Economics Questions

Re: Austrian vs Neoclassical Axioms

vive la insurrection — Sat, 21 Apr 2012 19:56:09 GMT

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

Re: Austrian vs Neoclassical Axioms

ziragt — Tue, 10 Nov 2009 02:48:48 GMT

Solid_Choke:

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.

Re: Austrian vs Neoclassical Axioms

Jon Irenicus — Tue, 10 Nov 2009 02:43:27 GMT

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.

Re: Austrian vs Neoclassical Axioms

Solid_Choke — Tue, 10 Nov 2009 02:40:14 GMT

Solid_Choke:

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.

Re: Austrian vs Neoclassical Axioms

Solid_Choke — Mon, 09 Nov 2009 21:34:32 GMT

Jon Irenicus:

The way Austrians conceive of marginalism and how neoclassicals do differs if you say read the works of Menger and take any neoclassical textbook, and this is reflected in how Austrians deal with 'problems' such as Giffen goods and so on.

I will read Menger when I get around to it.

Jon Irenicus:

Mainly neoclassical econ isn't too different to Austrian econ so far as micro is concerned (e.g. they recognise the same f.o.p as we do, perhaps a matter of Kirzner's influence... my textbook on business econ even cites him to the exclusion of Knight and speaks favourably of the Austrian approach to entrepreneurship) but its capital theory is by far more advanced, and the way it builds up from marginal utility theory all the way to price theory is far more coherent than what is taught in neoclassical econ.

Perhaps it is more tightly integrated or coherent, but the actual body of theory is so similar that it hardly seems worth it to make life hard for yourself by claiming to be heterodox.

Jon Irenicus:

And yes, the capital theory is a huge deal (as it's derived from Austrian views on TP and backwards imputation of valuation) because it is what makes Austrian macro distinctive.

I deliberately avoided discussing macro. There is near consensus among economists about the hard-core of Neoclassical Microeconomics. There is no consensus in macro (which means Austrian macro would be just one among many). My claim was that the differences between Austrian and Neoclassical Microeconomics are overstated.

Jon Irenicus:

Aside from Rothbard Austrians also see very limited use in graphs, and I think this is important because I've yet to do a neoclassical course that mentions the limitations behind them. They do mention say the 'assumptions' of neoclassical econ but not so much what holds for the graphs. Also, neoclassicals still lend credence to idiotic theories of competition which Austrians eschew altogether. Again, where they converge it is due to insights by Austrians like Hayek, and even then they still don't 'get' it fully (though they recognise monopolies may be the most efficient market structure.) Their price theory is of course broadly similar to Austrian theory.

I can't speak for others, but using graphs are useful for pedagogical reasons. When you learn a new theory in economics it helps to see English, Algebraic, and Geometric (graphs) representations to make sure you are really grasping the consequences of the model. Also, I'm not sure which theory of competition you calling "idiotic".

Jon Irenicus:

Methodologically speaking, aside from taking an aprioristic approach, Austrianism is also realist and thus rejects constructs like general equilibrium theorising (and derivatives such as perfect competition) and taking marginal utility as merely a 'useful' assumption. Here's a good paper on it. Get rid of "perfect competition", introduce a stronger element of time in neoclassical econ and recognise the heterogeneity of capital and the differences evaporate.

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).

Re: Austrian vs Neoclassical Axioms

Solid_Choke — Mon, 09 Nov 2009 03:11:08 GMT

William Barnett II:

Maintaining that “properly constructed” utility functions are
valid representations of, admittedly, necessarily ordinal utility is very misleading,
and confuses and obfuscates the issue, because as these functions are
to be the objects of calculus operations they necessarily require cardinal numbers.

I think this misses the point. These functions aren't used because there actually exists utility functions "out in the world". Utility functions are models that allow you to predict choice behavior, they aren't something that exists in the psyche of economic actors. It seems to me that Barnett is confusing the use of a model for a description of reality. Continuity and differentiability have to do with the ease of use of the model, not a part of reality. The map is not the terrain and economists are aware of that.

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.

