Arnold Kling  


The Dispersion of Knowledge: ... Alfred Kahn, RIP...

On my post on Pete Boettke's podcast, a commenter wrote,

The big thing now is combining institutional economics with general equilibrium analysis. This is what Daron Acemoglu has been doing for the last decade now. Which is obviously the way to go.

I would put it differently. In the spirit of Boettke, let me suggest a matrix.
Praexeology/Deductivenonehard-core Austrian

Mainstream economics focuses on the analysis of equilibrium, relies on formal models (aka "math") and econometric testing. The category that I call "semi-Austrian" looks at institutional factors while using the formal/empirical methods. I would put some of Acemoglu's work in this category. William Easterly fits there as well. The attempt to relate standard of living differences across countries to factors such as the ease of starting a business or an index of economic freedom would be "semi-Austrian" in this framework. So would the attempt to relate the level of inflation to the degree of independence of the central bank.

The hard-core Austrian view of Mises, Rothbard, and Hayek, would appear to reject semi-Austrian formalism and empirical work on methodological grounds. I use the cautious phrase "would appear to," because those icons are not here today to comment on the semi-Austrian work that has appeared over the past twenty years.

I admit to a tremendous amount of skepticism about econometrics. However, in terms of this framework, I would put myself in the semi-Austrian camp. I think that economists can come up with testable propositions and valid tests. However, the disposition to view the economy in equilibrium terms is often not helpful, and it leads to many useless exercises in formalism and unreliable econometrics. Mainstream macroeconomics is exhibit A.

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COMMENTS (8 to date)
Daniel Kuehn writes:

Could you flesh this out a little more?

Clearly Austrians have respect for institutional analysis, but how does institutionalism make you Austrian? I don't get it, and you don't seem to explain it.

And - following the commenter you respond to - why even divide equilibrium thinking and institutional thinking as two columns in the same matrix? I don't understand why these are segregated. Its clear why one would separate praxeology and formal empiricism. The other is less clear.

Even if you read Hayek and Garrison, that version of ABCT is far more "equilibrium" oriented than, for example, contracting models or your "recalculation story". The dynamics of the model are driven by disequilibria (just like the dyanmics in most equilibrium models), but its precisely the tendancy towards equilibrium that introduces the dynamics.

Lori writes:

Why must you use formal/empirical as if it's one word? Surely mathematics isn't one of the sciences, any more than sociology is a branch of economics?

Lori again writes:

The empirical test of econometrics is transparency. WHEN all transactions are in the public domain, econometrics will simply be accountancy writ large.

fundamentalist writes:

In my understanding of Austrian econ I think the "hard-core Austrian" is a bit of a caricature. Neither Mises nor Hayek had any problems using math. Hayek used a lot of graphs, which are just visual representations of equations. And both used equilibrium analysis extensively.

Where Mises disagreed with mainstream was the insistence on the exclusive use of math. Mises wrote that writing an equations gives us nothing new; it merely translates prose into math symbols. And I think Mises would agree with Hayek's perspective that the fixation on equations puts severe limits on economics because of the paucity of data. Hayek wrote in his Nobel acceptance speech that the obsession with aggregate demand is due to the availability of the data, whereas there are many things we know are true for which we don't have accurate data. Math alone puts econ in a straight jacket.

And both saw equilibrium theory as a tool for conducting controlled experiments, something which econ can't do in the same way that natural sciences can. But they always emphasized that equilibrium is a fictional construct. For some reason mainstream econ thinks equilibrium is reality.

Rafael Guthmann writes:

The modern fixation with equilibrium for mainstream economists is the product of mathematical methods: when you analyse an economy using equations, the process of solving these equations is the process of coordination the plans of individuals, given the coordination mechanism implied in the model. The solution is an equilibrium state. The mathematical straightjacket makes economists biased towards equilibrium analysis.

Also, I would think that Rothbard is in the equilibrium/praxeology square, since his focus was more on the pure logic of choice than on the study of market processes, like the mathematical economists. While the closest area that uses modern methods to traditional austrian econ is maybe modern computational economics.

Norman writes:

Rafael, meteorological science is *very* strictly mathematical, yet spends almost no time focusing on equilibrium itself because of the nature of the equilibria its models produce. Certain people might use mathematical tools for only one kind of job, but the tools themselves are quite versatile.

Dewey Munson writes:

"It's the money"

Why do trained economists continue to entertain the word "equilibrium" in the face of the money number which changes indiscriminately with each roll of our printing presses?

This is sustained by our inflationary policies which - in the case of housing - permit you to go to bed at night to awaken in the AM with in increase in home value for a home in which nothing has changed.

Economists appear reluctant to discuss "store of value"

Troy Camplin writes:

I agree with Daniel Kuehn, the divisions seem strange -- arbitrary, in fact. How is institutional thinking the opposite of equilibrium thinking? Certainly equilibrium is a bunch fo nonsense -- a complex adaptive system/process like an economy is in a far-from-equilibrium state. If it is not, it is dead. Insofar as Austrian economists are dealing with disequilibria and the other kinds of economics are dealing with equilibria, the first is dealing with a living economy and the latter are dealing with a dead economy. It would be like if mainstream biology were studying nothing but corpses. Lots of measurements of dead things, but that's about it -- while the biologists studying actual living things were looked upon as strange.

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