Primer Parcial - Economía Austriaca

I. Epistemology and Scientific Methodology

A. Distinctions in Scientific Approaches

• The history of science recognizes a distinction between two main methodologies:

  • Galilean Methodology (Hypothesis Testing):

    • Sees science as the formulation and testing of hypotheses.

    • Focuses on quantitative laws.

    • Aims for prediction and explanation of specific future events.

    • Often associated with the scientific method.

  • Aristotelian Methodology (Descriptive and Qualitative):

    • Views science as a descriptive enterprise.

    • Focuses on qualitative laws governing connections between essences or categories.

    • These laws are often considered knowable a priori.

• A heuristica (or heuristic device) is a creation or apparatus of the mind used for understanding something abstract, like a mental model (e.g., the supply and demand curve).

B. Apriorism, Realism, and Knowledge

• Epistemology is the study of how we acquire knowledge and how we know that knowledge is true.

• A Priori Knowledge: Knowledge that can be determined without reference to experience or experiment.

• Aristotelian Realism (Ontology):

  • The world exists independently of our thought.

  • Reality possesses intrinsic intelligibility, meaning humans are intellectually capable of comprehending its structure.

  • There are exact laws that express universal connections amongst essences and are subject to no exceptions.

  • The core essences or natures of reality constitute an alphabet of structural parts across different segments or levels of reality.

• Mises's Epistemological Stance:

  • Mises's methodology (praxeology) is aprioristic and deductive, based on universal axioms of human action.

  • He employs apriorism (like Kant) but maintains the Aristotelian belief that our mental categories/structures function as representations of the real order of the world.

  • Mises thus bridges Kantian formal methodology and Aristotelian realism.

C. Praxeology: The Science of Human Action

• Praxeology: The science of human action that focuses on the necessary implications of the fact that individuals act purposefully.

  • It assumes that individuals act rationally in function of ends and means to achieve their interests.

  • The goal of the human sciences is intelligibility, not prediction.

• Knowledge from Within: Human sciences (sciences of human action) differ from natural sciences because we possess "knowledge from within" (self-awareness and empathy) about the intentions and plans of human actors.

  • The Moving Boxes Metaphor illustrates that mere observation of external behavior is insufficient; understanding the actor's purposes and plans is crucial for intelligibility.

D. Historicism and the Methodenstreit

• Historicist School: A prevailing school of thought, challenged by Menger, that held that economic science was incapable of generating universal principles.

  • Focused instead on historical examination specific to cultures or nations.

• Methodenstreit (Dispute over Method): The influential methodological dispute between Carl Menger and Gustav Schmoller (leader of the Historicist School).

  • Menger defended the possibility of a universal and atemporal economic theory.

II. Foundational Austrian Economic Concepts

A. Value, Utility, and Costs

• Marginalist Revolution: Begun by Menger (among others) in 1871, shifting economic theory from the cost-based classical theory of value to the subjective theory of value.

• Subjectivity of Value: A core tenet.

  • A good is valuable only to the extent it satisfies a subjective human want.

  • Value is based exclusively on the mental states or subjective preferences of individuals.

  • Law of Imputation: The value of producer goods (higher-order goods) is derived (imputed) from the value consumers place on the final product (consumer goods or lower-order goods), not from the costs incurred.

• Subjectivity of Costs: Costs are also subjective, understood primarily as opportunity cost.

• Scarcity: Defined as a logical condition, not a physical property.

  • A resource is scarce if we want it.

B. Economic Calculation and Capital

• Economic Calculation: The rational ability to estimate the value a production plan may have in the future.

  • Private property of the means of production is necessary for rational economic calculation.

  • Without prices derived from private property rights, calculating the most efficient use of resources is impossible.

• Capital (Böhm-Bawerk): Capital is the bridge in time separating multi-period production plans from final consumer demand satisfaction.

  • Roundabout Economy: Refers to the sequential production stages required in more complex, richer economies.

• Capital Structure: Consists of heterogeneous goods that have multispecific uses that must be aligned.

  • Capital goods are not quickly reallocated to different production processes if mistakes are made.

  • The capital structure is best viewed as a structure of plans.

III. Market Process, Entrepreneurship, and Knowledge

A. Market as Process (Exchange Paradigm)

• Austrian economics uses the exchange paradigm (or market process).

  • It views the economy as a continuous process of adaptation driven by human interaction, not a focus on static equilibrium.

  • The objective is to understand exchange relationships and their unintended consequences.

• Catallaxy (Catalactics): Hayek's preferred term for the market order.

  • Refers to the spontaneous order resulting from the mutual adjustment of many individual economies in the market.

  • Metaphorically, it is the process of making an enemy a friend through voluntary exchange.

• System of Prices: The price system is a fundamental mechanism that economizes information for decision-making.