Re: Austrian vs Neoclassical Axioms

Adam Knott — Sun, 08 Nov 2009 23:25:42 GMT

Solid_Choke:

To get back to my original question: are these minor differences a result of the Austrian axioms or simply historical accident? I would appreciate if someone who actually considers themselves an Austrian would formulate the axioms, so that we can discuss how they differ from the axioms I listed above.

Solid Choke:

I will take a stab at this. The answer I will provide is based on my understanding of Misesian praxeology. I can't speak for all self-described Austrians.

Here is your original post:

"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:

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

#2) 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?"

****

Above, you also write:

"Also, in response to your points, methodological individualism IS a part of neoclassical microeconomics (it is only in the macro sphere where this methodological principle is discarded)."

You are saying that you don't see much difference between the axiom(s) that ground Austrian analysis versus those that ground neoclassical analysis.

However, if you look at your #2, that does not seem to be methodological individualism. Your #2 describes, it seems, not the point of view of an individual actor, but the objective state of things in society.

So #1 and #2 are two different points of view, indicating two different methodologies. As Hayek wrote:

"I have long felt that the concept of equilibrium itself and the methods which we employ in pure analysis have a clear meaning only when confined to the analysis of the action of a single person and that we are really passing into a different sphere and silently introducing a new element of altogether different character when we apply it to the explanation of the interactions of a number of individuals."

Speaking about the meaning of the term 'equilibrium' when it refers to the analysis of individual action, versus when it refers to the situation in society, Hayek continues:

"The data which are here supposed to be objective facts and the same for all people are evidently no longer the same thing as the data which formed the starting point for the tautological transformations of the Pure Logic of Choice. There "data" meant those facts, and only those facts, which were present in the mind of the acting person, and only this subjective interpretation of the term "datum" made those propositions necessary truths. But in the transition from the analysis of the action of an individual to the analysis of the situation in a society the concept has undergone an insidious change of meaning."

(Individualism and Economic Order, chapter 2, Economics and Knowledge)

What Hayek is describing is the subtle shift that occurred from the kind of analysis Austrians were using based on methodological individualism, and the new method which was gradually and imperceptibly abandoning this method in favor of one that seeks to address 'the situation in a society.' Your #2 axiom seems to be an axiom that refers to what Hayek describes as either 'the interactions of a number of individuals' or 'the situation in a society,' neither of which refers to the analysis of the action of an individual actor.

You can see this different approach most clearly in Mises. Here is how Mises conceives the grounding axiom of Austrian analysis:

"The starting point of praxeology is a self-evident truth, the cognition of action, that is, the cognition of the fact that there is such a thing as consciously aiming at ends."

"All the elements of the theoretical sciences of human action are already implied in the category of action and have to be made explicit by expounding its contents."

"The very category or concept of action comprehends the concepts of means and ends, of preferring and putting aside, viz., of valuing, of success and failure, of profit and loss, of costs"

(The Ultimate Foundation of Economic Science, p. 5-8)

These passages all refer to the idea of individual action, and not to the objective state of affairs in a society.

So I would say that according to what you have written above about neoclassical analysis, the difference between it and Austrian analysis, is that Austrian analysis takes your #1 plus a few extra assumptions, whereas---according to what you write---neoclassical analysis takes #1 and #2 plus a few extra assumptions.

As you can see, in doing so (in taking #1 and #2 as grounding axioms), neoclassical analysis, according to Hayek, introduces an additional and conceptually separate point of view by means of axiom #2.

According to your conception of neoclassical analysis, and according to the method Mises is using and which Hayek describes, neoclassical analysis uses two axioms of a fundamentally different nature; one representing the point of view of the individual actor, and one representing the situation in society. By contrast, the uniqueness of Austrian analysis is/was its reference to the point of view of the individual actor only (strict methodological individualism). At root, Austrian analysis is #1 only.

Re: Austrian vs Neoclassical Axioms

Daniel James Sanchez — Sun, 08 Nov 2009 22:39:07 GMT

Solid_Choke,

You're not alone in the general thrust of your posts here. Rothbard himself has said in at least one lecture I've listened to that, while mainstream macro is a complete mess, mainstream micro is fairly decent. I believe this is because, in spite of all their positivist protests to the contrary, mainstream microeconomists still adhere to laws and principles, the original derivations of which were at bottom praxeological (supply and demand, diminishing marginal utility, etc).

