Wednesday, June 9, 2010

Austrians need to know when they are and are not unique

The Austrian School can fall into priding itself on its insularity. I find it to be something of an odd impulse. I think it's encouraging to realize the existence of common ground, especially on scientific questions. On cultural or ethical questions it's less clear whether that is a good or necessary thing. On scientific questions disagreement may be productive - but it's jarring and uncomfortable. We seek answers, syntheses, and reconciliations precisely because scientific questions shouldn't have two answers. This is also why science is detail-oriented and qualified. If we can account for differences because of the existence of some caveat that changes the mechanics of the question, then we once again have a theoretical framework that eliminates contradictions.

Anyway, that's one thing that always irks me about the Austrian School - although perhaps it's simply how I'm perceiving them and it's all in my head. But they can come across as wanting to stress how different and in how much disagreement they are with everyone else. And they also sometimes manage to convince themselves that everyone else rejects the pillars of their theory. Many, many Austrians don't do this - I'm just saying the ones that do are conspicuous. I remember that an Austrian friend of a friend of mine, during a discussion about economics, once asked me pointedly "What theory of value were you taught in your program? Do you use a labor theory of value?". I calmly answered "No, I use a subjective, marginal theory of value just like you and everybody else - nobody has used a labor theory of value since the 1870s, if not before". That's an extreme case of ignorance - I don't think most Austrians are walking around thinking other economists are using a labor theory of value. But the underlying impulse is real. In an earlier post on another issue I called it the "presumption of ideological orthogonality" - the assumption that "because I think X and I know that guy disagrees with me on Y, he must think not-X".

I stumbled across what you might call a presumption of orthogonality again today at Coordination Problem, where Steve Horwitz writes of the opportunity cost of capital:

"Most economics textbooks teach opportunity cost in terms of foregone utility from consumption choices (e.g. "beer vs. pretzels"), although Economic Way of Thinking is an exception. And I think this is consistent with the post-Marshallian vision of most economists wherein subjectivism is about consumption and value but production decisions are based on more objective notions of cost as embodied in the cost curves. Other than EWOT, how many intro books derive the supply curve using an approach that emphasizes the rising marginal opportunity cost of alternative uses of the inputs?"

A better question, I think, is "how many intro books don't emphasize the opportunity cost of inputs". I'm not sure how you could talk about a cost curve without talking about the opportunity cost of capital. I did a quick Google search and predictably found a bunch of lecture notes and textbooks that references this. I know we learned about the opportunity cost of capital at William & Mary. To be honest, this post surprised me a little. Steve Horwitz, Peter Boettke, Mario Rizzo, Roger Garrison, etc. - these guys usually don't make this mistake of assuming that mainstream economists are dunces. They recognize that mainstream economists are more often than not "mainstream" because they are convinced by "mainstream" arguments, not because they are ignorant.

If you cut out that paragraph from Steve's post it would have been perfect - he really has some awesome things to say about the opportunity cost of capital, particularly the role it plays in Austrian theory. I don't want this post to detract from that. This is just something that I wanted to add.

What I think happens is that the Austrian School has a very unique set of emphases. The capital structure is important to them. The time structure of production is important to them. Subjective value - embraced by all economists - is something that they make a point of highlighting. The dangers of inflation and debt monetization - which is understood and accepted by all economists - plays a pivotal role in Austrian theory. The mature Austrian recognizes that their theory does have a few genuine novelties, but that for the most part it differentiates itself in it's emphases (this is especially true of Austrians that aren't particularly sensitive about things like praxealogical method). The same is true of any school of thought, really. The only really novel thing about Keynesianism is liquidity preference. Most of the rest is just a difference of emphasis, and most of the different conclusions flow from liquidity preference. Keynesians usually don't worry too much about heterogeneous capital, for example, which drives Austrians up the wall. But not worrying about it when they explain their theory is different from thinking it doesn't exist. Austrians and Keynesians universally agree about the reality of the heterogeneity of capital. The difference is, one group has made it a centerpiece of their theory and the other hasn't.

