Bryan Caplan  

My Latest Paper on Austrian Economics - and Why I Keep Writing Them

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I'm a critic of Austrian economics. I've published general critiques (see here, here, and here), and questioned their positions on economic calculation and the impossibility of socialism (see here and here). Today I just submitted a new piece to the Review of Austrian Economics, entitled "Mises' Democracy-Dictatorship Equivalence Theorem: A Critique." Here I explore and criticize Ludwig von Mises' claim that dictatorships, like democracies, have to be highly responsive to public opinion.

Fair question: If I'm so critical of Austrian economics, why do I bother?

The answer: I respect the Austrians as adversaries. Even when they're dead wrong, they're intellectually stimulating, try to answer important questions, and write well. Though often misguided, the Austrians get me thinking, and hold my attention. And once in a while, they get things very right.

A corollary of my respect for the Austrians is my belief that their movement is wasting precious libertarian human capital. Perhaps half of all hard-core libertarian economists are Austrians. If I'm right that they're (largely) wrong, we libertarian economists are engaging the mainstream with one arm tied behind our backs. Strategically speaking, the purpose of my anti-Austrian writings is to convince them to reallocate their human capital in more productive directions. If I didn't think the Austrians had a lot of potential, I wouldn't be trying to convert them.

Austrians may take all this as a backhanded compliment. But it's actually the opposite.

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The author at Economic Investigations in a related article titled Bryan Caplan Saves writes:
    Distinguished professor and public choice/voting systems theoretician Bryan Caplan is on a crusade to save the “Austrians” from themselves: My Latest Paper on Austrian Economics - and Why I Keep Writing Them That’s far too ambition fr... [Tracked on September 21, 2006 4:00 PM]
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Will Wilkinson writes:

The opposite of a backhanded compliment... a fronthanded insult?

James writes:

"If I'm right that they're (largely) wrong, we libertarian economists are engaging the mainstream with one arm tied behind our backs."

I'm not buying this. The statist mainstream will reject any argument for libertarian ideas regardless of whether that argument is based on Austrian or neoclassical economics. For that matter, I don't see that the Austrian and neoclassical arguments are even all that different from each other on most of the issues where libertarians would want to persuade the mainstream to change their views. For example:

The Austrian argument against countercyclical fiscal policy is that it isn't so attractive once you account for opportunity costs, and besides, the solution to economic woes is to stimulate production of new wealth, not to use up what little wealth you actually have. The Austrian argument against most interventionist policies is that they will have unintended consequences, and that it's a dangerous game to start imposing such policies because once they are imposed, politicians tend to respond to their unintended consequences by imposing more interventions rather than repeal the prior intervention. The Austrian argument against high taxes is that they discourage whatever is taxed, be it work, investment, etc., and so you reduce the incentive to do it. The Austrian arguments against anti-trust are that laggard businesses will compete against their more efficient rivals in the courts when they fail at competing in the marketplace, and that its unrealistic to try and force every firm to conform to the model of perfect competition where P=MC.

Remarkably, these are the very same arguments that neoclassical libertarians make and there is nothing distinctively Austrian or neoclassical about any of them. If all the Austrian libertarians gave up their Austrian tendencies tomorrow, they would still make all the same arguments for libertarianism (with perhaps the exception of abandoning ABCT in favor of some production function theory of the trade cycle) and the mainstream would still reject those arguments for the same reason that they reject those arguments now: their conclusions are unacceptable.

eric writes:

I think the problem with the Austrians is their disdain for empirical work. It's almost Randian in it's faith in self-evident truths.

James writes:

"I think the problem with the Austrians is their disdain for empirical work."

I suppose this may be true of some Austrians, but for the most part the Austrian attitude toward empirical work is not disdain. Rather, the Austrian attitude is that empirical methods are fine for answering empirical questions, but they can't prove or disprove economic laws.

This is completely anecdotal, but my experience has been that about 1/3 of the neoclassicals I've known share this view. Without exception, the ones who believed this were also the ones most knowledgable about the use of empirical methods.

"It's almost Randian in it's faith in self-evident truths."

It wouldn't exactly occur to me to refer to belief in self-evident truths as "faith," let alone to toss pejoratives at those who do believe in self-evident truths.

Max writes:

I am not an economist, so I have no idea what exactly the underlining problem is? The rejection of the Austrians to do math?

