On The Lack Of Persuasiveness Of Austrian-School Economists

Mattheus von Guttenberg exemplifies what I think are defects in many fanboys of Austrian school economics. Among these defects is an uncritical acceptance of Ludwig von Mises' characterization of his own theories. And another defect is uncritical acceptance, likewise, of what Mises, or even worse, Murray Rothbard, had to say about the mainstream economics of their day. And a third defect is to apply these characterizations to mainstream economics of our day, while remaining quite ignorant of relevant trends in contemporary economics. Without more widespread correction of such defects, advocates of the Austrian school should not be able to persuade many economists, both orthodox and heterodox, of the worth of their views.

For this post, I focus on the theory of choice.

Here are examples of arguably a weak understanding of both the Austrian school and of mainstream economic theory:

"...we're not rejecting cardinal utility functions because it's hip and counter-culture. There's a distinct reason utility functions are impossible and unrealistic, and that's because utility cannot be known or measured... The degree to which we draw swooping utility functions overlaying cost curves is a unacceptable practice borrowed from coordinate geometry. Utility, again - is ordinal, it is intrinsically subjective, and it cannot be made known by other people." -- Mattheus von Guttenberg

"The concept of diminishing marginal utility is implicit in the logic of action, the Austrians just draw it to the fore." -- Mattheus von Guttenberg

The claim that utility reaches an interval-level measurement scale is a conclusion formally drawn from the Von Neumann and Morgenstern axioms (which can be considered independently of game theory). Most introductory economic textbooks claim that utility only reaches an ordinal-level measurement scale, anyways. The introductory textbooks have a different set of axioms, where choice among a set of goods with specified probability is not formally modeled. And they assert that the utility obtained is not interpersonally comparable. Mattheus' objections are not addressed to any views prominent in mainstream economic teaching for at least half a century. And to assert that diminishing marginal utility is consistent with utility reaching only an ordinal-level scale requires an argument. (I'm actually intrigued by J. Huston McCulloch's 1977 attempt to make such an argument, the one example of which I know in the last quarter of the last century.)

Mises incorrectly asserted that much of his theory could be deduced from a single postulate.

"The only axiom is 'man acts' and we draw the entire body of economic science spanning a thousand pages." -- Mattheus von Guttenberg

"...I have always been interested in rewriting [Human Action] 'as a set of numbered axioms, postulates, and syllogistic inferences using, say, Russell's Principia.' I believe it can be done." -- Mattheus von Guttenberg

I think such a rewriting, as it starts from the above informally stated premise, would be unconvincing.

Furthermore, the current state of decision theory suggests that analyses other than Mises' approach, are consistent with this axiom. The Austrian school approach is roughly akin to Samuelson's revealed preference theory. (One important difference is that Austrian advocates have some silly things to say about the impossibility of indifference.) Anyways, the idea is that an acting human, when presented with two lists of goods, decides between them. But social choice theory, as developed by, say, Amartya Sen in the late 1960s and early 1970s, has shown how to dispense with the formalization of choice as a binary relation as a primitive notion. Instead, one can start with a choice function, that is, a mapping from each menu that an agent might be presented with to a set of best choices for that menu. The derivation of a complete and transitive binary preference relation from a choice function requires additional structure on how menu choices relate across menus. And why the imposition of those additional requirements follows from human action needs to be argued. For example, why are not increasingly prevalent models, at least in research literature, of divided selves consistent with human action?

Update (3 July 2014): The blog free radical has a blog post pointing out Austrian confusions about mainstream teaching on ordinal utility.

Elsewhere

• The Non-Equilibrium Social Science community and newsletter.
• Mike Beggs, in Jacobin Magazine, on Occupy Economics.
• Robert Johnson, in Time, on Economists: A Profession at Sea.
• Yanis Varoufakis has been building on his paper, "The Dance of the Meta-Axioms: On the Dynamic Mechanism by which the Inescapable Theoretical Failures of Neoclassical Economics Reinforce Its Dominance".
• Noah Smith has a couple of posts that I find hard not to read as implying that mainstream economists are trained into, at best, ignorance.

Nell's Diagram Of A Capitalist Economy

Figure 1: Nell's Diagram

Over at Naked Keynesian, Matías Vernengo explains some aspects of how he teaches the surplus approach. Vernengo presents a diagram created by Garegnani. Garegnani's diagram shows the logical relations among the endogenous variables and the givens in the Classical theory of value.

I thought I would take this opportunity to present the (complementary?) diagram above. Nell's diagram shows flows among three foci: production, markets, and the social classes comprising the population of an idealized capitalist economy.

Nell represents industrial production with an icon in the lower right of his diagram. The arrows connecting the factories in a circle suggest the production of commodities by means of commodities. Sraffa's book expresses this viewpoint in rigorous theory, and Leontief applied it empirically. Gross industrial output consists of a heterogeneous odd-lot of commodities. This output is divided into:

• The replacement of the existing means of production (represented by the previously mentioned arrows within the icon for industry)
• The surplus (represented by the arrow labeled "Net social product").

