Thursday, January 17, 2019

Problems With Bryan Caplan's "Why I'm Not an Austrian Economist": Part 2

By Robert Wenzel

This is Part 2 of my comments on Bryan Caplan's essay, "Why I'm not an Austrian Economist."

From the point I left off in Part1, Caplan continues on with his attack on Rothbard.

He writes:
Rothbard's rejection of the utility function approach led him to make strange ad hoc concessions to it elsewhere in his writings. Using his value scale approach, Rothbard was able to derive the laws of demand and supply as theorems. But then inexplicably in his later discussion of labor and land, Rothbard conceded the theoretical possibility of "backward" bending supply curves. Furthermore, in his discussion of the economics of taxation, Rothbard admits the theoretical possibility that greater taxation of labor income could induce an increase in labor supply - even going so far as to mention a "substitution" and an "income" effect which his initial treatment of utility theory and demand utterly failed to mention. What is interesting is that Rothbard was unable to derive the substitution and income effects from his value scale approach. Rather, he borrowed it from the standard utility function analysis, which shows that there are two different channels by which a price change induces a change in the quantity demanded. Thus, not only does Rothbard inappropriately dismiss the neoclassical approach to utility theory, but deemed it sufficiently fruitful that he borrowed its implications on an ad hoc basis...
Strange ad hoc concessions to the utility function approach? Inexplicably? In his later discussion ...conceded?

These points are just way off.

It is bizarre for Caplan to claim that Rothbard "conceded" that a backward supply curve could occur. Rothbard never wrote anything to imply that he held a view that a backward supply curve could not occur in labor and land markets. Is Caplan just using a loaded term? Or maybe he has a problem with the fact that Rothbard did not write about backward supply curves at the same time he wrote about supply and demand curves in general. It is difficult to know. Caplan is very hazy on the charge.

As for the fact that Rothbard wrote about backward supply curves in a later chapter of Man, Economy and State, it does not mean that this somehow indicates he conceded on a point he didn't cover earlier.

Rothbard's early discussion (pages 121-156) in MES of basic supply and demand curves, without discussing the potential for backward supply curves for labor and land, is classic textbook stuff.

In  Economics, Samuelson discussed backward supply curves only in an appendix. Krugman-Wells in Economics discuss standard supply curves on pages 76-81. They discuss backward supply curves on page 566. Greg Mankiw in Principles of Economics discusses supply curves on pages 73-76. He discusses backward supply curves on page 476. In Rothbard's Man, Economy and State, his discussion of backward supply curves came in at page 572.

Rothbard discusses the backward supply curve with the discussion of labor, just like Krugman-Wells and Mankiw. Just call him Mr. Conventional.

He also wrote very clearly on the backward supply curves and did not have to use the utility function approach as Caplan claims:
One of the complications in the analysis of labor is the alleged occurrence of a “backward supply curve of labor.” This happens when workers react to higher wage rates by reducing their supply of labor hours, thus taking some of their higher incomes as increased leisure...A backward supply curve might conceivably take place for a land factor as well, when the owner has a high reserve demand for the land in order to enjoy its unused (in the catallactic sense) beauty. In that case, the land would have an increasing marginal disutility of visual enjoyment forgone, just as leisure is forgone in the process of expending labor. 
As far as Caplan's claim that Rothbard "mention[s] a 'substitution' and an 'income' effect which his initial treatment of utility theory and demand utterly failed to mention."

What law is it that requires Rothbard to mention these in his initial chapters? Is Caplan ditching Austrian economics because he does not like the way Rothbard structured the content of his book?

Again, not everything is packed into the first chapters.

Further, Rothbard sees a problem with the neoclassical utility function approach and the way its proponents use the terms 'substitution' and an 'income' effect as part of the theory.

Rothbard only uses the terms at a later point where they do fit from his non-neoclassical utility function perspective. That is, he consistently and completely sticks to the perspective of acting man making decisions based on a value scale. That he uses  'substitution' and an 'income' effect in the context of his acting man analysis does not mean he has suddenly left the reservation and adopted the neoclassical utility function approach.

It is clear as day when seen in context how he is using the terms:
 [A]tax on money incomes creates both a“substitution effect” against work and in favor of leisure (or against saving in favor of consumption) and an “income effect” working in the opposite direction. This is true, and in rare empirical cases, the latter effect will predominate. In plain language, this means that when extra penalties are placed upon man’s efforts he will generally slacken them; but in some cases, he will work harder to try to offset the burdens. In the latter cases, however, we must remember that he will lose the valuable consumption good of “leisure”; he will have less leisure now
than he would have if his choices were still free.
This is far from the sense in which neoclassical utility function theorists use the terms. For Rothbard, it continues to be about changes in value scale rankings. In this case because of changes in the tax environment.

A tax may cause some to work less. That is a simple ranking change. Less money less work, substituted with leisure. (The "substitution effect"). However, for some, maintaining a given level of income after higher taxes is more important. Thus they work more, ranking work higher (The "income effect").

Part 3 next week Wednesday.

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

Robert Wenzel is Editor & Publisher of

1 comment:

  1. It is unfortunately how uncharitable, and mis-uninformed, Caplan is with his criticisms of Rothbard. Thank you for taking the time to provide these concise and clear rejoinders.