Are real Austrian economists neoclassical?

According to this lovely post, the answer is yes (ht Economist’s View).  Choice quote:

Does Davidson know what a neoclassical policy is? Does Boettke? Does anyone? I don’t think so, because neoclassical economics, as such, has no policy agenda. But whatever a neoclassical policy might be, Davidson assures us that Hayek is totally against it.

Now, although the term “neoclassical policy” is a pure nonsense term, I can guess how Davidson, after talking to a bunch of Austrians — I hope not Boetkke or Bruce Caldwell, who is also quoted in Davidson’s piece — picked up on the propensity of modern self-styled Austrians — generally followers of the fanatical Murray Rothbard, as distinguished from the authentic Austrians of Hayek’s generation — to deploy “neoclassical” as a term of abuse, providing sufficient justification for these modern Austrians to dismiss any economic doctrine or policy they don’t like by strategically applying the epithet “neoclassical” to it.

So let me assert flatly that F. A. Hayek was a neoclassical economist through and through. He was also an authentic Austrian economist, schooled in both branches of Austrian theory by way of his association with his primary teacher at the University of Vienna, Friedrich von Weiser, one of the two principal successors of Carl Menger, the founder of the Austrian School, and through his subsequent collaboration with Ludwig von Mises, a leading student of Eugen von Bohm-Bawerk, the other principal successor of Menger.

As well as placing Hayek in the economic mainstream (which most mainstream economists agree with), I love the fact that this post points out that neo-classical economics has no policy agenda.  Pure neo-classical economics provides an objective framework that helps us to describe issues – given this framework we could then apply a varying set of value judgements, which can then in turn justify almost ANY policy agenda.  The advantage of using the neo-classical framework is that we are forced to make our value judgements transparent – so that the trade-offs, and our assumed values, are plain to see!

The confusion about what neo-classical economics is pervades all discussion of economics, so it is nice to see this issue pointed out here 😉

Update:  Krugman has a nice post on the issue here.

Hot cross buns … a lesson on pricing

Over on his blog, Bill Bennett has been discussing hot cross bun inflation over the last couple of hundred years – saying that it has averaged about 1.1%pa.

With the consumption of hot cross buns about to spike, I thought I would copy and paste my comments on hot cross bun pricing over here:

One thing I’d note though is that the increase in the price level more generally only really got kicking off during the last 50 or so years. As a result, if hot cross buns had just been generally following inflation overall, the 1.1%pa figure could be a bit misleading.

Another point when looking at hot cross buns – we need to ask what the price of these buns has done relative to all other goods and services. Over the past 200 and a bit years we have seen the relative price of inputs fall for hot cross buns, but we have also seen incomes rise – and given that hot cross buns are a “normal good” it is ambiguous whether hot cross bun inflation has exceeded inflation in goods and in prices.

A final point, a hot cross bun in 1798 would have tasted and felt different than a current hot cross bun – any changes in the quality of said bun should be taken into account.

These are all points to keep in mind when looking at changes in the price of any good or service.

Jedi vs economist

I have previously stated that economists are like Jedis.  However, I have recently realised the error of my ways – economists are obviously superior to Jedis.

In both disciplines you have a person trying to understand the nature of society and find what they can add.

Economists do the following:

  • They stand back, look for tendancies, and try to come up with an objective framework for discussing the tendancies and trade-offs that exist.
  • They are trained from the age of 18, and are also allowed to interact normally with real people.
  • They recognise that they only have the ability to work out trade-offs, and often only express them in an “ordinal” manner – they avoid passing judgment and are careful about quantifying result due to this.

Jedi do the following:

  • They stand around and meditate waiting for “the force” (voices in their head) to tell them what the trade-offs are.
  • Following the Ruusan reformation they were trained from when they were children, and are allowed no equal interaction with non-Jedi.
  • They think they can determine what is fair and right – and as a result will impose this “truth” on other people.  To fix this they rely on what older Jedi’s have told them – these are the same people who also got trained as children, and a good number of them became Sith and tried to take over the galaxy anyway :/

Seriously, the Jedi are a bunch of spoiled kids who are endowed with awesome power – wouldn’t getting them to run society be the same as just telling well meaning businessmen who grew up in a wealthy family to run society (although the business man is likely to be more balanced – as he actually got the chance to grow up, and is unlikely to still treat society in the way an 8 year old would).  They may make some good choices, and they may do so with the best intentions – but both these groups are equivalent … even if many of the people who would rise up against the business man would welcome in the Jedi with open arms.

