Starting Assumptions
AC: "When mainstream economists build a theoretical model to understand an economic activity, they often -- but hardly always -- make assumptions of perfect conditions. For example, they will assume that consumers have perfect information about the market, that market competition is perfect, that all products are perfectly homogenous, or that there are zero costs to firms entering the market. Austrians point out, however, that these conditions do not exist in the real world, so the results of these models' calculations are worthless. It is even more short-sighted to use these unrealistic results to guide national economic policy. There is a mainstream rebuttal to this argument, but for the moment, let's continue."
Really: Fair enough, but these models also try to measure and quantify things that can't be measured or quantified.
AC: "Austrians call for economic assumptions to reflect the real world -- warts and all."
Really: As we will soon see, this is untrue. In fact AC himself will give us a quote that proves him wrong. Here he is quoting Ken Gaillot, an Austrian:
AC:
Market process theory assumes that there is no force and fraud. Force includes force by individuals in the form of theft and so forth, and force by the government in the form of taxation, regulation, and so forth. Austrians recognize that force by both individuals and governments exists, and that market theory does not completely explain reality. Instead, market theory allow economists to understand the processes at work in a market society and to isolate the effects of force. Attempts to analyze real-world markets must account for government and individual force. Austrian analysis of government policies thus includes not only the direct effects of the policies, but also the effect of the policy on the functioning of the market process.Really: AC says Austrians do not use false assumptions. Then he quotes an Austrian who says they do use false assumptions... AC fails to realize that false assumptions can be used as a mental tool to understand the market economy. This is completely different from what mainstream economists do with their false assumptions. For example there probably isn't any Robinson Crusoe on an island by himself at the moment. Yet the "Robinson Crusoe Economy" is a very helpful mental tool that many economists use. What about the evenly rotating economy in interest rate analysis?
I'd also like to point out that Ken Gaillot is a nobody and the link AC gives for this quote is broken. I did manage to find Gaillot's text in another place, though[1].
AC: "This remarkable paragraph essentially calls for the utopian perfection of the human race before the Austrian model can be applied or even criticized! All market failures today can be blamed on the fact that we have a government, regardless of the actual level of government involvement in the failure."
Really: This paragraph isn't remarkable at all and it doesn't "call for" anything. That's like saying the Robinson Crusoe Economy is "calling for" us to all live on separate islands by ourselves.
AC: "But what if the U.S. decided to become libertarian, and adopt an Austrian economic policy? Then they would still be protected from accusations of failure, because they can always blame criminals for wrecking the market process. This theory therefore serves to justify a heightened War on Crime. Considering the economic and demographic groups popularly associated with crime, one can easily see the possibilities for demagoguery and scapegoating in the event the new economic system turned out to be inherently flawed."
Really: I'm quoting this simply because AC clearly tries to imply that Austrians are right-wingers who favor the War on Crime. Very deep economic analysis here, guys!
AC: "First, we should note that economists are primarily concerned with how the real world can be modeled, and the accuracy of their models is continually improving."
Really: Too bad they aren't interested in how the real world actually works. I don't know what planet AC exists on, but you'd have to be blind not to realize how completely lost mainstream economics is.
AC: "Studying how assumptions are violated is a major part of economics. For example, William Vickrey and James Mirrlees won the 1996 Nobel Prize for their theories of asymmetric information (unequal information between buyers and sellers). The rise of New Keynesianism in the last 10 years has been based on George Akerlof's fundamental point that human beings are not perfectly rational, but nearly rational. Another liberal school of economics, institutionalism, doesn't even subscribe to static equilibrium models at all, but agree (ironically) with Austrians that the economy is one of constant change. It is really the neoclassical (conservative) economists who rely so heavily on perfect starting assumptions. If Austrians want to criticize their allies, then liberal economists are perfectly happy to let them."
Really: Reading this might leave you with the impression that economics has been going somewhere these last few decades. Let's see... Analysis on asymmetric information hasn't changed since the 60s. Rationality is a subjective term, but in its common sense meaning it was probably dealt with before Akerlof was even born. Ok so Austrians are now right-wingers, libertarians and conservatives? Why are neoclassicals conservatives? AC, you're not making any sense. And Oliver Williamson is an institutionalist and also probably the most "Austrian" nobel laureate in a while[2].
AC: "A neoclassical defense for using perfect assumptions is that countless factors affect activities taking place in the real world, so economists must simplify their starting assumptions if they are to quantify the economy at all. Even so, economists have numerous tools to get around this problem, tools that have been improving with time. They can start by isolating the most important factors. They can also focus the model on a highly specific industry, product or individual, which greatly reduces the complicating factors. Another method is to establish broad groupings or taxonomies with similar characteristics that yield variables that can be applied to smaller categories. The claim that these models do not have applications for the real world betrays the Austrian's own unfamiliarity with statistics."
Really: I suggest listening to Roderick T Long[3]. Even if a model had predicted 100% of past events right, all Austrian criticisms of that model would still hold. In the real world we're not even faced with such a situation, since most models are in fact worthless. Some do have applications and Austrians do not deny this(I mean hell, even private firms employ econometricians to give ball-park figures of possible future events).
[1] The Theory of Market Process
[2] Williamson and the Austrians
[3] Friedman and Mises on Method
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