Does Austrian economics make an testable predictions? Is it based on empirical data? Does it have models? It seems more like a statement of beliefs to me.
What am I missing?
The main reason for that is Keynesian economics reduces the many sectors of our economy to a few simple aggregate quantities - e.g., rather than having demand for housing, demand for pizza, demand for computers, we simply have "aggregate demand". An uncharitable person would say that this is simply because Keynes was not very good at math.
If you simply do this calculus, we should never have a recession. Therefore, Keynesian economics assumes these curves behave in certain tricky ways - this imposes recessions and stimulus comes out as the remedy.
Austrian economics, or at least their more modern variants, does not accept the reduction of a complex economy to simple calculus. It views recessions as being caused by misallocation of resources between sectors (i.e., too much housing, too little something else) and recessions as being caused by a lag [1] in re-adjustment. Fine tuning such a complex system is tricky (not to mention many parameters are unknown), and most predictions would simply be qualitative. Such a system is also not amenable to simple calculus (you need big ODE/graph models), which makes it somewhat unpopular.
[1] An unemployed construction worker may be unwilling to accept a non-construction job or to leave his hometown. Or he may be willing to make such a move, but not know where to move to. Until his attitudes change or he becomes more knowledgeable, he remains unemployed.
Austrians/Chicagoans believe this reduction is unjustified.
I freely admit I've only read a small portion of General Theory, though I've read a bit more by newer Keynesians (Krugman and Thoma are two names that spring to mind).
If you agree that aggregate demand is a well-defined quantity, then I'm not sure what you're objecting to. You can disagree with a theory based on this curve, but the curve itself requires no justification beyond a proof that it is well-defined.
I'll make the analogy to statistical physics again. You can always define the average temperature and pressure in a vessel. One can come up with simple calculus laws, such as PV=nT and make predictions(remember high school chem?). Sometimes that's an oversimplification, since temperature and pressure vary from place to place within the vessel. Sometimes you can't even use simple gas laws and need to revert to newtonian or quantum mechanics.
The belief of Austrians (and myself) is that for the most part, the simple calculus of aggregates is an oversimplification and hides important details necessary to explain the world.
One example: you can make a two-sector model of the economy, say [housing, everything else]. In this case, demand is a vector, say [housing demand, other demand]. The demand shock is in housing, and that's where a lot of the unemployment lives (there is some unemployment in "everything else" due to knock-on effects). It's fairly clear to see that stimulus will have different effects depending on whether it is a housing stimulus or an "everything else" stimulus, and that stimulus can mostly only help with the knock-on effects.
A theory based solely on aggregate demand is completely incapable of recognizing this, since it doesn't even have the variables to describe it. The AD theory simply studies AD=housing demand + everything else demand, and tries to go from there. If, for example, housing demand = alpha x AD, and everything else demand = beta x AD, an AD-based theory would be very useful since it would just hide unnecessary complexity. If that isn't the case, then an AD-based theory hides necessary complexity and gives the wrong answers.
This is exactly what is not clear. If Keynes is right, then any stimulus which boosts aggregate demand will have the same effect on unemployment, whether it acts through the housing market or by building Furbies. It is not that Keynes is unable to recognize the distinction; he positively asserts that the distinction does not matter when in a situation of deficient aggregate demand.
A lot of the unemployment is in housing and related industries (~2 million jobs lost in construction), but a lot of it is also not in housing and related industries (~8 million jobs lost total). Every industry save health and education has lost jobs since 2008. The expected effect from a large loss of jobs in one sector, absent the resulting loss in AD, would be an increase of employment in other sectors, since the employees freed from the bad sector would lower the price of labor in other sectors. This is simple supply and demand. The fact that the opposite impact is seen every single time strongly suggests that the adjustment is blocked, per Keynes theory.
As for why I think it's clear this reduction is not always valid, a simple hypothetical: suppose the stimulus targeted doctor-delivered medicine. There is no unemployment among doctors, so there is no pool of underutilized doctors to employ. It also takes about 8 years to train a doctor, so any effect that stimulus has on inducing construction workers (or others) to become doctors can only occur 8 years later.
Also, sticky wages don't immediately lead to the validity of AD or keynesianism. For example, suppose construction workers earned $30/hour before the bust and assume Keynesian wage stickiness. They will not take un-stimulated jobs at Walmart at $12/hour or even stimulated jobs at $24/hour and they will be unqualified for Sous Chef jobs at $30/hour or even a stimulated $35/hour. Unless there is some specific job out there that pays at least $30/hour and construction workers are qualified for it, they will simply remain unemployed. Thus, under some circumstances, Keynes own assumptions make his Calc 101 reduction invalid.
