On The Similarities Between Austrian and Neoclassical Economics

I have alluded to the fact that I see neoclassical and Austrians economics as broadly part of the same intellectual movement. At first, I was unable to pinpoint exactly why this was, other than the fact that they both shared a governments versus markets mentality, and the only major policy difference between neoclassical libertarians and (minarchist) Austrian libertarians was the latter’s disdain for central banking (I am also informed that Milton Friedman repudiated his support for Central Banking later in life. But didn’t he argue…eh, forget it).

Regardless, I have realised that the more substantive reason for this equivalence is that the two share the same methodology. Whilst Austrians might reject this at first glance, allow me to go through each methodological tool, as expressed by Arnsperger & Varoufakis, used by neoclassical economics and compare it to Austrian analysis:

(1) Methodological individualism. This one is not particularly controversial – both neoclassicals and Austrians build up their economic models from the behaviour of individual agents. Austrians are generally more reductionist, whilst neoclassicals are prepared to abandon it for AD/AS analysis, but the majority of neoclassical theories retain this approach.

(2) Methodological instrumentalism. This means behaviour is generally preference driven, and action is defined to attain some end state. For neoclassicals this is utility maximisation:

Economists use the term utility to describe the satisfaction or enjoyment derived from the consumption of a good or service. If we assume that consumers act rationally, this means they will choose between different goods and services so as to maximize total satisfaction or total utility.

For Austrians it does not necessarily revolve around maximising anything, but still shares the same ‘actions are aimed to achieve some end’ characteristic:

Human action is purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful response to stimuli and to the conditions of its environment, is a person’s conscious adjustment to the state of the universe that determines his life.

In both cases the theories revolve around revealed preference – what people actually do is meaningful, and we will build our theories around that assumption.

(3) Methodological equilibration. This means that analysis asks what behaviour we should expect, given the economy is in equilibrium. This is the one most likely to be resisted by Austrians, who generally insist that they study the economy as if it is permanently evolving and in disequilibrium. However, this paper on the subject disagrees:

Mises’ understood the of market process as a series of shifting imperfect equilibria, or plain states of rest. Hayek had views similar to Mises on equilibrium, but he added in the concept of a personal state of rest to Austrian theory. Lachmann accepted the basic elements of the Mises-Hayek theory of shifting equilibrium.

Mises and Hayek’s approach of starting in equilibrium and then asking whether that equilibrium is unique and stable echoes the approach of neoclassical economics, which generally assumes equilibrium to begin with, then looks at whether the system has a tendency away from that equilibrium, towards others or to stay in the same place.

Blogger ‘Lord Keynes’ has also commented on the reliance of many Austrians on some form of equilibrium analysis, noting that Mises and Rothbard thought the economy had a long term tendency towards equilibrium, whilst Hayek used equilibrium as an epistemological starting point. LK appears to think that Lachmann did not fall into these traps, in opposition to the paper above, but I am not sufficiently well versed in Lachmann’s work to comment.

It’s reasonably uncontroversial to note that elements of the neoclassical and Austrian school have the same origins in Menger and Walras, and the Austrians originally split from the neoclassicals to pursue a different path. However, it seems they still took many of the important concepts with them when they left, and to me its clear that many of these remain today.

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  1. #1 by stickman on June 7, 2012 - 10:05 pm

    The link between Austrianism and neoclassical (micro, especially) is interesting. I’ve long thought that the divide isn’t nearly so sharp as is made out by certain adherents.

    On that subject, my sense is that praxeology — despite various claims to the contrary and appeals to Kantian authority — is deductive in no greater sense than most economic theory. That is, it characterises a specific form of behaviour at the outset (in this instance, “purposeful” action) and then explores the ramifications within those constructs.

    Or, as I wrote a while ago: “Why the need to invoke Kant at all? When you have already specified the terms and limits of your engagement — i.e. purposeful behaviour — all this Kantian talk about (non) self-contradicting synthetic a priori truths becomes redundant. I mean, would it really be that different to saying “Homo economicus is only concerned with explaining human behaviour to the extent that agents are rational and narrowly self-interested“? I don’t think so.”

