We are now going to reply to some of the critical comments on the Austrian paradigm that are habitually made and which, for the reasons we will set forth, we believe to be unfounded. The most common criticisms against the Austrians are as follows:
The two approaches (Austrian and neoclassical) do not exclude each other but are, rather, complementary.
This is the thesis upheld by many neoclassical authors who would like to maintain an eclectic position which does not enter into open conflict with the Austrian School. However, the Austrians consider that, in general, this thesis is merely an unfortunate consequence of the nihilism typical of methodological pluralism, according to which any method is acceptable and the only problem of economic science is to choose the most appropriate method for each specific problem. We consider that this thesis is merely an attempt to immunize the neoclassical paradigm against the powerful critical arguments launched against it by Austrian methodology. The compatibility thesis would be founded if the neoclassical method (based on equilibrium, preference constancy and the narrow concept of rationality) corresponded to the real way in which human beings act and did not tend to invalidate, to a great extent, the theoretical analysis, as the Austrians believe. This is the reason for the great importance of reworking the neoclassical theoretical conclusions using the subjectivist and dynamic methodology of the Austrians, in order to see which of the neoclassical theoretical conclusions continue to be valid and which should be abandoned due to theoretical defects. The neoclassical method is essentially erroneous from the Austrian point of view and, therefore, creates serious risks and dangers for the analyst, which tend to lead him further away from the truth.(58)
Finally, we should remember that, according to Hayek’s theory on the hierarchy of spontaneous orders depending on their degree of complexity, a certain order may explain, include and give account of relatively simpler orders. But what cannot be conceived is that a relatively simple order can include and give account of others that are composed of a more complex system of categories.(59)
If this Hayekian insight is applied to the methodological field, it is possible to conceive that the Austrian approach, which is relatively richer and more complex and realistic, could subsume and include the neoclassical approach, which could be accepted at least in the relatively infrequent cases where human beings choose to behave in the more reactive and narrowly maximizing way considered by neoclassicals. But what cannot be conceived is that human realities, like creative entrepreneurship, which far exceed the conceptual scheme of neoclassical categories, can be incorporated into the neoclassical paradigm. The attempt to force the subjective realities of the human being that the Austrians study to fit within the neoclassical straitjacket leads inevitably to either a clumsy characterization of them or to the healthy failure of the neoclassical approach itself, overcome by the more complex, richer and more explicative conceptual scheme of the Austrian point of view.
The Austrians should not criticize the neoclassicals for using simplified assumptions which held to understand reality.
The Austrian economists reply to this so commonly used argument by saying that one thing is to simplify an assumption and another is to make it completely unreal. What the Austrians really object to in the neoclassicals is not that their assumptions are simplified but, precisely, that they are contrary to the empirical reality of how the human being reveals himself to be and acts (dynamically and creatively). It is, therefore, the essential unreality (not the simplification) of the neoclassical assumptions which tends, from the Austrian point of view, to endanger the validity of the theoretical conclusions that the neoclassicals believe they reach in the different applied economics problems they study.
The Austrians fail when formalizing their theoretical propositions
This is, for example, the only argument against the Austrian School that Stiglitz sets forth in his recent critical treatise on the models of general equilibrium.(60) We have already explained (pp. 8-9) the reasons why, from the start, the majority of Austrian economists have been very distrustful of the use of mathematical language in our science. For the Austrian economists, the use of mathematical formalism is a vice rather than a virtue, since it consists of a symbolic language that has been constructed in accordance with the demands of the worlds of natural sciences, engineering and logic, in all of which subjective time and entrepreneurial creativity are noticeably absent. It therefore tends to ignore the most essential characteristics of the human being, who is the protagonist of the social processes that economists should study. Thus, for example, Pareto himself reveals this serious disadvantage of mathematical formalism when he acknowledges that all his analysis is made without taking the real protagonist of the social process (the human being) into account and that, for the purpose of his mathematical economics analysis, “the individual can disappear, provided he leaves us his photograph of his tastes”.(61) In the same error falls Schumpeter when he states that “one needs only ‘enquire’ of individuals the value functions of the consumption goods, and one thereby obtains everything else”.(62)
In any case, the mathematicians’ response (if they can provide one) to the challenge of conceiving and developing a whole new “mathematics” able to include and allow the analysis of the human being’s creative capacity with all its implication, without resorting, therefore, to the assumptions of constancy that come from the world of physics and which have been the driving force behind all the mathematical languages known to date, is still pending. In our opinion, however, the ideal scientific language for including this creative capacity is precisely the language that human beings have spontaneously created in their day-to-day entrepreneurship, which materializes in the different verbal languages and forms of speech which prevail in the world today.
The Austrians carry out very little empirical work.
