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What's different about the 'Austrian' school of economics? Perhaps the most fundamental difference is a belief in subjective, rather than objective, rationality. But what does this mean? [A thread]
Homo economicus holds that economic actors are objectively rational—they pursue the optimal ends given their scarce means. This basic assumption allows economists to model economic activity as optimization.
A few decades ago, Herbert Simon pointed out the absurdity of this assumption: of course we don’t ‘optimize’. How could we?? We can’t even possibly know all possible options (and their outcomes) before us, so how could we know which is best?
So Simon introduced the concept of ‘bounded rationality’—that we select the best option from those we know about.
But even this was unrealistic, as behavioral economists would argue. Experience shows quite clearly that we *don’t* always optimize—that we often act *irrationally*, choosing sub-optimal options because of cognitive biases and mistakes.
Inasmuch as these 'irrationalities' are predictable, they suppose, we can redesign society to help us avoid these mistakes.
But the behavioral economists still don’t get it. Who decides what’s ‘better’ or worse’? As @teppofelin and colleagues argue there is no ‘objective’ right or wrong option or outcome. https://link.springer.com/article/10.3758/s13423-016-1198-z
It’s true that, for the most part, most everyone prefers more money to less, more health to less, happiness to sadness, etc., although even these aren’t universal. But the choices are not between these things, our choices are between possible actions.
What do we think will lead us, individually, to more money, health, happiness, etc.? Is it the same for everyone? Of course not. Can some outside observer tell you what would make you objectively happier? Many seem to think so. I think not.
This is the point of Austrian subjective rationality. *We* choose our own ends—what we want in life, and our choices in actions are pointed at those subjectively chosen ends. This is *very* different from the objectivist rationality that pervades the social sciences.
If ‘right’ vs. ‘wrong’ or ‘better’ vs. ‘worse’ is subjective (i.e. in the eye of the beholder), then we can’t ever say someone has acted ‘irrationally’.
Not only can we never know, but in fact, by recognizing Simon’s (and Hayek’s before him) insight of bounded knowledge, it’s essentially impossible to act ‘irrationally’. We always do what we want in a given moment, and we cannot say wanting that is/was ‘wrong’.
The actor can determine, post hoc, that an action was ineffective or even counterproductive to their own, longer-term subjective ends. They can regret their actions.
But those actions were not ‘irrational’ in the moment. All human action falls in the category of what we might call ‘bounded subjective rationality’. We do what, in the moment of action, we think is best for what we, in that moment, want.
This is the essential Austrian insight. We can’t study economic actors as if they were objective optimizers. We can't treat people as automatons. We can't presume to manipulated them toward our own objective standard of the ‘good’.
Not only will they not go along with it, they’ll resent you for trying. A need for autonomy is innate to our nature, and it’s the best option we have for *subjective* optimization.
There can be no economic ‘optimization’ and to pursue it is foolhardy and counterproductive. The best we can do is to give people freedom and autonomy to pursue their own health, wealth, and happiness as they see fit.
Economists cannot optimize society for us. We have to optimize for ourselves. The goal of science, then, must be to provide us knowledge and information that will aid us in our subjective rationality. That is the conclusion reached by the Austrian School of economics. [end]
