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.