This is the most common criticism that the empiricists make of the Austrians. Although the Austrians place an extraordinary importance on the role of history, they recognize that their field of scientific activity -theory, which it is necessary to know before it is applied to reality or illustrated by historical facts- is very different. For the Austrians, there is, on the contrary, an excess production of empirical works and a relative lack of theoretical studies that enable us to understand and interpret what really happens. Moreover, the methodological assumptions of the Neoclassical School (equilibrium, maximization and preference constancy), although they appear to facilitate empirical studies and the “verification” of certain theories, often conceal the correct theoretical relations and, therefore, may induce serious theoretical errors and an erroneous interpretation of what is really happening at any given moment or under any historical circumstance.
The Austrians renounce prediction in the economic field.
We have already seen that the Austrian theorists are very humble and prudent with regard to the possibilities of making scientific predictions of what will happen in the economic and social fields. They are, rather, concerned with constructing a scheme or arsenal of theoretical concepts and laws that allow reality to be interpreted and help acting human beings (entrepreneurs) to make decisions with a greater chance of success. Although the Austrians’ “predictions” are only qualitative and are made in theoretical terms, there exists the paradox that, in practice, as the assumptions of their analysis are much more realistic (dynamic and entrepreneurially creative processes), their conclusions and theories greatly increase the chances of making successful predictions in the field of human action in comparison with the possibilities of the Neoclassical School.(63)
The Austrians do not have empirical criteria to validate their theories.
According to this criticism, often made by the empiricists affected by the complex of St. Thomas the Apostle of “if I don’t see it, I don’t believe it”, only through the empirical reality can one become certain of which theories are correct or otherwise. As we have seen, this point of view ignores the fact that, in economics, the empirical “evidence” is never indisputable as it refers to complex historical phenomena that do not permit laboratory experiments in which the relevant phenomena are isolated and all aspects which could have an influence are left constant. In other words, economic laws are always laws ceteris paribus but in reality the other things never remain equal. According to the Austrians, the validation of theories is perfectly possible through the continual elimination of defects in the chain of logical-deductive reasoning of the different theories and by taking the greatest care when, at the moment of applying the theories to reality, it is necessary to evaluate whether the assumptions contained in the theory therein exist or not in the specific historical case analyzed. Given the uniform logical structure of the human mind, this continual validation activity proposed by the Austrians is more than sufficient to reach an agreement between the different protagonists of scientific labour. Moreover, in spite of appearances, in practice, this agreement is usually more difficult to reach in relation to empirical phenomena, which, in view of their very complex nature, are always subject to the most widely differing interpretations.
The accusation of dogmatism.
This is an accusation which, to a great extent, thanks to the notable re-emergence of the Austrian School and the fact that it is better understood by the economics profession, is fortunately being employed less often. However, in the past, many neoclassical economists fell into the easy temptation of globally discrediting the whole Austrian paradigm and describing it as “dogmatic”, without making any detailed study of its different aspects or attempting to answer the criticisms it raised.(64)
Bruce Caldwell is especially critical with this neoclassical attitude of disdaining and not even considering the positions of the Austrian methodologists, describing it, likewise, as dogmatic and anti-scientific and reaching the conclusion that it is in no way justified from a scientific point of view. In fact, and in relation to Samuelson’s position, Caldwell wonders: “What are the reasons behind this almost anti-scientific response to praxeology? There is, of course, a practical concern: the human capital of most economists would be drastically reduced (or made obsolete) were praxeology operationalized throughout the discipline. But the principal reason for rejecting Misesian methodology is not so self-serving. Simply put, the preoccupation of praxeologists with the ‘ultimate foundations’ of economics must seem mindless, if not perverse, to economists who dutifully learned their methodology from Friedman and who therefore are confident that assumptions do not matter and that prediction is the key. … Regardless of its origins, such a reaction is itself dogmatic and, at its core, anti-scientific”.(65)
The habitual way in which the neoclassical economists present what they consider to be the essential point of view of economics is much more arrogant and dogmatic. They base it exclusively on the principles of equilibrium, maximization and constancy of preferences. Thus, they intend to take on a monopoly of the conception of the “economic point of view”, extending the law of silence to the other alternative conceptions that, like the one represented by the Austrians, dispute the field of scientific research with them with a much richer and more realistic paradigm. We hope that, for the good of the future development of our discipline, this disguised dogmatism will gradually disappear in the future.(66)
Fortunately, some neoclassical authors have recently begun to recognize the narrowness and constraints of their traditional conception of the “economic point of view”. Thus, Stiglitz has said that “the criticism of neoclassical economics is not only that it fails to take into account the broader consequences of economic organization and the nature of society and the individual, but that it focuses too narrowly on a subset of human characteristics – self-interest, rational behaviour”.(67) However, this more open conception has not yet become general and, therefore, most of the neoclassicals are earning the well-deserved accusation of “scientific imperialism” when they try to extend their narrow concept of rationality to spheres which, like the family, criminality and the economic analysis of law, are becoming increasingly broad. In this respect, Israel M. Kirzner has recently said that “modern economists have seemed to permit the narrowest formulations of the rationality assumption to dictate social policy in what critics could easily perceive to be a highly dangerous fashion. It is not surprising that all this has stimulated sharply critical reaction”.(68)
Jesús Huerta de Soto
Professor of Political Economy
King Juan Carlos University of Madrid, Spain
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58. For the same reason, neither is Barry Smith’s thesis (Austrian Philosophy: The Legacy of Franz Brentano, Open Court, Illinois 1994, pp. 330-331), whereby the Austrian methodology would be appropriate for establishing the basic foundations of the discipline, while neoclassical empiricism would handle above all problems of applied economics, acceptable. Again, Barry Smith’s approach would be correct if the scientistic methodology of the neoclassicals did not tend to conceal the problems of real interest by generating defects in the theoretical analysis that affect, to a great extent, the validity of its conclusions.