I think Austrians especially - but really everyone - needs to be cognizant of this sort of thing.

It's silly to convince ourselves that there are stark disagreements or misunderstandings where there really aren't. It's also silly to reject each other's theories out of hand simply because of a difference of emphasis. For example, I think Austrian Business Cycle Theory is actually a very good and reasonable theory. I have no reason not to. I think inflation can distort the structure of production. I think people can miscalculate. I think capital is heterogeneous. There is no good reason for me not to see value in ABCT, nor is there good reason for anyone else to dismiss it out of hand. It's a solid theory. Now, the question of how much of the business cycle ABCT explains is an open and an empirical question. I think there are more important factors involved, especially for the post-gold-standard business cycle. But that's different from saying that ABCT is wrong. Keynesian theory might be a little harder to accept because it adds something where we don't have common ground, namely liquidity preference.

Before ending this, I want to identify a few points of agreement that some Austrians really need to stop pretending we disagree on:

1. Subjective value
2. "Seen and unseen"... I know you all like to quote Bastiat but the rest of the world calls this a "counterfactual". It is absolutely integral to our understanding of the economy, and we didn't need Bastiat to get there. This one bothers me to no end.
3. Heterogeneous capital
4. The credit cycle
5. The knowledge problem. I've covered this in a series of posts on calculation problems vs. incentive problems. Nobody sides with Lerner and Lange today - you're not the only ones carrying the Socialist Calculation Debate torch.
6. That inflation errodes wealth

And sometimes you even have a hard time convincing Austrians that we know about rent-seeking, the free market, liberty, free trade, and taxes too. But we have very intelligent readers here at F&OST, so I think it would be overkill to make a big deal out of those things.


  1. It seems to me that the Austrian view of the subjective theory of value is actually quite different from that of other economists; it is in a word more radical and more subjective. Most economists other than Austrians seem to have some sort of exception to it in other words. For example, say an economist claims that they can judge the objective worth of a place based on the number of immigrants who move there; of course, that doesn't say anything about the personal preferences of those who stay behind in the home country.

  2. Hmmmm... you didn't go in the direction I thought you would with that.

    The one thing that really does distinguish Austrian subjectivism is that it is ordinal rather than cardinal. That is a big difference, but I think it's biggest impact is to hamper Austrians methodologically - it doesn't really change findings.

    Bryan Caplan has joked about this "radical subjectivity" issue. An Austrian will tell you he is subjective. A neoclassical will say "I'm subjective too". The Austrian responds "oh... well I'm RADICALLY subjective!". Whatever the hell the distinction is is beyond me. I don't know of any other source of value other than subjective understanding of value... so I'm not sure how much more "radical" you can get than that.

    I'm not sure what you're trying to say about "the objective worth of a place". Whenever economists appeal to "revealed preference" - essentially what you're talking about - they're still talking about subjective values of things. I think you're just confused about the fact that it is an objective statement about a set of subjective valuations.

  3. Starts at 3:40 - it's pretty funny. I like this especially - it can apply to several other Austrian ideas too. He says that the only difference he's ever seen between "radical subjectivists" and "subjectivists" is that "radical subjectivists use the word 'subjectivists' more often".

  4. FEE had a lecture a few years ago where the presenter discussed the distinction between Austrian subjectivism and that of other schools.

  5. "...they're still talking about subjective values of things."

    I don't think they are; they are using this set of revealed preferences to make a value judgment.

  6. I guess I've just never seen this - do you have an example or a reason for thinking they're doing this?

    It might just be that it's left implicit. This is something that Caplan says - it's so universally accepted that most people don't even bother noting it.

  7. Anonymous - I did some quick googling but can't seem to find it. Do you have the link? Can you provide a synopsis?

  8. No, but it is a common argument in the "economic blogosphere" - "look at how awesome the U.S. because it attracts all these immigrants" (this isn't any sort of anti-immigrant argument I'm making BTW).

    Next time I run across something like that I'll note it here.

