Is Austrian Economics Heterodox Economics?

I just received this question from a reader who is doing a research project on classifying contemporary schools of economics.  The problem is that the question is not as easy to answer as one may think.

Clearly the contemporary Austrian school of economics is not part of the mainsream of economics.  But many of the main themes in Austrian writers are consistent with arguments presented by classical and neoclassical writers from Adam Smith to J B Say to Milton Friedman.  Austrians are part of the mainline of economic thinking, but not currently part of the mainstream.

This produces a weird intellectual context for me to answer the original question.  Part of the reason the Austrians are not part of the mainstream is because in the 20th century they resisted the unholly alliance of statism and scientism.  Ironically, the more difficult argument to win is the one against scientism --- statism while hard is not nearly as hard to defeat.  But the "science wars" are very difficult to win unless you ape the methods of the physical sciences.  Do a thought experiment for minute  and consider the following developments in economics over the past 50 years: law and economics; public choice; rational choice sociology; new economic history;  mathematical economics; and experimental economics.  In each of these cases, the field that was perceived to be the more "scientific" influenced research, not the other way around.  In most of the cases, economics was the more scientific field, but in the cases of mathematical economics and experimental economics, the more rigorous field invaded the less.

But what if while economics is definitely a science, it is a human science; a philosohical science, that is unique and distinct from the natural sciences.  To put it another way, what if we agree that the way to advance the natural sciences was to purge human explanations where they didn't belong (overcoming anthropromorphic explanation), but when applied to the human sciences this intellectual thrust would purge the very thing we hope to study?!  In other words, while purging anthropromorphism in the natural sciences resulted in progress, in the human sciences all that results is mechanomorphism.  Zesus didn't cause lightening bolts due to his anger anymore than economic systems operate like clocks or bathtubs or even linear accelerators.  The human element cannot be purged from economics and for us to make intellectual program.

Fighting scientism is  much harder than fighting statism, and thus even though the Austrian school originally fell out of fashion due to the rise of anti-market arguments, when market-oriented arguments came back in fashion the Austrian school remained for the most part on the outside looking in with respect to the economics profession.

But ironically many leading mainstream thinkers come back to Austrian points at the back end of their careers as they start to realize that standard models miss out on dynamics and creativity.  To use the langugae of Nelson and Winter, they realize that the appreciative theory of the market found in Mises/Hayek/Kirzner outdistances the formal theory of the market found in Arrow/Hahn/Debreu.

So what is my answer to the question?  Austrian economics starts from within a heterodox problems situation (heterogenous agents, uncertainty, ignorance, etc.), and they interact within complicated environments (differing tastes, heterogeneous products, market power, etc.), and thus the Austrian answer to how markets work differs considerably from the standard presentation in textbooks, and the non-standard presentation in heterodox writers.  Instead, the focus is on how the institutions of property, contract and consent engender market processes of adjustment and adaptation that produce social cooperation under the division of labor.

In other words, the Austrian school is heterodox sociologically, mainline intellectually (tracing back to Adam Smith and David Hume), and mainstream historically (a branch of neoclassicism).  But in the contemporary world, the mainstream label makes the least sense, the mainline label is little understood let alone appreciated, and the heterodox label serves a useful sociological function.  Though the Austrian school doesn't really fit anywhere easily.

Comments

[Mario Rizzo]

I agree completely. I would only add that I used to think that smart methodological work could have an effect in persuading economists to change how they study economics. In fact, a good deal of The Economics of Time and Ignorance is devoted to such an effort. There we emphasized the point that Aristotle made -- the method must be suitable to the subject matter. But we preached to the choir mostly. It has become quite commonplace to argue that the way you can convince people to change their method is by showing the superior results of another method. As good as this sounds, the problem is that "results" are theory or paradigm-cast. I have always been amused about what many economists call their "results" -- often some purely mathematical relationships which I challenge most people to remember after a week or two. Even if the results are empirical they are often completely enmeshed in statistical relationships with no easy "humanistic" interpretation. Frankly, I am at a stage of life and career where I just want to develop ideas that I think are important and interesting. I have found an audience for these in the broad community of economically literate people interested in law, psychology,and philosophy. I advise undergraduate students to go to political science, public policy, and law programs. Perhaps, as I predicted in a turn-of-the-century article, economics as we know it will split into a number of disciplines in the future, some of which will be true to the humanism of Smith, Hume and others.

