Note on the Austrian School

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By FERNANDO NOGUEIRA DA COSTA*

The Austrian School does not promote science, but an ideology in defense of capitalism

Economists of the Austrian School consider that the only means of elaborating a valid economic theory is the logical derivation from the basic principles of human action, a method called experimental praxeology. It's a hit or miss trial. Economic agents would seek to repeat the successful action.

Then, cataloging this instinctive practice, they imagine building a theory of the best decisions, useful as a daily guide. For them, economics is restricted to the analysis of human action, according to the perspective of individual agents.

This methodological individualism would allow the discovery of fundamental economic laws, valid for all human action. It differs from methodological holism, which seeks to capture the laws of social movement, that is, the factors responsible for the dynamics – variations over time – of the capitalist system.

The “Austrians” seek the explanation for macroeconomic phenomena based on the action of individuals, and not on collective entities, as historicism or Marxism does, for example. They reject any macroeconomic concepts and aggregates if they are not grounded in individual action.

In this sense, they disagree with Aristotle. More than 2.500 years ago, he stated, "the whole is distinct from the mere sum of its parts." This is strange in mathematics, where the sum of one and one equals two. But in other areas of knowledge this qualitative change of the whole, when a certain number of particular individuals are brought together, is adequate.

Methodological individualism has its philosophical origins in rationalism. It places the particular subject as the main responsible for the elaboration of the knowledge process. The theoretician would have the role of ordering the data of experience, according to logical categories, and, therefore, innate to the intellect.

Thus, a priori individual attitudes would be independent of experience, including collective ones, when, for example, a complex system would emerge from the interactions between economic agents. The challenge for adherents of holism is to interpret this complexity with simplicity, without binary Cartesian reductionism like “us versus them”.

Individual human action is the starting point for choosing agents. One of the premises of Neoclassicism, whose common thread still feeds the “hearts and minds” of self-classified economists as belonging to the mainstream (“mainstream”), is the principle of rationality.

According to this rationalism, economic agents maximize their utility and profit functions, that is, they act rationally. They also defend atomism: free markets, including the labor market, tend towards equilibrium via the flexibility of relative prices. They crown this trilogy with the premise of information symmetry: all agents have perfect information and are never wrong

Ludwig von Mises (1881-1973) and Friedrich Hayek (1899-1992), gurus of the ultraliberal “Austrians”, also defend the idea of ​​spontaneous order: the system of free relative prices indicates a better allocation of capital against the “tyranny of the collectivist majority” ”.

Their anticommunism is confused with the defense of the minimal State: businessmen would refrain from investing when they feared public spending would lead to higher taxes or inflation. They complete this anachronistic thinking in the face of real history with Say's Law of only saving being channeled to investment: for them, recessions are consequences of an artificial credit cycle, whose consequent crashes and bankruptcies must be supported, but not cured by the State .

Austrian economists reject testability in economics as virtually impossible, as human actors cannot be placed in a laboratory setting without altering their possible actions. Other economists, including orthodox mainstream, criticize the methodology adopted by “Austrian” Economics: it lacks scientific rigor, because it is not subject to a falsifiability test against empirical and/or statistical evidence.

Behavioral economics criticizes its premise of rationality. On the contrary, economic agents base their decisions on inconsistent rules of thumb, biased beliefs or bad arguments. They have a perception of risk and return influenced by the way the problem is presented, without maintaining the assumed rationality.

This economic thinking of the Austrian School is typical of the extreme right. It adopts the dogma of meritocracy as the explanatory principle of social inequality.

It presupposes that if all individuals had identical bargaining power, all had started exactly at the same starting line, that is, without any starting with an advantage, and no one had resorted to violence, fatally, some more competent individuals would see their equity grow while others less competent would see their equity stagnate or even shrink.

It raises the hypothesis that there are three large groups of individuals: the first is made up of those who save strictly what is necessary to replace their capital; the second saves more than is strictly necessary; and finally those who save below what is necessary. The first group of individuals will only be able to conserve their capital. The second group will tend to increase its capital and manufacture more consumer goods in the future. The third group will see their equity shrink.

Some individuals would consume too much in the present at the expense of having to dispose of their capital, others would increase their capital at the expense of consuming too little in the present. Just for this behavioral reason in relation to savings, profound changes in equity will occur.

Individuals born with the “misfortune of the cradle” would have not very cautious antecedents for having disposed of all their capital. The descendants of slaves will always have to work for other individuals capable of maintaining or increasing their capital.

Far from this historical reality of slavery, the “Austrians” say that the behavioral decision between saving or consuming is crucial to explain the difference in equity between capitalists and “others”. The Austrian School does not disseminate science, but an ideology in defense of capitalism, that is, conservative of the status quo.

Success in undertakings is the main explanatory cause of why some individuals can increase their capital while others can decapitalize. They therefore have to work for the former until they manage to save enough capital from their wages to return to being independent producers.

There is yet another cause. Partly derived from the above, the propensity to take risks also explains how people's wealth could become unequal.

Therefore, there would be three valuable economic virtues in all capitalists: postponement of their own consumption to finance investments, selection of successful investment projects, and patrimonial concentration of risks.

The fact that the worker does not receive the full value of production, for the “Austrians”, has nothing to do with the exploitation denounced by Marxists. It simply reflects the fact that it is impossible to exchange future goods for present goods without a discount. Wages represent present goods, while value added by labor represents future goods. From there arise the patrimonial differences: the compensation for the “sacrifice” of the capitalists in waiting for the future enjoyment.

Someone will always have to concentrate the functions performed today by capitalists. That someone would take the remuneration currently received by capitalists. And then all the wealth inequality would be back.

Could the state replace all capitalists? Charities or welfarism deal with the redistribution of wealth: they coordinate the transfer of some people's surplus to supply the scarcity of others. Private sector businesses, on the other hand, deal with wealth creation through the production and sale of goods and services desired by people.

According to the right, “only capitalism can make greed and selfishness improve people's lives. Charity is essential, but it does not eliminate poverty; only capitalism does.” The Austrian School does not test such an ideological claim with statistical evidence.

Faced with this binary reductionism, between the State and the market, the third included is the community. It conquered the Social Welfare State, after the defeat of Nazi-fascism, when its bargaining power, through parties of labor origin with their leftist ideology, reached the Republican powers.

*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Support and enrichment network. Available in https://fernandonogueiracosta.wordpress.com/2022/09/20/rede-de-apoio-e-enriquecimento-baixe-o-livro/

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