The large majority of neoclassical microeconomics can be derived from two principles (or axioms) and a few extra assumptions. It is often said that Austrian microeconomics is certainly true because all of it can be derived from a self-evident axiom.
The two axioms of neoclassical economics could be stated like this:
The Optimization Principle: People try to choose the best patterns of consumption that they can afford.
The Equilibrium Principle: Prices adjust until the amount that people demand of something is equal to the amount that is supplied.
What would be a good way to state the axioms of Austrian microeconomics?
Are they really more reasonable as premises than those that are the foundation of neoclassical microeconomics?
First of all, thanks for responding. Although it may once have been the case that those features that Machlup mentions were unique to Austrian economics, I do not believe it is the case today. Modern Neoclassical Microeconomics incorporates marginalism, the Law of Diminishing Marginal Utility and Opportunity Cost can be found in just about any neoclassical textbook. I’m not really sure what he means by the “imputation of value to complementary factors”. This may or may not be a part of modern neoclassical theory.
Also, in response to your points, methodological individualism IS a part of neoclassical microeconomics (it is only in the macro sphere where this methodological principle is discarded). Again, why do you think marginalism isn’t a part of neoclassical theory? Isn’t marginalism what separates neoclassical economics from classical economics? Are you implying that Neoclassical Microeconomics relies on the intrinsic theory of value or the labor theory of value? As I said before any major textbook will have a section on opportunity costs. I don’t know enough about how Austrians view time preference to know if it is substantively different than how neoclassical theory views the same type of behavior or not.
So this leaves us with the “imputation of value to complementary factors” and “time preference” as possible differences between Neoclassical Microeconomics and Austrian Microeconomics. Is this something that is really worth segregating yourself from the rest of the field over? Note, that I am not saying that Austrian Macroeconomics isn’t significantly different from the mainstream macroeconomics. I am only talking about microeconomics. Modern mainstream macro doesn’t have a core that almost the entire profession accepts like Neoclassical Microeconomics does.
To get back to my original question: are these minor differences a result of the Austrian axioms or simply historical accident? I would appreciate if someone who actually considers themselves an Austrian would formulate the axioms, so that we can discuss how they differ from the axioms I listed above.
well, that neoclassicals have adopted Austrian ideas is true, but this shouldn’t fool you into thinking that they are equal concepts.
for example, neoclassicals ‘say’ that they accept ordinal utility and have long disregard cardinal utility. Yet one can see that they proceed to mathematise their economics, erroneously introducing cardinality in through the back-door. William Barnett has written on this.
perhaps, you could refer to Bryan Caplan on why he doesn’t call himself Austrian to pick up on where a neoclassical schooled in Austrian texts thinks the neoclassical position is different and superior to the Austrian
also, forgive me for not better presenting the above quote. Machlup wrote both the paragraphs, i understand it may appear that I wrote the paragraph. I will edit the original post..
Isn’t another problem with neoclassical economics their faulty empiricism, whereby they may question certain axioms they consider fundamental in a “return to depression economics” etc?
The way Austrians conceive of marginalism and how neoclassicals do differs if you say read the works of Menger and take any neoclassical textbook, and this is reflected in how Austrians deal with ‘problems’ such as Giffen goods and so on. Mainly neoclassical econ isn’t too different to Austrian econ so far as micro is concerned (e.g. they recognise the same f.o.p as we do, perhaps a matter of Kirzner’s influence… my textbook on business econ even cites him to the exclusion of Knight and speaks favourably of the Austrian approach to entrepreneurship) but its capital theory is by far more advanced, and the way it builds up from marginal utility theory all the way to price theory is far more coherent than what is taught in neoclassical econ. And yes, the capital theory is a huge deal (as it’s derived from Austrian views on TP and backwards imputation of valuation) because it is what makes Austrian macro distinctive. Aside from Rothbard Austrians also see very limited use in graphs, and I think this is important because I’ve yet to do a neoclassical course that mentions the limitations behind them. They do mention say the ‘assumptions’ of neoclassical econ but not so much what holds for the graphs. Also, neoclassicals still lend credence to idiotic theories of competition which Austrians eschew altogether. Again, where they converge it is due to insights by Austrians like Hayek, and even then they still don’t ‘get’ it fully (though they recognise monopolies may be the most efficient market structure.) Their price theory is of course broadly similar to Austrian theory.
Methodologically speaking, aside from taking an aprioristic approach, Austrianism is also realist and thus rejects constructs like general equilibrium theorising (and derivatives such as perfect competition) and taking marginal utility as merely a ‘useful’ assumption. Here’s a good paper on it. Get rid of “perfect competition”, introduce a stronger element of time in neoclassical econ and recognise the heterogeneity of capital and the differences evaporate.