    • #2 by Min on June 8, 2012 - 3:51 pm

      “Why the need to invoke Kant at all? . . . I mean, would it really be that different to saying “Homo economicus is only concerned with explaining human behaviour to the extent that agents are rational and narrowly self-interested“? I don’t think so.”

      I do not know what aspects of Kant’s thought the Austrians invoke, but Kant is anti-homo economicus. The Kantian rational agent is decidedly not narrowly self-interested. He asks himself, What if everybody acted as I propose to act?

    • #3 by James Kroeger on June 9, 2012 - 6:17 am

      “Why the need to invoke Kant at all?”

      The answer, I believe, is that Mises wanted in the worst way to deny economists the option of using induction to derive general principles that could be said to apply to everyone.

      The ‘conditions’ that the action axiom places on economic inquiries are really quite arbitrary and unjustified by any apologetics I’m aware of. A great many of the economic actions that most economic agents carry out are informed by not only purposive intent, but also by raw emotion and impulsiveness.

      Indeed, sometimes economic behavior is inspired by both purposive intent AND ‘mindless emotional impulses.’ Why wouldn’t an economist want to study the degree to which the two are blended together to produce economic decisions, or various revealed preferences?

      And what distinctions should be made between those purposeful actions that are Good Guesses vs. those that are Bad Guesses?

      Many economic agents will make bad purposeful decisions based on a flawed understanding of what they are dealing with… Not a topic that economists should care about?

  2. #4 by rob on June 8, 2012 - 2:38 am

    I’m not sure what you’re trying to prove here – one could do a post entitled “On The Similarities Between Post-Keynsian and Neoclassical Economics” and come up with something quite similar. There is a (from an Austrain POV) a huge overlap between statist neo -classical thinking and statist post-keynsian thinking that you appear to be unaware of.

    • #5 by Isaac "Izzy" Marmolejo on June 8, 2012 - 3:30 am

      To Rob: you entirely missed the point from this post. Also the whole ‘statist’ thing is irrelevant here, it has nothing to do with economics, it has to do with ideology, different subject. Obviously there is some serious neoclassical flaws that the Austrians have taken, plain and simple.

      To unlearningecon: Methodological individualism (MI) is not in itself a ‘neoclassical’ concept. Quite plainly MI is ‘the method which seeks to explain human action in plans conceived before action is actually taken’ (for more see Lachmann’s essay: ‘Methodological Individualism and the Market Economy’).

      But definitively point 2 and 3 are well taken as (mainstream) Austrian flaws.

      I would highly disagree that Lachmann held similar views on equilibrium as that of Mises or Hayek. Actually his essay ‘From Mises to Shackle’ , it is quite clear that Lachmann rejected equilibrium analysis. A kaleidic view is one which one agrees that there is no equilibrium and that there is not even tendency towards equilibrium. The market is a process of continuous change, equilibrium is nonexistent.

  3. #6 by rob on June 8, 2012 - 4:23 am

    My point is that Austrians (at least mainstream ones) tend to have developed those parts of neo-classicism that focus on the idea that markets are self-equilibrating (irrespective of whether they are actually in equilibrium at any given point), while Keynes pick up on and developed those theories already present in neo-classicism that emphasized the tendency to market failure.

    I agree that these differences have their route in ideology not economics.

    • #7 by Isaac "Izzy" Marmolejo on June 8, 2012 - 5:13 am

      ” while Keynes pick up on and developed those theories already present in neo-classicism that emphasized the tendency to market failure.”

      This is not entirely accurate. In the General Theory, Keynes’ talk of market failures came as a result from uncertainty and subjective expectations, or what he called ‘animal spirits.’ The emphasis of including neoclassical explanations to Keynes’ economics did not come till people like Samuelson popularized it.

