How does it differ from the classical and austrian school and are there any e-documents that can be linked to that have some information on the school?
Student can definitely correct me so let me hazard some guesses:
the concept of indifference
AS/AD curves in determining macroeconomic equilibrium
neutrality of money
subjectivity of value
positivism and/or mathematical logic
Depressions either as a fall in AD or simply as a result of changes in technology
pareto optimality
rationality as utility optimization or as useful assumption
equation of exchange -tendancy towards equalizing utility.
possibility of interpersonal utility comparisons
Why did you include subjectivity of value? Most neoclassical economists acknowledge that value is subjective. They just don’t constantly harp on it like Austrians.
Edit: Also, why did you include in the assumption of rationality? Austrians assume this too, they just call it acting to achieve a certain end according to an actors own values.
I don’t believe the assumption of rationality is the same.
I’ve always understood it (and this is how I learned it in my undergrad econ classes) that humans are rational in so far that they act to maximize the present value of their expected utility. I don’t really see how this is majorly different from Austrian economists (other than using different terminology).
That seems to represent part of the Austrian connection. Hence at least as far as ends go, the person may be motivated to commit actions based on a past expected utility(in Austrian terms, according to his past value scale), which do not match his current one, and thereby realising he commited a mistake. (Like a kid ordering a beer, and then realising he doesn’t like it.)
It was my impression that neoclassicals were weak on this factor as far as means go however. Hence they believe that actors will have perfect knowledge of THE most efficient way or means with which to achieve their ends in order to be rational. The Austrians don’t go this far. E.g. the doctors in the past who advised bad methods for treating cancer were not irrational but acting as rationally as they could given the knowledge(or I should say beliefs given the unfortunate objective connotations “knowledge” has) they had, just like we do in all our endeavours where our knowledge of causal relations is incomplete. Similiarly entrepreneurial failure to produce instantaneous market equilibrium with 20 20 hindsight is not “irrational.”
Nir, your second link strikes my fancy with that paper by De soto.
I never get enough of recomending How Markets Work by Israel Kirzner. Before reading this I had never really thought about the assumptions that lay behind those demand & supply curves. All of it is good but part three probably anwsers the last part of your question most directly. The whole paper is basically a comparison of ‘mainstreem’ neoclassical theory with Austrian ideas.
well, i wonder if it wouldn’t be useful to clarify what exactly we are interested in. specifically, are we interested in discussing “neoclassical economics” or “mainstream economics”? if we are talking about neoclassical exclusively, then I think this desc from the cee works well:
Neoclassical economics is what is called a metatheory. That is, it is a set of implicit rules or understandings for constructing satisfactory economic theories. It is a scientific research program that generates economic theories. Its fundamental assumptions are not open to discussion in that they define the shared understandings of those who call themselves neoclassical economists, or economists without any adjective. Those fundamental assumptions include the following:
- People have rational preferences among outcomes.
- Individuals maximize utility and firms maximize profits.
- People act independently on the basis of full and relevant information.
Theories based on, or guided by, these assumptions are neoclassical theories.
http://www.econlib.org/library/Enc1/NeoclassicalEconomics.html
But of course “mainstream” economics goes well beyond this narrow description of “neoclassical” economics. For example, much research has been done over the past 60 years on how people act with less than full information, nonprofit maximizing firms, bounded rationality etc
and really, i don’t see austrian economics as being nearly as far away from the mainstream as some believe. but i guess it all depends on how you define “austrian”. personally, i prefer to think about good economics and bad economics.
I know how Bastiat and Hazlitt defined bad economics, how do you define bad economics?
as the opposite of good economics. but honestly, i don’t have a good definition of either term. i was only trying to say i try not to spend much time dividing the arguments/theories i see into schools of thought (austrian v. neoclassical), but instead focus on figuring out whether the arguments/theories do a good job of explaining reality.
as a side note, i was assigned readings from bastiat in 4 different classes an econ undergrad (intro to econ, intro to trade, intermediate macro, international finance) and hazlitt was recommended reading in 1 class (intro to econ). just thought i would mention that to illustrate the overlap in what we read.
Here are the main neo-classical positions that conflict with AE:
- The interest rate is the marginal product of capital (at equilibrium)
- Cardinal measurements of utility (either explicitly or implicitly).
- Capital as a homogenous fund (aggregation in general).
- Their concept of rationality.
- How they (usually) treat the element of time (logical vs historical).
- The literal interpretation of the quantity theory of money.
- How they interpret competition.
- Their method (positivism).
- The employment of game theory (optimal stop, decision trees, ect).
More specific neo-classical positions rejected by AE:
- Real business cycles.
- Efficient market hypothesis.
- Pareto and Khaldor-Hick efficiency.
- Dynamic stochastic general equilibrium models.
- The acceleration principle.
- Rational expectations.
There are others, but I can’t think of them right now. But I must stress the fact that not all neo-classical economists adhere to every position that I’ve mentioned. The “neo-classical” school is the amalgamation of many different schools of thought that hold different assumptions and often reach different conclusions.
Esuric,
Once again, a clear and concise explanation regarding complex subject matter. Thanks.
Can anyone recommend a book or something that examines this stuff from an Austrian perspective?
Cardinal measurements of utility (either explicitly or implicitly).
Nobody uses cardinal measurements of utility. Neither explicitly nor implicitly.
The employment of game theory (optimal stop, decision trees, ect).
Leeson, Rizzo and Foss and others see the utility in game theory.
…so my textbook is a cake?
Guess so.
The cake is a lie.
Oh, and by the way: indifference curves are, by necessity, dependent on cardinal utility.