Bryan Caplan has long been a thoughtful and forceful, and sympathetic, critic of Austrian economics, which is exactly why I was worried about having him as one of my discussants. He never makes life easy on the targets of his critical eye. And his reply raises a large number of substantive points in a fairly short space. In the interest of shooting for depth of conversation, I will not try to reply to all of them, but instead address what I see as the major ones, including several points that I agree with but could not adequately address in my lead essay.
Let me tackle two broad points first. I will confess to some “myside bias.” I wanted to present what I thought was something of an aggressive defense of modern Austrian economics if for no other reason than to put all of those issues on the table for discussion. As Caplan points out, I have argued that the mainstream is more open to Austrian work than it was 25 years ago, though I think that change is marginal. The fact that work by Austrians is getting published in mainstream outlets is some evidence of that point, but it might also be evidence that recent generations of Austrians are more interested in doing broadly empirical work and are better at finding the evidence to support Austrian propositions than were their predecessors. I will return later to the question Caplan raises about whether that work is truly “Austrian.”
Second, Caplan is quite correct to highlight the importance of behavioral economics. My neglect of that topic in my original essay was not because I don’t think it’s important or relevant, but just that it opened up a whole other element that I simply didn’t have space for. That said, I think Austrians ought to be engaged with that literature for a whole variety of reasons. The most important, in my mind, is that it challenges Austrians (and others) to understand how markets function with actors who are not the mainstream’s picture of rationality. It is a very Austrian project, I would argue, to look at the role played by institutions in enabling humans with all the cognitive biases we know they have to nonetheless find ways of coordinating in a world of uncertainty, especially given that Austrians have long rejected the version of rationality that the behavioral economists’ results question as well. Vernon Smith’s work on “ecological rationality” is relevant here and Austrians would do well to think more carefully about these issues and to understand empirically what a whole variety of institutions and other practices do to forward that social coordination in a world of cognitively biased actors. So Caplan’s point about behavioral economics is well-taken.
In general, I think Caplan’s picture of mainstream economics is far too rosy. In fact, one could argue he is guilty of some “myside bias” of his own. Teaching at George Mason might give one a somewhat slanted view of that mainstream, given the array of eclectic and open-minded types who populate the halls there. Like Pauline Kael’s line about how Nixon could have won when “nobody I know voted for him,” there might be some availability bias in Caplan’s view of the mainstream of the profession. Despite the somewhat more open environment of recent years, the attitude of mainstream economists beyond GMU toward papers that lack mathematical modeling or statistical testing (or an experiment) ranges from uncomprehending to hostile. In the parts of the mainstream that Caplan inhabits, that is certainly less true. But it is also true that Caplan himself would only be viewed as “mainstream” within the halls of GMU. I suspect that in a randomly selected second tier Ph.D. institution, the mainstream is much less open to Austrian ideas than Caplan’s experience at GMU might suggest.
Caplan wonders to what degree the work I pointed to in my lead essay really is Austrian, and he claims, early on in his piece, that Austrian work will continue to be “undervalued” to the extent Austrians keep talking “to each other in their own eccentric dialect.” All of this points to the question of what makes this work, or any work, distinctly “Austrian” and why is marking that difference important? I’m pretty sure my answers will not persuade Caplan, but perhaps they can at least help to understand why some of us find the insights of that tradition valuable enough to make them an explicit focal point of our work.
In his Concise Encyclopedia of Economics entry on “Austrian Economics,” Pete Boettke offers ten propositions that constitute the Austrian understanding of the market. Among them are claims about the importance of limited/subjective knowledge, entrepreneurship, competition, the heterogeneity of capital, spontaneous order, economic calculation, social cooperation, and the non-neutrality of money. The Austrian tradition, for example, understands competition differently from the mainstream, as conversations with colleagues over the years have amply demonstrated. The same is true of entrepreneurship, capital, and knowledge. All of that adds up to a distinctly different view of how markets and their institutions enable humans to coordinate and cooperate in a world of subjective and fragmented knowledge and structural uncertainty. Taking those claims seriously leads to analytical propositions that are distinct from those of the mainstream. How distinct remains an open question, but in Buchanan’s terms, the “allocation” paradigm of the mainstream remains clearly dominant over the “exchange” paradigm implicit in the Austrian tradition. To argue that Austrian insights have been so integrated as to no longer be distinct is an overstatement.
