libertarian and so I have quite a bit of exposure to somewhat more serious, less troll-like “Austrians.”  But commenter John S. points out (and I have heard from some others) that there are really two schools of Austrian.  The Auburn/Mises.org school which is essentially what I am complaining about and the more reasonable GMU school, and apparently they don’t get along very well.  So I can’t help but wonder if I am being unfair to the latter.  I am trying to look into it a little.

I watched this debate between Caplan and Boettke which I remembered watching years ago and finding interesting.  Essentially, Caplan represents my view perfectly in every respect.  And the Boettke comes out and, as far as I can tell, doesn’t really disagree with anything Caplan says.  I get the impression that they both agree on practically everything except what to call each other.  Boettke thinks Caplan is an Austrian and Caplan thinks Boettke is neoclassical and while Caplan makes points about methodology, Boettke talks about the history of economics and who said what when and a bunch of stuff that I don’t really know about but to me is not that important.  I care about the methodology.  And that is what the people in the Mises.org camp are always griping about.  However, from what I can discern, Boettke seems pretty reasonable to me (though I do think “radical uncertainty,” or whatever, is not a useful concept).

So my position is essentially this.  Speaking solely in terms of micro, the basic, neoclassical, consumer choice model (and the model of markets which is built on it) is good and the arguments I have heard from so-called Austrians against it are all dumb.  Now what I wonder is: Do Boettke and the GMU “Austrians” agree with me that this is a perfectly good model or do they agree with the Mises.org guys that it is all garbage, and on a side note, do they agree that diminishing marginal utility is a logical necessity or, for that matter, that it is important in any way?

I get the feeling that they aren’t completely comfortable with this model because Caplan also wrote this which makes many of the same points I tried to make, along with some others which are also excellent, and he knows the GMU guys pretty well I think.  On a related note, maybe I should have been talking about “indifference” instead of continuous quantities.  Indifference doesn’t drive people to action.  Fine, but people act until they reach a state of marginal indifference.  That’s actually pretty much the central tenet of neoclassical economics.  But I digress.  Also, I probably need to learn a bit from him about how to get along with Austrians better.

But if the answer is that they agree with me about this model, then I am left wondering what is the difference between us.  If they say “nothing, you’re an Austrian” then I am unsatisfied and I would say “no you are mainstream” and we would be having what I consider a pointless argument (very similar to the debate above).  There are still some issues regarding the degree to which our analysis should be driven by preexisting normative beliefs.  Maybe I will say more on that later but for the most part, in my mind, if you drop all the criticisms of mainstream economics (at least the core of micro) and just say “we want to look into the role of the entrepreneur more” or whatever, then I have no problem but then why make a point of differentiating yourself from the mainstream so much?

At any rate, though I am genuinely interested in answering these questions, I think they are all dodging the real issue which is those blasted Mises.org people.  It may be the case that the GMU Austrians are not that nuts but they aren’t the ones on TV or blowing up the comment sections of every econ blog.  And if you go to any kind of libertarian gathering and try to talk to somebody who fancies themselves a part-time Austrian economist (which will be half the people there), chances are they will be suffering from a lot of confusion brought on by the popularity of Mises.org-type thinking in those circles.  So to me that is the issue that must be dealt with.  It would be nice if the GMU types could draw people away from that but they don’t seem to be very successful at this.  I don’t know what the answer is.  I just know that it’s a problem.  And admitting you have a problem is the first step toward recovery.

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  1. John S
    July 4, 2014 at 3:07 pm

    Good summation of the issues. Here are my two cents.

    Re: these sentences,

    I am left wondering what is the difference between us. If they say “nothing, you’re an Austrian” then I am unsatisfied and I would say “no you are mainstream” and we would be having what I consider a pointless argument

    if you drop all the criticisms of mainstream economics (at least the core of micro) and just say “we want to look into the role of the entrepreneur more” or whatever, then I have no problem but then why make a point of differentiating yourself from the mainstream so much?

    I have believed for some time that it’s best to consider Austrians (GMU Austrians, not Rothbardians) as a sub-school within mainstream economics. As you say, Caplan has often said that “good” Austrian research often largely overlaps with neoclassical/mainstream econ, so it’s unnecessary to label it as “Austrian.” However, I would reply, “Well, if that’s the case, then what’s the point of having separate labels for ‘Keynesian,’ ‘Monetarist,’ or ‘New Classical’ viewpoints? Why not dispense with labels altogether and just call everything ‘Mainstream economics’?”