      And I think you misunderstood me with the ideology thing that I said because I did not say at all that the differences between economic school route in ideology. Clearly, saying something like ‘Post Keynesians are statists’ is not an economics statement, it is an ideological statement. Critiquing Austrians on their idea that in the long run, there is a tendency towards equilibrium is an economics concern, not ideological one.

  4. #8 by Jonathan M.F. Catalán on June 8, 2012 - 2:55 pm

    There are many “superficial” similarities between Neoclassical and Austrian economics; this, for instance, is embodied in the fact that early in their career Mises and Hayek didn’t make the effort to distinguish between the two schools. It was during the 1930s that it became very obvious that a differentiation was needed (mostly the divergent approaches to price formation). But, that the two schools are “superficially” similar doesn’t mean that they are truly comparable.

    On the use of equilibrium, blogger “Lord Keynes” is, again superficially, correct. But, whereas some envision the economy as existing in equilibrium, Austrians understand that the use of equilibrium is as an ideal type. In many respects, this isn’t a strictly-Austrian idea. Frank H. Knight, for instance, also understood that the model of equilibrium (e.g. perfect competition) is an ideal type and not a true approximation to the actual market. But, this goes back to what I discussed in the first paragraph — whereas the Austrian body theory allows room for dynamism, in many ways it seem as if Neoclassical economics began to focus on equilibrium constructs. This is manifested in the inadequacy of Neoclassical price theory, as integrated by George Stigler.

    Isaac, Lachmann did not disagree with the use of equilibrium in the economics of Mises, largely because Mises was not an equilibrium economists, but a disequilibrium economist. In his review of Human Action, Lachmann is clear that to him Mises is squarely in the camp of the “radical subjectivists.” I think it is also more-or-less clear that Hayek was not really an equilibrium economists, despite what Salerno may claim, although he may not have been a “radical subjectivist” in the spirit of Mises. Also, I’m not sure why you say the “focus” on “purposeful action” (that human action is meant to attain ends) is a “flaw” of “mainstream Austrianism” — surely, Lachmann did not deny that human action is meant to garner satisfaction.

    This being said, the divergence on theory of choice between Neoclassical and Austrian economics is a huge one, and is not done proper justice in this post. This is also related to equilibrium; showing the differences between the two approaches is, in part, Hayek’s task in his response to Oskar Lange in the late 1930s and early 1940s. It’s not just about a pure logic of choice given a utility or profit function, but action in the midst of imperfect knowledge and uncertainty.

    On point (3), like you said, this is resisted by Austrians. Salerno, in fact, argues that the “plain state of rest” is not a tradition position of equilibrium, but one of equilibrium. Where prices “settle” is not necessarily at their “equilibrium positions.” This is easy to confuse (and I did when I read Human Action for the first time [and I criticized this]) and even if true it doesn’t really characterize the more heterodox branch of Austrians, in the spirit of Mises. Finally, I don’t think MacKenzie (at least, in the excerpt you provide) really “gets” Lachmann. In a series of papers arguing with Kirzner, Lachmann even denies the existence of “equilibrating tendencies.” He repeats this in his 1986 book The Market as an Economic Process, which I review here.

    What all of this really argues is that by broadly comparing the Neoclassical and Austrian schools, as you’ve done here, you’ve (probably unintentionally) swept over the nuances in each category that provide the details of the relevant divergences.

    • #9 by Isaac "Izzy" Marmolejo on June 8, 2012 - 4:41 pm

      “Isaac, Lachmann did not disagree with the use of equilibrium in the economics of Mises, largely because Mises was not an equilibrium economists, but a disequilibrium economist.”

      This is debatale if Mises was that of an equilibrium economist or a disequilibrium one. It can be said that he at least used equilibrium as a tool but regardless it is quite clear that Lachmann did not view Mises as a kaleidic viewing person, this is to say, an economist that at least held the view that there was not a tendency towards equilibrium. In his essay ‘From Mises to Shackle’:
      “Professor Hayek and Mises both espouse the market process, but do not ignore equilibrium as its final stage…. Mises, calling the Austrians ‘logical’ and the neoclassicals ‘mathematical’ economists’, wrote: ‘Both the logical and mathematical assert that human action ultimately aims at the establishment of such a state of equilibrium and would reach it if all further changes in data were to cease.’

