 Welcome everyone to our second morning session. I'm going to start off with a joke. A physicist, a chemist and an economist are stranded on an island and they have no food and luckily one day this one can of food washes up on shore and they're debating over how to open it since they don't have any tools, how do we get this can of food open? And the physicist says well we could go up to this cliff and drop it and that would open the can, the force because of the gravity falling down, it would open the can, it would be a little bit of a mess but we could clean it up and eat the food. And the chemist says well yeah that's one thing that we could do but another option we have is we could make a small fire, put the can on top of the fire and the pressure would build up inside the can and that would open it up. That would also make a bit of a mess. And so they both look at the economist and ask him what should we do? Do you have any ideas of how we could open this can of food? And the economist says well first let's assume that we have a can opener. So obviously this sort of joke doesn't apply to the Austrian school only to the neoclassical economists. And so this is the school of thought that we're going to be critiquing. We're going to be looking at their fundamental assumptions that they make and how they do economics and their primary goal in doing economics in contrast to the Austrian school. This will be a compliment to Dr. Israel's lecture yesterday. We'll cover some of the same ground but from different angles so it won't be a pure repeat. So just to get started let's talk about the method of economics and how we approach economics. Mises and Rothbard advocate a sort of methodological dualism meaning that we should adopt or adapt our methods for studying things based on the thing that we're studying, based on our subject. So if we're studying atoms, if we're studying rocks, things inanimate material, these sorts of things then there's one way to approach questions related to the way we observe those things behaving. If we are studying something totally different like man who can think and act and make choices and has a mind then we should change the way that we study that subject because it is fundamentally categorically different. So Rothbard says therefore atoms and stones can be investigated. Their course is charted and their paths plotted and predicted at least in principle to the minutest quantitative detail. People cannot. Every day people learn, some professors might dispute that, adopt new values and goals and change their minds. People cannot be slotted and predicted as can objects without minds or without the capacity to learn and choose. This is in his great preface to Mises' book, Theory and History. And the idea here is, the reason I put this out here is because in the neoclassical branch, the neoclassical school of economics, they have adopted the methods of the natural sciences. They have what's called physics envy where they want to use the calculus, they want to use all of the precise measurements and have laboratory experiments and settings and assumptions in the way that they do economics. And Rothbard and Mises show that this is totally incorrect. We can't do that because our subject matter is fundamentally different than the subject matter of the natural sciences. So it's a little bit difficult to define starting points and end points for some schools of thought. So I have just this sort of a general timeline that gives you what we think of when we think of neoclassical economics, when it started and who were the main players. So you've probably seen these terms have been used so far this week. There's the classical school. Professor Salerno talked about them and the problems that they had with the diamond water paradox and they really couldn't pin down the way that we value goods and therefore where prices come from and how we can talk about prices. And then finally, we had the Marginalist Revolution in which William Stanley Jevons, Carl Manger, and Leon Valra. They independently discovered a new way of thinking about human choice and behavior that's based on the margins. It's based on valuing discrete goods or actually not always discrete in Jevons and Valra's case. But valuing goods on the margins. So we make decisions over a specific quantity and that's how we should think about valuing them and pricing them. So I intentionally drew this arrow to come from Jevons and Valra and I put this little asterisk next to Manger. And the reason why is even though we typically lump them together is these three big players in the Marginalist Revolution, Manger really was doing something fundamentally different. The way he approached the science of economics, the way he answered the questions was different. He employed what's called a causal realist perspective in doing economics. And what that means is that he was interested in the fundamental cause and effect relations. In fact, he started off his principles of economics with a broad sweeping claim about how all things are subject to the laws of cause and effect. And the realist part is referring to the fact that Manger was trying to explain and make sense of real world phenomena. So he was trying to explain how prices that we can actually see emerge and how they might change and what are the conditions by which prices and other economic phenomena change. So it's a causal realist approach. As opposed to the approach by Jevons and Valra which was highly mathematical. So Jevons and Valra, they sort of pioneered the use of math in economics. And the idea was that they made these precise abstractions. They took some observations and they tried to come up with a tractable mathematical way of describing what they see humans doing even if it wasn't very realistic and even if it was divorced from cause and effect. We'll