An Austrian Version of the Lucas Critique

The Austrian School of economics is mainly interested in human action. Austrian economists acknowledge that individual human beings act and that interacting economic agents form a complex system called the economy. Consequently, Austrians try to understand economic phenomena by analyzing human action. Compared to mainstream economists the methodology applied by scholars classified as Austrian usually is less formal. Indeed, the Austrian School of economics tends to criticize econometric analysis and formal modelling of the general equilibrium type. Instead of relying on formal models, Austrian economists usually start with explanatory axioms and then use thought experiments to try to understand economic problems (Rothbard 1976, pp. 19–21; Selgin 1988, pp. 20–28; Herbener 1996, pp. 97–98; and Backhouse 2000, p. 32). There is ample evidence for an aversion to mathematics and econometrics in the writings of scholars of the Austrian School of economics. The most prominent example, of course, is Mises, who argues: “There is no such thing as quantitative economics. All economic quantities we know about are data of economic history” (Mises 1996, p. 351). Scholars of Austrian economics argue persuasively that formal models are not able to capture the complex dynamics of market processes. In the eyes of Austrian economists the market is not only an abstract place of exchange between buyers and sellers of goods, but also a process that helps to generate knowledge by letting economic agents reveal their preferences in voluntary exchanges. Profit-seeking individuals continuously will try to detect chances