Well frankly I'm disappointed with the level of economic discussion that is going on with these forums (ever since Dave's been in and out I have no one to argue economic theory with and the only other decent discussion that's been going on is the discourse between myself and Jargon concerning the importance of interest and the production structure). Therefore I'm going to make a highly informal post about what I see as some of the essential aspects of Austrian economics in the way that these ideas have been floating around in my head over the past few months. Being able to contrast the Austrian approach to economics with the mainstream view has given me a much greater ability to contrast and appreciate certain aspects of AE (I'd also like to know Wheylous' views on this).
Within this list I will also include how these factors relate to capitalism, since I think that Austrainism (in the way it has manifested itself, not in its base methodology) can be accurately characterized as a description of the social function of the market economy within society. Indeed the entire path to becoming a supporter of free markets can be described as a path from considering the market as a random, purposeless, and elitist institution, to a spontaneous and purposeful entity which, above all, exists for a reason.
In no particular order:
1. Human action is purposeful behavior
All human institutions and practices within society exist for a reason and people act in certain ways for specific reasons. It does not mean that these reasons are always positive or wise, but it does mean that the market economy emerges for a reason, and this extends to the entirety of the market economy given time.
This contrasts with non-Austrian views of economics which, even though they don't usually explicitly state "people don't act purposefully", nonetheless marginalize the importance of this fact and are inherently predisposed to elitism and viewing the market as a positive entity
2. Human action occurs in the face of an uncertain future and is therefore imperfect.
Neither firms, consumers, nor governments act perfectly, however each individual constantly strives to reach a more perfect state of affairs. This means that the market economy doesn't fit to the relatively static equilibrium that lives within most mainstream conceptions of the market economy, instead the economy is continuously being destroyed and rebuilt. As consumer demand as well as objective productive considerations vary, different processes of production and different quantities of output need to be produced. The invisible hand does not perfectly "grasp" on to a position, rather the invisible hand is forever groping under dim light to find the most perfect level of prices and production.
This is one area where most models of the economy are wholly lacking. Some of the more astute critics of mainstream economics, and therefore capitalism, often base their arguments off of the fact that markets don't act "perfectly", and therefore the government must come in and correct this state of affairs. Yet this critique only works if one believes that the only defense of markets is that they are indeed perfect, or meant to be perfect. This is not the case, however. No human institution is perfect, but few have the inherent tendency towards establishing a more perfect state of affairs like the market economy does. In reality the existence of this imperfect world just means that well functioning markets need to exist in order to react to these changes as smoothly and swiftly as possible.
3. The market economy is the "democracy" of the consumer
This is, in my opinion, the ultimate justification of the market economy. The fact is that companies must ultimately service the consumer or else they will go out of business. There's no way of getting around this. In order to make profits a businessperson has to produce something that consumers want at a reasonable price. What the consumers want are produced, and those companies which are better than this than others receive larger profits. Foolish entrepreneurs go out of business and are replaced by superior counterparts. Even the most vicious of monopolies has an incentive to provide quality products and customer service to increase the demand for what they are selling. Despite the fact that in the short run the capitalists and entrepreneurs control production, it is ultimately buyers on the market who control the entire economy.
If one looks at the companies at the top fortune 500 companies; Mobil, Ford, Walmart, AT&T, Microsoft, Apple, General Electric, CVS, ETC, then one will notice that these are almost exclusively household names that cater to the common man (banks are very high on this list but presumably these are funding other companies such as the ones above), not to the rich and powerful. The market will always tend to allocate resources where they are most desired by consumers, and therefore resources flow from where they are least wanted into where they are most wanted. This inherently means that the market economy is a social system, it is a series of trade that is ultimately not based off of the capitalist, but the consumer and mutual interactions that provide what is desired in larger quantities.
This is not an element that is necessarily lacking in mainstream economics, but the true wonder of it is not emphasized. This is where socialism and statism can result, from the assumption that production is "automatic", and that it will always occur in the way that we have become accustomed to in our vaguely capitalistic society, when ultimately it is only so long as the consumers democracy and effective market structures are maintained that consumers are properly seen to and the most desired goods are ultimately produced. Just as with all human phenomena it is the result of definite human action that will not occur under all conditions, rather a state of very definite conditions continually allow it to occur.
4. Production is a process that always occurs over the course of time
This is an absolutely essential aspect of the Austrian model of the economy, particularly because of the school's emphasis upon the importance of capital (which I'm just going to lump in here). Time is important, time is valuable. I don't care what will be made available for me to consume in a thousand years, and I'm less interested in hearing what you will be able to do for me in 20 years than in a month. Therefore because production takes a decent period of time (as anyone who has ever seen a construction project knows) the market time preference is an essential coordinating factor within the economy. Furthermore capital, one of the only things which separates the economies of modern and primitive societies (the other primary factor being education) takes time to produce. Therefore by taking a longer period of production we can enjoy a greater living standards in the future.
This is why ABCT should really be just filling in intuitional gaps. Since the interest rate is an essential economic indicator in the accumulation of capital, fiddling around with this rate willy-nilly should ring some alarm bells in anyone's head. Since the interest rate is the price of time, and time is one of the few omnipresent aspects of the entire economy, large and unexpected alterations within this may obviously cause large problems.
This is one area where mainstream economics generally overlooks the matter. They overlook the importance of savings and production over time. Beginning with the Classical economists and emphasized by Frank Knight the production structure is generally viewed as "instantaneous" and the way that GDP is calculated (including the emphasis put on this measurement) overlooks the importance of savings in the economy. Capital is also considered important within the mainstream viewpoint, but it is not considered as essential and the only consistent means to a higher living standard, as it is within the Austrian view.
Well those are some of my brilliant insights for the evening. This will also serve as a place for other random rants on these sorts of topics that I might have.
I also invite anyone with casual economics questions to post things here, so as to entertain a bored and lonely young economist.
Why do people double post threads here and on LibertyHQ?!??!