[Brian Pitt]

Dr. Boettke,

I sort of liken Austrian economics, which I believe is very mainstream price theory wise, to Swedberg's version of economic sociology. Weberian economic sociology is heterodox sociologically (does not square well with network analysis), yet quite mainstream historically (answers Weberian, Simmelian, and Marxian research questions).

I believe that one of the reasons that many mainstream folks stay clear of Austrian economics is because it demands creativity. Think back to the Investigations by Carl Menger, to Socialism by Mises, to The Economics of Time and Ignorance by O'Driscoll and Rizzo down to Enterprising Slaves and After War by Storr and Coyne. These are works where the authors were forced to think deeply, and not allow models to do the "hard work."

I say keep up the fantastic work!

P.S. Dr. Rizzo, have you ever encouraged your undergraduates to pursue sociology?

[Pearl]

While I do think that After War is very good book and intellectually stimulating, I would not consider it as a piece of Austrian Economics. These works are definitely important with regard to discussions about policy, democracy, etc., but without a doubt nobody in the field of economics cares about "philosophical" and "theoretical" pamphlets whatsoever. It is just more convenient to reduce an economic question to an optimization problem and to deduce the conclusions which were already in the hypotheses.

The problem about established methods, etc. is obviously that once you admit that they are not that insightful as originally thought, many works become instantly useless and nobody with some pride would allow this situation. Let's take finance, literally the whole literature is based on the same wrong assumptions (EMH, etc.) if you prove them wrong, basically the entire literature on finance becomes useless, nobody would let this happen. Financial behaviourism only coexists to some because they don't try to destroy the basic assumptions. The cost is too high for too many people to admit they are wrong.

[Peter Boettke]

Pearl,

It is a HUGE mistake to not see the fundamental Austrianism in Coyne's work, or Leeson's work. They are doing Austrian economics the way that Mises and Hayek did their work. Austrian economics is NOT just the economics of Mises and Hayek. It is about applying sound economics to pressing issues of the day or historical scholarship. The theoretical work that underlies AFTER WAR was done elsewhere as Chris worked out arguments related to knowledge problems, bureaucracy, constitutional order, and entrepreneurship and economic development. Coyne's work is thoroughgoing Austrianism, as is Leeson's work on pirates, to argue otherwise is to miss why Austrian economics is important in contemporary scholarship in economics, political economy, and public policy.

To give but one example, Coyne's work is no less Austrian than my Why Perestroika Failed, except that I explicitly said I was doing Austrian market process analysis as well as public choice analysis of the perestroika period and beyond. In fact, I would argue that Coyne produced the better book, but it is Austrian from first page to last.

Pete

[Rafe]

The delay in translating Menger and Mises into English was probably a major setback for Austrian ideas, reading Hulsmann indicates the massive impact of Mises on the Continent, especially in Germany until a growing movement of liberal economists was swept away post 1933. Even Keynes didn't know German well enough to understand Mises and the situation was probably worse in North America and especially post WW2 when competent multilinguism became rare among English-speakers.

On scientism, the migration of Continental positivists to North America created ongoing problems. Even though very few scientists or economists take any notice of philosophy or methodology, the assumptions of positivism or some variant of it, like pragmatism or operationalism, rule by default.

[Peter Boettke]

As an example of how the "science" war is pulling the field of economic development at the moment see the discussion by Dani Rodrik --- http://rodrik.typepad.com/dani_rodriks_weblog/2008/05/re-uniting-development-economics.html

And, on Rafe's point about the migration of Continental positivists, I would like to relay a comment my professor Kenneth Boulding said to me when I asked him "Why did everyone become a logical positivist in the 1950s?" See his teacher Frank Knight had resisted the push toward positivism --- see his essay "What is Truth in Economics?" --- and Boulding himself understood the scientism and statism points. But he replied to me "My dear Peter, nobody would want to be an illogical negativist." And he chuckled in his charateristic chuckle (what an absolutely lovely man Boulding was).

Pete

[matthew mueller]

Another great post by Dr. Boettke. Austrian economics will always remain a unique tradition in the history of economic thought. From its very beginning, Austrian economics both contributed to and distanced itself from what is now identified as neo-classical economics.

Now how Austrian economics develops in the coming years, that is to say, whether it tends to dissolve into the corpus of mainstream economics or if it decides instead to continue attacking certain weaknesses in the mainstream program is entirely in the hands of people like Boettke and Horwitz. My own view is that very soon it will be so similar to neo-classical economics that one will have a hard time trying to make the distinction.