The net social product presents itself as an immense accumulation of commodities. It is further decomposed into:

• Necessities, consumed by the workers and the Unemployed
• Luxuries, consumed by the owners (i.e., capitalists)
• New capital goods, channeled back into industrial production from the markets on which industrial firms sell them.

Each component of the net social product also consists of a heterogeneous collection of commodities.

The diagram also shows money flows. The diagram illustrates the simplifying assumption that workers consume all their income. And the diagram also abstracts from the existence of government and of foreign trade. (All of these abstractions are removed in more advanced political economy, for example, in Kalecki's work.) Anyway one can identify a couple of accounting identities under these assumptions:

Total Receipts = Worker Consumption + Capitalist Consumption + Investment

Total Receipts = Wages + Profits

I like the clarity with which monetary flows and commodity flows are distinguished in this approach. It is not the case that capitalists own blast furnaces sitting in their backyard, which they then loan to firms. Mainstream economists are deliberately and consistently obfuscating on this issue, from introductory teaching to beyond. Perhaps there's a reason for this widespread confusion:

"From the point of view of Political Economy, however, the most important fact is that while wages are paid for work, and one can (and in some circumstances should) think of the wage bill, equal here to Worker Consumption, as reproducing the power to work, profits are not paid for anything at all. The flow of profit income is not an exchange in any sense. The Samuelson [circular flow] diagram...is fundamentally misleading; there is no 'flow' from 'household supply' to the factor market for capital. The only flow is the flow of profit income in the other direction. And this, of course, leads straight to that hoary but substantial claim that the payment of wages is not an exchange either, or at any rate, not a fair one. For Wages plus Profits adds up to the Net Income Product; yet profits are not paid for anything, while wages are paid for work. Hence the work of labor (using the tools, equipment, etc., replacement and depreciation of which is already counted in) has produced the entire product. Is labor not therefore exploited? Does it not deserve the whole product?" -- Edward Nell

References

• Edward Nell (1972). "The Revival of Political Economy"

Economists Working To Increase The Pain And Misery Of Billions

"Over the last three decades, economists played an important role in creating the conditions of the 2008 crisis (and dozens of smaller financial crises that came before it since the early 1980s, such as the 1982 Third World debt crisis, the 1995 Mexican peso crisis, the 1997 Asian crisis and the 1998 Russian crisis) by providing theoretical justifications for financial deregulation and the unrestrained pursuit of short-term profits. More broadly, they advanced theories that justified the policies that have led to slower growth, higher inequality, heightened job insecurity and more frequently financial crises that have dogged the world in the last three decades... On top of that, they pushed for policies that weakened the prospects for long-term development in developing countries... In the rich countries, these economists encouraged people to overestimate the power of new technologies..., made people's lives more and more unstable..., made them ignore the loss of national control over the economy..., and rendered them complacent about de-industrialization... Moreover, they supplied arguments that insist that all these economic outcomes that many people find objectionable in this world - such as rising inequality..., sky-high executive salaries... or extreme poverty in poor countries... - are really inevitable, given (selfish and rational) human nature and the need to reward people according to their productive contributions.

In other words, economics has been worse than irrelevant. Economics, as it has been practised in the last three decades, has been positively harmful for most people." -- Ha-Joon Chang, 23 Things They Don't Tell You About Capitalism. Bloomsbury Press (2011).

On "Lady Rosa De Luxembourg"

Figure 1: Statue on top of Obelisk

During the last week of 2011, I saw an exhibition of Sanja Ivekovíc's work at the Museum of Modern Art (MOMA). This show, Sweet Violence, continues through March.

The centerpiece of the exhibition is Ivekovíc's Lady Rosa of Luxembourg. This work mocks a statue, Gëlle Fra (Golden Lady), in Luxembourg. As I understand it, the original commemorates partisans active during World War II. The base of Ivekovíc's obelisk combines the phrases "La Résistance", "La Justice", "La Liberté", "L’Indépendence"; "Kitsch", "Kultur", "Kapital", "Kunst"; and "Whore", "Bitch", "Madonna", "Virgin". Three words, one from each of the three groups, is repeated on each of the four sides.

As far as I can see, this work, despite its title, does not have much to do with Rosa Luxemburg. It is more a matter of épater la bourgeoisie. I think Luxemburg's friend and colleague Clara Zetkin was more of a feminist; Luxemburg focused more on class. I don't know how Luxemburg looked while giving speeches. I know she walked with a limp as a result of a childhood disease. One leg was longer than the other. So I doubt she stood like the statue.

And I didn't overhear any museum visitors discussing such questions as:

• Do Marx's models of simple and expanded reproduction require an outside source of demand for capitalists to make the depicted investment decisions?
• Does Marx's depiction in volume 2 of Capital of smoothly reproducing capitalist economies contradict his account in volumes 1 and 3 of the breakdown of capitalism?

Occupy the American Economic Association@Chicago

Today's events consist of:

• 12:00 - 3:00 - People's Economic Conference Roosevelt University (430 S. Michigan, 3rd Floor)
• 4:30 - Mock Awards Ceremony (Michigan and Wacker)

If I were there, would I be able to explain reswitching and capital-reversing?