  • Prices serve as a guide and a reference for individual plans and resource allocation.

B. Entrepreneurial Discovery

• The market process is a process of entrepreneurial discovery.

  • This discovery drives the constant reallocation of resources toward their most valued use.

• Entrepreneurship:

  • Is an aspect of human action (something everyone possesses), not a type of person.

  • It is fundamentally a cognitive phenomenon—an alertness or attention to overlooked opportunities.

  • The essence is not assuming risk, but standing outside existing cognitive frameworks (seeing things others miss).

• Discovery and Profit:

  • The pure entrepreneurial act is the discovery of opportunities to buy cheap and sell dear (arbitrage).

  • Profit (Gain): Results from the entrepreneurial correction of errors stemming from over-optimism or over-pessimism (differences in subjective valuation).

  • Profits and losses are essential because they function as a mechanism of discovery and provide incentives for actors to adjust their plans.

C. Knowledge, Risk, and Uncertainty

• Dispersed Knowledge: One of the main challenges addressed by the market process is the dispersed nature of knowledge and information among individuals.

• Ignorance Radical: The state of knowledge where the individual does not know what they do not know (complete lack of awareness of available opportunities).

• Uncertainty (Knight's Distinction): Refers to events that are not insurable because the structure of the problem is unknown or the outcomes cannot be enumerated (Structural Uncertainty).

• Risk (Knight's Distinction): Refers to events that are insurable because they can be characterized by Class Probability (all possible states of the world are known).

  • Entrepreneurial discovery often works to reduce subjective uncertainty by acquiring knowledge.

IV. Social Analysis, Institutions, and Individualism

A. Methodological Individualism

• Methodological Individualism (MI): The core methodological commitment that holds that all social phenomena must be explained in terms of the individual's properties, goals, and beliefs.

  • MI focuses on how we comprehend social phenomena, and is not inherently a political statement.

• Ontological Individualism: The premise that only individuals have purposes, plans, or choices.

  • This ontological position justifies MI.

B. Institutions and Order

• Institutions: The formal and informal rules (laws, customs, and traditions) that affect individual interactions.

  • They play an important causal role and must be included in social analysis.

  • Causal Genesis: Austrian analysis emphasizes understanding the origin and evolution (causal genesis) of institutions.

• Spontaneous Order: Orders that emerge from human action but not human design.

  • Examples include money and the common law.

C. Culture and Meaning in Social Science

• The facts of the social sciences are defined as what people believe and think.

• Culture (or Social Stock of Knowledge): A system of inherited conceptions and attitudes that provides the context and necessary interpretive framework for individual action.

  • This includes interpretive schemes, relevance systems, and recipes (established knowledge, like a business model).

• Ethnography: A qualitative empirical method emphasized by subjectivists that seeks to recover the meanings individuals attach to their actions and environments.

  • Requires generating thick descriptions (capturing context and motivations) to distinguish purposeful action from mere reflex.

V. Key Historical Figures and Developments

A. The First Generation

• Carl Menger (1840–1921): Founder of the Austrian School (1871). Introduced subjective value and the atomistic method.

  • Key works include Principles of Economics.

• Eugen von Böhm-Bawerk (1851–1914): Systematized the theory of capital and interest.

  • Refuted Marx’s labor theory of value.

B. The Second and Third Generations

• Ludwig von Mises (1881–1973): Considered the most distinguished successor to Menger.

  • Developed praxeology and argued for the impossibility of economic calculation under socialism.

  • Wrote the systematic treatise Human Action (1949).

  • Conducted the highly influential Privat-Seminar in Vienna.

• Friedrich A. Hayek (1899–1992): Disciple of Mises, influential in economics, law, and philosophy.

  • Emphasized the market process as a discovery procedure governed by dispersed, imperfect knowledge.

  • Advocated for the catallaxy and spontaneous order.

C. Contemporary Figures

• Israel Kirzner (1930–): Key figure in entrepreneurial theory.

  • Focuses on entrepreneurial alertness and the discovery of overlooked opportunities.

• Murray Rothbard

• James M. Buchanan: A figure who influenced contemporary Austrians. His work focuses on removing romanticism from politics, viewing political actors as pursuing their own self-interest.

D. Philosophical Context

• Ayn Rand (Objectivism): Her philosophy emphasizes that reality exists as an objective absolute and that man's mind (reason) is his means of grasping it.

  • She criticizes altruism (the moral duty to live for others) as making man a sacrificial animal.

• Max Weber: A methodological individualist who emphasized Verstehen (interpretive understanding).

  • He is known for relating the Protestant ethic to the spirit of capitalism.

• Émile Durkheim: A methodological holist who argued that social phenomena cannot be reduced to individual action, emphasizing the influence of social norms and collective beliefs (e.g., solidarity types: mechanical and organic).