Sunday, November 14, 2010

Neoclassical Economist reads Rothbard's Man, Economy, and State - Introduction

I've been reading (some might say retraining) in Austrian economics for some time now. I'm trained in neoclassical economics. There are all kinds of ways that these two types of economics are similar and many other ways that they are different. There are boatloads of discussions regarding these differences. I would say Austrian economists, since it is considered heterodox, are aware of neoclassical, but the reverse is not the case. For me, I only became aware of the general existence of Austrian economics after working backwards through Hayek and finding out who his professors were.

Enough preamble. I am going to now begin abusing my blog (since I think only about 3 people read it this shouldn't be a big deal) by recording my progress through Man, Economy, and State. My plan is to post a discussion regarding every major section. I might say I'm aspiring to my own version of Bob Murphy's study guide for MES, but I haven't read it so I can't say it. My hope is that people will happen upon these postings and discover the genius that is Rothbard.

I will close by saying that the largest hurdle for Austrian economists (or aspiring ones) in advancing the profession is the immense chasm between Austrian methodology (that is praxeology) and the neoclassical methodology (mathematics). Both use types of logic: praxeology is essentially deductive logic, and math is symbolic logic. Nevertheless, the orthodox method is a menu of mathematical models. Austrian economists have to fight that battle. This has also been my most difficult hurdle in accepting as legitimate economics the Austrian method. I've crossed that hurdle as I've read the work of the various Austrians (most notably Hayek) but I believe this issue is what prevents Austrian methods from being taken seriously by the mathematically-driven orthodoxy.

Enough for now. In the next post, I will begin discussing Chapter 1 of MES.


  1. So, when you say Austrians rely on the praxeology method (I had to look that up, btw), does that apply to their work on micro or macro? Or do Austrians basically view micro the same as other schools, and only diverge on macro?

    And why do only 3 people read your blog? Don't you make your students read it and comment?

    And I'm posting as anonymous only because I don't see a Disqus logon option. Otherwise you'd know me as Observer_Guy1.

  2. Hola, OG (or BD what'ev).

    No, I don't make my students read this thing. I'm not sure if I want the current crop to be aware of it.

    First, Austrians don't see a difference between micro and macro. Or, more accurately, Austrians don't think there is a division - it's just economics, which is the study of human action. So the Austrians base any understanding of what would be "macro" issues on the actions of individual people. That leads Austrians to reject as baseless any kind of use aggregates as "decision" variables.

    So, the micro foundations of Austrian econ tend to be similar to a degree with some neoclassical results. But Austrians are much more interested in the process than with the end state.

    But Austrians can't get with Keynesianism (or New Keynesianism) because those branches are not based on sound micro theory.

    Stay tuned for more developments.

  3. Another way of looking at Austrian economics is that they believe the economy to be so complex that the mathematics has yet to be invented to understand it. Thus, they rely on a much more complex methodology.

    I would argue that Hayek's spontaneous order theory is the Austrian theory of macroeconomics. It's a very different theory, to say the least.

  4. Troy,

    I agree with that statement. Furthermore, neoclassical focuses on the state of rest (equilibrium) whereas Austrian focuses on the process. As we can never be in equilibrium, Austrian is more realistic.

    I have to give some thought to your argument regarding the spontaneous order. Insofar as it is a micro story that generates macro effects, that seems quite sensible.

  5. I disagree with your statement that Austrian economics is based on deductive logic. Its logic is more inductive, creating new general principles by integrating empirical evidence. You can't just deduce the business cycle theory from a few axioms. You need to observe business cycles in action, and that includes the behavior of central banks, the nature of money, and so forth.

    I think its a big mistake for Austrians to try to sell their theories as deductions from axioms. Where do you get your axioms?

  6. IceMan,

    First, thanks for taking the time to read & comment.

    I find some common ground with you in that Austrian economists are trying to explain really occurring phenomena, like the business cycle. But the reading I have done, which doesn't include all Austrian economists by any stretch (mostly just Rothbard and Mises), shows that Austrians use deductive logic for the most part. There is some induction here and there - like Rothbard sometimes argues in terms of most reasonable explanation etc. But Rothbard makes extensive use of the "evenly rotating economy" which is, by nature, not observable, before bringing his conclusions to bear on the really existing economy.

    I hope you will continue to follow my study of Rothbard. It will, I hope, prove interesting for others.

  7. A system at equilibrium is dead. Neoclassical economists thus are trying to study a dead system, and make conclusions about what it must have been like when alive, having never dealt with a living specimen. A real economy is in a far-from-equilibrium state. Far-from-equilibrium states are the most creative states. They are also the most complex, being on the border between chaos and order. Austrian economics has been dealing with the economy as such a system for over a century now; self-organizing complex adaptive systems theory is only now being applied to the study of the economy, and it coming to Austrian conclusions. Which is not in the least bit surprising to me.