The Corruption of Economic Science - Part 2

In continuation of yesterday's post, I would like to add the following.

Let me begin with the opening paragraph of the Royal Swedish Academy of Sciences' "Information for the public" document on this year's Nobel Prize in Economic Science. That is, the opening paragraph of the section "The theory takes shape," wherein the achievements of this year's awardees is described. The Academy says:

In the 1960s, researchers had already begun to use mathematical models to study the best possible way in which a buyer can try to find an acceptable price. In a renowned article from 1971, Peter Diamond examined how prices are formed on a market where buyers look for the best possible price and sellers simultaneously set their best price while taking buyers’ search behavior into account. Even small search costs turned out to generate a radically different outcome compared to the classical competitive equilibrium. In fact, equilibrium prices are equal to the price which a monopolist would have set on a corresponding market without search costs. This result attracted considerable attention and initiated intensive research on search markets.

The notion of "equilibrium" is entirely foreign to Austrian Economics. Equilibrium is a concept borrowed from Physics by mathematical economists of the Lausanne School - and its most horrible result has been the utterly fantastic idea, one that has no bearing whatsoever with reality, of "general equilibrium." Combined with the equally fantastic notion of "perfect competition," these absurd ideas have been used to berate real markets for falling below the "standards" set by these mathematicians / pseudo-economists. Their ideological father is Leon Walras, credited with the discovery of the "marginal revolution" in 1871, along with Carl Menger of Vienna, who founded the Austrian School. Yet, Walras' ideas were totally different from Menger's, who shunned mathematics and inaugurated a true science that is realistic, subjective, individualistic and entirely logical. It was Ludwig von Mises who, in the twentieth century, developed on Menger's initial ideas and built the towering edifice of Austrian Economics that stands proud and tall today.

To the Austrians, markets are ALWAYS in disequilibrium. There is a TENDENCY towards equilibrium, but this is always disturbed by the emergence of fresh data. The idea of an "evenly rotating economy" is just a mental construct, used in an extremely limited fashion, in order to understand real life markets better. In real life, there is never any equilibrium. The "evenly rotating economy" never happens. Thus, the "science" of the Austrian School is vastly different from that which the Royal Swedish Academy of Sciences is referring to.

Of course, in order to understand the complexities of the real world, Man has always looked out for "regularities." Without regularities, all would be chaos and confusion, nothing would be understandable and predictable, and Man would be utterly clueless. The earliest regularities observed and recorded had to do with the appearance of day and night, the moon and the stars, the tides - and these led to the emergence of almanacs and calendars. But the Science of Economics presented Man with grave difficulties, because NO regularities could be observed. This absence of regularity is only because of the absence of "equilibrium" - for all prices and quantities are always in a flux.

However, the Austrians did discover regularity, of course, but not "out there." Rather, the regularities they discovered were all "in there" - inside the mind of the "acting Man," the individual, in the "logical construct of the human mind," something he shared with all his fellow men. The Austrians, thanks to their individualistic and subjectivistic methodology, their proud inheritance from Carl Menger, discovered "laws of thought" - and since humans act according to these laws of thought, their Science of Economics predicts with "apodictic certainty."

For example, the concepts of Capital and Income are "mental categories" - present in the mind of even the most primitive of herdsmen, who carefully count their sheep and cattle to ensure that they are not "consuming capital." I have another post here on how the Laws of Demand and Supply are "laws of thought," mistaught today by the mainstream.

Indeed, to the Austrians, all phenomena must be traced back to the mind of the acting individual. Menger's Principles of Economics (1871) thus traces back money to the mind of the thinking and trading man. Money is NOT a creature of The State.

Let me now quote for my readers the opening paragraph of Ludwig von Mises' Human Action: A Treatise on Economics, pdf here.

Economics is the youngest of all sciences. In the last two hundred years, it is true, many new sciences have emerged from the disciplines familiar to the ancient Greeks. However, what happened here was merely that parts of knowledge which had already found their place in the complex of the old system of learning now became autonomous. The field of study was more nicely subdivided and treated with new methods; hitherto unnoticed provinces were discovered in it, and people began to see things from aspects different from those of their precursors. The field itself was not expanded. But economics opened to human science a domain previously inaccessible and never thought of. The discovery of a regularity in the sequence and interdependence of market phenomena went beyond the limits of the traditional system of learning. It conveyed knowledge which could be regarded neither as logic, mathematics, psychology, physics, nor biology.

Yes, Economics is an extremely young science - and it really begins with Carl Menger's Principles in 1871, barely 140 years ago. Menger's followers alone have built upon his achievements, against huge odds, complete neglect, and total disregard. This, indeed, is the story of Mises' life. It has been reported that, towards the end, Mises was so utterly despondent and pessimistic that he told a friend: "Perhaps, a thousand years from now, they will discover my writings like the Dead Sea Scrolls."

Allow me now to quote the last paragraph of Human Action. Mises concludes his magnum opus with these ringing words:

The body of economic knowledge is an essential element in the structure of human civilization; it is the foundation upon which modern industrialism and all the moral, intellectual, technological, and therapeutical achievements of the last centuries have been built. It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not annul economics; they will stamp out society and the human race.

I therefore advise all my readers to ignore and disregard the sort of thinking - if it can be called that - being promoted by the Royal Swedish Academy of Sciences. I suggest you carefully study Human Action.