Wednesday, January 16, 2019

Problems With Bryan Caplan's "Why I'm Not an Austrian Economist": Part 1

By Robert Wenzel

Bryan Caplan's essay, "Why I'm not an Austrian Economist," is apparently getting a second wind on the internet.  A version of the paper was first published in 1997 in the Southern Economic Journal and Caplan published a more expanded version at a later date on his website.

I have received a slew of emails linking to the website version, with correspondents asking me to comment on the paper, so I am guessing the paper has received prominent mention at some Austrian school site.

I will take up an analysis of the full Caplan paper except for one section, the section on Austrian school business cycle theory. I consider most of his paper weak, if not odd, and the ABCT section is no different. However, I am in the process of doing extensive thinking on ABCT with a planned paper that will cover much of the topics that Caplan raises and much more. So I will leave the commentary on the ABCT section for my future paper.

Let us begin.

Caplan starts with this:
Whatever Austrian economists have that is worth saying should simply be addressed to the broader economics profession, which (in spite if itself) remains eager for original, true and substantive ideas.
This is absurd. Any dominant school of scientific thought is essentially a closed shop. (See: Kuhn: The Structure of Scientific Revolutions). It is certainly so in economics. The great Austrian economists of the second half of the 20th century were stopped at the door of the top academic universities in America.

Ludwig von Mises was only able to gain an unpaid teaching position at New York University (funded by outside supporters). Friedrich Hayek was blocked from a position in the economics department at the University of Chicago and was bounced to something called the "Committee on Social Thought" at the university and his pay also came from an outside sponsor.

Murray Rothbard taught for decades at a very low salary at an engineering school, Brooklyn Polytechnic Institute. And then he got his "big break," an endowed chair at the University of Nevada at Las Vegas. Yes, the "What happens in Vegas stays in Vegas," Las Vegas. How appropriate.

Attempts were even made to stop Rothbard from getting his PhD because of his dissertation on the panic of 1819.

That's how these giants were treated. And Caplan admits they made contributions:
Mises and Rothbard spent the bulk of their careers making substantive contributions to economics...
Then Caplan makes his first serious attack at Rothbard:
[Rothbard] simply does not understand the position he is attacking. The utility function approach is based as squarely on ordinal utility as Rothbard's is. The modern neoclassical theorists - such as Arrow and Debreau - who developed the utility function approach went out of their way to avoid the use of cardinal utility. Let a neoclassical theorist say "bundle one offers utility of 8, while bundle two offers utility of 7," and Rothbard concludes that he believes in cardinal utility. But the language here is technical; to parse it, you must return to the underlying definitions. Upon doing so, you will find that the meaning of "bundle one offers utility of 8, while bundle two offers utility of 7" is nothing more or less than "bundle one is preferred to bundle two." A utility function is just a short-hand summary about an agent's ordinal preferences, not a claim about "utils." 
There are two problems with Caplan's argument here.  The first is that it is not true. Some economists use and have used utils or utility in an actual quantitative cardinal sense to assume definite quantitative amounts of utility.

The Nobel Prize winner Paul Samuelson, who knew some about modern neoclassical theory. wrote in his classic textbook, Economics (my highlight):
The most daring psychologists and economists assume that the consumer experiences a definite amount of satisfaction or anticipated pleasure when confronted with a batch of goods, This definite psychological quantity or sensation is given a the name "utility."
The second problem is that if we assume for a moment that Caplan is correct and that all economists use utility and numbers together but still view things in an ordinal sense, then Caplan is saying Rothbard is correct. That utility can be ranked only in an ordinal fashion. So what is the problem?

If anything, Rothbard's ranking system is clear, while those who introduce numeric numbers, that as Paul Krugman (Krugman-Wells: Economics) puts it are "hypothetical units" called utils, they are flying way off the reservation that can easily mislead and must eventually come back to Rothbard's point that utility is about ranking and there are no measures, hypothetical or otherwise.

Caplan wants to abandoned Austrian school economics for this coprolite?

This, by the way, is a perfect example of the much misunderstood Occam's razor.

Many believe that Occam's razor states that when two opposing conclusions are reached by different theories, then one should adopt the theory that is the simplest. This is inaccurate.

Occam's razor is called lex parsimoniae, or "the law of briefness" or, to be less brief about it, it means more things should not be used than are necessary.

That is, if you have two theories that explain something the same way, you go with the one that is simplest.

In the case of utility, Rothbard's explanation that you rank choices is correct and the simplest. The neoclassical formulation is either inncorrect, when it includes quantitative measures to utility theory, or it gets to the same point as Rothbard in a much more complex way by assuming hypothetical units and then using mathematical operations on these hypotheticals (with footnotes!) and then to "parse it, you must return to the underlying definitions" to get to the same place as Rothbard who simply says, "man ranks his choices."

Part 2 tomorrow.

The full "Problems With Bryan Caplan's 'Why I'm Not an Austrian Economist'" series is here.

Robert Wenzel is Editor & Publisher of

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