Why I Am Not an Austrian Economist
econfaculty.gmu.edu
econfaculty.gmu.edu
I personally like the Austrian framework because I find it aesthetically pleasing (I guess I'm a sucker for deduction). Some of the writing is simply intellectually interesting and also very scholastic for lack of a better word. For example, even if you completely disagree with the analysis I'd argue that "America's Great Depression" is a very good read simply from an intellectual point of view and "Man, Economy, State" is a very good tome that contains a framework of thought. I also enjoy the science theoretical musings quite a bit. The writing on Aristotelian ontology is very good for example.
There's also works where I constantly shake my head at the implications and political conclusions but intellectually I still love them. "The Ethics of Liberty" is probably the clearest example of this. Do I think that letting a baby starve to death because it is basically a parasite is morally desirable: no. Do I find the idea of trying to deduce an entire ethical framework from first principles fascinating and the way it is done interesting: yes
There are lots of things about AE that I find irking but the core theory and the science theoretical basis is very interesting/intriguing to read.
I also like that pretty much everything is readily available on mises.org. I wish all "schools of thought" would be this forward thinking.
I wonder if there is anyone less deranged than Rothbard working within the same deontological framework. I honestly struggled reading "The Ethics of Liberty" because I can't accept his base principles. I was hoping to find some kind of justification for homestead principle, but he basically says it's self-evident. Maybe for American libertarians it is, but for most people it's not.
David Friedman's consequentialist approach is probably less aesthetically pleasing, but at least his "The Machinery of Freedom" shows that you don't have to be a lunatic to be an AnCap.
Since none of the are integral to Austrian economic theory but a few of them are against opinions of Mises and Rothbard (and I wouldn't even disagree with the author's view points here), it's comparable to saying "Darwin said you should always explore distant nature in a naval vessel and he believed in God, therefore his theories are wrong".
To substantiate:
1. Utility Functions vs. Value Scales
Everyone can use the representation of utility he wants, it just has to be decided whether it's appropriate in the case he applies it to or not. I assume small quantities of every day items (say potatoes) are easier modeled in continuous well-defined functions while preferences for the quantity of shopping malls is much harder to model that way. Neither means the other is necessarily wrong but as always modelling is not the same as reality.
2. Indifference
I can personally see how I am indifferent to a few things but it's unlikely you see it in my actions (other than watching me flip a coin). Now how is that again related to Austrian Economics?
3. Continuity
Basically Mises and Rothbard are arguing against modelling various dimensions as continuous functions. I see how their claim can be true under some circumstances and how it can be useful under others.
So again how is that relevant to being (or not) an Austrian Economist?
4. Welfare Economics
> Rothbard could only claim the welfare effects of government intervention upon "social utility" are indeterminate
Agreed. Government is not necessarily bad.
The rest of the discussion there is about "assumptions": Whether and how a third party affects a voluntary exchange.
Again, this is not at all necessary for Austrian economics, and attacking it is an exercise in futility.
5. Subjectivism
This argument is not an argument, it's about word usage frequencies and how they imply things. WTF
1. author argues that Rothbard's austrian "value scale" approach is unable to derive the key income and substitution effects used in neoclassical modeling, but that Rothbard adds them into his framework ad hoc without properly deriving them
this has nothing to do with the reality of modeling the utility of potatoes for individuals vs. shopping malls for society, rather deriving key properties that are used in logical predictive modeling (eg my wages increase ∴ consumption curve shifts right BY income effect)
2. yeah, not related to any precepts of austrian or neoclassical economics, more of a philosophical discussion of how preferences must be revealed by action in econ rather than introspection, freezing time, or flipping a coin every time you're indifferent. he's rejecting both of their rejections of an implication of neoclassical theory, but it's not practically important, just a reflection of caplan's beliefs
3. rothbard and mises reject the notion that preferences are continuous, which means they can't be neatly drawn on 2D graphs and used in calculus. Rothbard continues to use diagrams and calculus somewhat hypocritically, while Mises doesn't use diagrams. author thinks (as do most economists) that graphing utility and preference functions as continuous and therefore being able to do useful things such as find their intersections, take their derivatives, etc. far outweighs the utility of describing them in non-continuous terms
author thinks all austrian economists reject continuous micro functions, which is untrue (just Rothbard and Mises) but supports his larger theory that austrian economics is not as useful/actionable as neoclassical
4. author is defending the principle of pareto efficiency, another fundamental neoclassical principle which allows economists to measure how free market distortions such as communism and rent control effect different groups within the economy. author is criticizing rothbard's framework which only allows one to call acts of government welfare "indeterminate" and thus be unable to measure their effect and get things done
5. defending the technical definition of "efficiency" again because the technical definition is needed to construct proofs and get things done
basically author is saying neoclassical is much more useful for getting things done with economics, and that rothbard and mises (who he takes to represent the whole school of austrian econ) didn't provide many useful tools from which others could predict/model/build off
As for your points:
1. The position that ordinal and cardinal representations of utility are both valid in certain circumstances and in practice identical economic models can often be derived from them is the mainstream economics one which the Mises strand of Austrianism rejected. If you believe that "neither means the other is necessarily wrong" you're rejecting one of their core assumptions.
