An Austrian approach to law and economics, with special reference to superstition

This paper has two purposes. First, it considers what the components of an ??Austrian?? law and economics might consist of. I argue that Ronald Coase??s conception of law and economics precludes the economic analysis of legal institutions and, in particular, the beliefs that support them. In doing so, Coase??s conception precludes an Austrian law and economics. In contrast, Richard Posner??s conception of law and economics makes such analysis the core of its study. In doing so, Posner??s conception provides a productive foundation for an Austrian law and economics. Second, to illustrate what some aspects of an Austrian law and economics might look like in practice, I consider several examples of the economic analysis of beliefs of import for the law. I focus on objectively false beliefs, or superstitions, and argue that some such beliefs are socially productive.     

Theory,history, and the great recession

This paper honors Don Lavoie’s work on the relationship between theory and history in Austrian economics by using the current recession as an example of many of the ideas found in his paper on the “Interpretive Dimension of Economics.” More specifically, I start from the premise that all history comes from theory because it is theory that guides what we count as “facts” or “data.” From Menger onward, a core element of the Austrian approach has been to see the purpose of theory as rendering human action and its unintended consequences intelligible. We do that by telling historical narratives where theory is the logical glue that holds the story together. I look at the Austrian story of the Great Recession in light of these ideas. What the Great Recession demonstrates is that the core theoretical elements of Austrian business cycle theory are narrower than we might think, but that consciously recognizing the contingent elements gives the theory additional flexibility to explain more of various real-world crises when augmented by additional ideal typifications properly used.     

The classical roots of the Austrian theory of capital and entrepreneurship

The paper deals with the continuities and discontinuities between some classical, Austrian and neo-Austrian authors with regard first to the theory of capital and then to the theory of entrepreneurship. Part I focuses on the elements of continuity between the classical and the Austrian theory of capital. These elements have been singled out by dealing first with the distinction between individual and national capital; and then with the difference between the resulting circulating-fixed capital and free-invested capital distinctions in the light, first, of the concept of roundaboutness and, then, of the method of vertical integration. Part II focuses on the elements of continuity between the Austrian theory of individual behaviour and the classical theory of national wealth. The distinctions between logical and historical time and between economics of time and economics in time are used to assess the links between the theory of capital as developed by the classics and Böhm-Bawerk, on the one hand, and the theory of entrepreneurship as developed by the neo-Austrians, on the other.     

Austrian economics and value judgments: a critical comparison with Neoclassical Economics

This article points out the limits of Austrian economics as far as the passage from positive to normative economics is concerned. We propose a comparison with neoclassical economics and discuss the different theoretical solutions adopted by these two schools of thought in their legitimization of the normative discourse. The bridge from positive to normative economics is analyzed as resting upon two interdependent pillars, one of a technical nature, the other of an ethical one. In neoclassical theory, these two pillars are, respectively, the Pareto principle and the so-called minimal benevolence principle. In the case of Austrian economics, they are the coordination principle and a set of value judgments considered to be ‘quasi-universal’. One problem for Austrian economics is that the coordination principle turns out to be incompatible with process analysis, the latter being a central tenet of the Austrian theory. A second problem, which creates serious difficulties for both schools, has to do with distribution. Our thesis is that whereas the neoclassical solution of the distributive problem is formally consistent (although deeply unrealistic), the Austrian solution is theoretically untenable and based on strong, although implicit, value judgments.     

The irrelevance of normative considerations for founding an Austrian law and economics: Reply to Marciano

In a comment on my paper, ??An Austrian approach to law and economics, with special reference to superstition?? (Leeson 2012), Marciano contends that Posnerian foundations ??may be problematic for an Austrian approach to law and economics??. In this reply I argue that the differences between Posner and Austrians that Marciano uses as the basis for his contention are normative. If, as Austrians claim, Austrian economics is purely positive, those differences are irrelevant to the appropriate foundations for an Austrian law and economics. They pose no problem for a Posnerian founding.     

Reappraising Austrian Economics' Basic Tenets in the Light of Aristotelian Ideas

This paper sustains that reappraising Austrian economics in the light of Aristotelian ideas is not only possible but also fruitful. First, I draw a sketch of the essential features of Austrian economics. Next, I argue about the necessity for a thorough analysis of the notion of freedom, and I analyze Mises' conception. Next, I expose Aristotle's social, epistemological and economic thought related to Austrian main traits. An account of how the exercise of Aristotelian virtues may be synergic with economic coordination and a sketch of the consequences of the proposal on the teaching of economics are then provided. Finally, the conclusion shortly sums up the content and relevance of Aristotle's contribution.     

Market process(es) and (un)knowledge

By extending an underdeveloped idea of Lachmann, I show that the Austrian theory of the market process à la Kirzner is unable to explain the diversity of market processes because it neglects the imperfect inter-market mobility of factors of production. I show that by taking into account the imperfect mobility of capital equipment and the associated reshuffling costs, it is possible to formulate a set of empirically testable implications about the unfolding of the market process. Furthermore, I show that reshuffling costs shape the context in which the learning process takes place and that the epistemic assumption of structural opacity on which the Austrian theory of the market process relies is not incompatible with the epistemics assumption of structural transparency of neoclassical economics. These epistemic assumptions can be seen as the two poles of a “knowledge spectrum”, from potential omniscience to sheer ignorance.     

