Austrian Economics - Research Paper Example

Austrian Economics Contemporary Austrian economics has nothing much to do with Austria. Carl Menger (1976) shed some light on the dynamics of Austrian economics in his book: ‘Principles of Economics’. The first objective in Menger’s mind was to fix the theory of production cost value due to which the classical economics had been inflicted since Adam Smith. Menger observed and then explained the real fluctuations in the commodity prices while working as an economic journalist in Vienna. The commodity prices are based upon their marginal contribution as they fulfill the desires of the individuals (Jaffe, 1976). The second prime objective of Menger was to prove that this explanation of commodity-price-formation is not only general but also abstract. The purpose of this explanation was also to correct the German Historical School, which suggests that there are no such universal economic laws that are applicable across different cultures, times and nations. They rejected the “Manchester School’s” requisition on global free trade in view of the universal relevance of the comparative edge (Mises, 1969). Menger being a supporter the rich empirical research of the historicists debated that the economic goods’ properties are based on the general theoretical investigation. He also dedicated his book to Wilhelm Roscher who was a renowned historicist. The Historical School’s younger members did not support Menger’s argument. The subsequent argument to this — characterized the methodenstreit or dispute over procedures — followed that the historicists started to refer Menger and his supporters as the “Austrian School,” that signifies their mediocrity in comparison to the genuinely German approach (Bostaph, 1994; Caldwell, 2004; Mises, 1969). Although the Historical School applied adequate impact on the German Universities and thereby, took them to the twentieth century however it is the insights of the Austrian School that marked an impact on the remaining professions in other parts of the world. The discussions by Menger in relation to subsiding marginal utility, scarcity, and Robinson Crusoe economies were naturally knitted into the surfacing marginalist consensus. Similarly, the students of Menger, Friedrich Wieser and Eugen Bohm-Bawerk made significant contributions to the principle concept, Wieser for introducing the terminology “opportunity cost” and Bohm-Bawerk for his coining the time preference discussion (White, 2003). The Austrians had differences with the others, particularly when Marshall reestablished the production-cost-concept as one blade of a pair of scissors that evaluate price whereas the marginal utility being the other blade of these scissors. However, these were just minor disputes under a wider consensus. Although both F.A. Hayek and Ludwig von Mises followed the tradition of Menger however by the time they were internationally recognized they were just economists and did not require any “Austrian” label. Since that point of time, the “Austrian School” simply became a term of historical significance. Nevertheless, the affiliation with the mainstream of the profession continued. The argument related to socialist calculation disclosed the deep, fundamental gulf that distinguishes the Austrians from the neoclassical orthodoxy, which commenced, in 1920, with the publication of “Economic Calculation in the Socialist Commonwealth” by Mises (1935). According to Mises, the socialist planners, without money prices, would miss-out a common denominator for calculating the effectiveness of alternative uses of resources and hence, would be unable to get involved in rational economic calculation. The socialist-economists retorted with the market socialism theory, the concept that the socialist planners could employ the centrally controlled accounting prices and systems of equations as an alternate for market exchange. Hayek and Mises retorted by pointing out that the market socialists basically misinterpreted the issue, but to no benefit. All Professional economists that include politically socialist and others supported the theoretical claims of the market socialists to a great extent. The Keynesian revolution brought a second major blow in the macroeconomics. Prior to the publication of the General Theory, Hayek elaborated on and articulated the trade cycle theory of Mises for making his international mark. Once again the profession changed the course from the Austrian position to the Keynes’s approach. After decades of work, the perspective of Mises and Hayek that derived from Menger’s old Austrian school provided a substitute to Keynes’s macroeconomics and to Paul Samuelson’s paramount neo-classical synthesis of Marshall’s microeconomics. Subsequently, their supporters commenced to find each other and developed a self-conscious network of congenial scholars. After which, Hayek was awarded with the Nobel Prize for his endeavors on the theory of business cycle. Particularly, these two events give rise to the “Austrian revival.” These scholars, by the end of 1960’s, commenced to refer to “Austrian” economics in its contemporary implication. According to a leading survey article (Rizzo, 2009), the Austrian School has developed firmly since its revival and has been playing an important role in the knowledge economics, development economics, applied political economy, monetary theory, and law, macroeconomics, and economics. 