Austrians vs. The Chicago School, Part III
A Theory's Unpopularity Does Not Make It Wrong or Useless
DECEMBER 01, 1996 by MARK SKOUSEN
Those [ideas] that are better tend to prosper and survive. Those that are worse tend to recede and vanish [like Austrian capital theory].
—Sherwin Rosen, University of Chicago
At every Mont Pelerin Society meeting, a debate develops between the two schools of free-market economics: the Austrians (followers of Ludwig von Mises) and the Chicago school (followers of Milton Friedman). I’ve discussed their similarities and differences in various columns (see, for example, the February, March, and April 1995 issues of The Freeman).
At this year’s program, held in Vienna, Austria, the discussion centered around how much (or little) Austrian economics has been absorbed into the mainstream neoclassical model. At the end of the discussion, Professor Rosen made an interesting observation: the competitive free market of ideas tends to weed out bad economics from good economics. Good economics passes the market test, he claimed, bad economics doesn’t, and is discarded. Therefore, concluded Professor Rosen, if some Austrian concepts have not been absorbed by the neoclassical model, they are probably useless and need not be pursued. He cited Austrian capital theory as an example.
It was almost as if Professor Rosen was suggesting that a student need not bother with actually studying Austrian capital theory; one could simply dismiss it on the grounds that it was not being taught by mainstream economists.
Does the Market Guarantee Good Economics?
I first encountered this odd view of economic progress while reading a paper by Professor William Baumol (New York University) about college economics. Baumol, a textbook writer, boldly declared, there is absolutely nothing wrong with the current state of economics, because, he claimed, the mainstream economic approach is a superb machine for grinding out theorems. In other words, the competitive process works in economic research. Through trial and error, economists sift and test theories, acquire good ones, and discard bad ones in a never-ending upward spiral of academic progress. In short, the science of economics marches onward and upward to its current advanced stage of knowledge and wisdom.
Based on this rather complacent view, Professor Baumol dismissed my criticisms of mainstream economics in Economics on Trial by reiterating, I am totally unrepentant. There is absolutely nothing wrong. . . .
I offer two criticisms of this distorted view of the market of ideas. First, I question the competitive market process in academia. As Professor Peter Boettke (New York University) notes, the economics discipline, like most social sciences, is a market of fashion, not the free and equal exchange of ideas through a rigorous scientific method. Philosopher Thomas Kuhn made this point forcefully in his classic work, The Structure of Scientific Revolutions (University of Chicago Press, 1962). Kuhn pointed out that the history of science typically works very differently. Once a central paradigm is established, very little testing or sifting is done until a series of failures or anomalies emerges. Only when a crisis arises does the profession seek out a new paradigm, and there is no assurance that the next paradigm will be more correct than the previous one.
The Keynesian revolution is a case in point. During and immediately following the 1930s, most economists incorrectly concluded that free-market capitalism caused the Great Depression. Throughout the fifties and early sixties, Keynesianism triumphed in the academic world, and the free-market schools of Vienna and Chicago were dismissed out of hand. Granted, free-market economics has made a huge comeback, thanks to the efforts of Friedman, Buchanan, and Hayek, and the turn of world events—most notably, the collapse of Soviet communism in 1990. But let us not fall into the trap of thinking that economic errors automatically are eliminated in the classroom, or that deeply flawed ideas cannot be resurrected.
Murray Rothbard calls this progressive view of history the Whig Theory because nineteenth-century Whigs maintained that things were always getting better and better. He states, the consequence [of the Whig theory of history] is the firm if implicit position that . . . there can be no such thing as gross systemic error that deeply flawed, or even invalidated, an entire school of economic thought, much less sent the world of economics permanently astray. Rothbard rejects the Whig theory. In writing his history of economic thought, he concludes that there can . . . be no presumption whatever in economics that later thought is better than earlier.
The Market Produces Goods and Bads
I offer another objection to Professor Rosen’s view of the free market. He notes that in a free market bad musicians don’t sell very many records. True enough, but one must distinguish between what is technically competent and what is morally deleterious. Certainly, Hollywood produces technically advanced films, with special effects, skilled acting, and superior photography, but it also makes films whose contents are often morally bankrupt. In short, the market does a great job in producing both goods and bads.
Austrian Capital Theory, Again
Finally, a comment about Austrian capital theory, as developed by Eugen Bohm-Bawerk, Ludwig von Mises, and Friedrich Hayek. Admittedly, it is not currently part of the mainstream. But is it useless? Hardly. In fact, I frequently depend on the Austrian stages-of-production model in analyzing the economy and financial markets. Because it is usually ignored by the establishment, I can more easily use the Austrian model in predicting economic trends and developing financial strategies. The unpopularity of Austrian capital theory does not make it wrong or useless.