The Austrian and Chicago Schools

This is from History of Economic Thought: A Critical Perspective, by E.K. Hunt, a long out of print textbook I had when I was an undergraduate at CSU Chico [update: it is has been published again by M E Sharpe]. It explains how the "Austrian and Chicago schools reduce all human behavior to rational maximizing exchanges and hence are able to prove that in every respect, economic and non-economic, a free market, capitalist system is the best of all possible worlds," and gives some of the critical reactions to that point of view:

The Austrian and Chicago Schools

The school of neoclassical economists that advocates extreme laissez-faire Capitalism represents the contemporary counterparts of Senior and Bastiat. In a sense this group really represents two separate but similar schools - the Austrian School and the Chicago School. The Austrian School traces its lineage directly back to Carl Menger (Chapter Eleven), Menger's extreme methodological individualism is the basis of the social philosophy of the Austrian School.

While Menger's first generation of disciples included both social reformers and conservatives, the ultraconservative nature of the Austrian School is more properly thought of as the product of two of Menger's second-generation disciples, Ludwig von Mises and Friedrich A. Hayek. Both von Mises and Hayek taught at various times at the University of Chicago. Together with Frank H. Knight, who taught for many years at the University of Chicago, they were the most important influences in the formation of the Chicago School. For the past generation, Milton Friedman has been the most influential member of the Chicago School. In 1976, Friedman was awarded the Nobel Prize in economics.

The problem with classifying the Austrian and Chicago schools together is that although they both emphasize the universal beneficence of exchange, extreme individualism, and a doctrinaire advocacy of laissez-faire, they have methodological differences. The Austrians generally advocate a rationalist approach to economic theory, while Milton Friedman and his followers generally advocate an empiricist approach. Although it is currently very common in the academic economics profession to hear all extremely individualistic advocates of laissez-faire referred to as the "Chicago School," it is probably more accurate to say that the more conservative wing of contemporary neoclassicism is about evenly divided between those who on methodological grounds follow the Austrian School and those who follow Friedman's Chicago School. We do not believe these methodological differences to be terribly significant,17 so we shall consider these contemporary advocates of extreme laissez-faire together.

One of the most frequent claims of these schools, which is nearly identical to that made by Senior and Bastiat, is that their theory is pure, value-free science that contains no normative judgments at all. Friedman, for example, argues "that, in principle, there are no value judgments in economics."18 Similarly, Richard McKenzie and Gordon Tullock have written: "The approach of the economist is amoral. Economics is not concerned with what should be, ... but rather with understanding why people behave the way they do. "19 They maintain that their "analysis is devoid (as much as possible) of our own personal values."20 In a widely used textbook written from the Austrian and Chicago perspective, Armen Alchian and William Allen have stated: "Economic theory is 'positive' or 'non-normative.' "21

Not only is the theory of these schools purported to be pure value-free science, it is claimed that only their theory merits the name economics and that their theory is equally valid for all people, in all social systems, in all times. In their introductory chapter, for example, McKenzie and Tullock proclaim: "In fact, it is the thought process or the mental skill developed below [in their book] that defines an economist."22 The modesty of the devotees of these schools is matched only by the purported scope of their theory. Their theory "is a valid core of economic theory applicable to all economic systems and countries."23

Before the reader becomes overawed by the claim of the Austrian and Chicago schools as constituting the only value-free economic theory that explains all behavior, in all societies, in all places, and in all times, we suggest a careful consideration of the following statement by Joan Robinson (who made many original theoretical contributions to neoclassical theory - admittedly of the liberal variety - in the 1930s, before she abandoned neoclassicism):

There has been a good deal of confused controversy about the question of 'value judgments' in the social sciences. Every human being has ideological, moral and political views. To pretend to have none and to be purely objective must necessarily be either self-deception or a device to deceive others. A candid writer will make his preconceptions clear and allow the reader to discount them if he does not accept them. This concerns the professional honour of the scientist. 24

A reading of the literature of the Austrian and Chicago schools shows their analyses to be about as value free as the writings of Senior, Bastiat, and Menger (who also made that claim). In fact, it shows that the values that have always been at the base of the most extremely conservative, utilitarian, laissez-faire tradition clearly form the foundations for these schools. The writings of these schools could be quite accurately characterized as the ideology of Bastiat stated in terms of the maximizing marginal calculus.

The Austrian and Chicago schools are generally not particularly bothered by the four major areas (listed above) in which liberal neoclassicists believe that the competitive laissez-faire theory is not a good representation of reality, and so, unlike the liberal school, they see very few reasons to extend the proper scope of government activity beyond the protection of the existing system of market power (that is, the protection of private property and the enforcement of contracts). They generally reduce, as we shall see, all human behavior to acts of exchange. Marx said of Bastiat and the other precursors of these schools, when one looks only at exchange, one is struck with the illusion that capitalism is a veritable Eden of the rights of man - freedom, equality, property, and Bentham (see the quotation by Marx in Chapter Nine). The four liberal neoclassicist objections to extreme laissez-faire are summarily disposed of by the Austrian and Chicago schools.

First, they maintain their faith in Say's Law of the automaticity of the market. They simply assert that what instability has been observed in capitalism is wholly the fault of too much government. Thus, Friedman writes: "The fact is that the Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy."25

Second, they simply deny that the gigantic corporations generally have any significant or meaningful monopoly power. Again, Friedman writes: "The most important fact about enterprise monopoly is its relative unimportance from the point of view of the economy as a whole."26 The small and insignificant amount of monopoly power that does exist is almost never due to the actions of capitalists. Any attempts on the part of private capitalists to secure monopoly power, Friedman assures the reader, "are generally unstable and of brief duration unless they can call government to their assistance."27 Once again, government, not the capitalist, is the culprit (although the evil is small and insignificant): "Probably the most important source of monopoly power has been government assistance."28

Third, the only "legitimate" socially consumed good that these schools generally feel the government should provide is defense. "I cannot get the amount of national defense I want and you, a different amount."29 In this particular case, the government can provide us with defense, but in nearly all other cases "government intervention limits the area of individual freedom"30 and is therefore undesirable.

Fourth, we have already discussed these schools' reaction to externalities (see Chapter Fifteen). Their answer is to create property rights to pollute and then to establish a market for the free buying and selling of these rights. We saw that this recommendation is based on these schools' individualistic belief that externalities are simply metaphysically given. Once one recognizes that individuals can, in fact, create externalities at will (because, in reality, we do live in a social world, not millions of individual worlds), then one sees that the recommendation of these schools would guarantee us that the free market would become an "invisible foot" that would automatically maximize human misery (see Chapter Fifteen).

So the Austrian and Chicago schools dismiss all of the liberal neoclassical economists' concerns and then advocate extreme laissez-faire. In Capitalism and Freedom, for example, Milton Friedman advocates the elimination of (1) taxes on corporations, (2) the graduated income tax, (3) free public education, (4) social security. (5) government regulations of the purity of food and drugs, (6) the licensing and qualifying of doctors and dentists, (7) the post office monopoly, (8) government relief from natural disasters, (9) minimum wage laws, (I0) ceilings on interest rates charged by usurious lenders, (11) laws prohibiting heroin sales, and nearly every other form of government intervention that goes beyond the enforcement of property rights and contract laws and the provision of national defense. Such are the conclusions of the value-free science of the intellectual descendants of Bastiat. The invisible hand, they believe, will do very nearly everything rationally and efficiently while preserving a maximum of freedom.

...

If, when reading Veblen's critique of John Bates Clark, the reader thought that Veblen's mocking example (in which "a gang of Aleutian Islanders slushing about in the wrack and surf with rakes and magical incantations" could be understood as harmonious neoclassical maximizers) was a little extreme, then one should read Alchian and Allen, or anyone of the writers of the Austrian or Chicago schools who piously announce the universality of their value-free science.

Their science applies everywhere because it applies nowhere. Most theorizing by these schools is purely tautological. The argument goes like this:

1. All human behavior involves choice.

2. In any choice situation, whichever alternative is chosen involves gains and costs (whether explicit costs or implicit "opportunity" costs).

3. Therefore, all human behavior involves exchange, since it involves acquiring gains in exchange for costs.

4. All human beings choose rationally; that is, they exchange in such a manner as to maximize the excess of the utility of the gain over the disutility of the cost (or the utility forgone in the opportunity cost).

