Austrian economics.

[Nusocialist]

I'm aware of the massive flaws in neoclassical economics but less so those in its Austrian cousin.

Does anyone know which of theseflaws are also in Austrian economics and which fresh flaws of its own it has?

Also does anyone know if it is correct to say its idea of human behaviour is based on psychological hedonism?

[JazzRemington]

Austrian economics is pretty much the "highest ideal" of neoclassical economics. Take the most extreme form of neoclassical school, and you basically have the Austrian school. From what I understand, at least.

[Demogorgon]

It's a load of crap quite simply. THey believe you avoid all empirical study and simply base economic theory around "self evident maxims". In other words, they make it up to suit themselves

[Dimentio]

The Neoclassical school claims that every agent in the market has full access to information about comparabe prices, and that everyone is rational and try to maximise the consumption.

The Austrian school agrees on rationality, but claims that the information is imperfect and therefore, human action is determined by subjective rather than objective parameters.

Then it has much garbage as well.

[mikelepore]

My reply here is based more on my conversations with people influenced by the Austrian economists' literature, rather than the literature itself. I would point to their assertion that necessary information is conveyed by all factors being reduced to the single dimension of monetary units. They believe that, lacking prices that have been determined by a competitive market, a socialist economic system would have no information to make a sensible decision. They often give idiotic examples, such as a socialist system having no possible way to know that it shouldn't pave the roads with diamonds. They don't realize that a socialist system could make decisions based on other criteria, such as the policy to minimize labor time, minimize the use of energy and materials, following technical specifications, attention to safety and health factors, etc. They believe that only money-based criteria, such as the directive to buy whatever is cheapest, provides information that can be used for planning purposes. They further claim that monetary prices contain all of the other kinds of information automatically, always ensuring sure that the best material will always be used, conserved wisely, applied at just the right time, etc. As for how all that information could possibly be multiplexed in a single one-dimensional number, the price, they never have an answer.

[Nusocialist]

Thanks guys.

But I was looking for more technical refutations of concepts in Austrian economics.

Edit: I didn't see your reply Mike, I'll read that now.

[Demogorgon]

Originally posted by [email protected] 08, 2007 04:04 pm
The Neoclassical school claims that every agent in the market has full access to information about comparabe prices, and that everyone is rational and try to maximise the consumption.

The Austrian school agrees on rationality, but claims that the information is imperfect and therefore, human action is determined by subjective rather than objective parameters.

Then it has much garbage as well.
Mostly right, but there is one niggle. Neoclassical economists don't say there is perfect information but rather that their sums will ad up whether there is or not. Austrian's say neoclassical theory is only correct under conditions of perfect competition (including perfect knowledge) and in practice that doesn't come along very often so it is more productive to look at other factors like human behaviour.

It is an interesting mix of having a reasonable starting point and being unbelievably incorrect. It is true that neoclasical economics simply can not deal with the fact that there is in reality no perfect competition, but the Austrian alternative, that we can basically rely on metaphysics rather than empirical observation is so spectacularly flawed I do not know where to begin

[Nusocialist]

Thank you all for your comments. But still I was looking for more technical refutations and possibly links.

ComradeRed do you have any of these?

[Luís Henrique]

Just to note that not all Austrian bourgeois economists are members of the Austrian school; in fact, the most important of them, Eugen von Boehm-Bawerk, was not.

Luís Henrique

[Nusocialist]

Bump.

Comrade Red?

[ComradeRed]

Most people don't waste their time criticizing the Austrian school, since they reply "Ah that's completely fallacious!"

One thing to bear in mind is that the Austrian school accepts Marginalism, so insomuch as the criticisms of marginalism apply to the Neoclassical school they also apply to the Austrian one too.

There is Sraffa's criticism of marginalism, e.g., which has been historically applied to the Neoclassical school. The same criticism could be applied to the Austrian school; Steve Keen mentions this in passing in the appendix to his book Debunking Economics.

Another problem with criticizing Austrian Economics is that they don't believe in math. So when dealing with Neoclassical economics, one can easily say "This theorem from real analysis doesn't apply here because we are using finite difference equations rather than derivatives" or whatever. You can't cut the crap with Austrian Economics because the crap is the entirety of Austrian Economics.

A peeve they have is with methodology. They are obsessed with doing everything "praxeologically" but in practice this goes out the window completely. Praxeology itself is useless since it's a set of a priori tautologies; the entirety of the methodology is little more than word games. It's intellectual masturbation, just like dialectics.