talk more about this later. So Jevons and Valra and especially Jevons they paved the way for folks like Marshall, Pagoo and Pareto to really start what we know as the neoclassical school or branch of economics. And here it's more mathematical. We saw Dr. Israel give a supply and demand graph and draw consumer surplus and producer surplus, dead weight loss, total welfare. All of this comes from what was started by these guys and especially Marshall. And then as we move on, so this is a continuation of the timeline here. Then Keynes, he was not neoclassical or at least he didn't do a lot of the stuff that Marshall and Pagoo were doing although he did credit them as mentors or he was trying to follow in their footsteps and basically fill in the gaps that Marshall had and trying to answer macroeconomic questions. But he was doing something that was very different and sometimes a rejection of what even the neoclassical economists were doing. And Rothbard notes in his History of Economic Thought Text, Keynes, a beloved student of the great Marshall, realized that the old man had left out what would later be called macroeconomics and his exclusive emphasis on the micro. So this was a revolution, so what he did was brand new on the scene and it revolutionized the way economists do macroeconomics and think about macroeconomics. And so economists after Keynes, they're left with the ramblings of this guy in the general theory and they're trying to make sense of it and they come up with formal mathematical models. And so some of them tried to reconcile the Keynesian insights, the Keynesian views of the macroeconomy with what we know about the consumer based on neoclassical micro. And so this was called the neoclassical synthesis. It's basically formalizing and mathematicizing what Keynes wrote about. And so this was primarily done by Samuelson and Hicks pioneered the ISLM model, which you might be familiar with, as well as guys like Robert Solo with their growth models. But then these models, they took a reputational hit in the 1970s. So the Keynesian models predicted through the Phillips curve, they predicted this short run tradeoff between inflation and unemployment and that broke down in the 1970s. We had inflation and unemployment increasing at the same time. And so a lot of people were trying to answer this question, how do we deal with that? And as a result of this, trying to answer that question, we had a bunch of new branches coming off and trying to answer the question in different ways. We had the Chicago School led by Milton Friedman. We had the supply side economics, public choices. And then we had what's called a new classical macro, which tried to bring, tried to go back to the original neoclassical conception of consumers and build macro up from that. And so it's interesting, there's all this new and neo and New Keynesian and neo-Keynesian and all these schools that are emerging. But then based on that, there was also a new Keynesian school that they were arguing with and they decided to compromise and come together, especially on discussing the short run. And that gave us the, what's now I would call dominant, the new neoclassical synthesis, which is you've got some of the neoclassical macro mixed with some Keynesian stuff about sticky wages and so on. So I just wanted you to see how the neoclassical school sort of developed and who the main players were just so that there's some familiarity with that, especially through the 20th century. But how would we define the neoclassical economics? What are some of the fundamental assumptions? And so there's some broad agreement on this and this is just taken from like an encyclopedic type entry. The first assumption is that people have rational preferences among outcomes and we'll see in just a moment that this term rational has a lot of weight. It's got a lot of baggage. It's carrying a lot. So what they mean by rational is very peculiar. It's much different than what the Austrians consider rational preferences or rational behavior. Second, individuals maximize utility and firms maximize profits. So you might already anticipate some of the Austrian critiques of this. I think it's safe to say that firms seek to maximize profits but they still conceive of it in a very different way. And finally, people act independently on the basis of full and relevant information. So let's begin unpacking this rationality assumption that's in neoclassical economics. And you'll notice that it's divorced from what we consider or how we even think about our own choices or our own actions. And we're going to notice that they make a lot of these formal assumptions for the sake of mathematical tractability so that they can take a derivative of an indifference curve, so that they can find an optimal consumption bundle for the consumer and ensure that it exists. And it's not necessarily starting from the ground up, the ground being reality, starting from reality and then building a science of economics. So they make assumptions about complete preferences and transitivity, which has implications regarding different choices that people can make across time. And there's really no argument over the reflexivity. It's one that's sort of true by definition. But then you'll notice that they add some extra assumptions on top of that. And like if you're feeling dizzy looking at all this, then that's at least one indication that there is they are divorced from the way regular people think and act. So they say that our preferences are continuous, which has implications for the fact that we make decisions over discrete goods. They have assumptions about local non-satiation and convexity. And really the main point of all of these, like I said, is so that we can get nice clean answers in our math problems. It's so that we can arrive at a result and think about