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Thursday, February 23, 2012

Handbook on Contemporary Austrian Economics

Why are many young economists drawn to the Austrian school? George Mason University professor and FEE trustee Peter Boettke, the editor of this volume, explains it this way: “I once described Austrian economics as humanistic in its method and humanitarian in its concern. This is what attracted me to the school. It promised philosophic understanding of the complex world around us and when combined with some basic concepts of morality produces a powerful argument for a society of free and responsible individuals.”

That’s a strong calling card, and readers of Boettke’s book—consisting of ten essays written by relatively young Austrian scholars—will find many more reasons to investigate the Austrian school. The book is brimming over with insights into Austrian analysis, along with some jousting with non-Austrians.

In the first essay, “Only Individuals Choose,” Anthony Evans explains that individuals are the building blocks of the social sciences. That is why Austrians insist on approaching economics through methodological individualism. Only individuals can act, not aggregates or collectives. Evans attacks the competing notion of methodological holism, which accounts for individual agency by appealing to “society.” Evans argues that the real debate is among differing conceptions of individualism.

In the second essay, “Economics as the Study of Coordination and Exchange,” Christopher Coyne contrasts two approaches to economics—one that centers on optimizing resource allocation and the other that centers on exchange relationships. Why does that distinction matter? Coyne writes that under the former, “the study of economics becomes one of computation and maximization instead of focusing on purposeful human action and the process through which individuals interact and coordinate their plans and goals.”

The book’s third essay, “The Facts of Social Science Are What People Believe and Think” by Virgil Henry Storr, shows that the “data” of economics are subjective in character. We can only comprehend economic phenomena by trying to comprehend individual beliefs, not through the crunching of numbers, as non-Austrians would have it.

Edward Stringham elaborates on subjectivism in his essay, “Economic Value and Costs Are Subjective.” He argues that economists can believe in subjectivism in different ways and to differing degrees, and concludes, “Exactly how much one embraces economic subjectivism is likely to influence the types of policies one is willing to support.”

The book’s fifth essay, “Price, the Ultimate Heuristic” by Stephen Miller, argues that the free market does not magically cause people to overcome their cognitive limitations, but has the virtue of getting them “to discard their counterproductive biases and mental shortcuts.” That is, the price system encourages rational behavior by compelling individuals to examine more information than they might otherwise have done.

Scott Beaulier contributes the next essay, “Without Private Property There Can Be No Rational Economic Calculation.” He introduces readers to the most famous Austrian dispute with non-Austrians—the calculation debate—and elaborates on it. “Since property rights are crucial for the coordination of economic activities,” he writes, “the central question for economists and policy-makers becomes how to gather accurate information about the scarcity of resources in a world with imperfect property rights.” Beaulier shows how that problem is especially important in efforts at privatizing State enterprises and functions.

In “The Competitive Market Is a Process of Entrepreneurial Discovery,” Frederic Sautet explores the implications of the Austrian approach to competition. “To compete means to be entrepreneurial,” Sautet writes. He traces the history of economic thinking about the nature of market competition and concludes that “[p]rofit opportunities and knowledge gaps in the market are one and the same thing.”

The final three essays all deal with macroeconomic issues. J. Robert Subrick’s “Money Is Non-neutral” explores the trouble that stems from the Monetarist and Keynesian ideas that money is, at least in the long run, neutral. Subrick shows that changes in the money supply have both short- and long-run consequences that lead to malinvestment, shifting resources away from their optimal uses and thus reducing national prosperity. Benjamin Powell’s essay, “Some Implications of Capital Heterogeneity,” explores Austrian capital theory, especially the importance of coordinating investment with consumer desires. Powell also elaborates on the Austrian theory of the business cycle and the folly of “stimulus spending.”

The book’s concluding essay is by Peter Leeson: “Anarchy Unbound: How Much Order Can Spontaneous Order Create?” It asks whether the self-interested activities of individuals could generate enough law and order to make the State unnecessary. Leeson’s analysis is fascinating, and I encourage readers to immerse themselves in it.

Those who are new to economics will find these essays rather difficult, but students who are already familiar with economic issues and language (and I should add that the writing is mostly in plain English) will find them to be most enlightening and thought-provoking.

  • George Leef is the former book review editor of The Freeman. He is director of research at the John W. Pope Center for Higher Education Policy.