“What Does Austrian Economics Predict?”

4 September 2007 at 2:42 am Nicolai Foss

| Nicolai Foss |

At the professional development workshop on “The Austrian School of Economics: Applications to Organization, Strategy and Entrepreneurship,” arranged by my co-blogger for this year’s Academy of Management Meetings, the first question raised from the audience after the presentations was the one in the heading to this post. (Fabio at orgtheory.net has also made related, ehhh, provocations, which we will deal with later here at O&M).

It wasn’t entirely clear what the person who asked the question meant, the acoustics in the room were terrible (he had to repeat the question twice), and I am sure that complex issues like the symmetry thesis were popping up in the minds of my co-panelists, so there was some hesitation in the panel to address the question. (Afterwards I learned that unfortunately this was taken by some audience members as an implicit admission that AE isn’t predictive).

The question was unclear because it could mean any of this:

1) Does Austrian economics really predict anything?

2) Are Austrian predictions congruent with those of other economics approaches?

3) What is the novel fact — in the sense of Lakatos — predicted by Austrian economics, that is, what is the new Austrian explanation of a fact that, while known, had previously lacked any theoretical explanation?

4) What are the uniquely Austrian predictions?

5) Does Austrian economics only put forward “pattern predictions” (according to Hayek 1964 the only possible predictions in truly complex systems)?

6) Does Austrian economics only put forward “logical predictions“, that is, it is subject to ceteris paribus clauses (and therefore only has limited operational content)?

I responded, saying that Austrian economics, for example, predicted boom-bust cycles as a result of expansionary monetary policy, to which was replied (quite correctly) that other business cycle theories entertain the same prediction. It thus turned out that the person who asked the question really meant, What are the uniquely Austrian predictions?, and I responded in terms of the business cycle example by saying that the specific transmission mechanism could be seen as a uniquely Austrian prediction.

Peter changed the terms of the debate somewhat by arguing that explanation and prediction were two different things, and one shouldn’t condemn an approach for not being strong predictively, as long as it was strong explanatorily. Joe Mahoney added that in general processes approaches were likely to be stronger in the explanatory dimension than in the predictive dimension. Peter then asked for other questions.

However, it it worth pondering the issue of “what Austrian economics predicts.” If by “predict” we mean putting forward unique (i.e., not embodied in other economics approaches) conjectures concerning mechanisms in the economy, I think there are plenty of such predictions. Regardless of what one may think of the plausibility of the Austrian business cycle story, the specific mechanisms conjectured by the Austrians to be operative in boom-bust cycles are unique to the Austrian approach. The Misesian calculation argument, in all its complexity and mix of property rights and evolutionary arguments, also seem pretty unique to the Austrian approach. My co-blogger has a very nice paper, published ages ago, where he argues that the boundaries of firms are constrained by what are essentially Misesian calculation problems. With a frequent co-author I have sketched an argument to the effect that bringing Austrian ideas on the entrepreneurial market process inside firms provides identifies new transaction costs that help shape firm organization (e.g., here). Such stories are clearly testable. They embody distinct predictions. Other examples may be found in the modern Austrian literature.

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Entry filed under: - Foss -, Austrian Economics.