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Thursday, April 23, 2015

Mises: The Original Freakonomist

The Austrians were the first to recognize human action as the subject of economics

Steven Horwitz and B.K. Marcus have written a decent rebuttal to a notably poor article by Janek Wasserman about the Austrian school of economics in its modern day incarnation. But I think there’s something more to be said in the Austrian’s defense.

When you study economics what is it that you’re studying?

As Israel Kirzner explained,

(L.M.) Fraser has classified definitions of economics into Type A definitions and Type B definitions. Type A definitions consider economics as investigating a particular department of affairs, while Type B definitions see it as concerned with a particular aspect of affairs in general.

The specific department singled out by Type A definitions has usually been wealth or material welfare. The aspect referred to in Type B definitions is the constraint that social phenomena uniformly reveal in the necessity to reconcile numerous conflicting ends under the shadow of an inescapable scarcity of means.

The argument as to which type is appropriate is far from settled. Ha-Joon Chang in his recent book makes a pretty unequivocal case for a Type A definition of the scope of economics. To him, ‘economics’ is something you step into when you leave your house for work in the morning, and something you step out of when you get home, hug your partner, and feed the cat the in the evening.

But, as Kirzner notes, “During the twentieth century…a transition from Type A to Type B definitions has been vigorously carried forward.”

Mostly thanks to the late Gary Becker, economic notions of choice and incentives were applied to an increasing array of hitherto non-economic phenomena. Becker applied economics to families and criminals and, while some may have griped about the “imperialism in the social sciences,” bestselling books now argue that economics explains everything from what makes a perfect parent and why milk cartons and soft drinks cans are the shapes they are to how racial segregation in housing can arise.

The Austrians were at these new frontiers in economics before most. One of the Austrian school’s great works is Ludwig von Mises’ Human Action. It was a vast treatise at a time when such had been denounced by Keynes. Compared to previous works, with names like The Principles of Political Economy and Taxation Principles of Political Economy The Theory of Political Economy Principles of Economics 

“Until the late nineteenth century, political economy remained a science of the ‘economic’ aspects of human action, a theory of wealth and selfishness,” Mises wrote in 1949.

It dealt with human action only to the extent that it is actuated by what was very unsatisfactorily described as the profit motive, and it asserted that there is in addition other human action whose treatment is the task of other disciplines.

The transformation of thought which the classical economists had initiated was brought to its consummation only by modern subjectivist economics, which converted the theory of market prices into a general theory of human choice. . . .

The general theory of choice and preference goes far beyond the horizon which encompassed the scope of economic problems as circumscribed by the economists from Cantillon, Hume, and Adam Smith down to John Stuart Mill.

It is much more than merely a theory of the “economic side” of human endeavors and of man’s striving for commodities and an improvement in his material well-being. It is the science of every kind of human action. Choosing determines all human decisions.

Modern-day armchair economists, undercover economists, economic naturalists, freakonomists, and their Type B students would agree. As Horwitz and Marcus point out, Austrian economics was not “made in America,” but a substantial part of the most cutting edge modern economics was, in fact, made in Austria.

John Phelan is a Fellow of The Cobden Centre and blogs at Phelanomics, where this post first appeared.