The Austrian Tradition in Economics
Peter J. Boettke joins us to explain the origins and methodology of the Austrian tradition in economics.
This week we are joined by Peter J. Boettke, who explains this history and tenets of the Austrian tradition in economics. Boettke traces the school’s history from Carl Menger through Eugen Böhm-Bawerk and Joseph Schumpeter, Ludwig von Mises, Friedrich Hayek, and Murray Rothbard to contemporary economists such as Israel Kirzner, Vernon Smith, and Mario Rizzo. He explains what Austrian economics does and does not do, and distinguishes between what he calls “mainline” economics and “mainstream” economics.
What distinguishes Austrian economics from other schools of thought in economics? How did the Austrian school come to be known as the free market school?
Show Notes and Further Reading
Peter J. Boettke, Living Economics: Yesterday, Today, and Tomorrow (book)
Trevor Burrus: Welcome to Free Thoughts from Libertarianism.org and The Cato Institute. I’m Trevor Burrus, a research fellow at The Cato Institute’s Center for Constitutional Studies.
Aaron Ross Powell: I’m Aaron Ross Powell, editor of Libertarianism.org and a research fellow here at The Cato Institute.
Trevor Burrus: Joining us is Peter Boettke. He’s the University Professor of Economics and Philosophy at George Mason University, the BB&T Professor for the Study of Capitalism, and Vice President for Research and Director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University.
Welcome to Free Thoughts, Professor Boettke.
Peter Boettke: Thanks for having me.
Trevor Burrus: The topic today is Austrian econ, which some people might think is econ done by Austrians, which is partially true. But it has more that just distinguishes it than just that. So as a first question, what are the main things that distinguish Austrian econ from so-called – I guess we call it mainstream economics or maybe just classical economic theory. What are the main differences there?
Peter Boettke: Let me start by saying something about labels. Labels are usually given to people by their opponents, not by themselves, right? So they – there are a few cases where the Chicago School and the Virginia School kind of were challenged by opponents and said that that’s what the people in Chicago or that’s what the people in Virginia believe and then the people sort of rallied around that and adopted it as a – kind of a rallying call of their difference and their desire – they’re there to be different in the scientific community and a similar kind of thing happened with Austrian economics.
Carl Menger, the founder of the Austrian School was simply trying to contribute to the German language tradition in economics and trying to defend the idea of theory as an important component to doing economics rather than just history or the collection of facts.
So the older historical school which grew out of classical economics in the German language community, they wanted to fill in a lot of institutional details and what not, guided by the theories. But the younger version of the historical school argued that the problem with classical economics was that theory was driving everything rather than empirics or facts.
So they thought that if we could just collect all the facts, then that would be a better science, a less ideological science and what not, and Menger in the transition period between the older and the newer German school wrote a book about the economic theory in which he defended marginalism and subjectivism so it’s one of the founding works of neoclassical economics.
But primarily he was also defending the role of theory in doing empirical work that what your economic theory is like is your set of eyeglasses and without your eyeglasses, you can’t read the empirical work correctly.
You can maybe gather up facts but you can’t interpret them or even arrange them in a certain priority without some guiding theory and economics can provide that guiding theory. So the younger members of the German historical school wanted to reject Menger’s message and they referred to him as that’s that Austrian School, right?
That’s the sort of the people we don’t have to pay attention to. It’s the Austrians over there and in the year subsequent to that, the two main developers of Menger’s theories were Böhm-Bawerk and then Wieser, and they developed into a school of thought around the University of Vienna.
The students of that school of thought were Joseph Schumpeter and Ludwig von Mises and Hans Mayer and then the students of their students included people like FA Hayek and Fritz Machlup and Oskar Morgenstern and Gottfried Haberler. Then 1930s came and the school was dispersed.
Trevor Burrus: Because of the Nazi, I assume. Yes.
Peter Boettke: Yeah, because of Hitler and so you have Hayek moving to London. You have Schumpeter moving to the United States. You have Mises moving to Switzerland and then as the war evolves and then ends, people like Morgenstern, Machlup, Haberler, all of them had moved to the United States.
So the center of intellectual gravity in the economics science community had moved from Europe to the United States by the 1940s and early 50s and so eventually what happens is Mises also leaves Europe in 1940 to come to the United States and he takes up shop in New York.
So you have Machlup first teaching at Buffalo then Johns Hopkins and then finally Princeton and then you have Morgenstern teaching at Princeton. You have Haberler teaching at Harvard, Schumpeter obviously teaching at Harvard and so the Austrian School had migrated to London where Hayek was teaching and then also to the United States.
At the same time, you have this sort of Keynesian revolution going on in economics and people like Morgenstern and Machlup and Haberler are kind of trying to just fit into the economics profession, Circa 1950 in the United States.
So the representatives of the Austrian School, modern Austrian School in the United States become Mises and the Hayek. Hayek moves from the London School of Economics to Chicago and the Committee on Social Thought in 1950 and then between 1950 and 1960, he was teaching at Chicago and he writes the Constitution of Liberty but he also publishes several other books, one a major methodological work called The Counter-Revolution of Science.
He also publishes a work on theoretical psychology called The Sensory Order and he also published a book called the Capitalism and the Historians, which is about the history of the Industrial Revolution and the counter to the economic history methodology about the misery of the working class under capitalism as opposed to the liberation of the working class under capitalism.