PICK ONE!!!!1!
"PICK ONE!!!!1!"
I swing both ways on this issue. I'm a transforumite
Indeed the entire path to becoming a supporter of free markets can be described as a path from considering the market as a random, purposeless, and elitist institution,
As you pointed out - It's always funny how the opposition will use hierarchy and elitism both to criticize the market and defend itself, anyway that is a topic for another thread: main addition I want to make to this is Ludwig Lachmann used the phrase to describe the market process as a "circulation of elites" - a phrase I intend to steal.
An analogy that I want to start using in someway to contrast the market mentality are the Egyptian pyramids - an inflexible,massively bureaucratic, hierarchy in "perfect equilibrium" that is built off a crazy master/slave mentality with Shackle's kaledic world
"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
"main addition I want to make to this is Ludwig Lachmann used the phrase to describe the market process as a "circulation of elites" - a phrase I intend to steal."
That is very true, and it fits in very well with Mises' full conception of the consumer democracy, where the "leaders" of the market economy are inevitably indirectly appointed by the consumers themselves
Here are some as listed by Peter Klein:
"In short, the core concepts of contemporary Austrian economics – human action, means and ends, subjective value, marginal analysis, methodological individualism, the time structure of production, and so on – along with the Austrian theory of value and price, which forms the heart of Austrian analysis, all flow from Menger's pathbreaking work." (Essay: "Menger the Revolutionary")
What is missing? The notion of exact (as opposed to empirical) laws of social phenomena. The notion of exact, universally valid, laws of social phenomena is the central concern of Austrian economics and is what praxeology is all about. As Menger wrote:
“The aim of this orientation, which in the future we will call the exact one, an aim which research pursues in the same way in all realms of the world of phenomena, is the determination of strict laws of phenomena, of regularities in the succession of phenomena which do not present themselves to us as absolute, but which in respect to the approaches to cognition by which we attain to them simply bear within themselves the guarantee of absoluteness. It is the determination of laws of phenomena which commonly are called “laws of nature,” but more correctly should be designated by the expression “exact laws.” (Investigations Into the Method of the Social Sciences, 1985, p. 59)
This approach is what Menger referred to as theoretical exact science (analogous to mathematics, geometry, formal logic, etc.), what Mises referred to as praxeology, and what Hayek referred to as the Pure Logic of Choice. Mises's praxeology is an extension and elaboration of Menger's social science of exact laws. What separates Misesian and Hayekian Austrian economics is Hayek's contention that exact laws (a priori propositions) are not possible with respect to market phenomena. Thus, the notion of exact laws is central to Austrian economics, not only because Menger defines exact laws as "the aim of this orientation" and not only because they are the primary focus of Mises's praxeology, but also because the scope of the application of exact laws in social theory constitutes the main dividing line between the Misesian and the Hayekian schools of Austrian Economics.
"It would be preposterous to assert apodictically that science will never succeed in developing a praxeological aprioristic doctrine of political organization..." (Mises, UF, p.98)
Found this article from the Concise Encyclopedia of Economics to be interesting, Austrian economists are seen as similar to flat earthers because they reject optimization. Optimization basically means that everyone acts as if they had perfect knowledge right?
http://www.econlib.org/library/Enc1/NeoclassicalEconomics.html
I read an article asking why neoclassicals don't just advocate having the economy run by a really big computer
From the article:
President Richard Nixon, defending deficit spending against the conservative charge that it was "Keynesian," is reported to have replied, "We're all Keynesians now." In fact, what he should have said is "We're all neoclassicals now, even the Keynesians," because what is taught to students, what is mainstream economics today, is neoclassical economics.
Interestingly enough in Human Action Mises said that mathematical economics was the reason people were fooled into believing socialism could have economic calculation. It is not just Marxism or Keynesianism it is the mechanical view of economics that creates so many fallacies. A mechanical view of economics also supports Keynesianism because GDP makes any economic activity look good even wasteful misuses of resources. Why not just run the economy with a really big computer like the Zeitgeist movement advocates
@Adam
If what you're saying is true, then isn't Hayek's attempt at constructing this exactness effectively useless since it can't actually be applied to the market economy?
@Gravy
That's a very good point. One of the things that I've never understood is the idea that neo-classicism and Keynesianism were somehow at odds. Keynesianism is a perfectly logical application of neo-classical economics into the macroeconomic realm with the assumption of sticky wages. Indeed Alfred Marshall was one of Keynes' major teachers.
The Anarch is to the Anarchist what the Monarch is to the Monarchist. -Ernst Jünger
"If what you're saying is true, then isn't Hayek's attempt at constructing this exactness effectively useless since it can't actually be applied to the market economy?"
No, because an individual could apply a set of exact laws to his own "individual action" such as: "If I walk toward a location (action A) I know I will be walking away from a different location (exact law and certain consequence B)."
Thus, Hayek writes that it is only the logic of individual action that is a priori (i.e., to which exact laws apply). The moment you pass from this to the interaction of many people (i.e., market theory) you enter the empirical field (exact laws no longer apply). According to Hayek, in market theory, only empirical laws apply: If X is done, then Y may happen or Y may not happen.
(see Hayek on Hayek, p. 72)
(see also Hayek, "Economics and Knowledge")
What would his rebuttal to the argument that he is wrong on the grounds that market interaction is just the outcome of the individual behaviors of many people?
Also, how exactly would Hayek apply such laws in an actual field of study? It seems like it would only work with things like maybe consumer theory.
"What would his rebuttal to the argument that he is wrong on the grounds that market interaction is just the outcome of the individual behaviors of many people?"
I explained Hayek's reasoning in this Mises Daily article of last November:
http://mises.org/daily/6248/Hayek-and-Praxeology
In the article it explains in more detail Hayek's argument that praxeology can't be applied to the interactions of a number of people.
"Also, how exactly would Hayek apply such laws in an actual field of study? It seems like it would only work with things like maybe consumer theory."
