Austrian economics excludes the use of calculus?

Greatest_Curse
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Austrian economics excludes the use of calculus?

I have been reading a little on it, and it seems that they don't believe in continuity, for example, among preferences.

 

But wouldn't that prevent the use of LIMITS, which of course are required for DERIVATIVES (a derivative is a limit), which is how many optimization problems are solved.

Obviously, you can have a limit at a point even if the function is not continuous there, but if a function has a derivative at a point, it must be continuous at that point.

 

So I have two questions:

 

(a) Is it true that Austrian economists do not believe in continuity with respect to economics?

(b) How much would this limit the use of mathematics in their economic modeling?

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atomicdogg34
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heres a good article on

heres a good article on austrian economics and mathematics:

http://mises.org/daily/926

 


Beyond Saving
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Greatest_Curse wrote:I have

Greatest_Curse wrote:

I have been reading a little on it, and it seems that they don't believe in continuity, for example, among preferences.

 

But wouldn't that prevent the use of LIMITS, which of course are required for DERIVATIVES (a derivative is a limit), which is how many optimization problems are solved.

Obviously, you can have a limit at a point even if the function is not continuous there, but if a function has a derivative at a point, it must be continuous at that point.

 

So I have two questions:

 

(a) Is it true that Austrian economists do not believe in continuity with respect to economics?

(b) How much would this limit the use of mathematics in their economic modeling?

Yes it is true. Murray Rothbard has been quoted as saying

Quote:
 Human beings act on the basis of things that are relevant to their action. The human being cannot see the infinitely small step; it therefore has no meaning to him and no relevance to his action.

Ludwig von Mises wrote

Quote:
 It must first of all be objected that the peculiarly mathematical conception of infinitesimal quantities is inapplicable to economic problems. The utility afford by a given amount of commodities, is either great enough for valuation, or so small that it remains imperceptible to the valuer and therefore cannot affect his judgment.

(The Theory of Money and Credit, p.57)

 

Their basic point was that mathematical models fail because people are not computers. When making economic decisions, they do not always sit down and calculate the exact consequences. They use intuition and emotion. For example, let us consider exactly how much you are willing to pay for your favorite soda. I assume you would spend $0.50 for a can without thinking about it. What about $0.51? $0.52? $0.53? Can you name that one penny that will break the camels back? Do you base your decision on whether or not to buy that soda based on a predetermined value it has to you? Of course not. You walk up to the vendor and ask how much it costs. If it is $0.50 you buy it. If it is $10.00 you say no thanks, but there is probably a range of prices in the middle that you would be willing to pay. Even if you were able to find that magic penny that made the difference, most likely your view of that could change by the minute based on your mood. The amount you are willing to pay for that soda is going to be affected by thousands of factors no economic model could hope to account for. From the temperature, your level of thirstiness, your mood, the amount of cash in your pocket, the attitude of the vendor etc. It is far more important to predict human psychology than it is to predict what the price "should" be based on a supply and demand curve made up in an ivory tower.  

 

This approach is often criticized because it means that supply and demand rarely if ever actually meet. Since the Austrian view is that supply and demand is actually a series of points, rather than a line, they can pass each other up without meeting. Along with accusations of hypocrisy that Austrian economists often use continuity to help predict supply and demand.

 

My response is that supply and demand really is a series of points and never do meet and that is ok. That soda vendor doesn't have to price his soda at the "perfect" price to get the most business. If he is missing out on a few pennies a can it doesn't significantly affect his life so he shouldn't waste time worrying about it. In the micro view of economics, it simply doesn't make sense for the vendor to do extensive graphs and calculations to arrive at $0.62 as the best price. In a minute that vendor can decide that $0.60 a can sounds like a fair price based on what competition around him charges and be content. He is unlikely to change the price unless his wholesale price rises or it doesn't sell at all. It is through millions of these tiny decisions, that are often made completely at random as far as any mathematical formula is concerned, that a pattern emerges.

 

When you are looking at the big picture, assuming continuity can come in handy. It is a shortcut to help predict future trends, and is used by all economists as such. Obviously, it quickly becomes impossible for anyone to consider all the small details going on at the micro level individually in an attempt to graph a possible future. So, Austrians, like everyone else will often use those mathematical formulas. However, the important thing to realize is that the mathematical formulas ARE a shortcut and are approximations. Using them as the gospel can create errant predictions. It is economists in their ivory towers, too busy writing their mathematical formulas, that sat around predicting the housing market would continue climbing. They laughed at the Austrians screaming that the housing bubble was going to burst at any time. They predicted that the stimulus would create new jobs and stimulate the economy because that is what their models said, while the Austrian's examined the micro level and said, "no it wont, business owners aren't going to hire more because of reasons A, B, C & D". 

 

My point is, at a macro level continuity is currently the best way to calculate a prediction and can be useful as such. However, it is extremely important not to rely on mathematical predictions without first considering what John and Jane Doe are going to do. John and Jane Doe are not going to follow your mathematical model, they will do what they feel like doing which is also predictable to a point and not always what the math says they should do. 

 

As for the success of the Austrian model, well it isn't perfect but I will put the predictions produced from Austrian economists against any Keynesian any day of the week.  

 

Anyway, ask any questions if what I said doesn't make sense. I have a tendency to ramble and am an admittedly a horrible teacher but will try to help where I can. 

If, if a white man puts his arm around me voluntarily, that's brotherhood. But if you - if you hold a gun on him and make him embrace me and pretend to be friendly or brotherly toward me, then that's not brotherhood, that's hypocrisy.- Malcolm X


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Actually there are models

Actually there are models that work much better than the ones many economists and especially market analysts have been using, and have been shown to be far better able to predict more extreme events than the simplistic ones that most such people could actually comprehend.

Humans are far more predictable, especially in collective behavior, than many would have believed. It is precisely because we are dominated by emotional and intuitive decision-making processes that we are so predictable.

Rational decision-making would confound the predictions, by introducing a very non-linear feed-back, IOW, those who were aware of mathematical predictions would take them more into account and so falsify them.

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