So why isn’t the Austrian School of economics retarded again???
Since we’ve been talking about anthropology, I am posting this mostly to satisfy my curiosity and get something off my chest. There was a time in the past when I was a hard-core libertarian. I was at a book store recently and flipped through Radicals for Capitalism, Brian Doherty’s intellectual history of the libertarian movement. I already knew most of the key players from my past readings. Now, I’m not one of the few dozen people in the world who has actually read Ludwig von Mises’ Human Action (I’d be willing to bet some gold that half of these individuals who’ve gotten through von Mises’ magnum opus are virgins!), so my libertarian nerdishness only went so far. All that being said, there was a time I would have said I favored the Austrian School of economics. This was during a period when I was busy boning up on the Krebs cycle, I wouldn’t have had any clue what an indifference curve was. I was a libertarian, and the Austrian School was congenial to libertarianism, ergo, I supported the Austrian School (I knew I opposed Keynesians as well as the neoclassical models).
But I’d always had issues because I knew that the Austrian school rejected econometrics and positivism; and being steeped in experimental science I’d always viewed positivism as a Good Thing. Eventually I read Bryan Caplan’s Why I am Not an Austrian Economist, the definitive smackdown of the school of thought derived from von Mises (an aside: the aspersions cast in this post are aimed primarily at the Misesian tradition, not the Hayekian; the reason for the distinction is made clear in Caplan’s piece). I’d already lost my interest in libertarianism by the time I’d stumbled upon this polemic, but it confirmed my growing suspicions that Austrian economics had turned into a cult of personality. Caplan, being an economist, has some pointed technical criticisms. But over the past few years, and especially over the past months, I’ve been doing some reading on Google Books and elsewhere on the intellectual history of the Austrian School, and especially praxeology. What the hell is praxeology? Well, from praxeology.net:
Praxeology is the study of those aspects of human action that can be grasped a priori; in other words, it is concerned with the conceptual analysis and logical implications of preference, choice, means-end schemes, and so forth.
The “grasped a priori” part has really bothered me. I mean, I read psychology and history, I can’t derive it a priori. Recently I was going over some issues in modern Middle Eastern history, and learned that King Hussein of Jordan had apparently asked Israel for permission to send a brigade to Syria to invade the Jewish state during the 1973 Yom Kippur War. Honestly, I really don’t know if I could ever grasp Arab psychology a priori. The more and more I read about psychology the more I think that anyone who believes that they could develop an axiomatic system of human action from insights they grasped a priori is totally retarded (mad props to Aristotle though, he worked before the cognitive revolution). More specifically I have to wonder if they are socially retarded. I have suggested that an attraction to libertarianism is in part a function of your personality. Normal people rarely become libertarians, rather, it’s a ideology driven by young non-alpha males with Roark/Galt fantasies. There are many more Justin Raimondo & Eric Garris types than Mark Cubans in hard-core libertarianism. Any survey of the biographies of von Mises or Murray Rothbard emphasizes their stubborn heterodox tendencies; but at this point I just wonder if they were social retards to whom their a priori logic was plausible because they really weren’t as complicated as most humans, who engage in habitual and casual hypocrisy and contradiction. I recall reading Rothbard once explaining how one might buy and sell children in “flourishing child markets” in an anarcho-capitalist order. Even then I remember thinking, “Dude is weird….”
Now, why am I posting this? Many readers of this weblog are sympathetic to the Austrian School of economics (e.g., Mencius Moldbug). On occasion readers have even emailed me pointing to chapters in Human Action. Seeing as that around 1/3 of the readers of this weblog are libertarian that’s never surprised me, and I haven’t cared enough about economics to ever elaborate my distaste for the Austrian School. There are three reasons I’m going on the record now though.
1) I’ve developed an interest in economics as an academic discipline. In other words, I do know what an indifference curve is, or comparative statics, or business cycles. My adherence to Austrian economics seems analogous to a young man’s infatuation with the prose stylings of Piers Anthony; I didn’t know any better.
2) My readings in psychology and history makes it very difficult for me to understand how anyone could adhere to a Misesian form of Austrianism with its commitment to praxeology. In short, I really think praxeology is a rotten foundation for any system of thought. Certainly when someone espouses Austrian economics it makes me question if they’re a bit nuts.
3) That being said, I’m curious to see how GNXP readers would respond to my objections and sentiments. Your responses should go in the comments (no emails please). I’m curious for two primary reasons: I want to know a bit more about the psychologies attracted to the Misesian school, and, there’s an chance I’ll revoke my critique and explore Austrian economics in more depth (more practically, I won’t dismiss readers who espouse Austrianism as bizarros if I think I’ve been too harsh on Mises’ work).
Labels: Psychology
Razib,
I read “Human Action” in high school (as well as Keynes’ “General Theory”).
Mises was a Kantian — Kantians believe in the “synthetic a priori.” Simple as that.
Rothbard was not a Kantian, and, in principle, disagreed with Mises on this – i.e., Rothbard thought that economics was ultimately based on some very broad (and very obvious) empirical facts about human nature. In practice, though, Rothbard did note that essentially all economics of all schools was based on “armchair” reasoning – e.g., Keynes did not go out and carefully measure economic variables before writing the “General Theory.”
The great exponent of positivism in economics was Milton Friedman, but in fact he did not really mean it. If your read “Free to Choose,” for example, or his more scholarly works (as I have), he uses empirical facts to illustrate economic theories but not really to test them.
The “a priorist” issue was largely just a matter of noting what economic theorists actually do and of codifying already established academic boundaries. For example, Rothbard’s Ph.D. thesis, “The Panic of 1819” and his later “America’s Great Depression” both included, of course, empirical data. But Rothbard (rightly, I think, in terms of academic terminology) labelled these as “economic history” rather than as pure economics. (A similar point is true of Friedman’s work.)
In a sense the distinction Rothbard was driving at was the same as the distinction I, as a theoretical physicist, make between math and physics. I use math, but I view it as a priori and do not even consider testing the math experimentally. (That of course does not mean I do not sometimes make errors in the math.)
Roughly speaking, as Rothbard and Mises saw it (and as most academics actually practice economics), economics is to economic history or econometrics as math is to physics. ItÂ’s more a matter of terminology than anything else.
The one non-terminological point here is that, periodically, some economists who are in fact engaged in clearly a priori thinking insist on claiming that they are empiricist positivists. Some Keynesians did this until it turned out in the ‘70s (stagflation, the shifting Phillips’ curve, etc.) that Keynesiansim empirically did not work. In fact, this was clear a priori to anyone of any intelligence from the beginning – Keynes’ reasoning was wrong in the “General Theory.”
If I make a math error as a physicist, empirical testing is pointless – we’re not really testing the theory if my math derivations from that theory are wrong. The same point applies in economics: since Keynes’ reasoning was wrong (he made errors in dimensional analysis – economists call what he missed the Pigou or real-balance effect), empirical testing was really pointless. While it is nice (although tough for the country!) that Keynes’ predictions were falsified by empirical experience, those predictions did not follow from his premises anyway.
Incidentally, I can falsify your hypothesis about Rothbard. You wrote:
> I just wonder if they [Mises and Rothbard] were social retards to whom their a priori logic was plausible because they really weren’t as complicated as most humans, who engage in habitual and casual hypocrisy and contradiction.
I knew Murray personally over several years and also had several mutual acquaintances. From my observations (and othersÂ’ reports), Murray was, oddly enough, a convivial, wild-and-crazy party animal. He was a big sports fan, loved soap operas, and was fond of early jazz.
In all of those respects, I hasten to add, I am Murray’s opposite – I’m a nerd and proud of it.
He did have an omnivorous curiosity (rather like you) and was, in my observation, fastidiously honest. In those respects, I suppose he could be called nerdy.
Incidentally, his biggest fights within the libertarian movement came over his insistence that empirical reality had to rule. He insisted for example that one had to look at the actual historical reality of American foreign policy, which of course turns out, historically, not to be exactly the model of high-minded altruism that most Americans (and a large number of libertarians) conceive it as being. This, and his empiricist insistence on looking at the concrete details of American historical icons – everyone from Washington to Lincoln to Reagan, as well as at the reality of the political power and shenanigans of Big Business (many libertarians – especially Objectivists – worshipped Big Business; Murray didn’t) antagonized a large number of libertarians.
He was actually the most empirically-oriented economist I’ve ever known – but he did indeed insist to this dying days that all of his empirical stuff was economic history, poli sci, sociology, etc., not real economics. As I said, largely a terminological matter.
Incidentally, I seriously considered majoring in economics rather than physics and actually had an offer to do a post-doc in econ after my Ph.D. in physics, which is why I am acquainted with all this. I can actually get up on the spur of the moment and give a one-hour lecture comparing and contrasting Keynesian, monetarist, and Austrian theories of the business cycle, one of my many useless talents, I fear. (I am not up-to-date on rational-expectations business-cycle theories, however, since I was already out of school when they were developed.)
Hope this answers some of your questions.
Dave
I’m far from a libertarian, perhaps partly because it runs in my family. (I was a sort of libertarian Goldwater Republican in 1962 or so).
I’ll just post one of my beefs with libertarians: Hayek’s “The Road to Serfdom” was a prediction of sorts, and it didn’t happen. Maybe the bad stuff didn’t happen partly because of Hayek’s warnings, but it just plain didn’t happen.
Some libertarians I’ve run into are like Armageddonists who keep postponing the date of Armageddon — Hayek was warning about the future in 1950 or so, but they take him to be talking about the period starting today.
Others believe that the disaster actually did happen, and that Sweden and France are slave societies. That’s a very hard sell.
I’ve read 17 books by Mises, five by Rothbard and four by Hayek. If you wish to call me a cultist, be my guest. I have an MBA from the University of Chicago and was steeped in Friedmanism. That said, I believe Austrian economics is ECONOMICS and Friedmanism is an Engineering discipline. Keynes missed nothing. His General Theory, which I read was just an apologia for inflation and mercantilism in new dress.
I once had a copy of Human Action that I got in a used bookstore, but I read 30 pages, set it aside, and ultimately lost it in one of many moves (I’m guessing). In the end I don’t have enough background in economics to draw meangingful contrasts between some of the figures you mention. But libertarianism is not something that is rooted exclusively in economic theory anyway; I would probably advocate for a smaller, less powerful government even if it were shown to be suboptimal in some economic sense.
Order arises from below, it’s not imposed from above, and attempts to so impose order tend to create greater problems than they solved.
It seems to me that libertarianism is the social/political/economic position that comes closest to acknowledging this principle, and so I tend to consider it to be better than other positions. But I don’t expect it to provide a proscriptive model of human psychology!