Nobelity and novelty: Finn Kydland and Edward Prescott’s contributions viewed from Vienna

The awarding of the Nobel Prize in Economics in 2004 to Finn Kydland and Edward Prescott represents an opportunity to evaluate their contributions in light of Austrian economics. We lay out the basics of their contributions—the general equilibrium approach to economic fluctuations and the game theoretic approach to policy—and argue that they have tenets similar to those of Austrianism. We argue that their methodology parallels Austrian methodology in several significant ways that have gone unnoticed. We conclude that Kydland and Prescott’s Nobel Prize suggests Austrian approaches can have a more prominent impact than they have had in the past.     

James M. Buchanan: An appreciation

James M. Buchanan co-founded the field of Public Choice. He was influenced by Austrian economics, and in turn influenced Austrian economics. In particular, he advanced the understanding of subjectivist cost theory. His individualist approach to public policy making has been adopted by many Austrian economists. With Richard Wagner, he analyzed the politics of Keynesian economics. They explained why Keynesianism in practice led to a larger government, permanent deficits and inflationary monetary policy.     

Using Psychology to Reinforce the Austrian Argument for Freedom: The Case of Loan Decisions

The emphatic statements of F. A. Hayek, and other members of the Austrian school of economics, in advocacy of a free society have produced much misgivings among the economics profession. The paper aims to make the Austrian views more intelligible by tracing them back to a theory of the mind that Hayek develops in The Sensory Order. More generally, the paper argues that Austrian economics would greatly benefit from extending itself from a pure logic of choice toward psychological analysis. The argument is illustrated throughout the paper by examples taken from the loan decision process of a banker.     

Exchange and evolution

This paper offers an extension of the distinction of [Kohn, Cato Journal, 24:303–339 (2004)] between the two paradigms of modern economic theory—value and exchange—as derived from the generic–operant framework of [Dopfer and Potts, The general theory of economic evolution, Routledge, London, (2007)]. I argue that Austrian and evolutionary economics can be analytically unified about a general framework of rule coordination and change that I shall call the generic value paradigm. This is an analytic generalization of Kohn’s “exchange paradigm” that will allow us to redefine his conception of the “value paradigm” as the operational value paradigm in terms of the economics of known and fully exploited opportunities. The generic value paradigm, in turn, underpins the economics of the growth of knowledge and the evolution of the economic order as an open-system process due to the origination, adoption, and retention of novel generic rules. Austrian economics is then circumscribed as a special case of the more general “generic” analysis of the coordination and evolution of economic rules.      

Menger’s causal-realist analysis in modern economics

Carl Menger pioneered a unique theoretical research method which served as the foundation of the early Austrian school of economics. Menger’s causal-realist analysis was revived and formalized just before and after World War 2 by Ludwig von Mises as the “praxeological method.” Murray Rothbard, a student of von Mises’, utilized the method in formulating a comprehensive system of economic theory in his treatise, Man Economy, and State published in the early 1960s. Rothbard’s treatise became the foundational work for the “Austrian revival” in the 1970s. In this paper, we address several issues related to the role of Menger’s method in modern economics. First, ample evidence is adduced that von Mises and Rothbard each expressed a surprising ambivalence with respect to his own work in relation to the early Austrian school. Second, von Mises viewed Rothbard’s treatise as beginning a new epoch in economic theory. Third, contrary to the conventional view, a careful analysis of his treatise shows that Rothbard drew heavily on the contemporary neoclassical literature in developing his theoretical system and that his intent was never to set up a heterodox movement to challenge mainstream economics. Rather, his main aim was to consistently apply the praxeological method to rescue economics from what he considered the alien methodology of positivism, which was imported into economics after World War 2. Lastly, I will tentatively suggest that the term “Austrian economics” as the designation for the intellectual movement that coalesced in the early 1970s may now have outlived its usefulness. This term, which initially served an important strategic purpose in promoting the revival of the broad Mengerian tradition, may have come to obscure the meaning and importance of the praxeological research paradigm that Menger originated.     

The theory of the firm: The Austrians as precursors and critics of contemporary theory

Conclusion In the above, I have taken the theme of Austrian economics and economic organization through several variations. I hope to have taken steps towards establishing that not only were the Austrians important precursors of the contemporary theory of economic organization, but they may also contribute to existing theory as well as provide their distinctive perspective on economic organization. Space limitations have dictated, however, that I have been able to only scratch the surface. Assuredly, there is much more to be done on all the three themes I have been discussing, particularly on the last, constructive one.A number of excellent comments from Murray Rothbard and three anonymous referees is gratefully acknowledged. All remaining errors are the author's.     

