Austrian Economics

The Next Generation

Steven Horwitz, Adam G. Martin, Daniel J. D'Amico

• Publisher: Emerald Publishing Limited
• Year: 2018
• Print ISBN: 9781787565784
• eBook ISBN: 9781787565791
• Topic: Business
• Subtopic: Business General
• Index: Business

Austrian Economics: The Next Generation brings together emerging and established scholars to explore the insights that can be gleaned from applying Austrian economics to a range of different topics. Spanning a variety of related disciplines, from history to politics to public policy, this collection explores a wide range of topics and how they relate to key Austrian themes. How has Austrian economics evolved over the past 40 years? What is the relationship between history and economic theory? How does the Austrian school of economics compare to other evolutionary schools of economic thought? What can public choice theory take from the concept of emergent order? What role does departmental culture play in enabling or deterring police misconduct? How do the multiple forces shaping the evolution of economic inequality interact with one another? What are the limitations of evidence-based policy? To what extent do regulatory agencies recognize key Austrian insights? How does the platform economy affect the possibilities for regulation of traditional utilities? What can a defense of market institutions rooted in market process theory learn from virtue ethics? Is a classical liberal limited state best situated to cope with the darker side of human nature, or might conservatism or social democracy perform better? This collection explores each of these topics in detail, providing fresh takes on a wide range of important topics.

CHAPTER 1

AUSTRIAN ECONOMICS IS ALIVE AND GROWING: RETROSPECT AND PROSPECT

Peter Lewin

ABSTRACT

A keynote address in which the author looks back at the rebirth of Austrian economics, characterizes its current state, and looks forward to its future development. The early years after the rebirth focused on methodology, but as the modern school has development its concerns have become much more varied and connected to specific current issues. The prospects for further development are good as more young scholars arrive.

Keywords: Austrian economics; disequilibrium; entrepreneurship; institutions; methodology; expectations

In this keynote address I will assume I am permitted to begin with some remarks of a personal nature, to recount some aspects of my own experience with Austrian economics that I hope will be illustrative of the themes I want to highlight.

When I first encountered Austrian economics, as an undergraduate economics major, from my teacher in South Africa, Ludwig Lachmann, in the years 1966–1970, the Austrian School was less than a 100 years old. It reached that milestone in 1971, during my honors years in economics, when I attended Professor Lachmann’s bi-weekly honors seminar – which I realized later was inspired by the Mises seminar in Vienna, though of course, it was but a pale reflection of that singular group of people.

In 1972 I left South Africa to do my graduate work at the University of Chicago, where I remained until 1976. Meantime, Ludwig von Mises had died in 1973 and the famous meeting marking the rebirth of Austrian economics occurred in 1974, also the year that Hayek won the Nobel prize. I was immersed in my graduate studies and did not return to Austrian economics until about 1980, by which time I had moved to Dallas, and at which time I quickly got reconnected with Austrian economics. When the Society for the Development of Austrian Economics (SDAE) was founded I became the treasurer of the new organization, in which position I served for 17 years. I have thus witnessed the growth of the modern Austrian school from close quarters, first centered at New York University and then at George Mason University. It has been amazing to behold. There has been a lot going on at the same time, and being among the trees, it is hard to see the forest. How is one to make sense of all of it?

Our theme at this symposium has been Austrian Economics: The Next Generation. So I asked myself which generation does this refer to? I thought I was part of the next generation – the generation of the revival of Austrian Economics in 1974. But, clearly, those many who have come after my generation outnumber us and have done important work. Are they the next generation or generations, plural? I decided it made sense to divide it up not according to the dates and ages of the participants, but, rather, according to the research agenda they have followed. In that sense, I hope I can claim to be a member of more than one of the next generations. Considered in this way a definite time pattern is revealed.

In recent years some detailed retrospectives on the revival and development of Austrian economics have appeared. I do not plan to repeat them here. My account is deliberately much more sparse and impressionistic. I plan to highlight just a few ideas for your consideration.¹

THE REBIRTH GENERATION – METHODOLOGY

The rebirth generation focused almost exclusively on methodological questions, on an Austrian critique of the methods of mainstream neoclassical economics. I include in this both the market-oriented approach of the Chicago school and the more standard neoclassical-Keynesian synthesis, as it was called. For this generation of Austrian contributions, it was mainly an exercise in product differentiation. It was not the scientific product per se that was being differentiated, but, rather, the set of methods considered valid, the way in which economic inquiry was conducted and reported, that was distinguished. This is, or should be, well-known to anyone working within the broad Austrian tradition, but, I sense that it is not as familiar to those more distant from that first next generation. So perhaps I will spend a little time talking about these essential methodological matters and the issues they raised within the reborn Austrian school as well as distinguishing that school from the mainstream.