      It is this view of the market process as at least potentially terminating in a state of long run general equilibrium that now appears to require revision.”

      Thus not only did he view that there was a tendency towards equilibrium, but saw it possible that equilibrium can be reached.

      • #10 by Jonathan M.F. Catalán on June 8, 2012 - 5:59 pm

        If your interpretation of Lachmann is right, then Lachmann is wrong. Mises means that if action were to end — that is, if all individuals no longer need further satisfaction — this is a teleological end. But, Mises is not adopting a deterministic or teleological doctrine; he is merely stating a truism. But, Mises was a disequilibrium economist, and I don’t think this is debatable.

  5. #11 by Lord Keynes on June 8, 2012 - 3:53 pm

    “In his review of Human Action, Lachmann is clear that to him Mises is squarely in the camp of the “radical subjectivists.”

    I would like to see your chapter and verse citation for this statement. And anyway, even if Lachmann said this in the late 1940s or early 1950s, it is clear he did not think so later in life (see Lachmann, Ludwig M. 1976. “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,” Journal of Economic Literature 14.1: 54–62.).

    “In a series of papers arguing with Kirzner, Lachmann even denies the existence of “equilibrating tendencies.” He repeats this in his 1986 book The Market as an Economic Process, “

    And this means that for Lachmann Mises cannot have been a radical subjectivist, for Mises accepted a long term tendency to general equilibrium, even if the state was never attained.

    Ludwig Lachmann criticised Mises for the view that there is a tendency towards general equilibrium, and Lachmann concluded that the economy is an on-going, open-ended “market process” with subjective knowledge and subjective expectations.

    This is clearly seen in a passage from the 1976 article by Lachmann:

    “Professor Hayek and Mises both espouse the market process, but do not ignore equilibrium as its final stage. The former, whose early work was clearly under the influence of the general equilibrium model, at one time appeared to regard a strong tendency towards general equilibrium as a real phenomenon of the market economy. Mises, calling the Austrians ‘logical’ and neoclassicals ‘mathematical’ economists, wrote: ‘Both the logical and the mathematical economists assert that human action ultimately aims at the establishment of such a state of equilibrium and would reach it if all further changes in data were to cease’ … It is this view of the market process as at least potentially terminating in a state of long-run general equilibrium that now appears to require revision.”

    Lachmann, Ludwig M. 1976. “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,” Journal of Economic Literature 14.1: p. 60f.

    The Austrian school is itself split between the Lachmann-wing and the moderate subjectivists. The latter have not properly dealt with the consequences of radical uncertainty and subjective expectations:

    “Kirzner initially saw his project as improving neoclassical economics and providing a ‘story’ as to how markets adjust, whereas the kaleidic Lachmann-inspired wing (including Shackle and Loasby) seems to have been reaching out to Post keynesians such as Davidson. Indeed, in their debate with Davidson … both Prychitko (1993) and Torr (1993) acknowledged the tension between the kaleidic wing of Lachmann, Shackle and Boulding, with their stress on divergent and disequilibrating expectations, and the more dominant, market-as-an-equilibrating-process axis of Mises, Hayek and Kirzner” (Dunn, S. P. 2008. The ‘Uncertain’ Foundations of Post Keynesian Economics, Routledge, London. p. 136).

    See my post here:

    http://socialdemocracy21stcentury.blogspot.com/2012/01/equilibrium-amongst-austrians.html

  6. #12 by Lord Keynes on June 8, 2012 - 3:55 pm

    “On point (3), like you said, this is resisted by Austrians. Salerno, in fact, argues that the “plain state of rest” is not a tradition position of equilibrium, but one of equilibrium.”

