Neoclassical Economics Developed as a Copy of Mechanical Physics Replacing Energy with Utility

Perhaps at this time it is most important to highlight the negative influence which the static conception of energy efficiency has exerted on the development of economics. Hans Mayer and Philip Mirowski have pointed out that neoclassical economics developed as a copy of nineteenth-century mechanical physics: using the same formal method, yet replacing the concept of energy with that of utility and applying the same principles of conservation, maximization of the result and minimization of waste. The leading author most representative of this trend, and the one to best illustrate this influence of physics on economic thought, is Leon Walras. In his paper ‘Economics and Mechanics’, published in 1909, he claims that in his Elements of Pure Economics he uses mathematical formulas identical to those of mathematical physics, and he stresses the parallel between the concepts of force and rareté (which he regards as vectors), and between those of energy and utility (which he regards as scalar quantities).

—Jesús Huerta de Soto, “The Theory of Dynamic Efficiency,” in The Theory of Dynamic Efficiency, Routledge Foundations of the Market Economy 28 (London: Routledge, Taylor and Francis, 2009), 4.

Hans Mayer On the Disguised Fiction at the Heart of Mathematical Equilibrium Theories

Another aspect of interest is the different position of the two schools [Neoclassical versus Austrian] regarding the utilization of mathematical formalism in economic analysis. From the origins of the Austrian School, its founder, Carl Menger, took care to point out that the advantage of verbal language is that it can express the essences (das Wesen) of economic phenomena, something that mathematical language cannot do. In fact, in a letter he wrote to Walras in 1884, Menger wondered: ‘How can we attain to a knowledge of this essence, for example, the essence of value, the essence of land rent, the essence of entrepreneurs’ profits, the division of labour, bimetalism, etc., by mathematical methods?’ Mathematical formalism is especially adequate for expressing the states of equilibrium that the neoclassical economists study, but it does not allow the inclusion of the subjective reality of time and, much less, the entrepreneurial creativity which are essential features of the analytical reasoning of the Austrians. Perhaps Hans Mayer summed up the insufficiencies of mathematical formalism in economics better than anyone when he said that:

In essence there is an immanent, more or less disguised, fiction at the heart of mathematical equilibrium theories: that is, they bind together in simultaneous equations, non-simultaneous magnitudes operative in genetic-causal sequence as if these existed together at the same time. A state of affairs is synchronized in the ‘static’ approach, whereas in reality we are dealing with a process. But one simply cannot consider a generative process ‘statically’ as a state of rest, without eliminating precisely that which makes it what it is.

—Jesús Huerta de Soto, “The Ongoing Methodenstreit of the Austrian School,” in The Theory of Dynamic Efficiency, Routledge Foundations of the Market Economy 28 (London: Routledge, Taylor and Francis, 2009), 39-40.