Awful Austrians

I'm an economics professor in one of the few departments where people specialize in Austrian economics, and after years of exposure to them: I still don't understand what they are claiming. Of course each person ends up with many specific beliefs, and many of those beliefs are correlated with being in that group. But that is not the same as core claims that they share because they are in that group.

If I can't understand someone's claims, and I'm not sure they even have clear claims, then I can't exactly say they are wrong. In contrast, theism does make relatively understandable claims.

The Austrian school does indeed have issues in their stated epistemological position, but I still have to respect an economist who, in 2004, explained how the implicit assurance of government bailouts made the economy fragile.

It is as if at least some of them are letting evidence affect their thinking despite the official philosophy. Maybe, rather than bashing them, we should try to extract useful evidence based models from their successes.

One of these days I'm going to write my own version of Why I'm not an Austrian Economist. Perhaps after a year or so in graduate school.

As a result of the Austrian's epistemology, they are completely against any sort of model. It's reality or bust. The fact is, they can't do economics without resorting to a model of some sort. Austrians won't admit this - agents are somehow ontologically fundamental entities, so they claim they are studying reality per se. Since they claim to eschew models, Austrians eschew the rigor of mathematics in the models they implicitly create, which just makes things go haywire.

There are a variety of Austrian mistakes related to not understanding that economics (and science in general) is model building. For example, some Austrians claim that neoclassical economics fails because it relies on calculus, which relies on continuity, but humans can't perceive infinitesimal changes. Austrians also rail against aggregation, but, again, that's just because they don't understand that they are building models.

Bryan Caplan published the essay I linked to above in a journal (at least in some form. I haven't read the journal version), and the Austrians responded in force. The two sides have gone back in forth a couple of times. All of their articles, except the original and the first response to caplan, are available for free on mises.org. In their replies, the Austrians do a good job of showing that they don't know probability theory very well. Caplan tries to illustrate why we are uncertain even about logical truths (his example was the pythagorean theorem), and Block doesn't seem to get the point.

I have to note that Hayek wasn't an Austrian in the methodological (i.e. epistemological) sense. If you read his Use of Knowledge in Society closely, you'll see that Hayek is fine with the neoclassical project, he's just telling them to be careful with their models. In particluar, Hayek, who understands the socialist calculation problem better than Mises, tells those on the side of the socialists, sure, you can centrally plan an economy if you know the marginal rates of substitution (MRS) of all goods. From then on out, it's a matter of calibrating your industries to produce the correct amounts. However, that's a big if - you don't know these MRS's, and you never will. The main point that Hayek emphasized is that prices contain all of this information. Some self-proclaimed Austrians reject this point (e.g. Hulsmann) because, and I'm quoting a lecture from memory (it's been a while, so it's definitely not verbatim):

Today's prices only hold information about things that happened in the past. They have no bearing on what that price is going to do in the future, and thus are worthless for making decisions about what to do in the future.(1)

But, of course, today's prices are the most important piece of information for predicting future prices.

(1)He does not mean that prices are irrelevant for finding what something costs, at least at this moment, rather, he means that currents prices tell you nothing about the state of the world in the future, whereas they may tell you a lot about , e.g., whether there was a recent conflict in the middle east (oil prices).

edit: We really need a preview button

I don't have the time to post a defense of the Austrians, but I encourage anyone who is really interested in the subject to read this comment thread: http://commentlog.org/bid/4408/Feynman-Rothbard-and-the-Science-of-Economics

This thread contains the best explanation I've seen of the Austrian position, and it actually makes a lot of sense. In economics, there is simply not enough variables to do a controlled experiment. So you have to use deduction and reason in order to understand events. Insisting on using Popperian falsifiability where such a procedure is not possible, creates the well known keys and lamp post fallacy.

I think we need to be a little more conscious of what "Austrian economics" is supposed to mean. I like to think of it as everything coming down from the "Mises Circle." Mises headed one of those Viennese "circles" of which the "Vienna Circle" is the most famous. He had amazing people around him, including Hayek, Oskar Morgenstern, and Fritz Machlup. If you trace it out, it turns out that these guys had a big hand in shaping post-war orthodoxy in microeconomics. (http://rss.sagepub.com/cgi/content/refs/16/1/45) If you take that approach to Austrian economics, than it would be a bit of a mistake to expect "them" to be "claiming" any one thing. It's a tradition of thought, not a finite set of crisp "claims" we might test or "believe in" or something.