Broken up into two comments because of the link-limit:
I arrived at libertarianism (though I thought it was just conservatism) through the Chicago school, Milton Friedman by way of Thomas Sowell (along with what Steve Sailer would consider the “good neoconservatives”). The empiricist/positivist aspect made a big impression on me. I was pretty young then (I think I had declared myself a communist in 2nd grade which I don’t think lasted a year) and the idea of focusing on results rather than intentions was like a revelation.
I think I first heard of the Austrian school from a commenter at Mr. Cranky named grundle. I liked the subjectivist aspect of the school, but I couldn’t take the a priori business seriously. A lot of Austrians also seemed wrapped up in an us-against-the-world complex and their economics was wrapped up too tightly with their politics (Pete Boettke has been trying to disentangle the two). Though Mises was a utilitarian (I thought I was as well because it was the only variety of consequentialism I knew of) the “Misesians” today tend to be into natural rights, which I could never take seriously.
They seemed to be involved in a kind of holy crusade that could seem as deluded as their socialist opposites. I remember reading Rothbard say “In short, there is no sign that David Friedman in any sense hates the existing American State or the State per se, hates it deep in his belly as a predatory gang of robbers, enslavers, and murderers“, and thinking Friedman sounds more sensible. Even if the State is a gang of thugs (and I have become ever more cynical about it, thanks in part to the Bush years) as even Randall Holcombe concedes, getting all fired up in hatred is probably not a sensible start to analyzing things.
Still, one thing I like about the paleos compared to more mainstream libertarians (who do give ocassional nods to the public choice school) is the importance they place on the state as an actor that seeks to expand. After watching the expansion continue under Reagan and Thatcher and of course all of what’s happened under Bush with no excuse of a Democrat controlled Congress, you’d think they’d have realized there’s no hope in D.C. Instead now they try to market themselves as hip or moderate “fiscally conservative and socially liberal”, which sounds uncomfortably close to Pew’s “enterprisers” responsible for much of the crap under Bush. Some of them are coming to disregard the growth of the state and focus on “positive freedom” or “dynamism” which to me sounds like not being a libertarian at all. I remember in the past arguing with those on the left who accused libertarians of just being Republicans who don’t want to admit it, and during the Global War on Terror business when many who were supposed to care about liberty instead focused on heaping abuse on “moonbats” and “anti-americans” while ignoring governmental abuses they would have screamed about under Clinton I realized the critique was often right.
Oddly enough, as I’ve become more radical in my libertarianism I’ve also drifted away from Locke and toward Hobbes (I discuss that here). A site that attempted to fuse a rather Hobbesian outlook with libertarianism was againstpolitics.com which has gone down, but I mirrored it.
At Across Difficult Country I had a brief discussion of how nerdy and wimpy libertarians are and how little libertarianism had to do with the American War of Independence.
I never read any Rand and Objectivists always struck me as rather silly. When I come across them I like to throw some Stirner their way.
I can actually get up on the spur of the moment and give a one-hour lecture comparing and contrasting Keynesian, monetarist, and Austrian theories of the business cycle, one of my many useless talents, I fear.
Hi, Physicist Dave, Why don’t you do just that, and point us to your podcast? –geophysicist Jon
Razib:
You’ve done yourself (and readers who have come to respect and admire your ability and practice of wide-ranging reading, distillation, and synopsis-generation) a real disservice by not having paid a bit of real attention to Mises. For Mises’ exposition, there exists no adequate substitute. One cannot begin to comprehend what Mises has distilled in his various works (chiefly HUMAN ACTION but also those concerned with important epistemological insights, such as THE ULTIMATE FOUNDATION OF ECONOMIC SCIENCE or EPISTEMOLOGICAL PROBLEMS OF ECONOMICS) through substitution of one or more of his epigones or attempted popularizers. He who would criticize Mises for “wordiness” or “denseness” in explication of his theory(ies) is badly mistaken. Though erudite, Mises is at all times scrupulously concerned with accuracy, clarity, and brevity: one does ones’-self no favor by attempting to understand the complex matters treated by reading Hayek or even Greaves’ MISES MADE EASIER.
(An aside). Some time ago, in a private e-mail, I suggested to you the perusal of about 3 pages from HUMAN ACTION dealing with the decline and fall of ancient civilization (Rome) as contrasted with Gibbons’ multi-volume treatment of the same subject. Mises’ is a lucid, thoroughly scientific, easily understood explanation of what, for most, remains one of history’s great mysteries. Gibbons, on the other hand, has bequeathed us something properly classed with GONE WITH THE WIND or, more charitably, with WAR AND PEACE. Further (and at the recognized risk of appearing unnecessarily wordy), Mises treatment of the matter is (like the entire body of his theoretical work), urgently practical and prescriptive. It is a sad fact (but a fact nonetheless) that, at least to the present, Mises can be judged to have been a failure in his avowed attempt to provide humankind with the knowledge and understanding necessary to avert both localized crises and an ever-present (and increasing) potential of civilizational disaster.
Mises is frequently (and pejoratively) presented by his ideological opponents (actual enemies, since their intellectual positions–and most usually, their very livelihoods, are dependent on the marginalization of his theoretical insights) as “anti-empirical.” Nothing could be further from the truth. Mises is careful in elaborating epistemological bases of “science,” distinguishing those in which truth may be approached by “scientific method” and those in which it may not (for the simple reason that there exist no magnitudes which can held constant while the one under investigation is measured). Those disdainful of “apriori,” “deductive,” or “armchair” methods, should reflect a moment on that the entirety of induction, for all its glories of achievement, is simply a subset of deduction, that there exists something basic and universal in the human mind (normally called logic and sometimes reason) prior to any “data of experience” or “sensory stimulation” without which those magnitudes would appear chaotic, incapable of assembly into something intelligible as “data.” Non-recognition of this fundamental distinction leads to entire edifices of, essentially, nonsense called “mathematical economics, econometrics, behavioral economics, etc. Though these, generally, describe useless microslices of economic history, they are, from a prescriptive (policy-making) viewpoint, the “scientific” equivalents of such techniques as alchemy, kabbalah, or the philosopher’s stone. The Scholes-whatsisname’s work may have won a Nobel but the LTCM failure doesn’t seem to have caused even a decent ripple of reappraisal of the underlying assumption of the validity of numbers and equations to represent economic processes.
I shall not belabor my essential point further. Those actually interested in the advancement, indeed the very preservation, of human civilization, cannot, without reading Mises, even comprehend what constitute the principal obstacles much less what is required to overcome them. No Armageddon preceded the fall of Rome nor do I expect any such eventuality. Decay works more slowly but is hardly less certain.
@Physicist Dave
Hi. I back up Jon Claerbout in his request. Why don’t you write a blog post? I’d also like to hear/read about that. Go for it.
“Now, I’m not one of the few dozen people in the world who has actually read Ludwig von Mises’ Human Action (I’d be willing to bet some gold that half of these individuals who’ve gotten through von Mises’ magnum opus are virgins!)”
I’m glad to say that I fall in the half who are not.
Damn, what a colossal waste of time that was. I don’t remember a single point that the book made, beyond the “humans act to pursue ends” banalities.
The problem with the whole Misesean way of looking at economics is that its based on his own made up psychology (praexology). As you point out, it’s a priori retarded. The hilarious thing, I think, is that you have entire think tanks devoted to an economic philosophy based on one guy’s mistaken understanding of psychology in the early 1900′s.
I’m wondering what the writers of this blog think about scientific attempts to craft a real understanding of economic psychology (behavioural economics and neuroeconomics).
Also, Razib, woe to you for criticizing Mises. His true believers are the most anal retentive people in existence– they will spend hours defending a minor detail of his theory if the Mises Institute links to this from their blog :)
PhysicistDave:
It’s interesting that you knew Murray Rothbard.
For several years, I “hung out” at a website (atrentino.com) of one David Mandel (d. Dec. 1, 2005), a whimsical but serious essayist (“Conning Tower,” “Conversations With Trentino) and commentor on current events. (His suggestion, I understand, led a friend, David Burge, to initially undertake the now-popular blog, “IowaHawk”) Just how the two were acquainted, I do not know; Burge is from Iowa, Mandel was a New Yorker.
Trentino told me that he didn’t really know Rothbard but had attended the same parties on at least two occasions he could remember. His assessment of Rothbard’s public gregariousness, spellbinding conversational virtuosity, and charm follow your own. But he also remarked to me that another (unidentified) friend who knew Rothbard better than he, had remarked (about Rothbard) that “Down deep, where it counts, he’s a real shit.”
I know nothing of the matter except that (and this was what led to my question of Trentino) I had already formed a hazy but inescapable opinion that Rothbard was secretly resentful of his mentor’s position atop the Austrian pile and wished for a method or process whereby he could be elevated to the position of his (d. 1973) former teacher.
I myself have been reading (starting with HUMAN ACTION) Mises since about mid-1972, to include everything (of which I’m aware). I had never had any interest in economic matters but was prompted (by a 25-cent rise in the price of a Fenwal thermoregulator) to begin wondering about markets and to the formulation of some ideas about monetary matters. That was in 1962 and I was generally regarded as a nutcase, though that opinion changed when my predictions came true, almost to the time projections, of the “reneg” on silver certificates and the freeing (and subsequent rise) of the fixed price of the metal. I read nothing. Almost 10 years later, a new acquaintance said “You sound exactly like this guy who’s book I just read a few years ago. His name is Harry Browne and he wrote a book called How You Can Profit From The Coming Devaluation.” Mises was one of the sources listed in the bibliography.
He did have an omnivorous curiosity (rather like you) and was, in my observation, fastidiously honest.
right, the honesty is a problem. people are not honest, even with themselves. even, i would hazard to add, you or i. though i think nerds are a bit simpler in their social psychology so more transparency is possible by the nature of our cognitive furniture (less cluttered).
i agree that a lot of economics is a priorist and not as positivistic as it claims. but, i do think that the claim is important. else, correctives from behavioral economics, psychology, etc. can’t begin to take hold. we’ve criticized econ here at GNXP for years for not being empirically grounded in the realities of human biology & psychology there.
thanks for the comment dave.
The problem with the whole Misesean way of looking at economics is that its based on his own made up psychology (praexology). As you point out, it’s a priori retarded. The hilarious thing, I think, is that you have entire think tanks devoted to an economic philosophy based on one guy’s mistaken understanding of psychology in the early 1900′s.
exactly. the problem i have is that the foundations are totally outmoded. but as bryan caplan notes anyone who approaches libertarianism will get the impression that austrian economics is the coming wave. this happens here occasionally even when politics isn’t that important or on focus, which is the main reason i posted….
“Now, I’m not one of the few dozen people in the world who has actually read Ludwig von Mises’ Human Action (I’d be willing to bet some gold that half of these individuals who’ve gotten through von Mises’ magnum opus are virgins!)”
OK, you have one hit, Razib. In my defense, I was 13!