Lastly, there is no reason a housing bubble bursting would cause job losses only in construction. It would also harm realtors, mortgage brokers, bankers, etc. It would indirectly harm people who sell things to realtors, mortgage brokers and bankers. Thus, in the recalculation picture, we'd expect the biggest job losses in construction, real estate and mortgages, and correspondingly smaller job losses as you move outward through the economy from this epicenter.
Also,
http://www.marginalrevolution.com/marginalrevolution/2010/04...
And, this is the most readable, but keep in mind that it's written by a Keynesian:
Austrian economics, at its core, is based on praxeology and mostly rejects models, math and science.
The only useful way to approach this is to look at what Austrians themselves have said and what then happened.
Praxeology simply claims that you can't predict the economy based on experiments where you stick 30 college students into some iterated prisoner's dilemma scenario.
Austrians strongly favor models, math and science. They just want robust models which are not sensitive to parameters, and econometrics of revealed preferences rather than highly controlled experiments.
The difficulty is that these logical arguments depend on the rationality of the actors in the economy. And while Mises acknowledges that the real reasons for a person's actions may not even be known to one's self, more recent experimentation seems to show that at least in some situations, people really do not behave rationally.
Anyway, if you're concerned about a lack of mathematical rigor, but are interested in Austrian ideas, you should look at the Chicago school, with luminaries such as Milton Friedman. The Chicagoans started from Austrian roots, but if anything, their attitude toward mathematical models is the opposite of the Austrians: they virtually invented much of the mathematical techniques that are employed by modern economists.
I'm also not sure what you mean when you distinguish logical from mathematical models. Could you explain?
Austrians are pretty much hard money. There are some interesting comments made by rothbards and Friedman about each other ot illustrate the split.
The schools reach similar conclusions on a number of issues, though.
You already accepted they are separate, I'm just trying to add flavor here, not win a point.
It does make testable predictions, but given the above one can always argue about how thus and so made the result irrelevant (either way).
Look at the current remaining faithful Keynesians, who say the only problem with the "stimulus" was that it wasn't big enough while the more honest admit it wasn't Keynesian at all to begin with.
So let me ask you this: can you or anyone else extract rigorous useful data WRT to all this from Japan's two lost decades?
Nice to see someone else say that for once. If one reads up on what Keynes considers "stimulus" and compare that to what our politicians have labelled "stimulus", less than 10% or so of our "stimulus" was Keynesian. There's a bit of play in that number depending on exactly how you apply definitions, but you certainly can't get it to 80% or 90%.
I am fairly Austrian and consider Keynesian economics to be interesting but misguided on some fundamental points, but in all honestly I can't consider the utter failure of this stimulus as evidence against Keynesian economics. From what I can tell, he too would have predicted this to be utter failure, so both true Keynesianism and my preferred systems predict utter failure and therefore I can't use this to distinguish the two. I am however coming to view Keynesian economics in much the same way I view Communism, as beautiful theories that can't survive contact with real humans. It's too easy for the government to squint at Keynesianism and see nothing but "Hey, spend more money and take more power!", which is not an accurate reflection of Keynesianism at all, but it's what they see. (There's a kernel of truth to that simplification, but no more; the reality of the theory is considerably more nuanced and complicated.)
However the "can't survive contact with real humans" is spot on. One thing you left out as I understand it is that you're supposed to pay back the money you borrowed after the economy recovers. This of course never happens.
True, some countries do decide to seriously pay back debt, I understand Canada did a lot not too long ago, and we paid back a lot of our WWII debt, but those are not the same thing.
And countries that run their operating budgets on ever increasing debt inevitably renege on it one way or another (getting conquered was not uncommon in times past), with I suspect the recent technology based boom (say the post-WWII one) being a special case of the game being able to last a lot longer than normal. (I.e. that's our (the hackers) fault :-).
This is where I say that even Keynes could tell you this stimulus would fail. For instance, there is a local road that even as I type is being "repaired" with stimulus money. But it didn't need repair. Where a $1 of stimulus here is supposed to produce, say, $1.20 in "stimulative value", now we're only getting the $0.20 in value. That's not stimulus. That's actively worse than letting the funds sit there, actively worse than the worse case that Keynes fears; now you're destroying capital. Not only does that not help avert the worst case, you actively bring it closer! And this is the "good" part of the stimulus that is actually infrastructure, too.
Granted, not every project wastes %100 of the capital, but an analysis of the actual stimulus shows the vast bulk of it does; most of it essentially puts useless and wealth-destroying institutions on life support so they can continue destroying wealth. You don't have to guess what the resulting consequences are, you just have to look around.
As an Austrian I believe (with some reason) that a central government is not capable of deciding which projects are actually valuable, any more than a central authority can set prices of any other kind. Moreover, in a relatively efficient economy (it doesn't have to be perfectly efficient), the big infrastructure wins would already have been built, leaving only the dregs behind, things that weren't already built because the economy has decided they aren't of value.