I do believe that there are real differences in methodology in microeconomics, but the body of theory that is generated from that methodology is so similar that it just doesn’t make sense to me to cut yourself off from the rest of the profession. Also, I know that there is a vast difference between Austrian macro and mainstream macro (but I don’t think very highly of macroeconomics in general so this doesn’t really bother me).
My favorite neoclassical textbook, actually has a section on cardinal utility that examines arguments in favor of cardinal utility and provides a counterargument to each of them. This is the concluding paragraph of that section:
I reread his paper, and it seems that Caplan agrees with me that the differences are overstated.
No problem.
From that lecture at the 37 minute mark:
I don’t know enough economics to determine if Murphy is right about causation in economics, but the other things he mentions are very small differences. Also, what is the difference between Time Preference theory and the discount function? It is still my judgment that Austrian Microeconomics is too similar to Neoclassical Microeconomics to segregate yourself from the rest of the profession over.
I concede that Austrian methodology is different than Neoclassical methodology, but isn’t this a good reason to compare and contrast the basic axioms of the two schools? I am still interested in talking about the merits and demerits of the Austrian versus Neoclassical axioms.
Note that I am not bashing Austrian economics (as far as I am concerned, Hayek was the greatest economist of the 20th century). I merely think that the differences are very minor and that those differences should be scrutinized and subject to comparative tests.
Checking your premises isn’t a “problem”. Also, you are referring to macroeconomics when you talk about a “return to depression economics”. I give as much credit to marcoeconomics as I do to sociology (which isn’t much).
I heard Salerno say that Mises agreed with you. that The Mainstream had adopted ‘Austrian Positions’ to the extent that Mises saw no value in describing himself as an ‘Austrian’ economist after that had happened.
To me, the appeal of the Austrian tag is
a) the tradition, we need to remind the mainstream where the roots of their ‘best ideas’ came from, and that they should pick up the old books and see what other good stuff is in there and why they might not be doing the stuff they adopted ‘quite right’.
b) Austrians are keenly aware of methodology whilst the Mainstreamers don’t really care, when the Mainstream adopt the Austrian methodology, that will end it for me.
Back to the topic of Hal Varian and his ilks stated acknowledgement of Ordinality over Cardinality, there is the paper:
You’re not alone in the general thrust of your posts here. Rothbard himself has said in at least one lecture I’ve listened to that, while mainstream macro is a complete mess, mainstream micro is fairly decent. I believe this is because, in spite of all their positivist protests to the contrary, mainstream microeconomists still adhere to laws and principles, the original derivations of which were at bottom praxeological (supply and demand, diminishing marginal utility, etc).
I will take a stab at this. The answer I will provide is based on my understanding of Misesian praxeology. I can’t speak for all self-described Austrians.
Here is your original post:
"The large majority of neoclassical microeconomics can be derived from two principles (or axioms) and a few extra assumptions. It is often said that Austrian microeconomics is certainly true because all of it can be derived from a self-evident axiom.
The two axioms of neoclassical economics could be stated like this:
#1) The Optimization Principle: People try to choose the best patterns of consumption that they can afford.
#2) The Equilibrium Principle: Prices adjust until the amount that people demand of something is equal to the amount that is supplied.
What would be a good way to state the axioms of Austrian microeconomics?
Are they really more reasonable as premises than those that are the foundation of neoclassical microeconomics?"
Above, you also write:
“Also, in response to your points, methodological individualism IS a part of neoclassical microeconomics (it is only in the macro sphere where this methodological principle is discarded).”
You are saying that you don’t see much difference between the axiom(s) that ground Austrian analysis versus those that ground neoclassical analysis.
However, if you look at your #2, that does not seem to be methodological individualism. Your #2 describes, it seems, not the point of view of an individual actor, but the objective state of things in society.
So #1 and #2 are two different points of view, indicating two different methodologies. As Hayek wrote:
“I have long felt that the concept of equilibrium itself and the methods which we employ in pure analysis have a clear meaning only when confined to the analysis of the action of a single person and that we are really passing into a different sphere and silently introducing a new element of altogether different character when we apply it to the explanation of the interactions of a number of individuals.”
Speaking about the meaning of the term ‘equilibrium’ when it refers to the analysis of individual action, versus when it refers to the situation in society, Hayek continues:
“The data which are here supposed to be objective facts and the same for all people are evidently no longer the same thing as the data which formed the starting point for the tautological transformations of the Pure Logic of Choice. There “data” meant those facts, and only those facts, which were present in the mind of the acting person, and only this subjective interpretation of the term “datum” made those propositions necessary truths. But in the transition from the analysis of the action of an individual to the analysis of the situation in a society the concept has undergone an insidious change of meaning.”
(Individualism and Economic Order, chapter 2, Economics and Knowledge)
What Hayek is describing is the subtle shift that occurred from the kind of analysis Austrians were using based on methodological individualism, and the new method which was gradually and imperceptibly abandoning this method in favor of one that seeks to address ‘the situation in a society.’ Your #2 axiom seems to be an axiom that refers to what Hayek describes as either ‘the interactions of a number of individuals’ or ‘the situation in a society,’ neither of which refers to the analysis of the action of an individual actor.
