The Online Library of Liberty

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• Associate Editors
• Editorial
• Bibliographical Essay: Ellen Frankel Paul, Laissez Faire In Nineteenth-century Britain: Fact Or Myth?
• I: Legal Philosophy
• The Minos: What Is Law?
• Obedience to Law
• Moral and Legal Justification
• Early First Amendment Theory
• The First Amendment & Freedom of Expression
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• The First Amendment Vs. the Cpi
• The Economics of Strict Liability
• The Rule of Law In American Politics
• II: Political Analysis
• Society, State, and Right In Proudhon
• Human Rights and Political Change
• Carter's Human Rights Policy
• Locke's Tolerance: Prudence Or Right?
• Political Intolerance
• Hayek: Reason, Relativism, and Liberty
• Hayek On Coercion and Freedom
• “advanced Liberalism” As Managed Capitalism
• Common Good & Public Interest
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• Milgram: Obedience, Authority, & Legitimacy
• Syndicalism & “the Servile State”
• The Parisian League
• Conservatism In Spain
• Soviet Intellectual Orthodoxy
• The Clergy & the American Revolution
• Russian & American Defenses of Servitude
• Croce's Hegemony: How to Win Minds
• III: War and the State
• Just War and Rights
• Just Wars Vs. No Wars
• Walzer & Just War
• Wartime Propaganda Tactics
• Iran, Oil, and the Cold War
• The State and Oil Policy
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• IV: Political Economy and Theory
• Three Kinds of “capitalism”
• Adam Smith: Economic Utilitarian
• Roepke: Laissez Faire and Social Order
• Government-induced Boom & Bust
• Austrian Vs. Neoclassical Methodology
• Professor Friedman's Instrumentalism
• Milton Friedman's Critics
• Entrepreneurship and Justice
• Externalities & Government Intervention

Austrian vs. Neoclassical Methodology

Richard B. McKenzie

• Clemson University

“The Neoclassicalists vs. the Austrians: A Partial Reconciliation of Competing Worldviews.” Southern Economic Journal (Summer 1980):1–12.

Although the economists of the neoclassical-Chicago and the Austrian schools share a commitment to market economics and individual freedom, they differ on a number of theoretical issues. The Austrians, such as Nobel laureate Friedrich Hayek, believe that the neoclassicalists have ignored Austrian policy and methodological insights that would have prevented the current inflationary crisis that savages western economies. To advance this debate, Prof. McKenzie explores the representative positions of the two schools, pinpoints the major issues of controversy, and offers some ways to reconcile their differences. His analysis concentrates on these theoretical issues separating the two schools: (1) the nature of economics as a discipline, (2) the predictability of human action, and (3) the nature and purpose of theory.

In regard to the nature of economics as a discipline, neoclassical economists endorse “Robbinsian” maximizing behavior which presupposes an objective external world existing independently of the subjective values of maximizing individuals. They see the task of economics as the study of how the individual pursues his subjectively determined interests by objective, external, scarce means. Neoclassicalists believe they can objectively measure, predict, and empirically test the behavior of economic man maximizing the use of given scarce means to reach ends. Whereas neoclassicalists downplay the subjective and nonmeasureable, the Austrians place in the center of their theory the subjective, nonmeasureable, and nonpredictable evaluations of individual actors. Smith and Jones may consume apples but they are not the “same” objective goods in each's evaluator's eye. For Austrians it is impossible to measure a country's capital stock since human actor's evaluations possess no constants that remain fixed over time. Austrian economics limits itself to “praxeology,” or the logic of choice in human purposive action. This subjectivist or individualist emphasis leads Austrians to seek a free social framework (e.g. Hayek's “Constitution of Liberty”) permitting individuals to solve their own problems. Neoclassicalists, on the other hand, are pragmatists and seek to deal with maximizing problems within a given social structure.

It follows that Austrians reject the neoclassicalists' central conviction that human behavior is predictable. Neoclassical economists test their hypotheses by the empirical accuracy of predictions. Accordingly, for neoclassicalists, what government (as opposed to the market) should do is an open question to be solved by an empirical cost-benefit analysis. By contrast, Austrians reject quantifiable empirical tests and predictibility because, as noted, they see no constants to measure in the subjective evaluations of individual actors. Since individuals learn, change their values, and develop a complex “spontaneous order” past regularities of human action cannot be the same in the future.

What are the two schools' respective positions on the nature and purpose of theory? As pragmatists, neoclassicalists are not interested in the correspondence of theory to reality. They consider theory as a convenient mental fiction or “tool” to make accurate predictions that can be tested on future behavior.

Austrians, by contrast, use theory not so much to tell what will happen as to explain the process by which human action occurs. Austrian theory aims not at prediction but at real “explanation” that makes sense of the world. Austrians limit their patterns to general “patterns of outcome.” Methodologically, Austrians believe that social sciences of human action deal with phenomena so complex that they cannot be observed in their entirety even if they could be measured.