So Mises and Hayek are then singled out and they’re singled out by many different representatives of the opposing or emerging sort of orthodoxy within economics after Keynesianism comes to dominate.
Trevor Burrus: Is that pretty much just the Samuelson kind of orthodoxy …
Peter Boettke: Right, So Samuelson and then also Albert Hirschman and his book The Passions and the Interests, but also John Kenneth Galbraith in his book The Affluent Society. All of those three books sort of take and target Mises and Hayek as representatives of what they call the extreme laissez-faire school which they associate with the Austrian School.
So the Austrian School by the 1950s is no longer viewed as just a scientific body of thought, but instead link closely with the laissez-faire argument and there’s a lot of reasons for that, that are tied sociologically to the fact that the Austrians in the 1930s and 40s – in particular again Mises and Hayek are embroiled in two major debates.
One of those debates is with the market socialists and the other debates are with Keynes and the interventions of the Keynesian school. So the Austrian School gets identified that way and that sort of has stuck.
In my own writing, I have a book that came out a couple of years ago called Living Economics and in that book, I make an argument that you need to distinguish between what I call mainline economics and mainstream economics.
Mainline economics is the economics that traces its roots all the way from Adam Smith, all the way up through – so Smith and Hume all the way into the French School, which is Bastiat and also Jean-Baptiste Say, into the sort of non-Ricardian British exchange school, which would include Philip Wicksteed, the Austrians of Mises and Hayek, Menger, Mises, Hayek and then modern, more modern thinkers like – people like Coase and Buchanan and Armen Alchian and Harold Demsetz and what not.
The real point – that goes all the way to Vernon Smith. So from Adam Smith to Vernon Smith, there’s this mainline tradition of economics and what that is, is the substantive [Indiscernible] proposition that you square the rational choice postulate with the invisible hand theorem via institutional analysis.
Trevor Burrus: Yeah. What does that mean?
Peter Boettke: Yeah. So what that means is rather than the behavioral assumptions doing all the work for you, what does the work for you is the institutional environments of private property, freedom of contract, transference of property by consent.
Trevor Burrus: Rather than having [0:10:00] self-interest or rational choice models being the core of your theory, you look at things like private property and other things.
Peter Boettke: Right. But it’s not the case that they’re not a rational choice. They’re rational choices if the choices are made by humans. So what you don’t have is you have humanly rational choice, which means that man is forever caught between [Indiscernible] hopes and haunting fears. They’re not likely calculators of pleasure and pain.
If the argument for laissez-faire conditions was a consequence of behavioral assumptions of super heroic behavioral assumptions like you are a fully informed and perfectly rational chooser that exists in a frictionless environment, which is how a lot of people think the argument goes, then all I need to do is undermine the rationality of agents and also the function of the price system as being a perfect guide, so the perfectly competitive model.
But from Adam Smith, all the way up to Vernon Smith, that’s never the way that they couch their argument for a relatively free economy versus an interventionist economy. They always couch it in terms of comparative institutional analysis and if you look at Adam Smith and the various different examples that he gives, it’s never the case that he relies on a perfectly-informed actor operating in a perfectly competitive market yields an argument for laissez-faire.
That’s not – but that’s how people that were critics of Smith from the very early period to the very – today believe that they have to couch it. So my view is that mainline economics is this tradition of economics in which all of these various schools, the Scottish Enlightenment, the French Liberal School, the Austrian School, the Virginia School, are all part of, and they don’t have to have any school of thought.
It’s just that’s what it meant to do, good economics. It’s an old Milton Friedman line that all there is, is good economics and bad economics. It’s just that good economics in this case is defined by this squaring rational choice with the invisible hand theorem through institutions. So the focus, the analytics focus is on comparative institutions.
Aaron Ross Powell: How does this tie into – I guess the characteristic of the Austrian School that people tend to hear about if you don’t know much else and maybe this comes from kind of the prominence of Mises’ human action among libertarians is the – I guess it has – the a priori nature of it that it’s – so the kind of outside view of it is that an Austrian economist approaches it more like an armchair philosopher. You think about first principles and then you kind of derive conclusions from them.
You don’t really care about data or looking at the world. It’s what logically follows from these axioms.
Peter Boettke: So there’s an unsophisticated way to present these arguments and that’s what dominates on the internet and among libertarian groups.
Trevor Burrus: No way. Are you kidding me?
Peter Boettke: And then there’s this very sophisticated way to present the argument and that’s what exists in the academy. All right? That’s what goes in journal articles and research. Human action is an unusual book in the sense that it is in my mind probably one of the greatest achievements in the history of economics.
It was published by Yale University Press. OK? I think it’s important to remember that Mises until the mid-1950s was publishing all of his papers in the journals and in the top university presses. We have a mythology about Mises as this martyr that sacrificed for the cause. That was perpetuated in the 1960s and 70s and has been a very damaging view I think actually.
Mises in reality was an extremely recognized scientist in his time. He won the Distinguished Fellow award from the American Economic Association. I dare anyone in your listening crowd to go through and look at the list of people who have won the Distinguished Fellow of the American Economics Association.
