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History
of Economic Doctrines Lecture 25 Austrian
Economics Carl Menger (Austrian)
Carl Menger’s intellectual lineage has a distinctly Ricardian flavor. He avoided dependence on complex formal mathematics and statistics, and largely ignored historical and institutional influences, while advocating a greater use of abstract reasoning and deductive logic [praexology] in building intellectual models. Principle of Economics (1871) Using the concept of subjective value to governing all economic activities, Menger developed the marginalist value theory. According to him, goods will be consumed to the point where the marginal utility of all goods are equal relative to their price (MUx/MUy=Px/Py). Note: the term “diminishing marginal utility” was coined by Friedrich von Wieser, a follower of Menger’s Austrian school, but the concept was first discussed in rigorous fashion by A. Jules. E. Dupuit. The subjective determination of consumption demands, Menger claimed, would determine the demand for factors of production. (Note: Menger’s subjective theory
of value was opposed by German Historical School) Austrian
School A number of economists influenced by Menger and later became known as the Austrian economists. Friedrich von Wieser – students
of Menger Principle Laws of Value (1884) Established that factor prices are determine by output prices through the process of “imputation”: marginal utility from consumption → price of a final good → prices of the factors used in production Developed the theory of opportunity cost – relative prices reflect foregone opportunities, that is the price of good x1 in terms of x2 is the amount of good x2 that has to be offered (and thus foregone). (Note: Marshallian tradition
focuses on actual cost) Eugen von Böhm-Bawerk – students
of Menger Capital and Interest, a Critical History of
Economical Theory (1884) “(Exploitation theories
of interest) is not only incorrect, but in theoretical value … are to be
found together so great a number of the worst fallacies.” Positive Theory of Capital (1889) Interest would
exist even in a socialist society because present goods are valued more than
an equal amount of future goods. First, people's marginal utility of income will fall over time because they expect higher income in the future Second, for psychological reasons the marginal utility of a good declines with time. Third, the "technical superiority of present over future goods," that is people postpone consumption to invest in capital goods that can generate greater amount of future goods (Note: The first and second reason
refers to the “positive time-preference,” that is people systematically
prefer present consumption over future.
However, Böhm-Bawerk insisted that the third reason was independent of the first
two, which resulted in his controversies with Irving Fisher and J.B. Clark. ) Ludwig Edler von Mises The Theory of Money and Credit Extended Austrian marginal utility theory to money. -- Money is demanded for its usefulness in purchasing other goods, rather than for its own sake (objective exchange value). Argued that business cycles were caused by the uncontrolled expansion of bank credit. (Note: Mises’s money theory was
later developed into a business cycle theory by his student, Friedrich August
von Hayek ) Friedrich August von Hayek Business Cycle Theory According to Hayek, the market
was evolved slowly as the result of human
actions. One reason that causes the
market to fail was increases in the money supply by the central bank. He argued
that such increases would drive down interest rates, making credit
artificially cheap. Businessmen would
then make capital investments that they would not have made. But long-term investments are more
sensitive to interest rates than short-term ones. Therefore, he concluded that there would be
too much investment in long-term projects relative to short-term ones, and
that the boom must turn into a bust. (Note: Hayek’s theory of business
cycle resulted in his battle with Keynes, and he responded with the idea of
the tradeoff between unemployment and inflation that resembled “Phillip
Curve”) “Economic Calculation” (1920) Claimed that efficient allocation of resource was impossible under socialism – Socialist Capitalist Debate Joseph A. Schumpeter– the wild child of Austrian school
tradition The
Theory of Economic Development (1912) Excluding any
innovations and innovative activities leads to a stationary state. The entrepreneur disturbs this equilibrium
and is the cause of economic development. Capitalism,
Socialism, and Democracy (1942) Distinguished inventions from the entrepreneur's innovations. Entrepreneurs innovate, not just by figuring out how to use inventions, but also by introducing new means of production, new products, and new forms of organization, which leads to led to gales of "creative destruction" as innovations caused old inventories, ideas, technologies, skills, and equipment to become obsolete. Monopolists continuously innovate in order to retain their monopoly power. In advanced
capitalism, the intellectual and social climate needed to allow
entrepreneurship to thrive will not exist, thus capitalism will be succeeded
by socialism. Ludwig von Mises Business Cycles - accepts Austrian marginalist approach to income von Thunen and location - would NOT accept Neoclassical conclusions about money -- Neoclassicalism: money doesn't matter; neutrality of money - Inflation matters a lot -- distributional consequences of inflation make investment planning problematic Oscar Morgenstern - Game Theory - false precision of economic data that is reported Hayek Road to Serfdom - paved with higher amounts of government - criticized Keynes b/c saw it as more government involvement -- Keynes:
government fiscal spending to correct business cycles - groups of leaders gravitate to the top and spoil things when government is empowered Joseph A. Schumpeter Schumpeter's Law -semi-inconsistent with Hayek, and semi-inconsistent with Schumpeter’s own prediction of the supplanting of capitalism by socialism - taxation as a percentage of GDP can't exceed 22% -- would cause a tax revolt - capitalism causes income to skyrocket -- positive income elasticity demand for freedom -- people
demand better government à seeds for demise of
capitalism as democratic Austrian Macroeconomics 1. Austrians Do NOT like aggregation and Quantitative analysis - Quantitative analysis comes from statistical data, which is self reported - for this data to be true it would have to have a mean distribution error of zero: people lie about, e.g., their incomes. - prefer a subjective a priori approach: better to trust your instincts. 2.
Favor policies that are fairly conservative: cynical
of government |
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These web pages are significantly edited and elaborated versions
of student notes based on lectures by Ralph Byrns, 2002-2005.
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