Well, I assume Hayek didn't think that much important could be learned from pursuing the Pure Logic of Choice in order to understand or describe social phenomena. Because it seems he didn't pursue this line of thinking except for his mention of it in a few essays. Maybe he believed that the praxeological aspect of social science was merely a foundational prerequisite for doing empirical field study; a logical exercise we do before our actual empirical social science. One should perhaps ask a qualified Hayekian how Hayek envisioned applying his Pure Logic of Choice to social phenomena.
I always see a lot of threads and even journal articles where Austrians note how they really "get" uncertainty and dynamics and that all of this stuff is ignored in mainstream econ models. On the whole, I think this is totally untrue, but say that it was not. What are you really saying in this thread?
You are saying that Austrian economists incorporate better assumptions into their models than mainstream economists. They assume humans act purposefully in a world where outcomes are uncertain and production takes place over time. And that this strikes you as more realistic.
But, if changing these were truly different assumptions and these differences really mattered, Austrian models should yield different results than mainstream models, right? Are you sure that is the case?
Stick to microeconomic models, say the model for consumer behavior. The mainstream model of consumer behavior predicts that if you increase the price of a product, the quantity demanded for that product will decrease (except under very special circumstances). By contrast, some Austrian economists say that if you increase the price of a product, the quantity demanded for that product will decrease (except under ver special circumstances). http://web.missouri.edu/~kleinp/misc/giffen.pdf
Of course, note that I choose my language carefully there. I only say "some Austrian economists say" and not say "the Austrian model of consumer behavior", because no such model exists. As best I can tell, there are lots of economists that self-identify as Austrian, each with their own way of analyzing consumer behavior that may contradict each other. For example, as I've noted in several other threads, some Austrians claim there is never any circumstance where an increase in price will lead to an increase in quantity demanded.
But let's move on from consumer behavior. What about how prices are determined in a competitive market? The mainstream model says price is determined by the intersection of supply and demand. By contrast, the austrian model says price is determined by the intersection of supply and demand. GROUND SHATTERING DIFFRENCES!
Now, I know Austrians like to pat themselves on the back and say they focus more on the "process" of how price is determined. But this undeserved self-congratulations. If you read MES, Rothbard's explaination for how prices are determined doesn't sound much different from the story you hear in undergraduate textbooks where the process is compared to an auction (consumers "bidding up" prices and all that). And at higher levels of study, mainstream economists certainly move beyond this simple story. http://mises.org/rothbard/mes/chap2b.asp#_ftnref2
Now this post is way too long and it is way too late. But my point is that you can make sweeping statements about how Austrians don't assume away the complications of reality and that they actually deal with uncertainty and all that more directly than mainstream economists. All I know is that when I look at individual microeconomic models, the differences are less striking than the similarities.
I guess what I am really saying is don't tell me how Austrians make different assumptions. Tell me how making those different assumptions MATTERS. Where does it lead Austrians to different conclusions than mainstream economists??? If you had to constrict yourself to microeconomics, I think you would be hardpressed to find major differences between mainstream and Austrian econ.
Ambition is a dream with a V8 engine - Elvis Presley
1. That is analogous to saying calculus is unimportant, because 2+2=4 in arithmetic, and 2+2=4 using calculus.
2. I thought it well known that the micro is the same more or less, the differences being in macro.
3. In any case, here's a difference with regard to supply and demand curves. The quotes are from Prof. Shostak.
Using the supply-demand framework for a particular good, mainstream economists proceed further and introduce supply and demand curves for the whole economy. They hold, for example, that if the economy is underperforming, then what is needed is a bolstering of demand by means of fiscal or monetary policies. For a given supply curve, they contend, this will push the demand curve to the right, thereby lifting overall output. Needless to say, the supply-demand framework provides the rationale for government and central bank interference with businesses.
In other words, the mainstream here is ignoring the fact that humans act, that human action is what determines economics. Just shift the demand curve to the right with some govt spending and you're good to go. Supply will increase automatically, magically, as written in the Holy books. You can't argue with a graph. It's pure mathematics, man, sheer science.
We'll quote how Prof Shostak introduces the human action understanding of economics to blow the magical thinking out of the water:
Also, we have seen that, in reality, it is producers that initiate the introduction of new products. They set in motion increases in goods and services, and not consumers as such. Producers present new products, so to speak, to consumers who, in turn, by buying or abstaining from buying, determine the fate of products. Hence there is no such thing as an autonomous demand that somehow triggers supply.
4. I remember seeing as well that one of the fundamental tools of economics [is it the law of supply and demand?] has no proof in mainstream economics, but provable rigorously with AE. Anyone able to help me out here?
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
You can prove 2+2=4 using calculus? Interesting.
Anyways, I want to make one thing clearer about my original post for anyone else that may care to comment (since looking back it wasn’t as clear as I wanted to be). Note that I explicitly say that I do not think the assumptions Neodoxy mentioned are that different from the assumptions that mainstream economists make in their models. It is true that the way he (and most Austrians) state these assumptions is much vaguer and less informative than the way mainstream economists would state them, but I will get to that in a second.
For the sake of argument, I say let's assume that mainstream economists ignore all these things he mentions. Then I ask, do the conclusions of Austrian models differ from their mainstream counter parts? I show at least two examples where they don't. The point of that comparison isn't exactly to say assumptions don't matter. Part of what I'm trying to say is that you should double check you are actually making different assumptions than your mainstream counter parts.
Of course, another part of what I was saying is that it is often hard to tell if Austrians are making different assumptions, because they often describe their models in such vague terms. For example, Neodoxy says that Austrians recognize we live in a world of uncertainty. Mainstream economists recognize this too, but they also recognize that sometimes uncertainty is not a dominant feature of the behavior we are trying to explain. I think this is especially true for modeling simple consumer choices like how much jam to buy at the store. In the real world, there is some uncertainty about the quality of the jam you are buying and the likelihood you will actually make it back to your house alive and not die in a car accident. But, mainstream economists explicitly abstract away from these uncertainties because for many choices the uncertainty is just too small to really matter for what we are concerned with answering. Of course, Austrian economists do this too. It just harder to know what they are assuming because they don’t have to spell it out. IMO this is probably why there isn’t really a consensus around an Austrian model of consumer behavior. How can you build a consensus if you are not 100% sure what the other person is saying?