2. Indifference is pretty easily reflected in actions. Obvious example of a revealed preference of indifference between two items: "Which one?" "Either one" (sure, I'll accept that in some cases a person might delegate a decision because they have a specific preference to give the delegate responsibility or to be surprised by the choice which is greater than their preference for one item over the other, but a lot of the time it's clearly genuine indifference between items. I'm not trying to impress the store clerk when I don't care which no-name manufacturer my $1 widget comes from). If Austrian economists insist on (re)defining economics as a set of immutable laws of human action, it helps not to have such obvious counterexamples to one of their claims...
3. Austrian Economists following the approach of Mises insist that modelling dimensions as continuous functions is never acceptable. ergo if you believe continuous dimensions are sometimes a useful modelling assumption, that's a pretty good reason not to be an Austrian economist (even if you think their objections to the representation of some dimensions as continuous differentiable functions are valid; it's not like Austrian economists are the only people offering such critiques)
4. Considering that the thrust of Mises/Rothbard's arguments is that government is [almost always] bad for allocation of resources, it's a pretty major shortcoming that based on their own foundational assumptions they can't actually argue that even the most egregious examples of government misallocation of resources actually are misallocation of resources.[1] (Many mainstream economists also argue against the validity of interpersonal comparisons of utility, but could at least have some grounds for argument that lesser quantities of output under a price-fixing regime are suboptimal on the grounds of Kaldor/Hicks inefficiency since they're willing to consider non-revealed preferences.)
5. Caplan doesn't elaborate on this particularly well, but it's a standard claim by Austrian economists that mainstream approaches involving quantitative analysis aren't compatible with the concept that value is subjective. It's also pretty well established that many classes of quantitative mainstream model work pretty well with Austrian-style subjective preferences (viz. based on ordinal preferences within a budget constraint).
[1]obviously Austrians have lodged other objections like claiming that allocation of resources for production in the absence of a price system is "impossible" (clearly incorrect) rather than merely less efficient, and generally subscribe to ethical arguments that government intervention is "coercive" except when used to prevent people from using resources other people claim ownership over. But not being able to say "West Germany produced better economic outcomes for its citizens than East Germany, or even than medieval Prussia" is a pretty major disadvantage in an economic theory.
Friedman had something similar to say about Hayek:
"[I am] an enormous admirer of Hayek, but not for his economics. I think Prices and Production is a very flawed book. I think his [Pure Theory of Capital] is unreadable. On the other hand, The Road to Serfdom is one of the great books of our time".
That list would make many at Mises scream bloody murder. Man our discourse is just so petty.
I'm not aware of Austrians being opposed to government pricing externalities, banning poisons, preventing deforestation and pollution or preventing private fraud. The Austrian school is not generally anarchist. From what I gather, the vast majority are minarchists.
Do you have a source for Hayek being "completely fine with" "limiting working hours" or any other interference in private contracts, or "providing minimum food, clothing, housing and social insurance"? I only know of one quote where he expresses support for any kind of government aid to the poor.
It is interesting to analyze why so many people fail to understand what Capitalism is. My guess is that unfortunately many modern "western" countries are slowly moving away from Capitalism into some kind of modern version of Feudalism. And people with very deep pockets are indeed able to do what they want - last financial crisis is a good example, although multiple banks were behind it, they didn't go bankrupt, but were saved using taxpayers money.
The end result is that people think that "Capitalism is wrong", "Capitalism is not working", etc. They are just not aware that Capitalism is no longer here.
You can say we don't have 'real capitaslism' rightr now but that sounds like the No True Scotsman fallacy to me.
We absolutely do have Capitalism. A heavily unbalanced, unfair and abusive crony capitalism, but it is still capitalism. I honestly can't see how capitalism wouldn't naturally tend towards these things anyway.
e.g. Here in Scotland the last elements of feudalism were only removed in 2000:
https://en.wikipedia.org/wiki/Abolition_of_Feudal_Tenure_etc...
The way I understand it, is that when Hayek was writing The Road to Serfdom, he was intended to make this book be a general defense of free market and argument against central planning, and reach as much people as possible, so he intentionally moderated the Austrian School's takes on government regulations, etc.
