Peter Boettke and I agree to such an extent that you may wonder why we are debating in the first place.
For one thing, we are practically in perfect agreement about desirable economic policy. Most economists do not fit the “doctrinaire free-marketeer” stereotype, but both Boettke and I do. Both of us would like to see sweeping libertarian reforms. Abstruse theoretical disagreements are often a mask for differences in political philosophy. But not here.
Boettke and I also agree that the economics profession grossly overrates the value of mathematical modeling and econometrics. They have their uses, but all too often become an end in themselves. They also crowd out other valuable approaches: economic history, surveys, interviews, introspection.
Last but not least, Boettke and I agree that most of our fellow economists are boring! Thousands of Ph.D.s spend their lives asking questions where - even if they found the answer - who would care? Articles published in top journals usually show great technical ability, but only a small fraction tell us important and new things about the world.
If we can both sign off on all of this, what is left to dispute? The answer, hard as it may be to believe, is that we disagree about a number of propositions in basic economic theory. In each of these cases, I maintain that the orthodox neoclassical view, properly understood, is correct, and the Austrian critics are wrong.
Of course, Austrians disagree not only with me but also with each other. With apologies to all of you anti-Boettke Austrians, I’m going to focus on him.
What makes this challenging is that Boettke often describes Austrian economics in vague enough terms to transform all economists into Austrians. For example, he will tell you that Austrians are "subjectivists": values and beliefs are in the mind of the actor. But every mainstream textbook assumes the same. When you point this out to Boettke, he'll respond "They're subjectivists; we're radical subjectivists." The only difference I can discern is radical subjectivists use the word "subjectivism" far more frequently.
There is one big area, though, where Boettke defends specific views that most other economists, me included, do not accept. The area is information economics.
The simplest neoclassical models assume that everyone has perfect knowledge about the world. They obviously don't. Standard neoclassical economics handles this difficulty using probability theory. It assumes that people implicitly assign probabilities, or degrees of confidence, to events that range from 0 - impossible - to 1 - certain. It further assumes that people take the actions that - given their beliefs - seem like the best gamble.
Probability is the foundation of so-called search theory, which essentially concludes that under uncertainty, individuals balance EXPECTED marginal benefits against EXPECTED marginal costs. For example, deer hunters have no guarantee that they will take home a deer, but they can still compare the expected payoff of alternative actions to the expected cost of those actions. One Austrian graduate student confessed to me that his dating efforts follow this logic to the letter.
Austrian economists reject this approach. Some, like Mises and Rothbard, deny that probability theory can be applied to any interesting real-world event. A more moderate position - held by Boettke - is that probability theory misses an important feature of the world. He calls that feature “radical uncertainty” or synonyms such as “sheer uncertainty” or “radical ignorance” or “sheer ignorance.” Sometimes people have no idea at all about something, a form of ignorance that probabilities cannot capture. Boettke often describes this as “not knowing that you don’t know.”
So what, you may ask? Well, without radical uncertainty, Boettke says, we cannot explain the existence of “surprise.” This in turn leads to lack of appreciation for both entrepreneurs and their use of profit-and-loss calculation. The consequence: people get overly optimistic about the ability of government to “mimic the market." This is one important reason for the intellectual appeal of socialism, and the main reason for its practical failure.
The only way to deal with this position is to unpack it piece by piece.
1. What in the world is radical ignorance? I have to be difficult here. You may use poetic license to say that “you have no idea at all about X,” but it can’t be literally true. Take any technological advance in the last century. How can you say that before it happened, people “had no idea at all” about it? Before the automobile was invented, for example, people knew about not only transportation of varying quality, but substitution of mechanical for animal power. Few people sat around day-dreaming about the future, but that hardly means that the general idea was alien to them. I am not much of an inventor, but I assign a high probability to the future progress of technology in general. It is crazy to say that I have “no idea at all” what the future holds.
2. Neoclassical surprise. Pete is wrong to say that probability theory cannot explain surprise. It has a very simple explanation: the occurrence of extreme, low-probability events is inherently surprising. It is surprising to win the lottery. Why? It is an extreme, low-probability event. It is surprising to have a big surprise 40th birthday party a couple days after you have a small party with your family. I know because I was there at Pete’s surprise 40th birthday party. I took a picture of him. He was surprised. But presumably he knew that such things as surprise birthday parties exist, that they are more likely to happen near your actual birthday, and that they are more frequent for birthdays divisible by 10.
