Uniting the Austrians and the Neoclassicals

Austrians and Neoclassicals have a ton of things in common. They are both economists. OK that’s just about all they have in common.

Except not.

As economists, Austrians and Neoclassicals both want, among other things, to learn how to maximize economic growth. Before growth can be maximized, however, it must be modeled. While the two schools model growth differently, they all do it with models.

Austrians utilize the Austrian Trade Theory of the Cycle and Austrian Business Cycle Theory. These two models imply the Austrian solution of a savings-based economic growth model.

Neoclassicals utilize the Solow-Swan model and variants thereof. An important descendant of that model is the Ramsey–Cass–Koopmans model, which endogenizes, or brings inside the model, the savings rate.

The Golden Rule Savings Rate is the rate of savings which maximizes economic growth. The Austrian GRSR is also the rate which maximizes savings. The Neoclassical GRSR is also the rate which maximizes consumption. Could the two solutions be more opposite one another? I would contend they are actually saying the same thing.

The Austrian model assumes a model of human action. In this model a person tautologically must do that which they believe best accomplishes their ends. This complex logical model can be reduced, perhaps a bit simplistically, to the statement, “A person will maximize their own utility.”

The Neoclassical model assumes a rational actor of insatiable wants. In this model a person must have as much as possible. As much as possible of what? No, not goods. The answer is utility. But, you would rightly respond, in a classic rational actor problem utility is always maximized by consuming the maximum amount of goods.

This is the real crux of the issue. The neoclassical assumption that more is better. Many contemporary neoclassical economists openly reject this tenet of economics, even while using it in their models. Marginal utility is never negative, and they are reluctant to even allow for marginal utility to = 0, but in the real world both of these happen all the time.

Have you ever eaten a cheeseburger? It wasn’t too bad was it? Would you want a second? Maybe, but you are getting really full by now. “EAT!” Says the Neoclassical. “EAAAAAATTTT! YOU WANT TO EAT AN INFINITE AMOUNT OF THEM I STUDY ECONOMICS!”

In real life, you would totes die.

What happens once we allow for the possibility that marginal utility can be negative or neutral? What if you do not want one more cheeseburger? What if you are saving, not out of a preference for saving per se, but out of the preference to consume nothing? From a goods and services perspective this doesn’t make sense to the neoclassical, but from a purely utilitarian and behavioral perspective there are actual times where we prefer to consume nothing, which is the same as preferring to save, even if we do not consciously chose or prefer to save.

The Neoclassical maximization of consumption ceases to imply a maximum consumption of goods and services. It merely implies, “A person will maximize their own utility.”

Well imagine that! Neoclassicals and Austrians are saying the same thing. If they step back from their policy solutions and look at the facts, they are both saying:

“People will save as much as they want to save. This will in turn maximize their ability to do what they want.”
Economics is deep man I’m telling yall. Sarcasm aside though, real economics does not focus on stuff. Producing the maximum amount of stuff is not optimizing the economy, it is not optimizing quality of life, and it is not accurately modelling what people actually do nor what they should do. Once we rightly put the focus on utility rather than goods and services, the Austrians and Neoclassicals are not saying anything widely different from one another in my view.


Leave a Comment