Wednesday, June 15, 2011

Putting Austrian Economics in its Place

Catalan gets it. He most definitely gets it. The Austrian school of economics is the one branch of economics that has one theory of practice that applies from the very smallest examples at the micro end of the scale to the largest examples at the macro scale. It successfully predicted the collapse of the USSR. It predicted the failure of the stimulus in the US in 2009. And it has predicted the continuing failure of Keynesian spending and quantitative easing to do anything good for the US economy. When you switch your frame from the absurdist Samuelson version of economics, with its sharp dividing line between micro and macro and a dependence on econometric models that don't work, to the Austrian version that uses thought experiments and derived universal truths, then the real shape of things becomes apparent.

Amplify’d from

I recently came across "Putting Economics in Its Place," an article penned by Richard L. Heilbroner, an avowedly Schumpeter-influenced socialist.[1] Heilbroner's main purpose is to argue that the explanatory scope of economics has been greatly exaggerated. He contends that economics does not provide a universal, underlying science of society. He exemplifies this theme by pointing to the — alleged — failure of the economics profession to predict and explain the sudden collapse of the Soviet Union.

Not only does the Austrian School not suffer from the weaknesses Heilbroner charges economics with having, but it was the Austrians who settled many of the issues Heilbroner suggests still mar the science. No less important, in reading his article through an Austrian lens, one realizes just how complete the Austrian framework is. Heilbroner, for instance, rehashes discussion on the scope and nature of the science — this discussion should have been settled with the contributions of the likes of Lionel Robbins and Ludwig von Mises.[2] Finally, an analytical union between Heilbroner's criticisms and his own flawed conclusions buries non-Austrian economic frameworks, and as a result elevates Austrian theory above its opposition. Had Heilbroner possessed a better grasp of the many Austrian contributions to the debate, the conclusions he drew would have been considerably different.[3]

Heilbroner's central assertion is that economics can only describe the capitalist system, and thus has nothing to offer in regards to describing noncapitalist orders, such as prehistoric and command societies. This thesis is a corollary of his belief that what defines economics is a specific technique by which man accomplishes sought ends, namely the mixture of labor and "the materials and forces of nature."[4] From this, one can infer that Heilbroner believes that the techniques that man may employ in seeking ends in a precapitalist society, a command society, and a capitalist society are different.

But the Austrians show us just how utterly absurd Heilbroner's position is. Society is not shaped by the techniques employed by humanity; rather, the techniques are fashioned by the underlying nature of society. Indeed, the entire purpose of economization is to organize means and ends as a method of dealing with the fundamental scarcity that characterizes society — if it were not for this scarcity, there would be no purpose for economization. The nature of this scarcity is no different whether a society is a precapitalist, capitalist, or command one; the economization technique employed is the same across the board. Indeed, economization is the technique! There is no alternative, and attempts to plan an alternative can only end in failure.[5]



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