Austria vs Chicago

which school of economics better supports libertarian conclusions?

Porcfest is an annual libertarian get-together at a camp site in northern New Hampshire. It runs for a week, usually has two or three thousand people, many camping, others in a motel on the site or nearby. The feel is casual, friendly, vaguely hippy, with a lot of children, dogs, people cooking and selling food. It’s a friendly mix of blue and red tribe culture — vegan gluten-free brownies, bitcoin, open carry of firearms. I like to contrast it to Freedomfest in Las Vegas. At Freedomfest someone tries to sell me a goldmine, at Porcfest someone tries to sell me a mango lassi.

This year, one of the many events at Porcfest was a debate between me and Gene Epstein. The resolution was:

The Austrian economics of Mises and Rothbard contains economic intuitions that are important, correct, and missing from Chicago School economics.

Gene took the affirmative. Since I would like to repeat the debate next year with a better topic, I have emailed Gene to propose:

Does the Austrian school of Mises and Rothbard¹ or the Chicago school provide better economic arguments for libertarianism?

One problem with this year’s topic was that, until I heard Gene’s first speech, I had no way of knowing what intuitions he was going to claim were in his school and were not in mine, hence what arguments I had to prepare. Until my first speech he had no way of knowing which of the intuitions he was going to claim were ones I would argue were false and which were ones I would claim were included in Chicago school economics.

My solution to that problem for the next debate is this post, which presents my side of the argument. Gene is welcome to prepare the best responses he can.

Evaluating Outcomes

Very nearly any political change one can imagine will benefit some people and harm others. To argue that the net effect is an improvement you need some way of adding up gains and losses. Chicago school economics does it by the concept of economic efficiency.² Austrian economics, which rejects that concept, provides no way of judging any change that makes at least one person better off and at least one worse off.³

“Consequently, there is no way of making interpersonal comparisons and measurements, and no basis for saying that one person subjectively benefits more than another.” (Rothbard, Man, Economy and State).

Hence an Austrian economist cannot offer an economic argument to show that a tariff, a minimum wage, or rent control makes the U.S. worse off. A Chicago economist can.

Mises, who was, like Marshall, a utilitarian, could in principle have combined economics with utilitarianism to evaluate a change, but the economics alone did not suffice and he does not describe any way of using the economics to support the utilitarian analysis. Marshall does.

Most people are at least in part utilitarians, regard increasing total human happiness as a good thing although not necessarily the only good thing, hence a form of economics that can give them reasons to believe that a policy increases or decreases total utility provides an argument for or against that policy. Chicago school economics provides arguments to show that libertarian policies generally⁴ increase economic efficiency, hence that they are likely to increase utility, for which economic efficiency can be viewed as a proxy.

Evidence as Argument

One way of showing that some policy, such as rent control, is a bad idea is economic theory. Another is evidence of the effects it has had in the past. Policies that violate libertarian principle usually have bad effects, often observable bad effects; liberty works.

The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future events. (Human Action)

Since Austrian economists are committed to the idea that economic conclusions must be based on theory not evidence, an Austrian economist qua economist cannot use the fact that policies have had bad effects in the past as evidence that they will in the future. A Chicago economist can.

Evidence from Accomplishment

The Chicago School is a descendant of what Mises referred to as the English School, the line of economic theory running from Adam Smith through Alfred Marshall. The economic arguments of that school persuaded 19^th century Britain to adopt free trade and a general policy of laissez-faire. The intellectual ancestors of the modern Austrian School preached much the same policies to the Austro-Hungarian Empire but less successfully.

Over our lifetime, Chicago School economists have played a central role in the abolition of the draft, the shift to floating exchange rates, the critique of regulation that led to the deregulation of the airlines, the rise of educational vouchers. James Buchanan, who was in large part responsible for the development of public choice theory, is the economist sometimes described as an Austrian⁵ who has the best claim to have influenced the public debate outside of libertarian circles. Buchanan, however, did his graduate work at Chicago.

By the time of next year’s Porcfest more arguments may have occurred to me. Readers are invited to offer suggestions.

P.S. An interesting post on Porcfest and the debate by an attendee.

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1. Since that is the version of Austrian economics that Gene supports it is the form I will be referring to. Some of my arguments may not apply to other forms.

2. The concept and problems with it are explained in a previous post.

3. I discuss Rothbard’s attempt to deal with this problem in an earlier post under the subhead Judging Outcomes.

4. How generally varies from Chicago economist to Chicago economist. Most support some government restrictions on freedom but almost all support fewer than most professional academics and do so based largely on economic arguments.

5. “I do not claim that Buchanan consciously and purposefully adopted Austrian analysis in his own work. I merely claim that the economics of James Buchanan has much in common with modern Austrian economics, especially the work of F. A. Hayek and Israel Kirzner.” (“James Buchanan and the Austrians: the common ground,” Charles W. Baird)

Note that the Austrians mentioned are not part of the school associated with Mises.

As Buchanan puts it: "I certainly have a great deal of affinity with Austrian economics and I have no objections to being called an Austrian. Friedrich Hayek and Ludwig von Mises might consider me an Austrian but, surely some of the others would not." (Wikipedia)