5. Therefore, all choices are rational and represent the best possible alternatives among those available in the exchange process (the utilitarian neoclassicists have always avoided facing the issue of how capitalist society gives some individuals so many alternatives and others so few) .

6. Since all choices, or exchanges (they amount to the same thing), are rational and maximize each chooser's or exchanger's utility, then total utility is always maximized .

7. Therefore, free exchange in a capitalist society harmonizes all interests, maximizes utility, results in rational prices, results in efficient resource allocation, and, in general, automatically creates the best of all possible worlds.

8. Furthermore, since all human activity is in reality exchange, each and every aspect of a capitalist society is rational and blissful.

...Austrian and Chicago schools reduce all human behavior to rational maximizing exchanges and hence are able to prove that in every respect, economic and non-economic, a free market, capitalist system is the best of all possible worlds. ... Smith and Ricardo, in the grandeur of their general vision of capitalist society, saw the economy, as we have seen, from both a utility (or exchange) perspective and a labor (or production) perspective. Neoclassical economics represents the final, ultimate extension of the utility perspective. In the development of this perspective, we have seen throughout this book an intellectual degeneration from Ricardo onward. Only eclectics such as Mill, Keynes, and Samuelson could escape the force of this degeneration, because they had enough common sense to combine more realistic perspectives with their utility perspective. The degeneration is now complete. The banalities of McKenzie and Tullock can be said to be the ultimate triumph - and the inevitable result - of the development of pure, logically consistent, individualistic utilitarianism. ...

Comments

[mmckinl]

The entire basis for the Austrian and Chicago Schools is the predominance of the individual.

I would like them to show me just one civilization ( that has survived ) that operates through individualism rather than hierarchy. Although it is claimed democracy meets that criterion in theory it delivers government services through hierarchy.

The fact is that the entire basis of the Austrian and Chicago School flies in the face of of every known dimension of normative human psychology. Man is a social animal, always has been, always will be, whereby social considerations are always first and foremost underlaying all free choice.

That is not to say that these social considerations are always for the good. We have seen the lust for status and wealth trump those attributes which add and contribute to well being and future benefit for society as a whole.

The Austrian and Chicago Schools are the ... well ... as John Kenneth Galbraith put it ...

"The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness."

[OhNoNotAgain]

It's basically an economic ideology custom-made for people like the Unabomber, Ted Kaczynski. And, in kind, we've constructed an entire economic and political system based upon the thought processes of a bunch of folks that show all of the characteristics of having some form of Asperger syndrome, and then wonder why our society has begun to break down.

[Greg Ransom]

This is really pathetic as an account of the "Austrian" school.

Just for starters, Hayek simply does not do this:

"reduce all human behavior to rational maximizing exchanges"

Hayek also rejects the "rationalist" approach, Hayek identifies a causal/empirical explanation -- learning in the context of changing relative prices and local condiditons -- and identifies an empirical problem -- perceptions of order and disorder in the market place.

No wonder you don't "get" Hayek -- you learned your "Hayek" from an ideological hack.

[Josh]

Greg-"Just for starters, Hayek simply does not do this:

"reduce all human behavior to rational maximizing exchanges""

Hayek may not have, but Mises and his lineage in the Austrian school do.

[Blissex]

«Their science applies everywhere because it applies nowhere. Most theorizing by these schools is purely tautological. The argument goes like this: [ ... various axioms ... ]»

But those are the base axioms of the neoclassical school too. These plus a few even more ridiculous others (smooth convex aggregate demand/supply functions, "rational expectations", ...) are the basis of the Arrow-Debreu-Lucas model.

At least the Austrian school worries about capital and its effect on time, while neoclassical economics makes up assumptions that essentially wish away time.

[ndd]

Ah, more red meat for the critics!

Just from what I have read from other bloggers, a crucial difference between the two schools seems to be that Austrians have a pretty good explanation for booms and busts, but Chicago, despite laboring mightily in the field of money supply, doesn't do so well.

Looking at the list of axioms, like others here I contend that #4 is patently false both in the individual and the aggregate cases, and negates the remaining axioms as well. How many of us have made choices we came to regret later? What of addictions to drugs, alcohol, or gambling? What of tulip manias, stock manias, and "real estate always goes UP!"? What of World War 1, which brought Europe to its knees at the height of its power, and in the face of widespread trade relationships? History and psychology both overwhelm with evidence against number 4.

Additionally, there is a missing axiom which is crucial, namely: the choices available to participants is entirely dependent on the assets (personal and material, but especially pre-existing wealth) at the starting point of the choice process. Much governmental intervention is based on the immorality and deleterious effects of wide, unearned disparities of wealth, which has a huge and unfair effect on the choices available to participants at any one time. To the best of my knowledge, this missing axiom is simply elided in most neoclassical treatments, and is subsumed in supply and demand curves which are simply charted without reference to the pre-existing factors that go into them. Quite the contrary, Paris Hilton's satisfaction with pedicures is given the same moral claim for society's resources as is the poor's desire not to starve to death.

[Beezer]

When reading this post, three things come to mind.

1) Has there ever been a state which approximates that recommended by Austrian/Chicago economics? If not, then their ideologies have never been tested. There's no real world experience as to what happens under this type of regime. We have a few nations that are still Communist (although evolving), and a number of successful Socialist/Capitalist states, including our own. So our knowledge of these systems is at least tested.

2) The whole contract law thing being a government responsibility. We know from experience how contract law works (or doesn't) under various systems, but what are the differences in contract law that might be "logically" needed in this laissez faire only world?

3) Clusters of homo sapiens have a community consciousness, the sense of which will influence a great number of individual choices. Even at the individual level, man is never alone in a decision. Pardon my ignorance here, but how do these schools incorporate the "community" part of decision-making? If there isn't a corresponding body of study that specifically address this "non-self" human decision making reality, then these schools of thought have a huge hole in their theories.

[Noni Mausa]

Thanks for this.

Why is it that most emperors seem to go naked?

There are certain sorts of academic claims which could only be put forward by people who live in a protected, self referential social and economic container, like a fish tank.

The idea that people make rational decisions, or even make them most of the time, is so laughable that nothing but an academic glass case could preserve it. Most people's decisions are not decisions at all, but are predicated on habit, proximity, social context and where their cash-flow tides happen to be.

Perfect information and freedom of choice is in pretty short supply, too. I laugh when I see discussion in the newspapers about the best ways to invest that extra $30,000 that's just laying around. For me, a "portfolio" is something I keep my pencil sketches in, and the "before" pictures in home renovation magazines are considerably nicer than my place. I know what my home's "after" pictures, would look like, but those would require that stray $30k.

That the Chicago and Austrian schools have held sway for so long does not imply they are true -- merely useful.

Noni

[tdaxp]

Thank you for this, though it's hard to take the passage seriously. An academic text that uses such political rhetorical tricks --- I think it classifies Chicago and Austria as "extreme" 9 times -- should be laughed out of the academy.

As "Critical" typically is the polite way of saying "Marxist," I would not be surprised if it has been, already.

[evagrius]

The elimination of value, moral value, is the heart of the question.

If economic activity has no moral purpose, then human existence itself has no moral purpose.

An economy based on no moral purpose will inherently collapse since human beings are also moral beings.

The disconnect between values and economic activity, ( fact), is the key reason for the present confusion.

Economic activity should be focused on maximizing the attainment of the virtues, i.e; the true, the good and the beautiful.

These values can be traced back to traditional cultures, from the Greek, Hebrew, Indian and Chinese.

Abandoning the quest for them is what the Austrian/ Chicago schools advocate.

Moral values are discovered, not created. They create the will and not vice-versa.

The Austrian/Chicago schools have Friedrich Nietzsche as their progenitor.

In other words, they are nihilistic at the core.

[ken melvin]

Wow! Thanks Prof. Thoma. Whence the great harm the nation and Grover's still around.

[Ninja Zombie]

NDD: "Quite the contrary, Paris Hilton's satisfaction with pedicures is given the same moral claim for society's resources as is the poor's desire not to starve to death."

FAIL. Economics leaves moral questions to the priests. Pedicures and food are given the same mathematical description (both increase utility), but that is all.

[Beezer]

"FAIL. Economics leaves moral questions to the priests. Pedicures and food are given the same mathematical description (both increase utility), but that is all."

