Abstract
Behavioral and experimental economics present challenges to the neoclassical theory of individual behavior, which is based on individuals making choices within the framework of utility functions that are assumed to have certain well-defined characteristics. Results in behavioral and experimental economics have shown that it is common for individual behavior to systematically deviate from the neoclassical axioms of utility maximization. Austrian economics is also based on axiomatic theories of utility maximization, but the assumptions underlying utility-maximizing behavior are much weaker in the Austrian approach. As a result, they have more solid behavioral foundations and are less subject to challenge by the empirical findings of behavioral and experimental economics. Neoclassical policy conclusions are often overly strong because of its behavioral foundations which are challenged by behavioral and experimental economics and are often misleading because of the comparative static nature of neoclassical welfare economics. For purposes of policy analysis, the Austrian approach provides better insights because of its more realistic behavioral foundations.
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Notes
Note, for example, Camerer (2003), which bears the title of behavioral economics, but which cites literature which mostly falls into the “experimental” category, indicating the fuzzy distinction between the two.
Two of these books—Besanko and Breautigam (2005) and Varian (2003)—make especially interesting comparisons when looking at the features of the neoclassical framework. While both those books are heavily neoclassical along the lines of Ferguson (1968), other books by the same authors—Bensanko et al. (2004) and Shapiro and Varian (1999)—present a much more process-oriented approach to the behavior of firms. Thus, while Besanko and Varian are very neoclassical in their presentation of textbook microeconomic theory, they clearly recognize economic behavior that goes well beyond what the neoclassical model describes. It is the neoclassical economics in their textbooks that lays the foundation for standard models of economic analysis in the early twenty-first century, however.
This statement on the stability of preferences in fact goes beyond the comparative static neoclassical framework where time is assumed away, but dynamic neoclassical general equilibrium models incorporate time, with stable preferences.
Williamson (1990) discusses the new institutional economics within a framework where all individual choices are rational, albeit with the limits that come with limited knowledge, so the arguments here could be extended to make a connection between Austrian economics and much of the analysis of the new institutional economics, as Williamson (1990) defines it.
One could take another step, following Samuelson (1956), and try to choose the best among the Pareto optimal outcomes, but that is unnecessary for present purposes.
This line of reasoning sets aside the public choice objection raised by Buchanan (1975) that government policies may also fail to allocate resources Pareto optimally. The point is, in the neoclassical framework, if the economy is not at a Pareto optimum, there is a potential policy remedy that could move it to one.
Rothbard (1956) argues that government action signifies a decrease in welfare for a similar reason: the fact that people have to be forced to undertake the activity signifies that they believe they would be better off without it. This aspect of Rothbard’s analysis of welfare economics goes beyond what is required for the analysis in this paper, and is insightfully critiqued by Prychitko (1993), who argues that the logical extension of Rothbard’s ideas implies that no conclusion can be drawn regarding the welfare implications of government intervention. Caplan (1999) offers a similar critique of Rothbard (1956). See also Lewin (1995) for an insightful discussion of welfare economics and efficient resource allocation.
DaimlerChrysler, the manufacturer of Smart, is working on a model of the car that will be legal in the USA, but it is not available as of 2007 because the current models do not meet U.S. regulatory standards.
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Holcombe, R.G. The behavioral foundations of Austrian economics. Rev Austrian Econ 22, 301–313 (2009). https://doi.org/10.1007/s11138-009-0081-9
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DOI: https://doi.org/10.1007/s11138-009-0081-9