consumers' behavior in a mathematical sort of way without any severe difficulties. OK, so let's contrast this with the Austrian view of rationality. What does an Austrian economist, what does Mises mean by rationality? It simply means that we have reasons. We have subjective reasons for our actions motivated in particular ways to act in a certain way. And so Mises says the ultimate end of action is always the satisfaction of some desires of the acting man. Since nobody is in a position to substitute his own value judgments for those of the acting individual, it is vain to pass judgment on other people's aims and volitions. So what we mean by rationality is not smart. We're not saying that everybody is smart, far from it. We're not saying that people are calculating computers that they enter in when they're walking down the grocery store aisles, that they've got their graphing calculator out and they're typing things and making sure that their purchasing decisions matches some sort of preconceived utility function. That's not what Austrians mean by rationality. All we mean is that we have a reason and it's our own reason for acting. So it's just simply having a reason. So human action is rational by definition. It's impossible to falsify or deny this because of simply the way that human action is defined. Okay, so what are these assumptions, starting assumptions take the neoclassical economists? The main framework that they use to think about consumer decision making is within difference curves and their corollary utility functions. So in their models, they have individual agents selecting bundles of goods, not one good at a time or one unit at a time like we see in Manger's work in the Marginalist Revolution. Individual agents selecting bundles of goods to consume to maximize their utility. So there's this idea that we can consume the right combinations and quantities of goods to achieve, and there's a lot of debate over this, achieve a level of utility. And of course we've already discussed this week about the issues with that phrase itself. What is the level of utility? And at least one way to interpret what the neoclassicals are doing is that they are assuming or at least they're implying cardinal utility. A lot of them try to back out of that with this escape hatch based on linear transformations of utility curves. And so what they say is, well, yeah, we're treating it like it's cardinal, but since any one utility function could be linear, could be transformed, could be moved up and down or left and right to any other utility function, so we can change the shape of it to reflect any other set of ordinal preferences. We're doing this, but we're not really saying that utility is cardinal. So they do have sort of an escape hatch there. But let's continue. In order for the calculus to work, if you know anything about calculus, you have to have a continuous and smooth curve so that you can find tangent lines. So when you're taking a derivative, perhaps of a curve like you see on the right, you need to have a unique tangent line that crosses the function that you're considering at one unique point. And what that means is, since you've got goods on both axes, you have good X and good Y on both of the axes, it means that in order to say that you have differentiable indifference curves, it means that you have to have continuous goods. So the idea that you could buy 1.417 sandwiches as opposed to 1.417000 so on and so on, one sandwiches. So the idea is that we buy fractions of goods. The neoclassicals have an escape hatch for this as well. They will sometimes say that it's still useful for approximations of how consumers make choices. So even if we do get a fractional result for a good, then the consumer in question would round up or round down depending. So the goods are continuous and utility is given by a mathematical function. And just as an example, a very commonly used one is this Cobb-Douglass form. One person's utility is a function of their consumption of good X and good Y, and it's equal to X to the alpha times Y to the beta. And so you have this utility function, and if you set utility constant, then you get the indifference curves over there. So what this means is that you can have one given level of utility for different combinations of the goods in question. So what they say is that if you have a certain bundle of goods, so say 10X and 10Y, and if you consider moving to 9X, then there's a certain amount of Y that you could be compensated with and have the same level of utility, said another way you would be indifferent between those two combinations, those two bundles of goods. Okay, our choices are constrained by a budget and the budget line, it's a line, it's linear, and so we find the tangency, we try to get to the highest indifference curve based on what we're allowed to with our budget set. And so you can see that they at least imply, they might not actually think that real people are doing this, but in the way that they're doing this whole process, they're implying that agents solve a constrained optimization problem. So you have to maximize your utility, achieve the highest level of utility that you can while you're constrained by a budget. And so just to do, I've got some points against this, pointing out some issues with this, but let's just do one big picture reflection here. How many of you do calculus when you're walking down the aisles of the grocery store? Okay, you people. Some people raise their hands. So of course we don't do this. We don't think about these sorts of things when we're making decisions, and so that's at least one proof that this sort of way of thinking about the way consumers make choices is divorced from reality. And I think even some neoclassical economists would agree with that statement. So yeah, it's divorced from reality, but