Nobody wins that award if they’re a quack. You might disagree with them, right? Disagreement is different than dismissal or ignoring someone. In 1969, Mises is picked as the Distinguished Fellow of the American Economics Association. Earlier in that decade, he had won the award from his home country of Austria for the greatest scientific achievement, the highest honor you can win as a scientist in the country of Austria. Mises was awarded that.
Paul Samuelson himself in an article that he wrote on who would have won the Nobel Prize had the Nobel Prize been established when the Nobel Prize in other sciences were established has rendered that Mises would have been one of the winners of the Nobel Prize.
So Mises’ stature as a scientist is often pooh-poohed at some level by the libertarian crowd because they want to build up a mythology that there are these unrecognized geniuses in the libertarian crowd and there is no such thing as unrecognized geniuses. That’s BS.
It’s self-serving for people that want to buy into this. Mises was disagreed with but again, as I said before, Samuelson – like called him out for ridicule. Galbraith tries to ridicule him and Hirschman tries to ridicule him. You’re not a subject of ridicule unless you’re worthy of being ridiculed, right? Which means that you have to be recognized as something – you don’t pick out like Joe Blow on the street to do this.
It’s kind of like in philosophy, a lot of people said that Robert Nozick ended up by becoming the target of everyone in their philosophy classes. Right. Robert Nozick did, right? Because Robert Nozick was a worthy target to try to go after.
Well, that’s kind of like with Mises. But we’re getting a little bit off of the substance and too much into the sociology I think.
Trevor Burrus: So what would be the …
Peter Boettke: Well, hold on a second. I do think that the issue is, is that when the mainline of economics, when the mainstream of economics, which is really a sociological concept – it’s whatever people think is fashionable at the moment. When the mainstream deviates from the core teachings of the mainline, schools of thought emerge to become extremely important and let me just give you two examples.
David Hume taught us in A Treatise of Human Nature that the foundation of society is property, contract and consent. Those are his three terms. He identified those in A Treatise of Human Nature. Armen Alchian is recognized as the founder of what was called “property rights economics” in which he had to re-introduce to the economics profession the important role that property rights play in the determination of economic performance.
Why would Armen Alchian have to reinvent property rights when at the core of the founding of the discipline, in the Scottish Enlightenment, property rights were at the core? It’s because the mainstream had deviated so far from the teachings of the mainline that Alchian had to bring them back in.
Another classic case of this is Gordon Tullock in rent seeking. Think of the greatest satire in the history of economics. It’s recognized by everyone, left, right or center. It’s not again some unknown work. It was Bastiat’s petition by the candlestick makers for unfair competition by the sun, right?
That is a rent seeking story, right? I want to concentrate the benefits on myself and disperse the cost on everyone else in society, the candlestick makers.
Trevor Burrus: Yeah, but he just didn’t come up with the terms. So that’s half of the problem, right?
Peter Boettke: Well, but he’s explaining the idea of seeking privileges, which is what rent seeking was all about and Gordon Tullock had to reinvent the idea that in political decision-making, we have to watch out for the fact that people try to use the state to protect themselves from competition rather than the state actually providing the rules for competition.
So Tullock had to rediscover an idea again that had been lost in economics. So schools of thought, the Virginia School, the UCLA property rights school, the Austrian market process school, they all become important precisely because the mainstream deviates from the mainline and in order to get the mainstream to come back to the mainline, you have to have entrepreneurial academics who like pull you back in. That’s where schools of thought become important.
Trevor Burrus: Well, I wanted to go back though to the question about Mises and the idea that – this a priori idea of Austrian econ, sitting in an armchair and deriving the economy to make a bad hash of the idea. But you said that there was a bad way of portraying that idea that is portrayed by libertarians on Facebook and then there’s a good way of doing it. So can you clarify what that idea is, it actualy is?
Peter Boettke: So go back to what I was saying about with Menger before. So Menger was embroiled in a debate with the historicists. At some fundamental level, what Menger is telling the historicists is that in order for you to be able to do history well, you have to actually put on a pair of theoretical glasses that enables you to read the empirical record, even if you’re going to like prioritize what facts matter.
So think about social sciences being divided up into two questions. What questions and why questions. The “what” question is trivial. What happened? It’s important. So don’t get me wrong. You have to know what happened. You can’t just invent stuff up.
But [0:20:00] the real question and the real thing that matters in social science is the “why” questions, why what happened, happened. Those why questions are theoretical questions and those theoretical questions are not derived from your experience. They’re derived through rationalization. So what you have here is a testing issue.
So the problem is, is that in economics, since around 1940s, we started with this rhetoric that what we were going to do is use empirics to test our theories.
We’re going to have sophisticated statistically analysis to test theories. Mises and Hayek, I should point out both of them are on the same side on this though Hayek’s rhetoric is a little bit more consistent with modern language and that’s why he gets a break in some sense where Mises is still fighting a battle from the 19th century language-wise.
But what – what you’re saying is, OK, where is the testing coming in? Are the tests unambiguous? So in some sense, the sophisticated way to see Mises’ argument is to put it in light of the Duhem-Quine thesis with regard to testing even in the physical sciences.
Trevor Burrus: What is that thesis?