2. Micro-foundations of Austrian Economics The Austrians, just like the neoclassical micro-economists, debate that methodological individualism is the appropriate procedure for explaining the social phenomena. The individual actions best explain the broader social patterns. Moreover, the Austrian economics relates to the wide rational choice camp of the social science. Although the individuals have various objectives however they experience a deficiency of ways to attain them, with all that requires: economizing, tradeoffs, incentives, etc. Nevertheless, there exist a few profound differences in the implicit model of the individual used by the Austrians. The Austrians particularly have a much thinner perspective of the notion that the individuals act rationally. Mises and his supporters debate that rationality signifies nothing more than the conscious struggle after the ends or objectives. It does not require epistemic rationality that means appropriate appraisals of the outcomes of an action, limited self-interest, or any specific psychology. The potential drawback to this approach is that it lacks its self-developed predictive content: any conscious act is rational. The potential benefit of this approach is that, as comprehended by Menger, it can be employed to all places and times, in general. Since this explanation of rationality is so succinct, it provides more capacity for identifying ecological or institutional factors that affect human activity (Chamlee-Wright’s, 2010). The most radical departure is abstracting from epistemic rationality that the Austrians develop from neoclassical micro-foundations. Indeed, asserting that individuals encounter a radical form of negligence is debatable the defining element of the Austrian approach. The George Stigler’s (1961) search theory provides the paradigmatic statement of the mainstream approach towards unawareness or negligence. According to Stigler, individuals will attempt to acquire new information exactly to the degree that the advantages either exceed or, at least, equal the costs. Neoclassical agents know how to find the answer of what they don’t know. In particular, these agents might be unaware of the actual value of a parameter of interest. The anticipated payoff from acquiring a more precise estimate as opposed to their uninformed guess and the cost of information decide if or not they will exhaust the resources in their search for more information. Although the Austrians also point in the similar direction however they have a different perspective in relation to the inadequacy of this account. According to Kirzner, the individuals are subject to a broad range of “absolute unawareness” where they don’t know how to find or acquire the unknown information. For knowing to find a certain piece of information, it is essential that one must know for sure that the information might be available at the place of search (Kirzner, 1997). According to O’Driscoll and Rizzo (1996), the Austrian economics is all about “the economics of time and ignorance.” They separated the Newtonian time: a dimension along with other parameters can change from the Bergsonian time that allows the origination of absolutely novel phenomenon. In Bergsonian time, individuals do exist and hence, they can bring real and radical surprise. On the other hand, both the Neoclassical models and the Newtonian models of motion and mechanics consider time as a variable. Time only let the variables to vary, not the origination of absolute novelty. Lastly, some Austrians analyze the Frank Knight’s perspective of uncertainty as a distinguishing feature of their approach (Martin, 2009). On the other hand, the standard economic approach to unawareness/ignorance considers agents being just unaware of the value-range of the variables; uncertainty considers agents as ignorant about the relevancy of the variables. It is important to determine the nature of the issue that challenges the actor. The most vital aspect shred by these approaches is a form of unawareness/ignorance prior to choice. They all are the ignorance of the opportunities that an agent has to respond to and not to the corresponding values of those opportunities. Hence, its solution not to be found in saving on information costs. Genuine errors do occur when the opportunities are missed out. Although such errors would outrage the standard of epistemic rationality of neoclassical economics however they would remain rational in the narrow Austrian sense. Individuals rationally select opportunities if they have knowledge about them, however that knowledge is not only limited (meaning that they do not have knowledge of all the possibilities) but also subject to change. Such anomalies from the neoclassical explanation of rationality can be accumulated to a fundamental form of subjectivism by the Austrian commitment. The subjectivity of values has been recognized by all the mainstream economists, which infers that individuals assign different weights to the debates against their utility functions. Although the Austrians recognize this however they go beyond it. The individual actor considers the costs and benefits only at the time of making the choice (Buchanan, 1999). In a different context, the costs and benefits are not only accrued borne but also determined by the agent. The agent, under consideration, considers all costs as opportunity costs. It should be noted that this basic position follows from disconnecting the individual’s available opportunities from his psychological considerations and describing them as a product of his own mind. Agents should be defining their own costs if they are defining their own opportunity sets. Although this notion is abstract however it has consequences for how the economy is being analyzed by the individuals. Austrians do not support the Marshall’s post-marginalist reintroduction of objective production-costs. In fact the prices are determined by the supply and demand phenomenon however the two blades of the scissors are subjective with respect to their origins. In the same manner, this rejection contributes in the Austrian concept about entrepreneurship in comparison to the technical production functions in understanding the supply part of the economy (Klein, 2008). 