Wow. I'm starting to think mathematics is seriously over-rated when it comes to human behaviour. People make economic decisions, in part influenced by moral considerations. So, where's the chapter describing the economic impact of morals? Is it a variable Xm in the mathematics? Is there an increase in utility if Xm results in two more acres of land being productive for food, as opposed to four more pedicures? Or are they identical, when it comes to math?

And morals are there. Everywhere. And they aren't identical either. Does the variable Christian Morals (Cm) have a different impact on economic activity than does Muslim Morals (Mm)? I'm guessing yes, they do.

Saying that morals is a priest thingy and I'm not concerned with that is a serious shortcoming. One beer short of a six pack.

[bp]

it depends on the meaning of "is"

if "is" is
then "not is" is "should"

so "should be is"
cannot be a priori

because it already was
and is therefore posteriori

otherwise
"is" is locked in infinite regress

between the normative "is"
and the positive "is"

because to prove that "is" is
requires either that "is" was

or "is" is
which is tautological

to break the definitional circle of infinite regress
the Austrians and Chicagoans

declared that supply and demand is a law
that always was and therefore is

[Beezer]

Here's an equation.
Cm is for Christian Morals
Shl is for the number of Sir Hump A Lots
C is for the number of children born

Cm x Shl = C

data shows where Cm is strong, it's value is (.8).
data shows where Cm is weak, it's value is (1.2).

My apologies to all the mathematicians present. I'm shameless, obviously.

And you said the priest thingy has no impact.

[Denis Drew]

I am currently from Chicago and my school says: the market is like a human body where every cell has a mind of its own and covets what all the other cells have.

Timely example? A dozen years ago, I paid $500 for a root canal in a prime location office -- about $750 in today's money. Now the country wide price (I checked in hopes of lower) is $1400 -- almost double. Mmm. Over that time period medical insurance at least doubled (while doctors are doing three times as much -- so much they cannot even charge us enough to cover it all?). Could dentists have wondered if they could get away with doubling their fees for doing the same thing and possibly get away with it because they would just seem to be to be going with the ever higher price medical flow?

A special Chicago Boys disconnection with reality is the labor market. Everybody understands that when more want to sell than buy it is a buyers market. The Chicago Boys don't at all get the need to virtually reduce the overwhelming number of sellers in the labor market via effective unionization (effective in the era of the race to the bottom can only mean sector-wide) and/or as high as practicable a minimum wage so that the share of the pie gotten by most people is based on their genuine utility, not powerless desperation. Let's at least say the Chicago Boys don't differentiate between the efficiency of utility and desperation.

[robertdfeinman]

First, a quick check seems to indicate that the book is still in print and in a revised edition. Amazon has it for $45, so I guess it still has a following.

Second, it is sort of discouraging to see that someone had demolished the latest version of justification for wealth so effectively, so long ago, without any noticeable effect on policy discussions.

To use the Emperor's New Clothes analogy mentioned above, its as if the child said he's naked and everyone went right on praising the Emperor's outfit.

The field of supporting the status quo, and power and wealth, by supplying suitable arguments is an old one. In earlier ages we had the divine right of kings supported by (alleged) religious precepts.

One of my favorites is this "biblical" defense of slavery:
Scriptural and Statistical Views in Favor of Slavery

I propose, therefore, to examine the sacred volume briefly, and if I am not greatly mistaken, I shall be able to make it appear that the institution of slavery has received, in the first place,

1st. The sanction of the Almighty in the Patriarchal age.

2d. That it was incorporated into the only National Constitution which ever emanated from God.

3d. That its legality was recognized, and its relative duties regulated, by Jesus Christ in his kingdom; and

4th. That it is full of mercy.

The rich and powerful can always find toadies to bolster their claims. The academic departments and think tanks that owe their existence to the funds coming from their patrons are only the latest incarnation of courtiers to royalty.

[Ninja Zombie]

Beezer, I think I should be more clear. Economics can model how people behave as a result of their personal moral preferences. It does not attempt to prescribe a proper morality.

"Wow. I'm starting to think mathematics is seriously over-rated when it comes to human behaviour. People make economic decisions, in part influenced by moral considerations. So, where's the chapter describing the economic impact of morals? Is it a variable Xm in the mathematics? Is there an increase in utility if Xm results in two more acres of land being productive for food, as opposed to four more pedicures? Or are they identical, when it comes to math?"

The effects of morals on behavior can be modeled. I believe the traditional approach is to add moral terms to people's utility function. You can then use revealed preferences to measure it. For instance, I derive utility from not cheating people. You can determine how much utility by examining how much money I've failed to gain by not cheating people.

However, utility comparisons between people are not meaningful since utility functions describe the preferences of an individual. NinjaZombieUtility(Pedicure) < NinjaZombieUtility(Porn) means that given a choice between a pedicure and porn, I pick porn. That's all.

To put it simply:

Economic question: "how can we maximize F = pedicures+non-starving people?"

Economic question: "how can we maximize G = 1e-6*pedicures+non-starving people?"

Moral question: "Which should we attempt to maximize, F or G?"

[Ninja Zombie]

Beezer: "Here's an equation.
Cm is for Christian Morals
Shl is for the number of Sir Hump A Lots
C is for the number of children born

Cm x Shl = C

data shows where Cm is strong, it's value is (.8).
data shows where Cm is weak, it's value is (1.2)."

The fact that you don't understand economics is not evidence of it's correctness or incorrectness.

[Bruce Wilder]

e: "The elimination of value, moral value, is the heart of the question."

Far from being amoral, Friedman and Hayek and others do make some pretty strong moral claims for organizing around markets. The Chicago school's claim for a "positive economics" is an outgrowth of methodological individualism, and related to the claim that a market economy is, or should be, an institutional process for resolving a joint maximization problem, satisfying the sometimes conflicting values and desires of individuals. What's denied, or at least minimized, are the possibilities of community values, implemented as a matter of public choice and realized as public goods.

To me, someone interested in the remarkable rise of the business corporation and the bureaucratic enterprise, the studied neglect of these phenomena by the most libertarian economists is more suspicious than the selfishness of methodological individualism. To blame government as the source of all ills, and to champion capitalist "freedom", is also to to champion private power against the individual and the community.

The core of the conservative program, from age to age and society to society, is always and everywhere, the establishment and maintenance of hereditary aristocracy -- a private power of government lodged in the few and exercised for their benefit. Libertarianism, it seems to me, in practice, is a disguised apology for the conservative program -- a superhighway to serfdom and corporate feudalism. Libertarians are never so enthusiastic as when they are attacking the protections afforded by government against the depredations of private business corporations. The common people, it seems, must be freed from the minimum wage and social security and the Food and Drug Administration. Libertarian ire is never so aroused by, say, tort reform aimed at eliminating the courts as a resort for the individual. Principle is always invoked against the practical means of individuals to organize for collective bargaining or municipal regulation.

The Kochtopus is as the Kochtopus does, and the actual founder of the University of Chicago was John D. Rockefeller, Sr.

[ndd]

If the first General Welfare Theorem says I cannot intervene on behalf of the poor because I will hurt Paris Hilton's thirst for pedicures (because there is another more optimal path than intervention out there in the ozone somewhere), then I say economics does make moral judgments -- by judging the two equivalently.

As to the "revealed preferences" of morals, I will simply point out that it is non-falsifiable hindsight and of imho of no scientific validity.

[Beezer]

Economic question: "how can we maximize F = pedicures+non-starving people?"

Economic question: "how can we maximize G = 1e-6*pedicures+non-starving people?"

Moral question: "Which should we attempt to maximize, F or G?"

You could start by putting "non-starving people" to the left of the equals sign. Maximize that.

[FairEconomist]

FAIL. Economics leaves moral questions to the priests. Pedicures and food are given the same mathematical description (both increase utility), but that is all.

No, free-market economics denies the option to make moral judgements (apart from the implied moral judgement that Paris Hilton's desire for pedicures is equivalent to starving villagers' desire to eat). Any intervention to reduce Paris Hilton's pedicures to feed more peasant moves away from the original Pareto Optimum and is hence wrong.