Peter Boettke: This is Willard Quine, who was one of the greatest philosophers of the 20th century and one of his points was is that when you do a test of a hypothesis, you don’t know whether or not – what – the refuting idea is one of the network of statements that make up the hypothesis or whether or not it’s the hypothesis itself that’s being tested and that’s actually in physics where you can have controlled experiments as opposed to in the theory of complex phenomena where you can’t have controlled experiments.
So there’s a rhetoric and a reality of the way we do science and a lot of the rhetoric that people hold is not consistent with the reality and this is even true of Karl Popper who if you read Popper’s Logic of Scientific Discovery, he makes one type of argument. If you read his other works let’s say on objective knowledge or later on, he understand that conjectures and reputations is a little bit different than the idea of the three by five card approach to methodology of philosophy of science.
So you got to put Mises in the context of his time and you got to then update those – that context to the context that we live in today and then reconstruct Mises’ argument about what he’s trying to say.
But to put it in a very, very easy way to do it, when you say that someone – that the theories are a priori, all you’re saying is that theories are like a set of eyeglasses. You put your eyeglasses on before you can read. You don’t put your eyeglasses on after you read. You put them on before and that enables you to read. That’s the whole point and that’s actually the way economics has done things from the beginning which again makes sense of Mises’ claim that he wasn’t doing anything new. It was the way in which economics had proceeded from the beginning.
Aaron Ross Powell: So if Austrian economics is a priori though in the way that you just described and it is dependent on the – so the theory it’s developing is dependent on arguing forward from axioms. Is it – I mean to go back to Popper, is it falsifiable? I mean is there any way that it could be wrong?
Peter Boettke: Yeah.
Aaron Ross Powell: That we might say, you know, this disproves it or this complicates it or whatever.
Peter Boettke: There are two issues. Theories can be rejected on two grounds. One, their logical derivations are flawed. OK? Or two, they are irrelevant for the questions that you want to ask.
So take Austrian business cycle for example. Does the Austrian business cycle theory – is it illogical? If you could show that, that’s a question of theory. You’re refuting theory with theory.
Is it applicable to every oscillation against the trend line? Probably not. Not every oscillation against the trend line is actually due to the fact that you had a manipulation of money and credit.
So if you try to use the Austrian theory of the cycle to explain what happens when you get hit with a hurricane or something, right? Or if you get hit with a tidal wave, that would be a bad use of the theory.
So what you worry about is applicability and inapplicability of the theory to various different empirical circumstances. But what you’re not doing is the empirical circumstances are refuting the theory. The empirical circumstances are determining whether or not the theory is applicable or inapplicable.
The logic of the theory determines whether or not it’s a flawed theory or a good theory.
Can I elaborate a little bit on this? I think it’s a very, very important point that’s a subtle point in philosophy because if you go to 19th century philosophy or just any philosophy 101 class and someone introduces you to a notion of critical reasoning, when you do critical reasoning, you make a distinction between logically valid arguments and logically sound arguments.
Trevor Burrus: Yes.
Peter Boettke: Logically sound arguments are not only logically derived correctly but they’re actually true statements about the world. A logically valid argument is a correct derivation but it need not be about the world. OK?
So economists always worried about deriving logically sound arguments, not just logically valid arguments and that was a constraint on the way in which economists reason from Adam Smith up to through John Stuart Mill.
The problem was it’s really, really, really hard to ensure logical soundness and applicability. All right? So in the 20th century, what happened was economists made a pact with the intellectual devil in some sense.
The first one was with formalism. The biggest ambiguities in social sciences emerged when we use the same words to mean different things or different words to mean the same thing. So if we could reduce all of our words to formulas, this is the whole [Indiscernible] project.
Trevor Burrus: Yeah.
Peter Boettke: And then what we could do is then through formalism eliminate the ambiguities that exist in our language. We could derive our theories but then we’re no longer deriving logically sound theories. We’re only going to get logically valid theories. So we’re going to get these logically valid theories and formalism ensures the steps in our logic.
At the same time, we were developing what we thought were sophisticated statistical techniques that could test the array of logically valid theories and weed out the ones that aren’t relevant. OK?
Trevor Burrus: OK.
Peter Boettke: So what we could do is we could use the sophisticated statistical techniques against all of the toy economies that we built and the only ones that would survive are actually the ones that would be empirically meaningful.
So the belief was is that you would get what soundness approximated by doing the formalism and empiricism and the outcome of that would give us what previously we puzzled over to get logical soundness. It turns out that the empirical testing part was much more complicated and so what we got stuck with was in fact an array of toy economies without an appropriate sorting mechanism to determine only those which are empirically meaningful.
So the project of – the joint project of formalism and empiricism in my mind is what crashed and burned. So what’s coming up in the ashes of it is – never been really formulated since the 1980s.
I mean if you think about the crashing and burning taking place around the time of McCloskey The Rhetoric of Economics. That was when it was kind of well understood.
Trevor Burrus: What do you mean by the crashing and burning?
Peter Boettke: No philosophical justification for what economists do.
Trevor Burrus: Oh, OK.
Peter Boettke: And what happened was economists before that – you can look this up. It’s a very empirical reality, which is that economists used to write a lot of methodology papers. The leading economists wrote a lot of methodology papers like Samuelson or Friedman or Buchanan or any of these people that all took time out to try to write these papers, to justify the enterprise, scientific enterprise of what economists are doing.