> I was able to attend the 1989 Mises Institute summer seminar at Stanford, where I met Murray Rothbard and many of the leading Austrian economists for the first time. It is now eight years later;
Utility can't be measured directly, and must be inferred from a consumer's behaviour. It's begging the question to infer an agent's utility function from their behaviour and to simultaneously conclude that the behaviour maximises the utility function: that's true by construction.
On the other hand, we can assume a functional form for an agent's utiilty for a given basket of goods. I guarantee that real-world preferences are more complicated than any function we can write down, so any prediction we make about an agent's preferences will almost certainly be wrong.
All in all, utilities are a nice toy, but aren't really any use outside of the world of theory.
eg 1 banana = 10 utils, 1 apple = 5 utils, 1 car = 100 utils, etc
utils are just a proxy for money and/or time which are interchangeable through wages paid for labor
money is our real world way of valuing the utility of goods, labor, and more generally time (the scarcest resource of them all)
utility functions will never describe an individuals preferences perfectly (hell you couldn’t perfectly describe the utility of any of the transactions you make) but they’re useful when describing and predicting aggregate behavior, especially when fed a lot of consumer data (higher confidence)
all of game theory also uses the concept of utility to weigh payoffs and there are many many real world applications of game theory
its not perfect but no models are perfect, that’s why we have statistics and probability theory to guide us as well
In Marginalism, you compare utility from agent to agent but you can never attribute an absolute value.
how do you decide how to allocate it between rent, food, savings, entertainment, etc.
most rational people would use some type of internal or subconscious utility calculation to decide what how to budget their income
i dont know what marginalism is or why its useful when you can simply approximate a value by looking at the price of the good/service and use that to compare with other goods and services
Money is a reasonable approximation of "aggregate utility" most of the time, but that holds only so long as interactions between individuals remain voluntary and there is enough trade in similar items to establish a "customary price". It doesn't work well for goods which are not customarily traded for money, or as a basis for orchestrating involuntary interference in the market.
I think you're describing some sort of regression there. I don't doubt that regression is a useful tool. But in that use case I think the notion of 'utility' is redundant: if I want to predict aggregate behaviour, I just collate some datapoints and stick a line (or logit, or softmax etc...) though them. Why do I need to concern myself with whether my regression approximates the agents' 'utility'?
I think game theory shares a flaw with many other constructs in economics: in the real world, it's actually quite rare that the payoffs are given to you. Instead you have to hypothesize payoffs that hopefully kinda-sorta reflect your preferences. There's a lot of theory about optimal behaviour in games, but in reality the hard part is setting the problem up.
As an example, I used to build trading strategies for a hedge fund. We'd usually optimise the parameters of a strategy to try to maximise its Sharpe ratio. But the strategy's Sharpe didn't actually reflect what we wanted to achieve. A 20% gain was nice and would get the team paid, but a 20% loss was an existential threat to the company. We were never able to find a 'utility function' that encoded that information without introducing all sorts of other weird artifacts. In the end, we just used a Sharpe ratio and accepted that it didn't actually encode our beliefs.
This left Mises respected but a laughing stock without a position. Unfortunately he did not understand what he had stumbled upon, and he could have reformed economics. But he failed. He failed because he was committed to his dogma, and committed to his error."
https://www.quora.com/What-are-some-criticisms-of-the-Austri...
But does it really make sense to use a nonlinear function to represent ordinal preferences?
As a philosopher working in the so-called theory of value structure - basically, about the meaning of 'better than' - my criticism of preference modelling would be different and applies to both camps. First, if the modelling is descriptive we know that people have e.g. non-transitive preferences and completeness also doesn't hold. Second, there are also pretty good arguments against the transitivity of 'better than' from a normative perspective that at least need to be defused somehow. IMHO, the right solution points towards conditional preferences and/or lexicographic decision procedures. In a nutshell, multiple criteria interact in complicated ways and the assumption that the outcome of aggregating them is a neat complete preorder is generally not warranted. (And there is plenty of work on nontraditional decision theory by e.g. Fishburn to support alternatives.) Third, there are good arguments why some of our evaluative comparisons between items are cardinal, at least on an interval scale, whereas others are purely ordinal. I understand why this would be an undesirable point of view for an economist, though, since there is no known rationally and normatively justifiable way of aggregating ordinal and cardinal utilities into a meaningful overall assessment. From a measurement-theoretic perspective, an overall ordinal utility is the best you can get in this case. There seems to be a certain tendency of economists to dismiss certain plausible views because they are technically undesirable rather than on the basis of substantive arguments.
Another thing is that as far as I can see, economists who presume ordinal utilities do not seem to care enough about Arrow's Theorem in contexts with multiple attributes. At least they should make clear that IIA ought not hold when ordinal preferences are aggregated.
I can't think of one off the top of my head, and the classical economic argument is that non-transitive preferences would create a 'happiness pump' where I get stuck in a loop trading one thing for another and feeling good about the trade every time.
