# Kaleidic Society

## July 2009 - Posts

Fellow travelers are often treated as annoying gadflies, whose only effect is to distract the hard core of a group. However, they serve in a number of underappreciated roles. In the Austrian case, they help to bridge the gap between the mainstream and the Austrian school. Economists like Leland Yeager, who sympathizes with market process theory, can make a marginalized movement appear more respectable to the mainstream.They can also help bridge gaps and create dialogue between different heterodox movements. For example, Theodore Burczak has recently attempted to synthesize Marx and Hayek, provoking conversation between Marxist and Austrian economists. Most importantly, such people help prevent groupthink and insularity within a school of thought.

I’ve tried to make an attempt to formalize the Austrian notion of utility. This seems to be a praxeologically sound formalization which does not imply that mathematics can be used in economic theory. This formulation does not state that utility functions are continuous or differentiable, so forming a Walrasian system with them would be nearly impossible. Nevertheless, it is at least an interesting exercise. Feel free to critique it:

The good's first unit will satisfy the most important end, the second unit will indulge the next most important, the third unit will tend to the third most important, and so on. Thus we get a set of ends E = ( e1, e2, e3, . . . ,ei) with the following property: For all e1, e2, in E, ej, is preferred to ei, if and only if i < j. The ranking of the elements of E is the basis for ordinal marginal utility. Let X = (x1, x2,  . . . xi, . . . ) be a set where x, denotes the number of units of good x at a consumer's disposal. Let xj > xi, if and only if j > i. Define a marginal utility function f: X --> R+ such that f(xi) > f(xj) if and only if xi, < xj. This is a result of the fact that a consumer will utilize additional units of good x to satisfy sequentially less important goals. f is thus a decreasing marginal utility function on X . To show that marginal utility is ordinal, let S = (f, g, . . .) be the set of all functions on X defined as above. Then for all f, g in S, and for all xi, xj in X, f(xi) > f(xj) implies g(xi) > g(xj). S is consequently an ordinal measure of marginal utility.

If the subscripts aren't working, the sets are meant to be ordered sets.

“On the one hand we want to have a time structure of production in order to have our theory of the trade cycle. On the other hand we often cop out by describing it as purely subjective; the time structure of production describes something about the plans of entrepreneurs and in this sense varies from entrepreneur to entrepreneur. But we can't have it both ways. If it supports ATBC, then it's an "objective" notion. If it is a "subjective" notion, the ATBC cannot be sustained. I wish we would pick up on a suggestion by Peter Lewin and cut the Gordonian knot with the idea of "duration." Before we can do that, however, we have to see the problem and it's my impression that almost no Austrians see the problem.”
-Roger Koppl

This is an interesting point, although I’m not sure whether I entirely agree with it. However, if this dichotomy of subjective entrepreneurial plans and objective physical capital really cannot be bridged, I think that I would have to take the side of subjectivism.

After giving more thought to this, I think that we should discard the time component as a critical part of the theory. While we can say that inflation alters the number of stages of production and introduces greater uncertainty into the system, we can’t talk about the process in a uni-dimensional manner. Because of the existence of looping in the capital structure (some production processes may produce materials that later end up in that same process), the order of any production process is an entirely subjective phenomenon, existing only in the interlocking plans of entrepreneurs. Therefore, a distorted rate of interest can only be said to disfigure and warp the web of interconnected capital. Although we might be able to empirically discern more specific tendencies, given a particular capital structure, the theory itself cannot give us any more information. We need to accept that we cannot derive a satisfying business cycle theory without empirical insight.

Critical Realism is a philosophical movement that has been gaining some ground in the past few years. It is an approach to philosophy that encompasses epistemology, ontology, and to some extent, morality. It approaches the world as being made up of “structures,” each with certains “powers.” These structures (think gravity) are always exerting these powers, even when there are other powers at work preventing the previous powers from achieving its full effect. For example, gravity works upon a bird, but the bird’s power to fly counters this.

You might ask: why is this so novel? In contrast to positivism, it is quite new. Positivism looks only at conjoined events of the form: A, then B. Realism attempts to look at the structure of events and denies that the prediction of such conjoined events is the purpose of science.

This is relevant to economics because this philosophy is incompatible with many forms of econometrics. If the purpose of science is to study “structures,” rather than laws, then the mainstream approach to economics is bankrupt.

Unfortunately, this philosophy is almost invariably used solely by the left, often to justify Marxism. However, Austrian economics could certainly make use of this philosophy to justify its methodological attack on the mainstream.

Andrew Collier’s book on Critical Realism would be a good place to learn about this topic, if you can ignore the Marxist ideas strewn throughout it.

