WHERE DO WE GO FROM HERE?

by Aran Patrick Murphy

"So, I suppose you buy the Austrian position?" asked Paul, the Friar Tuck from class with whom I've entertained brief post-lecture discussions.

"I suppose so," I answered.

I'm paraphrasing, but the gist of what he said next was interesting: "Well I'll argue for the Walrasians... I'm a math man, always been good at it, you can do things with math," and so on, and then, with emphasis, "The world is an equation."

And, despite my dislike (or, my lack of understanding) of "the Walrasian approach," Paul is right. The world is an equation. I agree with this; there are no miracles, no black boxes, and no free will. All phenomena are causally related and are ultimately culpable to reason and analysis. Even such highly improbable events as, say, the rise of Whoopi Goldberg to Hollywood fame and fortune, can be (at least in theory) captured in some equation or other. I imagine that, given this "the world is an equation" premise, one can create computer models that, if sophisticated enough and charged with enough data and speed, could give a white-coated economist some very potent predictive power.

I am aware that I'm speaking more of the econometricians, or of the math hounds, than of strict Walrasians when I speak of predictive power. As you had explained, Walras sought only to describe mathematically the conditions which give rise to a state of market equilibrium, and was thus seeking only description, not prediction. But no theory that is merely descriptive can escape being called predictive. A description of things, as Aristotle pointed out, is a description really not of things but of causal relations. Walras' work led inevitably to the ambitious applications which we see in political economy today.

And, as I've conceded Paul's premise - that the world is an equation - does this mean that these people are right in thinking they can predict, through the use of their models, the shifts and commutations of our economy, or the precise costs and benefits of a particular government project?

ENTER RONALD COASE

The answer is absolutely not. Even if I were to grant that we have the right models to work with, or like Hahn says, we've just about got them (the G.E.T.) pat, the transaction costs of gathering all the necessary information (and gathering it accurately) to fill all the variables would be absolutely prohibitive. I can think of nothing short of a global neural network, with feelers or Big Brother TV screens monitoring every aspect of human economic activity, that would give us the kind of information that would allow us to "get a jump" on the markets or give us an idea of the "social worth" of non-market values such as the ozone layer. Even then, the galaxies of data that would be pumped through such a network would have to be sifted and refined for what is relevant and what is not, and would have to account for ever shifting standards of relevancy, and would also have to account for the massive costs and distortions that the monitoring system itself would impose. In short, it would be an impossible task, impossible not in theory but impossible due to the insane costs incurred for such a massive economic "predictor" machine. Sure, the world is an equation, but so what? I have a hunch that, by the time one sifted through the "irrelevant" information for the data to fill this end-all-be-all equation, your readouts would not look too different from the Wall Street Journal anyway, which for $80 a year could save the grand wizard econometrician a lot of effort.

One could still stick to the guns of formal theory, saying that it's not trying to tell us how anything will turn out in the economic real world. I hope this is a straw man, that no one really says this, for why on earth should anyone care about formal G.E.T. if it is completely self-referential?

If I haven't convinced anyone of the limits of grandiose mathematical economics, I've at least made clear my skepticism of it. Given the parameters of this paper, I need to settle whether I'm a Marshallian or a Mengerian now.

Marshall made contributions that I'm directly grateful for. He has given me tools that have helped me understand economic relationships, and given me contexts by which I'm helped in defining what is relevant or not. Price-elasticity of demand is useful, as is the recognition in principle of short run and long run supply curves, economies of scale... Such insights help to make the world intelligible. I also think he was on to something very big when he thought biology is "the Mecca of the economist," although I'm sure he got nowhere so long as he considered biology and mechanics at ends with each other. (I'll have to read more before I can make stronger statements about what he thought.)