A_1: One year of intense pleasure.
A_2: Two years of slighly less intense pleasure than A_1.
A_3: Four years of slightly less intense pleasure than A_2.
. . .
A_n: 2048 years of very low pleasure (slightly less intense than A_{n-1}).
In every pairwise comparison we judge that A_{i+1} is better than A_i. However, we also judge that for some A_j in the spectrum, A_1 is better than A_j. Repeated applications of transitivity would contradict this, hence "better than" cannot be transitive.
Before you dwell on the example, note that the same construction can be made with well-being and it may be made as realistic as you desire. As the size of his book already hints, Temkin (2012) discusses a vast number of variants in many evaluative domains.
Money pumps under certainty are one argument against this. The problem is to explain what's wrong with your judgements in Spectrum Cases then. There are many other replies. John Broome suggests that "better than" is simply transitive by virtue of its meaning, but that misses Temkin's point and he's perfectly aware of this reply. You can also get away with giving up completeness, but the solution is not very convincing. It boils down to claiming that two adjacent items are incomparable somewhere in the spectrum, which is extremely implausible. In my personal opinion the only viable solution is a lexicographic approach that takes into account that two or more dimensions at play. I'll spare you the details, though.
On a side note, there is an older tradition of arguing against the transitivity of "better than" based on measurement errors or the indistinguishability of adjacent items. This started with Luce (1956). In these cases, only the transitivity of "equally good" fails but "strict better than" remains transitive, hence this can be modelled with semiorders or interval orders. The representation theorems for utility representations change, but this is well-explored and not a problem. Spectrum Cases are much worse, if you buy into them, because they show that "strict better than" is not transitive.
But I believe in general only linear transformations preserve all aspects of a utility function, when you start to look at the expected utility of a bet with probability p of outcome a and probability (1-p) of outcome b, which has expected utility E[U] = pU(a)+(1-p)U(b). I can imagine that it is harder to accept that this view of utility functions actually models human behavior.
The problem is that it makes no sense to even formulate a nonlinear utility function for an ordinal scale, because there will be a linear function that represents the same preferences.
EU makes no sense with purely ordinal utilities either, but economists use it all the time. When they do so, they assume cardinal utilities, contrary to what the author of the original article asserts. Note also that e.g. the Principle of Diminishing Marginal Utility makes no sense with purely ordinal utilities.
I'm afraid I don't understand your point. There won't always be a linear function representing the same preferences and anyway 'ordinal' utility functions that represent the same preference order mean the same thing, so they make as much sense.
> EU makes no sense with purely ordinal utilities either, but economists use it all the time. When they do so, they assume cardinal utilities
They use cardinal utility but they don't just assume it. The assumptions (implicit in a lot of cases, admittedly) behind Expected Utility are generally the Von Neumann-Morgenstern axioms (relating to ordinal preferences over probability distributions over outcomes) [0].
> the Principle of Diminishing Marginal Utility makes no sense with purely ordinal utilities
True, but I think very few if any economists would be confused about this. Also economists and econ text books (particularly after 101) are more likely to talk about marginal rates of substitution [1] or convex preferences [2] than diminishing utility.
[0]: https://en.wikipedia.org/wiki/Von_Neumann%E2%80%93Morgenster...
[1]: https://en.wikipedia.org/wiki/Marginal_rate_of_substitution
I've become a bit unsure about this myself (see below). An ordinal utility function only represents the underlying preferences according to the representation condition
(1) u(a)≥u(b) iff. aRb,
where "R" is the underlying weak preference relation, i.e. a complete preorder relation. For finite and countably infinite domains no further conditions are needed, for uncountably infinite domains you need additional conditions (Debreu 1954).
The scale of an ordinal utility function is, according to S. S. Stevens terminology, called an ordinal scale. It is characterized by admitting all strictly monotone increasing transformations.[1: 64] That means that whenever u(x) is a utility function representing R, then u'(x):=au(x) for real number a>0 also represents R in the sense of (1).
Question to you: Does it not follow from this that for every nonlinear utility function representing R in the sense of (1) there is also a linear utility function representing R in the sense of (1)?
For the countable and uncountably finite domain this should be easy to prove, since a linear utility function can be constructed for any such domain and any R. But I admit I don't know how to prove this for the uncountably infinite case. The way I put it, we'd have to prove that there is strictly monotonically increasing transformation of any nonlinear function into a linear function that preserves the order defined by R. I thought this was obvious but maybe I'm wrong. :/
[1]: Roberts, Fred (1979): Measurement Theory. Addison Wesley.
