5 Reasons Why Austrian Economics Is Better than the Mainstream
Noah Smith has acknowledged the failings of mainstream macroeconomics, but he says that none of the “outside ideas” offer a better replacement. He failed to mention the Austrian school, but we can still show how the Austrian tradition parries his criticisms with ease.
1. Quantitative Models Totally Miss the Nature of Human Action
Smith dismisses all outside approaches that do not produce quantitative forecasts, even though the best, newest, and high-powered quantitative macroeconomic models have failed recently.
The quantitative approach, however, totally misses the nature of human action, the fundamental starting point for economics. All economics boils down to individuals making choices, the outcome of which is dependent on individuals’ preferences.
Unfortunately, you can’t even do basic math with people’s preferences for two reasons: preferences are subjective, and preferences are ordinal. You can’t measure or compare something you can’t observe, and you can’t do math with ordinal figures. Adding 2nd place to 3rd place doesn’t get you 5th place or 1st place. It gets you nowhere, which is exactly where mainstream macro is today.
2. The Micro/Macro Separation is Baseless
Smith dedicated his article to problems with macro theories, but Austrians understand that there is no meaningful distinction between micro- and macroeconomics. The only difference is one of scale and focus, but the fundamentals of economics are the same no matter if you are looking at individual consumers and firms, or the effects of credit expansion and inflation.
Mainstream economists find their way into smaller and smaller categories. Now, there is “health economics” and “development economics” and “energy economics.” There is also a major divide between those who do macro and everybody else, to the point that neither side really understands what the other is doing.
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