The Importance of Fellow Travelers

Fellow travelers are often treated as annoying gadflies, whose only effect is to distract the hard core of a group. However, they serve in a number of underappreciated roles. In the Austrian case, they help to bridge the gap between the mainstream and the Austrian school. Economists like Leland Yeager, who sympathizes with market process theory, can make a marginalized movement appear more respectable to the mainstream. They can also help bridge gaps and create dialogue between different heterodox movements. For example, Theodore Burczak has recently attempted to synthesize Marx and Hayek, provoking conversation between Marxist and Austrian economists. Most importantly, such people help prevent groupthink and insularity within a school of thought.

Formalizing Ordinal Utility

I’ve tried to make an attempt to formalize the Austrian notion of utility. This seems to be a praxeologically sound formalization which does not imply that mathematics can be used in economic theory. This formulation does not state that utility functions are continuous or differentiable, so forming a Walrasian system with them would be nearly impossible. Nevertheless, it is at least an interesting exercise. Feel free to critique it:

The good’s first unit will satisfy the most important end, the second unit will indulge the next most important, the third unit will tend to the third most important, and so on. Thus we get a set of ends E = ( e₁, e₂, e₃, . . . ,e_i) with the following property: For all e₁, e₂, in E, e_j, is preferred to e_i, if and only if i < style="">X = (x₁, x₂, . . . x_i, . . . ) be a set where x, denotes the number of units of good x at a consumer’s disposal. Let x_j > x_i, if and only if j > i. Define a marginal utility function f: X --> R⁺ such that f(x_i) > f(x_j) if and only if x_i, < x_j. This is a result of the fact that a consumer will utilize additional units of good x to satisfy sequentially less important goals. f is thus a decreasing marginal utility function on X . To show that marginal utility is ordinal, let S = (f, g, . . .) be the set of all functions on X defined as above. Then for all f, g in S, and for all x_i, x_j in X, f(x_i) > f(x_j) implies g(x_i) > g(x_j). S is consequently an ordinal measure of marginal utility.

Subjectivism and Traditional Austrian Business Cycle Theory: Could They Be Incompatible?

“On the one hand we want to have a time structure of production in order to have our theory of the trade cycle. On the other hand we often cop out by describing it as purely subjective; the time structure of production describes something about the plans of entrepreneurs and in this sense varies from entrepreneur to entrepreneur. But we can't have it both ways. If it supports ATBC, then it's an "objective" notion. If it is a "subjective" notion, the ATBC cannot be sustained. I wish we would pick up on a suggestion by Peter Lewin and cut the Gordonian knot with the idea of "duration." Before we can do that, however, we have to see the problem and it's my impression that almost no Austrians see the problem.”
-Roger Koppl

This is an interesting point, although I’m not sure whether I entirely agree with it. However, if this dichotomy of subjective entrepreneurial plans and objective physical capital really cannot be bridged, I think that I would have to take the side of subjectivism.

After giving more thought to this, I think that we should discard the time component as a critical part of the theory. While we can say that inflation alters the number of stages of production and introduces greater uncertainty into the system, we can’t talk about the process in a uni-dimensional manner. Because of the existence of looping in the capital structure (some production processes may produce materials that later end up in that same process), the order of any production process is an entirely subjective phenomenon, existing only in the interlocking plans of entrepreneurs. Therefore, a distorted rate of interest can only be said to disfigure and warp the web of interconnected capital. Although we might be able to empirically discern more specific tendencies, given a particular capital structure, the theory itself cannot give us any more information. We need to accept that we cannot derive a satisfying business cycle theory without empirical insight.

Critical Realism: What is it and what does it have to do with economics?

Critical Realism is a philosophical movement that has been gaining some ground in the past few years. It is an approach to philosophy that encompasses epistemology, ontology, and to some extent, morality. It approaches the world as being made up of “structures,” each with certains “powers.” These structures (think gravity) are always exerting these powers, even when there are other powers at work preventing the previous powers from achieving its full effect. For example, gravity works upon a bird, but the bird’s power to fly counters this.

You might ask: why is this so novel? In contrast to positivism, it is quite new. Positivism looks only at conjoined events of the form: A, then B. Realism attempts to look at the structure of events and denies that the prediction of such conjoined events is the purpose of science.

This is relevant to economics because this philosophy is incompatible with many forms of econometrics. If the purpose of science is to study “structures,” rather than laws, then the mainstream approach to economics is bankrupt.

Unfortunately, this philosophy is almost invariably used solely by the left, often to justify Marxism. However, Austrian economics could certainly make use of this philosophy to justify its methodological attack on the mainstream.

