6.Conclusion: evaluating the successes and failures of the two approaches

What we have said up to now does not mean that all, or even the majority, of the theoretical conclusions of the neoclassical economists should be rejected. Our recommendation should rather lead to a review and, if appropriate, a reworking of the neoclassical doctrines using the Austrian approach. In this way, the important valid conclusions contributed by the theorists of the Neoclassical School would be reinforced, while the errors which have remained latent and surreptitiously been concealed from the theoretical “spectacles” of the neoclassical researcher would come to light.

We have not yet mentioned what is a very relevant aspect, especially for all libertarian economists interested in stimulating research into the theory and practice of human liberty. The fact is that the neoclassical methodology based on a narrow concept of rationalism, the utilitarian cost-benefit analysis and the assumptions of constancy and full availability of the necessary information (in determinist or probabilistic terms), one way or another, very easily ends up justifying coercive measures of state intervention. In other words, the typical “social engineering” approach that the neoclassicals naturally adopt leads them, almost without realizing it, to become “analysts” who are easily prone to giving an interventionist prescription to the different specific problems they diagnose in the real world. This, which is precisely what gives the appearance of greater “operational” success to the Neoclassical School, is also what, on many occasions, usually ends up justifying important measures of State interventionism. The problem is posed now with special virulence among our neoclassical allies of the School of Chicago, whose devotion and effort in the defence of liberty are indisputable, although their theoretical conclusions are often far from what would be considered desirable from the libertarian point of view, as they are influenced by the scientistic conception of the Neoclassical School, which they follow with what is, if possible, even greater devotion. Thus, as early as 1883, Menger, in his criticism of Adam Smith, showed how those who tried to scientifically create and improve the social institutions were headed towards interventionist conclusions.(69) And more recently, one of the distinguished members of the libertarian Mont Pelèrin Society regretted that “it is frustrating when our Chicago allies employ their manifest talents in helping the state do more efficiently that which it either shouldn’t be doing or of which it should be doing much less”.(70) The fact is that the neoclassical theorists who want to be libertarians, are often victims of what we could call the “paradox of the libertarian ‘social engineer'”: effectively, they fully share the scientistic paradigm of the neoclassical social engineers and, at the same time, try to justify, with the same analytical perspective and instruments, supposedly more “libertarian” policies, which are frequently in contradiction with the essential principles of freedom. In the long run, they end up, often without realizing it or wanting to, encouraging the institutional coercion which is typical of State intervention. This happens not only because the analytical innovations which they stimulate, in the hands of theorists who are less scrupulous or have a lower commitment to freedom, are easy to use to justify measures of intervention, but also because, as in the case mentioned by Crane, they themselves propose recipes that, although they appear to lead in the right direction, often finally reinforce the interventionist role of the State. This tension between the scientistic approach of the neoclassicals and libertarianism arises time and again throughout the history of economic thought and perhaps the most illustrative example is Jeremy Bentham who, in spite of his initial libertarian sympathies, ended up justifying important measures of interventionism.(71) In any case, it is evident that the social engineering approach which the mainstream neoclassical paradigm has been encouraging has, to a large degree, been responsible for the extension of the State in the present century. We should, therefore, consider that Hans-Hermann Hoppe is right when he says that the neoclassical-positivist methodology has often ended up by becoming “the intellectual cover of socialism”.(72)

The fall of real socialism and the crisis of the Welfare State, considered as the most ambitious social engineering attempts made by the human being this century, will have a profound impact on the future evolution of the neoclassical paradigm. It is obvious that something critical had failed in neoclassical economics when it was not able to analyze or predict such a significant historical event previously. Thus, the neoclassical Sherwin Rosen has had to acknowledge that “the collapse of central planning in the past decade has come as a surprise to most of us”.(73) And we have already seen the critical comments on the standard neoclassical models made by Stiglitz in his Whither Socialism? Fortunately, it is not necessary to start methodologically from scratch: a large part of the analytical instruments necessary to reconstruct economic science along a more realistic path have already been articulated and perfected by the theorists of the Austrian School, who have prepared, explained, defended and refined them throughout the successive controversies we have seen they were in dispute with the theorists of the neoclassical paradigm. Some of the latter, like Mark Blaug, have shown a great deal of courage and have recently declared their abandonment of the model of general equilibrium and the static neoclassical-Walrasian paradigm, concluding that: “I have come slowly and extremely reluctantly to view that they (the Austrian School) are right and that we have all been wrong”.(74) Furthermore, the healthy influence of the present circumstances has begun to make itself felt in the mainstream paradigm in a series of research (the theory of auctions, the theory of financial markets, the economic analysis of information, the theory of industrial organization and the theory of games and strategic interactions). However, some words of warning on these more or less recent developments are necessary: to the extent that they merely introduce somewhat more realistic assumptions while maintaining the neoclassical methodology intact, it is possible that we will see the replacement of one series of methodologically defective models by others which are equally erroneous. In our opinion, only the introduction into the new fields of the dynamic approach based on the market processes, subjectivism and entrepreneurial creativity that the Austrians have developed will allow the development of economic science to be fruitfully stimulated in the new era that is commencing.