A lot of criticism of "Austrian economics" is aimed either at Rothbard and his closest followers or at methodology. The Rothbard group is happy to claim the mantle, but not always so good about taking seriously the heritage they lay claim to. I guess we could set ourselves that easy target and be happy with our superiority. But I'd rather try to see what made the Mises Cirlce such a big deal. IMHO there are riches there we haven't fully exploited.

As for "the" methodology of "Austrian economics," I think we need remember a few things. As someone has noted, I think, Mises "apriorism" was descriptive, not prescriptive. He was saying, "This is how it really happens." And what did he say happens? You construct an argument. If your argument is tight, there isn't really any question about "testing" it anymore than you "test" a theorem in geometry. But your assumptions may or may not fit and you'd sure better check about that. I absolutely think there are holes to poke in Mises' methodology, but if you compare it to the silliness it was responding to, it starts to look pretty good. And he, Mises, was decades ahead of figures such as Lakatos and his "hard core." I never quite understand why people miss that connection and why they insist on judging his position worked out circa 1930 by today's standards of argument. Anyway, "Austrian economics" includes Hayek, who holds up very well indeed by today's standards of argument in epistemology and methodology.

I'm not an Austrian by any means, but I do see myself as something of a fellow traveler. It's been a few years since I studied Austrian methodology, but I remember Rothbard (at his best) being above the criticisms leveled at Mises (who does deserve them). After trying to find relevant passages of Rothbard, I've actually put my views of him through a mini-Crisis of Faith. Here we go...

Rothbard defines a praxeologist as someone who

"believes (a) that the fundamental axioms and premises of economics are absolutely true; (b) that the theorems and conclusions deduced by the laws of logic from these postulates are therefore absolutely true; (c) that there is consequently no need for empirical 'testing,' either of the premises or the conclusions; and (d) that the deduced theorems could not be tested even if it were desirable" (p. 1).

Ick. Reading that makes me feel dirty inside. By this definition, a praxeologist thinks their conclusions are strictly infallible. This is the Dark Side at its pinnacle.

Is there anything that will revitalize Rothbard, though? For example, Barry Smith tries to inject fallibilism into praxeology in this article (the diagram on the last page is particularly interesting). Rothbard also claims to be, at his core, an empiricist:

"Whether we consider the Action Axiom 'a priori' or 'empirical' depends on our ultimate philosophical position. Professor Mises, in the neo-Kantian tradition, considers this axiom a law of thought and therefore a categorical truth a priori to all experience. [...] I would consider the axiom a law of reality rather than a law of thought, and hence 'empirical' rather than 'a priori.' But it should be obvious that this type of 'empiricism' is so out of step with modern empiricism that I may just as well continue to call it a priori for present purposes. For (1) it is a law of reality that is not conceivably falsifiable, and yet is empirically meaningful and true; (2) it rests on universal inner experience, and not simply on external experience, that is, its evidence is reflective rather than physical; and (3) it is clearly a priori to complex historical events" (p. 6).

Can self-evident truths exist? The Action Axiom, like cogito ergo sum, is supposed to be (1) not definitionally true, but say something about the world, and (2) the act of thinking it or attempting to disprove it provides evidence for it. While such propositions feel suspect, I can't find an actual problem in them. Anyone know of a Bayesian take on this subject?

Now we get to my best reconstruction of Rothbard's zombie: Empirical testing of social science is really messy. While not impossible, in practice, statistical study of interesting real world subjects is unlikely to yield data that is suitable for evaluating theory with. The better research program is to start with more easily verifiable propositions and work deductively from them.

However, even simple deduction isn't really feasible. The social world is too complex to adequately be explained by simple mathematical models. Math per se isn't bad, but it is unhelpful to assume a continuum of agents each simultaneously maximizing a continuous utility function. A reanimated Austrian would probably claim it is better to work verbally, keeping all the messy psychological facts in the forefront.

There is a parable about a man who loses his glasses at night. Someone finds him searching under a streetlight and asks him what he is doing. The man replies, "I lost my glasses over there", pointing out into the darkness. "Then why are you looking here?" "The light is better here."