For Austrians the subjectivism of value implies a process in which individuals with different subjective valuations interact in markets. The result is the formation of prices that guide individual production and consumption decisions. In neoclassical economics the subjectivism of value is dealt with, not by focusing on variation in individual valuations, but by focusing on the equilibrium that would arise if these interactions were allowed to play out indefinitely while the exogenous conditions remains fixed. The hypothetical equilibrium state, in which individual marginal valuations all coincide, is assumed to apply continuously. There is little or no discussion of disequilibrium behavior. It is actually a bit more complicated than this, and depends very much on what one considers to be the parameters within which this equilibrium is assumed. However, as a practical matter, the two approaches resulted in very different methods of analysis.

Neoclassical economics moved steadily toward a paradigm of what came, somewhat confusingly, to be called “positive” economics, along the lines of Milton Friedman’s famous essay (1953). In crude terms it says that assumptions don’t matter, only predictions do. And some neoclassical practitioners take this very seriously and produce all kinds of technical nonsense. As Don Lavoie and others (Austrians and other heterodox types) pointed out, data have to be interpreted, and interpretation relies on notions of plausibility and comprehensibility – indeed, that the whole point of doing economics was to render the social world comprehensible. Clearly assumption do matter a lot.

So, in the immediate rebirth period, much effort was devoted to trying to spell out a more satisfactory way of doing economics. This was a period of exploration resulting in certain pivotal contributions, starting with Israel Kirzner’s Competition and Entrepreneurship (1973) and Dolan’s volume on the Foundations of Austrian Economics (1976) and culminating in The Economics of Time and Ignorance by Rizzo and O’Driscoll and Don Lavoie’s masterful books National Economic Planning, What is Left and Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered all published in 1985, and numerous articles by these and others. During the period following this, into the 1990s a lot of what the reborn Austrians did was still motivated by the effort to carve out an intellectual space separate from the mainstream, but they focused more on applications. So for example, Esteban Thomsen’s great little book, Prices and Information published in 1992, as the first in the notable Routledge series, Foundations of the Market Economy, contains a series of answers to mainstream information economics, much of it based on a particular interpretation of Hayek’s (1945) AER article (“The Use of Knowledge in Society”). Thomsen’s agenda was, in effect, set by the then current mainstream contributions.

And for most of this extended period, from the mid-1970s until the 2000s, the research agenda was dominated by reacting to mainstream concerns, and often in their terms. The mainstream set much of the agenda. Perhaps the most revealing example is Roger Garrison’s macroeconomics, a brilliant pedagogic framework (summarized in 2001), but one hitched onto the prevailing Keynesian theoretical structure. These contributions to a large extent were motivated by the desire to acquaint or reacquaint academic economists with the ideas and methods of the Austrian school; but in the process, of course, these ideas and methods were developed and tweaked. So if you go back to this period and look at the books and articles you will see a lot of methodology and history of thought. In fact, it was sometime during this period that I resolved henceforth to stay away from matters methodological. It had grown tiresome to me. As you might have guessed I have been singularly unsuccessful in fulfilling my resolution, in that I still frequently find myself embroiled in methodological discussions. I imagine this is the fate of an Austrian economist in today’s academic environment. We have to continue to have an understanding of the methods of our inquiry and how they differ and why they differ from the mainstream. The easiest way to see this is by looking at the role of the entrepreneur.

THE ENTREPRENEUR, SUBJECTIVISM, AND DISEQUILIBRIUM

Cutting through all the complex and profound discussions about method, epistemology, ontology, etc., it seems to me that the most obvious difference in actually doing Austrian economics is the presence of the entrepreneur. Whatever one calls him, it is simply impossible to do Austrian economics without taking account of the autonomous individual who is sizing up his situation and acting to improve it. All human action entails the appraising of a current situation in terms of opportunities perceived for improvement. In this sense, as Kirzner has noted, Mises claims that all actors are entrepreneurial to some degree. And yet, one searches in vain in current neoclassical economic practice for the entrepreneur. There is no room for him in equilibrium, just like there is no room for profits. Within the neoclassical world the existence of profits is evidence of economic inefficiency.