The evaluation of the comparative success of the different paradigms is usually made by the neoclassical economists in strictly empirical and quantitative terms, in line with the essence of their methodological point of view. Thus, for example they usually consider that the number of scientists who follow a methodological point of view is a criterion which determines its “success”. They also often refer to the quantity of specific problems that have apparently been “solved” in operational terms by the point of view in question. However, this “democratic” argument relative to the number of scientists who follow a certain paradigm is not very convincing. It is not only the fact that, in the history of human thought, even in the natural sciences, a majority of scientists have often been wrong, but, in the economic field, there is the additional problem that empirical evidence is never indisputable and, therefore, erroneous doctrines are not immediately identified and cast aside.

Moreover, when the theoretical analyses based on equilibrium receive an apparent empirical confirmation, even if their underlying economic theory is erroneous, they may be considered valid for very long periods of time. Even if the theoretical error or defect they include finally comes to light, given that they were prepared in relation to the operational solution of specific historical problems, the theoretical error committed in the analysis goes unnoticed or remains, to a great extent, concealed for the majority when the problems are no longer current.

If we add to the foregoing the fact that, to date, there has existed (and will continue to exist in the future) an ingenuous but significant demand on the part of many social agents (above all, the public authorities, social leaders and citizens in general) for specific predictions and empirical and “operational” analysis relative to the different measures of economic and social policy which may be taken, it is obvious that this demand (like the demand for horoscopes and astrological predictions) will tend to be satisfied in the market by a supply of analysts and social engineers who give their clients what they want with an appearance of scientific respectability and legitimacy.

As Mises rightly says, “the development of a profession of economists is an offshoot of interventionism. The professional economist is the specialist who is instrumental in deciding various measures of government interference with business. He is an expert in the field of economic legislation, which today invariably aims at hindering the operation of the market economy”.(75) If the behaviour of the members of a profession of specialists in intervention is, in the final analysis, the definitive judge who must pass judgement on a paradigm which, like the Austrian one, shows that their interventionist measures are not legitimate, it invalidates the “democratic” argument. If, furthermore, it is recognized that, in the economics field, unlike the engineering and natural sciences fields, rather than a continual advance, there are sometimes important regressions(76)and errors which take a long time to be identified and corrected, then neither can the number of apparently successful “operational” solutions be accepted as a definitive criterion, since what today appears “correct” in operational terms may tomorrow be seen to be based on erroneous theoretical formulations.

As opposed to the empirical success criteria (77), we propose an alternative qualitative criterion. According to our alternative criterion, a paradigm will have been more successful if it has give rise to a greater number of correct theoretical developments which are important for the evolution of humanity. In this respect, it is evident that the Austrian approach is clearly superior to the neoclassical approach. The Austrians have been capable of drawing up a theory on the impossibility of socialism which, if it had been taken into account in time, would have avoided enormous suffering for humankind. Moreover, the historical fall of real socialism has illustrated the accuracy of the Austrian analysis. Something similar occurred, as we have seen, in relation to the Great Depression of 1929 and also in many other areas in which the Austrians have developed their dynamic analysis of the discoordinating effects of State intervention. This is the case, for example, of the monetary and credit field, the field of the theory of economic cycles, the reworking of the dynamic theory of competition and monopoly, the analysis of the theory of interventionism, the search for new criteria of dynamic efficiency to replace the traditional Paretian criteria, the critical analysis of the concept of “social justice” that has been constructed on the basis of the static neoclassical paradigm and, in short, of the better understanding of the market as a process of social interaction driven by entrepreneurship. All these are examples of significant qualitative successes of the Austrian approach that contrast with the serious insufficiencies (or failures) of the neoclassical approach, among which its confessed inability to recognize and make provision for the impossibility and harmful consequences of the socialist economic system in time should be highlighted.

