Sunday, January 15, 2012

A Defense and Critique of Austrian Economics

My comment on Matt Zwolinski's blog entry Libertarianism, Political Action, and Cultural Change...

Here's my criticism of the Austrian Econ approach...but let me first begin with a defense of the approach. Let's start off taking a look at Adam's definition of economics..."When I use the word "economics" I am referring to the academic discipline of "economics" which you will find in "economics departments" at many universities."

Economics is simply the study of scarcity..."don't you know matches is scarce on this island" (Rabbitson Crusoe). If all our resources were unlimited then the field of economics wouldn't exist. The most important economic question can we guarantee the best possible use of limited resources? Well...Matt's article in question offers a perfect example of the solution.

"Libertarians, like everyone else, have limited time, money and other resources. And if we want to advance the cause of liberty, we should use those resources in the way that has the highest expected return. The Paul campaign is not it."

The economic term for this concept is "opportunity cost". Matt wants all Ron Paul supporters to consider the opportunity costs of the time/money that they spend on Paul's campaign. In order to maximize the return on your investment you should consider what you are going to forego/sacrifice as a result of your spending decisions. In other words...a dollar that you spend on Paul's campaign can't also be spent supporting the IHS.

What the Austrian Econ approach has completely correct is that you can't efficiently allocate resources by proxy. Why is that? Because there's no way of truly knowing whether Matt is correct that the Paul campaign does not offer the highest return on our investment. In other's entirely possible that Matt might be wrong. Of course, it's entirely possible that Paul's supporters might be wrong as well.

Now, what many of the academic disciplines at the "economic departments" are trying to do is to create models that can accurately predict whether Matt is right or wrong. Is it possible to create a model that accurately computes the myriad of possible factors? Sure. Are we even vaguely close to being able to create such models? Obviously not.

Matt can't truly know whether Paul's campaign does not offer the highest expected return because he, like the rest of us, only has partial knowledge...

"The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world." - Friedrich Hayek, The Use of Knowledge in Society

That's my defense of the Austrian approach. Here's my criticism...

What the Austrian Econ approach has completely wrong is the belief that there is no third solution. Just because we can't efficiently allocate resources by proxy does not automatically imply that we should reduce the scope of government. It just implies that we should have the option to directly, rather than indirectly, allocate our taxes.

Just like it's a good thing for people to consider the opportunity costs of donating to the Ron Paul would also be a good thing for people to consider the opportunity costs of their tax allocation decisions. We would benefit as a country if each and every taxpayer was given the freedom to try and maximize the return on their tax investment.

This invisible hand approach to the scope of government...aka pragmatarianism...would allow us to hedge our bets.


  1. ....."Economics is simply the study of scarcity...:"....

    Economics is the study of human action.

    Economics explains why some things are scarce and somethings are not.

    Economics is a human science that assigns consequences to human action.

    ..."If all our resources were unlimited then the field of economics wouldn't exist".....

    Yes, it would.

    What would change is the consequences of some human action.

    However, we need not worry nor ever consider this case at all as scarcity is a fact of the Universe.

    ...."The most important economic question can we guarantee the best possible use of limited resources?"....

    No, this is NOT the question at all.

    The question is: "How can we best ALLOCATE resources demanded and desired by human beings?".

    "Best possible use" demands you are infinitely knowledgeable - that using this piece of steel is better used to make a pot to boil water than a shaft of a golf club.

    You have no measure or metric which to judge "use" - it is a subjective measurement immune to objective calculation.

    Therefore, the question has nothing to do with what you want to use a good or for what purpose, the question is "how do we allocate what we have between the wide and varied demands on the same goods?"

    ..." Are we even vaguely close to being able to create such models? "....


    Human beings defy being classified by numbers.

    Humans are far more resilient -even in the face of utter futility, and far more whimsical, even in the face of undeniable reason.

    "...wrong is the belief that there is no third solution...."

    Because you mistaken both the task of economics and the root question, you -with no surprise- believe there is some sort of "third way".

    There is not.

    You can allocate scarce resources but one of two ways - and only these two ways.

    By Ration - the use of violence (Government)
    By Price - the use of trade (Free Market)

    You will find your way in the allocation by Ration.

    You merely complex up (or simplify down, depending your starting point of review) this particular methodology - allocation by ration.

    But allocation by ration comes with these consequences, no matter the methodology.

    1) It requires violence on the non-violent. Goods need to be stolen from the producer to be allocated to the non-producer.

    2) There will be massive shortages of some goods and massive inventories of other goods; the production of the goods is by decree, not by demand.

    3)Black markets - there are those that are allocated their "fair share" that will have more than they can use, but much less of other things that they want. They will find a Black Market where to trade - in essence, create a Free market - though very primitive - for its ability to create wealth is very muted as it cannot co-exist with the ration system.

    4) There will be parasite class of violence providers that will extract their desires from society while providing no real good or services in return - eventually exhausting the economy of society.

    All of these features will occur in your ideas as well - albeit perhaps in different intensities and forms.

    Economics is the study of human action.
    Start there.

  2. You're starting from the point where you think you know what the scope of government should be. That starting point is in essence not very different from the starting point of the socialists.

    As a pragmatarian my starting point is that I have no idea what the scope of government should be. Like Socrates said..." seems that I am wiser than he is to this small extent, that I do not think I know what I do not know."

    If you get a chance you should take this self-ownership survey.

  3. Xero,


    I am starting from the point of HUMAN ACTION - it has nothing to do with an argument for/against government.

    Government is a CONSEQUENCE of centralizing violence and is merely a tool.

    To enforce rationing - which is what you are advocating - you need to use violence.

    You require the coercive taking of goods from one so to deliver to someone else that YOU decide should have such goods.

    The reason you do this and why you believe this person is "more deserving" than the other person is absolutely immaterial.

    One source of this violence is government - but you can also hire your local thuggery to do so (though, this would necessarily limit the extent (aka "projection of violence") that you have.