I also wanted to offer a reply to Antony Davies’s comments. Although I think there are more complementarities between Austrians and parts of the mainstream than some Austrians seem to think, I’m not sure they are as complementary as Davies argues. It’s certainly true that both Austrian and neoclassical economists talk of rationality, and we both value logical argument, but I think those apparent similarities are not very deep. No doubt, expressing economic ideas in the form of an equation can sometimes help clarify our meaning, but as George entertainingly notes in his last contribution, there are times when English is clearer than algebra.
And I think the reasons for this are as George notes: human communication has nuances and subtleties and context that get lost in the formal language of mathematics. Antony rightly reminds us that when we start down the road of a mathematical model we have to keep an eye on whether we’re drifting from reality into unhelpful abstraction. As economists, we have to be willing to judge the trade-off between any gains in precision and clarity that come from expressing our ideas mathematically and the loss of the actual flesh-and-blood human characters that we are talking about.
Like most other economists, Austrians are interested in explaining the puzzles we find in the world in logical ways that rely on some notion of rational behavior by actors. However, in the name of realism we insist that the “problem situation” of those actors is not one in which they have the requisite knowledge to engage in the kinds of maximizing behavior that are at the core of most mathematical models. The engineering solution (what Kirzner called “Robbinsian maximizing” after Lionel Robbins) is at best only part of human action, and it’s the part where we know our means-ends framework and all the information relevant to maximization. The rest, and perhaps the majority, of human action is far more open-ended. Our more typical problem situation is where we don’t even know the ends we seek, nor have we a complete inventory of the possible means we might deploy.
We are in a world of structural uncertainty where we have to discover what it is that the neoclassical model assumes we know. This has been an emphasis of Austrian economics from Menger to Mises to Hayek to Kirzner. The problem with mathematical modeling is that it can too easily cause the theorist to lose sight of the importance of uncertainty and discovery, and thereby come to a weaker understanding of how markets actually work.
Having identified the importance of subjectivism, fragmented knowledge, and structural uncertainty, Austrians are interested in exploring how purposive actors who are looking to improve their well-being as they define it are able to do so by coordinating with other actors similarly situated. Purposiveness and process analysis are the heart of Austrian microeconomics. To focus on maximization and equilibrium, as most mathematical models do and, to a large degree, must, leaves unexplained how real world actors overcome our inability to know the future by making use of social institutions to coordinate with other actors.
That is the real problem situation choosers face and the way they solve it. Like our mainstream colleagues, Austrians see the market as coordinating, in some sense of the word, human choices. However, our depiction of that coordination is one that focuses on coordination as an ongoing process, not as a state of affairs. It is a verb, not a noun. We see coordination as an activity because we start from the alternative problem situation of fragmented knowledge and uncertainty. In that problem situation, coordination will be a matter of discovery, not instantaneous maximization.
Portraying “choice” or “rationality” as maximization rather than purposiveness and assuming that actors know the parameters of their choice situation rather than facing structural uncertainty too easily can lead us to a false understanding of how markets work, and especially the role played by coordinating market institutions. The clarifying aspects of putting economic propositions in mathematical terms have to always be considered in light of the damage that those propositions do to the reality of the social world. I don’t deny that mathematical models can be helpful, but I think I sit farther away from the “complementary” end of the spectrum than Antony does.