For example, in my own work on inflation, I have argued that the non-neutrality of money and the Austrian conception of the way disequilibrium prices serve to coordinate action under uncertainty lead to a far broader conception of the costs of inflation than is normally seen in the mainstream. This Austrian perspective allows one to see beneath aggregates such as the price level or GDP and understand how inflation disrupts the communicative function of disequilibrium prices and thereby undermines economic calculation and entrepreneurship, which in turn leads to greater resource misallocation and reduces wealth. I have also argued that taking capital heterogeneity seriously can help to understand the problems with stimulus spending in that the specificity of capital and human capital means that not just any old spending will suffice to create a sustainable recovery and long-run growth. Governments lack the knowledge to know just what resources are idle and how they would best fit into a sustainable capital structure and thereby generate economic growth. The complexity of fitting those multi-specific, but not infinitely so, pieces of capital back together requires the guidance of market signals and the distributed intelligence of the marketplace. An Austrian perspective sheds light on these issues in ways that mainstream economists are likely to overlook.
The empirical work I pointed to in the lead essay, including the pieces by Leeson and Coyne that Caplan argues are, essentially, not Austrian, are in fact attempts to provide empirical evidence for other distinctly Austrian claims. Coyne’s work on foreign policy attempts to demonstrate the importance of Austrian insights about the importance of economic calculation, while Leeson’s work, along with that of several other younger Austrians, attempts to show how social cooperation and rules can develop endogenously, even under the worst of assumptions about actors’ motivations. These are distinctly Austrian stories about how order can emerge through unplanned social processes.
Austrian methodological concerns are not simply abstract points in the philosophy of science, but instead flow out of the substantive analytical concepts that Austrians think are foundational to understanding economic coordination. If one believes that markets are processes for coordinating human action that is based on deeply subjective knowledge deployed in a world of structural uncertainty, then some ways of doing economics will be seen as more appropriate than others. In particular, constructing the kinds of analytical narratives that we see in the work of the younger Austrians might be the most appropriate way to provide evidence for the endogeneity of rules or for larger spontaneous ordering processes.
Caplan is right to say that the “Austrianness” of this work is sometimes subtle, and perhaps that’s a reflection of his point that Austrians should avoid “eccentric dialect.” To an extent I agree: there’s no need to use “insider” language when more commonly accepted terms can make the point. But doing so does not necessarily undermine a project’s ability to reflect a distinctly Austrian point, even as it might be something of interest to non-Austrians as well. It is interesting that Caplan does not directly challenge the Austrianness of the work on Hurricane Katrina, which has also been able to both contribute to that tradition and crack into some mainstream journals. I would argue that that work is less subtly Austrian and has given us a much better empirical understanding of recovery than has the work done by mainstream economists.
The question of the uniqueness of the Austrian tradition is one that Austrians must be prepared to answer. I believe that there are unique and valuable insights in that tradition that are missed by mainstream economics. Economists from outside the Austrian tradition have used those insights to enhance their own work over their careers. Here I think of people like James Buchanan, Elinor Ostrom, Deirdre McCloskey, and Vernon Smith. Although none of them identify themselves as Austrian economists, they all would say that insights from Austrian economics have added value to their work. (If I were in a cheeky enough mood, I might have included Bryan Caplan on that list as well.)
I also believe that Austrians can convey those insights, and provide empirical evidence to support them, in ways that avoid Caplan’s very legitimate concern that Austrians not isolate themselves with their “eccentric dialect.” Austrians are, after all, economists, and we should be trying to communicate our ideas with the rest of our profession, and doing so in ways that walk a fine line between making ourselves understood but not losing sight of our unique insights. Caplan may not think that’s possible. I think it is.
 Though perhaps not that distinct from what Boettke calls the “mainline.” His distinction between “mainstream” economics and “mainline” economics is a helpful one. The former refers to the current consensus in the discipline, while the latter refers to the long, consistent tradition of economic analysis that explores the way in which rules and institutions coordinate human action to produce the unintended order of the marketplace. That “mainline” stretches back to Adam Smith and includes a variety of 19th century economists (e.g. Jean-Baptiste Say) as well as the Austrians and others such as James Buchanan and Vernon Smith in the 20th. The mainline has not been as dismissive of the Austrians as has the mainstream.