Even liberal economics accepts the equivalence of pedicures and subsistence food. Liberal economics holds that equity issues allow one to take from Paris to give to the peasants, but doesn't address the issue of whether Paris' and the villagers' desires are morally equivalent. (That comparison might not be so unfavorable to Paris, if the village is Indian and wants to practice female infanticide. Or Christian and demands that old people dying of degenerative diseases spend all their time doing devotionals and praying to God for forgiveness of their theological misunderstandings which are the reason God is doing this to them and yes I *do* know a family doing just that.) It doesn't explicitly deny the possibility of moral nonequivalence but it does accept it implicitly.

[John V]

I'm far less surprised now than I was a few minutes ago at how so many economists...to whom we give the benefit of the doubt of having fully read and understood the likes Menger, Wiezer, Boehm-Bawerk, Mises, Hayek and even Friedman...on their way to getting their PhD's...simply don't truly understand the foundations and principles of economic thought economists from the Austrian School...and to a lesser extent the Chicago School.

When I think of Carl Menger's formative work toward the Austrian School, I don't think of this:

Menger's extreme methodological individualism is the basis of the social philosophy of the Austrian School.

What garbage worthy of an Op-Ed in an polemic magazine.

No. When I think of Menger, I think of Marginalism, Subjectivism and their role in his ground-breaking and totally new insight (in real time) toward the nature and formation of prices....a new and unique insight at the time.

That is a correct...if not very deep...observation on my part. And I'm not even an economist. That an economic historian would fail to note that and instead go into a subtly veiled polemic, is disheartening.

The irony is that PhD's in economics who are "Austrian" (so to speak) really do get and understand alternative schools of thought founded on Keynes and those who followed. They needed to understand it. It was part of thei doctoral studies. The opposite doesn't seem to true. Mainstream Keynesian, in my experience, have a fuzzy, inaccurate and opinionated view of the likes of Hayek and Mises and others.

I think if you quiz an Austrian economist on Keynes and then quiz a Keynesian economists on Hayek or Mises(for example), I suspect that the Austrian will demonstrate a far greater command of Keynes, his work and his guiding principles than vice-versa.

I see Austrians and the like reference the General Theory chapter and verse all the time. I don't see the opposite at all. In fact, I'm often left asking myself:

Which Hayek are you referring to??

and

Did you actually READ Mises or did your Keynesian professor simply assign a marginal chapter (with no real context) for biased commentary?

Does this mean Austrians and fellow travelers are right because of this observation? Not necessarily.

But it does mean that Modern Austrian-minded economists like Mario Rizzo, Peter Boettke, Steve Horwitz and others understand the Keynesian mindset far better than Keynesians do theirs.

That, IMO, is unfair to the debate.

And this article is an incredible example of this poor understanding run amok.

No Wonder....

[calmo]

Scuse me all those that commented after bp, whose post belted me, hopscotch fashion (to this little box here-now-gone for youall to see-soon-an-hopscotch yerself outatown)...iz yo or iz yo ain't my baby a philosophical attitude...in waiting.
I knows a cue when I sees it!
Ok, so can I pipsqueak up here with...somethin? [calmo pulls out next card in deck...ENTER (says so right on the key for chrisakes!)]
Recall Marx (.....Ok, I take it back. calmo, panicing maverickin, discards...with some humility, dignity, grace...and histrionics, now that he has antagonized the crowd (thisismo of shamlessit)...now retreats back (testin Everything) to Marx, a perfect stranger...second only to Jesus) who said (roughly, dammit you scholars! Get a Life!!!) "Twas inevitable...that History."

So, good thing the Chico School was a part of history...once.

[calmo]

Stop that italics John V and one more for good luck?

[reason]

John V
I don't see how your viw of Menger and that of the author are necessarily incompatible.

Ninja Zombie,
I tried to suggest to Mark Thoma some time ago that a lot of the difference between Liberal and Conservative economists is about their understanding about what economics is about. I guess that is a debate we need to have. You seem to define economics so that it excludes almost everything of interest (methodolical individualism is part of the problem).

How do you react to Herman Daly I wonder? And what is your view of the role of children?

[groucho]

Happy New Year!, Mark and all. Nice post on laissez-faire.

Of course what we overlook are the political developments that took place that colored the free market developments.

Communism, socialism, fascism, and eventually the cold war. What we know is that the west won. Thatcher and Reagan became the "emperors" that drove the privatization process.(UK had become totally socialist by then)

Now the free market evolution has swung far, far too much to "personal narcissism" (particularly with the boomers.."the ponzi generation")

Unfortunately, the State, it seems will be the winner going forward. Ironic that Obama, being elected, in part by "peace promises" will in fact be known in the history books as "the war president".

[John V]

oops

[Michael Cain]

Hayek, at least, recognized a moral argument that there should be constraints imposed on outcomes, and that government redistribution was probably the only way to impose those constraints (from the condensed version of Road to Serfdom):There is no reason why, in a society which has reached the general level of wealth ours has, (the certainty of a given minimum of sustenance) should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision.

The difference between that and modern conservatism seems to be that the contemporary group believes that everyone could make "adequate provision" for those risks, if only the government would get out of the way.

[anne]

Please remember to turn off the coding for the italics.

[Michael Cain]

Does this get the italics? Closing up unpaired HTML tags is a fairly trivial programming task; why can't Typepad seem to manage it?

[anne]

Please remember to turn off the coding for the italics.

[ScentOfViolets]

NDD: "Quite the contrary, Paris Hilton's satisfaction with pedicures is given the same moral claim for society's resources as is the poor's desire not to starve to death."

FAIL. Economics leaves moral questions to the priests. Pedicures and food are given the same mathematical description (both increase utility), but that is all.

Sigh. Do you realize that you have just agreed with what was said? Paris Hilton's satisfaction has no moral claim on the basis of 'economics'. Feeding the poor has no moral claim on the basis of 'economics'. What do yo think was meant by that statement that you so vigorously (as usual) disagree with?

[Bruce Wilder]

how hard was that?

[Ninja Zombie]

FairEconomist: "Any intervention to reduce Paris Hilton's pedicures to feed more peasant moves away from the original Pareto Optimum and is hence wrong."

Nonsense. "Pareto optimal" is merely a description of a state of the universe. It is a shorthand way of describing a particular property of the state, namely that no Pareto improvements are possible.

Economics can not tell you whether Pareto optimal is moral or not. Economics can only tell you if you are currently Pareto optimal and how to get there if you are not.

Similarly, physics can't discuss the morality of firing a cannon into the Gaza Strip. All physics can tell you where the shell will explode.

[Ninja Zombie]

ScentOfViolets: "Sigh. Do you realize that you have just agreed with what was said? Paris Hilton's satisfaction has no moral claim on the basis of 'economics'. Feeding the poor has no moral claim on the basis of 'economics'. What do yo think was meant by that statement that you so vigorously (as usual) disagree with?"

I interpreted it to mean that the poster (NDD) believes that economics makes moral judgements, and asserts that pedicures are morally equivalent to starving people. I claim that economics makes no moral judgements.

I wonder what NDD (the person I was responding to) has to say in response to my post. Did I misinterpret him?

NDD, from a later post: "If the first General Welfare Theorem says I cannot intervene on behalf of the poor because I will hurt Paris Hilton's thirst for pedicures (because there is another more optimal path than intervention out there in the ozone somewhere), then I say economics does make moral judgments -- by judging the two equivalently. "

I guess not.

Have fun with your word games scenty.

[Student]

/i> I seem to be the only one on this thread who does not have a good understanding of Austrian economics. Could someone please point me to something that simply expounds Austrian economics in summary form. I have put in an hours-long google session with no satisfaction.
TIA

[D^2 epigone]

Ninja Zombie asks, re NDD:

"Did I misinterpret him?"

Yes. This has been the department of simple answers to simple questions.

[julio]

Just trying to fix the italics.

[Patrick]

Any approach to economics that doesn't at least try to account for irrational actors and information asymmetries is ultimately not going describe reality because humans are irrational and information asymmetries exist.

[evagrius]

Fascinating tip-toeing 'round the bush.

[Ninja Zombie]

D^2 (scenty in disguise?):

Me: "I interpreted it to mean that the poster (NDD) believes that economics makes moral judgements, and asserts that pedicures are morally equivalent to starving people. "

NDD: "...then I say economics does make moral judgments -- by judging the two equivalently."

Gosh darn, I guess I did misinterpret. I thought NDD believed economics makes moral judgements. Silly me.