As I said, there really isn't any criticism of Austrian Economics that is technical because Austrian economics isn't technical. It's a hand wavy argument, like the outline of a mathematical proof it does nothing.

[Nusocialist]

Originally posted by [email protected] 19, 2007 06:22 am
Most people don't waste their time criticizing the Austrian school, since they reply "Ah that's completely fallacious!"

Well it is always good to be able to get one up on the American style libertarians.


One thing to bear in mind is that the Austrian school accepts Marginalism, so insomuch as the criticisms of marginalism apply to the Neoclassical school they also apply to the Austrian one too.

There is Sraffa's criticism of marginalism, e.g., which has been historically applied to the Neoclassical school. The same criticism could be applied to the Austrian school; Steve Keen mentions this in passing in the appendix to his book Debunking Economics.Well I've mentioned Sraffa critiques to a few but I've been told they don't apply to Austrian economics. My general ignorance of what Austrian economics is actually comprised off really is a set back here.

I personally prefer Institutionalist economics like that of Veblen to even Marxian and the LTV, I just can't see the use of more than basic maths in economics except for attacking Neoclassical economics. To me Veblen is the forgotten economic genius.


Another problem with criticizing Austrian Economics is that they don't believe in math. So when dealing with Neoclassical economics, one can easily say "This theorem from real analysis doesn't apply here because we are using finite difference equations rather than derivatives" or whatever. You can't cut the crap with Austrian Economics because the crap is the entirety of Austrian Economics.That is good because my maths is not good. I think I should really learn some.


A peeve they have is with methodology. They are obsessed with doing everything "praxeologically" but in practice this goes out the window completely. Praxeology itself is useless since it's a set of a priori tautologies; the entirety of the methodology is little more than word games. It's intellectual masturbation, just like dialectics.There absurd methodology is well known, but just attacking that does little in debates with American style libertarians.


As I said, there really isn't any criticism of Austrian Economics that is technical because Austrian economics isn't technical. It's a hand wavy argument, like the outline of a mathematical proof it does nothing.Okay, I was just looking for easy arguments to refute Austrians in other forums.

[Dimentio]

Originally posted by Demogorgon+October 09, 2007 11:34 am--> (Demogorgon @ October 09, 2007 11:34 am)
[email protected] 08, 2007 04:04 pm
The Neoclassical school claims that every agent in the market has full access to information about comparabe prices, and that everyone is rational and try to maximise the consumption.

The Austrian school agrees on rationality, but claims that the information is imperfect and therefore, human action is determined by subjective rather than objective parameters.

Then it has much garbage as well.
Mostly right, but there is one niggle. Neoclassical economists don't say there is perfect information but rather that their sums will ad up whether there is or not. Austrian's say neoclassical theory is only correct under conditions of perfect competition (including perfect knowledge) and in practice that doesn't come along very often so it is more productive to look at other factors like human behaviour.

It is an interesting mix of having a reasonable starting point and being unbelievably incorrect. It is true that neoclasical economics simply can not deal with the fact that there is in reality no perfect competition, but the Austrian alternative, that we can basically rely on metaphysics rather than empirical observation is so spectacularly flawed I do not know where to begin [/b]
Yea, but even a blind chicken could find corn.

[ComradeRed]

Originally posted by [email protected] 19, 2007 01:31 am
Well I've mentioned Sraffa critiques to a few but I've been told they don't apply to Austrian economics. My general ignorance of what Austrian economics is actually comprised off really is a set back here.
The Austrian criticism (http://www.mises.org/story/1486) of Sraffa boils down to this "Sraffa is fallacious because he uses math!" :lol:

This is not a valid criticism, and actually refutes nothing.

I'll work out a little piece applying Sraffa's criticism to Austrian Economics, but I'm usually busy during the week and I am working on a presentation on Marxist Economics. So I don't know when I'll be done, but Sraffa's criticism applies to Austrian Economics insomuch as Austrian Economics uses marginalism (the whole "roundaboutness" crap in their theory of value is based on marginalism).

[syndicat]

lepore:
They don't realize that a socialist system could make decisions based on other criteria, such as the policy to minimize labor time, minimize the use of energy and materials, following technical specifications, attention to safety and health factors, etc. They believe that only money-based criteria, such as the directive to buy whatever is cheapest, provides information that can be used for planning purposes.

the things you mention aren't measures of social opportunity cost. An economy can only be efficient if it minimizes social opportunity cost relative to benefit provided. Social opportunity cost is all things lost by committing resources to making something, such as our labor time, and other resources.

