From: Technotranscendence (neptune@mars.superlink.net)
Date: Mon Sep 23 2002 - 05:35:41 MDT
HAYEK-L BOOK REVIEW
Published by hayek-l@maelstrom.stjohns.edu
(Sept. 23, 2002)
Gene Callahan, _Economics for Real People: An Introduction to the
Austrian School_ Auburn: Ludwig Von Mises Inst (June 2002) 351 pages
Reviewed for Hayek-L by Mark Steckbeck
Assistant Professor of Econoimcs at Hillsdale College
Hillsdale, Michigan email: mark.steckbeck@hillsdale.edu
The influence on academia once maintained by the Austrian school of
economics declined precipitously in the early 1940s, never to regain its
former stature. Indeed, there was a slight revival of interest in the
Austrian school in the early 1970s, led primarily by the work of Israel
Kirzner and by the increasing interest in libertarian and classical
liberal political philosophy. But this influence had minimal impact in
the academic realm and proponents of Austrian economics have failed to
regain standing among their orthodox colleagues.
But Austrian theories have not been discarded altogether, many simply
having been assimilated into orthodox economic analysis. In fact,
criticisms of neoclassical economics have appeared in what are commonly
referred to as mainstream economic journals, often considered by
Austrians to be antithetical to their theories and methodology. For
example, Makowski and Ostroy (2001) acknowledge that the omission of the
evolutionary processes observed in markets (ala Hayek and Kirzner)
limits the ability of the perfectly competitive model to represent
actual market behavior; the assumption of price-taker markets in
particular means that the model precludes important market processes,
especially that of competition and discovery. And summarizing Rosen
(1997), many Austrian theories, especially those pertaining to
information and discovery, provide a more credible depiction of markets
than do models developed by their orthodox neoclassical counterparts.
Why the contributions of Austrian economists, both past and present,
have been largely ignored is speculative. (See Boettke 1996 for one
theory.) Certainly, though, the lack of introductory material available
to the novice explaining Austrian economic theories and methodology has
been simply a marketing blunder. Mises' _Human Action_, the bible of
the Austrian school, fills almost 900 pages while Rothbard's _Man,
Economy, and State_ pushes 1,000. Neither tome attracts the novice or
the undergraduate interested in acquiring an intuitive understanding of
economics without having to make a substantial investment of his or her
time.
Gene Callahan's new book, _Economics for Real People: An Introduction to
the Austrian School_, attempts to fill that market niche. In 287 short
pages (plus appendices), this exceptionally well-written and
well-organized book provides an intuitive understanding of economics
from the perspective of the Austrian school.
Callahan breaks no new ground, seeking only to explain how markets
function to coordinate the activities of disparate individuals via
Austrian theoretical and methodological underpinnings. In addition, the
two appendices provide a short but informative history of the Austrian
school as well as discuss the differences between Austrian praxeological
and neoclassical mathematical economics.
Callahan offers precisely what one would expect from an Austrian
economist. Subjective values are emphasized throughout. He defines the
importance of time in terms of both individual utility preferences and
the market adjustment process. He references Mises' evenly rotating
economy to contrast the dynamism inherent in the Austrian theories of
discovery and entrepreneurship and the stasis inherent in neoclassical
general equilibrium theory. And he employs simple examples to illustrate
the Austrian business cycle theory, describing how booms and busts are
the result of central bank intervention. The book is straightforward and
Callahan's organization, examples, and exceptional writing style make it
a valuable introduction to the economic way of thinking.
Mistakes are few, as are over and understatements. On page 12 for
instance, Callahan states that Austrian methodology "avoids the traps
that plague most of modern economics: the assumption of selfishness as
the basic human motivation . . ." (emphasis mine). Through its history
economists have described human action as being motivated by
self-interest, not selfishness, an important distinction. Similarly, he
quotes Steven Landsburg on page 184 with regard to the efficiency
criterion, insinuating that Landsburg-whom some would label an ardent
proponent of neoclassical economic theory-is advocating redistributive
social welfare policies. This is certainly not the case, however, and
Landsburg subsequently explains the adverse consequences of misapplying
the efficiency criterion in the manner he is being accused of promoting.