    Don’t you mean:

    On point (3), like you said, this is resisted by Austrians. Salerno, in fact, argues that the “plain state of rest” is not a traditional position of equilibrium, but one of disequilibrium.</b?

    • #13 by Jonathan M.F. Catalán on June 8, 2012 - 6:38 pm

      This is the third time I try to respond to these two replies, because I keep hitting the back button as I quote excerpts of Mises’ Human Action, which clearly show him as a disequilibrium economist. But, all you need to do is download the PDF and search “equilibrium:” here are a few page numbers: 251, 257, 295, 326, 333 (especially). There is evidence throughout the book. It is true that Human Action was written by the most radical Mises (although, it was in 1986 that Lachmann argues that it was Mises’ 1912 book on monetary theory — The Theory of Money and Credit — which is the most completely subjectivist).

      With regards to your second reply (the one I am directly replying to), yes I meant disequilibrium in that second instance.

      Also, the paper I cited (as I stated, Lachmann’s review of Human Action) is: Ludwig M. Lachmann, “Human Action — Treatise on Economics, by Ludwig von Mises,” The South African Journal of Economics 19, no. 1 (1951).

      With regards on the excerpt from Lachmann’s 1976 article, I don’t remember the context — it’s been a while since I’ve read it –, but if yours (and Isaac’s) interpretation is right, then Lachmann is wrong. There is a philosophical teleological end, which is one without action. But, this isn’t an economy of change; this is an economy without change. It is not as if Mises argues that all action is towards this teleological end, as if the market process is deterministic. In some of the pages I cite above, Mises denies that this is a real world possibility. The only thing that Lachmann might have a right to complain on is Mises’ continued use of the uniformity of profit process, which Lachmann (rightfully) argues is not a true tendency in his later years. But, post-1930s Mises was not an equilibrium economist, and this is very obvious familiar with his literature of those years.

      Finally, when you write “[t]he Austrian school is itself split between the Lachmann-wing and the moderate subjectivists,” it doesn’t say anything useful. In fact, it is even very misleading. Split over what? If it is about equilibrium, this is not true at all. In fact, the notoriously Misesian/Rothbardian “purists” of the Mises Institute are disequilibrium economists, contra Hayek and Weiser (see Salerno’s introduction to Human Action and the debate between him and Caldwell). Now, Lachmann also accepted many post Keynesian theories, like that of fixed prices (apparently, as I’ve written elsewhere, completely ignorant of Böhm-Bawerk’s theory of prices (see my review of his 1986 book), which explains the same phenomena of industrial price formation). It’s natural that most Austrians reject these late conclusions of a Lachmann heavily influenced by post Keynesians like Shackle, late Hicks, and Chick (but, I’m not saying that there are no valuable insights made by post Keynesians — Maclachlan’s book on interest theory is one example of many of great post Keynesian insight). But, your ambiguous alleged division between Lachmannians and the rest is not necessarily true and very misleading.

      • #14 by Lord Keynes on June 8, 2012 - 8:53 pm

        (1) “But, post-1930s Mises was not an equilibrium economist, and this is very obvious familiar with his literature of those years.”

        I am not asserting that Mises was an “equilibrium economist” like the neoclassicals; I am saying (as Lachmann did) that he appears to have thought there was “a strong tendency towards general equilibrium as a real phenomenon of the market economy. ”

        (2) “Finally, when you write “[t]he Austrian school is itself split between the Lachmann-wing and the moderate subjectivists,” it doesn’t say anything useful. In fact, it is even very misleading. Split over what? If it is about equilibrium, this is not true at all. …”

        Your problem is the use of straw man arguments.
        My statement: “The Austrian school is itself split between the Lachmann-wing and the moderate subjectivists” does not deny the existence of other Austrians, such as Rothbardians etc.

        And my statement is perfectly true: there is a division between a Lachmann wing and moderate subjectivists like Rizzo and O’Driscoll etc.

        These latter Austrians invoke the concept of pattern/plan co-ordination as an alternative to equilibrium.