it's helping us achieve our other goals. And we'll talk about those other goals in a second. Okay, but before that, let's contrast to the way we think about consumers and consumer decision making in causal realist or Austrian economics. So we say individuals act to bring about a preferred state. So there's this very tight connection. It's inextricable, the connection between action and preference. In fact, Murray Rothbard famously claimed that our preferences are only demonstrated in action. So in the tortoise reconstruction of utility and welfare economics that was cited by Dr. Israel yesterday, he emphasizes this claim. Preference can only be demonstrated in action. Action is the use of means for a purpose. So there's the rationality aspect here. The attainment of an end. Notice it's not to achieve a level of utility. It's not to maximize a utility function subject to a budget constraint. In action, less important ends are foregone to attain more important ends. So this sort of thing, the sort of way that we conceive of consumers making decisions is based on discrete margins and we're making qualitative judgments. And when we walk down the grocery store aisle, we consider what we're being asked to forego. What are we being asked to pay in monetary terms in exchange for the good that we would receive? And that's all. That's it. So we don't make grand assumptions about the completeness of preferences or the transitivity of preferences or all of these other assumptions. All we really need to know and really need to explain and talk about is the fact that one choice was made. Yes, I will accept this jar of peanut butter in exchange for the amount of money that's being asked of me. So that's it. It's bounded, but it's powerful because it is causal and realist. It's not divorced from reality. Okay, so now let's do some real criticism here. Some real comparisons at least. So the two approaches, they're definitely answering different questions. In the neoclassical approach, the goal is to model behavior for the sake of making good predictions. And this is really highlighted by Milton Friedman. What he claims is that the goal is for us to be able to make good predictions about how humans behave. And this goes back to the adoption of the methods of natural science. So the goal in natural science is to make good predictions about how different things will behave, depending on the field. And so the way neoclassical economists have translated that as well, we want to make good predictions about how people behave. So we want to be able to make good predictions. And so if we have mathematical models, then we can use stats and regressions and econometrics that we learned about yesterday to extrapolate and say, here's our best guess of how people will behave in different circumstances. Or even how they might respond to policy. In the causal realist perspective, the goal is to explain and understand real world phenomena. So we see there's a big difference there. Consumer behavior is explained in different ways. In the neoclassical approach, we see that consumers use or act as if they use calculus to make decisions. And like I said, in the causal realist approach, we say that consumers make qualitative judgments over discrete options. The elements, the things that we're choosing over are conceived in very different ways. In the neoclassical approach, they have continuous goods and they're consumed to achieve a certain level of utility. And in the causal realist approach, we have discrete goods that are consumed to attain a unique end. And actually, I could make this comparison even more striking. In the neoclassical approach, it's all about bundles. So to say that continuous goods are consumed, that's actually not even quite right. They say continuous goods as elements of a bundle of goods are consumed to achieve a certain level of utility. And this has really important implications for just the way we think about diminishing marginal utility, which is a necessary element or a necessary conclusion in Austrian economics, but it's something that just has to be imposed as an assumption ex-post in the neoclassical sense. And finally, the scope of the consumer's knowledge is very different. And the neoclassical approach, in order for you to have indifference curves over all of these different quantities of goods and over all the goods, what they're assuming or implying is that the consumer has knowledge of all possible bundles, knowledge of all goods. Even one decision about the purchase of one good, it means that you have to rule out an infinite number of alternatives, which is very strange. It's not how we make decisions. In the causal realist view, the consumer only necessarily considers the end attained and the highest ranked end foregone. So we're just thinking about the chosen state of affairs and the best possible alternative state of affairs that we're foregoing by choosing one course of action. So Austrians have a lot of critiques of the neoclassical approach centered on different aspects of it. One fundamental disagreement is just the concept of indifference itself. So if you read Rothbard in the article I mentioned earlier, you'll notice that he points out that indifference cannot be demonstrated in action. There's no way for us to show by acting in choice that we are indifferent between things. So what that means is that the neoclassicals are doing something different. They're thinking about preferences in a different way. For them, it must be this sort of psychological, not really a state of mind, but just almost like what you would get from survey data. So if you just ask somebody, what is your preference between this and that? And if somebody is like, they just shrug their shoulders and say, I don't know, I'm good either way, which is something that we do sometimes. I don't care