Yet another problem is the Neo-Austrian/Neo-Rothbardian anarcho-capitalist rejects model theory in economics because they believe that models cannot properly capture reality.
Not true. Austrian's acknowledge that models can be useful (and have used them) for pedagogical purposes, they just aren't very useful for predictions.
I think
Rothbard put it best:
The physical sciences are not in the fortunate position of positively knowing their fundamental axioms. On the other hand, the physical sciences are in a position to isolate causal factors in experiments. The physical sciences, then, have to arrive at their axioms by hypothesis and by experimental testing of conclusions deduced from these hypothecated axioms. In the "social sciences", the fundamental axioms of praxeology are known from the beginning, so that substantive conclusions may be drawn by means of logical deduction. In human historical events, however, causal factors cannot be experimentally isolated, so the historian must explain by use of judgment which praxeological laws apply in the particular situation.
[...]
The work of the economic theorist, or praxeologist, is to elaborate the laws from the various axioms and according to the rules of logic.
Charts, diagrams, models, and graphs with no quantity are an important feature of Economics 101 pedagogy. Everyone can probably recall the supply and demand graphs of the very first few classes on economics: no units or explicit quantity, and probably with unlabeled axes. If they had quantities, they were made up. Austrians don't have a problem with models used in this manner.
But constructing an actual Supply and Demand graph is difficult because of the difficulty inherent in isolating demand & supply out of a list of historical measurements. Inevitably you get a list of data from different times and maybe even different places, and the standard deviation can be substantial.
Making predictions within a reasonable degree of statistical error and margins is even harder. This is the kind of modeling that Austrians reject… or at least have a healthy dose of skepticism towards. I personally don’t mind models (nor do Austrian economists like Robert Murphy), but I am very skeptic of most economic statistics that people cite that are based off of models.
Two examples of this in action: Potential GDP and Fiscal Spending Multipliers. Any time any claim is based off of either of statistics generated from either of those two, I take all conclusions with a massive grain of salt. For illustration, see
this video, specifically the part where it criticizes the CBO’s use of the Fiscal Multiplier.
What Austrians in the Rothbardian tradition recommend is to treat historical and modern economic events in the same manner one treats human history and other social sciences (again, see
this article).
Praxeology is indispensible, but does not provide omniscience. It furnishes laws in the form of "If X, and if Y remains unchanged, then Z". It is up to the historian, and his counterpart, the forecaster, to determine the specific cases in which the law is applicable. [...] Historical events are complex results of numerous causal factors: praxeologic, psychologic, physical, chemical, biological, etc. The historian must determine which science and its laws apply, and, more difficult, the extent to which each causal factor operated in the events he is attempting to explain or predict. Historians will legitimately differ on the order of importance to be attributed to each factor.
Economic theory as has been developed is a component part of praxeology. It is deduced from the apodictic axiom of action, and most of economic theory, including the laws and implications of Uncertainty, Time Preference, the Law of Returns, the Law of Utility, etc. can be deduced with no further assumptions. With the help of a small number of subsidiary axioms which are rather more "empirical" in nature - such as the disutility of labor - the rest of economic theory can be deduced.
All economists realize that these factors do not exist in real-time but nonetheless, it is a theory that can be utilized for advancement of a free society.
Here is the problem for the Neo-Austrian/Neo-Rothbardian anarcho-capitalist; while rejecting models for lack of realism, the perfect competition model IS the anarcho-capitalist theory of society. This, of course, is highly problematic.
Disagree as well. The Anarcho-Capitalist position is that no government is superior to any government, which relies in part on economic analysis but is not wholly dependent on a specific model.
The anarcho-capitalist position is not derived from the naïve perfect competition model (which is, as a model construct, useful for pedagogy, but not so when attempting to obtain a more nuanced understanding of the market). In fact, to get to the anarcho-capitalist position from a mainstream economic model one must simply consider the following:
The First Fundamental Welfare Theorem asserts that market equilibria are Pareto efficient. The first welfare theorem holds for economies with production regardless of the properties of [said production]. Implicitly, the theorem assumes complete markets and perfect information.
If you recall, Pareto efficiency means that no change to the situation can be made that isn’t at the expense of any particular individual. Furthermore, economies tend towards equilibria over time due to trade, which is by definition mutually beneficial.
Therefore, a competitive market will result in improvements in the quality of life for all participants at the expense of nobody (because of trade), and will tend towards an equilibrium that is efficient and where no central planner could possibly improve the situation (because of the First Welfare Theorem), which is tautologically true under certain conditions.
The primary economic criticism of this position is the assumptions built-in to what makes a market competitive and why trade is mutually beneficial. The former is usually expressed in terms of various points of “market failure”. But criticizing the market for not being perfect is one thing; the question is, is it possible to create a sustainable system to address market failure?
The first criticism, that market failure can arise via imperfect information and therefore government is needed, is absurd. Perfect information can be safely ignored without affecting an argument in favor of minimal/no government. This is because both government and private actors face the same information constraints. Information, in a sense, can be (and is, in Austrian economics) no different from any other good and service. Consumers with superior information make more informed choices which leads to better gains from trade, just like producers with superior capital have lower costs which leads to better gains from trade. There is an incentive to accumulate valuable, practical information in the same manner as there is an incentive to accumulate capital.
Economic accumulation of useful information leads to superior quality of life for the person in question. Similarly, when it is not worth the cost to gather relevant information, the tendency to do so unnecessarily will be curbed. As such information (or lack of it) is not a significant constraint on the market except to say that there are always improvements to be made and room for entrepreneurship. This dynamism is what makes free markets a system and not a state; it has built-in tendencies towards resolving this problem over time since it rewards entrepreneurs who act on these information disparities.
Comparatively, there are less, and weaker, incentives for politicians, voters, and bureaucrats to be as informed, as Public Choice theory explains. Big Government types invariably carry with them the belief that they know what’s good for you and can fix all the problems; in some (coincidental) cases they might, but there is no reason to believe it is a systemic feature of government (in fact, there is ample reason to believe otherwise when examining history). People reason that because it’s possible for individuals to criticize a particular state of the market at a particular time (even a seemingly persistent state), this justifies inserting a system of government over top of it. This is unfounded. Those who propose such arguments rarely have a coherent and well-designed “system” in mind, only various states they wish to resolve through which they attempt to justify their impractical system. The failures of the government system are legendary but no pro-government type has taken sufficient steps to resolve this.
Similarly, the “complete markets” assumption can safely be dropped when advocating for a pro-market position. The complete markets assumption basically boils down to the fact that to the extent that something isn’t traded on the market (particularly as it pertains to future speculations), calculations involving it will tend to be suboptimal and externalities will arise where one group can benefit at the expense of another. The Austrian response to this is to eliminate said externalities by expanding the market to encompass such things, thereby resolving the problem.
The Statist response is to expand the role of government. This is even less defendable than the prior position. Whereas the preceding one is framed as an empirical or pragmatic position (“well if you just elect the
right people to enact the
right policies…”), this one is a solely deductive critique that fails to make any coherent sense. In effect, it states: “The market fails to work efficiently when its actors cannot make wholly internalized profit-and-loss calculations over certain goods and services. We fix this problem by making it harder, impossible, or illegal for actors to make wholly internalized calculations, since we hand the job over to an external party thereby magnifying the problems of externalization.” The government is just as susceptible to critiques of externalization, given that a given government policy is generally the literal embodiment of externalized costs and concentrated benefits.
