A Spectacle Due To Spectacles

I was recently recommended to read Bryan Caplan‘s 1999 article “The Austrian Search for Realistic Foundations” (JSTOR). Caplan is no doubt an intelligent scholar, but he does not show this fact in the mentioned article. Rather, to any reader knowledgeable in Austrian economics, this article appears at best to be a spectacle.

The reason for this post’s title is the very basic mistake Caplan makes throughout the article. Granted, it is all too prevalent in scientific discourse and it is a very easy mistake to make (I am bound to have made it myself at times). In fact, it is not a phenomenon exclusive to science; one may argue that it is a fundamental part of political discourse and rhetoric, especially in agitation. Yet science is supposed to be free of rhetoric, so why does Caplan make this mistake?

The answer is that most people (and this most likely applies to Caplan in this case) are not aware of them committing this type error. The problem is perspective: the fact that one cannot understand another’s arguments simply because one does not share his or her perspective. This is where scientific method is crucial, since it attempts to do away with most of the idiosyncratic perspective vision of the scholar in order to reveal the naked facts and subject them – rather than the perspective – to scrutiny.

In other words, the error committed by Caplan in the aforementioned article is that he attempts to critique Austrian economics, and especially prominent Austrians’ critique of neoclassical economics, from the perspective of neoclassical economics. It may be the case, a point which I’m leaving out of this discussion here, that Mises, Rothbard, Kirzner et al. are making the same mistake in their critiques of neoclassical economics, but that is not the point Caplan is trying to make. Rather, he is attempting to prove Austrians’ arguments for Austrian points wrong.

In order to do so, it is necessary for him to analyze the arguments put forth from the point of view of Austrian economics. After all, one cannot critique e.g. Mises’s and Rothbard’s very Austrian point that indifference cannot be manifested through action from a neoclassical point of view; the only result of doing so is confusion. And, unfortunately, confusion is the only thing a knowledgeable reader will gain from reading Caplan’s article.

I will here focus on only one of Caplan’s arguments, the one on indifference. However, this should not be interpreted in his favor: the error unfortunately permeates the article. But the interpretation on indifference, and especially Mises’s and Rothbard’s rejection of it, is of fundamental importance. (And yes, I realize my saying so may be interpreted, especially by non-Austrians, as my being dogmatic rather than analytic in my approach. But let’s see to the argument before drawing any premature conclusions.)

Caplan seemingly attempts to make two points in this section. First, he wishes to show that individuals can indeed be indifferent even though Mises and Rothbard seemingly do not accept this view. Second, and in support of the first argument, he shows that focusing on action is limiting in that it may not in fact reveal preference but may be a result of true indifference. He even makes an admittedly nice rhetorical point that an actor may indeed through introspection (an obvious swipe at Austrians adhering to the Misesian method) know he is indifferent, yet still choose to purchase a sweater of a certain color instead of the other (the example used by Caplan).

But this completely misses the point; Caplan simply doesn’t get what Mises and Rothbard are talking about. Austrian economics is not another brand of neoclassical economics, even though some self-proclaimed Austrians claim so, but a different paradigm (just as Rothbard claims). Neoclassical economics tries to understand (or, rather, explain) choice, whereas Austrian economics are only indirectly interested in choice – Austrians study patterns arising due to action. Caplan obviously doesn’t get (or chooses to disregard) this fact.

From Caplan’s neoclassical point of view, being interested in the individual’s choice and therefore his true rather than revealed preference, it matters a great deal if an actor indeed doesn’t care (i.e., is indifferent) if he ends up purchasing a blue or a green sweater. Caplan is trying to understand consumers’ preferences, which is a necessary psychologism part of neoclassical economics (this necessity follows, in my view, from an erroneous focus on subjects’ choice rather than the economically much more relevant action).

Indifference makes a difference (no pun intended), since neoclassical economists are trying to explain and, perhaps more importantly (at least if we trust Friedman), predict choices. Our future predictions of market demand are dependent on our understanding if you strictly preferred the green sweater that you ended up buying – or if you really didn’t care and could as easily have tossed a coin. (The latter, of course, signifies a strict preference for a sweater as compared to no sweater and/or the money you paid for it.)

From this perspective, the action itself doesn’t matter much since next time you might end up picking the blue sweater. In order to predict whether to produce only a billion green sweaters based on the data we have on your previous choices or if we should perhaps produce both blue and green sweaters, indifference is of fundamental importance. As Caplan’s discussion implies, the Misesian and Rothbardian statements that such indifference is basically worthless since it cannot be revealed (manifested) through action are ridiculous and false.