3. The Economy in Mind According to Simon and Buckminster Fuller, the principal cause of individuals getting equipped to perform progressively more with progressively less is the continuous unfolding of human knowledge and intelligence, due to which individuals have been able to convert otherwise ineffective matter into effective life sustaining value — in summary, to practice economy. Economics, in this context, itself is anti-entropy that can be defined as the constantly evolving process of turning the otherwise useless, order-less, and valueless matter in to utility, order, and value. Of course, the hazard is that although the economic and metaphysical processes yield wealth from no wealth scenario, the individuals can be very easily mesmerized into considering that the wealth exists in the products and objects that have been created by the human rather than believing in the concept of thought-process and ideas behind those creations or products. The individuals convert the focus of their mental process of accounting to the physical level from the metaphysical level. For example, they do not recognize that it was the internal combustion engine due to which the oil became so valuable today, and not the other way around. It has been due to the reason of this massively unaccounted metaphysical element of wealth that the individuals have gone from less than 1 percent of the people, over the years, who have been able to carry on at any acceptable degree of comfort and health to almost 50 percent of the total people now surviving at a living standard that was not imagined positively at the beginning of this century. Indeed, the economic investigations illustrate that, as opposed to the dooms dayers, the actual values of virtually all important natural resources have declined steadily, not only on the basis of constant hours of effort but also in terms of general commodity price levels, for as long as there exists authentic statistical records, or for above two centuries. In other words, economic history puts the lie to such limited growth concepts. Then what is the reason that the people are subjected to numerous glooms day predictions of resource scarcity? A part from the evident ideological biases of the sources of such prophecies, the basic cause appears to be the employment of the engineering approach of developing natural resources instead of taking the historical economic analysis in to account. The issues is that the individuals do not really knows what the current inventory is used for any resource and also the cannot possibly anticipate the discovery of unprecedented new lodes of such resources or the substitution factor, which signifies the arrival of accumulated new products in order to replace the previous ones. It has been found through the past studies that the real wealth has always been the productivity, which according to Buckminster Fullert means the ability of the individuals to cope with the upcoming days of their lives. This further infers to offer the goods and services that provide more relive to the mankind from slavery to continuous toil and drudgery. Moreover, this ability to cope emerges from the concept and the inventive capacity of transforming the inanimate materials into beneficial product and inventions in order to make the world productive. According to Fuller, the wealth can be defined in terms of the “progressive mastery of matter by mind". And, in this definition of wealth by Fuller, even supposedly important natural resources adopt the characteristics of ‘wealth’ only as a consequence of the inventions and ideas proposed by the human mind. Fuller further elaborates that the ideas constitute real wealth since they cannot be confined by anything. Both the capitalist and the socialist ideologies, in this context, are wrong as they keep on viewing the material world from the perspective of boundaries and limitations by believing that the real wealth is matter itself, that the only energy is the material energy, and that the wealth itself is inevitably vanishing or finishing and not being produced due to entropy. The outcome is that the "pirate mentality" has dominated the world for so long, which is the race for supervision, over certain and apparently finite material resources, by many nations and enterprises referring to a non-stop “Malthusian?Darwin?you?or?me?to?the?death?struggle" that signifies the presumption that some sort of economic catastrophe has been always just around the corner. This economic catastrophe that has constantly been anticipated as impending and inescapable for centuries has not yet arrived because it shouldn’t and does not have to. The environmentalists of today are worried about the annihilation of the cosmos and have been unsuccessful in trying to sell that worry as a model for the immediate future of the world. Both the millenarians and the billenarians continue to neglect the anti?entropic action of the human thought from the