Mundane Austrian Economics

7 October 2008 at 3:14 pm 11 comments

| Peter Klein |

The “Austrian” school of economics gets frequent mention on this blog. It even comes up in mainstream discussions of the financial crisis. But what exactly is it? Why do I care so much about the economy of Austria (or, I’m sometimes asked, Australia)?

The label “Austrian” describes a particular tradition in economic analysis, one that dates back to Viennese economist Carl Menger’s 1871 Principles of Economics (hence the geographic identifier). The Austrian approach is usually associated, particularly in applied fields like organization and strategy, with Hayek’s ideas about dispersed, tacit knowledge, Kirzner’s theory of entrepreneurial discovery, and an emphasis on time, subjectivity, process, and disequilibrium. Even Lachmann’s “radical subjectivism” is getting some play. Various Fosses and Kleins have also argued that Austrian capital theory has some implications for entrepreneurship.

Despite this renewed interest in the Mengerian tradition, the Austrian approach to “basic” economic analysis — value, production, exchange, price, money, capital, and intervention — hasn’t gotten much attention at all. Indeed, it’s widely believed that the Austrian approach to mundane topics such as factor productivity, the substitution effect of a price change, the effects of rent control or the minimum wage, etc. is basically the same as the mainstream approach, just without math or with a few buzzwords about “subjectivism” or the “market process” thrown in. Even many contemporary Austrians  hold this view.

In a new paper, “The Mundane Economics of the Austrian School,” I suggest instead that the Austrians offer a distinct and valuable approach to basic economic questions, an approach that should be central to research by Austrians on theoretical and applied topics in economics and business administration. 

From the introduction:

While I agree . . . that the Austrian tradition is part of a larger, liberal movement, I argue here that Austrian economics is nonetheless a distinct kind of economic analysis, and that the essence of the Austrian approach is not subjectivism, the market process (disequilibrium), or spontaneous order, but what I call mundane economics—price theory, capital theory, monetary theory, business-cycle theory, and the theory of interventionism. Call this the “hard core” of Austrian economics. I argue that this hard core is (1) distinct, and not merely a verbal rendition of mid-twentieth-century neoclassical economics; (2) the unique foundation for applied Austrian analysis (political economy, social theory, business administration, and the like); and (3) a living, evolving body of knowledge, rooted in classic contributions of the past but not bound by them.

My main target is Karen Vaughn’s 1994 book on the “Austrian revival” of the 1970s and 1980s — not her account of the revival itself (though that has been strongly disputed by critics), but her understanding of the economics of the founding Austrians. “Vaughn consistently characterizes the price theory of Menger, Böhm-Bawerk, Mises, and Rothbard as backward-looking, inconsistent, and often wrong. Their elaborations of mundane economics, she says, are mainly verbal ‘neoclassical’ economics, because they rely heavily on equilibrium constructs; indeed, Menger’s price theory is that of a ‘half-formed neoclassical economist’ (Vaughn 1994, p. 19).” Instead, I claim, 

Austrian economists from Menger to Rothbard were fully aware of time, uncertainty, knowledge, expectations, institutions, and market processes. Indeed, their understanding of these issues was sophisticated. They employed equilibrium theorizing, but in a precise and deliberate manner. They understood clearly the distinction between their own understandings of mundane economics and that of their Walrasian and Jevonian colleagues. They devoted their energies to developing and communicating the principles of mundane economics, not because they failed to grasp the importance of knowledge, process, and coordination, but because they regarded these latter issues as subordinate to the main task of economic science, namely the construction of a more satisfactory theory of value, production, exchange, price, money, capital, and intervention.

Check it out at the link above. Comments and suggestions are welcome.

Entry filed under: - Klein -, Austrian Economics.

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11 Comments Add your own

  • 1. Danny Kenny  |  7 October 2008 at 3:47 pm

    Professor Klein,

    Can you correct the link to Austrian Capital Theory? I am extremely interested in becoming more knowledgeable concerning the Austrian idea of capital, and if you have any other great books to get or papers to read, it would be greatly appreciated.

    Thanks, I am a big fan of your writing.

  • 2. Peter Klein  |  7 October 2008 at 4:22 pm

    Thanks Danny, and sorry about the link — does it work now?

    There are many good books and articles on Austrian capital theory, references to which are included in the FFKK paper linked above. Hayek, Lachmann, Rothbard, Kirzner, and more recently folks like Peter Lewin have made important contributions to the field. The list at

    http://mises.org/literature.aspx?action=subject&Id=10

    is also useful, though perhaps broader than what you’re looking for.

  • 3. Peter Boettke  |  7 October 2008 at 9:19 pm

    Peter,

    This is a well crafted paper, but I also think your argument has some omissions in it. First, you don’t consider the mundane work that people on your list of those I guess doing esoteric work have done. There is not only a division of labor, but also phases in people’s careers. I am the author not only of methodological writings and history of economic thought, but also applied work in political economy in the fields of economic history, comparative systems, and development economics. Including 3 books on the history, collapse and transition from socialism. And those works employ arguments developed in the fields of money and capital, market theory and the price system, and the dynamics of interventionism, etc. And if you look at my students at GMU, they have done much what you call mundane economics as well as esoteric economics. So the world of Austrian economics is a lot different today than it was in 1994, but I don’t think your paper captures that.