Since 1985, after McCloskey and then the growing recognition of the failure of this formalist empiricist project, what economists did in the step that no philosopher of science expected them to do was – is they simply reject it, continuing to find a new way to justify their project and just justify it on conventionalist grounds.
Economists do what economists do. That’s it, end of story. So I do what economists do and that means I’m an economist and there’s no justification for it. That’s why the flare-up over in the last couple of weeks with Paul Romer talking about the mathiness – I don’t know if you guys have been following this.
But Paul Romer who’s probably going to win the Nobel Prize has been criticizing modern economics for obscurantism into mathiness, which he thinks doesn’t aid any of our ideas. That’s why it has caused such a storm again because people are – now someone [0:30:00] from inside the citadel is challenging the existing message that’s going on in economics. But very fascinating.
Trevor Burrus: Let me see if I can recapitulate here. When you’re talking about this empirical project, for the non-economist out there, you’re talking about the statistical abstractions, the measuring of the economy with GDP and other sorts of …
Peter Boettke: Right, model and measure.
Trevor Burrus: Model and measure and trying to say that you can get a picture of what the economy looks like through some sort of empirical testing that then shows that your theory is sound in the sense that it corresponds to reality. So what I would like you to clarify in the – so the Austrian School here which I would like to nail down your definition of it, the sort of sine qua non on this, the traits of the Austrian and that they resist due to – I’m not sure exactly of the best way to describe it.
They resist the quantification due to a belief in the over-complexity perhaps. It’s one way of describing it. And resist that that’s a valid and worthwhile endeavor. Would that be an accurate characterization or could you expand on what actually makes the Austrians – Austrian economists and then what makes them resist this quantification type of economics.
Peter Boettke: OK. So there are different words that you all use there that would be part of an explanation. But the explanation as a whole I think is not quite right.
Trevor Burrus: OK.
Peter Boettke: Though I will try to fill in. But the easiest catchphrases that would make sense is that the Austrian School is methodological individualists but a lot of economists are methodological individualists.
Trevor Burrus: Yeah, I would assume so.
Peter Boettke: What that means is that the individual is the unit of analysis. Only individuals choose and they – right? And their choices are the centerpiece or the beginning of your analysis. That’s what you have to trace, all social phenomena back to the decisions – choices and decisions of individuals.
Second, Austrians are subjectivists. They believe in the subjectivity not only of value but the subjectivity of cost. Costs are not objective. Costs are forgone – you know, passed or whatever. There are different utilities.
So they’re the reverse of the demand. So the reason why you pay a lot of money to go see your doctor is not because the doctor spent a lot of money to go to medical school. It’s because when you go to the office, there’s a lot of people sitting there also waiting to see the doctor.
So costs are alternative demands in some sense. So it’s not both blades of the scissors cut the paper. That’s a line from Marshall. But both blades are made of the same stuff, the subjective utility of individuals.
It’s also the case that we have subjectivity of our expectations. You know, what we expect out of the future is also made up of our subjective assessments. Then the final component of Austrian economics is what’s called market process or process-orientation and that’s a very important key component which gets to your question that you were just asking because the difference – Austrian economics historically and even to today is mischaracterized often as a heterodox school of economics. It’s really not heterodox because Austrians believe in marginalism and they believe in subjectivism, which are two cornerstones or neoclassical price theory.
Austrians were the original contributors to neoclassical price theory. Menger is one of the founders of neoclassical revolution. Böhm-Bawerk was considered one of the top one or two economists in the world in his lifetime, either Alfred Marshall or Böhm-Bawerk, and not just by Austrian economists, by everyone around.
So the Austrians are part of the neoclassical tradition but they – their forefront of their analysis has always been – from Menger all the way to today has been the process of exchange that gives rise to the equilibrium conditions.
So the equilibrium conditions are the background and the process of exchange behavior is in the foreground of their analysis whereas in – the vast majority of economists, it’s the exact opposite. The reason why it’s the opposite is because of formal tractability.
Trevor Burrus: The background-foreground thing is a little confusing to me.
Peter Boettke: OK.
Trevor Burrus: Like analyzing a question of – I don’t know. I’m trying to think about just a basic economic question like the price of gas or why there’s too much traffic on the road or something. How would we say – what’s the background-foreground?
Peter Boettke: Well, imagine that you draw a supply and demand curve on the board. OK. Let me just use – let me just use the law of one price to be an example. David Friedman uses this example a lot. So the law of one price basically says that in a market, that individuals are going to engage in exchange until the exchange ratios equate. This is called the equal marginal conditions in economics.
So one of the examples we give to illustrate this is you go to a supermarket, right? And you pick up your things. You put them in your basket and now you go to the checkout line.
You notice the one checkout line is like 10 people deep and the other checkout line which the light just went on actually has only one person there. Which line are you going to get in?
Trevor Burrus: The one person …
Peter Boettke: Right. You’re going to go to the one with the one. Well, so will some of the people. Like maybe the tenth guy in this one will go. So the natural equilibrium in that checkout line is for the lines to be equated.
Trevor Burrus: Yeah.
Peter Boettke: Right? You follow me?
Trevor Burrus: Yeah.
