Friday, August 28, 2015

The Debate: Austrian Economics vs Neoclassical Economics

Dr. Walter Block responds to an email question  Original questions in red, Block's responses in blue: 

-----Original Message-----
Sent: Wednesday, August 26, 2015 4:57 PM
To: Walter Block
Subject: Austrian economics vs neoclassical debate


A. I watched your debate with Bryan Caplan. I was not impressed with him. I believe Mises was correct that economics is a science of logical deduction.
<< thanks. Here 'tis: for those who have not seen this.

B. Regardless, isn't it true that Hayek rejected the entire methodology and became an empiricist?

<< Yes, Hayek did reject the praxeological method; thus, he was an empiricist.  See this on that: Knott, Adam. 2012. "Hayek and Praxeology." November 13

However, even though he rejected what I see as the core of Austrian economics, he made magnificent contributions to Austrian business cycle theory. I'm a big tent kind of guy on matters of this sort, so I consider him an Austrian economist. Well, at the very least, a quasi Austrian. He wasn't all that good on libertarian theory, however:

Block, 1996, 1999, 2006; Knott, 2012; Rothbard, 1980, 1981-1982, 1998 (ch. 28)

Block, Walter E. 1996. "Hayek's Road to Serfdom," Journal of Libertarian Studies: An Interdisciplinary Review, Vol. 12, No. 2, Fall, pp. 327-350,; reprinted in Ama-gi: Journal of the Hayek Society at the London School of Economics, Vol. 1, No. 1, pp. 22-25

Block, Walter E. 1999. "The Gold Standard: A Critique of Friedman, Mundell, Hayek, Greenspan from the free enterprise perspective," Managerial Finance, Vol. 25, No. 5, pp. 15-33,

Block, Walter E. 2006. "Fanatical, Not Reasonable: A Short Correspondence Between Walter E. Block and Milton Friedman (on Friedrich Hayek 's Road to Serfdom)." Journal of Libertarian Studies, Vol. 20, No. 3, Summer, pp. 61-80;

Rothbard, Murray, N. 1980. "Hayek On Coercion and Freedom."  Literature of Liberty, Winter, pp. 53 54.

Rothbard, Murray, N. 1981-1982. "Hayek's Denationalised Money," The Libertarian Forum, Vol. 15, Nos. 5-6 (August-January), p 9;

Rothbard, Murray N. 1998 [1982]. The Ethics of Liberty, New York: New York University Press. (chapter 28)

C. Since praxeology uses logic to reach economic truths, doesn't the fact that Mises and Rothbard disagreed on the necessity of a state mean that one of them made a logical error?

There is an important distinction that must be made between normative and positive economics. Only the latter concerns "economic truths." But, whether a state is necessary is really a normative question. Thus, I see no necessary conflict between Mises and Rothbard.

D. Thanks, I appreciate your time. I'll try to stop e-mailing you so frequently!

<< no problem. I enjoy answering very good questions such as yours.

PS This Keynesian has done a lot of work exploring the different factions within the Austrian school. His blog is interesting.


  1. Adam Knott is (so far) one of the unsung greats who has fearlessly followed praxeology as far as he can go with it. I have had several meaningful exchanges with Adam.

    He rightly asks the question, if praxeology is the science of all human action (not just economics) then why has so little progress been made using this method in other areas of the social sciences? Was Mises wrong about this?

    He concludes that Rothbard did use praxeology for his works on economics, but abandoned it very literally and vocally in favor of natural law when it came to other areas. Frankly, he denounced it.

    Rothbard said, in Ethics of Liberty:

    "Value in the sense of valuation or utility is purely subjective, and decided by each individual. This procedure is perfectly proper for the formal science of praxeology, or economic theory, *but not necessarily elsewhere*. For in natural-law ethics, ends are demonstrated to be good or bad for man in varying degrees; value here is objective—determined by the natural law of man’s being, and here “happiness” for man is considered in the commonsensical, contentual sense. (EOL-12)"

    This was a major deviation from Mises' idea that only means could be judged, never the ends. Adam concludes that Rothbard's denunciation of praxeology being the true science of human action, and his being Mises' most famous student, effectively stuck a knife in the heart of praxeology as Mises had conceived it. This is why no progress has been made proving that Mises' ideas could be applied to other areas - but instead has heretofore been limited to economics only.

    Adam, himself, has continued to assess other areas of human interaction and social sciences using the method of praxeology, and has I believe succeeded in extending it considerably.

  2. I forgot the link, if anyone wishes to explore further.

    Where you could read:

    "Thus, owing largely to Rothbard’s misconception of the nature and scope of praxeology and owing to his advocacy of a theoretical paradigm wherein market activity is studied by praxeology and political activity is studied by objective ethics, many were persuaded to ignore Mises’s insight that praxeology could be extended to other realms of human action."