    This may be a crude generalization, but it seems to me that what most divides schools of economics within the mainstream is not micro but instead theories of what causes business cycles and how they should be addressed (i.e. macro). By this criterion alone, the Austrian school deserves its own sub-school classification for two contributions: free banking (more generally, privatized money creation) and Austrian business cycle theory (the idea that government policies, including monetary policy, can distort investment and consumption patterns leading to varying degrees of sub-optimal outcomes, possibly including periodic, sudden corrections).

    • Free Radical
      July 4, 2014 at 5:07 pm

      Yeah I think that is sensible. I would say that those other schools reside within the mainstream. So if we call Austrians just another school within the mainstream that agrees about the micro core and disagrees about the business cycle, rather than a heterodox branch with it’s own unique top-to-bottom methodology (praxeology), then they don’t seem so bad. I’m still not quite sure whether this is what Boettke has in mind or not.

      One more thing I forgot to mention. Boettke accuses Caplan of defining neoclassical economics “properly understood” in a way that is different from most mainstream economists and which makes it much more consistent with the Austrian view. But we have textbooks that say this stuff. You can take any respectable mainstream intermediate micro text and it will say that utility is ordinal. It’s taught to every undergrad econ major. If Scott Sumner decides to ignore that, it doesn’t mean that there isn’t an established “proper” view. I suspect that even Sumner, if pressed, would concede that his view of utilitarianism is entirely separate from the concept of utility in the classical consumer choice model. So is there an Austrian textbook that we can point to and say: okay, this is what Austrians believe in black and white and there’s no wriggling out of it?

  2. John S
    July 4, 2014 at 3:08 pm

    This isn’t to say that free banking is the “best” monetary system or that ABCT is the “correct” explanation of business cycles (either partially or completely). But I think it *is* fair to say that both of these ideas have sprung from a common core of “Austrian” concepts, including an emphasis on subjective value, the Mengerian theory of money, economies in perpetual disequilibrium, and entrepreneurs as an equilibrating force (e.g. private mints in late 18th century England seeing a profitable “gap” in the market for small denomination media of exchange, as brilliantly described by Selgin in “Good Money”). Other school of thought labels are a valuable shorthand for communicating similar sets of core concepts, so I think it is useful to maintain them, even though they often devolve into fault lines for tribal wars.

    (As an aside, I’m undecided on ABCT, but intuitively I’d say that if such a phenomenon does exist, it doesn’t play out in a predictable, mechanistic fashion such as a Hayekian “lengthening of the capital structure.” At any rate, given the high level of government involvement in asset markets, I think it’s a worthy line of inquiry.)

    http://www.arnoldkling.com/blog/securitization-and-government-backing/

    • Free Radical
      July 6, 2014 at 11:37 pm

      John,

      Retrieved your comment (these damn computers seem to learn pretty fast nowadays, I don’t want them to learn any wrong lessons if I can help it). Incidentally, it’s kind of shocking how many spam comments I have! I can’t believe any good comes from those things, most of them don’t even make sense. I get that they are just trying to post their links everywhere, but does anyone ever click them?

      OK, so back to business. I don’t know if you recall, but I actually do think that free banking is the ideal system (which, of course, is very different from Rothbard’s anti-fractional-reserve nonsense). So in that regard, I am a Selgin supporter (although I don’t think freezing the base would work but I have to think about that a bit more at this point). However, Selgin goes out of his way to avoid the Austrian label and frequently has some not-very-nice things to say about them.

      I actually don’t know enough about ABCT to really comment intelligently on it. I read Prices and Production but I can’t say I understood it well enough to either endorse it or debunk it. I did think there might be some ideas in there worth exploring though. But in general, I tend to agree that the business cycle can’t be very predictable, that’s basically the nature of well-organized markets. If ABCT allowed them to predict the ups and downs in the economy, we should have a world full of filthy-stinking-rich Austrians who rule the world and call all the shots from behind the scenes. Wouldn’t that be ironic!

  3. John S
    July 5, 2014 at 3:25 am

    I will admit that Austrians — all of them — have put far too much emphasis on trying to differentiate themselves from the mainstream, so they are in large part to blame for the indifference and outright scorn with which most mainstream economists regard them. Once we acknowledge that Austrians are part of the neoclassical mainstream (and I don’t think it’s that controversial), Austrians can stop asking the dumb question, “Who’s better, us or the mainstream?” and instead examine the much more interesting issue, “How can the Austrian perspective add to the body of theory and knowledge of mainstream economics?” Whether that’s a lot or a little I can’t say, but I’m pretty sure that it’s something.