Andrew Collier’s book on Critical Realism would be a good place to learn about this topic, if you can ignore the Marxist ideas strewn throughout it.

Is regret compatible with Praxeology?

Aristotle, upon whom Menger based some of his ideas, believed in the concept of akrasia. Akratic action is action that is known to be against an agent’s own interests, but is pursued regardless. This is obviously incompatible with any rational choice-based theory of action, since the agent is purposely acting irrationally. An example is the drunk who knows his alcohol addiction is harmful and regrets his problem, yet continues drinking. Is this a problem for a realistic economic theory based on the assumed rationality of economic agents?

One first step to deal with this problem is relaxing the standard of rational action to the Misesian notion of purposeful action. This does not solve the problem fully. In this case, we can understand the agent as having two opposing beliefs about the usefulness of their action. The agent only acts on one of these beliefs, leading to feelings of regret from the other. However, this leads to a new problem: why would an agent choose only to pay attention to an inferior belief?

Elster attempts to solve this problem by positing a rapid change in time preference of the agent during the akratic act. When the actor soberly examines his options ahead of time, he may choose X over Y. However, when confronted with the imminent choice, he chooses Y due to a rapid increase in his discount rate. This solution does not provide an answer to the deeper question of why the agent would feel regret simultaneous with the action. It seems that the only way out of this puzzle is to admit that this increased discount rate is caused by a weakness of will, perhaps due to impulsiveness. The actor knows that his choice is problematic, yet is unable to impede the force of his passions. This is not incompatible with any Misesian theory ofchoice, since praxeology makes no claims about the motivations of an action.

Principled Agents

Timothy Besley’s recent book on political economy, “Principled Agents?” attempts to chart a course between the skepticism of Virginia School public choice and the credulity of traditional political economy. That is, he tries to show how government could work without assuming either perfect benevolence or complete self-interest on the part of politicians. Rather, he tries to show how democracies are likely to elect politicians who will serve the public good, using a comparative statics framework. He believes that the key problem of political economy is creating systems where these principled people are most likely to be elected to office.

This kind of approach has a fair number of problems, many of which are detailed in the RAE symposium on the book. The most obvious is that he assumes that there are people who are inherently principled and those who are not. This goes directly against Gary Becker’s belief that the best economics is done when we assume that all agents have the same utility function. Using that method, we can see how incentives affect individuals without relying on certain kinds of individuals. Put differently, if we just assume that there are certain principled politicians, we are blinded to how previously moral politicians are tempted by the new incentives of office and end up acting against the public good.

Another very important point is one that has been made by Bryan Caplan. If voters are irrational and demand public bads of their politicians, democratic failure may be a feature, not a bug. Since the information on voter preferences seems to confirm that they habitually demand policies that have detrimental effects, it is entirely possible that unprincipled politicians will craft better policies than principled ones.

The Debate on Indifference

In the latest QJAE, there is another debate over the role of indifference in economic analysis. Like the previous debates, this is an outgrowth of the response to Nozick’s critique of Austrian economics. Since Mises, AE has rejected the use of indifference in economic analysis, which also means that indifference curves cannot be used. The reasoning behind this break from the mainstream is this: indifference cannot be demonstrated through action (we always choose something; we cannot choose to be indifferent) and is therefore only a vague psychological concept, not an economic concept.

Suppose that the above reasoning is valid. Nozick points out that we cannot use the concept of marginal utility or other economic concepts, since these depend on a stock of homogeneous goods. The individual must be indifferent between these goods for these concepts to be valid.

Block attempts to solve the problem in a very practical way. Until the moment of choice, the individual is indifferent between the homogeneous goods in a psychological sense. At the point when he chooses, he is no longer indifferent; he picks a specific dollar to trade (even though he valued all his dollars the same previously), for example. This solves the problem, although it seems to be an ad hoc solution.

Hoppe has a more elegant solution to the problem. He says that we are not indifferent between homogeneous goods, it is just that the matter of picking a particular member of that group does not matter for human choice. For example, if I am trading loaves of bread for ounces of butter, I do not care which loaf I trade for the butter. My action shows that I prefer butter to bread, but it does not show that I am indifferent to which loaf I get rid of. The matter of which particular loaf is not relevant for human action. Hoppe gives the example of walking to a park. At the start of my walk, I must either put my left foot or right foot forward. Am I indifferent between them? No, the choice is not one I make. I make a choice of walking to the park; the foot I start with is irrelevant.