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Situating Austrian Economics Within Modern Social Science
Peter J. Boettke2004 Hayek Visiting FellowLondon School of EconomicsOctober 11, 2004
What Did Marshall Miss?
According to Baumol (2000): Macroeconomics Entrepreneurial element in
the market process According to the ‘Austrians’:
The completeness of subjectivism
Entrepreneurial element in the market process
What are the interesting trends in Modern Economics?
Hayek 1974 Nobel Prize Winner Emphasis on Decentralized
Decision making Information embedded in
the price system Learning function of social
institutions Conditions for Social
Coordination as an overarching theme in work on economics, politics and law
What are the interesting trends in Modern Economics? Buchanan 1986
Nobel Prize Winner Emphasis on behavioral
symmetry between economic actors and non-economic actors, in particular political actors in the voting booth, running for office or situated in the bureaucracy Death of Romantic Politics
and the Benevolent Despot Emphasis on exchange behavior
and the institutions within which exchange takes place
Focus analytical attention on the constitutional level – the rules of the game
What are the interesting trends in Modern Economics? Coase 1991 Nobel Prize
Winner Emphasis on how alternative legal
arrangements impact economic performance Demonstrated the intellectual
bankruptcy of Pigovian welfare economics
Focus on the institutional framework within which economic activity takes place
Champion of “dirty” empirical work to get at the contractual record in economic activity.
What are the interesting trends in Modern Economics? North 1993 Nobel Prize
Winner Emphasis on institutions and
institutional change in economic performance Institutions as constraints Institutional change as a shift
in relative prices Importance of cognition in
understanding institutional change Emphasis on economic history as a
research field focused on institutions and institutional change
What is the Value Added of ‘Austrian Economics’? First, intellectual history point
Mises emphasized these points prior to any other thinker in 20th century economics, including Frank Knight
Mises should be recognized as the fountainhead of rational choice theory, new institutionalism and analytical narrative empirical work (friends and foes do injustice to Mises)
Second, the missing element in common understanding of New Institutional Economics Entrepreneurial element in human action and the
competitive market process. Knowledge problems in addition to incentive alignment issues
Behavioral Assumptions and Institutional Deficiency in economic theory
What About Information Economics?
Stiglitz 2001 Nobel Prize Winner Emphasis on imperfect
information and imperfect market structure Critique of Walrasian
economics Presumption reversed – market
failure is the rule, market efficiency is the exception
Relevance of economics to policy world Globalization and Its
Discontent Transition and Development
Economics after a decade
What About Information Economics?
Akerlof Nobel Prize Winner 2001 Emphasis on asymmetric
information “market for lemons”
Broaden economic analysis to address sociological questions Social status, etc.
Austrian Quick Answer to Information Economics Information economics is better than the previous perfect
knowledge economics and as such Stiglitz trumps Lucas as a research inspiring figure Search for Information versus the Discovery and Use of
Knowledge Stiglitz’s critique of Walrasian economics is on target, but he fails
to appreciate the role of disequilibrium prices in coordinating affairs --- in short, he underestimates the learning properties inherent in the economic processes and thus the robustness of markets
Akerlof problems lead to Hayekian solutions – markets are discovery procedures where we learn all sorts of things (like reputation) that enable us to coordinate our plans with others.
‘Austrian’ Theory of the Market Process and Information Economics Kirzner’s emphasis on:
Uncertainty and sheer ignorance as part of the human condition, not assumptions of particular environments – we must always be coping with our ignorance
The role of imperfections in driving entrepreneurial altertness to opportunities for pure profit
The importance of the institutional framework for issues of economic coordination
Other Interesting Trends
Andrei Shleifer – JB Clark Award Work on property rights and
privatization Grabbing hand vs. invisible
hand Work on incentive structures within
markets, non-profits and governments Role of entrepreneurship in
different institutional settings Work on law, politics and finance Work on Institutional Possibilities
Frontier --- *** Work on “inefficient” markets
But effective markets
The New Comparative Economics Framework
Public Predation
Private Predation
Socialism
State regulation
Common law courts
Self-government
Questions: (1) how do you move between different enforcement regimes, and (2) how do you shift the entire institutional possibilities frontier in to get less ‘bads’
Other Interesting Trends: Lab Experiments (continued)
Vernon Smith and Experimental Economics – Nobel Prize 2002 ECOLOGY OF ECON LIFE
(framing issues) Markets are more efficient
than theory would predict Groping market
Trust and cooperation is more common than theory would predict Trust games with
anonymous trading partners
Interesting Trends: Natural Experiments (continued)
Steve Levitt – John Bates Clark Award (2003) Creative and unusual data
collection (hockey, TV, abortion, gangs, and gambling)
Point is to see microeconomics come alive in different walks of life (natural experiments) Situations which
approximate meeting the ceteris paribus clause and thus approximate controlled experimentation
Other Interesting Trends
Theory Economics of Growth and Development
Increasing recognition of the role of institutions and culture in development
Focus on questions of well-being beyond aggregation attempts
Economics of Self-governance Recognition of the role of reputation, norms and conventions
History Analytical Narrative
Use of theory to do history Ethnographic turn
A Snap-shot of the Current Landscape in Economics
Formal Language
Natural Language
UniversalParticular
1940s-1950s
Samuelson –Arrow, Hahn, Debreu
Formalistic Histocism
Game theory (folk theorem)
Market failure theory and information economics
New Institutionalism, including Austrianism
Historicism
Old Institutionalism
1871 – C. Menger
1776 – A. Smith
One set of implications of this change in the intellectual landscape Debate is no longer versus historicists, nor is
it with General Equilibrium Theory Neoclassical Economics is extremely
adaptable and is just as comfortable with formal proofs of equilibrium and it is with formal proofs of multiple equilibria
We have to get more historical before we can re-establish the theoretical perspective
Another Way to Restate the Place of Austrian Economics in the Modern Landscape of Economic Thought If orthodox economics works in a realm where in order to
generate propositions of market efficiency the theorist is required to make simplifying assumptions about agent knowledge and structure, and heterodox economics works in a realm where once these simplifying assumptions are overturned the propositions of market efficiency must be rejected, then Austrian economics can best be understood as deriving propositions about market efficiency within a heterodox problem situation.
Snap-shot of the Problem Situation in Economic Analysis
Simple Problem Situation
Economic Order
NEOCLASSICAL
Simple Problem Situation
Economic Disorder
NON-ECONOMISTS
Complex Problem Situation
Economic Order
AUSTRIAN ECONOMICS
Complex Problem Situation
Economic Disorder
HETERODOX ECONOMICS
How do the ‘Austrians’ Accomplish this? Recognition of a Tripartite Division of Knowledge in Economic
Science Exact theory (apriori – logic of choice) Applied theory (institutionally contingent propositions) Economic History – Public Policy (interpretative understanding)
Uncertainty inherent in all human actions, means that economic actors rely on various norms and institutions to cope with this uncertainty
These institutions work to ameliorate conflicts and promote economic coordination and social cooperation Mises notion of Ricardo’s Law of Association
Conclusion
Economics has moved significantly in an Austrian direction since Samuelson. We should declare victory and stop behaving like we are a side show.
There is still much that the Austrians can add to the conversation. The economic and social world is just too damn interesting and exciting
to let devotion to technique and the incentive system within the modern academy to get in the way of our desire to understand the world.
Economics when done best is exceedingly relevant. To regain our theoretical footing, we must first do more historically
grounded research which demonstrates the interpretive power of the theoretical insights of the Austrian School.