And what the hell is welfare economics?

I'd be glad if you could shed some light on this issues. (as a student of engineering I am both wary of not-using math to support your ideas and using only math to support them :) )

Hi, Max.

What great questions you asked. I'm going to start with the least controversial and then move to the tougher questions:

And what the hell is welfare economics?

Welfare economics is about how we know if people are better off. Hard question! How do we know if someone is better off after a change in location, a change in a government program, or a change in education? How about a whole population--a state or nation or region? Is income the same as happiness?

Welfare economics refers to the subfield of economics that tries to match the mathematics and theory of how people improve their lives and happiness--their welfare--with how one could possibly measure or do empirical tests to test whether people are better off. (Welfare economics is not about government welfare payments like social security or food stamps, though that's a commonly-confused term.)

Economists have long known that income and wealth are not the same as happiness or well-being or welfare. We can see it with some beautiful mathematics, in elegant and inspiring graphs we can draw for students on the board that are convincing as all get-out to anyone who knows the least bit of geometry or even better, calculus.

But, if we want to measure and test scientifically whether happiness or well-being improve from one generation to the next, how can we do that? The areas in the graphs are not easy to measure. Do we sit silent and measure nothing, or try to measure, say, wealth or income as proxies?

Measurement is much harder than theory when it comes to individual or social welfare. That's what welfare economics is about: measuring empirically what we can talk about mathematically.

The most famous modern explanation of welfare economics was elaborated by Alfred Marshall (1842-1924). The concept of how one's welfare, well-being, or utility is personal and not easy to measure, even after the extraordinary developments in calculus and the marginal revolution in economics in the 1700s and 1800s, was understood long before Marshall's statement of the problem. The question of welfare is in fact best understood mathematically, and perhaps best in the work of Paul Samuelson. Another contributor was Arthur Pigou.

The meaning of a person or family's welfare and how that differs from what can be measured remains a fundamental economics question today. While wealth turns out to be a pretty reasonable, measurable proxy when taken with a grain of salt, trained economists know painfully well that wealth, resources, and money do not translate into what we really want to get at more generally: welfare or happiness.

The upshot is that economics as a science is tricky. Its entire theoretical, mathematical, and empirical foundations can only proceed at a slower pace because controlled tests can't be conducted at will. You can work out the theory and math, but naive or straw-man alternative theories and math can take a long time to reject empirically.

Next, you also asked another question:

The rejection of the Austrians to do math?

Well, it's not about math, but more about empirical testing and the meaning of statistical tests. It's maybe like this (I'm probably going to take a lot of flack here, but so be it):

The Austrian school of economics came into being during a very formative time in modern economics--the late 1800s and early 1900s. To my understanding, the Austrian school never objected to mathematics, theory, or statistical tests; but they had objections, many quite reasonable, about how to test and move further with the meaning of the theory and which alternatives to consider empirically. A social science like economics makes empirical tests even more difficult. Empirical--statistical--tests require very careful statistical statements, careful measurement, and the results and conclusions have to be equally narrowly and carefully interpreted.

The Austrian school of thought was willing to move forward with consistent, logically-based, economic theory after 100 years' worth of contributions and common sense, without waiting for the next 100 years' worth of measurement detail or empirical tests. They were well-schooled in and took the best ideas in math, economic theory, and empirical evidence into account, and moved forward from there.

What has distinguished the success and quality of the Austrian school was that the basic premises they originally emphasized have born out.

However, after another 100 years since 1900, the scientific method has caught up with some of the original plaints, so the Austrian school may now have some catching up of their own to do.

PrestoPundit writes:

All I ask is that you stop calling these criticisms of "Austrian economics" -- which is deeply misleading if not simply dishonest. Your criticisms rarely touch anything written by Friedrich Hayek, among other "Austrian economists". Usually you are critizing non-general claims specific to Mises or Rothbard, but not shared by all "Austrians".

Just a simple request.

Scott Scheule writes:

The opposite of a backhanded compliment... a fronthanded insult?

A frontfooted insult, I would have thought.

TGGP writes:

Presto, some of the Austrians would deny that some such as Hayek or Lachman were Austrians. Radicals do have a tendency to be always on the lookout for heretics.

RogerM writes:

So is there any difference between libertarian and neoclassical economics?

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