> They use cardinal utility but they don't just assume it. The assumptions (implicit in a lot of cases, admittedly) behind Expected Utility are generally the Von Neumann-Morgenstern axioms (relating to ordinal preferences over probability distributions over outcomes)
So they assume these axioms, that's what I'm saying. Not assuming them would e.g. be actually measuring preference intensities in decision makers (by direct scoring?), or eliciting preference difference comparisons of the form u(a)-u(b)>u(c)-u(d) from decision makers and having good independent reasons for them to make sense.
https://mises.org/wire/caplan-and-responses
Note Caplan replies to some of this and it's linked in the same place. Reader beware - I do not recall the jist of it all as it's been some time (~10 yrs) since I last saw this. Interestingly, Caplan has a profile on Mises.org: https://mises.org/profile/bryan-caplan
Cheers.
Edit, more Caplan stuff I find worth linking http://econfaculty.gmu.edu/bcaplan/anarfaq.htm#part18
This seems a little crazy to me. I think there is a world of difference between current economic philosophy that runs the US-centered world and Austrian Economics as depicted on the Mises web site.
I am not an economist but I do sometimes read the Mises.org web site and until recently I made monthly contributions to support the site.
I credit Mises.org with information that led me to divest my retirement accounts out of the stock market in 1997. That saved me a lot of money.
>I conclude that while self-labeled Austrian economists have some valid contributions to make to economics, these are simply not distinctive enough to sustain a school of thought. The task of developing an alternate Austrian paradigm has largely failed, producing an abundance of meta-economics (philosophy, methodology, and history of thought), but few substantive results. Whatever Austrian economists have that is worth saying should be simply be addressed to the broader economics profession, which (in spite of itself) remains eager for original, true, and substantive ideas.
He doesn't say that Austrian economists are always wrong, he says that even when they're right their works do not justify a completely different economic paradigm. The fact that anecdotally you saved some money by following their advice doesn't really contradict that IMO.
https://www.washingtonpost.com/local/education/george-mason-...
>Of course, if the problem is just inequality, then that’s one case where I would say there’s all sorts of inequality, so why is that actually something that is so bad the government needs to do something about it? Again, it’s different if you have people starving to death versus not being happy that they’re getting paid 5 percent less than what they ought to be getting paid.
Okay so because there is inequality and some dimensions are worse than other, government shouldn’t do anything about anything.
And if you’re not a privileged elite male who was educated, that’s just too bad because you are not the only one. The government should just leave everyone alone, and if some people are discriminated against, then his study on incomes of black males is enough to refute any kind of inequality in the workplace (or anywhere else for that matter).
I’m trying to paraphrase what I understood. How does anyone, regardless of their political biases, respect this guy or his “intellect”? I know I sound harsh, but please enlighten me.
For the record, I’m socially liberal but fiscally conservative.
For example, sections 2.1 and 2.2 resonated with me because, as a mathematician, because I can plainly see how the algebraic structure chosen by Rothbard for representing utility is going to severely impact the reasonableness of his models.
There are several other compelling examples, where anyone who has done a bit of mathematical modeling can see that the neoclassical school of thought is simply providing better tools for achieving the desired outcomes.
If he's claiming The Use of Knowledge in Society (1942) isn't about economics, then you have a very narrow view of economics. I mention it only because this essay was such a major contribution.
He's not.
To take your example, Section 3.1 critiques The Use of Knowledge in Society via a critique of Human Action (which was published by Mises nearly a decade after 1942). Many of the observations in Section 3 (and 3.1 especially) are directly relevant to The Use of Knowledge in Society.
I have issues with some MMT proposals however. For example, the full employment federal job guarantee proposal goes in the wrong direction I think, because I do not think, as a amateur, that understanding the limits of money creation, role of taxes, etc, implies that centrally planned solutions are the best option (ie. Federal government guarantees you a job), when Top-to-bottom-up (i.e. unrestricted basic income) alternatives might leverage market forces rather than central planning in how that money is spent to better lives or to help fund new businesses.
The "efficiency" of job guarantee (JG) jobs is perhaps not the best, but OTOH it's not zero either. The general idea in the JG is that it provides minimum wage jobs, functioning as a social safety net (or, JG effectively sets a minimum wage). When the economy does well, workers migrate to non-JG jobs, and vice versa in a downturn, keeping full employment at all times.
To some extent I think there's also a philosophical point here. Do we regard jobs as inherently useful, e.g. providing a social setting for peoples lives, or are most jobs "bullshit jobs" that serve no useful function whatsoever? How you answer that probably makes a difference in how you view JG vs. UBI as well.
0) If you, as a layman (and why not, if you're an expert as well), are going to have an informed opinion on economic issues, you owe it to yourself as well as whoever you're going to discuss it with, to educate yourself broadly and study both sides of an issue. Seems that too many people who discuss on the internet happened for some random reason to read a book, then (maybe) continue to read books in the same vein, and are subsequently unable to look out of the ideological pigeonhole they have jumped into. Don't become that old bore that rants endlessly about "libtards/global financial capitalism/whatever" at xmas dinner, while the rest of your family sits there in an embarrassed silence wishing you to drop dead or at least STFU so that the kids can have their presents! For some background that explains the thought behind MMT, I can recommend Mitchell & Fazi, Reclaiming the State.
