Over at The Week, Noah Smith, an economics professor at Stony Brook University and of online "Noahpinion" fame, attempts a dismissal of the Austrian school of economics. His critique is intended to show that "the Austrian School's demise came not because its ideas were rejected and marginalized, but because most of them were co-opted by mainstream macroeconomics." But Smith is obviously far from an expert on Austrian theory (or the history of it).
The argument that Austrian ideas have already been incorporated in mainstream economics has already been repeated by mainstreamers so many times that it would be strange if they don't believe it by now. It is easy to see where Smith got the "idea" to add to the myth-building. But there was perhaps some truth to it, at least in the 1930s, as Pete Boettke noted in 2002:
By the mid-30's ... the idea of a distinct Austrian program, even in the minds of the Austrians themselves, was seriously waning, in part because the mainstream more or less absorbed the important points the Austrians were making. Mises (1933, 214) had argued that while it is commonplace in modern economics to distinguish between the Austrian, Anglo-American, and Lausanne School, “these three schools of thought differ only in their mode of expressing the same fundamental idea and that they are divided more by their terminology and by peculiarities of presentation than by the substance of their teachings.”
But since then several things have happened and the Austrian and mainstream/neoclassical schools have drifted apart. Not only has the Austrian school further developed and strengthened its theory (by such "minor" works as Human Action and Man, Economy, and State) and seen a resurgence, mainstream economics has stumbled down a very non- (anti-?) Austrian path of unreal assumptions hidden in layers of excessive mathematization, and, thanks to their adherence to Whig theory, lost most of its economic heritage and sound grounding.Smith produces a "new" flavor of the mainstream Whig fable of Austrian irrelevance by claiming that the "'New Classical' research program of Robert Lucas and Ed Prescott shares just enough similarities with the Austrian school to basically steal all their thunder." (Yes, he writes "all.")
He's right in the sense that there is no reason why mainstream lines of thought should not incorporate the strengths of Austrian theory, just like they should incorporate - to the extent possible - other theories found useful. But that there is incentive to use Austrian thought doesn't mean it has happened. At least not - unfortunately - in economics. It is however true in other disciplines such as entrepreneurship and management, as Peter G. Klein and I show in a forthcoming RAE paper.
Smith's similarities don't come very far in proving the point he thinks he makes. If he proves anything, it is that he lacks rather fundamental knowledge of Austrian theory and methodology. He displays a very shallow interpretation of it in some type of text-analysis fashion, and that appears to be the basis for identifying all of the "similarities." Let's have a look at the comprehensive list:
1. Human Action Axiom. Smith here uses a quote from Human Action and notes that Mises talks about the individual's "goals and ends" and how she makes "conscious adjustments" as the world changes. For some reason, he finds that Misesian action "seems very similar to modern economists' notions of individual rationality" and rational expectations. Whatever made Smith think so is not entirely clear, but it might be that mainstreamers also use words like "goals," "ends," and "adjustments." And that Mises considers action always rational (from the perspective of the individual).
Yet it would be very difficult to fit Misesian action, especially considering the subjective, temporal, and speculative properties of this concept, into a mainstream-style model of mathematical rationality (which is typically more "objective"). That action is rather distinct from choice (rational decision-making) further complicates things since the former is inherently entrepreneurial (in the speculative, temporal, uncertainty-bearing sense) while the latter can be applied under perfect information conditions and does not even imply that the individual takes action.
2. Praxeology. This is obviously an extreme view. New Classical macro, to Smith, "doesn't go nearly this far, but it has some of the same flavor." How one can use a different method but with a "flavor" of praxeology isn't clear, but Smith doesn't even attempt to show how this is the case. Rather, he addresses the (by critics projected) cockiness of praxeologists by noting how Prescott claimed his theories are "too good to be rejected by econometric studies" and that Sargent was asked him to stop his empirical tests because they were "rejecting too many good models."
It should be quite obvious that a good theory does not need to be subjected to natural-science style falsification if it follows from true assumptions. Especially since "data" in the social sciences are necessarily both selected and interpreted before they're even entered into a model. Nevertheless, it seems Smith confuses praxeology with deductive theory in general (mainstream economics still pays lip service to the latter). But he is clear on that what he's noted about mainstreamers "is far from praxeology" since they "did not ignore data entirely." So obviously Smith seems to think that praxeology is simply a quirky way to say Never Use Data.
There is one more similarity, and it seems to have something to do with "blaming" government for its "allegedly" interventionist policies. How this is a major theoretical point should be difficult to see for anyone who has not had his or her brain soaked in progressive anti-think.
Smith also notes that there are differences, for instance that the New Classical macroeconomists are heavily into mathematical modeling and don't care much for malinvestments as a cause of the boom-bust cycle. But most of the differences are differences in degree and not in kind, so they shouldn't undermine his case.
The grand evidence Smith has collected makes him conclude that "the New Classicals drank the Austrians' milkshake." As to his analysis about how Austrian economics has been co-opted, he states:
The only slight exception is the idea of malinvestment and financial market malfunction, which the New Classicals discarded entirely...but that is unlikely to provide a big enough foundation on which to rebuild the edifice of the Austrian School. I'm pretty confident in saying that the paradigm of von Mises and Hayek is dead.
What can one say? It would certainly be difficult for a school of theory to rise from the grave after such devastating critique.
However, I'd like to humbly add a couple of "slight exceptions" of my own that Smith probably regarded too minor to include. For example temporal analysis and the importance of time, capital theory and the structure of production, Austrian monetary theory, entrepreneurship, and subjectivism. Of course, I don't think this would in any sense change Smith's great analysis.
Update: It's been brought to my attention that Peter Klein discussed another, similar commentary by Noah Smith almost a year ago. Peter there suggested Smith should "use the Google," a recommendation that obviously fell on deaf ears.
