Microfoundations and Macroeconomics: An Austrian Perspective
Callahan, Gene, Ideas on Liberty
Microfoundations and Macroeconomics: An Austrian Perspective by Steven Horwitz Routledge * 2000 * 276 pages * $100.00
Professor Steven Horwitz of St. Lawrence University has written an important new book laying the foundation of an Austrian school approach to macroeconomics. Horwitz is not addressing only fellow economists: While this book is certainly not an introductory work (don't give it as a gift instead of Economics in One Lesson), it is readily accessible to any reader who follows the economic arguments put forth in this magazine.
Horwitz begins by stating his agenda. He hopes to advance Austrian macroeconomics, seeking to demonstrate to mainstream macroeconomists that a viable alternative vision exists, one that adeptly treats many problems ignored by the mainstream approach. He explains that the Austrian themes of subjectivity, methodological individualism, and the market process focus macroeconomic explanation on the behavior of the individual in response to economy-wide disturbances, such as inflation or deflation.
Following the introduction is an excellent chapter that traces the development of a distinctive Austrian approach to economics and describes the history of Austrian interaction with the emerging neoclassical paradigm, which since has come to dominate the profession. Horwitz highlights the time when these two traditions nearly merged, before diverging again. In the 1930s Lionel Robbins incorporated certain Austrian insights into Marshallian economics, helping to define the neoclassical school. This Austrian-Marshallian synthesis focused on the properties of equilibrium markets, which were taken to be a good approximation of the real world. However, Hans Mayer's critique of price theories that simply assumed equilibrium foreshadowed EA. Hayek's work on knowledge and prices. Austrians moved away from Robbins's formulation of economics, emphasizing the freedom and unpredictability of human action. Austrians came to view general equilibrium as a model of an unreal and unobtainable world, which nevertheless aids our view of the market process.
Horwitz goes on to discuss the role of capital in macroeconomics. As Ludwig von Mises, Ludwig Lachmann, and Israel Kirzner have pointed out, the salient aspect of capital goods is that they are a part of someone's plan to produce one or more consumer goods. …