Another in my "series"(see part 1 and part 2), here is an introduction to Austrian economics through Rothbard's Man, Economy, and State (MES). Rothbard (in the pink glasses above) avoids the distinction between micro and macro, but I will call MES micro.
As with Mas-Colell with microeconomics and Stigler with price theory, the first chapter lays out the framework for praxeology. In many ways, Rothbard is a foil. A foil is not an opposite. Instead, Rothbard asks different questions. He is an eel to keep me critical.
(Note: Throughout I use "actor" for consistency. See the bottom of my About page.)
Published in 1962, he begins his analysis with the assumption that the reader will just follow and develop an understand of what praxeology and economics is. MES is laid out like other treatises on the early 20th century, such as Wicksteed (1910), Taussig (1911), and Fetter (1915) and new readers would not question the method. Either way, Rothbard assumes the reader will follow and does not start out with a long explanation of epistemology, heuristics, etc, like Mises in Human Action
However, in 2013, Rothbard´s economics (henceforth just economics) is so unfamiliar to most other economists that I will start with a simple explanation. Praxeology and its subdivision economics use logical deduction, similar to Euclidiean geometry. For praxeology, there is one axiom, the action axiom. Some of the steps are not "realistic", but the deduction is valid. Throughout the analysis, Rothbard adds some empirical claims. Rothbard presumes that people will accept these claims, such as leisure is a consumption good.
Just as Mas-Colell starts with the axioms of "completeness" and "transitivity", Rothbard starts with "action." If these axioms, whether from Rothbard or Mas-Colell, are not true, then the rest of the analysis does not follow. The former claims that the axiom if "self-evident", while the latter assumes the axioms. Mas-Colell uses "proofs", immitating the mathematicians, and Rothbard uses "logical deduction." For both authors, economics only explains the implications of the axioms. (For more, see the Appendix to chapter 1 of MES, Rothbard´s AER article on the topic, or this ungated article.)
As with all of my summaries, I am going to accept the author's method as true when possible.
We Know that Men and Women Act
Praxeology is the study of purposeful human action, compared to non-human action or mere reflexive action. This axiom is "self-evident." All action is only taken by individuals. Saying that the government or the people acted is a just a phrase. The government does not act in any way beyond the individual actors.
An actor seeks to replace some state with a better through actions. This action can be "inactive." Since man acts, he must believe that some state is better than other possible options. Notice that this action must take place at a specific time to change the future. It is impossible to alter the present. Inherent in the action axiom is uncertainty. If actors know the future completely, then they cannot act to change it. Time and uncertainty are closely tied with the idea of action. Action in equilibrium does not make sense.
Means and Ends
If I am typing, it is because I prefer this to all other opportunities at this moment. I rank it about others. This ranking can never be turned into a quantity. It is meaningless to say I prefer typing X times more than I prefer eating. Rothbard does not use utility functions.
To achieve his preferences, or ends, actors use means. These are goods. Action requires a subjective belief that the actor can alter his future through these means. Anything an actor believes he cannot alter is not a means, but a general property of the circumstance. Since all action occurs in time, time is always a means.
All means are scare. If a mean was not scarce it would not require action. Therefore, all action is necessarily a choice between ends. Choosing one preference requires that the actor not choose an alternative. This choice is called economizing. It is a trade between one end and another. The study of choice or trade are common descriptions of economics.
Since an actor uses goods for the subjectively most desirable end, each additional good of the same type (subjectively in the mind of the actor, not physically) is used for a less important purpose. From this, Rothbard derives the law of diminishing marginal utility.
Rothbard distinguishes between consumers' goods, which directly satisfy wants, and producers' good, which do so indirectly. Again, the emphasis highlights the distinction between authors. Rothbard introduces producers' good and a structure of production in the early pages. Producers' goods that are closer to an actor´s ends wants in time are "lower order" compared to the "higher order" goods. MES is attempts to explain the "structure of production.".
Savings and Investment
Rothbard uses Robinson Crusoe economics to start the topic of production. When Robinson Crusoe first arrives on his deserted island, the berries available from nature and leisure are the only available goods. Through the law of diminishing marginal utility, Rothbard shows that Crusoe collect berries until he prefers leisure to more berries. As Crusoe wants to increase both goods, he must become more efficient in gathering berries. He must come up with better strategies or develop producers' good.
The producers' goods that will help are either naturally occurring, land, or previously made items, called capital. The capital can only be created though a reduction in consumption. Crusoe must sacrifice leisure or berries in order to build a gathering stick. This reduction need not be absolute, only relative to possible consumption without savings.
At this point, savings and investment are interchangeable. Crusoe saves to invest in a stick. Since savings delays consumption, the additional capital lengthens the time of production. Austrians refer to this as the "roundaboutness" of production.
The berries directly satisfy wants, while the stick only satisfies his wants through the berries. The stick has no value by itself. All consumers' goods are valued relative the the ends they satisfy directly, while producers' goods derive their value from consumers' goods which they help to produce. This is a subjective evaluation by the actor and extremely difficult in a modern economy.
(Note: I have a bias towards Austrian economics, though it is flawed. I am just making my priors known.)
As stated earlier, praxeology is strange to economists in 2013. Yet, it is powerful for understanding economic reasoning. Rothbard compacts lots of economics into 70 pages. For the new reader, it is exciting. To an experienced economist, the beginning are boring compared to the heart of the book, but this is the case with all three authors.
Besides the method, which is a big "besides", Rothbard's economics should be agreeable to most economists. While his stress is different, with a focus on time, uncertainty, and subjective value scales, I cannot find anything substantive that contradicts Mas-Colell or Stigler. Rothbard is not constructing a heterodox theory, but is interacting with mainstream theory.
The foundation of all three methods are sound and are difficult to dismantle from within. The flaws appear once the theory goes beyond the basics. I will delay most methodological analysis until further. The main problems, of all three approaches, are inherent in the method and it is unfair to criticize too much now.
One problem might exist since Rothbard assumes savings equals investment. This explanation hopefully grows through the rest of MES. With Crusoe, it is not a dangerous assumption, but might be in a modern complex monetary economy.
Praxeology is not concerned with prediction. This extremely limits the subject. Austrians emphasize the distinction between pure theory, such as MES, and economic history/prediction. Stigler shows off what economics can do during the first chapter by applying his theory. I would like to see an Austrian version.