A reanimated Austrian would like to use this parable to say that even thought they are groping around without the rigor of math, at least they doing it nearer the truth. This reconstructed view looks much more like Hayek or Cowen, and not at all like Rothbard or Mises. If this reconstructed view is more defensible, what were the weakest points of the original? Not eschewing math, not trying to be deductive, and not doubting the effectiveness of econometrics. The huge glaring flaws were claiming infallibility, denying testing is even in principle impossible, and not admitting every assumption that was made.

Sorry for the brain dump as I tried to sort through this issue.

Pete Boettke, one of Hanson's colleagues, has a quick reaction to this post here. He links to a summary of "what they [Austrians] are claiming", though I imagine his Austrian-critical GMU colleagues are already familiar with it.

Is contamination with non-empiricism one of the dangers of studying economics? I ask because I tried to read J. K. Galbraith's The Affluent society. The first chapter is convincing on the point that things have changed and we face new problems. He also says that new problems require new solutions.

If he meant new in the sense of freshly computed that would be OK. Instead he went out of his way to emphasise that he meant new in the sense of different.The new solutions would necessarily be different from the old solutions. He fired off some pretty rhetorical fireworks to promote his claim, but I still found it bizarre.

If the later chapters, working through economics problems afresh, indicate a different solution from the ones favoured when he wrote the book, then he has made his point. If later chapters are unpersuasive, chapter one will not serve in their place. The anti-empiricism of knowing that certain answers are wrong, without going where the evidence points and seeing what is there put me of reading any more of the book.

May I suggest the alternative title "Awful Austrians"? (This will not break any links.)

But the point of a priorism isn't to make empiric predictions in the first place. To examine this, let us consider the example of putting two apples in a bowl, adding another two apples, and being left with four apples. This is often used, erroneously, as an empiric test of 2+2=4, but what you actually have done is not add two and two together but started with four apples and moved them closer together into a single container. That you frame this in terms of addition is somewhat arbitrary, and if you lived in a counterfactual universe where a fifth apple appeared, or, if in the process you somehow managed to destroy one apple, it does not disprove 2+2=4, which we can know is true a priori regardless of any empirical evidence.

Likewise with Austrian economics, at least in the Misesian view; praxeology purports to create a deductively sound framework that is essentially analytical.

On another note, Austrian economics actually begin with Carl Menger, famous as the author of the concept of subjective preferences and mutual gains from trade, ushering in the new paradigm of marginalism to replace the Smithian labour theory of value*. In addition, Mises' concept of acting humans is strikingly similar to Menger's concept of economising persons - if anything, Mises' action axiom is less strict than Menger's.

From division of labour to comparative advantage, the marginal revolution, the vast majority of major contributions to economics came from economists using methodologies that are essentially similar to the Austrian school.

*On LessWrong, the labour theory of value seems to often be misattributed to Karl Marx. This is historically inaccurate, as it was a very mainstream concept until it was replaced by none other than the founder of the Austrian school, ie. Carl Menger.

Edit: Fixed typo

W. W. Bartley III criticised presupposititionalism in his book "The Retreat to Commitment". Bartley pointed out that knowledge doesn't need to be justified, i.e. - there is no need to show that it is true or probable. Rather, rationality has to do with holding all of your positions open to criticism. We don't need justification because theories can be criticised without justifying anything. If I make an experimental observation that clashes with a theory then there is a problem to be solved independently of whether the observation is right or wrong. The problem is solved not by justifying anything but by proposing explanations for the observation and then trying to criticise them with respect to whether they solve problems, whether they are compatible with other explanations and so on. A theist who held his views open to criticism would have to ditch his belief in God because the theory that God exists solves no problems.

See also the first two sections of chapter 1 of Karl Popper's book "Realism and the Aim of Science", "The Fabric of Reality" by David Deutsch and the following links

http://www.criticalrationalism.net/2010/02/15/explanation-versus-justification/ http://www.criticalrationalism.net/2010/04/17/criticism-of-salmon-on-popper/.

I don't see any problem with a tautological definition of "selfishness", as long as you realize what it can and can't do (eliminate "impossible possible worlds" but not "possible possible worlds"). Of course, you should also have a word ("selfishness" is often used for this too) for utility functions that don't count the well being of others.

