How Behavioral Economics can enrich the Perspective of the Austrian School

Abstract

Economists early felt that something was not quite right with equi- librium economics and its corresponding «feature», the rational homo oeconomicus. Critique came from the Austrian school (see for instance: Huerta de Soto (1998), Kirzner (1997), Mises (1940, 1957), Rothbard (1962, 1997), yet from other sides, as well.

Complexity economics (Arthur 1999) was built on physics — just like León Walras’ equilibrium approach (Walras 1874). But it added interdisciplinary findings from biology, psychology and computer science. It views the economy not as a deterministic, predictable and stable system, but as an evolving process (see Arthur (1999, 1995, 2013) and Beinhocker (2006) for a review of the paradigm).

Furthermore, behavioral economics (Kahnemann and Tversky 1979 and Kahnemann 2011), showed that real human behavior often times falls prey to systematic errors, so called biases, and that the mind may take mental shortcuts (heuristics) when weigh- ing decisions. Behavioral Economics (BE), thus attacked the model of homo oeconomicus from another angle and eventually, Kahnemann received the Nobel Prize in economics for his achievements in 2002.

This rising critique against the mainstream model could have been applauded by Austrian scholars, for it finally seemed to shake the walls of the neoclassical dominance. Yet, contrary to the Austrian perspective, the new model of human beings was not an entrepreneur, but an often erring homo heuristicus  that even needed paternalistic policies for his guidance. At least this is the culminating conclusion implied by the book «Nudge» in which Thaler and Sunstein (2009) even argued for a libertarian paternalism.

The behavioral school of economics and especially their impli- cations for public policy were instantly criticized by Austrians — see for example (Shostak 2002), but the aim of this paper is to show how adding psychology can, in fact, enrich the Austrian paradigm and that the critique against BE from the Austrian side should be evaluated with a closer look. For instance, findings of the most prominent opponent of Kahnemann, the German psychologist Gerd Gigerenzer (Gigerenzer 1996), suggest that men indeed act rational and that they do so using the mind to gather and evaluate many chunks of information simultaneously in a bottom-up way. Thus, «Fast-and-frugal» rules of thumbs beat top-down algorithms in that model and resemble the mechanisms of free market dynamic.