Austrians and the Actor’s Problem Situation

I also wanted to offer a reply to Antony Davies’s comments. Although I think there are more complementarities between Austrians and parts of the mainstream than some Austrians seem to think, I’m not sure they are as complementary as Davies argues. It’s certainly true that both Austrian and neoclassical economists talk of rationality, and we both value logical argument, but I think those apparent similarities are not very deep. No doubt, expressing economic ideas in the form of an equation can sometimes help clarify our meaning, but as George entertainingly notes in his last contribution, there are times when English is clearer than algebra.

And I think the reasons for this are as George notes: human communication has nuances and subtleties and context that get lost in the formal language of mathematics. Antony rightly reminds us that when we start down the road of a mathematical model we have to keep an eye on whether we’re drifting from reality into unhelpful abstraction. As economists, we have to be willing to judge the trade-off between any gains in precision and clarity that come from expressing our ideas mathematically and the loss of the actual flesh-and-blood human characters that we are talking about.

Like most other economists, Austrians are interested in explaining the puzzles we find in the world in logical ways that rely on some notion of rational behavior by actors. However, in the name of realism we insist that the “problem situation” of those actors is not one in which they have the requisite knowledge to engage in the kinds of maximizing behavior that are at the core of most mathematical models. The engineering solution (what Kirzner called “Robbinsian maximizing” after Lionel Robbins) is at best only part of human action, and it’s the part where we know our means-ends framework and all the information relevant to maximization. The rest, and perhaps the majority, of human action is far more open-ended. Our more typical problem situation is where we don’t even know the ends we seek, nor have we a complete inventory of the possible means we might deploy.

We are in a world of structural uncertainty where we have to discover what it is that the neoclassical model assumes we know. This has been an emphasis of Austrian economics from Menger to Mises to Hayek to Kirzner. The problem with mathematical modeling is that it can too easily cause the theorist to lose sight of the importance of uncertainty and discovery, and thereby come to a weaker understanding of how markets actually work.

Having identified the importance of subjectivism, fragmented knowledge, and structural uncertainty, Austrians are interested in exploring how purposive actors who are looking to improve their well-being as they define it are able to do so by coordinating with other actors similarly situated. Purposiveness and process analysis are the heart of Austrian microeconomics. To focus on maximization and equilibrium, as most mathematical models do and, to a large degree, must, leaves unexplained how real world actors overcome our inability to know the future by making use of social institutions to coordinate with other actors.

That is the real problem situation choosers face and the way they solve it. Like our mainstream colleagues, Austrians see the market as coordinating, in some sense of the word, human choices. However, our depiction of that coordination is one that focuses on coordination as an ongoing process, not as a state of affairs. It is a verb, not a noun. We see coordination as an activity because we start from the alternative problem situation of fragmented knowledge and uncertainty. In that problem situation, coordination will be a matter of discovery, not instantaneous maximization.

Portraying “choice” or “rationality” as maximization rather than purposiveness and assuming that actors know the parameters of their choice situation rather than facing structural uncertainty too easily can lead us to a false understanding of how markets work, and especially the role played by coordinating market institutions. The clarifying aspects of putting economic propositions in mathematical terms have to always be considered in light of the damage that those propositions do to the reality of the social world. I don’t deny that mathematical models can be helpful, but I think I sit farther away from the “complementary” end of the spectrum than Antony does.

Also from this issue

Lead Essay

  • Professor Horwitz makes the case that the Austrian school of economics isn’t just a bunch of armchair theorists. Ludwig von Mises’s “praxeology” should not prevent and has not prevented economists from doing vital, real-world, empirical work on subjects including monetary policy, disaster recovery, communist political economy, and even piracy. Horwitz takes us on a tour of some of this work and suggests that the Austrian school can offer mainstream economics a number of vital insights.

Response Essays

  • Bryan Caplan argues that the Austrian school remains in general much more hostile to empiricism than mainstream economics. Austrian subjectivism is well and good, but its neglect of behavioral economics then constitutes a puzzling shortcoming. And even in the work Horwitz praises, there is little that is distinctively “Austrian”—little that necessarily relies on the distinctive methodological or conceptual apparatus of the Austrian school.

  • George Selgin argues that part of the disagreement at hand is semantic: Where von Mises and other Austrians used the word “economics” to denote what we now call “theoretical economics,” we need not be bound by this convention, particularly not if it tends to obscure. That said, a real disagreement remains, because many in the Austrian school have failed to grasp that a deduced theorem of economics can still be “in the (common) sense”—that is, it may still have no explanatory power over events in the real world. When such cases arrive, Selgin finds that Austrians are all too often flummoxed.

  • Antony Davies expresses admiration for Austrian-school economics as a “complementary approach” to the problems he tries to solve using modeling and mathematics. He finds Austrians at their most incisive in their critique of modern macroeconomics, which is based not on individual behavior, but on an “accounting identity.” He argues that both quantitative and non-quantitative methods can reveal important truths, and he suggests that Austrians should deploy the former in refuting their opponents’ theories.