The Distance from Chicago to Vienna
"AUSTRIAN AND NEOCLASSICAL ECONOMICS: ANY GAINS FROM TRADE?"
"AUSTRIAN ECONOMICS, NEOCLASSICISM, AND THE MARKET TEST"
Leland B. Yeager
Journal of Economic Perspectives 11, no. 4 (Fall 1997): 139-65
You can lead a neoclassical to Austrian waters, but you can't make him drink. Sherwin
Rosen, a distinguished Chicago
School economist, thinks that gains from trade between neoclassical and Austrian economics are
possible. Though his
openness to Austrian wisdom deserves our praise, he shows himself a victim of several
misconceptions. For these, Leland
Yeager, a self-described fellow traveler of both the Austrian and Chicago Schools (p. 153),
smartly raps him on the
Rosen acknowledges that "the methods of neoclassical economics mainly are concerned with
the establishment of economic
equilibrium under fully known . . . or given conditions of resource availability, technology, and
preferences" (p. 140).
But since these conditions are never in the actual world realized, is this not an admission that
neoclassicism is at
best of limited utility? Nor can neoclassicals escape, says Rosen, by the claim that they are not
confined to the study
of equilibrium. Rosen is skeptical: "There are serious questions of whether 'disequilibrium'
analysis is possible in the
classical scheme. In my view it isn't" (p. 140).
Of course it does not follow that if neoclassicism fails, then Austrian economics succeeds.
But Rosen thinks that the
main insight of the Austrians about the market is correct. In the situation that people confront,
one of very limited
knowledge of preferences and technology, no central authority can gather the data required
adequately to coordinate the
In a world of uncertainty, what is to be done? Austrians have the answer. They correctly see
that only a system of
competition among individuals and firms can use dispersed information effectively. Claims that
central planners can
mimic the market fail. "In what was perhaps their finest hour, the Austrians, led by Mises and
Hayek, argued that . . .
market socialism was impossible, and that it was based on a fundamentally misguided vision of
markets and prices" (p.
Rosen, here following Hayek, is greatly struck by parallels between market competition and
biological evolution. But I
fear his acquaintance with the history of biology has some missing links. He remarks "[Richard]
Dawkins recasts Thomas
Paley's criticism of Darwin by way of example of the construction of the human eye. How could
such a complex and
wonderful object be constructed other than by a supreme designer (p. 143)? Of course, Darwin
criticized Paley, whose
first name, incidentally, was not "Thomas" but "William."
You might think that Rosen is ready to jump ship and enlist under the banner of Mises. Not
so. The Austrians, it seems,
suffer from severe failings. Most particularly, Austrians reject, or at least view with misgiving,
much of quantitative
work. Austrians argue that "the world is changing so much that 'behavioral relationships'
inherently are unstable and it
is fruitless to estimate them" (p. 147).
You might expect that Rosen would endeavor to respond. But this criticism strikes too close
to the neoclassical home.
Rather than answer, he suggests instead that we shall not get the "realistic and useful" (p. 148)
results that we want
if we turn aside from the quantitative. The studies generate useful results, therefore they are
sound! Behold Chicago in
Professor Yeager addresses this criticism with appropriate severity. "As for predictions,
Austrians take another fact
seriously: the economic world is an open rather than a closed system and as such has an
unknowable future. . . . a
numerical forecast cannot be reliable. A pretense of satisfying unsatisfiable demands for
forecasts is intellectually
disreputable" (p. 157).
Yeager likewise finds unimpressive Rosen's complaint that Austrians do not define
operationally. (If you don't know what an "operational" definition is, you are not missing
Yeager responds: "My reply is the standard remark about keys and lampposts. Again we see
the difference between narrow
empiricism that looks only at numbers, and a broader empiricism that draws on direct
observations" (p. 157).
But it is another part of Rosen's article that most rouses Yeager to comment. Rosen suggests
that there is a
"marketplace in ideas": just as bad products fall by the wayside, so does struggle for survival
weed out bad theories.
Yeager will have none of this. He points out first "that the metaphorical academic market is
less responsive to the
wishes of whoever the ultimate consumer may be than is the actual market in goods and
services" (p. 161). And there is a
deeper criticism. The market produces what consumers want. It does not test for good taste or
truth. In science, our
goal is truth, and we have no reason to think that in this sphere God is on the side of the big
After reading Rosen and Yeager, I have no doubt that neoclassicals can gain much from
Austrians. Whether Austrians can
likewise benefit from trade with neoclassicals is open to question.