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Awful Austrians

33 Post author: Swimmy 12 April 2009 06:06AM

Response to: The uniquely awful example of theism

Why is theism such an ever-present example of irrationality in this community? I think ciphergoth overstates the case. Even theism is not completely immune to evidence, as the acceptance of, say, evolution by so many denominations over time will testify. Theism is a useful whipping boy because it needs no introduction.

But I think the case is overstated for another reason. There are terrible epistemologies out there that are just as bad as theism's. Allow me to tell you a tale, of how I gave up my religion and my association with a school of economics at the same time.

I grew up in a southern Presbyterian church in the U.S. While I was taught standard pseudo-evidential defenses for belief, such as "creation science" and standard critiques of evolution, my church was stringently anti-evidentialist. Their preferred apologetic was something called presuppositionalism. It's certainly a minority apologetic among major defenders of Christianity today, especially compared to the cosmological or morality arguments. But it's a particularly rigorous attempt to defend beliefs against evidence nonetheless.

Presuppositionalism (in some forms) hangs on the problem of induction. We cannot ultimately justify any of our beliefs without first making some assumptions, otherwise we end in solipsism. Christianity, then, justifies itself not on evidence, but on internal consistency. It is ok for an argument to be ultimately circular, because all arguments are ultimately circular. Christianity alone maintains perfect worldview consistency when examined through this lens, and is therefore correct.

Since I've spent a lot of time thinking about this--it can take a considerable effort to change one's mind, after all--I can imagine innumerable things wrong with it, but they're not the focus of this entry. First, I just want to note how close it is to a kind of intro-level Bayesian understanding. Bayesians admit that we must have priors, that it's indeed nonsense to think we can even have an argument with one who doesn't. We must ultimately admit that certain justifications are going to be either recursive or based on priors. We believe that we should update our priors based on evidence, but there's nothing in the math that tells us we can't start with a prior for some position of 0% or 100%. (There is something in the math that tells us such probability assignments are very bad ideas, and we have more than enough cognitive bias literature that tells us we shouldn't be so damn overconfident. But then, what if you have a prior that keeps you from accepting such evidence?) It doesn't have any of the mathematical rigor, but it comes very close on a few major points.

This is why Bayesianism appealed to me. It seemed similar to the supposedly deep argument I understood for God's existence, like something I could actually work with. (This is why, I think, anti-religion Overcoming Bias posts didn't throw me into defense mode.) This is also why I used to find Austrian economics so compelling.

For those who aren't familiar, Austrian economics is a radical free-market school, the intellectual product of Ludwig von Mises, Friedrich von Hayek, and Murray Rothbard. Before I continue, in hopes of taking any Austrian economists reading this out of defense mode: I still find many Austrian insights useful, I admire Hayek for his work on knowledge and institutions, and Mises for the economic calculation argument. But the first section on epistemology in Mises' magnum opus, Human Action, is probably the best example of Dark Side Epistemology I have yet seen outside of religious apologetics or standard woo-woo. What does economics (or in Mises' case, praxeology, an expanded science of all human action that seeks to understand more than resource allocation) investigate? After excluding psychology, Mises tells us,

No laboratory experiments can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged. . . The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future events. . . Neither experimental verification nor experimental falsification of a general proposition is possible in its field. (p. 31)

Well, ok. So how does economics tell us anything at all?

Praxeology is a theoretical and systematic, not a historical, science. . . It aims at knowledge valid for all instances in which the conditions exactly correspond to those implied in its assumptions and inferences. Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification or falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts. (p. 31)

In other words, the assumptions built into economics (which is a subset of praxeology)--people have preferences, are selfish (in the tautological sense--even altruist acts are self-serving to Mises), and they take rational action to satisfy those preferences--are unquestionable, ultimate givens. No evidence could ever confirm or disconfirm the predictions of economics, because it is an a priori science, just like math or logic. It is deductive--it starts from some assumptions, and its case rests on those assumptions alone, not on any evidence. (And he has a word for those of us seeking instances of human irrationality. On page 103, he claims out that any sign of preference reversals can never be considered irrationality, because preferences cannot be considered stable, even across spans of a few seconds. If your by-the-second preference changing leads you to be pumped for money, so be it. You're still by assumption a rational actor, satisfying his desires.)

You can understand why I think this sounds so similar to presuppositionalism. And, if you've been following Overcoming Bias, you can see how a Bayesian would differ from these views.

I saw the same problems with presuppositionalism as I did Mises' epistemology. So what if it's deductive? What if your deductive logic doesn't conform to the real world? This could be true of math just as well as economics. What if 2 + 2 didn't really equal 4 in our world? Could there be any way to convince you? If the answer is no, then aren't you just starting from the bottom line? If your deductively valid economic argument makes a prediction that is observed to never be true in the real world, would this not affect your rating of your deductions' usefulness? If your deductions are non-disprovable, why do you make so many claims regarding their predictive value? What does your logic not predict?

To really solidify the feeling that Mises' predictions about economics are comparable to the Bible's predictions about how the world works, consider the following. As I mentioned, Mises defines self-interest tautologically:

Praxeology is indifferent to the ultimate goals of action. Its findings are valid for all kinds of action irrespective of the ends aimed at. It is a science of means, not of ends. It applies the term happiness in a purely formal sense. In the praxeological terminology the proposition: man's unique aim is to attain happiness, is tautological. It does not imply any statement about the state of affairs from which man expects happiness. (p. 15)

However, Mises specifically predicts economic outcomes based on self-interest as, well, actual self-interest. For instance, on page 763, 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.

So when are we to believe Mises? When he says economics is a deductive logic that can never be tested in the real world, or when he makes predictions that can be tested in the real world? When should we believe presuppositional apologists? When they claim that "the Bible is the word of God" is an ultimate given, or when they tell us all about miracles (evidence for God) that we can test in the real world (by finding evidence for a global flood)?

The insistence on placing assumptions further and further away from our real ultimate givens, our real recursions, our real mystical priors, is a dark side epistemology. If we can devise a test for one of our assumptions, by golly, as rationalists we're called to test it. If that assumption fails, we have to perform a proper Bayesian update. We have to use all of our evidence available to us.

So to answer what other forms of irrationality we can regularly cite, I'd like to nominate Austrian economics, or at least those of its followers who still eschew the introduction of statistics, behavorial economics, or experimental economics into the discipline. It certainly isn't as pervasive as religion. It's a very minor branch of a specific discipline. Not all of its conclusions are wrong, but I think there's at least a little evidence of dial-cranking in Austrianism. And I think its epistemology is quite awful, as awful as the most evidence-defying justification for theism.