Papers on the old new financial crisis

Brad Delong links to a number of interesting papers regarding the US/global financial crisis of 2007-2009.  I recommend the optional ones.

I’m not sure I completely agree that the bailing out of Bear Stearns made matters worse – but it was an interesting perspective.

In any case, its a good idea to try and understand what happened then – in order to figure out whether the debt crisis in Europe will lead to similar global pain.

IMO when Greece does default, who holds the associated liabilities is widely know – as a result, my hope would be that nothing will really happen.  With nothing happening, the rest of the world will just move on.  The risk is that Greek default actually knocks out a big bank (it looks less likely now that it will knock out a sovereign government – although that remains the big fear in Europe).  Fluffing around in Europe has kept credit conditions tight for at least 18 months longer then they would have been, in the absense of European debt issues – it is starting to feel like some people will have to accept some loses before this crisis can end, and some semblance of global confidence can return.

Wants, needs and production

What is a ‘want’ and what is a ‘need’? Do these things change over time and how do we provide for them? These are the issues being considered by Pablo at Kiwipolitico in a fashion that may confuse many economists. He says:

The current phase of globalised capitalism brought with it the uncoupling of production from consumption even as the “wants into needs” syndrome persists. The specific result is that, relatively speaking, global production of goods has declined while the consumption of non-productive commodities has increased. That means that there is an excess of wants with respect to needs. In fact, mass focus on obtaining a proliferation of wants has served to obscure the basics of needs.

When I read that I had no idea what it meant and I think that is because of some definitional problems. First, what are ‘wants’ and ‘needs’? To an economist the distinction is fairly meaningless because there are only ‘things that people want to varying degrees’. Of course, there are trade-offs that one must make — I can’t buy a car and a bicycle with the same $5,000 — but the things we want are not inherently different and the degree to which we want them differs between individuals.

So, when Pablo talks of ‘wants’ being converted to ‘needs’, what does he really mean? What I think he means is that, as technology advances, our incomes rise and the relative cost of purchasing complex goods drops. Consequently, more people buy them and they become ubiquitous. You don’t need the nature of goods to change for that to happen. You don’t even need peoples’ preferences to change — although that may have happened, too — for smartphones to be in every pocket, either. It is enough that the cost of manufacturing has dropped and our incomes have risen due to technological progress.

What of his contention that these smartphones are ‘unproductive consumption’? I’m a bit baffled by that because it suggests that everything we purchase should be useful for producing something else. As if enjoying our purchases were not enough in itself. Either he is suggesting he knows better than we do about what makes us happy or, more likely, I am reading too much into a poetic flourish!

Finally, he suggests that there has been a ‘decoupling of production from consumption’, which is probably the most confusing statement of all. All production is consumption – as it is either consumption now, or it is investment which translates into consumption in the future. There can be no sustained difference between production and consumption in modern, market-based economies.

Rather than railing against the way he perceives society to be, it would be helpful for Pablo to refine the problems he sees and ask why things are the way they are. Once we understand the problems we can ask whether there has been a systematic misallocation of resources that has caused these problems. At the moment it appears that these issues are being clouded by some confusion over what wants, needs, production and consumption really are.

Strawman at the centre of the discussion of economics

In an article in the Herald it is suggested that the separation of economics from moral philosophy is morally abhorrent, and as a result we should ignore what economists say about tax.

I will put the tl;dr up first:  Economic theory is “descriptive” – which in turn allows us to discuss how economic theory is actually a very useful thing for discussing these issues.  In my opinion it is important to make these trade-offs that are described transparent –  and that is all economists are trying to do.  In that context, economists don’t actually seem morally abhorrent 😀 .  Furthermore, by showing a willingness to discuss and identify trade-offs, we can find some issues and facts that seem to get slightly missed in the article 😉

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