But I was not just saying that Austrians make the same assumptions as mainstream economists. I do recognize that there are cases where Austrians make explicitly different assumptions than mainstream models. For example, I have heard people complain that the amount of goods being bought and sold are discrete and not in continuous quantities (i.e. you can only buy 1 jar of jam not 1.153 jars). This is true. But does this assumption actually lead you to different conclusions than if you assumed continuous quantities? In some cases maybe. But in most cases not really.
So what do you gain from making this assumption except that you *feel* like your model is “more realistic” (except for all the other ways your model may be unrealistic)? Anyways, just somethig to think about.
Can anyone explain what optimization is because I thought it meant that people act like they basically know everything sort of like dispersed knowledge. In the article I posted one of the main reasons Austrians are seen as flat earthers is because they don't believe in optimization
After all I would assume to do something optimally you would have to have perfect knowledge of all factors involved
But to the extent these schools reject the core building blocks of neoclassical economics—as Austrians reject optimization, for example—they are regarded by mainstream neoclassical economists as defenders of lost causes or as kooks, misguided critics, and antiscientific oddballs. The status of non-neoclassical economists in the economics departments in English-speaking universities is similar to that of flat-earthers in geography departments: it is safer to voice such opinions after one has tenure, if at all.
In many ways. For example. The integral of the constant function F=1 from zero to four equals the integral from zero to two plus the integral from two to four. [This does not assume two plus two equals four, but follows from the linearity of the integral functional]. The integral form zero to two is two, and from zero to four is four. [This too, does not assume two plus two equals four, but is a property of they integral functional].
The integral from two to four can be evaluated from first principles by dividing it into two equal squares of dimension one by one. [This assumes one plus one equlas two, but not does not use the fact that two plus two equlas four]. Put all the above together and get 2 plus two equals four.
Smiling Dave:You can prove 2+2=4 using calculus? Interesting. In many ways. For example. The integral of the constant function F=1 from zero to four equals the integral from zero to two plus the integral from two to four. [This does not assume two plus two equals four, but follows from the linearity of the integral functional]. The integral form zero to two is two, and from zero to four is four. [This too, does not assume two plus two equals four, but is a property of they integral functional]. The integral from two to four can be evaluated from first principles by dividing it into two equal squares of dimension one by one. [This assumes one plus one equlas two, but not does not use the fact that two plus two equlas four]. Put all the above together and get 2 plus two equals four.
Student,
I've always wondered when we'd finally clash on a real economic topic, so I've pulled out a lot of stops for you, although what came out was generally incoherent. Let it begin.
I think that you make some good points, but I also feel as though there's a problem on both ends on the matter of what the real consensus of the various schools necessarily are. In particular I think that it's very important to realize that there is no such thing as a perfect consensus in any school of economic thought, and therefore I believe that whatever either of us points to as "the consensus" is going to be somewhat arbitrary and anecdotal. Furthermore I have to say that unfortunately I have a very limited idea of what "modern Austrianism" really means, particularly in terms of the knitty-gritty aspects of certain issues. While I've read enough by or about the big Austrians, I've read relatively little modern theory, although I want to take a look into recent publications from the Journal of Austrian economics to get a better idea of what it is that modern Austrians really do. Meanwhile I have been exposed fairly thoroughly to modern mainstream economics, so I feel that I have a much greater grasp on what that is, although what I've noticed is that there's a much less consensus on a lot of issues in the mainstream than there is within what I perceive to be Austrianism itself.
I should also note that within the umbrella of what we consider mainstream economics there are a lot of essential elements of AE that are "somewhere" within neoclassical economics, however these are not given nearly the emphasis that they are in Austrian economics. One thing that you can say about Austrianism is that it does start from the basics and work up, the basics being economic methodology. This is one thing that I've never seen emphasized in any economics course I have ever taken. Never has the question been answered "how can we know anything about economic phenomena". This leads to the first obvious difference that Austrians (with a few notable exceptions) avoid mathematical models, whereas mainstream economics revolves around mathematical models. If you want one major way that the Austrian opinion of uncertainty plays into things, then this is one major way that you have it. Furthermore the fact is that, as I stated in my original post, I have never seen a mainstream professor present the market economy as something that struggles towards equilibrium and that equilibrium is never something that is fully reached, that the economy as a whole is always struggling to reach equilibrium and that this is continually broken, and I have also seen this uncertainty surrounding real values and the uncertainty of these values in the market used as the basis for attacks on the capitalist economy. These attacks appear to me to be, ironically, wholly valid when they are levied at the moderate neoclassical economists who usually advocate for a moderation of the market economy with government intervention, but these attacks are pretty useless when they are used against the libertarian Austrian school that fully embraces capitalism.
I also think that it's unfair to sweep aside Austrian macroeconomic theory when talking about differences between the two schools since, well, that does account for about half of all economic studies (I consider all mainstream macroeconomic schools of thought (with the possible exception of real business cycle theory) to be derivatives of Keynesianism which is in turn a derivative of neoclassical economics). Since production structure analysis is a massive part of Austrian theory, it's unfair to overlook it (I'm assuming that this is classified under Austrian macro?). Another important area where neoclassical and Austrian economists adhere to different beliefs is in the area of economic calculation. In mainstream models it's never really addressed, which is a massive failure since calculation is what makes the entire economy possible (see the socialist calculation debate) and there are very real outcomes of interfering with this form of calculation. This could well be considered an outcome of Austrianism's massive emphasis upon subjectivism. This in turn leads to differing views in areas of social welfare, particularly when we look at the insane mainstream belief that we can actually calculate things like the real value of public goods in the absence of displayed preference. Interpersonal utility analysis also appears to be a real thing within neoclassicism, although I could be wrong there.