Reference: Ludwig von Mises. Human Action. San Francisco: Fox & Wilkes, 1996.

Comments (88)

Comment author: JGWeissman 12 April 2009 07:32:25PM 8 points [-]

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.

Comment author: Peter_Twieg 12 April 2009 10:19:26PM 5 points [-]

Unfortunately, Austrians more than any other group typify that classic Paul Samuelson quote: "Economists have correctly predicted nine out of the last five recessions." It's easy to make arguments about how trying to circumvent the market process will lead to calamity, and eventually you'll be correct. But if you want to find an Austrian economist to respect, find one who will actually make concrete economic predictions that are falsifiable. It's my impression that many of them simply will not, often on philosophical grounds.

Comment author: nazgulnarsil 13 April 2009 12:54:32AM 3 points [-]

you're talking about quantitative predictions instead of qualitative predictions. qualitative predictions can always be defended on "no true scotsman" grounds. This is a common defensive characteristic of various ideologies. making falsifiable claims makes an ideology less adapted to human hosts.

Comment author: JGWeissman 13 April 2009 02:06:01AM 7 points [-]

What if the economic recession had centered around corporations that were not considered "too big too fail", that weren't subject to government interference, or even that were subject to less interference than others that were doing just fine until they were caught in the wave of the recession? That would blow Austrian theory right out of the water. It is falsifiable, it describes economic systems that it predicts will not systematically suffer periodic recessions. If such a system were tried, and it did experience a boom-bust cycle, then Austrian economics would be wrong. If we, in our current economic conditions, stopped all bailouts and let the big banks fail, and the smaller banks that did not participate in the lending mess do not expand to fill the abandoned economic niche, then Austrian economics would be wrong.

Contrast that with the Keynesians, who will claim, if the bailouts and government stimulus do not revive the economy, that they were not big enough.

Comment author: RobinHanson 12 April 2009 07:00:57PM 26 points [-]

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.

Comment author: ciphergoth 13 April 2009 09:34:30AM 6 points [-]

theism does make relatively understandable claims.

Depends what you mean by "understandable". It seems to make claims that most people think they understand, but I am inclined to think that this is an illusion, that actually religious language only has connotations and doesn't denote anything. As teageegeepea references below, religion is "not even wrong". This case is made pretty strongly at the start of George H Smith's "Atheism: the case against God".

Comment author: AndySimpson 13 April 2009 09:37:07AM 1 point [-]

Agreed --- most religion is poetry masquerading as assertion. What makes it nasty is when people think they can pin down those assertions precisely and live their lives by them.

Comment author: Peter_Twieg 12 April 2009 10:11:53PM 3 points [-]

What in particular do you not understand? I think there are plenty of problems with Austrian arguments (and the OP does a good job of explaining some of them), but I can't say I've run into many cases where I felt that I just didn't understand what was going on. Do you mean that different Austrian economists make fundamentally incompatible arguments, or that the arguments that they do make just... don't say anything meaningful?

Comment author: RobinHanson 14 April 2009 02:59:58PM 6 points [-]

I mean I have some text in front of me, and I make up several possible interpretations of it. Some are trivial, some are crazy, and so I dump those and keep the rest and then go on to another text and do the same. Then I try to find an intersection of the reasonable interpretations across different texts, in the hope of finding "what they mean." I might find specific claims on which several authors happen to agree, but not claims that are plausibly the more basics claim that could be the cause of them saying there is this thing called "Austrian econ" with some important basic differences from regular econ.

Comment author: therewaslight 13 April 2009 06:50:00PM 2 points [-]

You will know a good epistemology by its fruits.

Comment author: teageegeepea 12 April 2009 09:34:35PM 2 points [-]

Would that make them "not even wrong"?

Comment author: badger 12 April 2009 09:21:44PM *  4 points [-]

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.

Comment author: nazgulnarsil 13 April 2009 01:00:11AM 1 point [-]

an apt comparison. austrians use the exact same style of axiom as cogito ergo sum. Man acts, if you try to disprove this you are acting: QED I have no problem with that. The next step has a little hand waving though. Man acts in rational self interest. huh?
I would say rather, that man is a cobbled together machine that approximates rational self interest in a very specific environment (the one he evolved in). I won't be able to take austrianism seriously until it incorporates the findings of cognitive research.

that said, I think austriansm does have something to offer economists, namely exposing the fact that current keynesian macroeconomics is blatant curve fitting.

Comment author: badger 13 April 2009 01:12:08AM *  3 points [-]

The next step has a little hand waving though. Man acts in rational self interest. huh?

I don't think they make quite that leap. The claim is something more like, "Humans act. Action necessarily entails a goal. Having a goal entails preferring certain states of the world over other states of the world. Therefore, humans have preferences."

Mises and Rothbard are quite clear that these preferences don't have to include self-interest and actors don't always succeed in achieving their goals. I think they both assume that people are self-interested and semi-rational, but don't claim that as being a deduced truth. They should have been much clearer about when they introduce assumptions like this though, as Swimmy pointed out.

Comment author: RichardKennaway 13 April 2009 07:13:14PM *  0 points [-]

"Humans act. Action necessarily entails a goal. Having a goal entails preferring certain states of the world over other states of the world. Therefore, humans have preferences."

This looks like mere word-play. What is a goal? The thing you prefer. What is a preference? Your attitude to a goal. Can you restate your explanation, while tabooing "prefer" and "goal"? I could, for my understandings of those words, but it wouldn't necessarily come out meaning what you mean.

Comment author: nazgulnarsil 13 April 2009 01:55:15AM 0 points [-]

right, but saying that those preferences then map to reality in a useful way is quite a leap.

Comment author: Matt_Simpson 12 April 2009 11:24:27AM *  7 points [-]

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

Comment author: Swimmy 12 April 2009 05:15:22PM 4 points [-]

I agree that Hayek doesn't fall into the same methodological trap. Which is why hardcore Mises/Rothbard Austrians spend a little time eschewing his work on knowledge. (See especially the last handful of quotes.)

Caplan indeed has quite a back-and-forth with Hülsman and Block. Especially of note for those on this site will be this paper (pdf) advocating a Bayesian interpretation of probability, something Austrians resist vehemently.

To be fair to the Austrians, mainstream economists aren't always keen on it either. Caplan recounted a story to us in class: Robin Hanson apparently submitted a paper to a journal about beliefs. The editor responded that using probabilities to represent people's beliefs was "crude charlatanism."

Comment author: Peter_Twieg 12 April 2009 05:02:21PM *  3 points [-]

Small quibble: I think it's unfair to many Austrians to imply that their school inherently eschews the type of mathematical formalisms that many prominent Austrians did, in fact, reject. Or at least, insofar as they do so, it's based on more than simply saying that the map doesn't reflect the territory, and therefore we must throw it out - they make elaborate arguments about how the map's systematic inaccuracies make it a poor representation of the territory. (Apologies if I'm using the map/territory metaphor poorly.)