Peter Boettke: Right. So the – what’s interesting about that story? To a lot of economists, it’s that oh, the lines will in fact be equated. That’s the equal marginal principles and we can write that down and we can prove that as a theorem. OK?
So the Austrian, that is the end result of a process of people recognizing a previously unrecognized opportunity to move from the line with ten people to the line with only one person.
So it’s about recognizing and moving in that direction because in order for the optimality conditions to hold, there had to be all this activity prior to leading to the activity.
So this is what the focus is all along is on that activity that brings about the optimality, not the optimality condition per se.
Trevor Burrus: So would this be for example – OK, I think I’m getting this now. For example the knowledge that the people on the line would have to have to say, “I see that that line is longer.” They have certain knowledge that directs their action and those are the kind of inputs that are of interest to Austrians.
Peter Boettke: Right.
Trevor Burrus: Why people made the decision.
Peter Boettke: How do I acquire that knowledge? And then also what are the institutional impediments? So imagine that you saw a line where one had ten, another one had one. You would say, “Why aren’t people moving over there?” Well then you would look and you would notice that it has a sign up and says, “Only if you have five items or less,” right? Or in the old days it used to be, “Cash only, no credit cards,” right? Or something like that.
Then say, “Oh, that explains why this line is longer and that line isn’t.” Well now think about the economy. Move away from this analogy and think about like why is it that certain – you’re on the border of West Virginia and Virginia and then you want to know why isn’t there much economic activity going on in West Virginia but on the other side of the board, there’s a ton of economic activity.
Well, I wonder what it is. Well, the costs of doing business in West Virginia are much higher due to the regulations than the cost of doing business in Virginia. So businesses locate over in Virginia, not in West Virginia even though it’s only like two miles away, right?
Trevor Burrus: So to use another example just to clarify, there’s the classic economics I guess almost joke about there are no $20 bills lying on the sidewalk, right?
Peter Boettke: Right.
Trevor Burrus: Now that – would it be the case that – like in that sort of classical liberal I guess just basic pantomime view of – the idealized view that they would say. An equilibrium or just going to say there are no $20 bills lying on the sidewalk. But the Austrians are interested in how people know about $20 bills, whether or not they’re impediments to people picking up the $20 bills, looking more at the actions of people, of what’s causing that $20 bill to be on the sidewalk because clearly it’s there.
Peter Boettke: Yes. So here’s the – so this is a great – well, not only is it there but there’s also $20 bills that have been previously unrecognized that are being picked up all the time. Those are called entrepreneurs.
Trevor Burrus: Yeah.
Peter Boettke: Right? So we know that the nirvana that there is no $20 bills because all that has been discovered has already been discovered is simply not an accurate picture of capitalism.
But what has happened is you got to think about it in a weird way in the debate. So if you noticed what I said about the mainline of economics, you will see that there are certain people that are not on my mainline of economics, right?
So I didn’t mention Milton Friedman. What I mean by that is the scientific work. Milton Friedman of Free to Choose would be on there but not Milton Friedman of – say the quantity theory of money or whatever even though Milton Friedman did tremendous things in the science of economics. Don’t get me wrong.
But he’s not really part of – his scientific work – George Stigler’s scientific work really doesn’t add to the mainline tradition of economics. Gary Becker’s work, while a brilliant economist and a very disciplined intellectual framework for us doesn’t really add to the mainline of economics tradition [0:40:00] the same way that Armen Alchian does or Jim Buchanan or Ronald Coase does to that sort of tradition.
I have a paper that is out on Alchian, Buchanan and Coase versus Friedman, Stigler and Becker as the heir apparent of the older Chicago tradition of Knight and Viner and Simons.
Trevor Burrus: So how does that relate to the $20 bill as you were saying, the …
Peter Boettke: Because in Stigler’s world, you squeezed out all the entrepreneurial innovations. So what happens is in the debate, over a market failure theory, you have perfect markets – think about what the debate says. The debate, the way it’s couched is as follows.
Perfect markets, perfect government, this is the first round of the debate. Let’s give it to perfect markets. That’s the belief that we’ve now set up the laissez-faire position.
Then what you have is imperfect markets but perfect government. That’s the Samuelsonian phase and so then we give it to government, right? Then what you have is the public choice change which is imperfect governments, imperfect markets and therefore you have this agnostic aspect which is the public choice point.
Then what you do is you get to the entrepreneurial area. The entrepreneurial approach says – is markets fail. Use the market to fix the failure. All right?
So this is the Coasean kind of idea that you’re going to look for where all the exchanges take place. So there are tensions in markets at all times. There are tensions in the – in society at all times. How is it that we can reconcile these tensions? We do it through various exchanges and so if the focus was just on all the – after all the activity of exchange has ceased, then you don’t understand how it is that you get to eliminate all the conflicts.
Trevor Burrus: OK.
Peter Boettke: The way conflicts get eliminated is through a reconciliation process through the market and so it’s – all of that is kind of ugly and bumpy and friction-laden and all kinds of things like that. It’s not smooth and continuous and twice differentiable, right?
So if we’re going to treat the world as if it’s smooth, continuous and twice differentiable, that can only take place when all the lines or all the activity of shifting lines has already been completed and then you have the law of one price or the law of one time waiting on the line.