So I suppose what you could say is that a huge amount of the difference just comes from where emphasis lies, and this has deep political implications on things, and since I'm probably waay too into the political side of economics, this is a large part of what I see. I would also like to note that what you are looking at, such as price determination, is an area where Austrianism and neoclassicism are practically identical in a lot of respects. In particular the sections that look at consumer theory, production functions, and cost curves would in no way be out of place within a microeconomic textbook, albeit a very good microeconomic textbook. The very attitude of economic inquiry within Rothbard's text is also extremely different than what I've seen within any sort of neoclassical work. while Rothbard's book is filled with life and a more fluid look at human behavior, what I've seen out of neoclassicism seems to be extremely rigid, mechanistic, and non-human. This might not even lead to any differences in the description of events, but it is a difference. Indeed the fact that Austrians and neoclassicals would have similar views on the matter of price determination, since this was the "epicenter" of the neoclassical synthesis. Indeed much of the subjectivism and marginalism that exists within neoclassicism originated with Austrianism. I've even seen Austrian economics called a type of neoclassical economics, something that I don't necessarily disagree with (beyond the matter of titles).
Well now, I don't even know how one would go about addressing this post, so I'll be interested to see any responses. Nontheless these are some of my random thoughts on your challenge.
Dave,
On point 3. I think that that's really a macroeconomic issue, or at very least the necessary microeconomic "fix" to allow for the macroeconomic issue to be a thing. I've never heard a microeconomics professor or text talk about a chronic "underdemand" for any particular good. The idea of insufficient aggregate demand originate in macroeconomics. Therefore this must imply that on a microeconomic level demand is too low, it's not really a matter of microeconomic supply/demand theory except insofar as it leads into macroeconomics.
I think it depends on what you mean by supply and demand (in terms of whether or not this can be proven in mainstream econ). I think that a proof similar to what an Austrian would say wouldn't be out of place in a neoclassical description of the matter. I'll crack open my principles book later on and see what it says on the matter. I also find your second response amusing when we consider the breadth of Student's post.
In many ways. For example. The integral of the constant function F=1 from zero to four equals the integral from zero to two plus the integral from two to four. [This does not assume two plus two equals four, but follows from the linearity of the integral functional]. The integral form zero to two is two, and from zero to four is four. [This too, does not assume two plus two equals four, but is a property of they integral functional]. The integral from two to four can be evaluated from first principles by dividing it into two equal squares of dimension one by one. [This assumes one plus one equlas two, but not does not use the fact that two plus two equlas four]. Put all the above together and get 2 plus two equals four.
Start talking about economics, end up talking about how 2+2=4...
Because why not?
NEODOXY. LET'S DO THIS!
In particular I think that it's very important to realize that there is no such thing as a perfect consensus in any school of economic thought, and therefore I believe that whatever either of us points to as "the consensus" is going to be somewhat arbitrary and anecdotal.
Fair enough. Consensus is probably the wrong word. But I would say that at the very least the neoclassical model of static consumer behavior could be considered a "textbook" model that every mainstream economist must lean and that other models are either extensions (dynamic consumption models) or deviations from (behavioral models) this textbook model. IOW it is a benchmark model that all mainstream economists learn and all consumer behavior models could be compared against. I dont thing Austrians have a similar "textbook" model. I could be wrong.
"I should also note that within the umbrella of what we consider mainstream economics there are a lot of essential elements of AE that are "somewhere" within neoclassical economics, however these are not given nearly the emphasis that they are in Austrian economics..... I have never seen a mainstream professor present the market economy as something that struggles towards equilibrium and that equilibrium is never something that is fully reached, that the economy as a whole is always struggling to reach equilibrium and that this is continually broken, and I have also seen this uncertainty surrounding real values and the uncertainty of these values in the market used as the basis for attacks on the capitalist economy. "
I would agree with that. One thing I do like about Austrians is that they do emphasize the market process toward equilibrium over simply finding equilibrium itself. Like I said earlier, I don't think mainstream eocnomists would disagree with this (and they certainly have models to characterize this process), it is simply not given the emphasis it deserves (even in graduate classes but especially for undergraduates).
"I also think that it's unfair to sweep aside Austrian macroeconomic theory when talking about differences between the two schools since, well, that does account for about half of all economic studies (I consider all mainstream macroeconomic schools of thought (with the possible exception of real business cycle theory) to be derivatives of Keynesianism which is in turn a derivative of neoclassical economics)."
Well, I don't mean to overlook it per se. I just wanted to focus on micro for two reasons. First, it seems that if Austrians can agree with mainstream economists on micro there is no reason you couldn't develop an Austrian macro model using mainstream micro. So it is less a seperate school of thought and simply one more macroeconomic theory of the business cycle. Second, I personally agnostic on most macro issues (i have no clue uncer what circumstances RBC or Keynesian or ABCT is the best model and the data for trying to answer that question are pretty poor). Third, business cycles are boring. :P
Another important area where neoclassical and Austrian economists adhere to different beliefs is in the area of economic calculation. In mainstream models it's never really addressed, which is a massive failure since calculation is what makes the entire economy possible (see the socialist calculation debate) and there are very real outcomes of interfering with this form of calculation.
Hmm I disagree. But maybe it is a matter of experience. I first read Hayek's essay on economic calculation in my intermediate macro class. I had to read it again in my undergraduate industrial org seminar. Maybe my experience is atypical, but I think Hayek's argument is solidly neoclassical and fully incoprorated into the mainstream. Of course, it may not get near as much emphasis these days since the socialist calculation debate ended 70 years ago.
he very attitude of economic inquiry within Rothbard's text is also extremely different than what I've seen within any sort of neoclassical work. while Rothbard's book is filled with life and a more fluid look at human behavior, what I've seen out of neoclassicism seems to be extremely rigid, mechanistic, and non-human. This might not even lead to any differences in the description of events, but it is a difference.