1) I don't understand the obsession with the gold standard that some in the Austrian school seem to have. Or if not gold, some other valuable commodity, energy, basket of commodities etc. Whatever. Bretton Woods is over, deal with it. The only underlying reason I've been able to find is that to people who dream of a nightwatchman-state, the notion of a state with fiscal and monetary power is poison.
2) The core of MMT, namely the description of the macroeconomics of a sovereign government with a monopoly on issuing its own floating fiat currency, is not new per se, but it's explained maybe slightly differently than usual, but it explains it pretty well. And given how confused people seem to be about macroeconomics, fiscal policy, and fiat currencies, being able to explain it clearly is a big deal.
3) As for the policy implications of MMT. MMT teaches us that in terms of monetary and fiscal policy governments are not as constrained as is commonly thought (the usual anti-MMT slurs of "printing your way to Nirvana" and subsequent hyperinflation tells more about the ignorance of whoever is presenting those). Now, most of the MMT proponents are pretty left-leaning, so they tend to want to use that extra fiscal space for various social programs, but one has to keep in mind that's a policy choice and not something inherent in the theory itself. Another policy choice would be to buy weapons and engage in various foreign policy adventures, but again, nothing that MMT per se prescribes.
They're like people who read only one side's arguments in an adversarial court case: it's the job of each lawyer to tell the most compelling story he can that's maximally biased on his client's behalf. They're not going to call attention to holes in their story or more probable theories, but rather paper over them. If they've done a good job you'll come out of with false impression thinking they're perfectly right (or even righteous), when in fact they may have been totally wrong.
A lot of books are the same way, arguing as strongly as they can for some point of view. People are busy, and like the righteous feeling of thinking that personally know "how it really is" and who the "real" villains are, so they'll often stop after reading one POV, because reading other POVs feels like a challenge to their new righteous-feeling ideology and therefore a challenge to themselves personally.
Coming from a STEM field myself, the state of economics with wildly different schools of thought is quite perplexing. But I guess that comes with the territory, considering that you can't really do society-wide experiments on different economic models, and even if you could, societies are so complex it's very difficult to discern the effect of a single measure.
Surely I'm misunderstanding something here.
You can be very wrong even though you are completely logical all the way down to your premise.
All policy decisions have consequences sooner or later. Economist can neither predict, save or create the financial market.
The things economists can say something useful about are different than what they are being used for. We should ask economists to calculate how public spending is going to be affected by various policies but the idea that they should be asked for advice on fundamental questions and thus what to implement as policy and not is simply a misguided idea to begin with.
People make the economy not economists. Economists should be treated as custodians not psychics which is happening all to often today IMO.
> Economist can neither predict, save or create the financial market.
I would argue the problem is much more than the government selects economists based on what exactly they predict. For example:
https://www.cnbc.com/2017/11/02/trump-picks-jerome-powell-to...
https://www.theguardian.com/business/2013/oct/09/obama-janet...
In both cases the selection procedure gave up what these people did to get selected. Janet Yellen had strong academic credentials and a theory on how to prevent economic crashes, which clearly Obama was partial to. Of course we just pretend she wasn't Vice Chair in 2011, because that would be a definite fly in the soup. Powell seems to have been selected on a promise to take the market into account (ie. to try to preserve the inflated prices of stocks), which Trump seems to like, or at least he used to.
The point is, both people were selected based on their opinions. To say that their actions represent economists is stupid. They represent Obama's and Trump's philosophies, not economists.
The point is that the idea that you can steer the economy through economical theory is what is wrong here.
I don't understand. That statement is so obvious I would call it a tautology. Of course you can.
Do you think the same about all the sciences btw ? I mean, there are plenty of systems much more complex than the economy. Climate, for example. Are they entirely unpredictable too ?
If we begin with the assumption that politicians are selfless servants of the people who only want to do what's best for society at large in the long run, then you would conclude that politicians will carefully examine the theories and methods of the two economists' schools of thought. If we begin with the assumption that everyone, including politicians, is primarily self-interested, then you would conclude that a politician would just do what's popular with no regard for how the two economists arrived at their advice.
I believe people are primarily self-interested. From that perspective none of this discussion about economic theories matters because politicians are just going to do what's popular anyway.
The proposition that people are primarily self-interested is therefore in my opinion the only idea of value that's come out of the study of economics, which is the study of human behavior after all.
Social science isn't "experimentable" as biology or physics... And if you try hard to force it you will end up with what's called social engineering instead...