3. Search theory is consistent with appreciation for entrepreneurship. I agree with Boettke that most economists neglect the importance of the entrepreneur. But I deny that there is any intellectual reason for this neglect. Search theory provides an elegant way to understand entrepreneurship: just as hunters are searching for deer, entrepreneurs are searching for profit. Good entrepreneurs, like good hunters, have a talent for succeeding where others do not, though of course in both cases even the best searcher occasionally fails.
4. Lack of economic calculation was not the main reason for the practical failure of socialism. Long story short: Full-blown socialism almost always struck backwards, agricultural countries like Russia and China. Pre-revolutionary farmers in these countries were often illiterate, and rarely did formal profit-and-loss accounting. Lack of economic calculation could not be the reason why socialism led to terrible famines and the like, because socialism could not abolish what had not yet come to exist. The main reason for the failure of socialism is the simple neoclassical one that farmers do not like growing food for free.
Furthermore, Austrians often point out that the Soviets were able to use Western prices to help make rational trade-offs. What they forget to tell you is that the Soviets usually deliberately ignored this information! Why? Planners had incentives to pursue national and ideological prestige rather than high living standards. Once again, a simple neoclassical story.
I grant that there is one big defect in the neoclassical approach to imperfect knowledge. But it is a defect that Austrians almost never mention! The problem: Do the probabilities that people assign fit the facts? At least as researchers, most economists assume that beliefs about the world are on average correct. But empirically, this is often not so. Flying is much safer statistically than driving, but many people refuse to accept the fact. A large field known as behavioral economics documents such biases. Or to take more policy-relevant beliefs: Basic economics shows us the benefits of free trade, but few non-economists recognize them. I have a series of papers on systematically biased beliefs about economics that explores this topic.
Now what is Prof. Boettke going to tell you? I suspect that he is going to say that merely focusing on people’s erroneous beliefs “makes me an Austrian." I call this the “Hayek said the sky is blue" tactic. If you say the sky is blue, that makes you an Austrian because Hayek defended the sky-is-blue thesis back in the 30’s. Hayek talked a bit about mistaken beliefs; therefore anyone who ventures within a thousand intellectual miles of this topic is a “Hayekian.”
This is ridiculous. By this standard not only does Hayek get credit for ideas that he did not anticipate; he gets credit for ideas that preceded his birth! Hayek made some contributions here - though frankly he was very repetitious. But he did little to advance modern rational expectations theorizing, and even less to anticipate its empirical weaknesses.
Would I have done any better? Probably not, but if I hadn’t done a lot more I wouldn’t want my posthumous admirers showering me with undeserved credit. (Well, maybe I would, but I wouldn’t deserve it).
Stepping back to my title, why shouldn’t you be an Austrian economist? The fundamental reason is that their main original claims are incorrect. In consequence, even when Austrians hit on a good topic, it is hard for them to follow through because they are struggling NOT to be neoclassical.
Take Austrians’ claims about the importance of the entrepreneur. To defend their position, they have written scores of articles philosophizing about the “radical uncertainty” of the world, which alone allows for “genuine surprise” and “real error.” Every now and then they remember that search theory exists - just long enough to dismiss it. How any of this begins to show that entrepreneurs are important in the real world is beyond me.
How should they proceed? Start with the common-sense notion of entrepreneurship that search theory provides; then look at the world. You might study the economy of Uganda after the expulsion of the Indian merchant class. You could turn to the history of the 19th-century industrialists, or interview dot.com visionaries. As long as you are not talking about radical ignorance, you might be on the right track.
There is a lot of talent in the Austrian school. Where else can you find so many market-oriented economists who write in English and aren’t boring? My motive in criticizing the Austrians is to persuade them to reallocate their talent. Stop talking about "subjectivism" and "process" all the time. Quit being amateur philosophers, waxing poetic about radical uncertainty. I know you have a lot of interesting ideas about the untapped power of the free market and the failures of government. If you put them down on paper and use plain language to explain why you’re right, there are plenty of open-minded economists who will listen to you. Probably including me.