Taking this one step further, since neoclassical economists (like all of us) only have data on the actions taken – i.e., that you indeed bought the green sweater – it is very important to figure out what this means in order to correctly predict future actions as well as what to do with the data, how to interpret it, and how to use it. As was suggested above, a producer of sweaters need to know if the demand for green sweaters is due to strict consumer preference or simply coincidence; and, more importantly to the neoclassical economist, this producer and regulating agencies will hold you accountable if your predictions turn out wrong. So you need to know: was the action based on strict preference or not?

But Caplan misses the basic point here: that neither Mises nor Rothbard are neoclassical economists. He also seems to misunderstand that Mises and Rothbard, as well as other Austrians, do not share neoclassical economists’ view of economics. Mises and Rothbard do not dogmatically focus on action simply because they have a thing for action. They focus on action because their perception of economics is different from that of neoclassical economists such as Bryan Caplan.

To Austrians, what is important is not an individual’s choice. And by choice, I  here mean  a “meatier” concept than simply to make a decision; a choice necessarily includes the weighing or ranking of available alternatives as well as the preferences and preference rankings (and perhaps values) on which such a ranking is made whereas decision is simply the non-reflective selection of one of the alternatives. Choice, in other words, implies the process of reflecting on the meaning of selecting one rather than the other, whether decision is simply picking one.

Austrians study action and, more importantly, the processes created and patterns arising in an economy due to individual action. The difference is fundamental and pervasive: Austrians try to understand market phenomena based on what can be observed in the market place – they do not (at least not primarily) try to predict people’s choices.

Let’s recapitulate for the sake of clarity.

Neoclassical economists necessarily tread into the territory of psychologists in order to try to understand people’s true preferences (or lack thereof) through which their actions may be explained and, consequently, future actions predicted. Their focus is almost exclusively on trying to predict what will happen in the future, which makes the reasons for actions important – if we see future actions change, this means that people’s reasons have changed. There is a one-to-one relationship between reason and actions, and the reason is the cause – and we need it in order to predict future effects (actions).

Austrians do not attempt to predict the future, but wish to understand phenomena. How do we understand a phenomenon in the market? Only through tracing it back to its basic components, i.e. people’s actions. Does it matter what exact reasons people had for those actions? Does it matter if a million consumers felt they were indifferent so they tossed a coin and they all got heads, so they purchased a million green sweaters? The answer is no. We are not attempting to explain why people chose green sweaters – we are attempting to understand (and explain general causal relationships) the effects of a million people suddenly buying green sweaters.

As Austrians, we need only realize that there was something that made these million people choose to buy green sweaters rather than blue ones (or pants, or groceries, or nothing) and that this something (which could be unique for each of the million consumers) means they all – for whatever reason – preferred to pick up the green sweaters. Because we know, through introspection and experience, that if they did not prefer the green sweaters to the alternatives available to them, they would not purchase them.

So we can without any problems whatsoever assume strict preference through observing action. This does not mean that the individuals’ choice to actually buy the green sweaters was swift, obvious, and without agony. (These things do not matter to us, because we are not attempting to predict their future choices and do not need to understand their exact preference rankings.) It only means that we know that a million people ended up acting to buy green sweaters (rather than anything or nothing else), and from this – through our causal-realistic understanding of economic phenomena – we would expect to see certain things.

This ties in to the Austrians “inability” to exactly predict when e.g. a bubble will burst or what the future price of green sweaters will be. We are not in the business of psychologizing or predicting people’s actions, but only in understanding phenomena. As Austrian economists, therefore, we can say that the sudden actions of a million consumers to pick up and purchase green sweaters will create a sudden (perceived) shortage of green sweaters, which will spur production of green sweaters and, perhaps, investments in higher order goods to increase production of green sweaters. Simply because we would expect suppliers to assume (correctly) that there is an overall increase in the demand for green sweaters and also assume (correctly or not) that there are profit opportunities in producing green sweaters (rather than blue, or whatever) for next week’s sales.

We cannot say if the latter is true, of course, since the future is uncertain. We know from experience that entrepreneurs tend to make profits through more or less correctly anticipating people’s actions, but we do not know how (or who or when).

Neoclassical economists tend to focus on trying to systematically do what successful entrepreneurs do: predict future actions. And they try to do so through assuming they know something about the choice people make (or, more correctly: the choices people made), even though they can only observe people’s actions. And based on this, these economists provide industrialists and regulators with predictions based on which the latter make plans.

Yet it is, as Austrians realize, but a guessing game, and a pretty naive one at that. And, so far, this undertaking of theirs has been quite unsuccessful. After all, when is the last time a neoclassical economists accurately predicted, as is their aim, an event?

Whereas I do not hold Caplan at all responsible for any of the failures of neoclassical economics, his critique of Austrian economics fails due to the neoclassical spectacles through which he has chosen to look at the works of Mises, Rothbard, and others. And the result is at best a spectacle.