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University Economics versus Austrian Economics

The Austrian School's Clear Association with Deductive Reasoning and Nonintervention May Leave Mainstream Economists Unimpressed

FEBRUARY 01, 2003 by ARTHUR FOULKES

Arthur Foulkes is a freelance writer in Indiana.

Some time ago my wife asked me to define economics for her.

“Ah,” I said, sensing an opportunity to sound intelligent. There was long silence. I sat up, cleared my throat, and said “Ah” again.

Truth was I wasn’t sure how to answer her. Of course, I could have spouted some answer with lots of “scarcities” and “resources” (after all, years of teaching college courses had taught me how to sound intelligent without being clear), but I wanted something better for my wife. To date, I still haven’t attempted to answer her, but I have, as they say in mystery novels, made inquiries.

One source I queried was, naturally, the Internet. I did a Google search of university economics department Web pages to learn how they, the trainers and certifiers of today’s economists, define their science. The results are a little disheartening.

Many of the economic departments I found defined economics as the study of how societies choose what to produce and then how to allocate what has been produced. If definitions mention individuals at all, it is usually in conjunction with society as a whole.

Perhaps a benchmark definition for this view of economics is one by the Nobel laureate and best-selling textbook author Paul A. Samuelson. It’s quoted prominently by one economics department. Samuelson writes economics is “[T]he study of how men and society end up choosing, with or without the use of money, the employment of scarce productive resources, which could have alternative uses, to produce various commodities over time and distribute them for consumption, now and in the future, among various people and groups in society.”1

This emphasis on “society” makes sense if you presuppose the existence of interventionism and see the economist as someone who can choose for society at large whether to produce guns or butter or a little of each. Since this presupposition almost certainly does exist in the minds of most academics, politicians, and citizens, it makes sense that economics departments would reflect this in their definitions of economics.

One department’s definition nicely sums up this perspective: “Our main motivation [as economists] is to find mechanisms which encourage efficiency in the production and use of material goods and resources, while at the same time producing a pattern of income distribution which society finds acceptable.”2

Another department put it this way: Economics is the study of “how society provides for its material well being. It concerns the production, distribution and use of goods and services. It studies the allocation of scarce resources among alternative uses.”3

In addition to (and perhaps as a result of) this highly collectivist view, many departments also take a highly inductive and quantitative view of economics. They present the economist as a sort of white-coated laboratory experimenter, tirelessly seeking “a socially efficient equilibrium” where, as one department explains, “no individual can be made better off without making others worse off.”4

One department states: “Economists are scientists. We design experiments, test hypotheses, make predictions, etc. As such, a good economist requires the same sort of skills needed by a good chemist or physicist. . . . [E]conomists work in the laboratory of everyday human and organizational behavior.”5

Another says: “Many economists use mathematical models to explain and predict economic behavior and econometric analysis to test these models against observed data from the real world.”6

Austrian Approach

Those two notions, that economics is about allocating society’s resources and that it is largely an inductive and quantitative science, are both at odds with the Austrian school’s approach to economics. First, Austrian economists do not focus on things (resources, goods, and services) but rather on human action. As perhaps the greatest Austrian economist, Ludwig von Mises, wrote, “Economics is not about things and tangible material objects; it is about men, their meanings and actions.”7

Mises and other Austrians further emphasize that while human beings are certainly enmeshed deeply within society and “social entities,” the focus of economics needs to remain squarely on the individual, not collectives. Mises wrote:

A collective whole is a particular aspect of the actions of various individuals and as such a real thing determining the course of events.

It is illusory to believe that it is possible to visualize collective wholes. They are never visible; their cognition is always the outcome of the understanding of the meaning which acting men attribute to their acts. We can see a crowd, i.e., a multitude of people. Whether this crowd is a mere gathering or a mass . . . or an organized body or another other kind of social entity is a question which can only be answered by understanding the meaning which they themselves attach to their presence.8

The view that economics is an inductive science is also misleading from the Austrian point of view. Austrians view economic science as principally deductive, based on fundamental laws of human action, which are as real as “the laws of nature” and represent a body of knowledge pertaining to a “regularity of phenomena to which man must adjust his actions if he wishes to succeed.”9 Further, the quantitative analysis implied by an inductive approach is further suspect in the Austrian mind.

As Mises wrote: “The fundamental deficiency implied in every quantitative approach to economic problems consists in the neglect of the fact that there are no constant relations between what are called economic dimensions. There is neither constancy nor continuity in the valuations and in the formation of exchange ratios between various commodities. Every new datum brings about a reshuffling of the whole price structure.”10

He added: “The mathematical economists . . . do not notice the individual speculator who aims not at the establishment of the evenly rotating economy but at profiting from an action which adjusts the conduct of affairs better for the attainment of the ends sought by acting, the best possible removal of uneasiness. . . . They describe this imaginary equilibrium by sets of simultaneous differential equations. . . . They deal with equilibrium as if it were a real entity and not a limiting notion, a mere mental tool. What they are doing is vain playing with mathematical symbols, a pastime not suited to convey any knowledge.”11

It is, to me, interesting that a school of thought that (through its founder, Carl Menger) helped uncover the subjective nature of value and whose students explained and foresaw the eventual collapse of communist systems decades before the fall of the Berlin Wall is so consistently ignored by economics departments and introductory economic texts.

I once asked an economics professor whose specialization is monetary theory whether he was interested in the Austrian school. His answer was a quick and undiluted “No.” At the time I didn’t know that his own area of expertise is perhaps where the Austrians have made their most significant contributions, providing a comprehensive theory of the business cycle tied directly to monetary policy.

It is perhaps because the Austrian school is so clearly associated with deductive reasoning and nonintervention that mainstream economists are left unimpressed. Austrian economics does not, for example, encourage endless debates over the proper interest rate or the best rate of growth of the money supply. Austrian theory makes it clear that the best monetary policy is one that bases money on gold or some other true media of exchange, as opposed to allowing politicians and bureaucrats to manipulate the money supply, creating false signals, artificial booms, and, inevitably, busts.

It is encouraging to hear, as I do from time to time, that Austrian economics is experiencing a revival and is arousing new interest, especially in light of the current recession. Let’s hope its fundamental notions can begin to penetrate our institutions of economic learning and training.


Notes

  1. Quoted on the economics department homepage of the St. Mary’s University (Halifax, Nova Scotia) website, www.stmarys.ca/academic/commerce/economic/eco.html. Emphasis added.
  2. Trinity College Dublin (Ireland), www.tcd.ie/Economics/what_is_economics.htm.
  3. Lock Haven University of Pennsylvania, www.lhup.edu/economics/.
  4. Indiana University-Purdue University Indianapolis, www.iupui.edu/~econ/whystudy.html.
  5. Franklin P. Perdue School of Business, Salisbury University, www.salisbury.edu/Schools/Perdue/EconFin/whatisecon.asp.
  6. University of Nevada, Reno, www.coba.unr.edu/undergrad/econ/info.html.
  7. Ludwig von Mises, Human Action, 4th rev. ed. (Irvington-on-Hudson, N.Y.: Foundation for Economic Education), p. 92.
  8. Ibid., p. 43.
  9. Ibid., p. 2.
  10. Ibid., p. 118.
  11. Ibid., p. 250.

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February 2003

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ARTHUR FOULKES

Arthur Foulkes writes for a daily newspaper in Indiana.

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