Austrian Empirical Economics?

Sherwin Rosen was one of the greatest University of Chicago economists.  While he did not win a Nobel Prize (he died at age 62 during the year when he was the President of the American Economic Association), his student Richard Thaler won the Nobel Prize and his student Kevin Murphy has won multiple major economics honors.   I was not his best student but he continues to teach me new lessons about economics.   I just read his 1997 paper on Austrian Economics.  I now see that my Climatopolis work is a type of Austrian Economics. 

My 2010 book (see the short version here) argues that the combination of rising urbanization, human capital and innovation together will allow us to adapt to climate change.  Cities compete for the skilled and those cities that successfully adapt to the challenge of climate change will gain in human capital.  Home prices (and thus income effects) will fall in areas that fail to adapt.  This competition and the potential for migration creates a more overall resilient economy. While I cannot tell you today which cities will win this competition, I am very confident in this “Austrian” vision.

At the same time that I continue this work, there are plenty of NBER environmental economics researchers estimating reduced form single equation models of the general form:

economic outcome =  a + b*climate conditions +  U

for example, the outcome variable might be mortality, or worker productivity and the key explanatory variable might be annual days of the year that the temperature is over 100 degrees.

Researchers seek out “credible research” designs to estimate “b”.  This slope represents the current marginal effect of climate on an economic outcome.  This research ignores cross-elasticities.  If the climate is bad in Kansas but great in Oklahoma and expected to remain so,  the negative shock to Kansas will actually create a boom in Oklahoma.  This is a migration (zero sum game) effect.
Yes, a migration cost must be paid but this is a 2nd order effect.

Given my read of Sherwin Rosen’s paper, I now see that Austrian Economics focuses on the evolution of the economic system.  Entrepreneurs intuit that there is emerging demand for this product (think of Uber) and begin the experimentation to develop it.  Some succeed and some fail.  The system evolves to economize on scarce resources (signaled by prices) that may becoming increasingly scarce.

What can NBER’s empiricists actually do here to satisfy an Austrian economist’s vision?  One empirical agenda is to study emerging venture capital fund investments. Another would be to study patenting behavior in key sectors affected by climate change.   Investment under Knightian uncertainty is an under-researched topic. In this case, firms know that they do not know the future for certain but they foresee certain emerging trends such as increased drought conditions in the American West. Rather than being passive victims, some firms see this as an opportunity and this starts the endogenous R&D progress.

Note that the empirical researcher who assumes she is studying a stationary process will begin to observe that the “b” coefficient defined above converges to zero over time (perhaps not in a linear fashion) as lumpy new innovations are developed and brought to market.  This point is one of our key points in this 2017 paper.