    1. I have been attacked repeatedly by “Lord Keynes” regarding this Hayek quote:

      These discrepancies of demand and supply in different industries, discrepancies between the distribution of demand and the allocation of the factors of production, are in the last analysis due to some distortion in the price system that has directed resources to false uses. It can be corrected only by making sure, first, that PRICES ACHIEVE WHAT, SOMEWHAT MISLEADINGLY, WE CALL AN EQUILIBRIUM STRUCTURE, and second, that labor is reallocated according to these new prices. ****

      The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept. The point I want to make is that this equilibrium structure of prices is something which we cannot know beforehand because the only way to discover it is to give the market free play; by definition, therefore, the divergence of actual prices from the equilibrium structure is something that can never be statistically measured. ****

      In contrast, the modern fashion demands that a theoretical assertion which cannot be statistically tested must not be taken seriously and has to be discarded. As a result of this belief, a theory which, in my opinion, is the true explanation has been discarded as not adequately confirmed, and a false theory has been generally accepted merely because it happens to be the only one for which statistical evidence, even though very inadequate evidence, is available.”

      It means what it says and explains both the necessity of economic calculation AND that the road not taken cannot be statistically measured. Further, I fail to see any FUNDAMENTAL dispute between the Misesian and Hayekian analysis in a manner that helps inflationists and/or interventionists.

      Why isn’t Hayek’s insistence upon giving “the market free play” praxeological? Do we run a bunch of tests first to see if that is indeed true? Doesn’t the nature of that process pre-exist and permeate the subsequent “free play of the market” which is the only way to obtain the necessary information in the form of prices/supply/demand/profit/loss for a productive society?

      Finally, all free market types agree in principle about the NAP. The statists simply insist that there are exceptions to the general rule. That does not refute the general broad areas of agreement.

      BTW, even commies and socialists agree upon the efficacy of the NAP as to THEIR houses, bodies, plans and property.

  3. There is a major conflict between Mises and Rothbard and the Rothbardians need to stop pretending there isn't. He said the state was indispensable. He also edited Human Action, specifically to refute Rothbard, to list courts, police, prisons, and armed forces as the necessary functions of the state, and that taxation to fund these was no injustice. These paragraphs are excluded from the Mises Institute reprint, which is of the 1st Edition. Grrr

    1. Like Rothbard, George Reisman was a student of Mises'. In the bibliography of "Capitalism", Reisman wrote: "[Man, Economy, and State] should definitely NOT be used as a substitute for "Human Action", all claims and recommendations to the contrary notwithstanding."

      In his bibliographical review for "What Has Government Done To Our Money?", Reisman wrote: "This booklet is a brilliantly clear analysis of government intervention into money, which, uncharacteristically, is not marred by any major contradictions on the author's part."

      I've always wanted to get someone to explain Reisman's comments.

  4. "Lord Keynes" of the "interesting" blog still does not understand or does not want to understand the concept of economic calculation. His M.O. in attacking the Austrian School is to find overly broad assertions by the Austrian masters and insist that no further application of BASIC Austrian concepts to new events is allowed. He cannot understand how Keynesian economic miscalculation is related to the socialist calculation problem and has attacked me specifically on this issue while hiding behind his anonymity.

    He refuses to accept that while the "classic" ABCT is the main type of phenomenon resulting from the artificial creation of money and credit under a quasi specie standard, other phenomena such as asset bubbles also result. Under our current totally politicized fiat money regime, there are additional complex monetary phenomena that one must study empirically and to which Austrian concepts and analysis may be applied. But according to LK, only the set-in-stone classic ABCT can be associated with Austrians while Austrian concepts and analysis are completely forbidden for use in analyzing bubbles and/or the more recent funny money phenomena.

    Being the cowardly little **** that he is, he never grapples with the basic analysis of distinguishing voluntary from involuntary exchange or of distinguishing previously distorted prices from undistorted prices. A most ridiculous example of his M.O. of trying to set-in-stone statements of Austrian masters is his insistence that a business the refuses to slash prices but instead slashes production disproves Austrian analysis because Austrian analysis is based upon FLEXIBLE PRICES. Really.

  5. One of the many many "debates" on the subject of LK not understanding economic calculation:

    His M.O. never changes. The socialist calculation debate is set in stone and thus has nothing to do with Keynesian miscalculation. The classic ABCT does not mention asset bubbles per se and therefore Austrian analysis has nothing to say about asset bubbles. Austrians believe in flexible prices and thus examples of production cuts without price cuts refute Austrian analysis.