Anyone who thinks the Austrians are not influential really needs to do his homework on the subject. Penrose, Lawson, and Lewin have all been influential in their fields and were heavily influenced by Austrian ideas.  Tullock and Buchanan have both said that Hayek greatly influenced them. Even some Marxists have become Austrians, such as Burczak. Just because a school's influence is diffuse doesn't make it inconsequential.

More importantly, there have been attempts by other heterodox movements to reach out to the Austrians. For example, Tony Lawson has made the case that the philosophy of Critical Realism is to some extent compatible with Austrian teachings. He uses Hayek as an example of a proto-Critical Realist. In itself, this shows that our school of thought has influence in the general sphere of heterodox economics. Although it's true that Hayek's influence has been more widely felt than most other Austrians, Mises has influenced many as well. For example, Mises has influenced many classical liberal historians, such as Leonard Liggio.

Aristotle, upon whom Menger based some of his ideas, believed in the concept of akrasia. Akratic action is action that is known to be against an agent's own interests, but is pursued regardless. This is obviously incompatible with any rational choice-based theory of action, since the agent is purposely acting irrationally. An example is the drunk who knows his alcohol addiction is harmful and regrets his problem, yet continues drinking. Is this a problem for a realistic economic theory based on the assumed rationality of economic agents?

One first step to deal with this problem is relaxing the standard of rational action to the Misesian notion of purposeful action. This does not solve the problem fully. In this case, we can understand the agent as having two opposing beliefs about the usefulness of their action. The agent only acts on one of these beliefs, leading to feelings of regret from the other. However, this leads to a new problem: why would an agent choose only to pay attention to an inferior belief?

Elster attempts to solve this problem by positing a rapid change in time preference of the agent during the akratic act. When the actor soberly examines his options ahead of time, he may choose X over Y. However, when confronted with the imminent choice, he chooses Y due to a rapid increase in his discount rate. This solution does not provide an answer to the deeper question of why the agent would feel regret simultaneous with the action. It seems that the only way out of this puzzle is to admit that this increased discount rate is caused by a weakness of will, perhaps due to impulsiveness. The actor knows that his choice is problematic, yet is unable to impede the force of his passions. This is not incompatible with any Misesian theory of choice, since praxeology makes no claims about the motivations of an action.

There are at least three distinct, but overlapping, research programmes (to use Lakatos' term) in Austrian economics, at least according to Rothbard. Each of these styles of thought can rightfully claim to be based on Mengerian insight.

There is the Mises-Rothbard strand, which emphasizes rationality, equilibrium as a mental construct, and theorizing based on axioms and logical deduction. This comes directly from Menger's search for "exact laws" of economics and human action.

A more prominent mode of thought, at least among the mainstream, is the Hayek-Kirzner paradigm. Although this group can easily be split up further, it generally emphasizes spontaneous order, discovery procedures, and entrepreneurship. This can be derived from Menger's discussion of organic and pragmatic orders and organizations. The classic example of an organic order is the means of exchange, which spontaneously arose to fulfill the need created by the problem of finding a "double coincidence of wants".

Another, more controversial, research programme is the Lachmann-Shackle school of radical subjectivism. This method of analysis focuses on expectations, sociology, and disequilibriating elements in the economic process. It shares some elements with the Post-Keynesians, although these ideas are taken in drastically different directions. This draws on Menger's role as one of the founders of subjectivism and claims to complete the subjectivist revolution.

How should we decide whether a school of economic thought is heterodox or mainstream? The line is not always very clear. We can safely say that economics in the style of Paul Samuelson, the neoclassical synthesis, is mainstream, but that is an easy case. One way to draw the line is to look at other areas of study that the school resembles. Does it resemble physics? Philosophy? Or perhaps sociology? I would suggest that any school which resembles physics or mathematics is mainstream. Even this is not always a good heuristic, since econophysics is not particularly mainstream. Another method of categorizing is to look at who founded or popularized the school. If the founder was English, it is probably mainstream. There are a number of other interesting ways of categorizing schools, based on differing perspectives on capital, interest, and other concepts, as well.

I believe that any kind of interventionism is incompatible with subjectivism. For example, suppose that a cluster of entrepreneurial errors occur in the economy, possibly as a result of the ABCT. The capital structure has become inconsistent with the demands of the consumers and relative prices are out of balance.

What could an interventionist Austrian suggest to deal with this? He could recommend that the government create incentives to invest in industries that would have done well had the cluster of errors not occurred (these would likely be producers of consumer goods). How would the government determine the proper industries to prop up? It could not. To do so would require precise knowledge of a counter-factual state of affairs. Since the correct capital structure is a reflection of consumers' needs, the only option is to let the entrepreneurs slowly discover their mistaken investments and correct them.  Therefore, Lachmann was inconsistent with his own methodology when he advised certain kinds of intervention to alleviate the business cycle.