Re: Austrian vs Neoclassical Axioms

Solid_Choke — Sun, 08 Nov 2009 22:37:13 GMT

nirgrahamUK:

Back to the topic of Hal Varian and his ilks stated acknowledgement of Ordinality over Cardinality, there is the paper:

The Modern Theory of Consumer Behavior: Ordinal or Cardinal?
Vol. 6 Num. 1
William Barnett II Quarterly Journal of Austrian Economics

http://mises.org/journals/qjae/pdf/qjae6_1_3.pdf

Thanks for the link. I'll get back to you later and respond to Jon Irenicus as well.

Re: Austrian vs Neoclassical Axioms

nirgrahamUK — Sun, 08 Nov 2009 22:31:19 GMT

I heard Salerno say that Mises agreed with you. that The Mainstream had adopted 'Austrian Positions' to the extent that Mises saw no value in describing himself as an 'Austrian' economist after that had happened.

To me, the appeal of the Austrian tag is

a) the tradition, we need to remind the mainstream where the roots of their 'best ideas' came from, and that they should pick up the old books and see what other good stuff is in there and why they might not be doing the stuff they adopted 'quite right'.

b) Austrians are keenly aware of methodology whilst the Mainstreamers don't really care, when the Mainstream adopt the Austrian methodology, that will end it for me.

Back to the topic of Hal Varian and his ilks stated acknowledgement of Ordinality over Cardinality, there is the paper:

The Modern Theory of Consumer Behavior: Ordinal or Cardinal?
Vol. 6 Num. 1

William Barnett II

Quarterly Journal of Austrian Economics

http://mises.org/journals/qjae/pdf/qjae6_1_3.pdf

Neoclassical economists maintain that indifference curves, utility and

the utility functions from which they are derived, are ordinal, not cardinal, in

nature. They also maintain that utility cannot be measured cardinally. That is,

an individual can only prefer A to B or be indifferent between them;1 he cannot

measure how much he prefers A over B. They also maintain that interpersonal

utility comparisons are logically invalid.2 Indeed, the history of economic

thought bears eloquent witness to the fact that the concept of ordinal

utility triumphed over cardinal utility.

Austrian economists also maintain that utility is ordinal. However, they

challenge the use of mathematical utility functions by neoclassical economists

on the grounds that such functions yield cardinal utilities, “measured,” usually,

in util

and on he goes....

Re: Austrian vs Neoclassical Axioms

Solid_Choke — Sun, 08 Nov 2009 22:27:23 GMT

abskebabs:

Isn't another problem with neoclassical economics their faulty empiricism, whereby they may question certain axioms they consider fundamental in a "return to depression economics" etc?

Checking your premises isn't a "problem". Also, you are referring to macroeconomics when you talk about a "return to depression economics". I give as much credit to marcoeconomics as I do to sociology (which isn't much).

Re: Austrian vs Neoclassical Axioms

Solid_Choke — Sun, 08 Nov 2009 22:15:23 GMT

nirgrahamUK:

well, that neoclassicals have adopted Austrian ideas is true, but this shouldn't fool you into thinking that they are equal concepts.

I do believe that there are real differences in methodology in microeconomics, but the body of theory that is generated from that methodology is so similar that it just doesn't make sense to me to cut yourself off from the rest of the profession. Also, I know that there is a vast difference between Austrian macro and mainstream macro (but I don't think very highly of macroeconomics in general so this doesn't really bother me).

nirgrahamUK:

for example, neoclassicals 'say' that they accept ordinal utility and have long disregard cardinal utility. Yet one can see that they proceed to mathematise their economics, erroneously introducing cardinality in through the back-door. William Barnett has written on this.