Admittedly, this opinion goes against what seems to be reflected on the almighty Wikipedia, and I realize that pinning down the essential features of a school of thought is a pursuit which is fraught with problems, but my impression is that there are a substantial number of Austrians who do not reject modeling per se (as was the case of Hayek), and labeling this tendency as a deviation from Austrian thought strikes me as a No True Scotsman argument. Perhaps someone more familiar with the Austrian school could correct me on this, however.

Comment author: Swimmy 12 April 2009 05:24:57PM *  1 point [-]

It may be unfair to lump the specific fallacy presented above as the essence of Austrian economics, or as something its true believers follow. But there undoubtedly is a strain of dedicated Mises/Rothbard followers who insist on it, and these are the Austrians I'm criticizing. I'll refer to this link again. Many major Austrians are ready to pounce all over Hayek at a moment's notice.

P.S. Hey, gonna go ahead and guess you're the same Peter Twieg from my class. This is Tim McGowan.

Comment author: Peter_Twieg 12 April 2009 09:06:20PM 1 point [-]

Oh, hey Tim. :D Not particularly surprised to see other classmates in these parts, but it's still a neat occurrence.

And of course I recognize the dogmatic tendencies of the Mises Institute crowd, but I guess my broader worry is that their particular style becomes conflated with Austrian economics in general. It's my impression that these failings aren't recognized in GMU's self-identified Austrian faculty, but I could be wrong.

Comment author: Matt_Simpson 13 April 2009 03:44:46AM 0 points [-]

Personally, I'm not too familiar with that group of Austrians other than that they typically claim to get everything from Mises, and this may also be wrong. So, yes, what I said may only apply to the Mises Institute crowd.

Comment author: Matt_Simpson 12 April 2009 08:43:10PM 0 points [-]

I know that some Austrians don't reject the formalism. When I was at the Mises Institute, Block called Lachmann a "calculus Austrian." I should have been a bit more clear, I tend to use the term Austrian to refer to those who are Austrians in the methodological sense. The line is, of course, fuzzy, but there are some clear cases of Austrian and non-Austrian on this definition.

Or at least, insofar as they do so, it's based on more than simply saying that the map doesn't reflect the territory, and therefore we must throw it out - they make elaborate arguments about how the map's systematic inaccuracies make it a poor representation of the territory.

My understanding of the Austrians is that using a map at all is intellectually sinful. They want to study the territory, not some representation of it. However, this intrigues me. Do you know of any relevant citations or links?

Comment author: nazgulnarsil 13 April 2009 01:30:03AM 3 points [-]

I disagree with one of caplan's main points. he questions why entrepreneurs would be unable to predict government policy in the same way that they predict other dynamics in the marketplace. This is trivially obvious: government isn't constrained by profit. There are a few ways to be profitable, but millions of ways to unprofitable.

Comment author: MartinB 14 February 2011 04:58:22PM 0 points [-]

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.

Did you? If so please link.

Comment author: Matt_Simpson 14 February 2011 05:12:03PM 0 points [-]

Not yet. I ended up in grad school for statistics instead of economics, so that may have derailed me.

Comment author: nazgulnarsil 13 April 2009 01:03:29AM 0 points [-]

actually I believe they rail against aggregation because the cumulative error becomes large enough to render the output meaningless in many cases (GDP, CPI, etc).

Comment author: Matt_Simpson 13 April 2009 04:07:05AM 0 points [-]

I'm pretty sure I've heard Austrians give that argument before, but I don't think it's the only one. I remember Block talking about how Austrian Business Cycle theory needed to be revised because of problems with the Hayekian Triangle.

I found the working paper. See, in particular, sections 1 and 2 and the summary. There's too much to quote concisely, but Block's main point in section 2 is that the aggregate Hayekian triangle doesn't have any microfoundations. He wants to be able to derive the aggregate Hayekian triangle from the Hayekian triangles for each specific good for each specific agent. But this isn't a reason to reject the model outright - very few scientific models have complete microfoundations (all the way down to physics). That doesn't mean they won't make accurate predictions. Microfoundations tend to help, of course, but they aren't necessary.

Disclaimer: I am not an advocate of the Austrian Business Cycle theory. This was just for illustrative purposes.

Comment author: Tyrrell_McAllister 12 April 2009 05:09:35PM 0 points [-]

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.

Thanks for clarifying this. I've heard so many good things about Hayek that I'm meaning to dive into his oeuvre at some point. But I'd also gathered that some Austrians were a-priorists, as the OP says, so I'm not interested in spending more time looking at their thinking. The OP had me worried that these ends conflict, but you've reassured me that they don't.

Comment author: Matt_Simpson 13 April 2009 04:08:07AM 0 points [-]

AFAIK Hayek's early stuff on business cycle theory is no good, but I don't think there's anything especially Austrian about it other than that Austrians seem to be the only ones that believe it.

Comment author: billswift 12 April 2009 01:47:42PM 0 points [-]

If the post doesn't look right, use the edit button. I'd rather have edit than preview any time. Not that they are mutally exclusive, but edit easily substitutes for preview.

Comment author: Matt_Simpson 12 April 2009 08:47:10PM 2 points [-]

Your right, and I used the edit button (about 5 times). Editing without making a note about why just seems deceitful though, yet that is essentially what we do when we use it as a de facto preview button. Oh well, minor thing.

Comment author: billswift 17 April 2009 01:22:58PM 0 points [-]

If I make a change in the substance of a post, I note the change. I was mostly pointing out that you can immediately click on edit to fix clumsy wordings and misspellings when you notice them right after posting. I dislike sites with no editing because I can't fix misspellings that I don't catch in time.

Comment author: teageegeepea 14 April 2009 02:02:35AM 3 points [-]

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.

Comment author: Koppl 14 April 2009 01:38:12PM 2 points [-]

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.

Comment author: AlanCrowe 12 April 2009 07:36:54PM 2 points [-]

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.

Comment author: devinfinbarr 13 April 2009 12:20:29AM *  4 points [-]

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.

Comment author: jsalvatier 14 December 2010 09:55:11PM *  7 points [-]

This looks like a good place to post what I think is the best critique of the Austrians out there: Bryan Caplan (who is sympathetic to the Austrians) does a good job of arguing that the Austrian foundations fall into two categories 1) not different than mainstream economists 2) wrong.

It starts here Why I am not an Austrian economist, continues some back and forth between Walter Block and Hülsmann (an Austrian) and Caplan:

There's more here (links from the appendix 1). Some of these are in .doc form.