where we go to dinner, you guys pick. That's what the neoclassicals are thinking about when they're thinking about preferences. It's just what might be stated or what might pre-exist in our minds before we actually go through with choices. However, like I said, for Austrians, preference and choice are, they're connected and they're integrated in a way that can't be separated. That's what integrated means. So what that means is there's no way for us to demonstrate in action that we are indifferent between two goods or two ends. But that's a fundamental starting point for neoclassical consumer theory. There's a violation of Occam's razor with neoclassical economics. And so by taking consumer choice and turning it into a bunch of mathematical symbols and then playing with the math to get different math results and then taking that and trying to map it onto the real world violates the principle that we shouldn't have duplication of entries, that we should keep things simple. And what the Austrians show is that you can, in fact, explain human behavior and talk about human behavior in a way that doesn't resort to these new symbols and new equations and so on. In the Austrian school, there's healthy respect for the boundaries of economics, but that doesn't exist. So notice that in my description of the way neoclassicals think about indifference, it's appealing to psychology. And throughout the neoclassical field, the way they do things, they have to make very precise abstractions. They have to say that people act in a certain way and the reason that they make those assumptions is so that they can have models that spit out results that allow them to make predictions. But in economics, in Austrian economics, we make non-precise abstractions and to the extent that we make precise abstractions, it's usually for pedagogical reasons or just to tease out something, but not as a model for the way the real world operates. I'll have some recommended reading at the end that clears that up. Like I said, we've got very different conceptions of rationality. With marginal utility and especially diminishing marginal utility, it's not necessary. It's something that has to be added and exposed in the neoclassical framework, but it's something that's logically true. It's something that we derive through the steps of starting with human action and thinking about the way that humans behave. Diminishing marginal utility must exist, but it's just something that has to be... it's a new constraint that has to be added to the neoclassical models. One final thing that I mentioned here, it's that the neoclassicals have an aversion to taste changing. So if we want to have good models that make predictions, it means that you have to make some assumptions about the constancy of preferences. It means that you have to assume that the utility functions and the way we think about consumers behaving doesn't change much over time. Or in some cases, not at all. And so there's this quote here from... it's called, by Stickler and Becker. It says, our title seems to us to be capable of another and preferable interpretation that tastes neither change capriciously nor differ importantly between people. On this interpretation, one does not argue over taste for the same reason that one does not argue over the Rocky Mountains. Both are there, will be there next year too, and are the same to all men. So those are some pretty heavy assumptions about the similarity of people and also how preferences don't change at all. And like I said, the reason why they do this is for the sake of prediction. Okay, so where did this go with macro? So we talked through a bunch of the issues with especially consumer theory in neoclassical economics, but where did it take macro economics? So like I said, the breakdown of the Phillips Curve relationship that was expected. So on the right-hand side, that's what the Phillips Curve, when it was developed, looked like. So the relationship between inflation and the unemployment rate. The idea is that there's this short-run trade-off that through monetary policy, we have, I think it was Samuelson who called it a menu of choice, where we can just choose what combination of inflation and unemployment that we want. And then of course, it all broke down. In fact, I like to refer to it as the Phillips Blob instead of the Phillips Curve, because after a while, you notice that there is no such relationship. There is no such short-run relationship. It's just an artifact of the ISLM in aggregate supply and aggregate demand model. But either way, so this broke down empirically in the 1970s. And so economists started suspecting issues with the Keynesian system. If only they had asked us about it. And so they came up with this dynamic stochastic general-equilibrium model, which is it's based on applying shocks to a system that represents the macroeconomy. And you can see how this might help them answer the Phillips Curve question, because if we jump in the diagonal direction this way, then we can just blame it on a shock. We can just say that there was, for example, there was a supply shock that caused us to move to a new level. And so now the new Phillips Curve is somewhere else. And that's why it looks like it's a blob. It's still a curve, but it's just moving around because of shocks. So the pictures over here just show how even they conceive of it. So there's the Federal Reserve Bank of New York dynamics stochastic general-equilibrium model. It's just a mess of math, right? So it seems like that betrays a view of maybe they sort of see their models in the same way that we see their models. And then they have this other schematic just shows how the shocks and the different agents in the model are related to each other. So let's compare this to the way Austrians think about macroeconomics. Oh, first of all, they