A Modern Guide to Austrian Economics
Per Bylund
Edward Elgar, 2024; viii + 317 pp.
The articles that Per Bylund has collected in this wide-ranging collection show that Austrian economics is thriving. I cannot comment on all fifteen of the articles, but I will highlight points of interest in a few of them.
In “Praxeology,” Roderick T. Long suggests that Austrians should abandon the view that the theorems of praxeology are infallibly true while continuing to hold that they are a priori true: “Mises’s and Hayek’s insistence that the fundamental principles of economics are a priori and exceptionless is easily misunderstood as involving a claim to infallibility regarding them. The truths of mathematics are likewise a priori and exceptionless, yet that is perfectly compatible with the possibility of getting them wrong and making mistakes in their calculations” (emphasis in original). Long’s point has merit, but are not some of the laws of praxeology indeed known to be apodictically true, as Mises says? Could the axiom that man acts be mistaken?
Disputes about the nature of entrepreneurship abound in the Austrian literature. In “Entrepreneurship and the market process,” Per L. Bylund argues that neither the “alertness” approach of Israel Kirzner and Friedrich Hayek nor the “judgment-based” approach of Peter Klein and Nicolai Foss are true to the insight of Ludwig von Mises because they stress entrepreneurial reaction to the existing framework of production. Bylund points out that the entrepreneurs who change the existing framework (rather than react to it) are the most important to economic progress in the Misesian model: “In Mises’s market process, the boundaries are shifted outward by the action of (successful) promoters, which in turn disrupt the resource allocations between and among other production processes throughout the market.”
Another important debate within the Austrian School is between free bankers and full-reserve theorists. In their very useful survey “Money,” Joseph T. Salerno and Kristoffer J. M. Hansen highlight an important difference between the analyses of free-banking theorist Lawrence White and Salerno of the effects of an increase in gold mining under a gold standard.
Salerno’s account shows how a hard money supply under a gold standard responds to changes in market data: “The equilibrium in the money market occurs when demand and supply, and hence the purchasing power of money, (PPM) are constant. . . . From this equilibrium, we can now imagine an improvement in production technique that leads to greater output of gold. As a result, the prices of goods increase and the amount of goods and services each gold ounce purchases declines. . . . Entrepreneurs relocate gold to industrial uses, and eventually prices begin to fall, and the discrepancy is eliminated.” The economy thus returns to equilibrium, but Salerno does not claim that there is “one stable PPM to which the economy will tend to return with each disturbance. As in all other markets, the final price (or PPM) is constantly shifting as the data of the market change.” White denies that the PPM constantly shifts.
In his wide-ranging article “The Pure Time Preference Theory of Interest,” Robert Murphy offers an important objection to the pure time preference theory (PTPT) of interest. According to the PTPT, a good that is to be consumed in the present is valued more highly than the same good in the future, and a good in the near future is valued more highly than the same good in the distant future. A familiar difficulty for the theory is that ice is valued more highly in a future summer than in a present winter: Isn’t this a counterexample to the PTPT because the same good is valued more highly in the future than in the present?
Murray Rothbard defended the PTPT by saying that strictly speaking, an economic actor values the satisfaction a good provides rather than the physical good as such, and ice in summer provides different satisfactions from ice in winter. If this is so, we cannot object that ice has a higher value in a future
Murphy is not convinced. He says:
The problem here is that . . . Rothbard explained that multiple units of ‘the same’ good are to be defined as interchangeable from the point of view of the individual actor. For example, the first unit of water might be devoted to drinking, the second to bathing, and the third to watering the lawn. They are three units of the same good (‘water’) because each of the units is interchangeable from the individual’s perspective, even though a chemist might point out that ‘the first’ unit of water actually had a slightly higher volume, or a slightly lower acidity, than ‘the second’ unit. These differences do not matter for subjective utility theory, however; what matters is that the individual would not distinguish between the physical items, and each would be equally useful in quenching thirst or filling the bathtub.
Notice, however, that the first unit of water provides different and greater satisfactions than the second unit. (This fact underscores the law of diminishing marginal utility.) So if we were to adopt Rothbard’s defense of the PTPT, we would be forced to conclude that our individual does not have three separate units of ‘the same good’ (namely, water), but sole units of three types of goods, namely one unit of water-for-drinking, one unit of water-for-bathing, and one unit of water for lawn-maintenance.”
I think the problem raised by Murphy is resolved by an insight by Israel Kirzner. In his Ludwig von Mises: The Man and His Economics, Kirzner observes: “For Mises, time preference refers not to dates, but to future distance from the moment of evaluation. Of course, the date at which ice is available . . . may affect its subjective evaluation. But for Mises, that kind of influence upon valuation is not what he understood by the notion of time preference. Time preference, for Mises, refers to the sense of futurity.” That is, for any satisfaction a good provides, we must ask whether the actor would prefer to have that satisfaction now rather than later, other things being equal. Modifying Rothbard, we can then define a good as physically identical units of a homogeneous substance and still uphold the PTPT.
Critics of Austrian business cycle theory often ask, “Why don’t entrepreneurs realize that the boom created by bank credit expansion is unsustainable and refrain from malinvestment?” In “Austrian Business Cycle Theory,” Jonathan R. Newman and Arkadiusz Sieroń argue that some entrepreneurs hope to benefit from government bailouts: “It seems likely that many financial institutions, entrepreneurs, and households expect . . . that there is a non-negligible chance of bailouts in one manner or another. . . . The expectation of being on the winning end of one of these transfers . . . would encourage riskier behavior (in the form of both malinvestment and overconsumption) even for actors who understand the consequences of artificial credit expansion.”
It should be clear from these examples that the Austrian School is thriving. Bylund has rendered a great service in bringing the scholarship in A Modern Guide to Austrian Economics to our attention.