It is interesting that Boettke singled out "statism and scientism" as issues that he felt needed to be discussed. Among professional economists, the Austrian position on "statism" is hardly interesting. Austrians have important things to say about politics and political organization, but in the end their policy conclusions are not very interesting. What Austrians have to say about "scientism" is not very different. Again, the Austrian view is just more sophisticated and layered with more qualifications than to the mainstream position.

These similarities can also be found in monetary theory, industrial organization, regulation, labor economics, etc. etc. Austrians I am afraid to say have lost their *dynamism*.

Austrians are not heterodox anymore because they have abandoned the quest for subverting the neo-classical paradigm. They are like the NIE, or public choice, unique traditions that have labored very intensively in trying to make important contributions to mainstream economics theory. Their contributions are supplemental.

Heterodox economists do not do this. They try instead to subvert the mainstream paradigm. Ludwig Lachmann tried to do this. And I think the conventional attitude among Austrians towards his work is quite telling on the question of Austrian heterodoxy.

[Peter Boettke]

Matthew,

Not quite sure what you are saying. The critique of scientism is a subversive move; it was Lachmann's move ---- the reason he called mainsream economics 'Ricardian' and contrasted that with the radical subjectivism of Mises and Shackle.

I am confused about your claim that we are going to become indistinguishable from the mainstream. In my own case, I have been pushing for the exact opposite of what I argued is the scientistic impulse --- sociology and economics (e.g., Granovetter and Swedberg) and anthropology and economics (e.g., Geertz and an ethnographic turn). This is what motivated the field work in Eastern Europe, Africa, and Latin America, but also in New Orleans. It is to account for the "natives point of view" in what I term the "political economy of everyday life".

Have you seen the special issue of the RAE focused on Alfred Schutz and his contributions? Have you seen the recent paper in the RAE by Virgil Storr on the Market as a Social Space. Storr's paper is outstanding in my opinion.

I admit that I borrow from a lot of mainstream thinkers as well --- e.g., Shleifer's work on predation --- and that I want to bring the work I am doing to a conversation with the mainstream, and not try to avoid that intellectual engagement. I am, afterall, an economist and want to talk to other economists about the way we do economics and what we see "out the window" --- btw, the out the window motivation is the reason for the emphasis on applied economics and political economy.

I wish I understood more what you are searching for because it would be easier to engage the conversation and explore mutual learning.

But the bottom line, the Austrian tradition is both supplemental to neoclassical theory, or 'noraml science', and an example of 'extrordinary science'. See Dolan's introduction to the South Royalton conference volume. But also note the significant changes to 'mainstream' economics since 1974 ... microfoundations, multiple equilibria and path dependency, behavioral economics, etc.

Pete

[Daniel J. D'Amico]

Pearl,

To say that After War is not an Austrian book is revealing of a very serious problem within Austrian circles. One that I think Mueller seems to have backwards. While Austrian economics is committed to resolving intense theoretical disputes (capital theory, interest, money, etc.), it is in my opinion a grave misunderstanding of Mises and Hayek's work to separate out applied economics as some how non-Austrian. The purpose of theory is to do history, even contemporary history or current events (not so historical at all).

While there is a bit of a strategy going on behind the work that young Austrians choose to do, that is not to say that it is being compromised from its Austrian roots in any way. For example, it is a sad truth, but a truth nonetheless that older economists discount theoretical or "big think" contributions when they come from younger scholars. But if you can show your chops so to speak hammering out the details of a particular field, only later to reveal a broad swath of theoretical implications and improvements that fall out of that body of work that is more what the profession has come to expect and accept.

Applied economics can also motivate the underlying theoretical debates. History of thought tells us this. The classical models predicted full employment, yet unemployment abounded. Keynesianism was messed up but it gave due attention to the problem at hand, thus it won attention at the time, and the debates moved on from there.

Explaining business cycles in a business cycle free world seems kind of silly. The great part of Austrian theory is that it's freakin' useful to explain the world around us.

[Peter Boettke]

And, I meant to add that to claim that Austrians are losing their dynamism is to be blind in my mind to the great advances that are being made in such areas as forensic science (Roger Koppl), self-governance (Peter Leeson), reconstruction (Coyne), entrepreneurship (Sautet), the demanagement of firms (Pongracic), the socio-economy (Virgil Storr and Richard Wagner), the capital using economy (Garrison and Lewin), the monetary system (White and Selgin), macroeconomic dynamics (Horwitz), libertarian theory (Stringham), critique of paternalism (Rizzo and Whitman), etc.