So I think right at the heart of Keynesian economic policy is an enormous "... and magic happens here...", right where the stimulating government entity determines how to allocate the stimulation. Which, if you note, rather precisely and correct predicts how the stimulus fails in the real world, which is that it was very inefficiently applied regardless of whose standards you apply, Keynes or otherwise. A Keynesian must believe that this was a poor application of the stimulus concept, but that hypothetically a government usually gets it right, despite my inability to come up with examples of said; an Austrian like me gets to continue believing that governments are foundationally and structurally incapable of efficient allocation of resources.
That said, my family and I have used CCC infrastructure out in the west in times past. Good investment? Don't know, we were vacationing.
A relevant example this many decades in the future? I seriously doubt it, as you note in your comment on dregs. Which is I gather a lot of what happened in Japan in the last two decades: they've now got some really super-duper infrastructure all over for a steadily aging and decreasing population (peaked in 2006 and is now accelerating downwards: http://en.wikipedia.org/wiki/Demographics_of_Japan#Populatio...).
There are two things to say here. First, if the materials you have are highly volatile and it is incredibly difficult to rule out "things happening that you didn't account for" as the explanation when the results of an experiment appear to disagree with your theory, then it's efforts to advance the theory by empirical investigation are likely to be doubtful and fruitless. Note that if your materials are free human beings and you're observing their responses to various stimuli, then the condition in the preceding sentence applies very thoroughly.
Second, even if [the reason the results of a physical experiment appear to disagree with the conclusions of a theory] is that the theory is incorrect, then it is always possible to confirm that the theory is incorrect by theoretical analysis. If you find that arranging physical objects in 3 rows of 4 and counting them up never yields 16, then you can verify by the methods of mathematics that 3 x 4 is not 16. And it is only once you've done this that you actually feel sure that the theory was wrong; until then, you always have the doubt that your experiment was badly designed, executed, or interpreted.
(Imagine telling mathematicians that you were going to test one of their theorems by physical experiment. Or announcing that you had disproven a theorem by physical experiment. I think you would be laughed at. At any rate, they would want you to turn your results into a mathematical argument, with no reference to your experiment.)
I believe it is with these things in mind that Mises and others say things to the effect that economic theory is not subject to empirical verification or falsification.
The thing is, most "Austrians" traditionally avoid conventional mathematical models, as well as formal notations, preferring to use plain textual reasoning. In some aspects it's good: they do not limit themselves only to what is easily rendered to math (correlations go well with maths, causal relations not so well (but perhaps manageable), formalizing teleological reasoning about human choice-making is much harder).
In other aspects, the lack of formal notations is really bad: most modern economists have mathematical, not philosophical training, and to an unaccustomed eye the Austrian texts actually do look like non-sensical hand-waving. It takes quite some studying to see the actual rigorous structure and careful choice of terms behind those walls of text -- and I won't go into why there aren't that many incentives for most people to study those kinds of books.
I actually think Austrians would gain a lot from adopting more formal notations (perhaps not of the kind adopted by mainstream nowadays). After all, Hayek himself have failed to finish his own book on the theory of capital (which is one of the distinctive concepts in the Austrian economics), because of the sheer complexity of it. Keeping rigor and precision without the formal language is really hard; and formalized representations might be better suited for independent review and verification.
However, in case of economics, the problem domain doesn't lend itself for easy formalization.
> Does Austrian economics make an testable predictions? Is it based on empirical data?
These are some hard questions about Austrians that pop up quite often. It's true that at its heart much of Austrian economics is based on deductive reasoning from a priori assumptions (the correct analogy, they say, is mathematics, not physics). Theories do not follow from the facts; instead, the observed facts are explained on the basis of the theories we find reasonable, and the best theories are those that provide the best (i.e., the simplest and the most general) explanations. This is not really a uniquely Austrian approach, but I believe it's a good way to approach their research.
However, there's not a single strong view on apriorism even within the Austrian school. Mises indeed was quite a radical a-prioist. Hayek and Menger much less so -- and that, I believe, for a good reason.
In my lifetime, when krugman and politicians have been saying one thing, and austrians have been saying another, consistently the austrians have turned out to be right. Meanwhile the politicians in question are no longer in office, and krugman contradicts himself regularly.
Plus, if you will read some austrian writings you will find the are retry straightforward and comprehensible.
Unfortunately, on topics like this, wikipedia has a very strong left bias, so it is best to go to the source.
Start reading the daily articles at mises.org or check out Henry hazlitts book "economics one Eason" which you can get there.
Mises.org also has many major Austrian books for free download