But in the process of it moving, you’re going to have all kinds of disjunctions and those disjunctions blow up the ability for us to be able to engage in the mathematics of calculus which was necessary for building the models that we built.
So you end up by having the theory of simple phenomena, not dealing with the theory of complex phenomena and that’s when you get into Hayek’s critique of what the problem is in modern economics.
Not that it hasn’t been formalized. The problem is, is that the formalization is not the appropriate formalization for the complex phenomena we’re studying, which is why now some people find hope in some of these complex adaptive systems modeling approaches.
Trevor Burrus: That was my next question, the question of is this – this is why Austrians are averse to the econometrics, right? They don’t measure really anything meaningful or anything very useful. They’re just sort of …
Peter Boettke: Well, I mean look, it’s not that Austrians are averse to econometrics. They’re averse to the idea that econometrics are a decisive test of a theory. But Austrians use statistics in all – I mean Austrians that are academic Austrians use statistics as – they do statistical analysis that is either of a descriptive statistics form.
So if you look at my own work for example, my early work was in economic history of the Soviet Union. OK? If you look – so I wrote three books on that. One of them is called The Political Economy of Soviet Socialism. Another one is called Why Perestroika Failed and the third one is called Calculation and Coordination.
So let me just – in the first two books, you will see a lot of descriptive statistics being used and also descriptive statistics that are trying to be used to provide – like helping – the providing of a case, right? To be made as that – this is why what happened, happened versus you think this is the reason why it happened, right?
I try to use evidence to Marshall to help bolster my case and what not. In the Calculation and Coordination book, if you look in the back, I do even appendices in there. I do rather simple like –kind of linear regression models to sort of look at the relationship between economic freedom and a variety of economic and social indicators of well-being and try to do that.
What I don’t believe that statistical correlations can do is give us causation. Causation is a function of our theories.
Trevor Burrus: Yeah.
Peter Boettke: And so this – so again, it’s a language. This is what I meant by a sophisticated version versus an unsophisticated version. The Austrians do not reject empirics. In fact if you look at Austrian economists, a lot of them have become very good economic historians, right? They rely on economic history a lot to do their work.
Larry White for example, you know, who developed his free banking in Britain. That’s an economic history book. My friend Dave Prychitko did his original work on having to deal with worker cooperatives as an empirical book.
Steve Horwitz did stuff on the panic of 1907. You know, George Selgin, Kurt Schuler. I mean go through a bunch of people. All of them have had successful academic publishing careers or whatever.
There are people of course who are theorists and – Israel Kirzner, right? He primarily works in the realm of theory. He doesn’t do applied economics at all. But that’s also true with the economics profession, right? There are people that don’t do any empirical work that are theorists in economics as well.
It’s just that there’s a small number of people – Murray Rothbard, I should mention, wrote probably more economic history than anyone else and yet he’s clearly identified with someone that believes strongly in the a priori aspects.
So the claim that somehow history isn’t what Austrians do is just the kind of a – a mythology I think.
Trevor Burrus: But is there a thing with the Austrians that – I get this from some of my friends who – maybe they’re kind of the Facebook ones we were talking about. But this almost conspiratorial type of thing that the – the professional economics is not set up in such a way that Austrians can excel because it revolves around like the Fed and a bunch of projections and macroeconomics which I – Austrians aren’t terribly fond of as far as I understand.
Peter Boettke: Sure.
Aaron Ross Powell: Let me modify that question a bit because there is – I mean you mentioned Murray Rothbard who’s a hero to a lot of libertarians and this relationship which Trevor is getting at between Austrian economics and libertarianism because it seems like – you know, I don’t – first, I guess are there – people who would identify as Austrian economists who are – who would not also identify as libertarian in some way and then I guess in the other direction too.
Is there some sort of necessary connection where if you embrace libertarianism, it either overwhelmingly does or ought to point you in the direction of embracing Austrian economics?
Peter Boettke: It’s a great question. There’s a sociological aspect to this and then there’s a scientific aspect or scholarly aspect. So let me do the sociological one first.
So the notion of Austro-libertarianism is really a unique phenomenon to Murray Rothbard. It didn’t exist in Hayek or Mises. It’s Rothbard. It doesn’t exist in Kirzner. It’s Rothbard and the reason is, is that Rothbard wanted to develop an axiomatic system in economics and an axiomatic system in political theory. OK?
And then the belief was – is that there was a coincidence between the two of these. So in that sense, the only other kind of systemic kind of approach to this would also be objectivism or Randianism, and it has all the characteristics associated with that, both in terms of an originator who is very brilliant and has a kind of a flash of brilliance, but then followers that are not necessarily always as bright and also the school of thought can run into problems in terms of its flexibility and where it’s going to go.
On the other hand – that’s kind of what you’re picking up on when you talk to people on the internet or whatever. It’s this legacy of this Austro-libertarianism and I should point out something and be very clear about it because I’m a little bit derogatory towards it, but at the same time you have to recognize that without what Murray Rothbard did, there really wouldn’t be any modern like – like any modern Austrian movement so to speak.
Kirzner is so subtle a thinker that you have to be really into economics and in [0:50:00] particular a kind of version of economics that would be open to what Kirzner’s contributions are that the number of people that would have gotten excited about that would have been so small that you couldn’t have had a ground swell of interest.