It perhaps is clear that the contempoary Austrian school does not have an intellectual leader of the rank of a Mises, Hayek, Lachmann, Kirzner or Rothbard. But during their time, they did not have many people pursuing their research programs. Now we have plenty of individuals pursuing these research programs. Somebody will come along and integrate all the advances being made and write a new treatise --- but it would be a huge mistake to not recognize all the work that is being done and the advances in particular areas that are being made by scholars from across the globe. Dynamism is not what is lacking, perhaps some integration is --- but the field is growing by leaps and bounds.

Perhaps we need to do a better job on our blog alerting people to all the exciting work being done in unusual areas. Maybe we should put a weekly profile up --- Koppl's work on forensics would be an excellent place to start as it contains not only an indictment of overzealous statism in the field of criminal justice, but does so from an epistemic point of view that undermines the scientistic pretense of forensics.

[Rafe]

In my capacity as a second and third hand dealer in ideas I would like to be spoon fed links or summaries to all the interesting Austrian and quasi Austrian projects to pass them on through the different local blogs where I have a presence. They are mostly centre to centre left because the non-left blogs are more focussed on politics and current affairs than ideas. For what it is worth this is my output on Catallaxy in 2007 http://www.the-rathouse.com/2007/Catallaxy.html

[Jeffrey Friedman]

The "human element" to which Pete refers is, in my mind, human ignorance about a complex world. Our ignorance leads to fallible interpretations of "the facts" of the world and theoretical disagreements over how the facts interact causally. Humanistic social science of this sort is possible in political science in a way that it isn't in economics.

I'd be happy to advise anyone interested in following Mario's advice and learning about political science grad school. After going ABD in History, I got my Pol Sci Ph.D. from Yale and have taught at Dartmouth, Harvard, and Barnard since then. Former students are now teaching about/studying human ignorance in politics at Berkeley, George Mason Law, Georgetown, UC San Diego, and Yale, and publishing in the top political-science journals.

Jeffrey Friedman
Editor, Critical Review
critrev@gmail.com

[Peter Boettke]

I agree with both Mario and Jeff that political science is an alternative. Law schools as well are an alternative. And I think sociology is wide open.

But there is still a role for the economist to play in economics. There is a reason to "fight the fight" and not give up.

I am not 50 yet, and I still have aspirations. My former students are knocking on the doors of the academic elite. In the latest ranking published of departments, GMU ranked #41. That is not in the top 20, but it is not a horrible ranking either and in fact beats out most of the so-called peer schools to GMU. With a top 50 ranking, graduates can land in PhD programs.

But clearly the better opportunities might come from skipping fields. I would suggest joint degrees. One of my former students received her PhD and then got a second PhD in philosophy, and now is teaching at UVA. Another former student (who I didn't work as closely with) got his PhD and then JD and is now a chaired professor at Penn. So you can break into the academic elite with a GMU style economic education. You just have to work your butt off and do good work.

But the bottom line is that we need to push the methodological line more aggressively than we have within the discipline of economics to carve out a niche for a humanistic economics and political economy. As I have said about Mises's economics to anyone for over 20 years --- it is humanistic in its method and humanitarian in its concerns. It would be ashame if we abandoned economics completely to the sterility of formalism and positivism. Perhaps not all, but at least some of the "best and brightest" have to remain to fight the fight --- and suffer the lumps that go with fighting a good fight inside the discipline of economics.

Pete

[Bogdan Enache]

I'm not sure that political science is really a good exit solution to the problem raised by professor Rizzo.

As far as I know, it's becoming increasingly mathematized and irrelevant in an effort to emulate economics - and all the equations and indexes regarding political coalitions, voters' behaviour, MP's voting and so on and on are actually more irrelevant than in economics science, basically, there are no "political laws" in political science, if there is a science as political sciences want it to be.

To get an idea of what I'm talking, just take a look at the work of Rein Taagepera or Arendt Lijphart, for example.

Moreover, the ideological atmosphere in political science departments is (this is a fairly predictive norme I invite you to test) inversely proportionately and of opposite direction to the general political opinion of the country.

[Bogdan Enache]

By the way, Eric Voegelin - a regular of the Vienna Miseskreis, an Austrian (in every sens of the word, so to speak) political scientist, and ideologically a terribly misunderstood thinker in the US where, however, his work is best known - warned against the positivist trend in political science in the first of his Chicago lectures, which were later published as "A New Science of Politics"; he outlined with remarkable clarity, I say, the reductionist and distorted way of looking at and thinking of the world it leads to and he tried to showed the way of a more fruitful, richer and appropriate methodological framework for this field...But nobody actually took notice - and that was 50 years ago!