Ben G:
You’ve expressed dissatisfaction (in the form of ridicule) of Mises’ use of the term “praxeology.”
Others here, including Razib, have also indicated disapprobation.
A little indulgence might be in order. Whether you’re aware or not, the entire branch of knowledge called Economics, i.e., the recognition that there occurs some sort of regularity of the type we’ve come to call “cause and effect” and which forms the basis of everything regarded as “scientific” is NEW–it is the youngest of sciences, even though some dim recognition of cause and effect relationships had earlier caused some to wonder what might be “going on.” (What has come to be called “Gresham’s Law” had been observed substantially before Gresham and even scholastics of the Church were cognizant that suppression of “usury” had seemingly inescapable consequences quite as unpleasant (or even more so) as those they restricted/criminalized..
Mises was aware that “Economics” did not quite fill the bill; what existed, for the most part, was capable of explaining only a fraction (the part concerned with human interactions of trade, etc. of activities in which human action (and the choices leading to such action) were concerned. Much human activity seemed outside this orbit although seemingly driven by similar choice-making process. Clearly, Economics was only a part of a larger, more all-embracing science of human action. He gave the name “praxeology” to this conceptualized new science, though recognizing that Economics was the branch of (so-far) greatest interest. He didn’t make up the name; it had been already coined by another to apply to very much the same intellectual territory. It is certainly not a “made-up psychology” nor even related to anything that most would characterize under that heading.
Despite discovery of a new realm of knowledge comprehending a strict cause and effect chain similar to that observable in natural phenomena, economics remained severely limited in scope by inability of economic thinkers to resolve what was called the “antimony of value”: the lack of explanation of the how values were constructed by the agents involved. Why were some thing valued more highly than others? Why were some of the most useful things valued so much lesser than some others for which hardly any use existed?
Nobody seemed to “have a clue.” repeatedly seeking some more or less constant relationships between the values of those things most prominent on the market (including “labor”). The insufficiency of the science escaped some of the greatest minds (including especially Marx, who considered that Ricardo had said everything on the subject worth knowing save his own conception of the inevitable “class struggle.”
A “breakthrough” came in the form of a discovery and exposition (by three different thinkers, independently but almost simultaneously) that all “value” lay not in the valued thing but, rather, originated in the mind of the valuing actor and the expression of which was the action concerned. One, an Austrian (thus “Austrian School) named Karl Menger, further developed a process known as “marginal analysis” in recognition that the object of attention in considering an acquisition or attainment of a desire is only the “marginal” increase in want-satisfaction afforded (and versey-visa for a price or effort expended). In such process are no computations nor even recognitions of equivalence; there is only an ordered “list” and a choice expressed in action.
The plain fact is that all extant economists are (at least nominally) “marginalists.” But only the Austrians, especially Eugen von Bohm-Bawerk (Menger’s pupil) and then Mises (Bohm’s pupil) have consistently expanded the fruitful horizons of the science utilizing the original analytical process. Don’t get me wrong here: plenty of the others make similar claims for their own methods and for having improved the original science. There is neither time nor space for me to present the various arguments or refutations–I can’t claim to know them all or even be capable.
Some criticisms of related Brian Caplan writings can be found here.
gene:
my main problem with misesean economics is that its understanding of human action is based on a century old understanding of how the mind works. i have no doubts that mises and austrian economics have made major breakthroughs in economics and perhaps even philosophy. what i wonder is why people would continue to use a century old psychological theory to understand microeconomics today..?
gene berman,
You wrote:
>His assessment of Rothbard’s public gregariousness, spellbinding conversational virtuosity, and charm follow your own. But he also remarked to me that another (unidentified) friend who knew Rothbard better than he, had remarked (about Rothbard) that “Down deep, where it counts, he’s a real shit.”
ThereÂ’s no question that a large number of people felt that way about Rothbard.
I always found that odd, since Murray was such a jolly fellow and since, in the experience of everyone I knew personally, he was also a kind, gentle, and generous person. So, I tried to do some digging to find out why many people felt that way about him.
All the cases I was able to follow through on seemed to fall into two groups.
Lots of libertarians see themselves as the second coming of Adam Smith or John Locke and try to create some grand treatise that will revolutionize human history; most of these guys (and they’re always guys –I’ll leave it to everyone to fill in the ev psych explanation here) are too lazy to actually do the empirical legwork or the logical thought to figure out what they are doing.
If/when they manage to get their grand thought actually published and taken semi-seriously, Rothbard would publicly point out their errors. These people were of course academic scholars or would-be scholars, and this is how the game of scholarship is supposed to be played.
But anyone with any experience in the academic world knows that this is not how the game is actually played (IÂ’ll let everyone again fill in their own references to ev psych). In the real world, the academic rules are that you only attack folks not in your in-group and then only if you have sufficiently strong allies to win the ensuing battle.
Rothbard cared not at all for those unwritten rules – although he clearly did know about them and indeed wrote explicitly about them.
This really, really irritated a lot of people! That fact really gave him a big kick, and indeed seemed to add to the general joyfulness of his life.
Secondly, as Razib suggested, hypocrisy is a normal part of our social institutions – for various obvious reasons, this is even more true in the “not-for-profit” world than the business world: as the banks, mortgage brokers, etc. have found out economic reality will come back to bite you in the end in the real business world, but there is no economic reality in the “not-for-profit” world. The “libertarian movement” is, of course, part of the “not-for-profit” world, and various sleazy operators, con artists, etc. flourished there as they flourish in other “not-for-profit” areas such as the defense/intelligence world, the acdemic world, etc. (I speak from personal experience in all of these areas.)
Murray took great joy in exposing such people.
This also made him many enemies.
I was never able to find anyone who hated Rothbard who did not fall into one of these two groups: as far as I could find out, his personal life (marriage, financial affairs, etc.) was beyond reproach. Of course, it’s always possible that he had his own secret “Lewinsky affair” and I just never found out about it – but I rather doubt it.
Incidentally, I myself disagreed with Murray on countless issues (ranging from theoretical issues in economics to foreign policy issues) and a couple friends of mine (Justin Raimondo and Scott Olmsted) were on the receiving end of some of RothbardÂ’s public dissections. Both Justin and Scott remained admirers of MurrayÂ’s, but then ScottÂ’s a nerd (and I mean that positively!) and Justin is a subspecies of Homo sapiens all his own.
I still find the whole Rothbard issue quite fascinating from the viewpoint of evolutionary psychology. He seemed to break all the rules of ev psych, and yet have quite a happy life despite that – indeed, I don’t think I’ve known anyone else with as much joie de vivre.
Of course, if you were a crook or a poseur, you might not find that he brought much joy to your life, but I rather get a kick out of watching that, too. Think of Steve Sailer if you want a comparison most of us are familiar with – just think, Steve, you could win a Pulitzer, be rich and famous, and have your own prime-time cable news show (“Sail Away With Steve”) if only you would refrain from constantly telling the truth!
Dave
razib wrote:
>i do think that the claim is important. else, correctives from behavioral economics, psychology, etc. can’t begin to take hold. we’ve criticized econ here at GNXP for years for not being empirically grounded in the realities of human biology & psychology there.
Razib, it wonÂ’t surprise you that IÂ’m curious about behavioral economics, game theory, etc. However, I have a “proof-of-the-pudding” attitude here: IÂ’ve seen very little from those areas that were interesting, significant, surprising results (the one exception that comes to mind, which includes both behavioral economics and game theory, is AxelrodÂ’s classic “Tit-for-Tat” study). On the other hand, old-fashioned “armchair” economics has come up with results that are extremely surprising to most people until they learn economics: an increase in the money supply does not increase wealth but only produces price inflation, minimum wage laws destroy jobs, rent controls cause housing shortages, etc. (I know those points may seem obvious to everyone here, but go out on the street and talk to ordinary Americans and you’ll find lots of people blissfully ignorant of those basic facts of economics!)
I think the reason for that is that traditional economics does not base itself on psychology at all but rather on extremely “robust” assumptions that are almost certain to hold true independent of details of psychology.
Consider for example the “profit-maximizing” assumption. Taken in a strict monetary sense (it can be expanded into a broader sense of psychological “utility” of course), no one really thinks it is true. Rothbard and Mises were well-aware of this, and, indeed, Rothbard was openly contemptuous of people who thought that “utility” was some measurable quantity that could actually be observed: he stated repeatedly that “utility” was simply short-hand for the fact that people do order their choices, make decisions, etc. (He was also contemptuous of “indifference curves,” etc. – obviously, indifference curves are a fiction useful for giving final exams to undergraduates, and not much else! The “results” you get from indifference curves were already well-known long before anyone heard of indifference curves.)
However, even though many firms do not actually systematically, single-mindedly try to maximize profits, a firm that pays no attention to its profits will go under and will, metaphorically speaking, be removed from the gene pool. In the end, the firms that survive will behave in a way that is pretty close to traditional profit maximization.
Do you know of Ollie Williamson’s work in so-called neo-institutional economics? Fascinating stuff, lots of empirical examples, but, in the end, he applies the same-old traditional armchair logic-of-action analysis used by Rothbard and all the traditional economists. The same can be said of Gary Becker et al.’s extension of economics to everyday life (“Freakonomics” etc.) – one can argue about whether their empirical data has been properly interpreted but to argue about whether or not people make choices, whether those choices are influenced by incentives, etc. would be rather silly.
Incidentally, natural science often works just like Austrian economics (really, all economics). You know the Maxwell velocity distribution for molecules in a gas – Maxwell derived it completely a prior; I worked out a novel (completely a priori of course) derivation myself a few weeks ago. Of course, it has been empirically tested many times, but if a test claimed to disprove it, we physicists would disbelieve the experiment, not Maxwell. The assumptions behind the derivation are so simple, and the math so straightforward and solid, that for a “classical” gas, it is hard for any physicist to see how it could possibly fail to be true. Again, let me emphasize that this was true long before it was tested empirically.
Perhaps even a closer case is natural selection – once you know some very simple facts about Mendelian genetics and sexual reproduction, you just have to have natural selection. The application of natural selection to, say, industrial melanism can be debated in terms of empirical details, but the broad analytic points that we all know about changes in gene frequency vs. selection pressure are essentially a priori.
It is in exactly the same sense that Rothbard thought of economics as “a priori”: to him, the word “economics” referred to the analytical apparatus analogous to the analytical apparatus we all know in modern genetics. In both cases, to refer to that analytic apparatus as “a priori” seems not unreasonable. This of course is the reason Popper once claimed that evolution was not really science, since the underlying principles (once you have Mendelian genetics) are not subject to empirical refutation.
IÂ’m afraid that a lot of people who criticize the Austrians (and in fact all competent economists) for their a priorism are making the same mistake Popper made: theyÂ’re failing to look at the full structure of the whole discipline. Indeed, as I said, the same criticism could also be made of huge chunks of physics, such as statistical mechanics.
