Economics: “even a broken clock is right twice a day …”

5 Reasons Why Austrian Economics Is Better than the Mainstream


by Jonathan Newman

Noah Smith has acknowledged the failings of mainstream macroeconomics, but he says that none of the “outside ideas” offer a better replacement. He failed to mention the Austrian school, but we can still show how the Austrian tradition parries his criticisms with ease.

1. Quantitative Models Totally Miss the Nature of Human Action

Smith dismisses all outside approaches that do not produce quantitative forecasts, even though the best, newest, and high-powered quantitative macroeconomic models have failed recently.

The quantitative approach, however, totally misses the nature of human action, the fundamental starting point for economics. All economics boils down to individuals making choices, the outcome of which is dependent on individuals’ preferences.

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2. The Micro/Macro Separation is Baseless

Smith dedicated his article to problems with macro theories, but Austrians understand that there is no meaningful distinction between micro- and macroeconomics. The only difference is one of scale and focus, but the fundamentals of economics are the same no matter if you are looking at individual consumers and firms, or the effects of credit expansion and inflation.

Mainstream economists find their way into smaller and smaller categories. Now, there is “health economics” and “development economics” and “energy economics.” There is also a major divide between those who do macro and everybody else, to the point that neither side really understands what the other is doing.

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3. Economic Laws Aren’t Just Empirical Regularities

Smith also said that many heterodox theories “have some serious flaws that make it very difficult to test them empirically.” This is meat on the table for anybody who has read Mises.

Economic laws are derived from the logic of action. It is undeniable and irrefutable that we will use additional units of some good toward the satisfaction of a lower ranked end (diminishing marginal utility). Subsequent claims are equally rock-solid, as long as each step in the chain is logically sound.

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4. Austrian Economics is not a Collection of “Vague Ideas”

Even though empirical testing is out of the question, economics is not reduced to a collection of “vague ideas,” as Smith put it.

Economics is based on both causal relationships and realistic relationships, which is why some rightfully refer to the Austrian brand as “causal-realist economics.” We do not conjure up some homo economicus who behaves in some predictable way or consider human behavior as a formula with a stochastic component. We consider real humans as they really act.

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5. Austrian Economists Did Predict the Housing Bubble Catastrophe … and the Great Depression

The funny thing is that the economists who don’t hang their hat on empirical validation, prediction, and quantitative models are the ones who consistently get it right when it comes to business cycles and other macroeconomic phenomena.

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Read more here: mises.org