Mainstream Economics and the Austrian School: Toward Reunification

Among mainstream economists, there is a basic orthodoxy about the philosophical foundations of economic theory. They agree that idealizations about people's psychological preferences serve in some way to ground economic theory, that economic theory can be represented using mathematical functions, and that those functions can guide and be guided by empirical research into a large range of social phenomena. Theorists associated with the Austrian school reject this approach. They think that speaking of a person's 'preferences' is just summarizing that person's past observed behavior in a misleading way, that formal rationality is empty, and that econometric analysis is of little empirical value.These differences have led Austrians and mainstream theorists to develop different bodies of theory, with different practical implications. But it is the philosophical disagreements between the two camps that explain why they currently have almost no productive engagement with each other, despite the Austrian school remaining one of the most institutionally established heterodox research programs. Neither side appears to have much interest in reconciliation, but, given the degree of overlap in both approach and ambition, this schism is due for a correction.The schism has been driven in part by the fact that the standard comparison between those in the mainstream and those in the Austrian school is too abstract to be meaningful. so, i will argue that a serious comparative evaluation of research paradigms requires a discussion cast at a lower level of abstraction. From this perspective, the problem can be more clearly seen to revolve around 'extreme apriorism'. The disappearance of that idea, I argue, is a Pareto improvement for economics.II. PreliminariesBefore comparing the mainstream and Austrian paradigms, it is necessary to explain at least roughly what they are and how they differ. some of the ways in which differences between these paradigms arise are visible to everyone. The two, for instance, differ in terms of their respective working practices. For mainstream theorists, economics is the enterprise of formal model-building. And sometimes, for the sake of simplicity or tractability, economists will need to include idealizations in their models. Robert Solow acknowledges as much:[I]f you ask a mainstream economist a question about almost any aspect of economic life, the response will be: suppose we model that situation and see what happens [...]. The idea is to focus on one or two causal or conditioning factors, exclude everything else, and hope to understand how just these aspects of reality work and interact. There are thousands of examples; the point is that modern mainstream economics consists of little else but examples of this process (1997, 43).Austrian theorists don't view the discipline of economics in this way. They do not see it in terms of building formal models, and they are usually unwilling to accept idealizations or the implications underwritten by them. The more fundamental disagreements between the two camps result from two different understandings of the basic categories in play.one disagreement among mainstream and Austrian theorists, for instance, concerns the theory of preferences: what preferences are, how we can learn about them, and how we should theorize about them. Ludwig von Mises writes of preference rankings (referring to them as "scales of values"):[O]ne must not forget that the scale of values or wants manifests itself only in the reality of action. These scales have no independent existence apart from the actual behavior of individuals. The only source from which our knowledge concerning these scales is derived is the observation of a man's actions. Every action is always in perfect agreement with the scale of values or wants because these scales are nothing but an instrument for the interpretation of a man's acting (1998, 95).There are two claims in need of discussion here. …