Marshall should be paid his dues, but I think the one who really grasped the complexity of the marketplace and went on to make useful insights about this complexity, is Menger. "The subjective element" of economic activity relates strongly to the widely varied and largely incommensurable hierarchies of values that guide individuals in their choices. Marshall made the killer assumption that social good could be maximized (a legacy of Mills?), which faults his later moves such as the tax-subsidy conclusion, consumer's surplus, and others. On the other hand, the Austrians realize that it is the height of vanity to presume to maximize social good, without consideration for the highly subjective individual perceptions of what "the good" is. The Austrian approach, particularly Hayek's emphasis on the role of prices in giving information, has proven to be of great use to me in understanding the commercial world. Time, the study of markets in dis-equilibrium, the process of price determination, the inability of anyone to draw such fantasies as a demand curve; these are a few of the real world tenets of the Austrians that find fascinating.

The readability of their work, the usefulness of their ideas, and their agreement with my philosophical and political biases, sum up to my significant regard for their work. Does this make me an "Austrian"? Perhaps, but their remains on their school a stigma which lays heavily (though unequally so) upon all three schools. The Austrians, despite their practical and sober nature, are still academics.

Academics, yes, academics, the scarlet letter "A" as brightly emblazoned on the Mengerians' doors as the Walrasians and Marshallians. I suspect that the Austrians have as difficult a time finding commercial work as disciples of the other two schools; and this discrimination is not due to unfair association.

Hans Sennholz, now head of the FEE, is an Austrian through and through. My respect and esteem for him is great, and I find his essays and speeches delightful. I had asked him for suggestions once, as to which graduate school he would recommend for learning Austrian economics. He then asked if I wanted to become a Ph.D. in economics. I replied yes, for there were a number of problems I was interested in solving.

"Solving problems?" He asked, incredulous, his v's coming out as Teutonic f's. "You don't go to graduate school to solve problems. Define problems, maybe. If you're lucky, and very, very good, you might solve one problem in your entire career. Students like you scare me..." and so on. Needless to say, I was red up to my ears. Was I naive for thinking I'd be solving problems as a grad student? Perhaps I was. His kindly wife later suggested NYU and Kirzner, to answer my original question, but the more I thought of it, the more I realized that Sennholz was right and I'd be a bad economist (that is, I would not well achieve my values) if I ever pursued Kirzner or any other academic for that matter.

Solving problems is for businessmen, not academics. The principles which govern the science of exchange are to be tested and applied in the marketplace, not in the classroom. Consider "social good" problems such as public transport, for example; while the monkey can chase the weasel around the college blackboard over free rider problems and market "lumpiness', the real economist is the entrepreneur who finds a way to coordinate resources, charge those who receive primary benefits from his project, and makes a neat profit for social services rendered.

By this test, if Buccholz is right, the world has known only two economists, Ricardo and (I hate to say it) Keynes. Greenspan might count as well, maybe. Yes, Aran Murphy does want a Ph.D. in economics; he would enjoy, I think, demonstrating to students what a wonderful and powerful tool that exchange really is. Unfortunately no respectable school will give him a Ph.D. for fulfilling the one most defensible criterion for a Ph.D., the one he is most willing to fulfill: To make a million dollars in the world of commerce.

Note that I do not argue for a brain-numbingly pragmatic view, that there are no principles of exchange or that the study of such is of no value. Instead, I want to emphasize the function of the study of economics, the purpose towards which it is to be directed, and that is, ultimately, towards helping men best achieve their rational values. It is in this context that I find the strongest positive case for the study of economics.

Another point before I close: I've heard the charge that Austrian economics is more a body of criticism of other schools than a positive school in itself. I disagree, thinking Austrian economics (from what I've read) is closer on track to fulfilling the afore-mentioned positive role than the other two schools discussed. Unfortunately, Austrian economists must spend more time "fighting fires" lit by fallacious economics than making positive assertions of their own. Considering the popular ideas that govern current economic policy, the Austrians, I believe, are well justified in their position as perennial nags.

Hopefully I've argued well why I favor the Austrian school over the Walrasian or the Marshallian. The labels of the schools, though useful, I'm sure have many gaps and inadequacies, exceptions and elements in common; however, if I've been able to fairly depict the general ideas the different schools represent, hopefully I've also been able to show my reasons for my preference amongst them.

ARAN PATRICK MURPHY