Empiricism is a false description of science – whether physics, biology, or economics.
Dave
John Emerson wrote:
>I’ll just post one of my beefs with libertarians: Hayek’s “The Road to Serfdom” was a prediction of sorts, and it didn’t happen. Maybe the bad stuff didn’t happen partly because of Hayek’s warnings, but it just plain didn’t happen.
Hayek actually said explicitly that this was what he hoped – he did not claim that it was inevitable, only that it would occur unless people chose to change direction. He hoped that the book would cause people to change their views and thereby falsify his own predictions.
Of course, with the Patriot Act, denial of habeas corpus, etc. perhaps it is too early to declare the patient fully recovered!
Dave
Jon Claerbot and geek1,
I fear that one of my deep character failings (see, Razib, I am honest with myself) is that I would much rather sit back and learn something interesting from some other bright fellow – Razib, Steve Sailer, Rothbard, etc. – than go to the trouble to teach something to others if I already understand it myself. I have various stuff lying around in physics and engineering that probably should be published – but, hey, why bother? Now that I understand it, it does not interest me. No doubt, this is one reason I have never functioned as an alpha male – indeed, on some occasions when I have been freely offered an alpha male position, I’ve turned it down: I’m just not interested in being a leader, being famous or admired, etc. (On the other hand, I do have couple of kids, so maybe my genes have a cunning all their own.)
Since I’m unlikely to ever do as you suggest, I will mention the key points here. I’ve already mentioned Keynes’ error, usually referred to as ignoring the Pigou/real-balance effect. To technical people, a clearer way of putting it is that he wrongly changed his units without seeing what he was doing – in the middle of his analysis, he switched from real units to monetary units without recognizing this. Had he stuck with one or the other, it would have worked (and he would have gotten results that were quite traditional). It’s the same error that kids make when they switch from feet to inches without multiplying by 12. The error is buried in a complicated discussion in a section of the “General Theory” that almost no one pays much attention to because it seems a pointless sideshow. Unfortunately, it’s not pointless, and it wrecks his whole system (and explains why Keynesianism failed disastrously in the US back in the ‘70s).
Keynes was actually a sort of pomo literary intellectual – a fascinating guy who had some interesting things to say about culture, etc. But his analytical skills were very weak. His literary skills bamboozled many of his fellow economists for quite a while, although some eventually started to escape from the spell. For example, John Hicks, one of the most prominent of the early Keynesians, actually wrote an interesting book in his later years explicitly extolling the Austrian theory of capital, investment, etc.!
The monetarist (basically Friedmanite) theory of the trade cycle is too a priori. It basically studies a make-believe economy in which monetary inflation is distributed uniformly throughout the economy, as via a helicopter that drops money across the country – hence, it is disparaged as the “helicopter model.” Incidentally, the current Fed Chairman is sometimes referred to as “Helicopter Ben” because he has publicly threatened to do just this to stimulate the economy!
Friedman applied this “toy model” to the experience of the US in the Great Depression, and it does in fact explain much of what happened after the ’29 Crash, though not the crash itself.
The Austrian theory, curiously, despite all the brouhaha over “a priorism,” is the most empirical of the three. The Austrians insist on rejecting the naïve helicopter model and following through the actual process by which the Fed injects new money into economy: new money first goes into the capital markets and from there diffuses through the economy at large. Initially, it therefore inflates prices in the capital markets (causing a capital boom) and only later causes price inflation in the economy as a whole.
You can show that the boom in the capital markets will subside once the money has diffused throughout the economy as a whole. The subsiding of the capital-market boom is what initiates the crisis.
This theory, incidentally, was worked out by Mises early in the twentieth century, well before the Â’29 Crash, which it so nicely explained. IÂ’ll leave it as an exercise for the student to look back at Fed monetary statistics and see how the theory explains the dot-com bust and the current subprime crisis.
The Fed can prolong the boom (and ultimately the crisis) by increasing its expansionary monetary policies – this seems to be what dear old Helicopter Ben plans to do.
One of the main points that Rothbard made is that the empirical details of how this works out are always different each time because of institutional changes, popular psychology, etc. He was fascinated by those historical, empirical differences, as shown by the fact that he published book-length studies of both the Â’29 Crash and the 1819 Panic. Of course, all of us have followed this pop psychology in the news for both the dot-com crash and the current subprime disaster. Interesting, isnÂ’t it?
Rothbard doubted (and I agree with him) that anyone can ever get an adequate theory that could fully explain these varying psychological details in the final playing out of the boom-bust process, but IÂ’m sure he would have been happy to be proved wrong. If anyone thinks you can do a better empirical job than Rothbard, do it! Tell us how the current crisis will play itself out in all its empirical details (before the fact, please, not afterwards).
Good luck!
Anyway, these are the highlights of my talk – all of the details can be filled in by going to fairly obvious sources.
I hope this does make it clear why I consider the Austrian school, at least in its Misesian/Rothbardian form, to be far and away the most “empirical’ school of economics of all and am always bemused by attacks against Rothbard in particular for being too “a prioir.” Rothbard was absolutely obsessed with learning empirical details about not only economic history, but, in my personal experience, even physics.
However, he was indeed unwilling to pursue what my own mentor, Richard Feynman, dubbed “cargo-cult science”: i.e., social science that was filled with complicated math that looked like physics (to anyone ignorant of physics) but had nothing to do with the real world.
I’m afraid that too many people who want “empirical” social science really want “cargo-cult” science.
Dave
Here is Bryan Caplan on Rothbard and Fridman’s take on the Great Depression. Here is a reply from his critics and here is a rejoinder.
The assumptions behind the derivation are so simple, and the math so straightforward and solid, that for a “classical” gas, it is hard for any physicist to see how it could possibly fail to be true. Again, let me emphasize that this was true long before it was tested empirically.
PD, i’ll try to engage with you in more detail later (time is finite, blah, blah, blah, trying to get linux drivers working on my dual boot right now….). but on this point, yes, totally correct. that’s why i reject any hard adherence to popperism or other sort of systematic theory of how science works. as i’ve asserted before: science is a culture. it’s wrong most of the time and only beats expectation over the long run. so yeah, scientists infer from the a priori, and they filter results through their presuppositions. but a kuhnian sociological treatment suggests that over time the priors shift in response to empirical results.
your reference to genetics is interesting. after all, i agree, a lot of it is a priori. that being said, two points
1) a minor point is that i trust mathematical formalism a lot more than verbal logic. i’m generally skeptical of chains of propositions from verbal analysis.
2) even though the grossest outlines of genetics are derivable a priori, stuff like debates about neutralism, selectionism, the different dynamics of population genetic parameters across taxa, show that you can’t really derive the structure from first principles as a matter of practicality. fisher, haldane and wright were very smart, but obviously there were reasons that they didn’t elucidate a theory of molecular neutralism before crow & kimura (i.e., they didn’t know as much about the nature of the substrate through which the dynamics operated, nor did they have access to empirical work such as lewontin and hubby’s which would make them recalibrate their presuppositions).
now, in the end, you surely know more about the history of economic thought than i. perhaps my whole critique is built upon misimpressions or a misunderstanding.
p.s. re: rothbard and consistency, what’s up with the accusation that he benefited from rent control?
Razib,
I assume he did benefit from rent control in the sense that he lived in New York for many years and therefore had a below-market rent. If you managed to get and hold on to a place in New York, you could benefit from rent control in that way (of course, maintenance would tend to suffer). I hasten to add that my empirical knowledge of New York rent control policies is meager and decades out of date.
I know you’re not a naïve positivist. I’m just trying to make the broad point that whether we are talking about Popper’s erroneous (and later retracted) criticisms of evolutionary theory or criticisms of Rothbard’s “a priorism,” you need to look beyond the soundbite version of methodology to see what is really going on.
Rothbard was actually a very empirical guy, though his research interests happened not to lie in the same direction as Becker’s or the behavioral economists’.
Years ago, I actually played around (naturally enough, since I’m a physicist) with putting the stuff in my response to Jon and geek1 into mathematics. You don’t really gain anything, although if I wanted to get it published in mainstream econ journals, it would probably help to impress the editors and reviewers (as Feynman said, “cargo-cult science”). If you know what you are doing, you can make all sorts of cool oscillations occur, for example, but, if you know what you are doing, you also realize you are really putting that in by hand by how you structure the model equations.
Incidentally, the same thing happens even in physics, where some math is of course really necessary. I’ve seen physics papers published in prestigious journals where the math is simply wrong, but complicated enough that the reviewers and editors did not catch it. An old friend of mine, now a tenured professor at one of the country’s top universities, actually released a preprint of this sort years ago – utter nonsense, due to a trivial algebra error. Fortunately, I caught it for him and it was never published. If he had simply described what he was doing in words, instead of fooling around with unnecessary algebra, it would have been clear to him and anyone else that it was nonsense and that he should never have bothered to write the paper.
Based on experiences like this in physics, I have formulated MillerÂ’s law: never use more mathematics in any paper or presentation than is absolutely necessary unless you wish to publicly make a fool of yourself.
All the best,
Dave
If he had simply described what he was doing in words, instead of fooling around with unnecessary algebra, it would have been clear to him and anyone else that it was nonsense and that he should never have bothered to write the paper.
i think there’s a trade off. in the short term, yes, math just obscures. but in the long term i think the problem with verbal arguments is quite often you don’t ever need to admit your wrong if you have the will. i’ll have to come up with the proper verbal analogy for what i’m trying to get at at some point…. ;-)
Razib wrote:
>i think there’s a trade off. in the short term, yes, math just obscures. but in the long term i think the problem with verbal arguments is quite often you don’t ever need to admit your wrong if you have the will.
Unfortunately, math doesn’t save you. I once saw a “ground-breaking” paper (it would have been if it had been right!) published in the top US physics journal in which the authors “proved” their conclusion by dividing by a quantity that is provably equal to zero.
YouÂ’re supposed to learn that this is a no-no in first year algebra.
I patiently wrote up a letter to the authors and the editor explaining this.
The authors sent a verbally abusive response back to me; the editors were too dumb or too busy to remember that you cannot divide by zero.
The paper eventually sank into the oblivion it so richly deserved.
Believe it or not, this is actually the norm in academic physics. When I was a doctoral student, my thesis advisor told me not to bother to read the journals.
I do of course agree that in physics and engineering, it is nonetheless nice to try to cross-check yourself however you can, and I do strive for multiple different derivations to check an answer when IÂ’m doing math. And, obviously, in much of physics and engineering, you simply have to use math: verbal arguments are sometimes simply not possible.
But I’d be hard-pressed to think of any place in econ where math helped, and I can think of a lot of places where it hurts. I’d be happy to see a counter-example, since I’m better at math than at words. (Of course, no one denies that you have to use statistics in econometrics, economic history, etc. I’m talking about “pure” theory.)
