Situating Austrian Economics
Within Modern Social Science
Peter J. Boettke
2004 Hayek Visiting Fellow
London School of Economics
October 11, 2004
What Did Marshall Miss?

According to Baumol
(2000):



Macroeconomics
Entrepreneurial element in
the market process
According to the ‘Austrians’:


The completeness of
subjectivism
Entrepreneurial element in
the market process
What are the interesting trends in
Modern Economics?

Hayek 1974 Nobel Prize
Winner




Emphasis on Decentralized
Decision making
Information embedded in
the price system
Learning function of social
institutions
Conditions for Social
Coordination as an
overarching theme in work
on economics, politics and
law
What are the interesting trends in
Modern Economics?

Buchanan 1986 Nobel
Prize Winner

Emphasis on behavioral
symmetry between economic
actors and non-economic actors,
in particular political actors in the
voting booth, running for office or
situated in the bureaucracy



Death of Romantic Politics
and the Benevolent Despot
Emphasis on exchange behavior
and the institutions within which
exchange takes place
Focus analytical attention on the
constitutional level – the rules of
the game
What are the interesting trends in
Modern Economics?

Coase 1991 Nobel Prize
Winner

Emphasis on how alternative legal
arrangements impact economic
performance



Demonstrated the intellectual
bankruptcy of Pigovian welfare
economics
Focus on the institutional framework
within which economic activity takes
place
Champion of “dirty” empirical work to
get at the contractual record in
economic activity.
What are the interesting trends in
Modern Economics?

North 1993 Nobel Prize
Winner

Emphasis on institutions and
institutional change in economic
performance




Institutions as constraints
Institutional change as a shift
in relative prices
Importance of cognition in
understanding institutional change
Emphasis on economic history as a
research field focused on institutions
and institutional change
What is the Value Added of ‘Austrian
Economics’?
What is the Value Added of ‘Austrian
Economics’?

First, intellectual history point



Mises emphasized these points prior to any other thinker in
20th century economics, including Frank Knight
Mises should be recognized as the fountainhead of rational
choice theory, new institutionalism and analytical narrative
empirical work (friends and foes do injustice to Mises)
Second, the missing element in common
understanding of New Institutional Economics

Entrepreneurial element in human action and the
competitive market process.


Knowledge problems in addition to incentive alignment issues
Behavioral Assumptions and Institutional Deficiency in
economic theory
What About Information Economics?

Stiglitz 2001 Nobel Prize
Winner

Emphasis on imperfect
information and imperfect
market structure

Critique of Walrasian
economics


Presumption reversed – market
failure is the rule, market
efficiency is the exception
Relevance of economics to
policy world

Globalization and Its
Discontent

Transition and Development
Economics after a decade
What About Information Economics?

Akerlof Nobel Prize
Winner 2001

Emphasis on asymmetric
information


“market for lemons”
Broaden economic
analysis to address
sociological questions

Social status, etc.
Austrian Quick Answer to
Information Economics



Information economics is better than the previous perfect
knowledge economics and as such Stiglitz trumps Lucas as a
research inspiring figure
 Search for Information versus the Discovery and Use of
Knowledge
Stiglitz’s critique of Walrasian economics is on target, but he fails
to appreciate the role of disequilibrium prices in coordinating
affairs --- in short, he underestimates the learning properties
inherent in the economic processes and thus the robustness of
markets
Akerlof problems lead to Hayekian solutions – markets are
discovery procedures where we learn all sorts of things (like
reputation) that enable us to coordinate our plans with others.
‘Austrian’ Theory of the Market Process
and Information Economics

Kirzner’s emphasis on:



Uncertainty and sheer
ignorance as part of the human
condition, not assumptions of
particular environments – we
must always be coping with our
ignorance
The role of imperfections in
driving entrepreneurial
altertness to opportunities for
pure profit
The importance of the
institutional framework for
issues of economic
coordination
Other Interesting Trends