    As far as your micro question goes, I don’t know the answer. I’ll ask around.

    One more thing I want to add: Austrian economics is fun. Really! Brian Albrecht has a nice comment touching on this on JFCatalan’s most recent post (“Resist the Noah Smith Brain Worm”). I skimmed his blog and found this post showing his path from a well-paying job to an econ PhD, largely inspired by Austrian writings on the web, including Mises Institute stuff. So while the MI mostly churns out Rothbardian internet robots, occasionally it inspires a nice story like this.

    http://www.econpointofview.com/2014/04/reflection-pre-phd/#more-894

    Much as I love to hate on Rothbard, I have to say that he can at times be a very clear and energetic writer, and in his popular tracts his enthusiasm shines through. Check out the section on the origin of money in “The Mystery of Banking.” Though I now disagree with much of the rest of the book (and find it generally dull), I still love this passage, and I don’t think anyone could have done a much better job. Prior to reading it, I had thought of anyone who merely mentioned gold in an economic context as a “goldbug” and/or nutcase. But Rothbard lays out a very logical explanation of why societies have historically used gold and silver as monies. This was pretty mind-blowing stuff when I was just getting interested in economics (years after taking a fairly dull intro class in college).

    There’s a reason the MI stuff has such a popular following, and I think this explains a large part of it. It’s immediately accessible, and it makes sense to normal people that intro textbooks don’t (I think once they get to the chapter on elasticity, most students are saying “F this, what do i need for the test so i can get outta here”). So it isn’t just GMU Austrians that need to learn how to propagate their views better; the entire economics profession needs to do a much better job. The best mainstream beginners’ book I’ve read is Sowell’s “Basic Economics.” I think it’s great, but it’s not exactly a breezy read. “Armchair Economist” was immediately forgettable to me (I read it years before Mises stuff, and it didn’t stoke a fire). So from a PR perspective, the MI is doing something right, and that needs to be dissected and mimicked.

    (By the way, I posted a comment earlier but it’s probably in spam. No biggie if you can’t fish it out).

    • Free Radical
      July 6, 2014 at 11:48 pm

      John,

      Yes, Austrians within the mainstream wouldn’t bother me that much (actually I might be one in that case). It’s mostly the incessant criticizing of all things “mainstream” that drives me nuts. It’s sort of weird for me, I have always thought that free markets were amazing. That’s why I liked economics. As far as I’m concerned, that’s the number one implication of classical economics. But now it seems like people who are fans of free markets get so bent out of shape over the Krugmans and the Stiglitzs of the world that they decide that mainstream economics is the enemy and they have to fight it at every opportunity. I thought it was interesting in that debate that Boettke said not getting behind Robert Lucas was the biggest mistake Austrians ever made. To me, that is profoundly reasonable. I just wish he could spread that sensibility throughout the ranks.

    • Free Radical
      July 7, 2014 at 9:58 pm

      John,

      Read that Catalan post and though it was quite reasonable (as well as the comments). Maybe there is hope for some kind of sensible Austrian/neoclassical libertarian alliance.

  4. Chris
    July 7, 2014 at 6:28 pm

    I just wanted to point something out about these series of posts about the Austrians. To add to what Jonathan Catalan stated in the post in his blog (mention by John S. in another post on this blog), Hayek and Mises were both, at the time of their living and working, considered mainstream economists. Mises was a distinguished member of the AEA, the recipient of the highest awards in Austria, was approached to produce unified currency rules for the League of Nations, and was employed by the NBER.

    • Free Radical
      July 7, 2014 at 8:40 pm

      Chris,

      That’s interesting about Mises (especially the unified currency for the League of Nations). I know that some Austrians don’t think Hayek is pure enough for them but he was also given a Nobel prize specifically for being heterodox. So to some degree “mainstream” is in the eye of the beholder. But just to reiterate, my complaint is substantive, not just about labels. It’s the criticisms of the consumer choice model that I take issue with.

  5. Chris
    July 7, 2014 at 10:55 pm

    I don’t know why, but the site is having problems with me submitting a longer reply.

    I understand that you’re after substantive issues. I was just pointing that out because a certain group of Austrians take “woe is us” mentality and want to treat Mises like a martyr. He wasn’t. He was well respected. The person who really suffered was Hayek. And anyone who thinks Hayek isn’t pure enough deserves all the derision heaped in their way.

