The Austrians accept the economic argument that production is characterised by diminishing returns. As a corollary of this, they also accept the marginal productivity theory of income distribution – though they temper this by arguing that disequilibrium allows for entrepreneurs to make super-normal profits. As was shown, these economic notions are fundamentally unsound. To theextent that Austrian economics relies upon these same concepts, it is also unsound. A simple illustration of this arises from the Austrian theory of production. The economic model argues that an increase in the quantity of a factor of production – such as capital – will decrease its marginal product, and thus reduce its income. The Austrians instead argue that a cheapening of capital – via a fall in the rate of interest – will lead to a more ‘roundabout’ approach to production, meaning that less direct labour and more indirect capital will be applied to its production. Sraffa’s critique of the neoclassical theory of production, is equally applicable to this Austrian theory. By providing a way to measure capital inputs in terms of wage units, Sraffa showed that the economic concept of a quantity of capital was dependent on the rate of profit: the same logic shows that it is impossible to define one way of producing a commodity as ‘more roundabout’ than another independently of the rate of profit. Consider two ways of making wine: process A which involves the application of 1 wage unit now, 8 units last year, and 1 unit 8 years earlier; and process B, which involves 1 unit now and 1 unit 20 years ago. At a low rate of profit, process A might be more roundabout than process B; at a higher rate of profit, the order could reverse; and it could reverse again for a higher rate of profit. Therefore, the Austrian notion of roundaboutness is as internally inconsistent as the neoclassical concept of the marginal productivity of capital. Secondly, even more so than conventional economics, Austrian economics has a faith in the self-adjusting properties of the capitalist economy, with Say’s Law providing much of that confidence. As was argued, Say’s Law is invalid in a production economy with growth. Thirdly, while it is in general an evolutionary approach to economics, at least one branch of Austrian economics, associated with Murray Rothbard, has a quite non-evolutionary attitude towards both the existence of the State, and the role of money. The market economy may have evolved, but it seems the State was simply imposed from outside as an alien artefact upon our landscape. This is certainly one way to consider the growth of the welfare state; but an equally tenable argument is that the welfare state evolved as a response to the failures of the pure market system during the Great Depression. Similarly, while they believe that the money supply should be determined endogenously – by either handing over money creation to private banks, or by returning to the gold standard – they argue that the current system of State money means that the money supply is entirely exogenous, and under the control of the State authorities. They then attribute much of the cyclical behaviour of the economy to government meddling with the money supply and the rate of interest. The Post-Keynesian school, on the other hand, argues that though it may appear that the State controls the money supply, the complex chain of causation in the finance sector actually works backwards. Rather than the State directly controlling the money supply via its control over the issue of new currency and the extent to which it lets banks leverage their holdings of currency, private banks and other credit-generating institutions largely force the State’s hand. Thus the money supply is largely endogenously determined by the market economy, rather than imposed upon it exogenously by the State. The empirical record certainly supports Post-Keynesians rather than Austrians on this point. Statistical evidence about the leads and lags between the State-determined component of money supply and broad credit show that the latter ‘leads’ the former (Kydland and Prescott 1990). If the Austrians were correct, State money creation would instead precede private credit creation. This non-evolutionary weakness in Austrian economics is a sign of a wider problem. The philosopher Chris Sciabarra, a specialist on the Austrian school and Ayn Rand, identifies an inconsistency between Hayek’s notion of ‘spontaneous order’ – which corresponds to evolutionary development – and ‘designed order’ – where change is imposed from outside the market by the State. While such a distinction makes for good polemic writing against State intervention, it ignores the extent to which the State’s own behaviour might be reactive to the market, and thus, to some extent, also a form of spontaneous order. As Sciabarra puts it: There are more fundamental problems with Hayek’s social theory. By positing such a sharp distinction between spontaneous order and designed order, Hayek has not provided us with any explanation of the emergence of those institutions which are agents of constructivism [designed order]–To what extent is the state itself a spontaneous, emergent product of social evolution? To what extent does the state define the parameters of the extended order which Hayek celebrates? What are the actual interrelationships between the spontaneous order of the market and the designed institutions of the state? The reader of Hayek’s works will strain tofind developed answers to any of these important questions. (Sciabarra 1995) Finally, though Austrians eschew equilibrium analysis, and regard it as an unattainable state, their preference for capitalism as a social system is partly dependent on the belief that it will remain close to equilibrium. If, instead, capitalism is endogenously unstable, then it may remain substantially distant from equilibrium situations all the time. This weakens Austrian economics, to the extent that its support for capitalism emanates from conditions which are assumed to apply in equilibrium.
Posted on: Mon, 27 Jan 2014 08:30:50 +0000
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