One of my blind spots in economics is rational-expectations theory: they use a lot of math, and it may actually be needed there. I donÂ’t yet know enough about that area to judge.
All the best,
Dave
TGGP,
I largely agree with Bryan’s comments on “America’s Great Depression”: to a large degree, they boil down to saying that Bryan (and I) would have written a somewhat different book. Specifically, I, like Bryan, would have given more attention to the effects of sticky wages combined with the contraction of the money supply – this is why, in my little essay above, I said that monetarism explains much of what happened after the Crash. As Bryan said, Rothbard did address this, but I would have given it more prominence than Rothbard did. Indeed, a lot of other issues were relevant too – the disastrous “beggar-my-neighbor” protectionist policies that wrecked the world trading system, cartelization of failing industries, etc. Rothbard did address some of these issues also.
I disagree with Bryan most strongly on the ability of entrepreneurs to predict the future actions of the monetary authority (the Fed) and the consequences of those actions. For one reason or another, anyone who reads the newspapers knows that they just donÂ’t do this.
Of course, why they don’t is an interesting question. Perhaps it has something to do with the institutional structures – golden parachutes for CEOs, federal deposit insurance, etc.
While I’ve been in the role of defending Rothbard here – he was a very bright guy, and I liked him personally – I hope it is clear that I am not saying that he is beyond criticism. I could list a long string of topics on which I disagreed with him, ranging from Giffen goods to the philosophical status of natural law. But that only proves that either Rothbard or I was wrong sometimes, which is hardly news to anyone, given that he and I were both human.
Dave
PhysicistDave said: I’ll leave it as an exercise for the student to look back at Fed monetary statistics and see how the theory explains the dot-com bust and the current subprime crisis.
I don’t know much about Austrian theory, but are you saying that the Fed’s actions caused the dotcom bubble? Having lived through it, I saw plenty of irrational herding behavior in myself and the people around me – I find it hard to believe that Netscape going to 75 the first day was ultimately caused by anything the Fed did.
I find real business cycle theories hard to swallow for a different reason – basically, the RBC people don’t think there is a cycle at all, just changes in productivity. So booms must have been caused by some increase in productivity (e.g. a new technological discovery) while busts must be due to a “negative” technology shock – but I haven’t seen many convincing examples of just what such a thing might be.
Well, I’ve never been sympathetic to libertarianism, so maybe my impression is wrong:
Libertarians have always struck me as among the more intelligent and able people, who know they can make it in this world on their own. For that very reason resent the idea that they should support others who cannot, by being forced to pay taxes by the state, ie, by the welfare state.
This is just the opposite of Rawl’s idea of the veil of ignorance: that we should prefer that society in which we did not know into which social class, or with what innate intelligence, talent, education, etc., we might be born.
In short, libertarians are like poker players who want to set the stakes after they have had a peek at their hand.
Is this unfair?
I’d like to point out that the Austrian school isn’t limited to Von Mises, Hayek and Rothbard. Schumpeter, of “Creative Destruction”, should be added to that list. And Schumpeter was a real bon vivant, certainly no social retard. Of course, he wasn’t anywhere as dogmatic as Von Mises.
I’d also like to point out that Hayek was originally attracted to biology, where as I would guess ( but do not know ) that Von Mises was something of a mathematician, given that his brother was a rather famous one.
Finally, PhysicistDave’s original post was spot on.
If Razib is looking for sociological data, I have degrees in math and computer science and finance, worked on the CME for a number of years, and consider myself a conservative with libertarian leanings, though preferring Hayek or the Chicago school to Von Mises.
Perhaps I’m missing something in your argument, but… I get the impression you’re trying to argue against Libertarianism. But what I read in your post is an argument against Austrian economics.
Libertarianism and Austrian economics are not the same thing.
It seems like a straw man argument.
(Again forgive me if I’ve misunderstood your argument.)
It’s true that there’s a feel that some libertarians are fans of Austrian economics. But that doesn’t make them the same thing.
I’ve heard a number of libertarians profess to be atheists. But that doesn’t make Libertarianism and Atheism the same thing.
ChicagoCatholic,
Schumpeter was certainly an economist from Austria; heÂ’s usually not listed as a core member of the Austrian school, though I think it is at least fair to say he had affinities for the Austrian school. His research interests were significantly different.
I donÂ’t think L. von Mises was a mathematician, and in fact I understand he and his famous brother Richard had an intellectual dispute about the nature of probability. RothbardÂ’s bachelorÂ’s was in math, which disproves the often proposed theory that he opposed an excess of math in economics because he could not handle the math: on the contrary, like me, he knew enough math to see when it was merely being used to impress the rubes and not to serve any legitimate purpose.
Hayek of course was indisputably a member of the Austrian school, but with different perspectives on philosophical issues from either Mises or Rothbard (although on economics, they were very close): the Austrian school was not monolithic. Unlike Mises and Rothbard, Hayek was quite interested in psychology and actually wrote a book on the subject.
Incidentally, there are actually some pomo-hermeneutic Austrians floating around the academic world whom Rothbard viewed with horror. And the original link that Razib provided in the post that started this thread is to Rod Long, a “left-libertarian” professor of philosophy who believes he can combine Wittgenstein (also an Austrian by birth) with the Austrian economists. I’m a bit skeptical, though Rod is a very bright guy with whom I’ve had some interactions (only on the Web) and whom I like personally.
Milton Friedman, the most prominent member of the Chicago school, once commented that there was not Chicago economics or Austrian economics but only good economics and bad economics: he made clear that he was not trying to claim that one school of thought had a monopoly on good economics. While I lean towards the Austrians, I actually agree with FriedmanÂ’s point: good work is good work, no matter where it comes from. IÂ’ve learned some things from MiltonÂ’s son David, who is, curiously, a physicist turned economist, even though David Friedman is, not surprisingly, a Chicagoite.
Dave
I’d like to point out that the Austrian school isn’t limited to Von Mises, Hayek and Rothbard. Schumpeter, of “Creative Destruction”, should be added to that list. And Schumpeter was a real bon vivant, certainly no social retard. Of course, he wasn’t anywhere as dogmatic as Von Mises.
right, that’s why i made a distinction between hayek & mises in the original post. my main beef is actually with praxeology.
Perhaps I’m missing something in your argument, but… I get the impression you’re trying to argue against Libertarianism. But what I read in your post is an argument against Austrian economics.
your impression is wrong. if i was going to make a brief against libertarianism i would have made it. my personal sentiment is toward libertarianism though my political beliefs are rather attenuated and not of great concern to me at this point.
Luke,
You wrote:
>Libertarians have always struck me as among the more intelligent and able people, who know they can make it in this world on their own.
>[snip]
>Is this unfair?
It depends on which libertarian you are talking about, of course.
Speaking for myself, I certainly never viewed myself as a Nietzschean Ãœbermensch who would rise to the top if only we could rid ourselves of government.
As a child, I had a congenital vision impairment that caused me to be “legally blind” (20/200 vision with glasses). I was in a regular classroom, and it was therefore quite difficult for me to function. (My vision is somewhat better as an adult, by the way.)
I was attracted to libertarian ideas because I thought that a libertarian society would allow more space and freedom for people who were different in some ways – whether they had different tastes or values or whether, like me, they had a physical disability.
So, I suppose I come to libertarianism from a rather “Rawlsian” perspective, in your terms: I’ve always thought that the super-able, ruthless, alpha-males types will make it under any social system – they certainly seemed to do alright by themselves under Soviet Communism, for example. I thought those of us who were disabled in some way, or who did not “fit in” for whatever reason, would do better under libertarianism.
IÂ’ve also always basically held the ev-psych view of government IÂ’ve mentioned before: government is a tool for the predatory alpha males and their allies to exploit the rest of us. The more I watch contemporary politics, learn about history, and watch my fellow human beings, the more I suspect that this is indeed true.
Incidentally, I think that the truth of this perspective indicates one of the biggest hurdles that libertarianism faces: because a libertarian society would not be to the advantage of the dominant elites, they are likely to do whatever they can to block its emergence. You donÂ’t see many rich businessmen among libertarians, and the voting data shows that Ron PaulÂ’s voters are comparatively poor (they are also comparatively youthful, which partly explains their relative poverty).
Since the predatory elites run the show in our society, they can be pretty effective in blocking any move to dismantle the structures of privilege and create a libertarian society. On the other hand, all ruling elites ultimately rule through the manipulation of popular culture and opinion, and IÂ’m hoping that the Web can break the elite monopoly on managing opinion.
If the broader populace can be brought to reject the worship of the state and its symbols (the Pledge of Allegiance, the idolatry of dead Presidents such as Lincoln, the reverence for militarism, the worship of the flag, etc.), I think the power of the elite can be broken and the populace can establish a free society without a powerful predatory elite (i.e., government). This is part of the reason for my interest in cultural anthropology.
Did I mention that I have a bit of an optimistic streak?
Dave
tc wrote to me:
>I don’t know much about Austrian theory, but are you saying that the Fed’s actions caused the dotcom bubble? Having lived through it, I saw plenty of irrational herding behavior in myself and the people around meÂ…
Perhaps I’d use the word “enabled” rather than “caused.”
One should never underestimate the power of human irrationality, herd mentality, etc. Social affairs are multi-causal. But if you already have, as the Chairman said, “irrational exuberance,” it does not help for the monetary authority to provide a congenial monetary environment that makes it easier for the capital markets to go nuts.
Your point is the one that I was making and that the Austrian economists have repeatedly made. Every boom is different in its details, psychological features, etc. – the Great Boom of the ‘20s was different from the “Nifty Fifty” of the ‘60s which was different from the dot com boom which differs from the current subprime crisis.
Human psychology and culture are so complex that I doubt that anyone will ever come up with a unifying theory that applies in great quantitative detail to each and every speculative boom.
But there does tend to be a commonality among the booms of an expansionist monetary policy on the part of the monetary authority (for the US, the Fed). While that is certainly not the sole cause of irrational speculation, it does fuel the fever and allows the booms to be sustained longer, and therefore ultimately causes more damage when the inevitable bust occurs.
Incidentally, as long as we have a fiat money system “managed” by a central bank that is ultimately responsible to a democratic political system, this unfortunate “accommodation” of irrational behavior is probably inevitable. Greenspan wrote about this years before he became the Chairman (and people who knew him personally said he continued to acknowledge it privately even while Chairman), but if he had acted according to his convictions, he would have lost his job.
Chairman Al really liked his job.
Dave
I consider myself to be a libertarian. Milton Friedman appeals to me. I have never studied economics. I tried to read Human Action but quit in disgust after an hour of browsing. I felt the same way as I did when reading Marx: this was nothing more than revealed secular scripture. The cult of Ludwig von Mises scares me.