"he proclaims that price controls will lead to rationing by non-price means. But this is only true if the provider of the good in question is attempting to maximize profit; if the producer is willing to take a hit in the wallet out of the goodness of his heart for his customers' well-being, as Mises' tautological definition of self-interest allows, a small price ceiling could conceivably have no effect."

That prediction is based on the second definition of selfishness, and is not required by the first. It's an empirical prediction based on a falsifiable premise of selfishness2, so I don't see what the problem is.

If Mises has trouble keeping the two meanings in different mental buckets, then he has a problem, but I don't think that damns Austrian economics. If Austrian economics came about purely because of confused thought, then maybe we could dismiss it offhand, but unless you're convinced of this (I'm not), then all you're doing is attacking the weak support.

I'd only like to add a small contribution, concerning Mises's argument that "The human being cannot see the infinitely small step" and thus continuous functions cannot be used as models.

Discretely sampled (digital) signals are used all the time in engineering, and they are analogous to their continuous counterparts (analog). Particular care must be taken when "converting" between one and the other; but for most purposes they're pretty close.

All the appliances you have at home now take discrete samples of continuous quantities (physical quantities like temperature and such). Just because a human can't sample a signal / economic quantity infinitely, it doesn't mean that math must be taken out of the equation entirely. You just need to bend your math a bit to accommodate.

http://en.wikipedia.org/wiki/Sampling_(signal_processing) (And notice how there -is- math despite the fact that such systems cannot discern infinitely small changes in quantity.) (Edit: The link parser doesn't like that ending braces somehow; it should be included in the link.)

As a personal note, some people's narrow views simply blow my mind, how they can dismiss entire subjects with just one fallacious argument.

It sounds like there's some equivocation creeping in there too. If Mises is going to define happiness as "whatever people aim at", he shouldn't rely on the connotations of happiness; his argument shouldn't change if the word is replaced with "gensym01". Similarly for "self interest" and "gensym02".

It seems to me that the whole thread is littered with academics who adhere to intellectualism vs realism. Austrian economics is about the latter. One of the best (but overlooked) books to read (fundamental stuff - which is what most academics fail to take into account) is Hazlitt’s “Economics in one lesson”. It’s essentially Austrian school 101 and I think most of you in here need to retake the course. The Austrians were always right and now it WILL become evident. Austrian economics is existential economics (in a sense), and that fact puts them apart from traditional economic theory that’s model-based. That’s a huge difference right there and very much in line with the most modern work on perceptual reality (see, for example, Don Hoffman’s work). That’s a huge deal that points to the incredible insight that the Austrian school is based upon. 

~A participating agent of the market…

Deflation is normal?

I would think it would be pretty obvious why theism is always the example used. Standard human in-group/out-group dynamics and similar psychological factors. Unlike merely being of a different religion (at least in the US) being an atheist often comes along with (even causally triggers) a certain degree of alienation from many others in society. This alienation drives atheists to strongly signal group membership when around others of their kind and gives them a strong need for reassurance that indeed they are the ones in the right not the majority. Additionally atheism is the sort of topic where people feel the situation is so transparent and clear there ought not to be any question about the conclusion.

As to the Austrian school of economics (or hell the public choice econ class I took in college that had us constructing proofs about which preference axiomitizations are equivalent with and without the axiom of choice) they are right in that pure stipulative mathematical exploration can sometimes be a useful practice even in an empirical science. After all what is statistical thermodynamics than a purely mathematical and stipulative piece of physics.

The issue is that to be useful you also need to have bridge laws (which often go unstated) that govern when it's reasonable to assume the model assumptions are good idealizations of the real empirical phenomenon.

According to the about page, this group holds mathematical modeling in high esteem. A central idea being that the mind itself, individually and, by extension, groups of minds, can be mathematically described and modeled.

I would be interested to hear how one claims to correlate the results of a model to the workings of the mind. It sounds to me more like the result of industrious researchers mixed with computing power which is sufficient for the task of repeatedly tweaking a complex model until the product resembles an observed reality. Afterward, chosen variables can be modified singularly or in groups, such that some brilliant claim or conclusion can be drawn from the model.

With this confidence in the ability of science to model the mind, true believers must disdain the claim that economic modeling for management purposes is a useless endeavor. After all, the economic model is a layer above the internal mind modeling claims made here. From this starting point, one could never expect a fair analysis of the Austrian theory.