My favorite neoclassical textbook, actually has a section on cardinal utility that examines arguments in favor of cardinal utility and provides a counterargument to each of them. This is the concluding paragraph of that section:

Hal Varian:

Even if we did find a way of assigning utility magnitudes that seemed to be especially compelling, what good would it do us in describing choice behavior? To tell whether one bundle or another will be chosen, we only have to know which is preferred--which has the larger utility. Knowing how much larger doesn't add anything to our description of choice. Since cardinal utility isn't needed to describe choice behavior and there is no compelling way to assign cardinal utilities anyway, we will stick with a purely ordinal utility framework.

nirgrahamUK:

perhaps, you could refer to Bryan Caplan on why he doesn't call himself Austrian to pick up on where a neoclassical schooled in Austrian texts thinks the neoclassical position is different and superior to the Austrian

I reread his paper, and it seems that Caplan agrees with me that the differences are overstated.

nirgrahamUK:

also, forgive me for not better presenting the above quote. Machlup wrote both the paragraphs, i understand it may appear that I wrote the paragraph. I will edit the original post..

No problem.

nirgrahamUK:

Further help may be listening to Bob Murphy.

http://mises.org/media/2138

Austrian vs. Neoclassical Analytics

Mises Media: Tuesday, August 07, 2007 by Robert P. Murphy

From that lecture at the 37 minute mark:

Bob Murphy:

Mainstream economics really doesn't believe in cardinal utility...

I don't know enough economics to determine if Murphy is right about causation in economics, but the other things he mentions are very small differences. Also, what is the difference between Time Preference theory and the discount function? It is still my judgment that Austrian Microeconomics is too similar to Neoclassical Microeconomics to segregate yourself from the rest of the profession over.

I concede that Austrian methodology is different than Neoclassical methodology, but isn't this a good reason to compare and contrast the basic axioms of the two schools? I am still interested in talking about the merits and demerits of the Austrian versus Neoclassical axioms.

Note that I am not bashing Austrian economics (as far as I am concerned, Hayek was the greatest economist of the 20th century). I merely think that the differences are very minor and that those differences should be scrutinized and subject to comparative tests.

Re: Austrian vs Neoclassical Axioms

Jon Irenicus — Sun, 08 Nov 2009 16:00:07 GMT

The way Austrians conceive of marginalism and how neoclassicals do differs if you say read the works of Menger and take any neoclassical textbook, and this is reflected in how Austrians deal with 'problems' such as Giffen goods and so on. Mainly neoclassical econ isn't too different to Austrian econ so far as micro is concerned (e.g. they recognise the same f.o.p as we do, perhaps a matter of Kirzner's influence... my textbook on business econ even cites him to the exclusion of Knight and speaks favourably of the Austrian approach to entrepreneurship) but its capital theory is by far more advanced, and the way it builds up from marginal utility theory all the way to price theory is far more coherent than what is taught in neoclassical econ. And yes, the capital theory is a huge deal (as it's derived from Austrian views on TP and backwards imputation of valuation) because it is what makes Austrian macro distinctive. Aside from Rothbard Austrians also see very limited use in graphs, and I think this is important because I've yet to do a neoclassical course that mentions the limitations behind them. They do mention say the 'assumptions' of neoclassical econ but not so much what holds for the graphs. Also, neoclassicals still lend credence to idiotic theories of competition which Austrians eschew altogether. Again, where they converge it is due to insights by Austrians like Hayek, and even then they still don't 'get' it fully (though they recognise monopolies may be the most efficient market structure.) Their price theory is of course broadly similar to Austrian theory.

Methodologically speaking, aside from taking an aprioristic approach, Austrianism is also realist and thus rejects constructs like general equilibrium theorising (and derivatives such as perfect competition) and taking marginal utility as merely a 'useful' assumption. Here's a good paper on it. Get rid of "perfect competition", introduce a stronger element of time in neoclassical econ and recognise the heterogeneity of capital and the differences evaporate.

Re: Austrian vs Neoclassical Axioms

abskebabs — Sun, 08 Nov 2009 15:45:04 GMT

Isn't another problem with neoclassical economics their faulty empiricism, whereby they may question certain axioms they consider fundamental in a "return to depression economics" etc?

Re: Austrian vs Neoclassical Axioms

nirgrahamUK — Sun, 08 Nov 2009 15:33:02 GMT

Further help may be listening to Bob Murphy.

http://mises.org/media/2138

Austrian vs. Neoclassical Analytics

Mises Media: Tuesday, August 07, 2007 by Robert P. Murphy