60. Stiglitz even entitles one section of his book “Hayek versus Stiglitz”, Joseph E. Stiglitz, Whither Socialism?, op. cit., pp. 24-26. Unfortunately, Stiglitz tries to reconstruct the neoclassical models using a static methodology based on equilibrium and formalized language, failing, from the Austrian point of view, to avoid the methodological errors of the same models as he himself is criticizing. See Stephen Sullivan’s “Signifying Nothing: A Review Essay of Joseph Stiglitz’ Whither Socialism?”, Advances in Austrian Economics, Vol. III, Jay Press, 1996, pp. 183-189.
61. Vilfredo Pareto, Manual of Political Economy, Augustus M. Kelley, New York 1971, p. 120. Pareto is referring specifically to the instrument of the indifference-preference curves the use of which is, in our opinion, very negative for economic science as it does not recognize the sequential and non-synchronic nature of all human actions, does not take into account the fact that the human being only considers the combinations thought most appropriate for each specific end (indifference does not involve any human action) and does not adequately reflect the most universal and relevant phenomenon of the complementary nature of goods.
62. See Joseph Alois Schumpeter, Das Wesen und der Hauptinhalt der Theoretischen Nationalökonomie, Dunker & Humblot, Leipzig 1908, p. 227. The best known criticism of this Schumpeter’s scientistic book was written by Friedrich von Wieser, “The Nature and Substance of Theoretical Economics”, Classics in Austrian Economics, Israel M. Kirzner (ed.), ob. cit., Vol. I, pp. 285-303.
63. Two examples of what we are saying are the “prediction” of the fall of real socialism that is implicit in the Austrian analysis of the impossibility of socialism and the Austrians’ prediction of the Great Depression of 1929. Neither of these very significant historical events were predicted by the neoclassical economists. In this respect, see Mark Skousen, “Who Predicted the 1929 Crash?”, in The Meaning of Ludwig von Mises, Jeffrey M. Herbener (ed.), Kluwer Academic Publishers, Amsterdam 1993, pp. 247-284. Lionel Robbins, in his “Introduction” to the first edition of Prices and Production of F.A. Hayek (Routledge, London 1931, p. xii), referred to Mises and Hayek’s prediction of the inexorable advent of the Great Depression as a result of the monetary and credit excesses committed in the twenties, which appeared expressly in an article by Hayek published in 1929 in the annals of the Monatserichte des Osterreichischen Instituts für Konjunkturforschung. This Austrian prediction contrasted with the optimism of many neoclassicals (Keynes and monetarists like Fisher) who, even a few months before the Crash, still publicly affirmed that the economic boom of the twenties and the high stock market index which characterized it would be maintained indefinitely.
64. See, for example, the harsh observations made by Samuelson, who even commits the excess of stating that the existence of the Austrian economists made him “tremble for the reputation of my subject” (The Collected Scientific Papers of Paul A. Samuelson, R.C. Merton (ed.), The MIT Press, Cambridge, Massachusetts 1972, Vol. III, p. 761). And also the accusations against the Austrian School made by Blaug in his book on The Methodology of Economics, Cambridge University Press, Cambridge and London 1980, pp. 91-93. However, as we will see later, more recently, Mark Blaug has gradually changed his position and is increasingly inclining towards the propositions of the Austrian School, if not in his deductive methodology, at least in his acceptance of the dynamic entrepreneurial approach and criticism of the model of equilibrium of the neoclassical-Walrasian paradigm.
66. An example of this neoclassical habit of assuming a complete exclusive on the “correct” conception of the “economic point of view” could be Gary Becker’s speech on receiving the Nobel Prize, “The Economic Way of Looking at Behaviour”, reproduced as Chap. 26 of The Essence of Becker, Ramón Febrero and Pedro S. Schwartz (eds.), Hoover Institution, Stanford University, pp. 633-658.
68. Israel M. Kirzner, The Meaning of the Market Process: Essays in the Development of Modern Austrian Economics, Routledge, London 1992, p. 207. However, the accusation of imperialism is not justified when it refers exclusively to the scope of application of economic science, and not to the use of the neoclassical approach: from the Austrian point of view as well, since economics is considered a general theory of human behaviour, it is applicable to all fields in which the human being acts. Only when the conception based on the strictly rational homo oeconomicus is applied is the accusation of imperialism clearly justified, not with regard to the scope of application of the economic point of view correctly understood, but in respect of the neoclassical attempt to apply the strictly rationalist approach to all human fields.