What is clear is that, in order to overcome the inertia implied by the constant social demand for specific predictions, recipes for intervention and empirical studies, which are easily accepted in spite of the fact that they include significant defects from the theoretical point of view, hidden in an empirical environment in which it is very difficult to obtain indisputable proof of the conclusions presented, it will be necessary to continue to extend and deepen the subjective and dynamic approach proposed by the Austrian School in the field of our science. In this respect, we should recall the much quoted phrase of Hayek that “it is probably not exaggeration to say that every important advance in economic theory during the last hundred years was a further step in the consistent application of subjectivism”.(78) If Hayek is right, only the consistent application of the Austrian subjectivist method can make economic science advance in the future.

The ongoing Methodenstreit will continue while human beings still prefer doctrines that satisfy them to those that are theoretically true and while the rationalist fatal conceit of the human being, which leads him to believe that he has, in each specific historical circumstance, information which is much greater than that he can really possess, prevails. Against these dangerous trends in human thought, which inevitably will appear time and time again, we only have the much more realistic, richer and more humanistic methodology developed by the theorists of the Austrian School, which I, here today, cordially invite the maximum number of freedom-loving scientists possible to join.

Jesús Huerta de Soto
Professor of Political Economy
King Juan Carlos University of Madrid, Spain


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69. For Menger, this (neoclassical) approach, “contrary to the intention of its representatives inexorably leads to socialism”. Carl Menger, Problems of Economics and Sociology, University of Illinois Press, Illinois 1963, p. 177 (pp. 207-208 of the original German edition of the Untersuchungen über die Methode der Socialwissenschaften und der Polistischen Oekonomie insbesondere, Verlag von Ducker & Humblot, Leipzig 1883).

70. Edward H. Crane, “A Property Rights Approach to Social Security and Immigration Reform”, comment on Gary S. Becker’s paper “An Open Door for Immigrants?”, presented at the Regional Meeting of the Mont Pèlerin Society that took place in Cancun, Mexico, in January 1996, manuscript pending publication, p. 6. Also, William H. Hutt, in his excellent book Politically Impossible …?, The Institute of Economic Affairs, London 1981, lists several specific examples where the neoclassical libertarian economists have directly or indirectly justified interventionist measures.

71. Murray N. Rothbard even referred to how “the case of Jeremy Bentham should be instructive to that host of economists that tend to weld utilitarian philosophy with free market economics”. Murray N. Rothbard, Classical Economics, op. cit., p. 55.

72. Hans-Hermann Hoppe, “The Intellectual Cover for Socialism”, The Free Market, February 1988.

73. Sherwin Rosen, “Austrian and Neoclassical Economics: Any Gains from Trade?”, op. cit., p. 145. Another surprised theorist was Ronald H. Coase: “Nothing I’d read or known suggested that the collapse was going to occur”. “Looking for Results”, Reason: Free Minds and Free Markets, January 1997, p. 45.

74. See Appraising Economic Theories, Mark Blaug and Neil de Marchi (eds.), Edward Elgar, London 1991, p. 508. Even more recently, in the Economic Journal (November 1993, p. 1571), Blaug has again referred to the neoclassical paradigm in relation to its application in order to justify the socialist system as something “so administratively naive as to be positively laughable. Only those drunk on perfectly competitive static equilibrium theory could have swallowed such nonsense. I was one of those who swallowed it as a student in the 1950s and I can only marvel now at my own dim-wittedness”.

75. Ludwig von Mises, Human Action, op. cit., p. 869.

76. Illustrations of regression in the evolution of economic thought would be, for example, the revival of the objective theory of value by the neo-Ricardian School, Keynesian economic analysis, the abandonment of the time dimension and the theory of capital in modern macroeconomic thought and the narrow concepts of rationality, maximization and equilibrium upon which neoclassical analysis is constructed.

77. Additional arguments against the so called market test on Austrian Economics are given in the most brilliant paper of Leland Yeager, “Austrian Economics, Neoclassicism and the Market Test”, The Journal of Economic Perspectives, volume II, No. 4, Fall 1997, pp. 153-165.

78. F.A. Hayek, The Counter-Revolution of Science, Free Press of Glencoe, New York, 1952, p. 31. Hayek adds in note 24 (on p. 210) that subjectivism “has probably been carried out most consistently by Ludwig von Mises and I believe that most peculiarities of his views which at first strike many readers as strange and unacceptable are due to the fact that in the consistent development of the subjectivist approach he has for a long time moved ahead of his contemporaries”.