        “But, your ambiguous alleged division between Lachmannians and the rest is not necessarily true and very misleading.”

        The words “and the rest” are your own addition to my statement. I said no such thing. I was talking only of those one can call the “moderate subjectivists.”

  7. #15 by James Kroeger on June 8, 2012 - 4:01 pm

    “Regardless, I have realised that the more substantive reason for this equivalence is that the two share the same methodology.”

    I’m not sure that I agree with your suggestion here that there might be some necessary connection between the methodological individualism embraced by both the Austrians and the neoclassical libertarians and the ‘governments vs. markets’ mentality that they also both share.

    Let me suggest that it would be more accurate to say that both the Austrians and the neoclassical libertarians misuse/misinterpret the ultimate meaning of the fundamental assumptions of MI in similar ways.

    The sin they are guilty of is assuming that (1) NOT ALL HUMANS are motivated by the same fundamental needs, and that because of this (2) any and all efforts by collectives to embrace/promote shared efforts to optimize the satisfaction of shared needs are flawed and rationally indefensible.

    Austrians like to believe that something significant is achieved if/when one focuses only on the actions that individuals carry out in their pursuit of various subjectively-perceived ‘values’, rather than on the values themselves, but they are mistaken in this belief.

    This becomes apparent if/when we understand that all human beings are born with the same intrinsic ‘needs’ as a condition of their existence. (A ‘need’ is that which, when satisfied, causes the host to experience some form of pleasure or when unsatisfied, causes the host to experience some form of pain)

    But humans are not born with an innate knowledge of what their needs are, or of how they might best be able to go about getting them satisfied, so we have had no choice but to GUESS at what we are dealing with.

    All humans have precisely the same ‘needs’, but different people have different guesses re: what those needs are, how important their satisfaction is relative to each other, and which ways to go about getting them satisfied are the best. (One very common complication: individuals mistaking means-to-ends for ends-in-themselves)

    These different guesses are what Mises was actually referring to when he made reference to the Action Axiom.

    Perhaps surprisingly, I agree with Mises, et al., that—generally speaking—the best way to deal with the great variety of our guesses re: what our needs are and how we might best go about getting them satisfied is through the marketplace. But that is really only because of (1) the uncertainty and (2) the complexity of those competing guesses.

    It is simply wrong, however, to assume that any and all collectivist attempts to optimize the satisfaction of certain basic needs are illegitimate and irrational. Through trial and error, we are able over time to improve the accuracy of a great many of our guesses.

    The Libertarians are wrong about a great many of their assumptions/conclusions (especially related to money and banking), but methodological individualism is not one of them, IMO.

  8. #16 by Isaac "Izzy" Marmolejo on June 8, 2012 - 6:51 pm

    “If your interpretation of Lachmann is right, then Lachmann is wrong. Mises means that if action were to end — that is, if all individuals no longer need further satisfaction — this is a teleological end. But, Mises is not adopting a deterministic or teleological doctrine; he is merely stating a truism. But, Mises was a disequilibrium economist, and I don’t think this is debatable.”

    If my interpretation of Lachmann is right? Of course it is, how else can you interpret Lachmann’s passage on Hayek and Mises? Lachmann’s critique on Mises is that he has the mentality that there is a long run tendency towards equilibrium, do you not agree that Mises held that view?

    • #17 by Lord Keynes on June 8, 2012 - 9:19 pm

      “Lachmann’s critique on Mises is that he has the mentality that there is a long run tendency towards equilibrium ..,”

      That is undoubtedly correct, and the Austrian school had its own serious debates in the 1970s-early 1990s when Lachmann’s ideas were starting to be taken seriously: take George A. Selgin’s Praxeology and Understanding, 1990) where Lachmann’s kaleidic view is opposed to most other Austrians like Kirzner etc.:

      “Central to the current controversy in Austrian economics is the debate concerning whether or not the market harbors a tendency toward equilibrium. The skeptical position, represented by Lachmann, is that no such tendency exists. It is opposed in particular by Kirzner, who attempts to defend the more traditional, praxeological position.” (Selgin, p. 37)

      http://mises.org/document/3578/Praxeology-and-Understanding-An-Analysis-of-the-Controversy-in-Austrian-Economics

      See also:

      “Commentators in the Austrian literature have emphasized and discussed the contrast between Hayek’s view that the tendency to equilibrium is an empirical matter and Mises’s view that it follows logically from the ‘activities of enterprising men.’” Method, process, and Austrian economics: essays in honor of Ludwig von Mises, p. 88

      Mises in Human Action:

      “Both the logical and the mathematical economists assert that human action ultimately aims at the establishment of such a state of equilibrium and would reach it if all further changes in data were to cease. But the logical economist knows much more than that. He shows how the activities of enterprising men, the promoters and speculators, eager to profit from discrepancies in the price structure, tend toward [p. 356] eradicating such discrepancies and thereby also toward blotting out the sources of entrepreneurial profit and loss. He shows how this process would finally result in the establishment of the evenly rotating economy. This is the task of economic theory. The mathematical description of various states of equilibrium is mere play. The problem is the analysis of the market process.”

      Ludwig von Mises, Human Action: A Treatise on Economics. The Scholar’s Edition, 1998, pp. 352-353.

  9. #18 by Lord Keynes on June 8, 2012 - 10:14 pm

    More here:

    http://socialdemocracy21stcentury.blogspot.com/2012/06/did-mises-believe-in-tendency-to.html

    And nice work, Unlearningecon, for a thought provoking post.

  10. #19 by Mick on June 9, 2012 - 11:07 pm

    Both neoclassical and Austrian economics ignore the effects of momentum trading. I wrote a blog entry on this here: http://mickanomics.blogspot.co.uk/2012/04/momentum-trading.html

  11. #20 by Unlearningecon on June 12, 2012 - 12:16 pm

    Hi everyone, sorry for the delay – I’ve been busy. Some great discussion here.

    Stickman, min & James Kroeger: good points about Kant and the narrow definition of human behaviour offered by the axiom.

    Jonathan: you say I highlight ‘superficial’ similarities. You are correct to say – and I will freely admit – that my reading of the Austrian school is not comprehensive. However, I don’t think a shared methodology is a superficial similarity, and whilst Austrian economics has developed, it retains its view of markets as a process built from individuals acting to attain some ends. This is what neoclassicism does.

    You say theories of choice are ‘hugely different.’ What evidence do you have for this? To me, both seem to rest on an ex post justification based on revealed preference – for Austrians, people act meaningfully in response to stimuli; for neoclassical they act to maximise utility. As Stickman & Kroeger note. bother of these are methodologies that start by defining a specific form of individual and then build up from there.

    On equilibrium – LK, yourself and Isaac are discussing this on a level that is beyond my knowledge.

    Rob: this is about methodology, not policy conclusions. I started by noting that my first impression was based partly on policy conclusions and acknowledging that this was not substantive. Isaac is also correct to say that this is mostly a technocratic discussion and we need to keep ideology out of it.

    James: I did not mean that governments versus markets stems from MI; I was referring to the broad equivalence I have drawn between the two schools, rather than any specific aspect.

    Methodological individualism is useful, but not all encompassing. We do not need to look at every aspect of the economy from the basis of individual behaviour – we can look at flows, emergent properties, and so forth, like other sciences. For example Steve Keen’s ‘Minsky’ model is not based on individual decisions; rather, it focuses on the flows between agents and the role of debt. It is incredibly effective at modelling crises like the ones we’ve experienced.

    LK, thanks for the kind words and some interesting follow up posts.

  1. Sloppy Interpretations | Economic Thought
  2. Lachmann, Mises, and Equilibrium | The Radical Subjectivist
  3. Milton Friedman on Corporations « Unlearning Economics
  4. An FAQ for Mainstream/Neoclassical Economists « Unlearning Economics
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