Nobody would write a treatise on the sexual preferences of fruit flies without ample experimental data on how flies choose mates and copulate. Economics is just human behavior, and to correctly characterize human behavior, one must analyze real behavioral data collected on real human animals.
ChairmanK,
I take it you’re not a scientist (e.g., a physicist like me)? If you were, you’d know that the naive positivism you espouse has not worked historically in the natural sciences, as Razib and I discussed earlier in this thread.
And, as also was discussed earlier, most of Friedman’s theoretical work (e.g., the “quantity theory”) was also essentially a priori, like almost all economists (including Keynes, Ricardo, Smith, etc.). I know of no significant results in the history of economics that were arrived at through the sort of positivistic approach you suggest.
Of course, maybe I missed something — I’d be happy to hear your examples if you have any.
Every now and them some ignoramus makes the suggestion that mathematicians too should stop their silly a priori theorizing and simply use the experimental method like all sensible people do. This sort of person could not understand a need to prove Fermat’s Last Theorem given the huge number of examples that had been shown empirically to satisfy the theorem.
I think it is fair to say that no one who understands mathematics makes such suggestions.
And I also think it is fair to say that no one with a decent understanding of economics would make the suggestion you have made.
But I am open-minded on issues of methodology. Prove me wrong.
IÂ’ve listed earlier on this thread various well-established, interesting results in economics arrived at through the traditional non-positivist methods of economics.
Now, itÂ’s your turn. Tell us of all the wonderful, solid, interesting results arrived at through the positivist approach. you advocate.
Go for it.
Give us your best shot.
I’m actually hoping you come up with something – I like learning new things.
Oops… I just noticed that you wrote, “I have never studied economics.”
Oh, wellÂ…
Dave
Mathematicians do use the scientific method. Their experiments apply to concepts.
Dave,
I like Milton Friedman as a matter of ideological preference (Free to Choose). I can’t judge for myself whether he was correct about economics, so I trust on the basis of reputation.
I study neuroscience. I am accustomed to working with mountains of data and little theory. I believe that I can gain astonishing insights into how animals process information, simply by looking at patterns in the experimental data. I use mathematics to do this, but the mathematics alone do not give me any useful results.
I agree with you that a priori reasoning is an essential part of science. I appreciate your example of the Darwinian theory of natural selection, which I believe must be trivially true, even though the direct experimental evidence is not overwhelming. Likewise, I believe that economists have deep reasons for believing the non-empirical explanatory theories that they invoke. Simple, elegant theories help us to understand real data.
But Misesian praxeology is not a simple, elegant theory which helps us to understand the data; it is a total system of thought which is so unwieldy that it must be explained in a huge treatise. (Contrast to Darwinian theory, which can be summarized with three simple statements.) Like Freud, von Misees relied on anecdotes and thought-experiments to construct his model of human decision-making. This model is violently inconsistent with the model of human decision-making that we obtain from cognitive neuroscience or psychophysics.
An interesting conversation which I’m afraid I arrived at late!
razib, if there is one book that will make you change your mind: it is Rothbard’s Man, Economy, and State. The only way to judge AE is to actually work through it. It is not hard. It is actually much simpler than the mathematical models that have entranced you. And it makes better predictions. (Checked the news today?) Sometimes simple is good.
Dave, let me tell you what people told me when I showed up here and started posting quasi-essays in the comments section: get your own blog! I hear it’s free…
Let me try to explain the relationship between psychology and praxeology. Razib, chairmanK, both you guys program, n’est ce pas? You are familiar with the word “orthogonal”? In that case, the answer is simple: praxeology is orthogonal to psychology. They do not conflict any more than TCP conflicts with IP.
When Misesians think praxeologically, they abstract over psychology. They try to derive principles which apply to systems of subjectively motivated agents whatever their desires may be. Praxeological conclusions, at least if they are right, are independent of psychology.
Do you think that no such conclusion can be drawn? Here is a simple example. Try and refute it.
A basic principle of praxeology is that an option cannot have negative subjective value. That is, a subjectively motivated agent, whatever its motivation, whether it is a human or a little green alien, cannot rationally prefer a position in which it has more options to a position in which it has less.
If you can go to the mall or play chess, your life is better than if you can only play chess. “But wait,” you say. “What about the psychological stress of making a decision? Isn’t that a cost? Doesn’t it factor into my utility curve?”
(There is no such thing as a utility or indifference curve. The entire trope illustrates the abominable 20C habit of talking about undefinable, immeasurable and unquantifiable concepts as though they were definable, measurable and quantifiable. Hello, cargo cult science. Or more precisely, cargo cult empiricism.)
But actually, Austrians have not missed the psychological burden of an option at all. They merely insist that you include it in the problem statement. If you subjectively prefer to be relieved of the decision of whether to go to the mall or play chess, that relief is a good, and when you set up your problem without it and then later tried to shoehorn it in, you erred.
The fascinating thing about Austrian economics, then, is that it is absolutely independent of human psychology. The Austrian theory of the business cycle may be correct or incorrect – you can check it for yourself, just as you can check any proof. It is not a hypothesis, it is a deductive construct. (I am not endorsing all the conclusions of the Mises-Rothbard school – in fact, I think some of them could use a little updating.)
But if the derivation of the ABCT is correct, it works just as well for the nine-armed octopi in the Large Magellanic Cloud as well as for humans here on earth. If AE in general is correct, monetary policy is the same thing for the octopi. Term transformation will not work any better for them than it works for us. Und so weiter.
From a broader standpoint, I think Popperian science occupies too large a place in your epistemology. “Science” has come to mean two distinct things: any procedure for arriving at highly reliable knowledge, and one specific procedure for arriving at highly reliable knowledge. The latter is constantly threatening to crowd out the former, generating the well-known lamppost effect.
Perhaps if we call the former “reason” and the latter “science,” we could say that (Popperian) science is a valid epistemology because reason can deduce – aprioristically – that it should be so. The scientific method itself, for example, would be valid even if no science had ever been done. It is not at all the product of empirical analysis.
In other words, it is not that reason works because reason is scientific. It is that science works because science is reasonable. But this – as Dave points out – doesn’t prevent other things from being reasonable. Socrates is not a cat, or even a Kat.
In case it isn’t obvious, I should also mention why Austrians prefer to apply praxeology than the scientific method to economics.
The reason is that it is impractical to apply the scientific method to economics, because people are not fruit flies and do not fit in a Petri dish. “Empirical” is a telling word. What it means is “we don’t have the budget to perform an actual controlled experiment.”
If you could perform significant controlled experiments on human societies, this would be another path to the conclusions that praxeology produces. You cannot. But you can certainly pretend to. You can certainly treat uncontrolled correlations as evidence that some real mechanism exists which matches your model. (Can you say “Phillips curve,” boys and girls?) If this isn’t what Feynman meant by cargo cult science, well, um, it should have been.
ChairmanK,
You wrote:
>But Misesian praxeology is not a simple, elegant theory which helps us to understand the data; it is a total system of thought which is so unwieldy that it must be explained in a huge treatise.
It really would help in conversing with you if you would talk about things you have actually read rather than things you have not read!
First of all, “Human Action” is about economics not about “praxeology” in some broader sense; Mises did seem to have some vague concept of a larger discipline of praxeology of which economics would only be one part, but, to the best of my knowledge, he never worked this out. I actually think what he had in mind was “the economics of everyday life” as worked out by some of Friedman’s colleagues such as Gary Becker – so the best “praxeologists” may actually be some Chicagoites!
Second, it is not a “total system of thought”: Mises wrote very little, for example, about systematic ethics, political philosophy, etc., and I disagree with much of what he did write on those subjects (his student Rothbard did write extensively on those subjects, but Rothbard disagreed with Mises).
Third, big subjects take big books – I’m currently reading an introductory text on neuroscience (Bear, et al.): it may be even huger than “Human Action.” You would not count that as a strike against neuroscience, now would you?
Incidentally, you are in the right field – neuroscience is the science of the twenty-first century. It will be to this century what quantum physics and molecular biology were to the last century.
Treatises in economics – and even college textbooks – are traditionally huge; lots of stuff to cover.
Fourth, one reason that “Human Action” is so big is that Mises has a lot of side discussions about empirical stuff, intellectual controversies in the field, etc. You may not like that, but that just means you would have written a different book.
Fifth, as I have tried to explain above, the correct term for MisesÂ’ approach (and really all economic theorists’ historically) would be “deduction from well-established, broadly robust empirical facts.” Unfortunately, that does not have the zing of “a priorism,” but it does capture more accurately what Mises (and all economic theorists) actually did. Rothbard did make this point explicitly to try to correct misconceptions due to MisesÂ’ use of the term “a priorism,” but, as this lengthy thread so well demonstrates, Rothbard did not do an adequate job of getting the word out.
Your own field of neuroscience is a very young science, and therefore it is not surprising that you are dealing with mounds of data.
But the goal of science is indeed “deduction from well-established, broadly robust empirical facts.”
More mature sciences, such as economics and some parts of physics, have actually achieved this.
As I mentioned above, statistical mechanics may come closest to economics in this respect. Given some extremely broad principles – basically conservation of energy and a weak form of time reversal invariance – you can deduce statistical mechanics quite rigorously. (If any mathematician is lurking, yes, I know you also need some form of ergodicidty, but I also know it is hard to avoid ergodicity in any sort of realistic system. I’m using “rigorous” as natural scientists use the term, not mathematicians.)
To the best of my knowledge, no competent physicist has ever though it necessary to empirically check statistical mechanics: we use it all the time, but if some experimentalist claims to have experimentally disproven the Maxwell-Boltzmann distribution, we would just chuckle, pat him on the head, and recommend psychiatric treatment.
We cannot yet do this in all fields of physics, but the goal of physics is to be like economics.
It is indeed true that if you can find a community of humans all of whom would much rather pay higher prices than lower prices for everything that they buy, then that will wreak havoc with the law of supply and demand. But, as long as most people, other things being equal, usually prefer a low price over a high price, the law of supply and demand will stand. And, if an experimental economist claimed to ‘disprove” the law of supply and demand, economists would quite appropriately think he was more than a little incompetent.
To take another example from physics, are you old enough to remember the “cold fusion” brouhaha? When it came out, my cousin, who is a banker, asked me if it was legit. I told him that almost certainly the claimed experimental results were either fraud, or, more likely, incompetence.
Almost all physicists said the same thing before any experimental checking had been done. We were of course correct.
Yes, economics, like any empirical study is not and cannot be strictly “a priori.” But, for practical purposes, like many areas of physics, it is. Again, a more accurate description would be “deduction from well-established, broadly robust empirical facts” rather than “a priorism,” but in practical terms, most people would call my behavior as a physicist in the cold fusion case or in statistical mechanics “a priori,” even though strictly speaking it is “deduction from well-established, broadly robust empirical facts.”