  9. Xenophon -
    Right, I get that sort of statement - but that is a statement about revealed [subjective] preferences. Where is the objectivity? They're essentially saying "lots of people agree it's awesome". It's not like they're making a statement about an objective quality known as "awesomeness".

  10. I think they are making that sort of statement; that one can determine the awesomeness of a country based on the notion of "voting with their feet."

  11. I've always taken statements like that from the social sciences to mean "objective given such and such a standard"... that is, it's a value measurement outside of any given subjective stance, but it's also a quite relative statement. It has no metaphysical intentions. "Awesomeness" is always being spoken in the register of certain recognized assumptions.

  12. Evan -
    I think thinking about this idea in the context of the idea of "science" is important to do. Austrians also often distinguish between social sciences and natural sciences because of this subjectivity.

    I think that is wrong. Social sciences are as much "science" as natural sciences, AND it is equally objective for the reason that you state. What we are doing is making objective statements ABOUT subjective values and choices. The value is a subjective value, but the subjectively determined value itself can be an object of study.

    This really is different from the "natural sciences" in degrees, and the easiest way to think about it is to think about biology. No owner of a dog or a cat can honestly say that animals don't have "subjective preferences". These aren't as big of a deal for biologists studying animal behavior as they are for humans, because these preferences are quite simple (and many of them can be chalked up to evolved instinct). We need to think of economics as just a form of human biology. We're studying human social structure just like Jane Goodall studied ape social structure. We deal with subjectivity in this pursuit, but the study itself is still "objective".

    Think of a labor supply curve. The shape of that labor supply curve is going to be determined subjectively by the decentralized preferences of workers. That will determine the labor supply curve. But labor supply itself - however the preferences shake out - is still an objective fact (what Durkheim called a "social fact"). So I can make objective statements about the labor supply curve which don't change the fact that that curve is determined by subjective valuation.

  13. Right, I think that's how I take it. Since I'm not knowledgeable about value theories employed in your discipline, I've probably couched my thoughts more hesitantly. But the things that I take such statements to be relative to are the values/choices that you mention as your scientific object.

  14. dkuehn,

    I guess I just don't buy that explanation; it doesn't really square with the way I think of human behavior.

    Anyway, while we are on the subject of Austrians:

    Too bad "The Constitution of Liberty" isn't #1, but I'll take "The Road To Serfdom."

  15. Glenn Beck sure was a pal on that one, wasn't he :)

  16. Speaking of whom... that man wrote a novel?!

  17. dkuehn,

    Yeah, no fan of Beck here, but hey, what the heck. Whether most people who buy it will read it is another matter.


    F.A. Hayek - the most well known Austrian economist - though he actually spent very little of his career explicating Austrian economic theory.

  18. Beck & Hayek:

  19. Yes, I know of Hayek. I was referring to Glenn Beck's novel.

  20. I bet it's a real tear-jerker...

    Ba dum CHING!

  21. I empathise strongly, Daniel. Indeed, reading this post was a bit like hearing my own thoughts!

    Two friends of mine started an Austrian blog in the wake of their Great Libertarian Awakening; post-Great Economic Recession of 2008 and many Peter Schiff / Marc Faber videos later. (I'm sure that at least someone of you out there must identify with this situation...)

    Anyway, I've had numerous debates with them on related economic topics and inevitably started commenting on their blog posts. However, I've all but stopped after tiring of the many issues that you have highlighted above. As an example featuring your man Bastiat and the counterfactual, see the comments section here:

    I also find that the "singularity" mindset often leads to Austrians conflating everything into false dichotomies (although that is true of other schools as well). Respectfully disagreeing or even trying to pass reasoned comment might lead to you shrilly being labelled "marxist!" or similar dirty word. (E.g. Comments section again:

  22. sorry, that should be '"insularity" mindset' (not "singularity").

    clearly :)

  23. Stickman - welcome to the blog! Needless to say I agree with most of what you said - I'll take a look at their links and maybe try to link to them, comment on them, and engage them. See if a joint effort can pry them out of their bunker mentality.

    Please continue to read the blog, and make sure you check on the most recent posts too. This is an old one so you're unlikely to get other responses.


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