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The Realistic Path

April 9, 2012
In his Bloomberg View column today, Economists Have a Lot to Learn from the Weather, Mark Buchanan chides economists for clinging to their neoclassical general equilibrium models in the wake of their spectacular failure to track the financial crisis. A theoretical physicist, Buchanan advises economists to follow the example of atmospheric scientists who supplanted equilibrium models with computer simulations using equations of fluid dynamics in the 1950s in their attempts to track atmospheric flows. That “there’s no stable balance, but ceaseless change” in atmospheric flows because of baroclinic instability leads Buchanan to wonder “if a similar mechanism might be driving financial crises and business cycles that typify the economic ‘weather’ we’ve experienced over the centuries.” He laments that “the mental inertia of theoretical economists” prevents them from abandoning their general equilibrium ways “to develop more realistic alternatives.” Those of us in the causal-realist tradition share Buchanan’s lament and the more cynical among us would entertain the suggestion that more than merely mental inertia lies behind the refusal of neoclassical economists to seriously reconsider their paradigm. But a more realistic account of the economy cannot be found by accelerating down the wrong path. Adopting more sophisticated mathematical techniques to handle the complexities of tracking billions of people interacting through voluntary exchange and a division of labor to better satisfy their preferences misses the fundamental point. As Ludwig von Mises saw it, the limitations of human knowledge force economists to accept methodological dualism. “Reason and experience show us two separate realms: the external world of physical, chemical, and physiological phenomena and the internal world of thought, feeling, valuation, and purposeful action. No bridge connects—as far as we can see today—these two spheres (Human Action, p. 18).” Murray Rothbard was more emphatic claiming human beings are fundamentally different than other entities. “Stones, molecules, planets cannot choose their courses; their behavior is strictly and mechanically determined for them. Only human beings possess free will and consciousness: for they are conscious, and they can, and indeed must, choose their course of action. To ignore this primordial fact about the nature of man—to ignore his volition, his free will—is to misconstrue the facts of reality and therefore to be profoundly and radically unscientific (The Logic of Action One, p. 3).” From either view, the understanding of human action is the one offered by Carl Menger. The human mind integrates all aspects of action into a harmonious system for the satisfaction of its preferences. The mind values ends, perceives the causal connections between means and ends and among consumer and producer goods, imputes value from the ends to the means, anticipates the realization of ends from different courses of action, etc. Since the knowledge, judgments, and foresight of the mind are not constant with respect to the different aspects of action, functional analysis of human action, no matter how sophisticated, is inappropriate. The realistic path to understanding the economy lies in the trail blazed by Menger, Mises, and Rothbard.

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