Austrian economics

1. Austrian economics ECON 434 | Spring 2011

2. From last time Finishing up the emergence of neoclassical economics and marginalism

3. Forerunners of marginal analysis • Neoclassical economics • Emerges in the mid 1800s • Application of math to economics • W. S. Jevons (a founder of marginalism) • Dupit (price discrimination) • Cournot (duopoly model; foundations of modern game theory)

4. American marginalists • Also called American apologists, marginalist economic thinkers in America are distinguished from their European counterparts by the willingness with which they took sides in the policy debates raging in the late 19th century. • They were uniformly conservative, advocates of late 19th century industrial growth, and defenders of the status quo. • Wary of government intervention in the economy (i.e. minimum wage laws, maximum hours laws); strong opponents of the Progressive movement (especially the emergence of unions) • Simon Newcomb • John Bates Clark • William Graham Sumner

5. American marginalists and Social Darwinism • American marginalists adopt Social Darwinism from Herbert Spencer (England, 1864) who is the first credited with its development. • He coins the term “survival of the fittest” and extends Darwin’s theories of natural selection into the realms of sociology and economics • Simon Newcomb • The late nineteenth-century mathematician and economic thinker who argued that certain seemingly humanitarian gestures generate negative externalities (e.g., charity to beggars stimulates more panhandling and sloth) that significantly outweigh any possible social benefits • William Graham Sumner

6. John Bates Clark • Marginal productivity • Under a perfectly competitive market, the return to each factor of production equals its marginal productivity.  • The distribution of income under a perfectly competitive market reflects each factor’s contribution to the social product and is therefore equitable. • People are compensated with income strictly in accord with the amounts of their productive contributions as reflected in wL + E + rN + iK • Product exhaustion • Paying each factor its marginal productivity will exhaust the total product. • A refutation of Marxian surplus value

7. Outgrowths of marginalism • Three founders of marginalism: Jevons, Carl Menger, and Leon Walras • Develop marginal analysis simultaneously • The “Marginalist Revolution” takes place from 1871-1874 as the 3 thinkers independently and almost simultaneously publish path-breaking work in the field. • They never end up working together, despite their similar research interests. • Carl Menger and Leon Walras go on to found two separate but related branches of economic thought: • Menger: Austrian school • Walras: Lausanne school

8. Austrian economics

9. What it’s all about • Analyzes human behavior from the perspective of individual agents • Heavy emphasis on non-empirical analysis • They aren’t on board with mathematical modeling • Why not? • Social sciences are different from natural sciences because we are what we study. Viewing human behavior from a scientific point of view blinds economists to the central mechanisms that drive human behavior.

10. What it’s all about • Utility and costs are subjective. • Goods have subjective value (what Aristotle called “value in use”). Goods are worth different amounts to different people, depending on their situation. • The value of anything, then, is what someone will pay for it. • “The value of a thing is just as much as it will bring” • Note: Today, Austrians are associated with libertarians.

11. Important names • Founder: Carl Menger • Heavily influences two Austrian professors, Friedrich von Wieser and Eugen von Bohm-Bawerk. • Von Wieser • The theorist who expanded upon Carl Menger’s earlier assertions about pricing with a basic statement of the general law of value and who also invented the term “marginal utility” • Von Bohm-Bawerk • Round about production: investing in capital goods by postponing consumption, thereby enabling the production of greater amounts of consumer goods in the future. • Critic of socialism (“the worst fallacy”)

12. Important names • Ludwig von Mises • Macro focus • Disagreed with the neoclassical conclusion that “money is a veil,” arguing that inflation is an uneven process that disrupts planning by consumers and business investors (causes uncertainty). • Reconciles Austrian theory of value with monetary theory

13. Important names • Friedrich von Hayek • The Road to Serfdom (1943) • Warns that tyranny (“serfdom”) can result from increasing government involvement in the economy • Socialism and freedom are not compatible • Key opponent to John Maynard Keynes

14. Important names • Johann von Thunen • “Location, location, location” • Hans von Mangoldt • Organized violent conflict, including war, might sometimes contribute significantly to economic and social progress • The technological advances stimulated by armed conflicts might be more valuable than the resources destroyed during wars • Similar to Marx

15. Important names • Joseph Schumpeter • The entrepreneur is the pivotal agent in economic growth and development. • Creative destruction • Capitalism cannot survive in the long run • Why not? • Marx’s answer: Marxian capitalistic crises (fewer people own more wealth) • Schumpeter’s answer: As democracy increases, socialism will tend to displace capitalism