Methodology of Austrian Economics

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Scott Grizzard replied on Fri, Jul 17 2009 2:48 PM

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Suggested by hayekianxyz

The fact is, while Austrians are nit picking on methodology, the Austrians and the Neoclassicals come to many of the same "basic conclusions".

If a Neoclassical economist listens to an Austrian explain Supply and Demand, the Neoclassicist is going to say, "basically yes, but..." and then run off a long series of mathematics.  Likewise, the Austrian is going to object to "objective costs" with a string of verbal logic, not understanding that yes, even Neoclassical economists understand that Supply is, fundamentally Demand, and if you press them, they will say that production functions do not "exist in nature" but in the minds of the producers (which they then refer to as "the 'Z' thing" or "human capital").

Neoclassical economists have this "ideal of physics" stuck in their head about "testing" economic theory, and that is nonsense, and most of them, deep down, know it.  The real difference between Neoclassical economists and Austrian economists is math - the Neoclassists want to reason deductively using mathematics, and the Austrians want to reason deductively using long strings of verbal logic.  Wherever they seem to come to the same conclusion, they are really just using a different vocabulary to get there.

The perfect example of this is the Law of Dimminishing Utility for Austrians.  Neoclassical economists will say "how can you have the first direvitave of U with respect to x always be negative if U is ordinal"?  They are right, but when an Austrian talks about "marginal utility" of a good, he's really talking about in Neoclassical verbage is "Diminishing Marginal Rate of Substitution of one good compared to all other goods" when, once you look at what Austrains are defining as a good, is the something that reconciles perfectly well with the "Neoclassical model".

Austrian economics and Neoclassical economics feed off each other in very positive ways, so the idea of "picking one or the other" is really silly.  The neoclassical approach works much better when you are concerned with magnitudes of effects, such as "which has the larger effect on suburbanization, raising land prices or raising opportunity cost for commuting?", and that is where "testing" models against econometrics comes into play, not to find some new "economic law", but to find a "best fit" for a particular time and place.  The Austrian approach works much better when calculation and coordination issues, which is why Hayek's seminal paper on prices and knowledge shows up in Economics of Organizations classes along with Coase's theories of the firm.

The place where the two schools of thought disagree most vehemently is on macroeconomics, and there I think the Austrians are right (which is why I am here).  The two things that most Neoclassical economists cannot seem to get a handle on is discordination and uncertainty - and if you figure out a way to put that in mathematics for them, I think you can earn a Nobel Prize.

Both approaches to economics are useful, and, though it is good to hear and understand both arguments, the "marginal returns" to discussing it further quickly eclipse the marginal cost - the opportunity cost of reading something that could lead to new economic insights for everyone.