W. Brian Arthur is an economist I like. Complexity theory is also very exciting for me. I do not have any experience in those, but they and other things inspired how I perceive the world.
I probably did not deliver what I think clearly. The link above might be helpful to deliver what I mean.
This isn't really true. When Human Action was written there already was a fair bit of literature on behavioural psychology and other fields, but Mises made a conscious choice to not base his theories on them. In the first part of Human Action Mises does bring this point up but makes a clear distinction between investigations into human behaviour that are rooted in the natural and empirical sciences (i.e. biology) and his own flavour which is rooted in a Kantian-esque introspection. This concept is referred to in Mises' work as well as in the works of his successors as methodological dualism, and is a core tenet of Austrian social analysis.
That said, no one would judge you for doing math. However, the important pieces (axioms) don't require it.
Lack of math doesn't mean anything bad. See Frédéric Bastiat and Gustave de Molinari. Both are amazing and no math required :)
The trouble with praxeology is not the lack of math, though; it is the notion that results need not be validated empirically because they're based on logic. However, your assumptions (i.e. axioms) need not hold in nature and any number of mistakes could had been made in the reasoning process. This is why being based on logic does not make a model magically free of errors.
Problem is, the real world is messy. Some aspects of the world are susceptible to logical reductionism, but not all of it. Enough of it is arbitrary that you very quickly fall off the rails, even when it's not obvious. A theory can often seem superficially more consistent than it really is simply out of coincidence, insufficient precision, or insufficient predictive power. In the real world the proof is in the application.
> But the main fact is that there are no constant relations. > Economics is not, as ignorant positivists repeat again and > again, backward because it is not "quantitative." > It is not quantitative because there are no constants. > Statistical figures referring to economic events are historical data. They tell us what happened in a nonrepeatable historical case.[27]
If you can’t reliably reproduce an experiment, you can’t make statistical inference from it.
The reproducibility crisis in the humanities is very well known.
The methodology of Austrian economics seems completely unscientific, I believe a part of praxeology is disregarding empirical evidence(?). Reminds me of something like Ayn Rand's egoism. It just seems to me you can't persuasively argue a philosophical theory without empirical justification
I have a more favorable view towards Polyani's methodology, who largely draws on historical sources. The historical approach seems at least some what grounded compared to the pure theory used in much of economics
Economic theory and statistics can't answer questions like "How much of an effect can we expect if we were to raise minimum wage by one dollar an hour".
A randomized control trial is the gold standard, and the way forward seems to be more experiments like the RAND Health Insurance Experience and the Oregon Health Insurance Experiment. Even these results and their policy implications are subject to debate, so how could pure theory even get close?
However, randomized experiments in the social sciences often aren't feasible for cost or ethical reasons. So econometrics has developed tools to work on natural experiments, or even observational data, like Differences-in-Differences, Instrumental Variables, Regression Discontinuity designs.
Even a brief skim of methodological considerations in economics reveals how much uncertainty there is. I am only a fan of economics (only high school and college microeconomics) so I'm likely wrong
That's exactly it, it's more of a religion you have to accept on faith as opposed to a useful model for governing a society.
https://en.wikipedia.org/wiki/Praxeology
>Austrians argue that that empirical data itself is insufficient to describe economics; that consequently empirical data cannot falsify economic theory; that logical positivism cannot predict or explain human action; and that the methodological requirements of logical positivism are impossible to obtain for economic questions. Ludwig von Mises in particular argued against empiricist approaches to the social sciences in general, because human events are unique and "unrepeatable".
The way I see it from a science theoretical POV is that the action axiom and what you derive is basically the "hard core" of the research program (at least Lakatos makes the most sense for me with regards to science theory).
Praxeology is supposed to be an application of logic* where economic analysis is based purely on specific axioms and propositions. In other words, praxeology is supposed to be as empirical as mathematics and a decent amount of mainstream economics. IIRC, in Human Action, Mises argues Economics is like (Euclidean) geometry, echoing Kant's rationalism. I believe then in Man, Economy, and State, Rothbard argues for term logic in natural language as opposed to predicate logic represented symbolically. It's good for laymen and philosophy-fans but bad for introducing implicit assumptions (basically Krugman's criticism).
* While I think logic isn't empirical some people disagree https://en.wikipedia.org/wiki/Is_Logic_Empirical%3F
This debate between neoclassicals and austrians reminds me of logicians and people from static typing systems endlessly arguing about which logic or type system is the best and complete, without flaws, inconsistencies and paradoxes. They are trying to reconstruct the world from axioms but get stuck at the very bottom in these petty debates.
In the meantime we have people which just whip out Python or other dynamic language, accept its flaws, but produce some real working software which powers the world. Similarly in logic, people just infer generalizations from examples (inductive reasoning) instead trying to build axiomatic truth so that they can reason deductively.