The behavioral foundations of Austrian economics

Behavioral and experimental economics present challenges to the neoclassical theory of individual behavior, which is based on individuals making choices within the framework of utility functions that are assumed to have certain well-defined characteristics. Results in behavioral and experimental economics have shown that it is common for individual behavior to systematically deviate from the neoclassical axioms of utility maximization. Austrian economics is also based on axiomatic theories of utility maximization, but the assumptions underlying utility-maximizing behavior are much weaker in the Austrian approach. As a result, they have more solid behavioral foundations and are less subject to challenge by the empirical findings of behavioral and experimental economics. Neoclassical policy conclusions are often overly strong because of its behavioral foundations which are challenged by behavioral and experimental economics and are often misleading because of the comparative static nature of neoclassical welfare economics. For purposes of policy analysis, the Austrian approach provides better insights because of its more realistic behavioral foundations.     

Austrian economics at the cutting edge

Austrian economists today have a valuable opportunity to rejoin the mainstream of the economics profession. As Colander, Holt, and Rosser have argued, neoclassical orthodoxy is no long mainstream. What I call the “heterodox mainstream” is an emerging new orthodoxy. The five leading characteristics of the emerging new orthodoxy are bounded rationality, rule following, institutions, cognition, and evolution. When listed in this order, they suggest the acronym BRICE. The Austrian school is also an example of BRICE economics. The shared themes of BRICE economics create an opportunity for intellectual exchange between Austrians and other elements of the heterodox mainstream. Although Austrians should engage the heterodox mainstream energetically, they should also defend the essential elements of an early version of neoclassical economics, elements at risk of becoming half-forgotten themes of an earlier era. These elements are supply and demand, marginalist logic, opportunity-cost reasoning, and the elementary theory of markets. JEL Codes A14, B50, B53 This text is an edited version of a talk given in Washington, D.C. on 19 November 2005 at the SDAE annual dinner. I thank persons present at that time for a helpful discussion. I also thank William Butos, Roger Garrison, Steven Horwitz, and Peter Lewin for useful comments on an earlier draft.     

The view from Vienna: An analysis of the renewed interest in the Mises-Hayek theory of the business cycle

We review the post-crisis literature that engages Austrian business cycle theory and we discuss what is being said that is correct, what is being said that is incorrect, and what is not being said that ought to be said. This last category is important due to the fact that the post-crisis literature engaging Austrian business cycle theory has not addressed advances in the theory made since the days of Mises and Hayek. We also highlight three key areas of contemporary economics where Austrian business cycle theory has the potential to do significant work.     

Austrian Economics as a Progressive Paradigm: Explaining More Complex Economic Phenomena

This article examines two major issues of Austrian economics. The first is the alleged superiority of Austrian over neoclassical economics. The second is the capacity of Austrian economics to support new theoretical research. The analysis shows that Austrian economics has the widest domain of validity for explaining economic phenomena. It is also shown that Austrian economics has a progressive theoretical character due to the fact that there exist a number of analytical phenomena that Austrian economics cannot explain in its present state but that may be explained by means of a leap with continuity from Austrian anthropological presuppositions.     

The Austrian theory of the firm: Retrospect and prospect

Using as a focusing device the famous arguments of Coase (Economica 4(16), 386–405 1937) and Hayek (The American Economic Review 35(4): 519–530 1945), I sketch in bold strokes what an Austrian theory of the firm would look like. Such a theory would pay serious attention to issues of knowledge, uncertainty, change, and complementarity. I describe a literature in which much of this theory has already been constructed; make connections to closely related literatures in economics and management; and suggest directions for future development.     

Austrian theories of entrepreneurship: Insights from complexity theory

This paper examines various Austrian theories of entrepreneurship through the lens of complexity theory, more specifically via the concept of a dancing fitness landscape. Problems in many fields (including economics) can be characterized as attempting to find the highest peak on a fitness landscape (which corresponds to an efficient or optimal resource allocation). A rugged fitness landscape is one characterized by many peaks and troughs, while a dancing fitness landscape is one where the peaks and troughs change over time due either to exogenous or endogenous activity. I argue that several key disagreements among Austrian economists can be better understood through the metaphor of a fitness landscape. The implications of this insight for various branches of Austrian economics are also considered. This study is timely as radical Austrian views are starting to percolate into business schools leading to increased debate among management scholars about the precise nature of the entrepreneurial process (Chiles et al. 2007; Sarasvathy and Dew 2008; Alvarez et al. 2010).     

Pluralism and heterodoxy in economic methodology

Economists work within models that are simplified depictions of reality. An argument for a pluralistic understanding of economics is that different approaches lend insight by looking at different phenomena from different viewpoints. While all economists can benefit from taking a pluralistic approach to understanding economics, Austrian school economists must be more pluralistic in their understanding and presentation of ideas than mainstream economists if they want their ideas to have an impact on mainstream economics. Despite the argument for a pluralistic understanding of economics, in research, as in other activities, specialization increases productivity. While Austrian school economists can benefit from taking a pluralistic approach to understanding economics, they are likely to be most productive in their research by specializing in the development of Austrian school methods and ideas.