called this the sort of bridging of the gap, bringing in micro foundations. So the idea is that we're going to take the neoclassical consumer and reconcile it with the Keynesian macro. And then, yeah, there's these issues with the Phillips Curve in the 1970s and so we'll introduce a model that's based on having us allow shocks to the system. And so that was their way of integrating micro and macro. It's like let's take this neoclassical consumer and try to integrate it, try to formalize it with the Keynesian results, basically. And so that's very different compared to the way Austrians think about economics in general. And for Austrians, economics, the micro and the macro, it's a complete integrated whole. So we do start at the individual level and then from there we can move on up through diminishing margin utility and talking about market prices and profit maximization, talking about where money comes from and what banks do all the way up to things that we can call an economy-wide phenomenon. So it's all an integrated whole. It's not just plucking this mathematical model out of micro-consumer theory and plucking it into a totally separate macro model. That's not what Austrians think about when we think about a macroeconomic way of looking at things with micro foundations. It's all an integrated whole. So in Austrian macro, we've got Bumbawerk's concentric circles. These are all just different ways that the structure of production has been depicted. And what's notable is that this sort of thing, applies to the individual level. So we can think about Caruso as having a structure of production and taking time to produce capital goods and other intermediate products on the way to some final consumer good that he desires. But we can also think about it applying to a macroeconomy. So we can think about for a whole economy there are stages of production and capital is being produced on the way to making a large mass of heterogeneous consumer goods for consumers. And so we've got Hayek's version and then Rothbard's version. And then famously, the Hayekian Triangle was turned the other direction by Roger Garrison. Great contribution there. It allows us to think about time moving from left to right. I think I had a... I mentioned that feature in my last lecture. So this is how Austrian economists think about the macroeconomy very different from the way that the neoclassicals do and what we see in the new neoclassical synthesis. Okay, so where has this taken the neoclassical economists? Where has this taken the mainstream? It's certainly true that they are questioning themselves, which is good. I'm glad they're questioning themselves. So here's Noah Smith says that there's no question that mainstream academic macroeconomics failed pretty spectacularly in 2008. So they're noticing that these models that have been designed for the sake of prediction are not doing very good at prediction. Paul Krugman says too much of it involved making assumptions about how unmeasurable things affected other unmeasurable things. Paul Romer... This is one of my favorite quotes. In the bottom left, Paul Romer said presenting a model is like doing a card trick. Everybody knows that there will be some sleight of hand. There is no intent to deceive because no one takes it seriously. Perhaps our norms will soon be like those in professional magic. It will be impolite, perhaps even an ethical breach to reveal how someone's trick works. So they're noticing all of these problems with the real models and the other general equilibrium models that they have. Solo, who was featured on my timeline of the big players, said, I do not think that the currently popular DSGE models passed the smell test. Later, he said the protagonist of this idea make a claim to respectability by asserting that it is founded on what we know about microeconomic behavior, but I think this claim is generally phony. Greg Mankiw, author of a very widely used Principles textbooks. From the standpoint of macroeconomic engineering, the work of the past several decades looks like an unfortunate wrong turn. So they're noticing that these, what they've conjured up is basically worthless. Finally, here's a president of the Federal Reserve Bank of Minneapolis. Why does an economy have business cycles? Why do asset prices move around so much? At this stage macroeconomics has little offer by way of answers to these questions. So I'm glad that they're noticing this and I hope it sort of picks up steam, especially with what we see in a lot of empirical economics today. There's a lot of talk about the replication crisis. So it seems like it seems like the mainstream is doing a little bit of introspection and that's good. Okay, so contrast this to what we see in the Austrian school. Even though we do not hang our hat on making predictions, I scoured old Mises Daly articles and found this interview with Sean Corrigan where he was predicting with almost scary accuracy what would happen later on. And this was in 2002. Nobody was talking about it at that point. So people started talking about it saying that there could be a housing bubble around the corner in like 2005, 2006, but even then it was just, it was sort of on the fringe. And so he said the appraisal process in home loans has been corrupted in the boom even with the inflation and the prices that we've seen, this is in 2002 remember, it's worse than it looks because house values aren't there in the first place. And then also famously Mark Thornton predicted the housing bubble and the earliest one that I could find was in 2004 where he said, given the government's encourage of lax lending practices home prices could crash, bankruptcies would increase, and financial companies including the government sponsored mortgage companies might require another taxpayer bailout. It's like, wow. It's like four years