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.