Friday, March 8, 2019

I'm An 'Austrian' Economist: What Does It Mean?

Walter Block
By Walter Block

In addition to being a libertarian in political philosophy, I am also a member of the Austrian school of economics.

Austrian economics has nothing to do with the economy of that European country. It is so named because its founding fathers all emanated from that part of the world. They include such European scholars as Carl Menger, Eugen von Bohm-Bawerk, Ludwig von Mises, Friedrich A. Hayek (Nobel Prize winner in the dismal science in 1974) and Joseph Schumpeter.  Murray N. Rothbard and Israel Kirzner are the most high profile American Austrians. In like manner, the Chicago School of economics does not at all focus on the commercial well-being of that particular city. Rather, this perspective too takes its name from the fact that its progenitors were all in some way associated with the University of Chicago. Luminaries include Aaron Director, Henry Simons, Milton Friedman, George Stigler, Gary Becker and Ronald Coase.

Austrian economics diverges in several important ways from that followed by our colleagues in the mainstream of the profession. First and foremost, the praxeological school, at least insofar as I see matters, belongs in the realm of logic; it is not an empirical science. For the mainstream neo-classicals, logical positivists to the core, the be-all and end-all of proper empirical science is falsifiability and testability. All claims in economics are only tentative hypotheses, which stand or fall if and only if they can withstand empirical testing. While Austrians also entertain such hypotheses, we also deal in the realm of apodictic necessarily true laws. They cannot be tested nor falsified and yet are absolutely certain.

Let us consider some examples of the latter. 1. Whenever voluntary exchange occurs, both parties necessarily gain, at least in the ex-ante sense of anticipations. Joe sells an apple to Mary for one dollar. At the moment this commercial transaction takes place he values the money he receives more than the fruit he gives up. She more highly regards the foodstuff than the price she has to pay. We do not have a clue as to why these two folks have these preference rankings. It may be that the ordinary motives are in play. She sees a bargain, he fears the rotting process will soon occur, rendering his goods valueless; a dollar is far better than nothing. For all we know, however, the price is so low because he wants to ingratiate himself to her so that he can date her. Or perhaps she is poor, and he is “selling” her this apple to promote her self-esteem and is really doing this out of charitable impulses. But there is no testing possible here. We know it is undeniably true that both parties think this transaction will benefit each of them. Why else would both agree to the deal were it not for the fact that they hope to thereby improve their economic situations?

Other such synthetic apriori claims in the Austrian lexicon include the following: In equilibrium a minimum wage will create unemployment for all those whose productivity is lower than the level stipulated by this law. This cannot be tested because we are never in full equilibrium and would not know it even if we were. Here is another: there is a tendency for profits to equalize in all industries, assuming equal risk. This claim is not falsifiable since if at any given time profit equality has not been attained, this can be because the tendency has not yet fully worked its way there. In all such cases, these laws are logically undeniable and yet give us important knowledge of how the economy actually functions. They are not mere definitional tautologies.

Austrians join their mainstream brethren in subscribing, also, to empirical hypotheses. All is not apodictic law. For example, if the price of bananas rises by 10%, we know that fewer of them will be purchased, other things equal (downward sloping demand curves are yet another economic law -- poo on the Giffen good; look it up). But the only way to determine its elasticity (by what percentages purchases will fall) would be via empirical econometric research.

For our pains in these matters, many mainstream economists look upon Austrians as a cult, or a religion, and they do not mean the latter in a complimentary manner. My estimate is that members of the praxeological school account for, oh, 1% of the dismal scientists in the U.S. but, at least we are probably ahead of the Marxists, of whom there are nowadays precious few, thank goodness.

Austrians and their neoclassical cousins diverge on a number of other issues. Many of them are technical and esoteric. The former reject indifference and indifference curves, transitivity, cardinal utility (we only allow for the ordinal variety thereof), the Phillips Curve, the Giffen good, etc. Of greater import for public policy analysis, the praxeological school rejects in its entirety the doctrine of market failure (monopoly and hence anti-trust laws, externalities, public goods, asymmetrical information, etc.), while the mainstream positively revels in all these concepts.

Perhaps the most important element of this intellectual diversity may be found with regard to macroeconomics, money, inflation, unemployment and the business cycle. For the Keynesians, the free market continually veers from unemployment to inflation and back again. In their view, the business cycle is endogenous to the marketplace; the latter causes the former. In the Austrian perspective, in contrast, these oscillations are a result of unwise government policy (there ain’t no such thing as wise government policy), mainly perpetuated by the central bank, and in our case, the Fed. Take a peek at the ups and downs of GDP and its growth or unemployment, in the roughly 100 years before and after the founding of the Fed in 1913. The latter looks like a roller coaster, while the former is far more sedate. And virtually all of the variations in the earlier period were the result of (lesser) government interference with the free enterprise system.

Are all Austrians libertarians? No. Most of us are, but there are some few who are not. Are most libertarians Austrians? No. Of course not. In order to be an Austrian economist one must be an economist in the first place, and most libertarians are not.

Walter E. Block, Ph.D is the Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University, New Orleans.

The above originally appeared at Real Clear Markets and is reprinted here with  the permission of the author. 

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