ahead of time. He's basically just laying out what's going to happen. And so why is this? Why are those associated with the Austrian school able to make these predictions? And I would argue it's because of our causal realist approach. I would say it's because the world is ruled by cause and effect. Certain macroeconomic policies like increases in the money supply have certain effects. And the way that we think about those effects is based on our understanding of real humans making choices and all of the conclusions that we draw from the edifice of economic theory that's based on human action as a starting point. And so it applies to the real world and it makes sense. And even though we understand the inherent unpredictability of the future it seems like we can make even very specific predictions about what's happening in response to policies even like half a decade later. Okay, so let's conclude here and then I've got another slide of recommended reading. So the Austrian approaches is focused on understanding real world cause and effect. Neoclassical economists like to use mathematical models to model consumer behavior, firm behavior and macroeconomic phenomena. Mises and Rothbard present a unified and systematic but very importantly bounded science of economics. One thing that we've noticed in the past few decades in economics is that there's all of these new fields. There's health economics and labor economics and energy economics and all these different fields and they're splintering off. And as compared to what we see in the Austrian school, while scholars will specialize in answering a certain question they would all say that the body of work, the body of economic theory that they're relying on to do their research is cohesive. I often tell this story, there was one time that I went to a macroeconomist paper presentation so there were these weekly seminars and a macro guy was giving this presentation and I'm sure it was one of the representative agent DSGE models something along those lines. And I remember a labor economist leaned over to me in the middle of his presentation and said, I have no idea what's going on. So there's a fundamental disconnect between what's happening in these silos in mainstream economics. Like I said as compared to what we see in the Austrian school where it's very cohesive, systematic and very importantly bounded. So we do know that there are boundaries to what we can explain and what we can talk about based on economic theory. So we know that we can't discuss the particulars of human action. If somebody asks the question why does Joe prefer peanut butter over almond butter? And that's something that economics can't really answer. You'd have to go to some other field. You'd have to use a different set of theories, different set of laws to explain that preference because that's a particular of action. All that we can discuss in economics is action as such and its consequences. So the differences between the Austrian school and the mainstream begin at the most fundamental level at the methodological level. So should we use logic to derive economic theory or empiricism to basically just collect a bunch of data and find a correlation and also differences in the goal of economic science. Are we trying to understand the real world or are we trying to predict? And if you're trying to predict then you have to abandon the real world. You have to come up with these formal models and use empirical methods and statistics to try to do that. Okay. So here's some reading. If you're interested in this topic Roderick Long has one of my favorite articles is called Realism in Abstraction in Economics, Aristotle and Mises versus Friedman. And here he's talking about the difference between precise and non-precise abstractions and what we achieve by in Austrian economics, what we achieve by having non-precise abstractions. So what this means is in order for us to think about the real world we have to simplify things so much because the real world is very complex we can't just map we can't just take the real world and try to map it over into some sort of fully complex simulation. So we have to make simplifying assumptions and Long points out that what we can do is we can specify certain things being absent so we can ignore the question of why somebody prefers peanut versus almond butter. We can just leave that outside and the answer to that question doesn't really matter because what we're trying to explain is something different. We're just trying to explain the fact that they do make this choice and what are the impacts of the supply of it increasing or their demands changing but actually asking the further question of what's causing their demand to change I mean with some exceptions we don't make precise claims about what's inside their head, what's inside their psychology. A former summer fellow, Sam Selikoff wrote this great paper that's available on his website called Understanding Neoclassical Consumer Theory and he does a very good job of not attacking straw men. So he sets up the neoclassical framework in a very fair way and he's pointing out some internal problems along the way and then he ends with a full Austrian critique. It's an excellent read. I recommend you check it out. Murray Rothbard wrote toward a reconstruction of utility and welfare economics. This was just a devastating blow to neoclassical economics in my opinion and I think that if I think it could be convincing to many mainstream economists I think that if they read it some of them might actually convert so maybe we should drop this like pamphlets or something around mainstream departments. Also Rothbard has many great articles on the way Austrians do economics in contrasting with the mainstream found in economic controversies which is a great collection of his work. Thank you very much.