The behavioral foundations of Austrian economics (original) (raw)

Behavioral and experimental economics present challenges to the neoclassical theory of individual behavior, which is based on individuals making choices within the framework of utility functions that are assumed to have certain well-defined characteristics. Results in behavioral and experimental economics have shown that it is common for individual behavior to systematically deviate from the neoclassical axioms of utility maximization. Austrian economics is also based on axiomatic theories of utility maximization, but the assumptions underlying utilitymaximizing behavior are much weaker in the Austrian approach. As a result, they have more solid behavioral foundations and are less subject to challenge by the empirical findings of behavioral and experimental economics. Neoclassical policy conclusions are often overly strong because of its behavioral foundations which are challenged by behavioral and experimental economics and are often misleading because of the comparative static nature of neoclassical welfare economics. For purposes of policy analysis, the Austrian approach provides better insights because of its more realistic behavioral foundations. Keywords Behavioral economics. Utility maximization. Austrian economics. Welfare economics JEL Codes D03. D60 In the last several decades of the twentieth century, and on into the twenty-first, behavioral and experimental economics have been areas of growing prominence within economics. This was recognized in part by the awarding of the 2002 Nobel Prize in economics jointly to Daniel Kahneman, for his contributions to behavioral economics, and Vernon L. Smith, for his contributions to experimental economics. These subdisciplines present challenges to the neoclassical theory of individual