Contemporary Austrian‐school economists reject neoclassical welfare theory for being founded on the benchmark of a perfectly competitive general equilibrium, and instead favor a formal theory deemed consistent with the notions of radical subjectivism and disequilibrium analysis. Roy Cordato advances a bold free‐market benchmark by which to formally assess social welfare, economic efficiency, and externalities issues. Like all formalist, a priori theory, however, Cordato's reformulation cannot meet its own standards, being theoretically and empirically flawed, and perhaps ideologically suspect.

Most economists—old and new classical, old and new Keynesian, and Austrian postulate an immutable reality unchangeable by any human action. They differ only over the amount of information decisionmakers have, in the short run, about this unchanging reality. Keynes and the Post Keynesians provide an axiomatic alternative model that presumes a transmutable economic reality. Runde, Torr, Prychitko, and Boehm and Farmer fail to adequately address this dichotomous analysis of reality in responding to my review of O'Driscoll and Rizzo's book.

Our response to Davidson is two‐pronged. First, we dispute the basis for his dismissal of Austrian economics as presented by O'Driscoll and Rizzo. In particular, we reject his claim, dictated entirely by his Post Keynesian perspective, concerning an “identical axiomatic foundation” of Austrian and neoclassical economics. Second, we seek to show that Davidson's criticism of neoclassicism is based on a superficial, incorrect, and outmoded reading of neoclassical economics.

F. A. Hayek's realistic economic theory has been replaced by the formalistic use of equlibrium models that bear little resemblance to reality. These models are as serviceable to the right as to the left: they allow the economist either to condemn capitalism for failing to measure up to the model of perfect competition, or to praise capitalism as a utopia of perfect knowledge and rational expectations. Hayek, by contrast, used equilibrium to show that while capitalism is not perfect, it contains (...) error‐correcting institutions that bring it closer to perfection than is intuitively apparent. (shrink)

Paul Davidson's critique of O'Driscoll and Rizzo is based on an “official” philosophical position that turns on an opposition between knowledge and ignorance and a corresponding opposition between ergodic and nonergodic processes. But Davidson's substantive analysis reveals a very different “unofficial” position, based on “sensible expectations” and a realist ontology of enduring social structures. While O'Driscoll and Rizzo have the edge on Davidson in terms of their characterization of agents’ beliefs, their ontology of event regularities is ultimately the same, and (...) suffers from the same drawbacks, as Davidson's official ontology. The solution to some of these problems may lie in adopting an ontology similar to the one Davidson invokes in his unofficial capacity. (shrink)

Paul Davidson asserts that Post Keynesians could fare just as well without insights from their Austrian colleagues. He's wrong. Radical subjectivists within both schools of thought have something to gain through dialogue, as evidenced by the efforts of Kenneth Boulding, G.L.S. Shackle, and Ludwig Lachmann. Many Austrian and Post Keynesian economists share a common methodological principle of radical subjectivism, which emphasizes nonergo‐dic constructs and systems indeterminacy, and each school can gain from the insights of the other when asking such questions (...) as why capitalism generates recessions and depressions and why capitalism generates any degree of order at all. (shrink)

ECONOMICS AND INSTITUTIONS: A MANIFESTO FOR MODERN INSTITUTIONAL ECONOMICS by Geoffrey Hodgson Philadelphia: University of Pennsylvania Press, 1988. 365pp., $39.95 Traditional institutional economics argued that the methodological individualism of both classical and neoclassical economics was grounded in a false conception of human nature and a pre?scientific understanding of economic life. Geoffrey Hodgson has provided a restatement of this position and extended the institutionalist critique to modern developments within economics at both a positive and normative level. In the course of doing (...) so, Hodgson both draws on and differs from developments within modem Austrian economics. It is argued that Hodgson misunderstands key aspects of the Austrian project and as a result his indiscriminate criticisms of methodological individualism and classical liberalism are not convincing. (shrink)