    Second, market process theory need not be a theory which rejects equilibrium analysis. But I think to argue that Misesian price theory is not market process theory forgets Mises’s own words — he states explicitly that the “market is a process” in Human Action. Step-by-Step method, Mises has described in a letter to Hayek from 1940 (see the paper by Coyne and myself on this) is process analysis and also owes much to the Swedes.

    Third, I do think your paper is well written and tells a certain narrative. But fundamentally I think the omissions — not just of the work associated with me, but Horwitz’s work on monetary theory, Lewin’s work on capital, Prychitko’s work on workers’ self-management, Machovec’s work on competition theory, Ikeda’s work on interventionism, Sautet’s work on the firm, etc. — lead to a stilted narrative.

    Fundamentally, I am in very strong agreement with your call for doing economics. I do think the history of ideas is an important subfield, and I do als think methodology is VERY important, but I agree that mundane economics should be the main thrust of our teaching and research endeavors. But I am not sure that your narrative does justice to the efforts in this direction, and because you don’t address these works head on, you are unable to provide the criticisms of the weaknesses in this existing literature so that new work along these lines will move forward rather than spinning wheels.

    Pete

  • 4. Peter Klein  |  7 October 2008 at 9:48 pm

    Pete, thanks for the comment. You’re right that I didn’t say much about the applied Austrian work that’s been done since the 1970s, but that’s because my main focus was on the older literature, particularly the price theory tradition represented by Fetter, Wicksteed, Davenport, Clark, Mises, and Rothbard, a tradition not well appreciated IMHO within the contemporary Austrian movement. I don’t see the works you cite above, e.g. your stuff on comparative systems, as strongly influenced by this particular price-theory tradition, though I’m willing to be convinced otherwise.

  • […] post no Organizations and Markets. While I agree . . . that the Austrian tradition is part of a larger, liberal movement, I argue […]

  • 6. Danny Kenny  |  8 October 2008 at 8:14 am

    Professor Klein,

    Thank you, it works now and thank you for the other reading.

  • 7. Peter Boettke  |  8 October 2008 at 11:16 am

    Peter,

    I respectfully disagree. The applied work in economics and political economy IS very influenced by Wicksteed, Mises and Rothbard, less influenced by Fetter, Davenport and Clark (though not ignorant of it).

    Rothbard is a major influence in all of this work and yet that fact is often pushed aside — including the influence not only of Rothbard’s social theory, but his particular approach to economics. Mises’s influence is throughout the works I would argue.

    But I guess we can disagree on this and debate the issues in other forums. I think your paper is very well written and I hope widely read.

    Pete

  • 8. Brian Pitt  |  8 October 2008 at 3:35 pm

    Professor Klein,

    I must say that I was quite impressed by this paper. Aside from the ommissions of the developmental work being done by Mercatus scholars, this was just a beautiful paper.

    I will note, however, that I believe that Market Process theory IS consistent with Misesian Price Theory. Not only is this seen in Human Action, it is seen in the Epistemological Problems of Economics (63-65). Nevertheless, I am glad to see Vaughn’s work featuring prominently in your paper; she seems not to make it to the reference lists of many Austrian papers.

  • 9. matthew mueller  |  10 October 2008 at 12:52 am

    A few comments.

    Danny Kenny,

    Austrian Capital Theory is a fascinating field to study, and the best person on this is Ludwig Lachmann. I would go to a library and check out “Don Lavoie, ed. “Expectations and the Meaning of Institutions: Essays by Ludwig Lachmann.” Please read the essays: “On the Measurement of Capital,” “A Note on the Elasticity of Expectations,” and “Investment Repercussions.” After that, you should be very knowledgeable about Austrian Capital Theory. The Capital Theory chapters in Lachmann’s earlier (1977) book “Capital, Expecatations, and the Market Process” are also very good, and can be purchased from Amazon relatively cheaply.

    Pete Boettke,

    I think Professor Klein is right. Reading the work of Fetter and Wicksteed is very different from reading the work of more contemporary Austrian scholars. Your objections to the contrary strike me as an assertion only. I would like to see a more focused treatment of Austrian price theory be developed by young Austrian scholars. The most important work that has been done recently is the book by Esteban Thomsen, and that is applied Kirznerian entrepreneurial theory more than theoretic price theory. I think Professor Klein is right on in this matter.

    Brian Pitt,

    I am glad to see that someone out there appreciates Vaughn’s book. I think it is excellent and should be required reading for every young Austrian. However, I have criticized Klein’s interpretation of her work here: http://blog.mises.org/archives/008739.asp
    You and others might find this discussion interesting reading.

  • 10. Brian Pitt  |  10 October 2008 at 3:25 pm

    Great Comments Matt,

    Thanks for the plug.

  • 11. Neel  |  28 October 2008 at 10:07 am

    I really enjoyed this paper, it offers a refreshing interpretation of the history of the Austrian school of economics.

    Omissions and biases are perhaps unavoidable in such papers, as we tend to focus on our own research interests. Hayek, whom Peter Klein quotes in fn 1, has himself changed his mind about what is the most important contribution made by Austrian economics. In his early writings, he wrote that it was marginal utility; then, it was subjectivism and price theory a few years later, it was the theory of institutions, and finally, as Peter quotes the theory of complex phenomena. His reading of the ‘essence of the Austrian contribution’ evolved with his own research interests!

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