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Austrian vs Neoclassical Axioms

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Solid_Choke posted on Sat, Nov 7 2009 5:16 PM

The large majority of neoclassical microeconomics can be derived from two principles (or axioms) and a few extra assumptions. It is often said that Austrian microeconomics is certainly true because all of it can be derived from a self-evident axiom.

The two axioms of neoclassical economics could be stated like this:

The Optimization Principle: People try to choose the best patterns of consumption that they can afford.

The Equilibrium Principle: Prices adjust until the amount that people demand of something is equal to the amount that is supplied.

What would be a good way to state the axioms of Austrian microeconomics?

Are they really more reasonable as premises than those that are the foundation of neoclassical microeconomics?

"I cannot prove, but am prepared to affirm, that if you take care of clarity in reasoning, most good causes will take care of themselves, while some bad ones are taken care of as a matter of course." -Anthony de Jasay

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William Barnett II:

The cardinalists . . . claimed that ordinal ranking of bundles could result
in either preference or indifference. (The latter) permitted mathematical
functions to be used since indifference means equal utility and thus,
implies cardinal numbers.

If this turns out to be true I will adopt the Austrian position on this issue, but I first need time to find some Neoclassical sources that deal with this problem (which I think might be a misunderstanding of Pareto). I don't know why he claims that indifference implies cardinality, but I am willing to look up the Rothbard text he cites and read for myself. I will address the remainder in a later post.

Okay it seems that even if indifference implies cardinality then BOTH Austrian Microeconomics AND Neoclassical Microeconomics have a problem that needs solving. In Socratic Puzzles, Nozick shows that the concept of commodity relies on indifference:

Robert Nozick:

Indeed, the Austrian theorists need the notion of indifference to
explain and mark off the notion of a commodity, and of a unit of a
commodity. . . . Without the notion of indifference, and, hence, of
an equivalence class of things, we cannot have the notion of a
commodity, or of a unit of a commodity; without the notion of a
unit (“an interchangeable unit”) of a commodity, we have no way
to state the law of (diminishing) marginal utility.

If indifference implies cardinality and Austrian Microeconomics relies implicitly on the notion of a commodity, then Austrian Microeconomics is sneaking in cardinal utility "through the back door".

What do you guys think?

Also, when is someone going to get around to stating the Austrian Microeconomic axioms so that we can compare them to the ones I listed? I would really appreciate it if a self-described Austrian would do this for me so that I can be sure that I am now creating a straw-man.

"I cannot prove, but am prepared to affirm, that if you take care of clarity in reasoning, most good causes will take care of themselves, while some bad ones are taken care of as a matter of course." -Anthony de Jasay

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I meant perfect competition is idiotic when taken to be a representation of anything in the real world, or something to which policies must be adjusted (and the textbooks do often give the impression that it is its purpose, with 'countervailing' factors such as the benefits accruing from monopolistic firms drawing from Hayek and others.) I think Rothbard pretty much eviscerated monopoly theory on the whole (aside from references to legally granted monopolies.) The differences exist, but yes when it comes to micro Austrian econ is not so divergent from neoclassical econ as it is when it comes to macroeconomics. There are differences, but nuanced.

On indifference, give this a read.

Freedom of markets is positively correlated with the degree of evolution in any society...

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To a large extent, Neoclassical Microeconomics has moved away from GE and towards a more game-theoretic approach which is much more realistic (especially in markets with a relatively small number of firms).

I don't know if game theory is really that much better than GE thinking. It tries to set rules of the game, then looks at optimizing solutions. The problem is that the rules of the the game are created endogenously and are forever changing. Trapping agents within artificial constraints doesn't really give insight into real world problems. In addition, many games are simply non-computable, including some simple ones. How should this be interpreted?

If we have to use math in economics (note: I'm not saying we should), then we would probably want to look at more complexity based work, that emphasizes the unpredictable nature of economies.

Also, I would like to mention that there are economists who dispute modern micro, however you would like to define that. It isn't just Austrians.

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I'm bumping this.

If "neoclassicals" actually believe this, and would agree with this - there is no possible it is superior to Austrianism, nor is it doing economics

"As in a kaleidoscope, the constellation of forces operating in the system as a whole is ever changing." - Ludwig Lachmann

"When A Man Dies A World Goes Out of Existence"  - GLS Shackle

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