But what Rothbard did was he excited the minds of young people. He filled them with a lot of courage and intellectual justification and then they were able to sustain themselves in the rigor of graduate school and in the gauntlet of the profession to try to make their own way to advance these ideas which they thought were not being appreciated enough.
So Rothbard should get his due. He really did have this major impact in the generation of students in the 1970s and 1980s that enabled them to build careers and do all of that kind of stuff.
Trevor Burrus: Including you.
Peter Boettke: Including myself, yeah, sure. Definitely, including myself. But I wasn’t counting myself. I was counting people like Mario Rizzo and Jerry O’Driscoll and Larry White and all kinds of other people, Don Lavoie, my teacher. They all came out of being influenced greatly by Murray and then what happened was – is that in the 1980s, they – as they were making their way in their professional career, they recognized that scientifically, a school of thought has to be a little bit more flexible, not as rigid.
You know, all kinds of things. I got to make – go on different research projects, ask questions that – answering questions with an already established libertarian conclusion is not the same thing as ending up with a libertarian conclusion after your analysis. All right?
So Rothbard could derive the answer to everything from the non-aggression axiom, right? Then it was just about the consistent and persistent application of the non-aggression axiom to the world of public affairs.
That’s different from the way that Mises and Hayek came to appreciate the role of private property, right? They come to appreciate the role of private property through consequentialist examination of how alternative institutions either promote or hinder peaceful cooperation and productive specialization.
So their argument is different than Rothbard’s argument. What happens is that as you develop in your career, at least – some people at least in that, they recognize that the Mises and Hayek direction is much more of an open-ended research program. It’s an invitation to inquiry, not a settled document.
So a school of thought is only as good as its invitations to inquiry are. If a school of thought offers all the questions to already be answered, it’s going to die as a research program because there’s no research.
Trevor Burrus: Yeah.
Peter Boettke: What it is, is it’s a catechism whereas if you’re a research thing, a school, what you’re going to do is have an open-ended invitation to inquiry. It’s like a framework. If you look at the world through this set of lenses, look at how many questions are opened up and then the more the questions are opened up, the more you know you don’t know, the more questions you can ask whereas if you have it as a catechism, it closes down your conversation and it doesn’t progress.
So the one way is towards a progressive research program. The other way is towards activism because you already know the answers, right? And that’s where you’re going to go. So those of us who are drawn into scholarship and what not tend to – not completely but tend to go more in the consequentialist grounds and consequentialist type arguments, which are analytical arguments and institutional arguments rather than normative arguments, right? From first principles. So libertarianism is a byproduct of your analysis, not the beginning point of your analysis.
Trevor Burrus: That makes you – this Austrian School, because of this opening, that research project – a growing – is it growing?
Peter Boettke: You mean in the profession today?
Trevor Burrus: In the profession …
Aaron Ross Powell: Yeah. What’s the future of the Austrian School?
Peter Boettke: OK. So there are a couple of phenomena going on. On the one hand as a social movement, the Austrian School benefited tremendously from the internet and it benefited from Ron Paul. But that’s more this Rothbardian version of the school, right?
That has actually exploded tremendously. I mean you go around the world. There are these Rothbard institutes or Mises institutes that are set up everywhere. I was in Brazil. There’s one amazing in Brazil. You go over to Romania. I’ve been in Romania. They have them in Romania, Poland, all these – Canada. They have all these different institutes and they’re a combination of study groups and political movement kind of groups, right?
That has been amazing. If you talk to students in SFL or something like that, there’s a subset of them that are very excited about all this. But on the other hand, if you go and you talk to this sort of academics, you can also – you asked me a question earlier which is, “Are there academics you don’t identify as libertarians, who are in fact the Austrians?” Yes!
There’s actually – it’s not a large number because of the sociological reasons about why people got into Austrian economics but there are people that have come to Austrian economics from other ways.
If you look at the review of Austrian economics, take a look at all the different people from the different countries around the world now that we have on the editorial board. It’s a very large number and a good portion of them are people that are either – are very far removed from what we call libertarianism in America. Maybe loose classical liberal but even some not as classical liberal as others, right?
So they’re more interested in things like subjectivism or process theory or complex phenomena theory and that’s what sort of draws them to that. But there is a kind of an important reason why the Austrians have a link to classical liberalism. But that goes back to this – that’s like saying that Adam Smith had a link to classical liberalism, right?
A large part of that is because of the institutional conditions under which the self-interested postulate can be squared with the invisible hand theorem. Those institutions that allow that to take place are the institutions that are most approximated with the history of classical liberal thought. Private property, freedom of exchange, freedom of association, free trade, sound money, fiscal prudence. This kind of issues, right? Or what you call it Cato – you know, the economic freedom index. Those institutions of economic freedom, right? Security, property, freedom of prices, low regulations or whatever.
You know, sound money, fiscal responsibility and free trade, right? And those institutions and all that’s involved as the institutional infrastructure, that’s what enables us in that environment to be able to square the pursuit of self-interest with the invisible hand.
Trevor Burrus: Thank you for listening. If you have any questions, you can find us on Twitter at FreeThoughtsPod. Free Thoughts is produced by Evan Banks and Mark McDaniel. To learn more, find us on the web at www.Libertarianism.org.