The undervalued insights of the Austrian School of economics
The undervalued insights ofthe Austrian School of economics Marcin Senderski Warsaw, 7 July 2012
Agenda1. What is the Austrian school of Economics2. Austrian school vs. neoclassical school3. Thoughts and quotations4. The Austrian school nowadays5. ConclusionsThe presentation was prepared on the basis of two major sources:• Huerta de Soto, J. (2006) Money, Bank Credit, and Economic Cycles, Auburn, Alabama: Ludwig von Mises Institute.• Huerta de Soto, J. (2008) The Austrian School: Market Order and Entrepreneurial Creativity, Edward Elgar Publishing.
What is the Austrian School of EconomicsIn general• The Austrian School of economics is a school of economic thought which advocates an individualist approach to economics called praxeologyHistory and ethymology• The Austrian School derives its name from the identity of its founders and early supporters, who were citizens of Austria-HungaryMethodology• Whereas mainstream economists generally use economic models and statistical methods to model economic behavior, Austrian School economists argue that they are a flawed, unreliable, and insufficient• Austrians focus on theory rather than empirics, and employ descriptive analysis, i.e. verbal formalismReception• From the middle of the 20th century onwards, the Austrians have been considered outside the mainstream• Austrian views are heterodox and mainstream economists are generally critical of its methodology• Mainstream economists generally argue that Austrian economics lacks scientific rigorWho are the scholars?• Multidisciplinary theorists and philosophers, and radical libertariansMain representatives• Friedrich Hayek (Nobel Prize 1974), Ludwig von Mises, Carl Menger, Murray N. Rothbard, Eugen von Böhm- Bawerk, Israel Kirzner
Austrian school vs. neoclassical school (1/3)Points of comparison Austrian paradigm Neoclassical paradigmConcept of economics (essential A theory of human A theory of decision: maximizationprinciple): action, understood as a dynamic subject to restrictions (narrow process (praxeology). concept of „rationality”).Methodological outlook: Subjectivism. Stereotype of methodological individualism (objectivist).Protagonist of social processes: Creative entrepreneur. Homo economicus.Concept of information: Knowledge and information are Complete, objective, and constant subjective and dispersed, and they information on ends and change constantly. A radical means is assumed. Practical distinction is drawn between (entrepreneurial) knowledge is not scientific (objective) and practical distinguished from scientific knowledge (subjective). knowledge.Reference point: General process which tends Model of equilibrium (general or toward coordination. No partial). Separation between micro distinction between micro and and macroeconomics. macroeconomics: each problem is studied in relation to others.
Austrian school vs. neoclassical school (2/3)Points of comparison Austrian paradigm Neoclassical paradigmConcept of „competition”: Process of entrepreneurial rivalry. State or model of „perfect competition.”Concept of cost: Subjective (depends on Objective and constant (such that a entrepreneurial alertness and the third party can know and measure resulting discovery of new, it). alternative ends).Formalism: Verbal (abstract and formal) logic Mathematical formalism (symbolic which introduces subjective time language typical of the analysis of and human creativity. atemporal and constant phenomena).Relationship with the empirical Aprioristic-deductive reasoning: Empirical confirmation ofworld: Radical separation and hypotheses (at least rhetorically). simultaneous coordination between theory (science) and history (art). History cannot confirm theories.
Austrian school vs. neoclassical school (3/3)Points of comparison Austrian paradigm Neoclassical paradigmPossibilities of specific Impossible, since future events Prediction is an objective which isprediction: depend on entrepreneurial deliberately pursued. knowledge which has not yet been created. Only qualitative, theoretical pattern predictions about the discoordinating consequences of interventionism are possible.Person responsible for making The entrepreneur. The economic analyst (socialpredictions: engineer).
Thoughts and quotations (1/2)1. Man does not so much allocate given means to given ends, as constantly seek new ends and means, while learning from the past and using his imagination to discover and create the future (via action). Thus, for Austrians, economics forms part of a much broader and more general science, a general theory of human action (and not of human decision or choice). = PRAXEOLOGY2. For Austrians, cost is the subjective value the actor attaches to those ends he gives up when he decides to pursue a certain course of action. = NO OBJECTIVE COSTS3. Hayek uses the term „scientism” to refer to the unjustified application of the methodology of the natural sciences to the field of the social sciences. = NO MATHEMATICAL FORMALISM4. It is obvious that our concept of entrepreneurship is of an essentially humanistic nature, a concept which makes economics, as it is understood and advanced by members of the Austrian school, the quintessential humanistic science. = HUMANISTIC STNDPOINT
Thoughts and quotations (2/2)5. Those who gauge the just price of an article by the labor, costs, and risks borne by the person who deals in or produces the merchandise are seriously mistaken; for the just price springs from the abundance or lack of goods, merchants, and money, and not from costs, labor, and risks = BROAD BASE OF FACTORS INFLUENCING PRICE GENERATION6. The equilibrium price depends on so many specific circumstances that only God can know it. = AWARENESS OF LIMITATIONS7. All unjustified intervention in the market constitutes a violation of natural law. = LIBERTARIANISM8. The dynamic process of entrepreneurial coordination would eventually lead toward a state of equilibrium, though this state can never be reached in real life. = DYNAMISM9. It is never feasible for the blind to lead the sighted. = CRITIQUE OF GOVERNMENT INTERVENTION
The Austrian school nowadaysMyths regarding the Austrian school or the points of critique raised by neoclassicals:1. The two approaches (the Austrian and the neoclassical) are not mutually exclusive, but complementary2. Austrians should not criticize neoclassicals for employing simplified assumptions which make reality easier to understand3. Austrians fail to formalize their theoretical proposals4. Austrians produce very few empirical studies5. Austrians jettison economic forecasting6. Austrians lack empirical criteria by which to validate their theories7. Austrians are dogmatic
ConclusionsMajor „sins” of neoclassical economists that „feed” Austrian economists:1. Neoclassicals focus exclusively on equilibrium states via a maximizing model which presupposes that the information is „given”2. Neoclassicals often arbitrarily select variables and parameters for both the target function and the restrictions, and in doing so, they tend to include the most obvious aspects and overlook others which, though of vital importance, are more difficult to handle empirically (moral values, habits and traditions, institutions etc.)3. Neoclassicals concentrate on equilibrium models which treat true cause-effect relationships with mathematical formalism and thus blur them4. Neoclassicals raise mere interpretations of historical reality to the level of theoretical conclusions, interpretations which may be significant in certain specific situations, but which cannot be considered theoretically valid on a universal scale, since they reflect only knowledge which is historically contingent5. The insufficient attention to the role played in the market by subjective information, knowledge, and learning processes