You can see this different approach most clearly in Mises. Here is how Mises conceives the grounding axiom of Austrian analysis:
“The starting point of praxeology is a self-evident truth, the cognition of action, that is, the cognition of the fact that there is such a thing as consciously aiming at ends.”
“All the elements of the theoretical sciences of human action are already implied in the category of action and have to be made explicit by expounding its contents.”
“The very category or concept of action comprehends the concepts of means and ends, of preferring and putting aside, viz., of valuing, of success and failure, of profit and loss, of costs”
(The Ultimate Foundation of Economic Science, p. 5-8)
These passages all refer to the idea of individual action, and not to the objective state of affairs in a society.
So I would say that according to what you have written above about neoclassical analysis, the difference between it and Austrian analysis, is that Austrian analysis takes your #1 plus a few extra assumptions, whereas—according to what you write—neoclassical analysis takes #1and#2 plus a few extra assumptions.
As you can see, in doing so (in taking #1and#2 as grounding axioms), neoclassical analysis, according to Hayek, introduces an additional and conceptually separate point of view by means of axiom #2.
According to your conception of neoclassical analysis, and according to the method Mises is using and which Hayek describes, neoclassical analysis uses two axioms of a fundamentally different nature; one representing the point of view of the individual actor, and one representing the situation in society. By contrast, the uniqueness of Austrian analysis is/was its reference to the point of view of the individual actor only (strict methodological individualism). At root, Austrian analysis is #1 only.
I think this misses the point. These functions aren’t used because there actually exists utility functions “out in the world”. Utility functions are models that allow you to predict choice behavior, they aren’t something that exists in the psyche of economic actors. It seems to me that Barnett is confusing the use of a model for a description of reality. Continuity and differentiability have to do with the ease of use of the model, not a part of reality. The map is not the terrain and economists are aware of that.
If this turns out to be true I will adopt the Austrian position on this issue, but I first need time to find some Neoclassical sources that deal with this problem (which I think might be a misunderstanding of Pareto). I don’t know why he claims that indifference implies cardinality, but I am willing to look up the Rothbard text he cites and read for myself. I will address the remainder in a later post.
Perhaps it is more tightly integrated or coherent, but the actual body of theory is so similar that it hardly seems worth it to make life hard for yourself by claiming to be heterodox.
I deliberately avoided discussing macro. There is near consensus among economists about the hard-core of Neoclassical Microeconomics. There is no consensus in macro (which means Austrian macro would be just one among many). My claim was that the differences between Austrian and Neoclassical Microeconomics are overstated.
I can’t speak for others, but using graphs are useful for pedagogical reasons. When you learn a new theory in economics it helps to see English, Algebraic, and Geometric (graphs) representations to make sure you are really grasping the consequences of the model. Also, I’m not sure which theory of competition you calling “idiotic”.
To a large extent, Neoclassical Microeconomics has moved away from GE and towards a more game-theoretic approach which is much more realistic (especially in markets with a relatively small number of firms).
Okay it seems that even if indifference implies cardinality then BOTH Austrian Microeconomics AND Neoclassical Microeconomics have a problem that needs solving. In Socratic Puzzles, Nozick shows that the concept of commodity relies on indifference:
If indifference implies cardinality and Austrian Microeconomics relies implicitly on the notion of a commodity, then Austrian Microeconomics is sneaking in cardinal utility “through the back door”.
What do you guys think?
Also, when is someone going to get around to stating the Austrian Microeconomic axioms so that we can compare them to the ones I listed? I would really appreciate it if a self-described Austrian would do this for me so that I can be sure that I am now creating a straw-man.
I meant perfect competition is idiotic when taken to be a representation of anything in the real world, or something to which policies must be adjusted (and the textbooks do often give the impression that it is its purpose, with ‘countervailing’ factors such as the benefits accruing from monopolistic firms drawing from Hayek and others.) I think Rothbard pretty much eviscerated monopoly theory on the whole (aside from references to legally granted monopolies.) The differences exist, but yes when it comes to micro Austrian econ is not so divergent from neoclassical econ as it is when it comes to macroeconomics. There are differences, but nuanced.
I don’t know if game theory is really that much better than GE thinking. It tries to set rules of the game, then looks at optimizing solutions. The problem is that the rules of the the game are created endogenously and are forever changing. Trapping agents within artificial constraints doesn’t really give insight into real world problems. In addition, many games are simply non-computable, including some simple ones. How should this be interpreted?
If we have to use math in economics (note: I’m not saying we should), then we would probably want to look at more complexity based work, that emphasizes the unpredictable nature of economies.
Also, I would like to mention that there are economists who dispute modern micro, however you would like to define that. It isn’t just Austrians.