I should also point out that I do think the Austrians are more correct than mainstream economists on several issues, but I don't think these follow from their epistemology.

I will also add that this discussion highlights that LWers should be particularly good at seeing the epistemic flaws of the Austrians since they are 1) a rejection of the use of probability theory as a fundamental part of decision theory 2) a rejection of utility functions 3) abuses of language (they frequently attempt to argue "by definition").

Comment author: tkadlubo 13 May 2012 02:33:54PM 3 points [-]

Here are the links to the official and well typeset PDF versions of two of the above Caplan's articles:

Comment author: Peter_Twieg 13 April 2009 01:04:17AM 2 points [-]

I'd point out a couple problems here:

Firstly, "controlled experiments" is simply an ideal which is no more achieved in the physical sciences than in the social ones. The various experimental methods employed by scientists differ only in the degree to which they're uncontrolled. Popperian falsifiability has been criticized in all scientific contexts for these reasons. I believe that Quine's discussions of this issue are the best-known... suffice to say, the Austrians need to come up with a better reason for dismissing the scientific method as applied to economics versus the scientific method as applied to other disciplines - but alas, this would probably require them to wade into the kind of messy empirical issues which they seem to abhor.

Secondly, even if scientific knowledge of economic phenomena could be rejected for the above reasons, the fact is that Austrian economists still routinely make empirical predictions based on praxeological reasoning which seem incredibly difficult to support based on that reasoning alone. See the OP's part about Mises on price controls - no purely praxeological account can determine that price controls will cause non-price rationing. So the criticism is that Austrians do not actually practice what they preach, largely because if they did so they would have very little to say about the real world.

Comment author: Douglas_Knight 13 April 2009 03:19:10AM 1 point [-]

That is a reasonable criticism of mainstream economics. I am skeptical that it has anything to do with Austrian economics. Probably someone sat down with an unshakable belief that the Austrian economics meant something and extracted this claim.

I don't see why I should care about the correct attribution of this complaint. The Austrians are so bad at communicating that this interpretation has not helped me extract anything else from them. If other people can extract other useful claims from the Austrians, they should isolate and promote those claims.

Comment author: Swimmy 13 April 2009 01:44:22AM 1 point [-]

I'm not looking for Popperian falsifiability. I'm looking for Bayesian inferential updating. If the argument is that no evidence of any form could ever change the Austrian's probability estimate of a certain theory, I charge the Austrian is either being overconfident or violating the conservation of expected evidence.

Even extremely messy evidence can still be evidence. In economics, messy evidence that is messy in a stable way can be very good evidence. For instance, Mises explains that we can never find examples of irrationality, because preferences can never be frozen in time. So the preference reversal involved in the Allais Paradox is perfectly rational. But even if it's a rational preference change, those constant changes are stable over time. If you ask a person which gambles they prefer a second time, they'll give the same answers, and so on. By saying "it's not a controlled experiment so it doesn't count," the Austrian misses out on a key insight about how people can be milked. The Austrian tells us that this person wants to be milked!

Comment author: SilasBarta 13 April 2009 07:25:12PM 3 points [-]

Sorry if I'm late to the party.

If the argument is that no evidence of any form could ever change the Austrian's probability estimate of a certain theory, I charge the Austrian is either being overconfident or violating the conservation of expected evidence.

Not true; such a position can be perfectly Bayesian: You would just believe that P(E|~H) = P(E|H). In other words, "On average, learning E tells you nothing about H, and vice versa." Such an H wouldn't be very useful, but it's Bayesian. (I had to point this out on a post by Bob Murphy critical of Bryan Caplan, but I can't find it ATM.) All Bayes prevents you from doing is taking both E and ~E as evidence for H. That is, believing both that P(E|H) > P(E|~H) and P(~E|H) > P(~E|~H). That would violate conservation of probability.

By saying "it's not a controlled experiment so it doesn't count," the Austrian misses out on a key insight about how people can be milked

Please refer to the OB discussion on the Allais paradox, where the participants' actions were justified quite well by poster <a href="http://www.overcomingbias.com/2008/01/allais-paradox.html?cid=97751682#comment-97751682">"gray area"</a> early on, and never answered by Eliezer_Yudkowsky. Long story short: the choice one is making fundamentally changes depending on whether it's one-shot or indefinitely repeated. The money pump doesn't manifest until you actually offer the choice multiple times at which point people not surprisingly pick up on it. But that money pump is just not happening in the one-shot version; ergo, no money is being pumped and nobody is being cheated, nor liking it.

Also, I'd like to comment on the price control example. While I certainly don't want to defend the Austrians, I also don't see how this is a point against them: rather, it's a confirmatory example.

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.

If the producer is continuing to sell at the ceiling rate, that is still non-price rationing because he is rationing the good based on who gets there first or who he likes most, etc, exactly the thing Austrians are warning about, and exactly the kind of non-trivial insight many people still don't appreciate.

So I agree with the general thrust of this post, but this is a bad example.

Comment author: Swimmy 13 April 2009 09:59:07PM 0 points [-]

I agree money pumps don't work forever. Experimental economics bears out, to some degree, that rationality is often a product of incentives. But if people can be milked in the very short run (the Allais Paradox is of course not the only example), this might have some bearing on economic theory.

I disagree that a producer who produces at a ceiling rate rations based on who gets there first. The producer could increase supply in response to the price control. The only thing limiting him from doing so is the size of his bank account.

Comment author: SilasBarta 14 April 2009 02:44:55AM *  4 points [-]

But if people can be milked in the very short run (the Allais Paradox is of course not the only example)

But they weren't milked in the short run. They weren't milked at all! From their perspective, they got two free lottery tickets. Doesn't sound like a milking to me. They never go through the hypothetical "implication" of the Allais Paradox, that they would start to trade opportunities intransitively, because they never have a chance to. A scientist just throws two choices at them, and concludes that they would make some other stupid choices that, it turns out, they never do.

I disagree that a producer who produces at a ceiling rate rations based on who gets there first. The producer could increase supply in response to the price control. The only thing limiting him from doing so is the size of his bank account.

Yes, and that's exactly the Austrians' point! If that is what turns out to happen, then the goods are being rationed by a) the size of producer X's bank account, plus b) who is among the first n people to reach producer X before he exhausts the limits of his inputs. And that is -- wait for it -- non-price rationing. That is, it's not the price of that good that ultimately "rations" who gets it, since there will be people willing to pay the ceiling rate who won't get to buy at that rate.

So again, I don't see how these two examples substantiate your case -- they're counterexamples.