This means that neoclassical economics is essentially incapable of explaining fundamental aspects of the economy like innovation, business organization, or competitive processes that are driven by anything other than price competition. So anyone doing economics, who wants to make room for the entrepreneur, and for entrepreneurial profits and drivers of economic advancement, has to engage the question of action in disequilibrium. Doing this necessarily brings one face-to-face with the inescapable conclusion that actions are driven by subjective values and expectations. Once we allow the entrepreneur in we have an Austrian world that is different from a neoclassical world. As much as those endless methodological discussions that characterized the rebirth period, like the Kirzner–Lachmann debate (e.g., see the chapters by each in the Dolan book), might have been energizing and informative, going forward it is not clear that we need any kind of firm resolution to them in order to do good Austrian economics. All we need is the ubiquitous entrepreneur.

Kirzner asked a simple question: if the existing price and quantity are not market-clearing, how does the market move toward equilibrium? Who makes this happen? And of course the answer is anyone who sees an advantage in doing so, anyone who sees that the market price is likely too high or too low, and acts accordingly, will move the market toward that market-clearing price. There is no guarantee that that market-clearing price is a fixed target. It may be changing. Yet as long as these entrepreneurial actions are successful in creating value for the actors, the price and quantity will move toward market clearing.

Lachmann objected to Kirzner’s treatment of entrepreneurship as implying that such a tendency towards equilibrium was inherent in entrepreneurial action. He noted that since perceptions of opportunities are necessarily subjective, these perceptions may turn out to be wrong. Perceptions of opportunities, based as they are on expectations, are diverse. According to Lachmann, Austrians need to be aware that expectations are most unlikely to be single-valued. Different entrepreneurs are likely to have different expectations about the same future. In fact, without such differences there would be no competitive economic process. It follows then that if there are disparate expectations about the same future, then, at most, only one can be correct. To be sure, expectations are part of extensive human plans. And plans may be judged successful or not by the planners depending upon whether they fall within a particular range of outcomes. So, in that sense, more than one entrepreneur could carry out successful plans even if their expectations did not align completely. Yet, still, the occurrence of error is both inevitable and necessary. It is from market-made errors that social learning takes place.

For Lachmann the emergence of order, in spite of the coexistence of both equilibrating and disequilibrating forces, is an empirical matter. Paris does get fed, reliably so. But not inevitably so. It seems that this is true for both Mises and Hayek, but in different ways. Hayek tackles it explicitly. It is more implicit in Mises. But what we Austrians in the post-revival period have realized and have come to increasingly concentrate on are the institutional conditions that militate in favor of the miraculous extended order that Hayek talked so much about – the order that results in Paris getting fed. In the post-revival period then this has come to be part of the normal science of Austrian economics. For social learning to take place, the institutions, in the broadest sense, have to be right.

INSTITUTIONS

As a Lachmannian it has always seemed to me that Hayek’s conception of plan–equilibrium is not the kind of equilibrium toward which any tendency can be imagined. What does it mean to say that plans are rendered more or less compatible in a world of ceaseless competition and innovation? This is Lachmann’s issue with both Hayek and Kirzner. I don’t think it should be an issue. I have argued, most recently in the Review of Austrian Economics, that we don’t need an equilibrium of plans, or strict plan-coordination (2015). What we need is an institutional structure that can accommodate a huge diversity of incompatible plans based on alternative incompatible visions for commercially viable ventures. Th...

Table of contents

• Cover
• Title
• Editor’s Introduction: Austrian Economics: the Next Generation
• Chapter 1 Austrian Economics is Alive and Growing: Retrospect and Prospect
• Chapter 2 Praxeology, History, and the Perils of Historicism
• Chapter 3 The Socialist Calculation Debate and its Normative Implications
• Chapter 4 Toward a Market Epistemology of the Platform Economy
• Chapter 5 Austrian Economics as an Evolutionary Science
• Chapter 6 Robust Against Whom?
• Chapter 7 The Role of Culture, Information, and Expectations in Police Self-Governance
• Chapter 8 The Spontaneous Order of Politics
• Chapter 9 Principles of the Austrian Tradition in the Policy Cycle
• Chapter 10 The Fall and Rise of Inequality: Disaggregating Narratives
• Chapter 11 The Challenges Facing Evidence-Based Policy Making in Canadian Agriculture
• About the Editors