[Bruce Wilder]

Student: "Could someone please point me to something that simply expounds Austrian economics in summary form."

No. The Austrians don't do summary form. Part of their charm, I guess.

The Wikipedia article is pretty good, as an historical narrative.

[ScentOfViolets]

NDD, from a later post: "If the first General Welfare Theorem says I cannot intervene on behalf of the poor because I will hurt Paris Hilton's thirst for pedicures (because there is another more optimal path than intervention out there in the ozone somewhere), then I say economics does make moral judgments -- by judging the two equivalently. "

I guess not.

Have fun with your word games scenty.

As another poster has just commented, yes, you did. Do you have any idea what a conditional statement statement is? Or a normative one? No, 'economics' would only give a purely descriptive statement of what would happen; introducing words like 'should' does indeed introduce value judgments with all the messiness that implies.

This isn't difficult material to understand, nor is it introduced only after years of study at the graduate level. If you don't know basic concepts like this, why are you bothering to make any comments? Don't you think you should be reasonably informed on the basics before venturing an opinion?

[calmo]

How does John V do it?...Ok, I tried the heretofore "html tag left: the less than symbol, followed by decline to the left, followed by html closer, the greater than symbol" but History...so fickle...and possibly John's connection to the Pope somewhat less...calling Mark Thomas For Chrisakes!!!
That should do it...eventually...

In the meantime, Greg...I could listen to your version, ok, anybody else's improved edition.

[John V]

Student

This is a pretty summation.

Perhaps a tad long but accurate.

[John V]

Correction:

"Pretty good"....not pretty.

[Michael John]

Kay Hunt's "History of Economic Thought: A Critical Perspective" is still in print; Publisher: M.E. Sharpe

http://www.amazon.com/History-Economic-Thought-Critical-Perspective/dp/0765606070/

[anne]

Official disclaimer:

No actual Austrians were harmed in the course of constructing this thread.

[GloomBoom]

Rational decisions? They must be joking. The idea that reason is a decisive factor can come only from academics. The real world is based on emotion with a sprinkle of rationality thrown in.

[Peter Boettke]

I must confess, I am confused. The Austrian school discussed in the quote and in the comments is not the Austrian school that I was educated in, or practice to this day. Methodological individualism is not atomistic individualism; methodological individualism does not entail a commitment to political individualism.

Hayek neither had a position of maximizing individual, nor did he argue for the perfectly competitive model of the market economy. In fact, he is explicit in his rejection of these and some of his most well-known essays are directed at such models. But is also true that Mises shared Hayek criticism --- in fact, one might legitimately argue that Hayek got his position from Mises.

I am sure there are a lot of things that Prof. Thoma and his readers can find objectionable in Austrian economics without making assertions which are not true about what the Austrians argue.

Finally, again I urge that those who want to criticize the Chicago school focus their intellectual energies on Friedman, Stigler and Becker and their system of ideas, and not a caricature of those ideas that is convenient to criticize because one can just roll out arguments which have been around for 50 years (and were as misguided then as they are now in terms of coming to a 'true' understanding of the positions one is criticizing).

Pete

[ScentOfViolets]

Sigh. No, NZ, I am not in the habit of employing sock-puppets as intermediaries. If you don't believe me, feel free to verify this with unseres gastgeber host.

[Michael John]

Austrians like to emphasis their differences with the Neoclassicals, but Kay Hunt understood, like Paul Davidson did in the "Critical Review" debate, that the Neoclassicals and the Austrians come to the same conclusions because they both hold the same assumptions. The subjectivity of value is in Hunt's view the commonality of both the Austrians and the Neoclassicals.

[ScentOfViolets]

Would those saying that (yet another) person has got it wrong wrt what is actually the Austrian school of economics care to comment on those statements being attributed to that school[1]? Would they at least agree that those statements, whatever their origin, are wrong?

Also, since we have supposed authorities on this school of economics participating here, would it be too much to admit that yes, some people claiming to follow the Austrians do indeed make these kinds of comments?

[1]Amazing isn't it, how so many people get it wrong, even PhD's writing a textbook.

[Scott W]

Check this sight out for more on Austrian Economics. There are a number of books, articles, etc. on Austrian Economics including some very thoughtful summaries.

http://mises.org/

For what it is worth, the level of ignorance I see being demonstrated here is truly amazing.

[Dan Zale]

Here is some wonderful "value free" stuff from von Mises:

The characteristic feature of the market economy is the fact that it allots the greater part of the improvements brought about by the endeavors of the three progressive classes—-those saving, those investing the capital goods, and those elaborating new methods for the employment of capital goods-—to the nonprogressive majority of people. ... The market process provides the common man with the opportunity to enjoy the fruits of other peoples’ achievements. It forces the three progressive classes to serve the nonprogressive majority in the best possible way.

Everybody is free to join the ranks of the three progressive classes of a capitalist society. These classes are not closed castes. ... What is needed to become a capitalist, an entrepreneur, or a deviser of new technological methods is brains and will power.

Sources: "The Anti-captialistic Mentality" (1956) p. 40
Part of these two paragraphs are also used in the E.K. Hunt text. Hunt reminds us common people how fortunate we are.

[DW]

I see everything slanted!

So true... for everyone...

[Ludwig Von Mises]

Such an appalling lack of understanding...You folks don't even know what or where the foremost online site for Austrian economics is located.

I guess it is ok to attack something out of ignorance, right?

Try a little research at www.mises.org and try again.

[jalrin]

Maybe this will remove the italics.

[John V]

Well, SOV,

I can honestly say that, to my knowledge, only one true authority on Austrian Economics has commented so far and that is Dr. Peter Boettke. Not sure of any others.

He gave a very good starting point.

[Phillip Huggan]

A catatrophic failur of the Austrian/Chi/Cgy Schools is they assume a society cannot improve (or degrade) over time. It is a failure large enough to destroy the schools of thought. Our progress depends on harvesting new resources more faster than we degrade others. Any reality based economics must observe this.

"Milton Friedman advocates the elimination of:
1) taxes on corporations
2) the graduated income tax
3) free public education
8) government relief from natural disasters
I0) ceilings on interest rates charged by usurious lenders"

#1 may be more efficient, but favouring businesses must be made on the basis of measuring rates-of-return, not dogma.
#2 creates a caste system and eventually a monarchy. A monarchy is a very inefficency economic system, maybe worse than communism.
#3 educating poor children by taxing the parents of rich ones is a productivity gain.
#8 often freshwater and food are all that is needed to preserve health and life.

All in all, the Austrian School is a model for a steady state economics, disconnected from reality at present.

[bob mcmanus]

As someone who considers himself pretty far to the left and engaged in trying to develop a coherent critique of liberalism and individualism, classical & modern, I think many of the commenters here who question the basic premises of Austrian & Chicago Economics are in danger of creating internal inconsistencies and incoherence in their own favored ideologies. But this isn't new, since Locke, Leibniz, and Spinoza.

Communitarian values over individual freedom? You really want to go there? Liberals think they are achieving some kind of balanced moderation when they are really just bullying another irrationalism.

[Phillip Huggan]

....#10 leads to financial collapse if usury results in pyramiding debts. Duh.

"(Dan Zale wrote) What is needed to become a capitalist, an entrepreneur, or a deviser of new technological methods is brains and will power."
"Milton Friedman advocates the elimination of (3) free public education..."

Wad if my bwain cant make thoughts of bizzness or big books...

[roger]

It is obvious that the "description" rhetoric is a dodge. One of the most common Chicago school ploys is to speak of the Government 'interfering" in the economy - which is like saying that the Coca Cola Company "interferes" in the economy. The economy, descriptively, is an arrangement between all economic actors. Now, one can non-descriptively support a certain sphere of activity, on the part of private investors, and one can argue that the econnomy works best when it serves to make the rich richer. Or 'justly awards the entrepreneur', in the comic speech of Mises. But one has to acknowledge that these are normative, not descriptive, statements. A description that includes Paris Hilton's pedicures and Mother Theresa's charities does not have to favor one over the other, and can be launched from an economic, or anthropological, or psychological, or historical viewpoint. That is what the social sciences are about. However, the ideal of description will probably be bare - before long, one's normative notions will come through - for instance, in making efficiency a virtue - or in advocating growth, or in advocating competition, or in advocating egalitarianism. The importance of a minimum of description is to provide these normative points of view with a common reference. But the politics of social science consists in substituting one's favorite normatively skewed vocabulary or conceptual scheme for this neutral reference point - a talent in which Chicago school economists excel.