My 'real world' comments to that economic debate.
1. subjectivity. Humans share 99% of DNA not only among themselves but also with pigs. It's evident that some people have subjective preferences, but vast majority of human needs are similar. Housing and food are obviously the largest markets out there
2. welfare, ie. connecting micro to macro When you observe microparticles of gas (motion, collisions, velocity) you don't get macro (temperature, pressure, density) values until you put the gas into a container, ie. introduce a boundary condition. Similarly for economics, you can observe individual collisions (transactions) but unless you observe what happens at the boundary (scarcity of certain goods) you won't make it to macro values (wealth distribution, poverty)
3. monopoly. You get monopoly when you constrain supply of certain good in the economy. This can happen artificially (pharma industry preventing other companies from entering the market because of inexperience and safety). Or naturally (network effects - all utility (electricity, gas, water, railroad, internet providers, law and justice) companies eventually merging into one). Because of natural monopolies you need a government, but only for those.
The last point about monopolies is the georgist (Henry George) critique of both neoclassicals and austrians. The monopolies are the cause of poverty and unequal wealth distribution, because in the money eventually ends up in the black holes (monopolies) and rarely make it out. The biggest market of all - housing - is a perfect example. All the money ends up parked in real estate.
George back then proposed a remedy. To price 'private property' as a service. The private property owners are those consuming the government services. Eg. Houses require guarding by firefighters, police against squatters and court system to resolve disputes. These services should be financed from taxes based on property then. But nowadays they are financed from taxes on labor (income tax) and consumption (vat, sales taxes). In other words those people that don't own anything pay for the services of those that do own.
It's likely no conspiracy, it's just one of those cases where people measure the thing which is easier to measure, not the one which is important to measure.
1. Mises, who did not work one day in his whole live in a private free market enterprise, has fundamentally not understood capitalism. He describes free market barter economies, e.g. in the middle ages, that have nothing to do with capitalism. At least he describes them very good, including, why interest exits etc.
2. He fundamentally does not understand the need to pre-finance industrial production. The pressure to recover the debt gives capitalism its impressive dynamic. But in the end it is basically a ponzi scheme that relies on a) ever increasing debt, because previous debt is settled with new debt. b) a growing economy that allows the creation of more debt.
Mises got the idea, while thinking very hard on a desk in an academic environment, that companies "save money to make investments". This can not be observed in reality. Very few companies are able to do this (e.g. IT companies like google). Most companies take shitloads of loans to pre-finance new production in the expectation that this loans can be repaid,recoverd with future economic growth. e.g. selling more cars.
Gail Trevberg touches some of this ideas (I got it from a German book from 1998) in this blog post: https://ourfiniteworld.com/2011/02/21/there-is-no-steady-sta...
3. Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump.” — Ludwig von Mises
This is his biggest joke since it is a tautology. Every boom goes with a credit expansion and every credit expansion goes with a boom. It is the principle of a debt based society. He is correct that a boom always ends in a bust. But this is a feature of capitalism, not a bug.
This is how capitalism works: https://i.ibb.co/9nms8xK/Net-Worth.jpg
This is one of my big big complaints about economists.
If I understand correctly (and I may not), Mises' position was closer to true in his day than it is today. The debt-based investment is a more recent phenomenon.
It's an information theory issue. Information travels at the speed of light or less.
Hayek married his cousin, but he was right that information transfer over large distances creates huge latencies in CAP theorem analysis of Markets. To me, Austrian just means don't pretend information latency is zero or bandwidth is infinite.
Or to put it another way, to the extent that we interpret local and federal and so on formally enough that they retain any connection to information theory, we're no longer talking about politics.
The words either have their political meaning or their formal meaning, but pseudomathematical sophistry that conflates formal and informal statements in the same breath leads to quackery and nonsense, which is exactly one of the article's critiques of libertarianism as a framework.
The CAP theorem occupies a similar place in pseudomathematics as Goedels theorems. An important result, but almost never for the reasons that someone attempting to use it to make a non-rigorous mathematical argument thinks it is...
What you're talking about sounds like transaction costs and information asymmetry, which are interesting. Hayek's work is interesting to me, even as someone who would self describe as a socialist.
His decentralized market solution to the economic calculation problem, the information from prices (price signals) tell producers and consumers to increase/decrease supply and demand.
But markets aren't perfectly competitive, there are monopolies. Markets are embedded in societies, they don't exist outside of them. Markets don't guarantee an optimal equilibrium. 50% of R&D spending is by the government.
He also did early work on neural networks, published The Sensory Order in 1952, 3 years after Hebb's The Organization of Behavior
Above all, it's a well-reasoned piece from someone who was sympathetic and proximate to leading contemporary Austrian economists.