A Review of Subjectivism and Economics

In preparation for an article arguing in favor of objective value, this article goes over comparative views on subjective value among economists. Basically, all economists recognize subjective value, but to different extents and with subtly different meaning.

I claim that Austrians emphasize subjective value in a decidedly more extreme way compared to other schools. I take the Chicago School as a more or less mainstream comparative example.

The Chicago School is fond of equilibrium analysis, efficient markets, and fundamental analysis in business and finance. All of these approaches have an objective value flavor to them. An equilibrium price under which all producers and consumers are price-taking is effectively objective. Fundamental analysis likewise supposes something like objective value in the subject of analysis. I would characterize this approach as soft subjectivism, which I also take to be the ordinary form of subjectivism, and which is in contrast to radical subjectivism.

At the same time, they acknowledge no microeconomic problem can be solved without the existence of preferences. Indeed, Milton’s revolution was to say that macroeconomic fundamentals such as the rate of inflation are entirely beside the point. What matters is the expected and perceived values of those factors. This is why macroeconomic problems can arise from unstable currency and other issues or mistakes leading to systematic error by investors, consumers, the State, and so on.

The Austrians would agree in some sense. Garrison’s aggregate ABCT model shows how an unsustainable boom followed by a bust are the result of expansionary policy. The boom, however,  does not obtain if the expansion is entirely expected. David Friedman (my fav) seems critical of ABCT because it depends on investors failing to learn over time. See this poor Rothbardian Circle lad try to give a defense.

Frankly I have to agree with the Austrians in that investors can’t ever be perfectly informed. It is not the case that ABCT requires that investors don’t learn. It is the case that it requires that investors produce systematic error. They may learn, but never to such point as to entirely eliminate some measure of systematic error. The contrast between David and the Austrians here looks very much like the broader contrast between the Chicago idea of stipulated or obtained equilibrium and the Austrian idea of perpetual equilibration. David seems to believe that investors which learn about the pattern of the State would eventually be able to fully correct and obtain an equilibrium produced by errorless forecasting. I think the Austrian analysis allows for investor learning, but it would contend that investor learning never results in the elimination of some systematic error. Investors may, and do, tend to correct for government’s calculative errors over time, but investors will never be able to correct with entirely or with certainty, so there will always be some error. More strongly, the Austrians claim this error is systematic and it is expected to move in a particular direction. I see no issue no issue with those claims and I think they have been historically supported. Unfortunately the Austrian distaste for econometrics hasn’t served their case.

The Austrian School rejects equilibrium analysis. The typical line is we are never at equilibrium and we are always equilibrating, in line with Hayek. Some Chicago types might agree, but GMU is not on the same page with Fama in that GMU’s understanding of the equilibrating process a la Boettke and Coyne is that there are forever huge profit opportunities and the market is never at an efficient allocation in the price-theoretic sense of the absence of gains from trade and the exhaustion of profits. In applied work, the idea of starting with an equilibrium and anticipating the effect of some change is in some sense ridiculous to many Austrians, because it supposes an incorrect starting point. Many Austrians prefer a focus on the emergent process from more or less a state of nature toward a theoretical equilibrium which may be a moving target and which is never actually obtained. A classic example of this process line of thought is the Regression Theorem. More extreme Austrians, such as Wagner, even doubt the reality of a theoretical equilibrium and they prefer non-equilibrium theory. I disagree with such thought, but sources for more discussion there are found at the end of the article.

Austrians are notorious for rejecting econometrics. Some have argued that on principle while others, such as Coyne, Leeson, and perhaps even Boettke, embrace compatibility of Austrian economics and econometrics in principle, yet because it’s not super important for publishing in the Austrian journals it takes a back seat. If Austrians did conduct empirical work, as the Chicago School does without ceasing, I have little doubt that Austrians would be forced to conclude that the world appears to be insignificantly far away from a theoretical equilibrium in certain markets at certain times. Perhaps such a finding would dispose the school to more strongly consider the possibility of objective value. As it stands, the extreme Austrians outright reject equilibria in theory, while the Hayekians and less extreme Austrians see equilibrium as something to be approached in the limit, never obtained, and itself the subject of frequent movement. In conclusion, I claim that Austrians are more doubtful of objective value compared to someone from the Chicago school.

Interestingly, Austrians would say that the market is perfectly efficient and rational in a sense other than the sense meant by Chicago school folks. I have seen many a confused argument arise from this semantic pollution, particularly in Leeson’s class. Not because Leeson is particularly confused (he’s in fact brilliant) but because he is such a fan of price theory and yet he rejects the Chicago idea of rationality or efficiency in adamant favor of the Austrian idea, even appearing to agree with Wagner in many cases. Austrians say the market is perfectly efficient in the sense that everyone is always ecologically rational and value maximizing subject to constraints. Importantly, such constraints include lack of information, cognitive limitations, the influence of social institutions, and so on.

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