Jacob Viner (1892-1970) famously claimed that “economics is what economists do.” While this is a fun play on words, it really means nothing at all. And this has become even more the case over the past decades as economists have almost completely turned their backs on their discipline’s history and tradition and instead gone “all in” with advanced-seeming statistical methods and mechanist design of economic systems through oversimplified models.

Considering the over-use of mathematical notation and statistical mumbo-jumbo rather than economic logic, it is safe to say that whatever economists do is not economics. Or, at least, it is nowhere close to what economics used to be and always has been. There are two parts to this statement, both of which are equally interesting on their own: (1) the lack of proper methods and (2) the refusal to consider the real market in economic research. These are fundamentally related, and I have already treated the first of these points in other posts (see e.g. The Fundamental Importance of the Trade-Off). I doubt I will have to elaborate on the second point.

Whether or not these points have been made sufficiently clear, they should at least suggest that there is a difference between how economists post Joan Robinson and Paul Samuelson do economics and how economists did economics earlier.

One way of expressing this, though overly simplified, is to point to the difference between classical and neoclassical economics. The former focused on the wealth of nations and the distribution of value in society and is generally regarded as stretching from Adam Smith’s 1776 tome An Inquiry into the Nature and Causes of the Wealth of Nations to the “marginal revolution” in the 1870s. Neoclassical economics, based on the marginal analysis discovered simultaneously by Menger, Jevons, and Walras, focuses on the price system and how it allocates scarce resources toward satisfying human needs and wants.

But what is interesting here is really a different division of approaches to economics, of which the non-scientific modern version is undoubtedly the most influential. This fundamentally important distinction is often forgotten, which I was again reminded of reading a Business Insider article by the pseudonym Tyler Durden, who again regurgitates the rather anti-intellectual development economist Ha-Joon Chang (which makes one wonder if Chang in fact acts under the name of Durden). This article makes the rather bland and uninteresting claim that there are “9” schools of economic thought.

What got my attention in this article, which includes (uhm, consists of) a pocket guide to these schools, was how utterly un-insightful it is along especially the methodology or “conduct of economics” axis. Chang’s understanding for Austrian economics illustrates this point very well – especially when contrasted with Classical economics. The reason for this contrast, which might at first seem arbitrary, is that Austrian economics is the “true” descendent of the classical economic analysis. Many of the classical observations, which have since long been discarded by the neoclassical, Keynesian, and other schools, contribute to or are core to the Austrian school’s theoretical framework. As we will see, the Austrians are in a sense the modern standard bearers of the classical economic analysis.

I will not here address the rather strange emphasis Chang places on “tradition” in Austrian economics. The reason for this is that I have no idea what he means by this. As an Austrian economist, I have never come across Austrian writings, theorizing or even economists who focus on tradition as the determinant of rationality or individual choices.

While there are other differences, what is interesting here is really two rows on which Chang clearly distinguishes between classical and Austrian economics in a way that directly contradicts much of what we know and understand of “Austrianism.” The rows are prefixed “The world is” and “The most important domain of the economy is,” respectively. The difference between classical and Austrian economics are, to Chang, that the former is characterized by certainty through “iron laws” and production, whereas the latter focuses on the market as “complex and uncertain” through exchange. This is a curious difference, since Austrian economics has a rather awesome emphasis on production. See for example Murray Rothbard’s tome Man, Economy & State or many of the massive works on capital theory such as FA Hayek’s Pure Theory of Capital or Ludwig Lachmann’s Capital and Its Structure, all of which emphasize production.

Even more conspicuous is the asserted difference between the “iron laws” of classical economics and the “uncertainty” in markets according to Austrians. If we consider the Misesian method of Praxeology it becomes obvious that there is no contradiction here. Praxeology utilizes a strictly deductive system of reasoning that establishes “economic laws” that are not subject to change – under uncertainty. The effect of uncertainty is that we cannot predict the exact, detailed nature of the outcomes, but this does not in itself mean that there are no regularities to economic phenomena that are independent of the situation’s particular time and place data. Rather the opposite, it turns out.

The funny thing is that if we look at classical economists such as JB Say or Richard Cantillon (though perhaps the latter is a “pre-classical,” if we accept the misleading designation of Adam Smith as the “father” of economics), then the kinship between classical economic reasoning and Austrian economics becomes rather obvious: both Cantillon and Say acknowledge the role of entrepreneurship in the economy as uncertainty-bearing – but they still discussed the regularities of economic law. This is exactly what Carl Menger, the founder of the Austrian school, does in Principles of Economics. It is also what Ludwig von Mises and Rothbard do. As do many other Austrians.

So distinguishing between classical and Austrian economics the way Chang does is at best misleading, though one can easily make a case that it is completely, utterly, and fundamentally wrong. The problem here is that Chang does not understand economic analysis as it has been during most of the discipline’s time as a science. Economic law is, in fact, interesting because of the uncertainty under which we all act; economic law emerges only through the interaction of individuals and is therefore an abstract phenomenon – but it does not mean that our actions can escape these laws.

The interesting point to make here is that Change makes a distinction where there really is none – and he does it by misrepresenting both classical and Austrian economics. While this is an impressive feat, perhaps we should not be surprised (or, for those so inclined, awed). It is important to point out, however, the fundamental methodological ignorance in the misrepresentations as well as the distinction. Modern economists, who are not schooled in (or even knowledgeable about) the traditional study of economics, would make the same errors as Chang makes, thinking the “iron laws” of classical economics necessarily produces a perfectly certain economic world. This is only true if one first asserts (or only knows about) the mechanistic, mathematical models of modern economists. To an Austrian, however, there are “eternal” economic truths – laws – and uncertainty, and there is no contradiction in this.

Of course, one should not go as far as to say that no classical economists believed the economy is certain – or even that all Austrians use and rely on Praxeology (which is also not true). But this does not in itself mean that Chang is right. In fact, his interpretation of the schools as well as the terms he uses to describe them are almost outrageously inaccurate.

Economic law has been a concept in economic theory for a long time, but the specific term “iron law” generally is used in terms of the Iron Law of Wages. The latter refers to the Marxist dogma that wages in the market are forced down to subsistence level due to competition between labor workers. This is hardly a “law” that all or even most classical economists subscribed to.

Chang’s pocket guide shows very clearly the problem with stating that “economics is what economists do.” The reason is that economics, as the discipline was traditionally formed and developed, was a very different study from the mechanistic model-creating trade it is today. And, as Chang also shows, economists are as ignorant of the traditional economics as they are unable to understand it. What contemporary economists do, in fact, has very little to do with economics.