Comment author: Swimmy 14 April 2009 04:45:02PM 0 points [-]

If the size of X's bank account can accomodate all the increased demand, there's no non-price rationing. Hence why I qualified with the word "small" in the OP.

Comment author: SilasBarta 14 April 2009 05:51:52PM 3 points [-]

Yes, you qualified with "small" ... and the term you qualified was "price ceiling". A small price ceiling amplifies this effect. Perhaps you meant to say "A price ceiling that is a small amount below the current market-clearing price".

In any case, the claim is still wrong. To the extent that the seller reallocates inputs based on non-price-maximizing goals, then non-price rationing is happening. That is, when he ups production, he's putting inputs to uses they otherwise wouldn't have been put at their current prices. Non-price rationing has still resulted, just maybe not in the good that was price-controlled.

Yes, you can keep adding on more conditions that get the scenario to work out, but like I said, that would still make it a bad example, considering all that you have to add to delete the insight the Austrian attempts to give.

Ready to cry uncle on conservation of expected evidence and Allais?

Comment author: Swimmy 14 April 2009 08:48:45PM *  0 points [-]

Haha. I thought on those CEE and Allais we had a disagreement rather than a confusion, so I didn't press it. But on those points:

I charged conservation of expected evidence or overconfidence. I'm plenty willing to concede that overconfidence is more likely. My idea was that any claim which takes the form, "No evidence could convince me otherwise," is probably falling victim to at least one of the two.

Now that I look back, I think we have some confusion over the Allais Paradox point. I'm asserting that the stability across large groups of people of Allais gamble preferences is evidence of a violation of rationality rather than a preference change. (IE, if it could be chalked up to a rational preference change, it shouldn't be so predictable.) Tversky, Slovic, and Kahneman apply some diagnostic rigor to suss out the various causes of preference reversals. "Milking" (but not "money pumping") is therefore an accurate diagnosis of what happens in the one-shot game.

I'm sorry I was not clear on "small." I did indeed mean the difference between the ceiling and the market clearing price. I do not understand your point about price rationing. Prices reflect subjective values. If the producer's motivation is "decrease price to the mandate," how do the new prices on inputs not reflect that value? The economy rations on goods forgone, yes, but the producer in question is the highest bidder for the use of those goods, so the new prices still reflect people's values.

Comment author: SilasBarta 14 April 2009 09:19:43PM 0 points [-]

I charged conservation of expected evidence or overconfidence. I'm plenty willing to concede that overconfidence is more likely. My idea was that any claim which takes the form, "No evidence could convince me otherwise," is probably falling victim to at least one of the two.

If that's what you're saying, then the situation I gave you still doesn't count as either. The situation was where you believe that P(E|~H) = P(E|H) for all E and a given H. I showed how it doesn't violate CEE already. It also can't be described as "overconfidence". If anything, its' under confidence since the person who believes it is deliberately setting it up so as to shy away from any possibility of being proven wrong.

Of course, this position also might not be what Austrians believe, since they claim that the insights (the H's) from Austrian economics do constrain their expectations, but also that nothing can make them change their belief in them, which would then be a violate of CEE.

I'm asserting that the stability across large groups of people of Allais gamble preferences is evidence of a violation of rationality rather than a preference change. ... Milking" (but not "money pumping") is therefore an accurate diagnosis of what happens in the one-shot game.

And I've shown how that's wrong. It's not a preference change, and it's not irrational. Rather, it's a reasonable choice when you only get one shot at each choice. All the supposed "proofs" of irrationality or preference reversal require you to first assume multiple repititions of the game and the chance to trade one game for another, neither of which happen in the experiment. And again, they weren't milked; they got two free lottery tickets.

I do not understand your point about price rationing. Prices reflect subjective values. If the producer's motivation is "decrease price to the mandate," how do the new prices on inputs not reflect that value? The economy rations on goods forgone, yes, but the producer in question is the highest bidder for the use of those goods, so the new prices still reflect people's values.

No, they don't. For the case of a price cap that is a small amount below the market-clearing price, the noble producer must up his production to handle the additional buyers, which requires him to implicitly sell his labor (to himself) below market prices. (If this were not the case -- if his labor were really worth that much -- the market price would not have been at its current level, which was the assumption.) Then there is non-price rationing because there is someone who wants to buy his underpriced labor but cannot.

Comment author: ciphergoth 13 April 2009 09:57:40AM 1 point [-]

Was your "Allais Paradox" link meant to go to this article? The Wikipedia page is also good.

Comment author: Eliezer_Yudkowsky 12 April 2009 03:11:52PM 2 points [-]

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

Comment author: Swimmy 12 April 2009 04:51:07PM 0 points [-]

Yeah, that works better.

Comment author: Tyrrell_McAllister 12 April 2009 05:00:59PM 0 points [-]

I disagree. The presuppositionalist position is also addressed, and not just in passing.

Comment author: Swimmy 12 April 2009 05:31:00PM 0 points [-]

I only meant to use presuppositionalism as a starting point, to compare to another epistemology as bad as a theism. As according to the standard hangups one gets after leaving a religion, I have a whole lot more to say about presuppositionalism, let me tell you.

Comment author: Tyrrell_McAllister 12 April 2009 07:16:19PM 0 points [-]

Fair enough. Disagreement retracted :).

Comment author: TruePath 13 April 2009 11:17:34PM 0 points [-]

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.

Comment author: Shane 13 April 2009 01:26:03AM 0 points [-]

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.

Comment author: Swimmy 13 April 2009 02:51:45AM *  1 point [-]

I have little interest in creating a model of the economy so that I can control it with a magic government wand. I am a Public Choice libertarian. I have an interest in updating my beliefs according to the evidence.

The problem is not that Mises and Rothbard have presuppositions, it is that they consider their priors immune to all inference. As soon as you invoke experience and evidence as justifications for their presuppositions, you have distanced yourself from their position, which is that no evidence could ever confirm or disconfirm their theory.

Comment author: Shane 13 April 2009 11:18:33AM 1 point [-]

I understand this point, but the presupposition has a purpose beyond itself. It is not intended to exist as a statement of truth which cannot be refuted. Its purpose is to acknowledge the lowest step in the Austrian analysis for which we can describe our understanding. That point is the touchstone for what we cannot know and for that which we cannot go beyond because of the nature of the things in question.

The Austrian view observes certain outcomes which can be quantified and then works backward through regressions to describe what we can know about why these observed and knowable outcomes are indeed the outcomes.

In essence, the claim being made in the Awful Austrians piece is that the theory should not claim to not know or be incapable of measuring anything in the regression toward the foundation of the thought, else the measurable conclusions should be disdained.