Fair enough. Though, imo, Rothbard strikes me more like a prick with a political and methodological axe to grind in 90% of his writings. Which is weird because I love Paul Krugman's textbook even though in his popular writings he is also a prick with a political axe to grind. :P But when he is writing about economics he strikes me as a scientist trying to understand naked ape behavior. I find that more appealling. But it could be a difference in tastes.
You have simply demonstrated the additive property of integrals
No. I assumed that, not proved it, as my post explicitly states.
This is not the same thing as "proving" 2 + 2 = 4. The additive property of real numbers is a totally different beast.
You are conflating three distinct things. A. Additive property of intrgrals. B. Additive property of reals. C. 2+2=4.
You seem to think that "2+2=4" is the same thing as "Additive property of reals". No, it isn't. I suggest you go ask someone you trust to clarify this blunder for you.
When I took real analysis several years ago we talked about how you could prove that the set of real numbers satisfied this and other properties, but it is a bit beyond me now.
Once again, you blunder. Real analysis course usually take two possible paths. One is to assume the reals are a complete ordered field, meaning they assume those properties, and do not prove them. The other is to assume the positive integers obey the usual laws of addition etc, what you call the additive property of numbers, and from them construct the real numbers and prove they, too, obey the usual laws. Bottom line, real analysis courses do not prove the additive properties of positive numbers. They just accept them. Courses on set theory usually devote themselves to proving the additive properties of positive integers.
In any case, even if we have either proven or taken as a given all the above rules and properties, a seperate proof is needed to prove the particular fact that 2+2=4.
In any case, I don't need to prove the additive property to make my main point. Which is that you need the additiive property of real numbers (among other properties) for calculus of real functions to even work.
Same blunder here, repeated. 2+2=4 is NOT the same as the addiitve property of real numbers. You need the latter to develop the calculus. But you do not need the particular fact that 2+2=4 to develop the calculus. The calculus can be developed completely using only symbols such as x, y, z etc. Nowhere is the fact that 2+2=4 used.
Specificaly, I am really not sure how you can say you're not assuming that 2+2=4 when you take the integral of this function.
I'm sorry, but it is too complicated to explain to you in your current state of confusion about calculus and mathematics. Just take this little epistle to your trusted math teacher, sit humbly before him, and there you will find enlightenment, grasshopper.
The rest of your post makes the same blunder a few more times. Go, my son, swallow your pride. Don't ask me, who you do not trust. Ask your math teacher. Just be ready for his guffaws and mockery if he isn't the diplomatic type.
... Srsly guyz? Still?
I'm done, Neo. I sent him to his math teacher.
I hope Paul Krugman never reads this thread. Accept debate with Austrian economist...debate about the philosophy of math instead. Bob Murphy will have to raise something like a million bucks if that ever happened.
"I'm done, Neo. I sent him to his math teacher."
If so that would be rather embarassing... Gradschool requires a pretty high level of math...
Just so we're clear, I'm totally the one on the right... Kid's a total baller.
"the neoclassical model of static consumer behavior could be considered a "textbook" model that every mainstream economist must lean and that other models are either extensions (dynamic consumption models) or deviations from (behavioral models) this textbook model. IOW it is a benchmark model that all mainstream economists learn and all consumer behavior models could be compared against. I dont thing Austrians have a similar "textbook" model."
Do you think so? I'd disagree. I think that the Austrian vision of consumer actions is just one of changing, striving, and imperfect,
"Well, I don't mean to overlook it per se. I just wanted to focus on micro"
I just think that it's unfair to rule out half of econ and then make the claim that the methodology doesn't lead to effective differences.
"Hmm I disagree. But maybe it is a matter of experience. I first read Hayek's essay on economic calculation in my intermediate macro class. I had to read it again in my undergraduate industrial org seminar. Maybe my experience is atypical, but I think Hayek's argument is solidly neoclassical and fully incoprorated into the mainstream. Of course, it may not get near as much emphasis these days since the socialist calculation debate ended 70 years ago."
We're at an anecdotal impass here, but I know that I've never seen one of professors so much as mention this, nor have I heard one of my professors so much as mention it. I talked to an economist that I know very well about Marxism and centrally planned economies and she never once mentioned the matter.
"Though, imo, Rothbard strikes me more like a prick with a political and methodological axe to grind in 90% of his writings."
True fact is true, that's why I take most of what he has to say with a grain of salt, although I still believe him to be a brilliant economist. Did you ever read the monopoly chapter of MES? That was particularly awful.
"I love Paul Krugman's textbook even though in his popular writings he is also a prick with a political axe to grind. :P"
I haven't read anything by Krugman that isn't one of his fucking blog posts. This could just be because I align myself much more with Rothbard, but I didn't see a lot of the same idiocy and emotional flaming that Krugman does whenever he talks. I'm sure that ultimately they have very similar reasons for being economists.
I dunno. As I have posted elsewhere, I am still having a hard time figuring out whether "income effects" are even considered legit in the Austrian model of consumer behavior. I've seen 3 authors giving 3 different answers.
http://libertyhq.freeforums.org/viewtopic.php?f=5&t=275
Well, Austrian macro basically just ammounts of ABCT. And if that is the ONLY difference between Austrians and the mainstream, then I'm not sure why we need things like the Mises Institute advancing a single theory of business cycles. In other words, I think that effectively means Austrians are not a seperate school of thought.
We're at an anecdotal impass here, but I know that I've never seen one of professors so much as mention this, nor have I heard one of my professors so much as mention it. I talked to an economist that I know very well about Marxism and centrally planned economies and she never once mentioned the matter
hmmm. really strange. Maybe she was just taking Peter Leeson's advice to Austrians to heart:
"4. No more discussions about the calculation debate. The calculation debate is very important but has been essentially dead now for a very long time. There is no reason for you to recount this debate, rehash its components, etc. We all get the point. You will feel drawn to rehash the calculation debate nevertheless. Resist this urge." http://austrianeconomists.typepad.com/weblog/2007/03/austrian_vices_.html
"4. No more discussions about the calculation debate.
