Friday, February 22, 2013

Why I Too Am Not and Austrian Economist or Am I?

I choose not to self-label myself as an Austrian economist and rather prefer Milton Friedman's line about how there is only good or bad economics. But mainly my reluctance is because of my own ignorance related to the major Austrian works. Simply put, I have not done close readings of Mises' Human Action, Rothbard's Man, Economy and State, much less the works of Menger, Bohm-Bawerk, or even Schumpeter. Many SWEET students could no doubt school me on the finer points in those works.

My own training was quite conventional and neoclassical (except for an early introduction to Public Choice). I did attend the 2nd "Mises University" (before it was even called that) in 1987 and was awed to meet Walter Block, Roger Garrison, and Chuck Baird (who are all friends now) and even sat at the foot of Murray Rothbard himself as he held court each evening. Nevertheless my formal training has been very inside the box.

Story time: In addition to being a great Austrian economist, Benjamin Powell and I are also close friends and hiking/mountaineering partners. (Ben visited Fairbanks a year or two before me some of you may remember.)  On our many long days of hiking and climbing he and I naturally talk about economics a lot. One recurrent theme is whether or not I am an Austrian economist. Our conversation is usually along these lines:

BEN: Do you think values including costs are subjective.
ME: Sure.
BEN: Gee, you answer yes to every one of my Austrian economics questions. You're an Austrian.
ME: I thought that was just good economics.

So what do I make of Bryan Caplan's essay "Why I Am Not an Austrian Economist"? Let me take Bryan's claims in turn:

2.1 Utility Functions v. Value Scales.  Bryan is correct here. There is NOTHING in neoclassical economics that requires cardinal measurement. Period.

2.2 Indifference. Again Bryan is correct. Rothbard's notion is that preferences can only be revealed by human action and since indifference is inaction we cannot use the concept to describe anything about preferences.

This is bizarre even on Austrian grounds. Consider every Austrian's favorite example, The Broken Window fallacy. The Austrian says breaking window's intentionally is harmful because the money spent on the glazer is not spent on the suit which would have been preferred. But how do you know this? The only human action we see is the person fixing the window. We can't know this person's preference for the suit without seeing him buy it!

Austrians may claim I am being overly pedantic here, but I see this as no more pedantic than the claim that indifference is invalid because we can't see it expressed in human action.

2.3 Continuity. Here I am much more sympathetic to Austrians. There is no reason to think our preferences for goods and services obey nice mathematical properties of being smooth and continuous. Bryan says, without continuity, "it is also highly unlikely that e.g. supply and demand can ever be equal". This is true but so what?! I don't think supply and demand (technically students we should say quantity demanded and quantity supplied here) are ever literally equal. Supply and demand are static expressions of a dynamic process. 

Take a different example. A free-market, but neoclassical, economist might say that saving 1 certain life (think of the kid trapped in the well) for $10 million is silly unless we have first exhausted all opportunities to save statistical lives (think better roads) that cost less than $10 million each. But hey wait! Who says I have to value the kid trapped in the well the same as a 1/300million chance of death (which probabilistically means 1 death in a country our size)? Value is subjective - damn it -- and there is no reason my preferences for saving people should be so smooth and continuous.

(Now I do appreciate the value of framing arguments this way. When someone say's they want to "save lives" it is entirely appropriate to point out that we can save lives less expensively in other ways.)

2.4 Welfare Economics. Again, I think Bryan is correct. Rothbard's argument against externalities doesn't work for me either. I am no fan how statists abuse externality arguments (as I am no fan of how murderers use guns) but that is not to say externalities do not exist.

For my money the best reply to a statist externality argument is a more Hayekian argument about the lack of knowledge on the part of government on how to fix the problem.

2.5 Subjectivism. I agree again with Bryan that neoclassical economics is fundamentally subjectivist but with a caveat. The Austrian economist is an economist who says value is subjective AND REALLY MEANS IT. The neoclassical house is built on subjective value, but oddly a lot of neoclassical economists don't know it. Want to start a fight at an economics conference? Tell a neoclassical economist that "costs are subjective". They are and if he thinks about it will agree, but most are so poorly trained on the underlying principles (as opposed to the mathematica) that they don't know this.

3.1 Economic Calculation.  I find Bryan's criticisms to be very flat here. No markets, means no market prices, means no information about relative scarcities/preferences....I agree that there are OTHER arguments against socialism (like incentive problems) but the calculation problem is big.

3.2. Like supply and demand and other trappings of formal neoclassical theory I have no objection to the heuristics of perfect competition and monopoly. Most good neoclassical economists understand the limits of both concepts in the real world. And again I find Bryan's analysis sound.

3.4 I confess to a very weak understanding of ABC, but I didn't find Bryan's criticisms convincing. Here I punt however.

Summary: Most of Bryan's complaints seem to be to be about Rothbard not Mises or Hayek or other "Austrians". For example, read William H. Hutt's work on monopoly (mostly as applied in labor markets) and see how fundamentally neoclassical it is.  If you based the definition of "Austrian" as "agreeing only with Rothbard", then I join Bryan as not an Austrian. But if you think Austrian means "in the tradition of Mises, Hayek, Rothbard, Hutt, Garrison, Kirzner, Yeager, etc. then count me in.

I was surprised Bryan left out the impressive work of Kirzner (and others) on entrepreneurship which is clearly important. Of course, a fair view is that this kind of work is already in the mainstream so it is no longer distinctly "Austrian".

Finally, no reading of Caplan's essay can be complete without a careful study the debate he had with Pete Boettke.


  1. Hey doclawson,

    Did you not read the first section of Caplan's paper? You wrote:

    "Most of Bryan's complaints seem to be to be about Rothbard not Mises or Hayek or other "Austrians" "


    "I was surprised Bryan left out the impressive work of Kirzner (and others)..."

    Well, his complaints "seem to be about Rothbard" for the following reason:


    "[L]et me stipulate at the outset that I use the term [Austrian economics] to refer to the economics of Ludwig von Mises, Murray Rothbard, and other scholars' work consistent with their fundamental outlook. If any two economists ever belonged to the same "school," Mises and Rothbard did..."

    "In most cases, Mises and Rothbard think so similarly that to provide textual support from both Rothbard and Mises would be redundant."

    So, his critique not only includes Mises but anybody who strongly holds almost all his views. I imagine most -- if not all -- of the LVMI fellows would be included.

    Also, from my perspective, and you already echo this in your penultimate paragraph, if you use a general enough definition, then everyone will be living under the same roof. Robert Murphy had to deal with this as well when he was comparing Austrian and neo-classical analytics, pointing out that some definitions of neo-classical economists are broad enough to include Austrians so he had to make some stipulations in the beginning.

    I wouldn't recommend that particular talk, though. I didn't think it was very enlightening; some people convey their ideas better in writing than speaking.

  2. Oh yeah, I forgot to mention why Hayek is not included, but hopefully, you'll read the short section now:

    "[T]here is simply much more to say about the economics of Mises and Rothbard than about the economics of Hayek."