The implication then is that these things described by the presuppositions can indeed be measured or quantified, or else that they are irrelevant to the question and something else is the correct next measurable regression in the theory.

For instance, as a Public Choice libertarian, do you recognize the mathematical and logical truth that when inflating a costless money supply, if everyone receives the new money on the same day, then inflation serves no purpose? If you do, step back through the regressions from this level until you discover some part of the theory that is unsustainable. If that point is at the presuppositions which in essence are describing what cannot be known, then where is your argument?

The presuppositional construct is a method of attaching symbols to concepts regarding which we can only see the shadows. The evidence they reject is that which irrationally claims to confirm or disconfirm their starting point, not the following layers of theory which exist within our quantifiable apprehension.

Comment author: Swimmy 13 April 2009 08:33:41PM 1 point [-]

And, come to think of it, no, I do not agree that the inflation example is a mathematical and logical truth, unless one assumes self-interest to actually mean selfishness. Otherwise, a banker may say, "I love all you little goofballs so much, I'm not going to raise the interest rate the full price of inflation. Go ahead and have some of my mone." Then the inflation would have an effect.

But if self-interest is selfishness, then it's not an unknown variable, and I can think of many experimental results to confirm or disconfirm it.

Comment author: Shane 14 April 2009 02:19:18PM 0 points [-]

Swimmy, I think perhaps you are not following the argument regarding inflation.

If one created a simple model wherein everyone had x currency units today, and then tomorrow an additional quantity of costless new money was created, such that each person had 2x currency units, then inflation would serve no purpose. Each person's purchasing power would be unchanged.

What is the mathematical and logical error you see in that model?

Comment author: Swimmy 14 April 2009 03:00:32PM 0 points [-]

Prices have to change as well. The prediction that producers will change their prices is based on the selfishness assumption.

Comment author: Eliezer_Yudkowsky 14 April 2009 03:34:26PM 1 point [-]

Nominal debts and nominal savings both decrease.

Comment author: Shane 14 April 2009 09:25:07PM 0 points [-]

In the example there are no debts. Savings in money terms are the dollars held, therefore the savings rate is unchanged. Savings in corn or cattle are unaffected by the change in money quantity.

Comment author: Shane 14 April 2009 03:34:05PM 0 points [-]

Prices change based on the law of supply and demand.

Consider Bernanke’s recent comments about the control the Fed has over the economy.

“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

(Ben Bernanke, “Deflation: Making Sure ‘It’ Doesn’t Happen Here” [Remarks before the National Economists Club, Washington, D.C., 21 November 2002])

Comment author: Swimmy 14 April 2009 04:55:12PM 0 points [-]

The law of supply and demand is based on the selfishness assumption. Yes there is an argument that even upward-sloping demand curves will eventually slope downwards, but I can always find some margin or theoretical example for which it's not true over some interval.

Comment author: Shane 14 April 2009 09:11:35PM 0 points [-]

Why would the law of supply and demand not rest on marginal utility, rather than selfishness? Just because I have a selfish desire doesn't mean that I can satisfy the desire. Utility and means mix together with self interest to render choices regarding use of scarce resources.

Comment author: Swimmy 13 April 2009 05:42:19PM 0 points [-]

My argument is that the it's irrelevant whether the presuppositions can be known with certainty. You can attach a probability estimate to them, allowing for the uncertainty of your missing variables, discount the evidence from experimental and behavioral economics accordingly, and update your priors accordingly. If your unconditional probability assignment is such that the uncertainty influenced by those missing variables discounts all such evidence by 100%, I really want you to show your work.

Comment author: Shane 13 April 2009 06:47:31PM -1 points [-]

Austrians recognize that there is an unquantifiable variable in economics, namely human action, which heavily influences economic outcomes. You want to insert an arbitrary (estimated) variable value, i.e. probability estimate, in a model to account for something that Mises claims cannot be accounted for based on experience and historical fact.

Since you seem to believe that the variable value can be known and quantified for modeling purposes, what is it? What are the attributes of the variable collection which represent human action in economics?

Mises claims that human action is present, significant and cannot be measured. Are you claiming human action is absent, insignificant or measurable?

If you can set up the conditions to prove your case experimentally, then you have an argument.

How are your assumptions, i.e. probability estimates, inserted in a model going to provide feedback that will enable a valid update of the priors? Is that not circular reasoning?

If the claims made by Mises and the Austrians went no farther than to say human action cannot be measured and therefore nothing in economics can be measured, you would have an argument simply because their thinking would be inadequate. This is not the case.

To the contrary, Mises thinking regarding economic calculation in the socialist commonwealth clearly shows that human action coupled with ownership is a required component of a healthy and sustainable economy. Human action is necessary and yet cannot be measured or predicted, except that people are going to act in such a way as to satisfy their own self interest, which is conditional and subjective.

If experience and fact can be used to account for human action in economics, then Mises claims are false.

If they cannot, why discount his theory because he acknowledges a real-world constraint using a presuppositional argument?

Comment author: Swimmy 13 April 2009 08:11:22PM *  1 point [-]

If human action could not be predicted, the results of experiments into the Allais Paradox, preference reversal, conjunction fallacy, and on and on, should be a random walk. Since they're not, human action can be to some measure predicted. If an Austrian believes all such research should be discounted by 100%, I'm taking issue with whatever prior gives that result.

And no, using priors in the way I described is not circular reasoning. Recall Bayes' Rule for updating on evidence: P(H|E) = P(H)P(E|H)/P(E)

To be as clear as possible, let's use the following example. We want to test the hypothesis "People act rationally and self-interested." As a definition for rationality, let's say people's STABLE preferences disallow intransitivity.

Say I start with a prior for the hypothesis, P(H)=0.9. The likelihood that we see experimental evidence of intransitive preferences given this hypothesis must be fairly low, but there could always be experimental error, so P(E|H)=0.05. This estimate is where my priors come in as I described above. If I think it's equally likely for an experiment to show evidence of intransitivity as transitivity, even given my hypothesis, P(E|H)=0.5.

I discount by my estimate that there will be experimental evidence of intransitive preferences regardless. P(E) = P(H1)P(E|H1) + P(H2)P(E|H2). Given P(Intransitivity results | People are rational) = 0.05, P(Intransitivity | People are irrational) = 0.95, we have, for the case of the believer P(E) = 0.05 * 0.9+0.1 * 0.95 = 0.14 and, for the case of the skeptic, 0.5 * 0.9+0.1 * 0.5 = 0.5. So, for the believer, evidence of intransitivity gives 0.9*0.05/0.14 = 0.32, and for the case of the skeptic, 0.9 * 0.5/0.5 = 0.9, ie, no updating.