[John V]

Dan Zale,

Well, I suppose when is looking for information to back up one's preconceived agenda, one will always find something, somewhere to substantiate it somehow and someway.

"Anti-Capitalist Mentality" is not an economics book. It is a critique of the anti-capitalist mentality...as the title so bluntly states.

The thing that makes me chuckle about that quote is the fact that in a critique of the Austrians's claim of practicing "value free" economics, Hunt would need to circumvent literally thousands upon thousands of pages from true Austrian economics texts that explain the foundations and more complex principles of real Austrian Economics to make the preconceived point.

Mises's treatise "Human Action"? Not a word.

Countless books, article and papers on the basis of human action, capital theory prices, time preference/interest rates, the entrepreneurial process in a constant world of disequilibrium and on and on? Not a peep.

You don't need to be an economist to see thew gaping holes in such critiques. You only need a very rudimentary grasp of Austrian tenets and some intellectual honesty.

[John V]

Phillip Huggan,

A catatrophic failur of the Austrian/Chi/Cgy Schools is they assume a society cannot improve (or degrade) over time.

That's a new one. Please explain.

[Listen only to the True Believers]

As Justin Fox found out over at Curious Capitalist only Austrian true believers are qualified to speak about Austrian economics. "Theirs is the true path, and all others are in error."

http://curiouscapitalist.blogs.time.com/2008/12/31/must-a-journalist-listen-to-the-true-believers-in-austrian-economics/

http://curiouscapitalist.blogs.time.com/2009/01/02/tyler-cowen-statist-anti-rothbardian-agent-of-the-kochtopus/

[anne]

"In Capitalism and Freedom, for example, Milton Friedman advocates the elimination of (1) taxes on corporations, (2) the graduated income tax, (3) free public education, (4) social security. (5) government regulations of the purity of food and drugs, (6) the licensing and qualifying of doctors and dentists, (7) the post office monopoly, (8) government relief from natural disasters, (9) minimum wage laws, (I0) ceilings on interest rates charged by usurious lenders, (11) laws prohibiting heroin sales, and nearly every other form of government intervention that goes beyond the enforcement of property rights and contract laws and the provision of national defense."

Really having with less sense than a turnip, but beloved nonetheless.

[Real Person from the Real World]

The comments are as good as the post. I especially like:

mmckinl's comment:
The fact is that the entire basis of the Austrian and Chicago School flies in the face of of every known dimension of normative human psychology. Man is a social animal, always has been, always will be, whereby social considerations are always first and foremost underlaying all free choice.

That is not to say that these social considerations are always for the good. We have seen the lust for status and wealth trump those attributes which add and contribute to well being and future benefit for society as a whole.

The Austrian and Chicago Schools are the ... well ... as John Kenneth Galbraith put it ...

"The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness."

[Dan Zale]

John V.

Hunt doesn't need to circumvent the "true Austrian economics texts." He needs only to refer the curious readers to Marx's critique of Samuel Bailey, which is found in Chapter 20 of "Theories of Surplus Value." This is the same Samuel Bailey that Mises cites with approval on page 219 in "Human Action." Marx's critique of Bailey applies with equal force to Mises, his notion of economic calculation, and all those Austrians who follow this path.

[Real Person from the Real World]

it's easy to ignore "moral" considerations, when one lives in an IVORY tower, running mathematical models all day long. I think every economist who wants his PH.D. should be required to go incognito for 4 yrs, and work at low/minimum wage jobs only. Eventually, the difference between Ms. Paris Hilton's pedicures and the value of starving or not starving, would start to enter into the discussion.

[John V]

Dan Zale,

I'm sorry but that is one of the strangest non answers I have ever seen.

And for FWIW, I have never read Marx's Theory of Surplus Value. So, I have no idea what you are referring to.

[julio]

"The market process provides the common man with the opportunity to enjoy the fruits of other peoples’ achievements."

[So do some buddies and a few pitchforks.]

"Everybody is free to join the ranks of the three progressive classes of a capitalist society. These classes are not closed castes. ... What is needed to become a capitalist, an entrepreneur, or a deviser of new technological methods is brains and will power."

[Not being a capitalist or entrepreneur, I went for #3 and filed "Patent 20356739: julio, Bierce, et 1M others: a device to open cat food without the expense of a can opener". Do I finally qualify as "progressive"? Or am I still totally "common"? No value judgments please, I need an objective decision.]

"Milton Friedman advocates the elimination of...government intervention that goes beyond the enforcement of property rights..."

[In the new spirit of Obama and bipartisanship, let's go for the property thing. Just make sure we start from scratch.]

[anne]

Julio:

"The market process provides the common man with the opportunity to enjoy the fruits of other peoples’ achievements."

[So do some buddies and a few pitchforks.]

Genius.

[James]

I can't tell if Hunt is ignorant or deliberately deceptive.

As but one example, he writes, "They simply assert that what instability has been observed in capitalism is wholly the fault of too much government." Neither the Austrians no the Chicagoans "simply assert" this. In cases where Austrians and Chicagoans attribute economic maladies to government activity, they don't do so without also offering up their reasons for that attribution.

As another example, Hunt writes, "Their answer is to create property rights to pollute and then to establish a market for the free buying and selling of these rights." Again, I can't tell if he's ignorant or deliberately deceptive, but the majority of Austrians oppose tradable rights to pollute.

Finally, very few Austrians or Chicagoans would claim that "... in every respect, economic and non-economic, a free market, capitalist system is the best of all possible worlds." It is certainly possible that market outcomes could be improved upon if some subset of society were exempted from the laws and norms which forbid aggression against property rights. It's just overwhelmingly unlikely in light of history that the members of that subset of society would use that exemption to improve upon market outcomes when they could instead act to benefit themselves and their allies and to maintain their position.

[Lee A. Arnold]

Austrians ought to have learned, by now, that individual choice is only half of the puzzle. Group agreement is the other half, and the two patterns are homomorphic. it is not a matter of having one or the other. See "New Chart, for Descartes":

http://www.youtube.com/watch?v=GrVsLdTtepM

Peter Boettke's summation of the Austrian school points to a concomitant misapprehension. Economics cannot be built upon a logic of choice -- it has to be built upon a logic of purposiveness. Choice and purposiveness are not identical; purposiveness gives some results which are not in the realm of freedom, as Kant taught.

But first, there is another problem, and by now we should all know that economics cannot entirely be built upon a logic of individual choice, because complete information is required for that, and the system has grown too complex for all the information to get through, much less for it to be adjudicated by individuals. Contrary to popular belief (particularly among Austrians and Chicagoans,) markets do not transmit all relevant information. A notable case is ecological information. This cannot be fixed by "fixing prices"; wildlife areas simply have to be gotten out of the market economy. (There is an intermediate strategy wherein traditional, common-pool resource institutions should be supported in the cultures of some less-developed nations.)

And even if markets could transmit complex information, individuals by and large are not learned enough to properly evaluate all of it, and respond to the price with proper demand. So falling back upon "satisficing" will not solve the environmental problem using only the allowances of methodological individualism. A scientific determination as to the health of ecosystems must be made, by experts who study the stuff, and then simple injunctions applied at the group institutional level. (You might try to depend upon Julian-Simonian "creativity from the multitudes" with all their promised technological fixes to handle our energy and resource problems, but that's applying historical luck-to-date, as the continuing solution into a logarithmically different future. This is scientifically and mathematically very unwise.) So much for the problems of choice in complex systems that are generating more critical information than can be computed by individuals via markets.

The logic of purposiveness, on the other hand, includes choice, but goes beyond it -- because some purposive results are NOT free choices. The determination of the laws of physics, for example... Yet the laws of physics are most certainly a case of economizing. Ernst Mach demonstrated a good deal about the effects of memory, language, mathematics and scientific law upon the economy of thought -- all eminently economic phenomena, (and further, they are at the very heart of marketable innovations!) but having less and less subjective reality as we go up that scale. Economics has to be based upon purposiveness, not merely choice, which is a minor and rather subjective and egotistical concern.

P.S. Wasn't the socialist calculation debate effectively settled by Lange, against Mises' position?

