Contemporary Methods and Austrian Economics: Volume 26

In the work of von Mises and Rothbard one can find a case for a strong presumption against traditional coercive paternalist policies. Coercion is generally undesirable, and legislators and bureaucrats cannot know what is best for each agent. Not all of the traditional case against paternalism applies to the new libertarian paternalism espoused by behavioral economists and popularized in Sunstein’s and Thaler’s Nudge. There is no way to rule out the possibility that legislators sometimes know better than agents what generally benefits them, and that they can impose feasible regulations that do not limit important freedom and whose costs and risks do not outweigh their benefits. Paternalism is not a bugbear to be avoided at all costs. There’s good reason for skepticism about its virtue and feasibility but no justification for its blanket condemnation.

What is behavioral economics? This chapter explores a mismatch between what is included in the field of behavioral economics and some of the most visible Austrian critiques of behavioral economics. While paternalism, nudging, and a focus on irrationalities and biases are a big part of modern behavioral economics, the portrayal of the field of behavioral economics as being focused predominately upon those areas leaves a swath of low-hanging fruit that would be beneficial for Austrian scholars to consume and use in their own work.

Laboratory studies of social interaction have revealed a wide range of phenomena that are difficult to explain using standard economic models. For example, people will often sacrifice their own earnings in order to be generous, cooperative, punitive, and retributive in interactions with anonymous strangers. “Behavioral” models that redefine agents’ preferences attempt to provide an account of these phenomena as reflecting a “taste for fairness” or altruism, aversion to inequality, concern about others’ beliefs, and so on. Such models either fail to account for the rich sensitivity of actions to context or in allowing for rich context-dependence, these models ultimately substitute description for explanation. Hayek’s work provides a foundation for thinking about how to explain these phenomena, by conceiving of people as both purpose-seeking (as in economic models) and rule-following. Decisions are shaped both by material interests and by a normative framework that is evoked by context and helps people decide what one ought to do in a particular situation. The implication of this approach is that rather than trying to understand heterogeneity across individuals in terms of preferences, experimenters should instead try to understand heterogeneity across contexts in terms of the rules and norms that operate in the background and guide or constrain people’s purpose-seeking tendencies. What economics needs, then, is a theory of how and why these rules and norms vary with context as they do.

This chapter focuses on the results of laboratory experiments that reveal how social preferences help regulate behavior to overcome social dilemmas. It argues that this evidence provides empirical support for the Austrian argument that social rules (as well as the institution of the market) are an important part of how societies respond to the knowledge problem. However, it also argues that the specific laboratory results regarding the “crowding out” of social preferences and the redistributive character of social preferences when outcomes are influenced by luck provide challenges to Austrian economics. In response, Austrian economics would seem to need to develop some more expanded notion of what matters in human life beyond the exercise of freedom and so extend the list of rules or institutions that require defence beyond those of the market and the rule of law.

A discipline is bound by some combination of a shared subject matter, shared theory, and shared technique. Yet modern economics is seemingly without limit to its domain. As a discipline without a shared subject matter, what is the binding force of economics today? The authors combine topic modeling and text analysis to analyze different approaches to inquiry within the discipline of economics. The authors find that the importance of theory has declined as economics has increasingly become defined by its empirical techniques. The authors question whether this trajectory is stable in the long run as the binding force of the discipline.

In this chapter, the author argues that Austrians are perhaps uniquely placed to be effective practitioners of causal inference techniques on observational data. This is because, while the methods are easy to implement, their validity and value lies in a detailed, “analytical/historical” narrative to accompany the findings. This is true for several reasons. (1) all the models have identifying assumptions (e.g., no spillovers and parallel trends) that are best addressed by an exposition of the institutional/economic/historical milieu in place before and after the treatment under study; (2) determination of external validity also requires detailed institutional and historical knowledge; and (3) researchers often want to know the mechanisms producing the reduced form result that comes out of most causal inference studies. Here again, institutional and historical learning is crucial. My conclusion is that Austrians should add the tools of causal inference with observational data to their arsenal of analysis. This would be good both for their publication prospects and for the profession at large.

F.A. Hayek’s famous critique of the socialist planned economy turned on the role of information in markets. In competitive markets, decision-making is decentralized and relies on locally available market signals. Decision-makers do not have to be omniscient or predict the future; they simply have to focus on market prices. By contrast, socialist planners face a much more demanding situation where they have to acquire and process vast amounts of information in a centralized fashion. The author revisits Hayek’s early work in light of the contemporary revolution in information technology, using recent research on organizational decision-making. The author argues that a great deal of market information is produced by public and private institutions, and includes much more than market prices. The boundary between tacit knowledge and formalized knowledge changes as IT enables the spread of the latter. Furthermore, the growing “knowledge economy” underscores the importance of intellectual property, and the legal institutions that support it. Overall, some of Hayek’s early insights hold up well while others need updating.

This chapter uses Austrian capital theory to illustrate why empirical work can be elusive in typical Austrian themes. It explores the nature of the problem and different alternative solutions to empirical challenges. This chapter also discusses the Austrian literature’s epistemological approach to empirical work to shed light on the controversial relationship between Austrian theory and empirical testing. Finally, this chapter offers examples of how Austrian and mainstream economics can find a common empirical ground.

This chapter analyzes markets with an “infinite variety” of goods, such as large parts of the service economy and creative industries such as the book, film, and music market. I argue that the infinite variety of supply that characterizes such markets does not lead to discoordination, because of the emergence of cognitive institutions in the form of market categories, reference points such as exemplary goods, and instruments of interpretation which facilitate the (quality) coordination process. These cognitive institutions function as an extended mind of market participants and enable what is termed interpretative rationality, as distinct from calculative rationality. This interpretative rationality consists of the ability to recognize relevant differences and similarities between goods. These cognitive institutions, like the price system, are an emergent order which can be analyzed through the lens of Austrian economics. This chapter further demonstrates the potential convergence between particular strands of economic sociology and Austrian economics.