Mises argues that we can never have any evidence of intransitive preferences because preferences are not stable. Thus, the preference reversal evident in choosing Gamble 1 in Part 1 and Gamble 2 in Part 2 of the Allais Paradox can never be evidence of intransitive preferences. But, I argue that if we show, in study after study, across the majority of people, that the preference for Gamble 1A and Gamble 2B is stable over time--seconds, weeks, months, years, lifetimes even!--that we should discount the skeptic argument P(Intransitivity results | People are rational) from 0.5 to something lower, akin to P(E|H) = 0.05.

But that's not where it begins. I'm saying that experimental evidence of such preference stability should change your probability estimate of P(Preferences are stable) from 0.5 (This variable is mystical, completely unknown, sublime and unknowable even to a superintelligent AI with the capability of doing a nanosweep of your entire noggin) to something much higher, like 0.9 (I am pretty damn sure this preference is stable because the evidence says so and evolutionary psychology suggests it's universal). Even if you want to leave it highly unknown, P=0.51, this will change your update according to the evidence. So it's not circular reasoning. It's using priors/updates on one hypothesis (preferences are stable) to update on another hypothesis (people are sometimes irrational).

If you're arguing that we should remain radically uncertain even in the face of such evidence, I want to know the priors you assign. Saying "it's unknown" isn't enough. How unknown is it? I have trouble believing it's really a 50/50 split. Are we really equally likely to see most people choose Gamble1A and Gamble 2B in every experimental study with highly statistically significant results across times and cultures as we are to see a random walk? If so, how come we never see random walks?

Comment author: Shane 14 April 2009 01:02:56AM 1 point [-]

Human action can indeed be to some measure predicted.

For instance, if I conducted an experiment with 100 people wherein I presented each person with the opportunity to place their bare hand on a red hot burner on a stove, including leaving it there for one minute, I predict 100% would say no. I could even model that experiment.

However, this kind and degree of predictability is meaningless in the context of economic modeling.

What if the person who is being presented with the choice in the Allais Paradox just lost their mother to death, as well as losing their job in the same week? How does this affect the model? What does that research show?

How does one account for decisions made without adequate consideration, or when the decision maker doesn't understand the problem? What about the follow on effects of choices made in the past which encumber via contract, or cause emotional or financial pain, such that the decision is not rational or the risk assessment is distorted? Or the reverse when the rewards have been great in the past?

How many life choices exist in such pristine, simple and clear conditions as the Allais Paradox?

Are not our choices, responsibilities, assets, liabilities, obligations, future earnings, job markets, work relationships, preferences, skills, talents, capital, regulatory environments, choices of other people, comparative advantages, currency fluctuation, taxation, inflation, religious beliefs, IQ, education, weather, genetics, resource allocation, scarcity, social stability, time constraints, competing demands, influence of peers, influence of media, family relationships, beliefs about the future, and more, all knit into each decision made?

Are you really claiming that the minor complexities presented in such a simple model as the Allais Paradox rise to the level of mathematically illuminating, for the purpose of useful economic modeling, the myriad decisions inherent in daily life? After all, everything in life depends, at some significant level, on exchange of productivity, which is generated as a result of the decisions of life.

My point is that the models relating to human action which are herein employed as proofs, are not sufficiently complex to be useful or meaningful in economic modeling.

You criticize the Austrian school on the basis of presuppositions which are designed to note the limits of our ability to construct theories or predict future events. At the same time, all that is offered to suggest we are not limited are simplistic and wholly inadequate models which do nothing to solve the problem. As long as Mises claims we can't know or test these things and no one else shows that we can, I have to agree with Mises.

Besides, if these things were knowable, Mises would never have accepted stopping at this level. He would have anticipated and likely discovered and modeled the information so as to press another layer deeper, in hopes of gaining a greater mastery of the subject.

Comment author: ciphergoth 13 April 2009 07:56:16PM 1 point [-]

I'm having a hard time following your argument.

Everyone who is doing economics is working on the assumption that there are some useful regularities about human behaviour. None claim a model that perfectly predicts the behaviour of every individual. What distinction are you drawing here between the regularities that the Austrians assume about human behaviour, and the regularities that other economists assume?

Comment author: Shane 14 April 2009 01:27:27AM 0 points [-]

Austrians believe that modeling for purposes of prediction is fruitless. Modeling for the purpose of control is unethical and oppressive because property rights are violated.

Other economists believe they can successfully model and manage an economy. They deal in numbers without taking into consideration human action at a level that has explanatory power. Monetarists, Keynesians, etc. ignore human action and generally treat the notion as unimportant. Austrians claim human action cannot be modeled, but knowledge of human action is required in order to model.

Austrians, for example, are able to model the effects of unrealistically cheap money, which is the source of malinvestment which leads to a boom bust cycle. We are experiencing the bust now.

With Austrians, things that can be modeled are modeled. Things that cannot be modeled or achieved are accepted, rather than, like the Keynesians, arrogantly claiming knowledge which is proven wrong time and time again.

Every time we have a bust, we are first told it should never have happened because after the last bust the bankers were given the tools necessary to prevent the bust. Then we are told that they just need a few more tools in their bag in order to fix the problem and ensure it never happens again. Then it happens again, each time bringing us nearer to the hyperinflation of 1920s Germany or today's Zimbabwe.

The economists which claim to be able to manage our economy for our good are either liars or incompetents or both. And we are supposed to accept their critique of the Austrian baseline?

Claiming the presuppositions are wrong is fine, if one can show that these need not be presuppositions because they can indeed be measured and worked into a predictive model... This proof I have not observed in a research model, let alone in the applied science, which we live with daily.

Comment author: teageegeepea 14 April 2009 02:26:07AM 1 point [-]

Models are used for prediction in all sorts of domains. Each of us has a mental model (or "theory of mind") of how others behave to a significant degree of accuracy. Economics often covers situations well outside the range of the evolutionary adaptive era for which our intuitive mental models don't work as well. If modeling were truly useless, it wouldn't matter if it was used "for the purpose of control" because it wouldn't get you anywhere.

I wish Matthew Mueller's Post-Austrian Economics blog was still up, because he made a good point about the unfortunate entanglement of austrian economics with political libertarianism since Rothbard. This results in some of its adherents viewing people who think their method is flawed as political enemies. For the record, I still read sites like mises.org & Lew Rockwell (though to a lesser extent recently due to all the competing distractions on the internet and my banning from the comments section of the former) and appreciate the work they do in bringing economics to a wider audience even if they can exhibit the flaws they point out in Rand's circle.

Comment author: Shane 14 April 2009 02:00:28PM 0 points [-]

Thanks for your remarks teageegeepea.

There is a difference between modeling and manipulating.

To model, is to create a framework that describes something.