I personally like his article "The Accidental Theoriest" (the hotdog & buns model blew my mind). http://web.mit.edu/krugman/www/hotdog.html
"Well, Austrian macro basically just amounts of ABCT. And if that is the ONLY difference between Austrians and the mainstream, then I'm not sure why we need things like the Mises Institute advancing a single theory of business cycles. In other words, I think that effectively means Austrians are not a separate school of thought."
I get exactly the opposite out of this. First of all you haven't shown that there are indeed no differences between neoclassicism and Austrianism. Secondly business cycles (and the associated makeup of the macroeconomy) are by far the largest part of macro. I know that this is bad evidence of this fact, but wiki barely talks about anything else, my principles class talked about little other than economic aggregates, . Furthermore Austrian macro and micro are much more intimately linked than in mainstream economics, and the Austrian disposition against statistical, empirical, and quantitative analyses, as well as its emphasis on avoiding over-aggregation both set it quite apart. The entire makeup of ABCT, the time-structure analysis of production is wholly unknown in mainstream economics. There are also disagreements about certain aspects of monetary theory, as well as a much greater emphasis on behalf of Austrians on the importance of capital.
While the differences between mainstream economics and Austrian economics may not be as large as the differences between the former and Marxist economics, I certainly think that it qualifies itself as another school of thought since its very base components, as well as its advocacy of outcome and explanation of events, are much farther apart than the difference between, say, Keynesianism and Monetarism.
"hmmm. really strange. Maybe she was just taking Peter Leeson's advice to Austrians to heart:"
Well I know she's not an Austrian, but nontheless this is still something I've never heard discussed, and as for this advice:
"if you take intermediate macro and they don't include it as a syllabus reading, raise hell!"
I'm afraid that it's too late :(
My intermediate macro teacher followed in Keynes' footsteps and called Hayek a "classical economist"... I also don't quite agree with that advice, since I think that the calculation argument, beyond being of massive importance politically, also demonstrates a large number of other important principles. I do agree that Austrians talk about it too much, but I also feel as though it was massively misunderstood by the mainstream economic establishment. For instance a quote by Heilbroner (which was wholly supported by the authors of a history of economic thought book I read) basically said that the fall of the Soviet Union showed that Mises and Hayek were right, when what the fall and the inefficiency of the USSR didn't really exemplify the calculation argument at all.
"the hotdog & buns model blew my mind"
C'est ce qu'elle a dit
I'm becoming increasingly disillusioned with behavioral economics. It may well yield interesting results, but currently the research done is far too spread out, far too "anarchistic", and much too anecdotal to actually yield any substantive results. I'd be surprised if we saw a coherent melding of behavioral and neoclassical economics (or worse, and independent school of behavioral economics) before a couple of decades from now, and the fact is that by that time some of the core of the data collected may literally be obsolete. Mises wins the day as far as methodology goes. How some people act is not how other people act in certain situations, and the law of large numbers doesn't help us too much when there are specific actors in question in specific circumstances. Furthermore these beliefs change over time.
I think that a much better way to go about behavioral economics would be to take a more psychological approach and try to find the most universal and prevalent laws of human behavior, and then combine a praxeological approach with some laboratory work and field experiments. With the current methods being used I think that you would need a massive government-funded institute with funding in the hundreds of millions, if not billions to get the appropriate kind of data to get effective and meaningful data, although even then much of what they would find would probably be temporary. I think that this is all indicated by the inability for behavioral economists to actually publish and large and meaningful works relating to current events, although I can't really make this judgment until I've read animal spirits. This is the first attempt at behavioral macro that I've ever seen, so I'll be interested to read it. i do think that the description sounds interesting:
The global financial crisis has made it painfully clear that powerful psychological forces are imperiling the wealth of nations today. From blind faith in ever-rising housing prices to plummeting confidence in capital markets, "animal spirits" are driving financial events worldwide. In this book, acclaimed economists George Akerlof and Robert Shiller challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity.
Akerlof and Shiller reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery. Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government--simply allowing markets to work won't do it. In rebuilding the case for a more robust, behaviorally informed Keynesianism, they detail the most pervasive effects of animal spirits in contemporary economic life--such as confidence, fear, bad faith, corruption, a concern for fairness, and the stories we tell ourselves about our economic fortunes--and show how Reaganomics, Thatcherism, and the rational expectations revolution failed to account for them.
Animal Spirits offers a road map for reversing the financial misfortunes besetting us today. Read it and learn how leaders can channel animal spirits--the powerful forces of human psychology that are afoot in the world economy today.
I think that, regardless of the truth or falsehood of these claims, it really just astounding how monumental the claims themselves are. Nonetheless, I think that the Keynesianism inherent behind this work probably pervades and destroys anything good behind all of this. Anyone who thinks that there is no rationality behind the human economy is just wrong. Challenging the tacit neoclassical assumption of homo economicus has been the greatest achievement of behavioral economics, but going too far with that is wrong. I also think that it's interesting that when we saw decades of relatively mild business cycles we saw the rise of new classicism and monetarism, both of which were relatively anti-government, but now that we're seeing the return of depression economics we're seeing a revival of Keynesianism. The confidence these authors have in government, and their evident of ignorance of the indisputable roll that the state played in the recent recession practically invalidates any solutions they provide, regardless of how insightful their description of market failure is. Well, we'll see.
Edit
Also, this is all a very ironic standpoint since I'll probably be working with my professor on work for behavioral economics next year... I may even coauthor a paper XD
Behavioral economics sounds a lot like thymology. If that is the case, Mises double wins.