So much could be said on this; what shall I choose.

First, I recognize that Mises made some claims which, particularly when analyzed outside the purely academic context, are a reach. However, the minutia which are used by a purist to discover and articulate baseline ideas with words, which can only be symbols of ideas at best, are not where I find value in the school of thought. I am more interested in the practical and applicable knowledge that is the fruit and product of the analysis, which happens to be solid because the originators were willing to rigorously test their assertions, seeking ways to describe and model the theory.

Yes, I said model. The idea of choosing a narrow, purpose oriented term like "happiness" is designed to create and sustain resources for an intellectual model. It is to select a fairly useful term, while stripping away the baggage that distorts its purpose in the model; which is akin to isolating a variable mathematically.

Additionally, the claim that the Austrians make, which must be hard to swallow here, is that a mathematical model is useless in the field of economic prediction for the purpose of successfully managing an economy. The problems with this concept of modeling are really quite simple.

A model will not incorporate all variables. If a model incorporated all variables and each had values, it would become a copy of reality. If it is a copy of future events, then it is unbounded by time. In addition, there is the question of whether the model "knows" the future, or is describing a potential reality. If only a potential reality, then the information is useless unless the information about actions can be disseminated, but this dissemnination process would then have to be incorporated into the model, which would then be distorted. If anyone disagreed, the modeled decisions would have to be applied by force... Where does this lead and where does it end?

All variables are not known.

If all variables were known, which they cannot be, their present and subsequent values in the model cannot be known, because the values are subject to human action; i.e. individual choice at a point in time based on concurrent conditions (which are unknown variables having unknown values).

Models produce averages, which are then conceived to be the answer for each actor, which is irrational. The model itself doesn't actually claim that all actors will enjoy the average results, and yet the results are rendered, communicated and applied as averages.

Even if a model were able to incorporate all known variables, apart from an active system on the ground which can actually control a variable that the model incorporates, moving the variable would be a fruitless exercise, other than for curiosity sake.

Models are owned by men, who pursue their own "happiness". They will have an agenda. If the model has any use for wielding influence, it will be applied through a system. The goal will be to use a system to enrich the players in the process, which then reduces the model to a tool of manipulation and theft.

Therefore, we find that modeling in economics, as a method of managing an economy, is futile. However, modeling the effects of a controlled variable at play in the system, is quite attainable. The Austrian theory of the business cycle is described in part by this sort of modeling.

The Austrian theory clearly describes the mathematical effects of currency manipulation. These effects lead to a boom bust cycle, which we have observed repeatedly. The ability to control the variables of money quantity and the distribution of new money, enables economists to "model" the effects. In the economists' arrogance or disdain for the producers, they see themselves as managers of a system, when in fact they are simply pillagers who have successfully created a pillaging system with the aid of central banking and coercive government intervention.

Therefore, the presuppositions in the Austrian School provide a foundation for communicating that models cannot be created to successfully manage an economy. A model that is used to describe productivity in a genuinely free market without government intervention, would be useless. The outcomes would reduce to things like the industriousness and ingenuity of the actors.

A "brilliant" model is only attainable and useful when there is the ability to control the system by way of unavoidable force applied to the producers. When that case is exists, we find that the power to act in this way is always used oppressively.

Our monetary system is Keynesian and Keynes wrote about the destructive effect of inflation at least as early as 1919.

"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

The Economic Consequences of the Peace, John Maynard Keynes, 1919

The point is missed when the Austrian effort to articulate presuppositions is attacked on the grounds that they are presuppositions.

Evidently the claim being made here, by implication, is the presupposition that the actual economy can be modeled. But that has never happened. Listen to Greenspan explain how the "housing boom" was neither predicted by the models nor anticipated by him or his staff. Either the model was useless, even with the control of currency and positive law, or the system was used to pillage, or both.

The role of an economist should be to observe and describe the economy, not attempt manage it. The Austrians understand this role and acknowledge that certain things cannot be known at all, and that other things cannot be known or controlled, unless accompanied by violation of the rights of the individual.

Mises and other Austrian economists sought a way to put into words why, in actual reality, a successful controlling model has never been created and cannot be created. Quibbling over presuppositions, which happen to be supported by experience and evidence, as a basis for discrediting the Austrian Theory is weak thinking indeed.