The more important to us something is, the more costly it is to use it up. Since the point to an economy is to satisfy the desires that people have, there needs to be a way to measure how important various alternative potential outputs are. Since any decision has a ripple effect throughout the economy, we need a measure of relative benefit and relative cost, i.e. a way of measuring things in terms of the desires of the population.

A price system need not be in terms of prices formed by market forces. But a social accounting unit is needed, a scale, on which to measure relative importance to people of costs and benefits of possible alternative production paths. And thus a price system is needed.

The error of the pro-capitalist economists is in assuming that market prices accurately measure social opportunity costs. In fact market prices only measure relative bargaining power. It's notorious that external effects -- such as pollution --are pervasive in a capitalist economy, and these render the market price system inefficient, i.e. not an accurate measure of social opportunity costs. It doesn't follow that we don't need an accurate measure of social opportunity costs. We do.

one of the criticisms of neo-classical economics by the Austrians was that the neo-classicals, thru their assumptions about perfect information and so on, can't account for the importance of tacit knowledge, such as practical know-how. But a system based on the oppression of the workforce also ignores the tacit knowledge of the workforce, it fails to adequately develop their capacity. Thus their argument is inconsistent with their defense of capitalism. A hierarchical mode of production will necessarily leave out much tacit knowledge.

[Nusocialist]

Originally posted by [email protected] 19, 2007 04:36 pm

The Austrian criticism (http://www.mises.org/story/1486) of Sraffa boils down to this "Sraffa is fallacious because he uses math!" :lol:

This is not a valid criticism, and actually refutes nothing.

I'll work out a little piece applying Sraffa's criticism to Austrian Economics, but I'm usually busy during the week and I am working on a presentation on Marxist Economics. So I don't know when I'll be done, but Sraffa's criticism applies to Austrian Economics insomuch as Austrian Economics uses marginalism (the whole "roundaboutness" crap in their theory of value is based on marginalism).
Thank you for your help.

[ComradeRed]

I just finished my calculations and I'm very excited about this brilliant destruction of the Austrian school.

The basic idea about the "roundabout" method of creating goods is that the method which is more roundabout has a higher yield.

The historical example is a man on an island can catch 10 fish in an hour, or spend an hour making a spear and then use the spear to fish for an hour to catch 100 fish. Then the spear breaks.

Which method of production is better?

Well, the idea is that the first method produces 10 fish per hour.

The second produces 100 fish in 2 hours, or 50 fish per hour.

The second method which is more roundabout produces 5 times as much output.

The Sraffian Crucible

All right, so I make the assumption that a fish feeds a man sufficient for 6 hours of labor.

One method of production is as follows:

4 hours + 1 tool -> 3 tools
2 hours + 2 tools -> 8 fish

The rate of profit here is 63.075% and 1 tool = 4.764 hours.

The other method is:

1 hour + 1 tool -> 2 tools
2 hours + 1 tool -> 2 fish

The rate of profit here is 82.684% and 10.55 hours = 1 tool.

The first method is more roundabout (4 fish per 3 hours compared to 2 fish per 3 hours)...but the second method is more profitable. This contradicts the Austrian theory.

It should be noted that the rate of profit determines the output, so to be more accurate, we write the first method of production as:

4 hours + 1 tool -> 3 tools
2 hours + 2 tools -> (1 + (d/6)) fish

Where d is the variable indicating output variation dependent on the rate of profit. The second method is:

1 hour + 1 tool -> 2 tools
2 hours + 1 tool -> ( .5 + (d/6)) fish

Note that if you don't want to think of (d/6), you could easily use D=d/6. I use d/6 because it simplifies things drastically later (hint why: the value of 1 hour of labor is set to unity, 6 hours of labor = 1 unit of fish...).

So the rate of profit of the first method, written as a function of output variation, is:

1 + r = (36 + 6d_{0})/[ 13 +or- sqrt(145 + 24d_{0}) ]

For the second method:

1 + r = (6 + 2d_{1})/[d_{1} + 3 +or- sqrt(d_{1}*d_{1} + 2*d_{1} + 14)]

We find through a hell of a lot of manipulations that (and I verified this with mathematica!):

d^{+}_{0} = [20 - 3476r - 859r^2]/(144(r-2))
d^{-}_{0} = [-864r(4+r)]/[-188+44r+25r^2]
d_{1} = (-1 -3r + r^2)r

At r > -1, d_{1} > d_{0} which implies that the variation of output in the second method, which is supposed to be least productive, is actually more productive when the rate of profit increases above -1.