The few errors and over and understatements specific to Callahan's book
are somewhat trivial. The real problem as I see it is not what he wrote,
but what he didn't write. (And this of course, begs the appropriate
question, Then why don't I write it?) Callahan discusses most of the
theories and methodologies of the Austrian school that have faced
unrelenting criticism-and not from just orthodox neoclassical
economists-without adequately addressing these criticisms. Although it
may not be the appropriate forum for an elaborate defense, the failure
of Austrian economists to acknowledge and adequately address these
criticisms has led many to reject Austrian economists in general as not
being serious scholars.
On page 35 for example, Callahan rejects economics as a 'real' empirical
science by the fact that difficulties in ascertaining the exact
motivations of individuals from which data may be based means that
predicting future actions cannot be exact. I concur with Callahan and
other Austrian economists who bemoan the over-reliance on scientism by
the profession, but eschewing empirical testing altogether is as extreme
as the over-reliance by those the Austrians criticize. Callahan asserts,
"The fact that humans learn makes exact prediction in the social
sciences impossible. It means that we will never discover constants in
human behavior equivalent to the constants representing the speed of
light in a vacuum or the ratio of hydrogen to oxygen in water."
Economists may never discover constants in human action but few have
ever claimed we would. We certainly can make predictions with some level
of confidence, however, and some with fairly high levels of confidence.
For example, we can predict within a fairly accurate margin that when
the price of a good or service increases the quantity demanded will
decrease. Similarly, we may not be able to predict precisely what effect
licensing and regulations will have on a specific industry, but we can
predict within a relatively narrow margin of error how prices will rise
and maybe even how much product or service quality will deteriorate as a
result of these entry barriers.
The Austrian business cycle theory is another area of contention that,
although logical on its face, is anecdotal at best. Callahan does an
excellent job of describing the events leading up to the current
recession, but it is just that, events leading up to the current
recession. In a subchapter titled, "Out of Gas," Callahan illustrates
the Austrian business cycle theory using a parable of a bus driver who
relies on information provided by his passengers to calculate the speed
of the bus in order to arrive at its destination without running out of
gas. Passengers provide the driver with information about their
temperature preferences, understanding that there is an inverse
relationship between speed and comfort (a metaphor, of course, for
individual time preferences). After making his calculations, and partway
through the trip, the driver discovers that the information the
passengers provided has subsequently changed and that they now desire a
cooler bus (their time preferences increased). He must now decrease his
speed from 70 to 55 miles per hour (a reference to the boom and bust of
the business cycle). The cleverness of the example is overshadowed by
the fact that deviations from GDP trend have been attenuated over the
past 20 - 25 years. If the Austrian business cycle theory is correct how
can this attenuation be explained? It seems that ABCT would predict
(Oops! No predictions.) errors to progressively worsen, leading to
greater fluctuations in GDP. Callahan's illustration might have been
more accurate had he instead explained why the bus driver, given his
passengers' subsequent changes, was forced to lower the overall average
speed of the bus, a metaphor for the consequential decline in the growth
rate of GDP occurring during this 20 - 25 year period. The Fed has
actually been somewhat successful at attenuating the business cycle, at
least since 1980; the problem is that this attenuation is correlated
with a reduction in the growth rate of the economy.
A self-professed Austrian traveler once mentioned to me that "The
problem with Austrians is that they think that there are no other viable
alternatives." This book validates that assertion. Although it is a
terrific book for introducing undergraduates and the layperson to
Austrian theories and methodology-its intended purpose-it fails to
address public criticisms of these theories and methodology. Including
these criticisms and providing a simple but adequate defense against
them would thwart the eventual criticisms that this book, too, is overly
dogmatic.
Mark Steckbeck is Assistant Professor of Economics at Hillsdale College,
Hillsdale, Michigan. email: mark.steckbeck@hillsdale.edu
Copyright (c) 2002 by The Hayek Center for Multidisciplinary Research,
all rights reserved. This work may be copied for non-profit educational
use if proper credit is given to the author and the list.
----------
Gene Callahan's _Economics for Real People_ is available at discount
from Laissez Faire Books at:
http://www.laissezfairebooks.com/product.cfm?op=view&pid=EC8626&aid=1009G|
7
and from the Mises Institute at:
http://www.mises.org/product.asp?sku=B292
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