I've decided that if I had no life and an infinite resistance to idiocy that I would dedicate myself to trying to smash some sense into the sad ball of self-righteous nonsense and economic barbarism that is tumblr. The political posts are infinitely more disgusting and shameful to me than the pornography
Also, on further reflection I find it extremely silly that these economists cite confidence in ever rising housing prices as an example of animal spirits. I sincerely wonder if either of these economists thought that there was a housing bubble when it was going on, or what their opinion about the SEC just letting the housing bubble happen, and that the federal reserve, which is also tasked with the role of ensuring sound lending standards was convinced that everything was fine while the bubble was inflating as late as 2006. The federal reserve's stated role in banking regulation:
Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, the Federal reserve bank shall give consideration to such information.
Good fucking job guys.
I'm also in the process of reading Wood's meltdown. I'll probably write a review that gets posted here and on the Voluntaryist Reader when I'm done. It's a great book, particularly because it actually deals with Austrian bubble theory, and it does so without being especially unrealistic. It provides a strong, reasoned case for the free market that is easy to understand and that relies upon human motivations, actions, and imperfections, as well as pointing out why the non-thought of "regulation" just won't work and has never worked. The 50 pages or so that I've read thusfar has made me far more competent at arguing for the free market case in relation to business cycles, since financial regulation and bubbles weren't really dealt with by Mises, Hayek, and Rothbard.
A request for help (this will become a thread if no one answers it)
Hmm, I actually have a question concerning Wood's interpretation of the business cycle in Meltdown. He seems to be arguing that too many investments occur at one time and that there aren't enough resources within the economy to allow this to occur, yet I thought that Mises specifically argued that what caused the business cycle was not "overinvestment", but rather "malinvestment". I fail to understand this point.
Woods states that what happens is that there are not enough complementary goods to allow for the completion of all projects that are undertaken during the boom. How I interpret this with my current understanding of ABCT is that what happens is that, if old prices and the old interest rate had persisted then these complementary goods would have been produced, but since they haven't, and it's no longer profitable to do so, some projects are left uncompleted.
Thoughts? This would seem to be an accurate and reasonable interpretation, there's just something that doesn't add up with this description and the way that Woods is describing this aspect of the business cycle.
Neodoxy:1. Human action is purposeful behavior
Woods is primarily a historian, so if there are any strange things there, go with the classic explanation.
That said, the word "overinvestment" has different meanings depending on the context. In HA, it means what is often called a general glut, a lack of AD, a money shortage, in short too much was made and nobody can, or wants to, buy it all. This is evident on page 854 [878 of the pdf file] where he writes:
There is no need to tell us that an ampler supply of various commodities would be welcome to all people. The question is whether there is any means of achieving a greater supply other than by increasing the productivity of human effort by the investment of additional capital. All the babble of the
welfare propagandists aims only at one end, namely, obscuring this point, the point that alone matters. While the accumulation of additional capital is the indispensable means for any further economic progress, these people speak of “oversaving” and “overinvestment,” of the necessity of spending more and of restricting output. Thus they are the harbingers of economic retrogression, preaching a philosophy of decay and social disintegration.
Malinvestment, of course, means investing in the wrong things.
That's Mises's use of these words. In later times, some Austrians blurred this distinction, and started using overinvestment as either a synonym for malinvestment, or as a technical term for a specific component of malinvestment [which I am not clear about]. I imagine they were comfortable doing so because the non Austrian literature started using other words for what they used to call overinvesment, e.g. lack of AD.
Woods's ideas, if not his choice of words, comes from Chapter 20 of HA.
...if old prices and the old interest rate had persisted then these complementary goods would have been produced, but since they haven't, and it's no longer profitable to do so, some projects are left uncompleted.
It depends on why the prices and interest rates persisted.
First we'll look at the situation absent all govt intervention after the first intial increase of the money supply that lowered interest rates and started the boom going. In such a scenario, prices depend on supply and demand. If old prices had persisted, then that means the supply and demand situation was the same. If the old interest rate had persisted, after the intial dip in interest rates caused by the introduction of printed money and FRB, that means time preferences were the same and consistent with a low interest rate, meaning people were consuming less, and the resources were not being consumed, but were available for long term projects.
So that if prices and interest rates stayed the same, that means the underlying reality was the same, meaning there was enough to go round to complete the planned projects.
That's the way things look if there is no govt or central bank intervention.
But if prices stay the same due to wage and price controls, and/or interest rates stay the same due to constant injection of new money into the economy, then the prices and interest rates no longer conform/reflect the underlying reality. While prices are the same, supply may have dropped or demand may have increased, and there will be shortages. If interest rates are kept artificially low, that means that the reality is that time preferences are high, meaning people prefer to consume now not later, meaning resources will be gobbled up now, not saved for the long haul, and will not be available to complete the projects.
Mises points out that with respect to interest rates, the illusion can be kept up that time preferences are low by keeping rates low, but the day will come when the resources will be actually used up, and then [since he did not assume price controls] prices will shoot through the roof, what he calls a crack up boom, which I presume means hyperinflation.
I'd recommend the first section of HA.
"What is considered "human" here? What is "action" here? What is "purposeful"?"
In a praxeological context we use the word "human" to mean a being actively making purposeful decisions. Purposeful implies having means, ends, and an understanding of available choices.
"Is this sort of stuff on a spectrum?"
I think that it's sort of on a spectrum up until a point. My dog's actions are obviously less then purely reactionary, but I doubt that he's very aware of his choices at a particular time. This is not to say that humans always know their options, but that they are doing more than just reacting, they choose between ends and imaginatively develop new visions for their world, evenif it is done in a way that is rather... Stupid. It's much easier to point to an example of human action than where the exact cutoff is.
"Is a "human" always fully consciously aware of his "action"?"
Depends on what you mean by this. The full repercussions of any single human action are beyond human comprehension.
"What about his "purpose" for such "action"?"
It depends upon the action
"Does all of the "human" participate in each "action"?"
What do you mean by this?
In addition to Human Action, I recommend the introduction to Theory and History.