To manipulate is to choose one or more elements among the known attributes of the model which can be controlled and then use that to coercively accomplish goals; then set the model up to "show good things are happening" based on the all wise management of the modeled system by the managers.

You note "a significant degree of accuracy". The point is that the degree of accuracy that can be attained is insufficient for the purpose.

Comment author: ciphergoth 14 April 2009 07:25:07PM 0 points [-]

Austrians believe that modeling for purposes of prediction is fruitless.

So if someone does successfully make a prediction about human behaviour, for example that a price increase will reduce sales, that falsifies the entire edifice of Austrian economics?

Comment author: Shane 14 April 2009 08:57:06PM 0 points [-]

That is not an economic model or prediction of utility for the purpose. It will remain to be understood what happens to all other prices and production when this single adjustment is made. In addition, the question arises why the price is being adjusted. For example, what decisions were made and what conditions changed, either actually or by way of changes in understanding, which caused the prices to change?

Besides, your example is in reference to the law of supply and demand.

Comment author: nateemmons 14 April 2009 01:05:11PM 0 points [-]

I would be cautious saying "Modeling for the purpose of control is unethical and oppressive because property rights are violated" purely because I wouldn't want people to get the idea that Austrian Economists consider economics as normative. Austrian Economics may point out that the economic calculation problem shows that central planning is impossible, but it's libertarian political philosophy that talks about things being 'ethical' or 'unethical'. I think it's important to keep the distinction between economics and political philosophy very clear.

Comment author: Shane 14 April 2009 01:49:03PM 0 points [-]

Thanks nateemmons. I appreciate the distinction being made.

My reason for mixing is the centrality of private property and the consequent violation of property rights, using the standard of theft or fraud, that follows manipulation of currency, favored business license or heavy taxation for the purpose of redistribution. My interest in the school of thought is less theoretical and more practical application; i.e. how the body of knowledge affects the decisions by government that we then have to live with.

The problem I have here is the ganging up on the Austrian school in general because of a methodology used at the base of the theory. Mises said certain things cannot be done; he didn't say don't do them. If someone believes his presuppositions are wrong then simply prove it by doing what he claimed cannot be done.

To criticize Mises presuppositions is to claim a different set of presuppositions; i.e. we can experimentally measure the concept labeled human action and that there is nothing meaningful about human action that is antecedent to the study of history. I would say to the one making the claim, if this is the presupposition you would have us accept, please show your work.

Comment author: Jonathan 21 April 2009 10:00:56AM 1 point [-]

If there was ever a Popperian refutation of the econometric/quant modelling of human behaviour we are surely living through that now.

No matter how many people know that water is H2O, it will not affect the fact. Once we have people telling us they can plug in probabilities for human actions, we have the start of monumental folly.

Every wise investor understands what Soros calls reflexivity. There is a role for math clearly but I find this post obsession about what to me seem fairly dull objections to the Austrian school miss their larger picture which seems to me overwhelmingly supported by current market experience.

It should not be a surprise to note that some of the most successful money managers/traders I work with have a strong Austrian bias, at least in the understanding of the monetary system and its systemic flaws and the predictable response of government... all using shiny models of course. Ahem.

I believe Mises said that socialism would fail at a time when the left (I do not imply Mises was thus on the right) was wowed over the success of Russia etc. and logically his theory would suggest money would be debased over time and that wealth would increasingly, and unjustly flow in Cantillon fashion to the earlier recipients of new money. Well, that to me means bankers, property developers, lawyers etc and this is so.

Today we are seeing rates near zero and government supporting long bonds and it is no surprise, to an Austrian trader, that we are seeing enormous trading profits in these areas of investment banks. This is an example of the Cantillon effect.

I would recommend we take the powerful parts from the Austrian theory and use them in real life. They surely work but it is also true that many who call themselves Austrians are of a 'perma-bear' disposition so be careful who you listen to. Look for form.

Comment author: JulianMorrison 12 April 2009 11:23:04AM 0 points [-]

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".

Comment author: jimmy 13 April 2009 03:04:16AM 1 point [-]

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.

Comment author: Jotaf 12 April 2009 10:38:03PM *  1 point [-]

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.

Comment author: gwern 13 April 2009 04:26:52PM *  0 points [-]

In theory, according to <http://daringfireball.net/projects/markdown/syntax#backslash>, you're supposed to be able to backslash-escape ')'. That this doesn't work is a bug in LW's software, I think. (At least, I don't remember running into it using markdown or Pandoc on my own Markdown pages.)

Comment author: thomblake 14 April 2009 06:17:36PM *  0 points [-]

I'm pretty sure it works. try it

ETA: yep, you can do it.

Comment author: CaveJohnson 28 January 2012 06:18:28PM 0 points [-]
Comment author: alanforrester 22 September 2010 11:10:04PM 0 points [-]

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/.

Comment author: Faithkills 01 November 2012 08:52:26PM -1 points [-]

Yes deflation is normal.

Anyway I found this while looking for another article. I'm not fond of a priori anything, and I have criticized Mises and Rothbard for just that, but this 'Awful Austrians' critique seems a bit wrongheaded or even deceptive. When Mises speaks of rational or selfish he means it in a very limited sense, and it's simply that humans act and thus made choices. This isn't a farfetched claim. Without a disclaimer to the reader to the effect that 'rational' does not imply 'intelligent', 'wise', 'prudent' nor any such thing you have led people to the wrong conclusion, and imo the wrong critique of Austrians.

Essentially Mises et al, derive their school from what they consider an a priori claim. Humans act. Yet I don't think WE need to take that assumption as a priori, and attacking an assumption on the basis of the understanding of the assumee is itself dangerous to reason. Christianity comes to valid many moral conclusions based on profoundly worse farfecthing.

You may find logical or empirical inconsistencies with Austrian economics, or you may find fault with it's premise, that Humans act, but the latter ONLY IF you have reason to suspect the presumption is false. Personally I don't think the presumption provides an easy task of falsification;)

People have many wrong assumptions. But as well people assume a lot is true, CORRECTLY, without understanding why it's true, and certainly not being able to articulate why it's true. But the validity of an assertion doesn't derive from the ability of the person asserting it to explain it's validity.

Einstein proceeded from an assumption about the universe which was not provable at the time and he could not prove, and was not EXACTLY correct, but he was able to advance physics immensely and was on large correct. Similarly Mises/Rothbards predictions are eventuating as we speak. The form of your critique could as easily be applied to Einstein as Mises.

Conclusion, critique fails. Disprove the premise, always the easiest of tasks if possible at all, or show that the conclusions do not follow from it.

"He who knows only his own side of the case knows little of that." - JS Mill