[calmo]

kudos to DW @ January 04, 2009 at 11:37 AM for correctly diagnosing everything...the upside of italics...eventually we come to our non-Italian senses it could have been bold rampaging...so many passionate responses here...I cannot possibly keep up...so I'm stayin way back there with bp...chained to the doghouse, say what you like... you pitbulls
Are you in for an ideological skirmish of just the idiotical screamish?
How our digits put up with us I don't know...apart from demonstrating an ideological impasse and of course digital dexterity, is there something...anything...little scrap howeva miserable, chewed, that one school has luckily stumbled upon that it might join with the other(s) fabled school(s) possible retrievables?...the germination of a possible fledgling 3rd school...something modest to start with...men are not dogs...something humble...men are dog-like...and honest...
..so that it doesn't look like the vertible garbage dump?..not that my place is the current Nobel Prize winner of Good Housekeeping...and alright, I like a mess. It's true.

[nyet]

This reminds me of Freudian psychoanalysis asserted as science and unprovable. What happened is that the psychoanalytic profession (as distinct from psychologists) which is derived specifically from Freud, had declined in influence, number, reputation. Freud obviously influenced psychology, but many of his claims to truth are now simply not taken seriously.

It's possible that could happen to the whole economics profession, unless they are circumspect about washing the ideology from their dirty laundry.

[Phillip Huggan]

"John V says...
Phillip Huggan,

A catatrophic failur of the Austrian/Chi/Cgy Schools is they assume a society cannot improve (or degrade) over time.

That's a new one. Please explain."

The dogma of market forces prevents you from analyzing for instance, how to improve the precursors to markets forces, and the precursors to tools other than market forces. Eventually the productivity gains from markets forces equal losses of environmental capital, among other externalities. Probably where market forces and environmental externalities intersect the least is in costing food and freshwater, though port cities are also a long-term cost. Instead of spending money on this we have overbuilt USA suburbia and Iraq.

[ctindale]

John V (bravo)

Every bit true !!! the discussion is contexted by the fact that the neo classicals, are mostly "3 chapter" Austrians who claim readership of the entire lineage of Austrian traditon from those three chapters. This is made gob smackingly obvious by the depth of knowledge they display with the emerging curiousity with past ideas that didnt get us into so much trouble.

Austrian theory is re emerging from the black lagoon. We are simply in to much trouble not to question, destroy and renew the current failed (sorry) orthodoxy.

Veben, Schumpeter, Minksy, Hayek, Mises all of them need to be reconsidered. Minksy based his finanicial instability hypothisis on the General Theory, how do we find and encourage Scuhumpeters catylsts of innovation

Economists trying to debunk the Austrians at this point smacks of a some long denied neo classical Jungian shadow , maybe folks are suspecting the current orthodoxy will be proved to have been a fad and folly.

[Lee A. Arnold]

It should be pointed out that Schumpeter thought that capitalism would be superceded. I don't think that's entirely likely, but with this amount of inconsequential, mind-numbing blather from the pop-Austrians, anything's possible.

[Dan Zale]

John V.

Perhaps the "gaping holes" that you see in Hunt's critiques are simply a lack of understanding as to what he is arguing. His entire book, after all, is rooted in the works of Marx. And in particular, as he notes in his Preface, it is primarily about the moralities of different value theories. I have in fact read literally thousands upon thousands of pages from true Austrian economics texts and, from the particular vantage point that Hunt is working at, I don't see the gaping holes that you see. Contrary to the self-deceptive claims of Austrians, I do not see a value free economics being practiced. Hunt and I are in full agreement with Heilbroner [*] who maintained that a vision underlies and precedes all analysis.

[*] Robert Heilbroner, "Was Schumpeter Right After All?" The Journal of Economic Perspectives, Vol. 7, No. 3 (Summer, 1993), pp. 87-96

[Noni Mausa]

beezer said, quite a ways upthread: So, where's the chapter describing the economic impact of morals?

My first impulse is to say that the economic impact of morals is to reduce wealth and expand costs.

By "morals" I mean awareness of need and suffering around oneself and acting to reduce them. But other things classed as morals, like honesty and fortitude and temperance and personal responsibility, also restrict one's income and expand one's costs, if only in time.

So then, of what use are these expensive morals?

I have a theory that they provide a sea-anchor for the society at large. The wind may blow east or west but the general movement of things is constrained by the pull of people saying "I just couldn't live with myself if I didn't do X, Y or Z." Drowners get saved, grandkids get raised, lost valuables are returned.

Economics, I suppose, is just a tool, like engineering or metallurgy. As Krugman said a few blogs back, there are economies that get along just fine without a middle class. As in algebra, there are many correct solutions to the problem of stable societies. It is the job of statesmen and other leaders to decide which of those solutions to espouse and which to be avoided, and then use the tools at hand to row in that direction.

Considering how many Americans think that the postwar, pre-Reagan era of a thriving middle class exemplified the "happy days" American dream, I suppose it's not surprising that it's taken more than a generation to detach Americans from it, fingernail by gripping fingernail.

Noni

now let's see if this turns off the italics

[John V]

Lee,

economics cannot entirely be built upon a logic of individual choice, because complete information is required for that

That is perhaps a necessary tenet that buttresses other schools of thought or methodologies but not Austrian.

In fact, to my understanding, the market process doesn't work this way and almost it's almost impossible for it to work this way because the price formation, according to Austrians, doesn't work this way.

To my limited knowledge, (I may be misrepresenting the point a bit) this sharp difference exists because of how Austrians look at equilibrium.

See Mises here.

The concatenation of the market is an outcome of the activities of entrepreneurs, promoters, speculators, and dealers in futures and in arbitrage. It has been asserted that catallactics is based on the assumption — contrary to reality — that all parties are provided with perfect knowledge concerning the market data and are therefore in a position to take best advantage of the most favorable opportunities for buying and selling. It is true that some economists really believed that such an assumption is implied in the theory of prices. These authors not only failed to realize in what respects a world peopled with men perfectly equal in knowledge and foresight would differ from the real world which all economists wanted to interpret in developing their theories; they also erred in being unaware of the fact that they themselves did not resort to such an assumption in their own treatment of prices.

In an economic system in which every actor is in a position to recognize correctly the market situation with the same degree of insight, the adjustment of prices to every change in the data would be achieved at one stroke. It is impossible to imagine such uniformity in the correct cognition and appraisal of changes in data except by the intercession of superhuman agencies.

[Jule R. Herbert Jr.]

To the charge that Mises and his followers are "conservative" consult Mises' 1923 book, Liberalismus, which concisely lays out the political conclusions of the Austrian school of economics. It can be found at this link in pdf format. http://mises.org/liberal.asp

Mises was a "liberal" in its non-socialist sense.

[ken melvin]

Time to bring in the baptists.

[John V]

Well, Dan Zale,

I'm not very good with Marx. And most of what little I do know of him in the economic sense is not very good. And that is based just about every economist I've ever read from Keynes to Hayek and everywhere in between and on either side.

[Fred]

Austrianism and Keynesism mean pretty much whatever people want them to mean. In practice, people who call themselves Austrians also tend to call themselves libertarians, and they combine a small amount of Keynes emphasis on animal spirits and similar non-quantitative psychological phenomena along with a large amount of stupidity in ignoring or misunderstanding the rest of Keynes. It doesn't matter how much so-called Austrians quote Keynes (usually to denouce him). The fact is, they don't understand him.

Much more interesting to me is WHY people are attracted to Austrianism and libertarianism. The effect of radical Austrian policies would be almost surely to weaken and impoverish the United States in every way imaginable, which is why such ideas are not strongly supported by the powers that be. My general impression is that Austrians are mostly intelligent men of a very rigid moral upbringing, and this rigidity makes them incompentent in the world of practical affairs. They are usually employees in some sort of bureacracy, diligent savers but very timid investors, so that inflation is their bugaboo, whereas the entreprenurial types, who are the true creators of wealth in capitalist society, welcome a small amount of inflation. There is probably some sort of connection between the Austrian/libertarian personaly and Freudian anal-orientation, which would at least partly explain the obsession with a gold standard. Austrians tend to be much more psychologically at ease with deprivation than prosperity, and there are especially uncomfortable with the disorderly prosperity of boom periods. Consequently, most of their economic prescriptions seem to be designed to prevent booms, especially booms that go on for long periods of time. Better a permanent depression than a permanent boom. The percentage of Austrians in the population at large is very small, and even smaller among the active capitalist entrepreneurs. Crypto-austrians are fairly common among the shills at institutes funded by passive capitalist rentiers, but they are most truly at home here in the blogosphere, where their presence and influence is widely out of proportion to their influence in society at large.