completely physical to the rousingly metaphysical and mental, a rush that has by far been rejected the so-called thinning resource base. Yet it is generating the new wealth as well as the capacity at a swift pace even when it takes breaks for cleaning up the environment. The Western Judeo?Christian history world has witnessed this slow but progressive transformation of the physical and finite in to spiritual and metaphysical. The Bible also supports the central message of anti-entropy, signifying the pursuit of an economy based upon spirit and mind that transcends the limitations and boundaries of matter. Also, even in the light of the physical construct of the 2nd Law of Thermodynamics, it has been demonstrated through experience that the most vital form of energy is mental and not physical, and also, that if the energy or the physical component of our wealth system may appear to abate or even disappear then the know?how or the meta-physical component of our wealth system can only grow further. Even if we do mistakes then we are learning more at the same time. And, the more we get to know, the more we discern and the wealthier we get. The secret to success lies in doing more with less through clearer ideas. Fuller introduced the concept of "synergy", which can be defined as a restatement of the previous postulate that the whole is better than the sum of its constituents signifying that a complete idea is more precious and profound in comparison to the accumulation of its individual components. A human being is certainly of more worth than being just the agglomeration of various chemicals and organs. Similarly, a computer is obviously more than a few hundred dollars of silicon, metal, wire and plastic and a car is far more than a few thousand dollars of metal, plastic and rubber. Then, the synergy can be explained as the process by which the whole ideas or concepts turn the otherwise useless objects into useful, valuable and beneficial products or services. The value or the wealth is generated through the ideas that change the matter in to valuable products and not by the matter on its own. This synergistic process can be ultimately extended to the concept that the better we understand any product, the less matter we require and the more real wealth is generated. The synergy makes a promise that by increasing our metaphysical capital that includes our knowledge and our comprehension of the world around us, we can only increase our economic wealth. Fuller sights the danger that we can ignore our real potential since our wealth is constantly increasing to great extent, formally unacknowledged and unbeknownst by the human world and our accounting systems of economics are as yet unrealistically considering wealth as matter. As for instance, now some economists ask that if or not the level of capital investment holds any correlation with the economic growth, any longer and if or not we are even estimating the economic growth appropriately under the existing accounting models. Such accounting models leave us entirely unaware of drastic transformations that have taken place in the real economic development. This sort of unawareness not only responsible for individual limitation and hoarding but also it supports the development of the very bureaucratic and governmental frameworks, regulations and controls that could stifle the growth in the economic and technological structure which we are actually capable of. It was vividly demonstrated through the ballyhooed energy crisis. We witnessed a world oil glut as soon as the controls over the price were taken off. Advocates of a yet more dangerous concept, known as the "re industrialization", debate that we should invest vast amounts of the capital into the old industries, which now are considered as obsolete in terms of technology rather than supporting the procedures that provides better alternatives to them with new breakthroughs. Lately, the evident decrease in the supplies of the uranium instigated the creation of the breeder reactor that yields new fuel almost as rapidly as it consumes the old fuel. Although we might never decide to use it however it illustrates our synergistic potential, and might well turn in to a future energy resource by adopting more effective protective measures. The full potential of the fusion reaction, or of the solar energy, or of the genetic engineering, is not yet known as all of these subjects are still comparatively in their early stages of development. Nevertheless our horizons are actually expanding in each subject. The biotechnology all on its own offers a glance at the renewable energy resources under the open system of the earth. 4. Conclusion The future of our economic growth is not now and never was confined by the physical objects that we now see, however it is based on the mass untapped potential of creativity that has been defines as the metaphysical process demonstrating completely new reserves and better ways of achieving our objectives, increasing wealth and extending value without exhausting our resources. The only hindrance to this is limited notion of the actual source of our wealth, a deficiency of believe in our potential as independent individuals and institutions for fulfilling our requirements on our own and also, to allow for: new concepts to disclose and new resources and procedures for development. The bottom line is that to allow carrying on to explore the unbounded economy that exists in mind. References: Buchanan, J. (1999). 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