Someday, we can all hope, neuroscience will reach the same level of maturity already attained by economics and some areas of physics.
I have made some of these points earlier in this thread, but you do not seem to have read or understood them: I hope this does make them clear.
If you feel that Mises was wrong about the practicability of socialism or the fact that minimum wage laws cost jobs or whatever, by all means let us know your reasons for thinking that.
But to attack Mises, when you have not actually read him yourself, on the basis of vague inaccurate soundbites you have picked up somewhere does not make sense.
As I’ve said, I myself disagree with Mises on numerous points – ethics, political philosophy, epistemology, etc. But when I express those disagreements, I do try to address what Mises actually said, not what I think someone somewhere may have tried to imply that he said.
Dave
Mencius,
I think what Feynmann meant by “cargo-cult science” was specifically loading up on mathematical mumbo-jumbo without any actual empirical basis for the math but just to impress people with how “scientific” you were. I know he was especially disdainful of SamuelsonÂ’s “Foundations of Economic Analysis,” which he reportedly read cover to cover (unlike some people here who are criticizing Mises without having read “Human Action”!).
I never talked with Feynmann about this in detail, although I did know him well. (However, I actually did hear his original speech about this in person.)
Incidentally, Feynmann had the same attitude towards physics – he thought that one clear concept was worth a hundred pages of math. He had a true gift for seeing through the math to the underlying physics (hence, “Feynmann diagrams”). I aspire to the same, but then I’m no Feynmann.
I do think it is fair to expand the phrase “cargo-cult science” to describe all sorts of silly “physics envy” in the social sciences, most especially when that physics envy exhibits a woeful lack of understanding of the actual procedures of physics itself!
I hope it is clear from all this discussion that I do not deny the possibility that either advanced math or detailed empirical studies may someday produce some important results in economics. I just do not know of any historically. Of course, as I have emphasized, Mises’ foremost student, Rothbard, acknowledged that broad well-established empirical facts were indeed at the foundation of economics, and Rothbard, who after all, unlike most of his critics and most “mathematical” economists, actually had a degree in mathematics, also did use some math in his presentation (e.g., in the classic Austrian textbook, “Man, Economy, and State”).
But Rothbard, perhaps because he actually did know mathematics, also did try to obey what we might call “Feynmann’s principle”: use no more math than necessary.
Dave
Mencius says: A basic principle of praxeology is that an option cannot have negative subjective value. That is, a subjectively motivated agent, whatever its motivation, whether it is a human or a little green alien, cannot rationally prefer a position in which it has more options to a position in which it has less.
This doesn’t sound any different from what is taught in mainstream decision theory, except they use fancy mathematical notation to do it. Utilities and indifference curves are derived (given some additional assumptions e.g. continuity) from there, but I don’t see what would be a deal-breaker in neoclassical economics (again, I don’t know much about Austrian theory).
Schumpeter started out as part of the Austrian school, but later declared that Walras was the greatest of economists. Other Austrians not part of the Mises-Rothbard line are Kirzner and Lachmann (the latter of which influenced Don Lavoie and the Austrian-hermeneuticians).
I’ve heard that Bartley (who also worked with and possibly ghostwrote for Hayek) greatly improved on Popper. I’ve also heard that Popper’s “Open Society and It’s Enemies” is a massive beast whose end-notes are longer than the actual text, so I might read “Retreat to Commitment” before that.
I thought Roderick Long was mostly interested in combining Aristotle with the Austrians.
Friedman also started out as a mathematician before switching to economics.
I almost forgot to post this critique of Mises on probability by E.T Jaynes: http://bayes.wustl.edu/etj/articles/well.pdf
Different Mises – that was Ludwig’s brother, Richard.
Dave,
In Human Action, Ludwig von Mises proclaims a “correct” praxeological understanding of
time
probability
information
teleology
pleasure
money
taxation
war
education
the welfare state
the gold standard
democracy
etc.
Blah blah blah. Yawn. This is not science. Ludwig von Mises is just another wanker with a grandiose worldview, like Aristotle, Kant, Marx, Freud, etc.
I’m surprised that you think that economics (at its current state) is comparable in maturity to physics. As I admitted before, I have never studied economics, but I am comfortable with statistical mechanics. (Much of neuroscience is, effectively, the statistical mechanics of squishy computational units.) My understanding is that most economists still haven’t fully adopted the methods of statistical mechanics. Isn’t this what econophysics is all about? I would be perfectly to read a textbook on the statistical mechanics of money. This is not what Mises delivers, though.
tc,
No, it’s not really different, and the assumption of continuity (contra Rothbard) is unimportant.
The problem with treating “indifference curves” as mathematical constructs is that it creates a false impression of precision. Nor is this a side effect; it may well be the reason that the exercise exists. As a glance at Keynes will satisfy you, even very simple math can be spun into a web of obfuscation that effectively conceals many kinds of invalid assumptions.
The goal of AE is to explain the recurrent patterns of behavior that we see over and over again in networks of independently motivated, intelligent individuals. The product of this exercise is verbal by definition. If you try to achieve it with the mathematical techniques of Marshall and his heirs, what you get is a string of formulas, plus a press release explaining it in English.
The former is rigorously derived, but its assumptions are extremely hard to corral, collate and check. The latter is (typically) incredibly sloppy and ill-reasoned, and derives its authority from the former in classic papal style.
The Austrians, like the economists of all centuries but the last, prefer to take both in one step. Thus their work is far more open to criticism and debate – the adversarial process that actually makes the “scientific method” work.
Did your training in mathematical economics convince you that maturity transformation is a normal, healthy part of a stable financial system? Try my Austrian-lite explanation of the problem, which I think any intelligent person can read. Though it helps if they understand division.
Probably the most important product of the Austrian edifice is not the ABCT, but simply the conclusion that any quantity of money is adequate – there is no need for the money supply to expand “to meet the needs of trade.”
This can be explained simply without any math:
Demand for currency is indirect – it is motivated not by the monetary commodity itself (gold, engraved green paper, Yap stones, etc), but by the goods the commodity can be exchanged for. [This is not completely true under a gold standard, because gold has direct uses, but even under a gold standard most demand for gold is indirect.]
Thus, as Hume pointed out, currency can be redenominated neutrally – adding or subtracting zeroes, or multiplying by any other value – as long as the change is uniform, it affects all those who hold or owe the currency equally. For example, contracts must be redenominated as well.
Thus, we can define all balances of a currency as fractions of the total quantity extant. If that quantity is fixed, the fractional and traditional notations are identical. If that quantity changes uniformly, the traditional representation changes and the fractional representation does not.
In the fractional representation, however, nonuniform creation of new currency is equivalent to a transfer of money from those who did not get the new currency, to those who did. Ie, illegal counterfeiting is theft. Legal monetary creation is taxation.
The punch line is that we have no reason at all to believe that healthy trade and industry depend on involuntary transfers. So we have no reason to believe, with Friedman, that the money supply must expand to match “economic growth.”
Of course this observation, which as you can see has nothing to do with psychology, was known not only to Hume, but to all 19C economists. (I believe the first at least in modern times to observe it was Cantillon.) It is also basically obvious. But if today’s neoclassical economists understand it, they keep that very, very quiet.
There is a reason for this, which is that the relationship between 20C economics and the 20C state is unusually close. The former sees its primary role as suggesting policy choices to the latter. Thus some friendliness is to be expected.
The monetary models that the likes of Keynes and Fisher produced, which of course were vastly less sophisticated than what PhDs today turn out, were primarily designed to obscure this rather obvious fact. Ie, they allowed state and quasistate institutions to engage in behavior which in the past had been conceived as prima facie evidence of official malfeasance (debasing and coin clipping), and present it as the latest, greatest science, an update of the old “orthodox” fuddy-duddy conventional wisdom.
To hear the products of this tradition describe the gold standard as “crank” economics is sort of like being in the Louvre when a crazy homeless person pulls down his pants, craps in his hand, and rubs it all over the Mona Lisa, while museum security and a roomful of tourists applaud. I don’t believe that any further empirical evidence is required to distrust mathematical economics. Your mileage, of course, may vary.
tc wrote:
>This doesn’t sound any different from what is taught in mainstream decision theory, except they use fancy mathematical notation to do it. Utilities and indifference curves are derived (given some additional assumptions e.g. continuity) from there, but I don’t see what would be a deal-breaker in neoclassical economics (again, I don’t know much about Austrian theory).
Can you suggest a good intro text on decision theory for someone who knows a good deal of economics? I had a number of friends at Stanford who were heavily into decision theory, so I picked up bits and pieces (and figured out that to a significant degree it was just applied “praxeology”!).
But IÂ’ve never actually studied it systematically, and IÂ’m curious about it.
Your broader point is basically what IÂ’ve been hammering away at trying to make.
Austrian economists are basically economists.
They have a more clear-headed and honest view of what economic theorists actually do (as I’ve said, “deduction from well-established, broadly robust empirical facts”). When many economists were naïve about the possibility of actually functioning socialism, the Austrians pointed out the truth (which now everyone knows, of course). Austrians were generally less naïve about government interventions and about the whole-hearted altruism of government functionaries.
Austrians specialized in the area of the time aspect of production – interest, investment, time preference, etc. – and did some really ground-breaking work there which has now been somewhat integrated into the profession at large (as I mentioned earlier, one of the last books by the early Keynesian John Hicks was an interesting Austrian book on the economics of time, interest, and capital – old economists can indeed learn new tricks).
Austrians were interested in issues of risk and uncertainty before that became all the rage, and I think their insights are still superior – for example, no competent Austrian would have trusted the Black-Scholes equation as naively as did the folks who ran Long Term Capital Management!
Austrians have produced a clearer analysis of ‘cost’ than was oft used in the field. And Austrians have always focused on the self-organizing properties of the economy, the diffusion of information through the economy, etc.
In all of these respects, I think they were ahead of the rest of the field. But, in the end, all of this is not really “Austrian economics,” but just plain old economics.
There are smart, insightful economists who are not Austrians. I have already mentioned a Keynesain (Hicks) who late in his life learned from the Austrians. Some members of the public-choice school (e.g., Jim Buchanan) have also made clear their debts to the Austrians, etc.
There is really just one field of economics. The Austrians have contributed to that field well out of proportion to their numbers.
But, in the end, Milton Friedman was right: there is really only good economics and bad economics – all other distinctions are ultimately irrelevant.
Dave
Ch. K.,
Your alternative is not Mises or nothing. It is Mises or Keynes or Fisher. If you’re looking for “wankers,” you don’t have to look far!
Forget about Mises. His stuff is not right for you. Try Rothbard’s treatise, which has minimal philosophical “wankage.”
Dave,
I’m afraid you have Hicks’s career path backwards – he was an Austrian (a Hayekian at LSE) before he was a Keynesian.
