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370 sats \ 1 reply \ @SimpleStacker 29 Dec 2024 \ parent \ on: What Makes Austrian Economics Unique? econ
Yes, the macro models that I learned in grad school had a way-too-simplified view of the firm.
Here are some of the assumptions that modern macro models often make about the firm:
- It frictionlessly converts labor and capital inputs into outputs, usually via a Cobb-Douglas or CES production function.
- It has no fixed costs of production and exists independently of any decision made by anyone in the economy.
- It is commonly owned by all the consumers in the economy and simply returns its profits to the consumers.
You are right that in such models there is no channel through which entrepreneurial decision making is reflected.
Interestingly, macroeconomists recognize the weaknesses of these assumptions, but they make them in the name of mathematical convenience, so that their models are more solvable.
This tradeoff, simplifying models for the sake of mathematical tractability, is probably one of the biggest problems in modern economics. It's become impossible to publish anything without a solvable model (whether by hand or by computer), and so rather than dealing with the underlying complexity through reasoning, economists just assume away the complexity.
It seems to me that the simplifications needed to make the mathematical models work make the models less than useless for making economic decisions and policy. They reflect an unreality that the economists may recognize but are trapped by the model they are employing to understand the firm or the economy in general. I think this is the main reason Austrian Economic school is superior in predictions and actually making policy decisions.
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