I did this when I was about to go to bed, but I used mathematica to verify the manipulations so it should check out mathematically.

[Nusocialist]

Thank you for that Comrade.

When I was discussing Sraffa with one Austrian he dragged up that Mises.org article and claimed Sraffa was basically incoherent as he ignored individual demand and utility.

I really didn't know what to say to this as it is my understanding he used Neoclassical logic to critique it and he seemed to ignore this whenever I stated it, so all I was able to do was state that in the Cambridge capital controversy the likes of Samuelson and Solow admitted defeat so he couldn't of been that easy to debunk.

These were the kinds of things he said.

From the law of diminishing marginal utility we can construct supply and demand schedules, of course with the law of returns contained within the supply schedule. This is what Sraffa does not understand. He does not realize the individual subjective components that comprise these schedules. He totally ignores human beings in any and all of his analyses. It is therefore useless knowledge in regards to economics since he does not address anything related to human action, which is ultimately the foundation of economics...........


..........Come on, Sraffa has been debunked for years:

http://www.mises.org/story/1486

Eliminating individuals and their subjective preferences from an economic model seems somewhat dubious, no?

The strange thing was I was talking about Sraffa's 1926 article about the law of diminishing returns and this guy seemed unable to differeniate that and his 1960 book which was all the article deals with.

[ComradeRed]

Allow me to elaborate on the mathematical details of my last post for those that want to know...

The two methods of production are (when the rate of profit is zero):

4 hours + 1 tool -> 3 tools
2 hours + 2 tools -> 1 fish

and

1 hour + 1 tool -> 2 tools
2 hours + 1 tool -> .5 fish

We write the equations to determine value as (let the value of 1 hour of labor be set to unity and 1 tool be x):

(1+r)(4 + x) = 3x
(1+r)(2 + 2x) = 6

and

(1+r)(1 + x) = 2x
(1+r)(2 + x) = 3

We see that r = 0 in this instance. If we write the variation of the output as a function of the rate of profit, then d_{0} (the variation in the fish output for the first method of production) is:

d_{0} = -12 - 6r + 6x

and

d_{1} = -2 + r + 2x

We can write x in terms of d by:

(1+r) = 3x/(4+x) = (6+d_{0})/(2+2x)

Thus: 6x(1+x) - (6+d_{0})(4+x) = 0 is quadratic, and we can use the quadratic equation to solve for x.

x = (d_{0} +or- Sqrt[576 + 96d_{0} + d_{0}*d_{0}])/12

Similarly we can apply the same steps to the second method of production to find:

2x(2+x) - (3+d_{1})(1+x) = 0

Thus:

x = (-1 + d_{1} - Sqrt[25 + 6d_{1} + d_{1}*d_{1}])/4

So now we can plug this in to find:

d_{0} = -12 + 6r + (d_{0} +or- Sqrt[576 + 96d_{0} + d_{0}*d_{0}])/2

and

d_{1} = -2 + r + (-1 + d - Sqrt[25 + 6d_{1} + d_{1}*d_{1}])/2

We can rewrite this to find r:

r = a(d_{0}) = (1/6) (d_{0} + 12 - (d_{0} - Sqrt[576 + 96d_{0} + d_{0}*d_{0}])/2)

r = b(d_{1}) = 2 + d_{1} + (1 - d_{1} + Sqrt[25 + 6d_{1} + d_{1}*d_{1}])/2

Since we are interested in the variance, we want to find a D such that:

a(D) > b(D)

and an E such that

a(E) < b(E)

Again, by abusing mathematica we find D = 16, E = 0.

We plug in these values for d_{0} = d_{1} = 16 and find that the productivity of the first method is (22/6 = 366.67%) and for method 2 is (19/3 = 633.33%). (The rate of profit here is about 77% in the first method, 79% in the second method.)

When d_{0} = d_{1} = 0, the productivity of the first method is 100%, the second method is 50%. The rate of profit here is, of course, 0.

So when the rate of profit increases, the productivity of the second method increases and is greater than that of the first method.

This contradicts Austrian theory, so we reject it.

EDIT: For those wondering why the rate of profit is not the same in both cases, let r = 79.1756% for the first method of production.

That means that:

d_{0} + Sqrt(576 + 96 d_{0} + d_{0}*d_{0}) + 24 - 9.50107 = 0

Thus:

-365.781 - 67.0021 d_{0} = 0

So:

d_{0} = -5.45924

Thus the first method produces:

4 hours + 1 tool = 3 tools
2 hours + 2 tools = (6-5.45924)/6 fish

And the roundaboutness is (measured with fish converted into hours, as we did with the other methods): 0.0901267 < 11/3 < 19/3, so we haven&#39;t changed anything really.

