Thursday, June 02, 2011

Austrian Welfare Economics Confused

In my critique of Austrian Business Cycle Theory, I cite some critiques of the Austrian school. Hill (2004) and Gloria-Palermo & Palermo (2005) critiques I do not cite.

Palermo and Palermo focus on how Austrian school economists reach normative conclusions. They put aside the influence of values in, for example, choosing the questions one addresses in one's positive analysis. For Austrian school economists, the idea of coordinated plans acts as a bridge from their positive theory to their normative claims. A state in which all agent's plans are coordinated is thought to be a desirable state by Austrian school economists. They claim that a market system has a tendency towards such a state without ever reaching it. Since then market systems are always in an undesirable state in which some agents' plans are mutually inconsistent and uncoordinated, why do Austrian school economists, in their nascent normative analysis, not conclude that market systems are undesirable?


Ian Wright said...

Hi Robert

"They claim that a market system has a tendency towards such a state without ever reaching it."

Is there any formal analysis that backs this claim? Or is it mere assertion?


Robert Vienneau said...

Lachmann doesn't even assert that, which makes his (policy) views especially problematic.

For Mises, a stationary state with unchanging tastes and technology - he calls it an Evenly Rotating Economy - provides a picture of coordinated plans. For Hayek, sometimes, the Arrow-Debreu model of intertemporal equilibrium provides a picture of something like coordinated plans. (I find "Austrian school" Internet fanboys are usually unavailable to discuss such details.)

I don't know of any formal analysis backing the Austrian school claim. I find it especially difficult to even conceive of how the economy could even have a tendency towards the Arrow-Debreu equilibria associated with the tastes, technology, and endowments in existence at any point in time. I could image some academics finding agent-based simulations to be of interest for such a claim.

Ian Wright said...

Thanks for the information -- which is as I suspected.

One of the more astonishing facts I learned when I first began studying economies was the absence of any substantive effort to provide stability analyses for economic models. Without such analysis, most comparative statics exercises are ill-founded and most claims that markets tend towards optimal allocation of resources are groundless hubris. It really is a sorry and shameful state-of-affairs.

Yes -- you are right -- there are recent efforts to map Arrow-Debreu into agent-based models, which exhibit stabilizing tendencies. And some of the work in experimental economics seems to demonstrate an empirical tendency towards some notion of equilibrium. I think what's happening here is that the Cold War GET framework -- which I think with hindsight we can clearly see was part of an ideological effort to combat the claims of centrally planned economies -- built in highly unreasonable assumptions that prevented progress in out-of-equilibrium stability analysis. Once some of the bizarre assumptions of the model are dropped, then it becomes easier to see that supply/demand dynamics do have some weak kind of stabilizing tendencies (but certainly there's no inherent tendency toward full employment, best-of-all-possible worlds states).

A lot more could be said here of course.



TonyFernandez said...

Austrians always claim that free markets are never perfect. However, the debate should not be free markets versus perfect. The debate should be free markets versus any other alternative. Remember that perfect is not an option, but no system devised has ever trumped the efficiency of free markets.

Matías Vernengo said...

The same applies to Keynesians. They don't claim that the State is perfect, just consider the alternative: anarchy. A good example are the recent earthquakes in Haiti and Chile. Larger in the latter, but with way less victims, because there is a functional State. Keynesians are not against markets, just regulated ones, to avoid a crisis like the one we are in.

Ian Wright said...

The question is not whether markets are "perfect", or whether there any alternatives to market organization.

The question is whether Austrian economists have any analysis to back-up the claim that market dynamics *even have a tendency* toward coordination. AFAIK, they do not, and instead simply assume or assert this.

"no system ever devised has ever trumped the efficiency of free markets". Well we're trying to do science here. So how do you know the market is "efficient" without an argument that market dynamics have a tendency toward optimal allocation?

Or is this mere assertion?


Anonymous said...

Well, actually, Austrians are more like old-school neoclasical economist: they claim that the economy tends towards normal prices and "normal" quantities (i.e., full-employment). What that has been criticized by the UK Cambridge side of capital controversies.


Robert Vienneau said...

This seems to be a fairly comprehensive outline of the errors in Austrian Business Cycle Theory - not that I read german.