Abstract
Since most economic theories that discuss individual choices treat individuals as acting for reason, and thus in some way rationally, questions about the role that rationality plays in economics are of great importance. Rationality is often expressed by “Homo Economicus” through utility theory versus its identification through social terms by “Homo Sociologicus”. In this framework, business cycle theory is often rooted in assumptions regarding individual or collective rationality. Thus, the study of business cycles in combination with the concept of rationality may shed light on methodological issues. This paper focuses on the Austrian tradition because of its distinct characteristics: (a) the view that economics is part of the broader concept of political economy; (b) its antithesis to mathematical formalism, (c) its antithesis between ideal types and reality, (d) the struggle between groups for the distribution of wealth; and (v) methodological reductionism. Hence, investigating the methodological origins of these ideas in economics and re-evaluating the influences that shaped them is quite useful for promoting dialogue in the methodology of economics.
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Notes
Morality is the public system that no rational person can quit, implying its categorical nature meaning that one can do nothing to escape being legitimately liable to sanction for violating its norms, except by ceasing to be a moral agent (Gert & Gert, 2016). Morality applies to people simply by virtue of knowing what morality prohibits or requires and being able to guide behavior accordingly (Gert & Gert, 2016). Nevertheless, ethical relativists such as Harman (1975), Prinz (2007), and Wong (1984) deny that there is any universal normative morality and claim that the actual moralities of societies or individuals are the only moralities there are (also Gert & Gert, 2016).
According to Frommel (2016, p. 11), in the context of the social economy identical production processes are continually repeated. Thus, “in such a ‘steady-state’ economy, there is no scope for entrepreneurial discovery described by Kirzner (1979); all the decisions of entrepreneurs are simply “technical” ones, which cannot be treated as economic decision-making”.
According to Cowen (1997, p. 77) “the postulated entrepreneurial mistakes in the traditional Austrian theory which are systematic, violate the rational expectations hypothesis”. The cluster of errors is incompatible with rationality in the neo-classical sense (Evans & Baxendale, 2008, p. 84). If a rational investor was asked to choose the time at which he would leave the market, it would be momentarily before it peaked, because “[w]hen some investors follow positive feedback strategies… it may pay arbitrageurs to jump on the bandwagon themselves… although arbitragers sell out and help prices return to fundamentals, in the short run they feed the bubble rather than help it to dissolve” (Shleifer & Summers, 1990, p. 297). The Austrian School’s position is that the size of the monetary footprint is more telling than the interest rates, even if it does not increase inflation (Evans & Baxendale, 2008, p. 89).
Part of the Austrian School sees entrepreneurs as rational passive actors that react to the false signaling of the prices collectively, while for others the knowledge produced through price distortions is not distributed horizontally to all entrepreneurs, but solely to those being on the margin, even if credit expansion affects real variables (Evans & Baxendale, 2008, p. 81).
According to Garrison (1989, p. 9) “rational expectations may exacerbate rather than ameliorate the misallocation of resources induced by monetary expansion”.
Contrarily, Garrison (1989, p. 14) writes: “the assumption of rational expectations (…) implies that a monetary disturbance should not have any systematic real effects beyond the period in which the disturbance occurs”. Such a mechanism of business cycles does not support Murphy’s (2005) view; entrepreneurs are actually not fooled by the central bank (Frommel, 2016, p. 34).
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Papageorgiou, T., Michaelides, P.G. Rationality and Business Cycle Theory in the Austrian Tradition: A Note on Methodology. Atl Econ J 49, 377–391 (2021). https://doi.org/10.1007/s11293-022-09741-w
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DOI: https://doi.org/10.1007/s11293-022-09741-w