[anon]

Beautiful music, Fred

[Aesthete]

Wow, that was pretty interesting.

What is missing is that humans will value something, hence transact for it. A large part of human makeup is their social urges, the same as bees like to create a complex group.

So strong desires will be for transactions that enhance and secure the social group, this is why we don't like it when people are left to die and insist that hospitals give emergency care to everyone.

I've noticed that libertarians (which seem to be the group that really likes the laissez-faire concept) are characterized by having a poor understanding of social urges. It's my theory that they don't have a strong social gene, so it's value tends to go right over their heads.

[ctindale]

Fred,

Almost certainly impoverish the US ? (sorry thats already been done)

The problem is the complete propaganda, there are many great concepts within the Austrian tradition, yet folks want to denounce every aspect as way of swearing allegiance to the current orthodoxy. The current orthodoxy (as Stiglitz suggests) is a pure cult , with its own cult speak and propaganda.

The current one sided orthodoxy has completely failed , there is no way to escape this conclusion. It may have failed so badly that American and Great Britain might not recover in the current generations lifetime.

American soviet centrally planned consumption is every bit a loony as anything thats been served up in the history of economics, sure we dont have to go back to Mises or Hayek and start again, but surely we do need to incorporate some of the work of Minksy and Schumpeter.

You can tjust consume and not produce, you cant ignore debt levels as a source of instability, you cant ignore the failure of Bernanke style monetary policy

[Robbie]

These economists offer an ethical worldview and not science. What ever school they are from; they claim that "We should pursue our own interests exclusively". Now, depending on what "school" you are from, you argue about what curves and graphs to read, and how to interpret the data, but it is all for not because...

Ethical egotism is not a very good ethical system. No matter what charts you read, or what "school" you are from, the pursuit of your own interest is solipsistic. Hence from this solipsism; economics would be against its own doctrine to advocate that others behave as, pursuing our own interests exclusively.
Ethical egotism does not explain; what is the good, and more importantly what the good is it to somebody else. In this ethical system it is possible to have one situation with two results: One good and one bad.(i.g. A factory moves to Mexico, and the owners save money on labor costs, which is considered good for the owners but is bad for the workers who lost their jobs.) A good ethical system can not have two results for one action.
Because of this dual result; the need for a court that enforces property laws. Utilitarianism, Ethical egotism and the rest of these consequentialist theories rely upon, and can not escape the grasping for a strong legal system. Consequential ethical theories always need deontological ethics to make up for its short-comings by slowing the social calculus down.

So we have an ethical system that is forced at us, economics, and preaches a system of individual rights and happiness but it ultimately fails on the need for a strong property rights based legal system.(i.e. The displaced factory workers are not happy, so deontological ethics has to bail out the whole operation.) Not only does this system contradict itself as an ethical theory, but it requires the use of another ethical system to hide its short-falls.

[Lee A. Arnold]

John V,

Every market transaction has a few different levels of information contained in it: (1) There's the level of information about whether prices are accurate (what Mises is talking about in the link you give.) (2) There's the concept that the price of a transaction reflects the long train of knowledge, by distant people about distant conditions, leading through the total web of transactions that produced the product for sale (let's call this Hayekian information.) (3) There's the fact that some product information isn't revealed, which is the informational "market failure" studied by economists such as Akerloff and Stiglitz. (4) There's the fact that "path dependence" can make for efficient transactions, but still take the whole system onto a sub-optimal and ultimately undesirable path, to a crash.

Misean information looks pretty much like neo-classical price theory to me, minus the theory of perfect markets and allocative efficiency. Even so, it appears that Austrians believe that any move in the direction of free markets is still a move toward efficiency, relying upon the sort of analogy from physics that, for example, the gravitational pull of Earth's moon must have an effect upon the planet Jupiter, even though they are so far from each other, and of such differing masses. It strikes me that this analogy would be difficult to prove in economics, and may not really apply. We are left with the "market system" as a social control ideology allowing room for some kinds of freedom that include some kinds of innovation. That's fine by me, but I'm not sure it's interesting.

My comments were directed at the notion of Hayekian information, a theory developed more or less in the pursuit of a chain of thought as to why socialism couldn't work. See Hayek's "Knowledge Problem," etc. But I think this doesn't cover certain sorts of information which may become critical, particularly environmental conditions such as whether dolphins were killed when the tuna was caught, or social issues such as discrimination or labor abuses, anytime these are not addressed by governing institutions. I simply do not see how these things can be reflected in prices, and I do not see consumers having the time to learn about all the different things happening in the world, so that they can make choices as good citizenship would require, and as many of them would certainly prefer.

Consider path dependence: I may prefer, indeed I do prefer, to make choices which would move toward the end of the use of oil -- for climate, health, and foreign policy reasons -- and to do so quickly enough to prevent a calamity. No such choices are available: the entire market system depends on oil. The only way out is massive institutional intervention to realign the market to a different path. Whether that is to be by R&D spending or carbon taxes or building code changes or simple prohibitions, is a secondary issue to be hashed out in a policy debate: and Austrian economics doesn't give guidance upon contingent circumstances.

The primary issue is that when all of these caveats are made, including the some of the criticisms in Mark Thoma's post above, I do not quite understand why anyone would find Austrian economic philosophy especially noteworthy.

[Josh]

Didn't Sraffa pretty much debunk the "natural rate of interest" concept paramount to the Austrian Business Cycle Theory?

Didn't Kaldor also destroy the Hayekian belief that overconsumption was the cause of recessions?

[ken melvin]

I wish they would go away before they do more damage.

[Josh]

My main problem with Austrians is that their ideal political economy only works in a closed system or in a world where every nation, society, and population follows their prescriptions. All governments would attempt to manipulate the world economy to their favor.

Austrian Economics: It works everywhere, or it works nowhere.

[Gene O'Grady]

Going back to the start of the comments, is it possible for economic blog commenters to stop using autism and Asperger's syndrome as insults? Not only is it inappropriate in general, but as the parent of a child with Asperger's that condition does not in fact comprise what those who use it as an insult tend to think it does, such as lack of empathy -- as opposed to extreme difficulty in easily and quickly reading what other people expect.

For what it's worth, my Asperger's son is a great devotee of Lord Keynes.

[s. commenter]

hile Menger's first generation of disciples included both social reformers and conservatives, the ultraconservative nature of the Austrian School is more properly thought of as the product of two of Menger's second-generation disciples, Ludwig von Mises and Friedrich A. Hayek. Both von Mises and Hayek taught at various times at the University of Chicago. Together with Frank H. Knight, who taught for many years at the University of Chicago, they were the most important influences in the formation of the Chicago School.

Sorry, but this history is pretty wrong. Mises NEVER taught at Chicago and as far as I know had nothing to do with that university. Hayek was certainly there, but NOT in the economics department, and also NOT in the formative years of what we now think of as the "Chicago School." In terms of economic thought, Hayek has little in common with the "Chicago School." Pardon me for casting aspersions, but I have to assume the author of this piece doesn't understand what characterizes either school. By the 2nd paragraph you already have major errors about their history and thought. The rest is no better. The author is, unknowingly, having difficulty grasping his subject matter, so he has to fall back on writing about what he imagines it to be, rather than what it really is.

I'm not sure I fall in with either school, but I've read enough Hayek and enough Friedman, plus copious outside commentary, to know that the two schools are fundamentally irreconcilable on a wide range of points. You wouldn't guess that from reading the article above. That's a fatal deficiency that can't be corrected without also dropping most of the major theses that appear in the article.

[OhNoNotAgain]

"Going back to the start of the comments, is it possible for economic blog commenters to stop using autism and Asperger's syndrome as insults?"

My apologies if you viewed what I said as an insult towards those like your son that deal with a condition such as Asperger's syndrome. It most certainly was not intended in that fashion. I was simply trying to demonstrate that a lack of appropriate social skills is not a desirable qualification for those espousing ideology about how we should organize our economic and political systems.