The reply to the philistine


From the law of diminishing marginal utility we can construct supply and demand schedules, of course with the law of returns contained within the supply schedule. Assuming this works at the micro scale, which it really doesn&#39;t since you can&#39;t measure "diminishing marginal utility" with any units of utility, there is still a problem with this at the macro scale.

Neoclassical logic says just add up all the individual demand curves to get the aggregate demand curve. This works only if the Debreu theorem is applied, which states that individuals aren&#39;t as unique as in reality.


This is what Sraffa does not understand. He does not realize the individual subjective components that comprise these schedules. The problem with this argument is that it contradicts the marginalist theory of value "MC = MR".

Thus Neoclassical economists don&#39;t understand this either.

Austrians are also guilty of this, at least within the sphere of their theory of production. That&#39;s what the above math demonstrates.


He totally ignores human beings in any and all of his analyses. It is therefore useless knowledge in regards to economics since he does not address anything related to human action, which is ultimately the foundation of economics........... Economics isn&#39;t the study of human beings, that&#39;s sociology.

The Austrian school tries to apply sophistry to redefine economics as the study of human activities, whereas economics is more properly defined as the study of the production and distribution of commodities.

An orthodox Austrian would argue there is no difference; really, there is no difference between having sex and going to work?

The article that this fellow linked to is tragically flawed. For example:


Originally posted by Article
In Sraffa&#39;s models, for example, labor unions could increase real wages and lower interest rates, and this would have no real effects on production but would merely redistribute ownership of the net output in each period. Uh, not quite. This fellow doesn&#39;t understand the use of the modified rate of profits are used to determine the amount reinvested in the capital. That&#39;s covered in the book, which this fellow obviously didn&#39;t get to.

It&#39;s represented by a capital letter R.

Oh well, at least he tried to read <_<


Sraffa&#39;s method of determining equilibrium prices in a surplus economy already assumes that the system has settled down at the optimum level of production in all possible lines. Sraffa&#39;s techniques leave no room for the individual members of society to influence the methods of production that end up being used (whether or not there is a surplus), ultimately because there are no individuals in Sraffa&#39;s models. No, the entire point of the opus was to point out that, given the assumptions of a static equilibrium economy which Marginalism assumes, Marginalist analysis does not work&#33;

Sraffa proved this.

It can be applied to other methods of marginalist analysis, e.g. the Austrian method of roundaboutness.

Sraffa&#39;s techniques was not used to create a realistic model of the economy, but to demonstrate the internal inconsistencies of the Marginalist models.



The strange thing was I was talking about Sraffa&#39;s 1926 article about the law of diminishing returns and this guy seemed unable to differeniate that and his 1960 book which was all the article deals with. You might want to strongly point out that this guy you&#39;re arguing with doesn&#39;t have a fucking clue what he&#39;s talking about with regards to Sraffa&#39;s paper.

[Raúl Duke]

I know this doesn&#39;t apply here but a side question:

What kind of school of economics is mostly presented in an American AP Economics course? (I have a feeling that&#39;s neoclassical, they also talk alot about rational choice theory and that economics is a "social science that studes the choices of individuals, businesses, societies, etc make as they cope with scarcity and incentives" This is from my economics book.)

(i.e. my economics book is very strange...they don&#39;t mention much the schools of economy and especially not Marxist economics.)

[ComradeRed]

Originally posted by [email protected] 21, 2007 01:09 pm
What kind of school of economics is mostly presented in an American AP Economics course? (I have a feeling that&#39;s neoclassical, they also talk alot about rational choice theory and that economics is a "social science that studes the choices of individuals, businesses, societies, etc make as they cope with scarcity and incentives" This is from my economics book.)
It&#39;s the neoclassical school they teach in high school and undergrad level uni.

[Nusocialist]

Originally posted by [email protected] 21, 2007 08:29 pm
No, the entire point of the opus was to point out that, given the assumptions of a static equilibrium economy which Marginalism assumes, Marginalist analysis does not work&#33;

Sraffa proved this.

It can be applied to other methods of marginalist analysis, e.g. the Austrian method of roundaboutness.

Sraffa&#39;s techniques was not used to create a realistic model of the economy, but to demonstrate the internal inconsistencies of the Marginalist models.


This is what I was sure of. I&#39;ve had several marginalist tell me his model weren&#39;t realistic and therefore we can discount him. Which is hilarious and very ironic.