  6. Chris
    July 7, 2014 at 10:58 pm

    To get to your substantive issues:

    I don’t really accept the full criticism that Catalan puts together for praxeology, though some of it is certainly correct. For example, this is Rothbard in the AER:

    “The categories of praxeology may be outlined as follows:
    Praxeology-the general, formal theory of human action:
    A. The Theory of the Isolated Individual (Crusoe Economics)
    B. The Theory of Voluntary Interpersonal Exchange (Catallactics, or the Economics of the Market)
    1. Barter
    2. With Medium of Exchange
    a. On the Unhampered Market
    b. Effects of Violent Intervention with the Market
    c. Effects of Violent Abolition of the Market (Socialism)
    C. The Theory of War-Hostile Action
    D. The Theory of Games (e.g., Von Neumann and Morgenstern)
    E. Unknown
    Clearly, A and B-Economics-is the only fully elaborated part of praxeology. The others are largely unexplored areas.”

    The reason that I supply that quote is because even Rothbard, one of the great lightning rods if there has ever been one, agreed that methods that the mainstream would consider empirical are parts of praxeology. So while there is much to listen to in Catalan’s post, his case may be overstating the drawbacks of the term. Now, he is ultimately correct that if there isn’t a definitive difference between the term and what mainstream economists do, then maybe we ought to throw it out.

    • Free Radical
      July 8, 2014 at 1:14 am

      I’m not sure what to make of this. It seems to me like all of those issues can be addressed within the mainstream framework, I’m not sure what it is about them that is essentially “praxeological.” (Maybe that is the point?) And I can’t really wrap my mind around this:

      “methods that the mainstream would consider empirical are parts of praxeology”

      Can you give me an example of such a method?

  7. Chris
    July 7, 2014 at 11:17 pm

    This is frustrating. I apologize for having to reply in parts but I think my internet is just not accepting a longer post.

    This probably doesn’t mean much, but as a graduate student who is often surrounded by Austrians, I have never seen them use the McCulloch paper in an academic (or non-academic) setting (I’ve come across it on the internet but other than that, never). They use the same books as every other student. I’ve never heard any of the Austrian professors ever use any consumer choice model other than the model used in every other class in America. Are there slight disagreements? I’ve heard a few Austrian economists lament the existence of Giffen goods as artifacts of the mathematical model by which they’re produced. But, depending upon your opinion of those studies coming out of China (and others), that may or may not be true.

    The only difference that I’d note (and this probably isn’t as true as I’ll make it sound), is that in the specifically Austrian courses a lot more time is spent studying the work of Coase, North, Alchian, Demsetz, Ostrom, Buchanan, Tullock, etc. Are they mainstream economists? Sure, but Austrians tend to find links between what are important to them and the thought processes of these and many other mainstream economists. It may also be worth pointing out that many of the people on that list weren’t exactly mainstream at the time of their work.

    • Free Radical
      July 8, 2014 at 1:09 am

      Chris,

      Thanks, this largely answers my question. I’m glad they are using the same model. The Austrian school as you describe it doesn’t bother me at all. What school are you at? Since posting this I have managed to stumble on quite a few seemingly reasonable Austrians which is what I hoped would happen so I’m pleased about that (Jonathan Finegold also seems to be on board with the mainstream consumer choice model).

      Also, sorry you’re having trouble posting. I’ve had that happen to me and it’s quite frustrating. I suspect it’s not something I can do anything about since Major Freedom managed to post a pretty long one somehow, so it might be on your end. I will look into it though.

  8. Chris
    July 7, 2014 at 11:20 pm

    John S. Makes a point about Austrians trying to separate themselves too much. That may or may not be true. This is a paper by Boettke about the issue entitled “Information and Knowledge: Austrian Economics in Search of its Uniqueness.”
    I think it’s more about pointing out the comparative advantages due to the lineage, if that makes it seem more intelligible. If you read Boettke’s piece, I think you’d find that there isn’t much difference between what he’s asking new generations of Austrians to do from what Buchanan, Tullock, and Ostrom did (all of which share great sympathies with the Austrians. Buchanan and Tullock pay homage to Human Action at the beginning of one of their joint works and Ostrom (actually Ostroms) were both great friends to the Austrians during their lives).

    I’m not mentioning these things as an issue of labels. I think that this is the where the substance of serious Austrian academic work lies and is in good standing.

  9. Chris
    July 8, 2014 at 1:14 am

    Oh. I also wanted to put this here. This is from Kevin Vallier (one of the philosophers over at bleedingheartlibertarians):

    “Let me give a more specific example. After going to LvMI conferences for four years, I pretty much thought that only Austrians believed in praxeology. But in 2006, when I started working with Gaus, I discovered that he was a praxeologist, despite having never read Mises on methodology. What’s more, so was his friend and teacher, Stanley Benn, who even used the term. It then became clear that all kinds of people in social science and philosophy believe that economic knowledge has a purely formal/a priori component that must be distinguished both from empirical information and thymology/hermeneutics/fitting concepts to data. I mean, what else is social choice theory but praxeology of a kind?