Andrei Shleifer – JB Clark Award

Work on property rights and
privatization


Work on incentive structures within
markets, non-profits and
governments




Grabbing hand vs. invisible
hand
Role of entrepreneurship in
different institutional settings
Work on law, politics and finance
Work on Institutional Possibilities
Frontier --- ***
Work on “inefficient” markets

But effective markets
The New Comparative Economics
Framework
Public
Predation
Socialism
Questions: (1) how do you move
between different enforcement
regimes, and (2) how do you shift
the entire institutional possibilities
frontier in to get less ‘bads’
State
regulation
Common law courts
Self-government
Private
Predation
Other Interesting Trends: Lab
Experiments (continued)

Vernon Smith and
Experimental Economics –
Nobel Prize 2002

ECOLOGY OF ECON LIFE
(framing issues)

Markets are more efficient
than theory would predict


Groping market
Trust and cooperation is
more common than theory
would predict

Trust games with
anonymous trading
partners
Interesting Trends: Natural Experiments
(continued)

Steve Levitt – John Bates
Clark Award (2003)


Creative and unusual data
collection (hockey, TV,
abortion, gangs, and
gambling)
Point is to see
microeconomics come alive
in different walks of life
(natural experiments)

Situations which
approximate meeting the
ceteris paribus clause and
thus approximate controlled
experimentation
Other Interesting Trends

Theory

Economics of Growth and Development



Economics of Self-governance


Increasing recognition of the role of institutions and culture in
development
Focus on questions of well-being beyond aggregation
attempts
Recognition of the role of reputation, norms and conventions
History

Analytical Narrative

Use of theory to do history

Ethnographic turn
A Snap-shot of the Current
Landscape in Economics
Formalistic Histocism
Formal Language
1940s-1950s
Game theory (folk theorem)
Samuelson –
Arrow, Hahn,
Debreu
Market failure
theory and
information
economics
Particular
Universal
New
Institutionalism,
including
Austrianism
Historicism
1871 – C. Menger
Old Institutionalism
1776 – A. Smith
Natural Language
One set of implications of this change in
the intellectual landscape



Debate is no longer versus historicists, nor is
it with General Equilibrium Theory
Neoclassical Economics is extremely
adaptable and is just as comfortable with
formal proofs of equilibrium and it is with
formal proofs of multiple equilibria
We have to get more historical before we can
re-establish the theoretical perspective
Another Way to Restate the Place of Austrian
Economics in the Modern Landscape of Economic
Thought

If orthodox economics works in a realm where in order to
generate propositions of market efficiency the theorist is
required to make simplifying assumptions about agent
knowledge and structure, and heterodox economics
works in a realm where once these simplifying
assumptions are overturned the propositions of market
efficiency must be rejected, then Austrian economics
can best be understood as deriving propositions
about market efficiency within a heterodox problem
situation.
Snap-shot of the Problem Situation in
Economic Analysis
Simple Problem Situation Simple Problem Situation
Economic Order
Economic Disorder
NEOCLASSICAL
NON-ECONOMISTS
Complex Problem
Situation
Economic Order
AUSTRIAN
ECONOMICS
Complex Problem
Situation
Economic Disorder
HETERODOX
ECONOMICS
How do the ‘Austrians’ Accomplish
this?



Recognition of a Tripartite Division of Knowledge in Economic
Science
 Exact theory (apriori – logic of choice)
 Applied theory (institutionally contingent propositions)
 Economic History – Public Policy (interpretative understanding)
Uncertainty inherent in all human actions, means that economic
actors rely on various norms and institutions to cope with this
uncertainty
These institutions work to ameliorate conflicts and promote
economic coordination and social cooperation
 Mises notion of Ricardo’s Law of Association
Conclusion





Economics has moved significantly in an Austrian direction since
Samuelson. We should declare victory and stop behaving like we are a
side show.
There is still much that the Austrians can add to the conversation.
The economic and social world is just too damn interesting and exciting
to let devotion to technique and the incentive system within the modern
academy to get in the way of our desire to understand the world.
Economics when done best is exceedingly relevant.
To regain our theoretical footing, we must first do more historically
grounded research which demonstrates the interpretive power of the
theoretical insights of the Austrian School.