(P.S. Sorry for the spelling mistakes above - not used to check after I finish)

[Jeffrey Friedman]

Bogdan--I think, although it is hard to be sure, that the invasion of political science by rational-choice theory (i.e., economics) is on the wane. When I published *The Rational Choice Controversy: Economic Models of Politics Reconsidered* (Yale UP, 1996), you could fill any auditorium at an American Pol. Sci. Assn. convention if you held a debate on rat-choice. (That, in itself, indicates a difference between Econ and Pol Sci: there would never be such a debate in Econ. Rat-choice is and always has been an unquestioned--and largely appropriate--assumption in Econ., but was a hotly debated import into Pol Sci.) Fortunately, you couldn't fill a good-sized room with such a debate now. It was a passing fad.

Rat-choicers took over Harvard and Stanford, and they are scattered around at lots of other places. Having failed in their attempt to take over the whole discipline, rat-choicers go on doing their pointless research into what *might* be the case *if* voters were well-informed and logical. Since most empirical researchers know that those assumptions have virtually no applicability in politics, they leave the rat-choicers alone--and they wish the rat-choicers would stop demanding universal laws of behavior when there are none.

Pol sci is fragmented into four subdisciplines (American, Comparative, Theory, and Intl. Rel.) that serve as firewalls against any one methodology--or ideology--taking over. There is a lot of methodological pluralism. There is less political diversity than I'd like to see, but not because of any fierce political correctness--just the usual liberalism of professors who read the NYT and have never run into a sophisticated argument for any non-left conclusion. They are more moderate in their politics, however, than the historians I met when I was in that field, and Critical Review hasn't experienced any political resistance to, our outrage at, its radical critique of democracy (based on the depth of the public's ignorance about a complex world).

The main things about political science, for people considering grad school, are (1) that there is no orthodoxy that you'd have to spend your whole career trying to overturn, and (2) that there is huge scope for creative work that would put to radical use the empirical discoveries (such as about public ignorance) that political scientists haven't had the imagination to make anything of.

In any given grad department there will be personal pressures, and it's always better in these settings to listen to what your liberal colleagues believe than to argue politics--you can learn a lot by listening! But in all, political science seems to be the best, most open of the social sciences right now.

Jeff

[Rafe]

Voegelin is very easy to misunderstand, judging from the exchanges on an email discussion group devoted to his thoughts. On the topic of Voegelin and personal pressure, there was a fascinating exchange of letters between Voegelin and Leo Strauss where they agreed that Popper's excursion into political science with The Open Society was a disgrace (strong language was used) and Strauss advised that he had used personal influence at a high level to defuse any risk that Popper might be appointed to the faculty at his place.

On rational choice in political economy, it seems the pressing policy issue is to find an institutional arrangement that minimises the damage that can be inflicted by leaders who achieve office on the basis of personal popularity in the eyes of voters who have next to no understanding of the issues. Sounds like the minimal state.

Jeffrey, do you have any insights on the way to suggest that to left-liberals?

[Jeffrey Friedman]

Rafe--Left-liberal political scientists, at least, are suddenly extremely open to the idea that "the public can get it wrong." Why? Because the public voted to re-elect Bush, the most "disastrous" president ever (the political scientists think).

My former students and I are in the process of trying to build on this opening (which is fully consistent with the mountain of public-ignorance research that's accumulated over the years) to ask our political-science colleagues: Is there any reason to think that, overall, the public will tend to "get it right"?

However, even if they concede that the answer is no, our burden of proof has not yet been met. We need to establish a reason why private-sphere decision making is likelier to get it right than public-sphere decision making.

My answer blends Hayek and Popper: private-sphere decision-making is more experimental, because what defines the private sphere is the opportunity to "exit" from decisions that turn out to be unpleasant. By contrast, the public sphere has limited exit possibilities (emigration or the occasional rotation of elites). Therefore, the main mechanism at work in politics is "voice," i.e., theorizing--but without much experimental check on bad theories.

I've presented this argument at a couple of scholarly events and the reaction is favorable, although wary. I'm trying to find time to write a book called "No Exit: The Problem with Politics."

The key starting point, though, is simply to find areas where one's interlocutors think that the public has screwed up. For instance, they can be Marxists who think the public screws up by not overthrowing capitalism--the content of their disagreement with the public doesn't matter, in principle. Once they admit the possibility of public error, they've given you an opening for an argument that, if sound, leads to a defense of capitalism.

Jeff

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