By Arnold Kling
On my post on Pete Boettke’s podcast, a commenter wrote,
The big thing now is combining institutional economics with general equilibrium analysis. This is what Daron Acemoglu has been doing for the last decade now. Which is obviously the way to go.
I would put it differently. In the spirit of Boettke, let me suggest a matrix.
Mainstream economics focuses on the analysis of equilibrium, relies on formal models (aka “math”) and econometric testing. The category that I call “semi-Austrian” looks at institutional factors while using the formal/empirical methods. I would put some of Acemoglu’s work in this category. William Easterly fits there as well. The attempt to relate standard of living differences across countries to factors such as the ease of starting a business or an index of economic freedom would be “semi-Austrian” in this framework. So would the attempt to relate the level of inflation to the degree of independence of the central bank.
The hard-core Austrian view of Mises, Rothbard, and Hayek, would appear to reject semi-Austrian formalism and empirical work on methodological grounds. I use the cautious phrase “would appear to,” because those icons are not here today to comment on the semi-Austrian work that has appeared over the past twenty years.
I admit to a tremendous amount of skepticism about econometrics. However, in terms of this framework, I would put myself in the semi-Austrian camp. I think that economists can come up with testable propositions and valid tests. However, the disposition to view the economy in equilibrium terms is often not helpful, and it leads to many useless exercises in formalism and unreliable econometrics. Mainstream macroeconomics is exhibit A.