    Of course, Austrians of most stripes will object to social choice theory in many ways, but that’s just an objection to a form of praxeology, not praxeology itself.”

  10. Chris
    July 8, 2014 at 1:20 am

    “I’m not sure what to make of this. It seems to me like all of those issues can be addressed within the mainstream framework, I’m not sure what it is about them that is essentially “praxeological.” (Maybe that is the point?)”

    That is the point. Boettke brings up this paper a lot because the point is that there are very few (if any) empirical methods that the mainstream uses that Austrians would disagree with. Indeed, if there are Austrians out there who have an issue with these, it isn’t because “Austrianism is non-empirical.” It’s because those specific people are non-empirical.

    “And I can’t really wrap my mind around this:
    “methods that the mainstream would consider empirical are parts of praxeology”
    Can you give me an example of such a method?””

    So, what Rothbard was saying, for example, is that Game Theory is in fact a part of praxeology. So when game theorists, who are definitely in the mainstream, do their work it is not outside of praxeology.

    • Free Radical
      July 8, 2014 at 2:59 am

      Yeah so this sort of gets at what I don’t get about Praxeology. I can’t figure out what distinguishes it from whatever the rest of us are doing. When I hear people talk about it, they seem to always be doing one of two things.

      1. Explaining what everyone else does but trying to claim it is different for some reason I can’t discern.

      2. Making some criticism of the “mainstream” that makes no sense.

      Maybe the criticisms are all misrepresentations of Mises, I can’t say. But I still don’t get the essential essence of praxeology. When I was an undergrad, the history of econ prof explained it as: “Austrians were anti empiricism and Germans were pro empiricism.” I don’t think that really gets at the heart of the matter but it seems difficult to get at. Interestingly, I hear Boettke, in that debate I linked to previously actually endorse a kind of “hyper-empiricism.” I thought that was interesting.

      • Chris
        July 8, 2014 at 4:02 am

        I hate to say it but your history of econ professor had it wrong…though I suppose that depends upon what is meant by empiricism. The German historical school attempted to derive all of economics from historical statistics. The Austrians wanted a form of deduction from general theory. You may recognize this as the same debate about the importance of theory before the use of empirics.
        As a part of this, the German school more or less denied the existence of concrete economic laws.

        So what was the result? Well, the position of Menger and the Austrians fell in line with that of the neo-classical economists. Along with everything else, the German historical school only wanted to use aggregate methods to do analysis so this was also the beginning of the marginal revolution (as Jevons, Walras, and Menger all had the same position).

      • Free Radical
        July 8, 2014 at 5:14 am

        Yeah, I think in fairness to my professor, that is essentially what he actually said, the variance from reality is probably mainly in my interpretation. For what it’s worth, I was pretty squarely in the Austrian camp in that discussion. I’m just grateful I had a history of econ prof.

        At any rate, my general sense of it all is that the Austrians contributed greatly to neoclassical economics, had some good points in their day and actually won a lot of battles but there seems to be a modern strain (not saying you but you know who I’m talking about) that refuses to accept victory. As far as I can tell, most of what they say is basically compatible with mainstream economics and what isn’t compatible seems to usually be confused, often a sort of crudely repurposed criticism of what somebody thought a hundred years ago but which has basically been sorted out since then, at least regarding micro and basic methodology. Macro is still wide open. It’s sort of like they were so mad at Samuelson and the “neoclassical synthesis” that they stormed out and tried to take their subjective value and their ordinal utility with them. But it doesn’t work that way, we are all still using them haha.

  11. Chris
    July 8, 2014 at 6:48 am

    It’s more like during the Samuelson period, Austrians were more or less inactive. There was Lachmann and Kirzner and a bit for Mises and Hayek every now and then but mostly their work had shut down until the 80s but at that point it became more important to shake off the dogmatism and…other latchers on to get back to actually doing good work. That’s where we are today. The genearation before the latest generation of Austrians is trying to lay a path for the new generation to follow while trying to thin the herd of latched onto the name during the down period.

    • Free Radical
      July 8, 2014 at 5:19 pm

      Yeah, I think they are getting behind on their herd-thinning. The latchers-on seem to be growing in number and exposure.

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