The Convergence of Austrian Economics and New Institutional Economics: Methodological Inconsistency and Political Motivations

By Palermo, Giulio | Journal of Economic Issues, June 1999 | Go to article overview

The Convergence of Austrian Economics and New Institutional Economics: Methodological Inconsistency and Political Motivations


Palermo, Giulio, Journal of Economic Issues


The thesis of the paper is that Austrian economics (AE) and new institutional economics (NIE) are methodologically incompatible. This casts doubts on the coherence of the programs that are trying to unite these two branches. The structure of my argument follows.

Austrian economics (as typified by Ludwig von Mises and Friedrich A. von Hayek) made precise its peculiarity with respect to neoclassical economics in the 1930s during the planning debate when it strongly attacked the equilibrium method, and it is as an alternative to neoclassical approach that modern AE (typified by Israel M. Kirzner and Ludwig M. Lachmann) actually developed. New institutional economics originated from the inquiry of Ronald H. Coase [1937] on the nature of the firm. The analysis is explicitly developed within a neoclassical context, and its goal, as stated by Oliver E. Williamson [1975, 1985], is to explain all economic institutions of capitalism by means of neoclassical tools.

The fact that the theoretical exercises (developed, for instance, by Richard N. Langlois, Andrew Schotter, and Nicolai J. Foss), intended to join the implications of the two approaches, are growing fast thus looks bizarre on methodological grounds: NIE belongs to the methodological approach that is strongly criticized by AE. Notwithstanding this methodological distance, the implications of the two schools are used to support market deregulation, laissez-faire policies, and, in general, the extension of the margins of maneuverability of private capital. My conclusion is that the two schools have little in common from a methodological viewpoint (and that the projects of their unification fail to take account of their methodological specificity) and that the alliance is founded mainly on a common ideological commitment toward capitalist apologetics and a common political involvement in favor of market sovereignty.

The Convergence of AE and NIE

There are several theoretical reasons that have led to the consideration of AE and NIE as complementary. First, one of the main analytical weaknesses of AE is the lack of a theory of the firm, a problem with which NIE begins.(1) Second, NIE makes sense only in an imperfect information context,(2) suggesting that the Hayekian theory of knowledge might be relevant also in the explanation of non-market institutions.(3) A third stimulus has come from the Austrian analysis of the dynamic role of the entrepreneur stressed by Mises and developed by Kirzner for its potential relevance in the new institutionalist explanation of the firm.

But perhaps the most powerful theoretical challenge is to be found in the necessity to reconcile the contradictory results obtained by AE and NIE since the former argues in favor of the efficiency of the market (with respect to the state) by stressing the benefits of decentralization, and the latter argues in favor of the efficiency of the firm (with respect to the market) by stressing the benefits of centralization.(4)

The result of these stimuli and challenges has now led to a number of general research projects that investigate capitalist institutions within a pluralistic paradigm.(5) This asks the questions: is this pluralistic approach theoretically coherent? And, more specifically, are AE and NIE methodologically consistent?

Methodological Inconsistency

Let us start with a historical characterization of AE. Austrian economics emerged as an independent (heterodox) school in the 1930s. The old idea that AE and neoclassical economics say basically the same things with different languages (the former verbal and imprecise, the latter mathematical and rigorous) is explicitly rejected by Austrians, and during the planning/debate(6) (in which the planning supporters argued from a neoclassical perspective(7)), the leaders of the Austrian school progressively clarified their differences with respect to neoclassicals.(8)

Mises's contribution to the characterization of AE can be found in his criticism of neoclassical homo economicus as a reactor and in his proposal of homo agens as an actor making decisions in a historical time context; the introduction of historical time puts uncertainty in the forefront, giving human action a necessarily speculative dimension. …

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