The number of students or grand-students of Mises who wound up defecting to the neoclassical camp is quite impressive. This is either a sign that Mises was on crack, or that the professional rewards of defection were considerable. Or, of course, both.
Haha, I never claimed that Keynes wasn’t a wanker!
Thanks for pointing me to the Rothbard text. I’ve only browsed a few pages, but already I like it more than Human Action.
Razib,
I believe you’re thinking of Nozick, not Rothbard, wrt rent control.
I disagree with the comments above about Mises’ writing and psychology. Early on, he makes it clear that he thinks psychology, the study of why people choose their ends, is very different from praxeology, which applies without care for what those ends are.
The whole praxeology – neo-classical economics divide is overblown. Praxeology is simply the most skeptical method of microeconomics. Consider Bill Gates vs Mother Theresa. The skeptic would point out that though Gates is ‘selfish’, Mother Theresa is selfless and does not fit the standard homo economicus model.
But both Gates and MT fit praxeology: both take actions to achieve their ends, however different those ends might be. “Duh!” says the skeptic, “So what? Haven’t you merely stated a tautology?” But that’s the nature of praxeology. It assumes very little. It tries to see how much we can conclude before adding any simplifying assumptions. Some conclusions:
* Exchange occurs with the expectation of mutual benefit
* Saving has to occur before borrowing
* Two people should perform tasks at which they’re both relatively less worse than each other to maximize the efficiency of those tasks.
* Prices are required for economic planning.
* Etc
Once we have exhausted our efforts, squeezed every drop of wisdom out of praxeology, we can add more simplifying assumptions. Neo-classical economics adds the assumption that people are selfish. Though there are some Mother Theresa’s out there, most people are like Bill Gates. More conclusions can now be drawn, such as “A society based on selflessness won’t last unless there’s an extremely powerful ruler.”
Add another layer on top with the assumption that individuals in govt as just as selfish as individuals in the private sector and the result is public-choice economics. More conclusions can now be drawn, such as “Trying to correct unacceptably selfish behavior of individuals in the market by individuals in the govt isn’t likely to succeed.”
You can keep adding layers with more assumptions, such as, “Humans may be self-interested, but they’re also status-seeking” and you get into behavioral economics. You can then make conclusions about why people often turn down absolute gains in wealth (at the expense of relative loss of status), and why people might go to war.
More layers mean more chance of error. Fewer layers mean less chance of error but also less power to conclude anything meaningful. All along the way, at each layer, there are empiricists working to prove/disprove whatever conclusions are reached. Once a conclusion is falsified, the assumptions are re-examined and modified.
Praxeology is the very bottom layer of this organic system. It’s the foundation of economics. Despite what some may claim, other economics labels aren’t contradictory to praxeology. Rather, they’re merely layers on top of it based on various simplifying assumptions. It’s part of the culture of the science of economics.
ChairmanK,
It is a bit difficult to carry on a discussion with you when you insist on making dogmatic and derisive comments about a book that, you keep reminding us, you have never read and about an intellectual discipline that, you keep reminding us, you have never studied.
If you have never read “Human Action,” could you tell us where you got the misinformation about the book that you just posted? Did you cut-and-paste it from some anti-Semitic Website that has a thing about Jewish economists such as Rothbard and Mises… or what? Tell us where you’re getting your misinformation from and maybe we can help clear up your confusion.
IÂ’ve recently been having some on-line discussions with various creationists. They will make some outrageous statement about some field I know well, such as information theory, a current obsession of the creationists (I hold several patents in the area). I will patiently point out their errors and try to explain what is correct.
Their response, quite invariably, is either personal abuse against me or, more often, an insistence that I have to prove to them in the thread in which we are participating all of the basic assertions of information theory. If I decline to do so, which of course would require writing a textbook on information theory in the comments section of somebody else’s blog (I could do this – except I don’t have the time and I doubt the blog-owner would appreciate it!), they claim that they have proved creationism and that I have admitted defeat.
You appear to be doing the same thing. If you read through this thread, you will notice that I have presented a great deal of information about Austrian economics. You have not specifically challenged any of that information – how could you, since, as you keep reminding us, you know nothing about Austrian economics or, indeed, economics in general?
Yet, you keep coming back with dogmatic, derisory, and, as you keep reminding us, literally ignorant remarks to which you seem to expect some serious response.
Do you see why this seems just a bit unreasonable?
If I have time, I may choose to reply to one or two of your most recent questions, just for the sake of general interest.
But with all due respect, conversing with you seems to be pointless for reasons of which you yourself keep reminding us – you have never studied economics and you have never read the book you are obsessed with, “Human Action.” Might I suggest that you either bite the bullet and actually read the book or somehow figure out how to rid yourself of your obsession with the book.
Maybe you can explain to us exactly why you are so obsessed with Austrian economics even though you know nothing about it and have no desire to learn anything about it, and then, perhaps we can help you.
You know, you really need not give another moment of your life to obsessing over Mises or “Human Action.”
Sincerely,
Dave
Mencius,
Hicks did write the Austrian book I mentioned very late in his career (I’ll dig up the title if you’re interested) – perhaps he was returning to his roots.
Dave
ChairmanK wrote:
> Thanks for pointing me to the Rothbard text. I’ve only browsed a few pages, but already I like it more than Human Action.
So, perhaps itÂ’s all just a matter of taste!
For the record, I also like RothbardÂ’s writing style much more than MisesÂ’ style. Rothbard tended to get along great with scientists and engineers. Perhaps his degree in math made his style more congenial to technical people.
Now, if you actually read Rothbard and can’t find some things to complain about, you’re not reading carefully. All of these guys made mistakes – they’re human beings, you know.
Dave
Dave,
Yes – Hicks did go back to the church of Hayek in late life, when Hayek was becoming hip again.
But I don’t believe this conversation would be complete without a small warning against Hayek. As Hulsmann points out in his new Mises biography, Hayek (though he was Mises’ student) was really more of a Weiserian than a Misesian. And when you compare Hayek’s output to Mises’, I think the old saw about truth and originality has a certain relevance. Mises was hardly inerrant, but he was very, very sharp, and he would never have produced anything so sloppy as (for example) Hayek’s “Denationalization of Money.”
BTW, I also find some things to complain about in Rothbard. Part of the tragedy of the Austrians in the 20C is that they invested so much energy in merely defending themselves, that they had little to spare for actual advance and revision.
For example, Caplan in his famous (or infamous) essay that Razib cites makes a couple of good points along with the bad ones. But along with his good points, he admits that Rothbard in the 1950s was basically right about most things, at a time when the Keynes-Fisher-Samuelson mainstream was seriously divorced from reality.
Scholarship does not proceed from error. If you admit that the intradepartmental revolutions of the ’30s were the triumph of quackery over scholarship, you need to go back, find the last point at which the thread of reason was untainted by Lysenkoism, and work forward from there. I would respect Caplan if he used this situation as an excuse to update the Misesians. Instead he takes it as a pretext for dismissing them. This is chutzpah, surely, and history will not look well on it.
I believe you’re thinking of Nozick, not Rothbard, wrt rent control.
no, i know the nozick issue. people accused of rothbard of hypocrisy on that issue too. nozick later disavowed libertarianism anyhow.
Dave,
I must be saying something terribly wrong if you think that I’m getting my information from some crackpot source that hates Jewish economists. And I hope that I have not accidentally directed any abuse against you personally. Forgive me for being abrasive.
As I stated above, I tried to read Human Action, but gave up after realizing that it was a protracted Kantian contemplation about the nature of reality. Without ever having studied economics, I can nonetheless confidently assert that Misesian praxeology is not economic science, in the same way that I can confidently assert that the epistemology of William James is not psychological science, or that theology is not science.
I do not disagree with the policy prescriptions of Austrian economics; I do not have the expertise to evaluate them, nor do I care. But it does bother me when you talk about Misesian praxeology as some sort of incredibly useful mathematical toolbox, as if it were as useful as the statistical ensemble formalism in physics.
the last point at which the thread of reason was untainted by Lysenkoism
Why assume there has ever been such a point?
Dave,
Yes – Hicks did move back toward the church of Hayek in late life, when Hayek was becoming hip again.
But I don’t believe this conversation would be complete without a small warning against Hayek. As Hulsmann points out in his new Mises biography, Hayek (though he was Mises’ student) was really more of a Weiserian than a Misesian. And when you compare Hayek’s output to Mises’, I think the old saw about truth and originality has a certain relevance. Mises was hardly inerrant, but he was very, very sharp, and he would never have produced anything so sloppy as (for example) Hayek’s “Denationalization of Money.”
BTW, I also find some things to complain about in Rothbard. Part of the tragedy of the Austrians in the 20C is that they invested so much energy in merely defending themselves, that they had little to spare for actual advance and revision.
For example, Caplan in his famous (or infamous) essay that Razib cites makes a couple of good points along with the bad ones. But along with his good points, he admits that Rothbard in the 1950s was basically right about most things, at a time when the Keynes-Fisher-Samuelson mainstream was seriously divorced from reality.
Scholarship does not proceed from error. If you admit that the intradepartmental revolutions of the ’30s were the triumph of quackery over scholarship, you need to go back, find the last point at which the thread of reason was untainted by Lysenkoism, and work forward from there. I would respect Caplan if he used this situation as an excuse to update the Misesians. Instead he takes it as a pretext for dismissing them. This is chutzpah, surely, and history will not look well on it.
Mencius,
Bryan CaplanÂ’s a young, bright guy, pretty confident of himselfÂ… and, well, IÂ’m willing to make allowances.
Did Hayek make some serious mistakes? Well, I disagree with some of his later political/philosophical writings (as someone noted, some of them may have been ghosted by Bill Bartley), but a lot of his stuff was quite thought-provoking and got me thinking. IÂ’ve certainly learned more from reading Hayek than from most books IÂ’ve read.
As I’ve made clear, I’m a bit of a Rothbardian, but I nonetheless think Murray was wrong on various issues. People make mistakes – I can think of some real doozies I’ve made.
As I’ve said, I have a streak of optimism. The conversation we are having here would have been unthinkable when I first got interested in this stuff almost four decades ago – and not just because of the Web. Razib professes a relative lack of knowledge in all this, but he, and most educated bright people nowadays, take for granted ideas that were eccentric, radical fringe ideas forty years ago.
Of course, socialism does not work. Of course, incentives matter. Of course, the structure of property rights is relevant.
I remember when those were weird, fringy ideas. Now they are mainstream.
And Communism is dead.
The world is a better place.
Dave
Ch. K.,
When you evaluate Mises, I really think you are failing to adjust for the fact that he was basically a figure of the late Austro-Hungarian Empire.
Mises’ real magnum opus was his first book, Theory of Money and Credit, which appeared in 1912. Also, Mises himself was extremely influential in the Austrian banking industry after WW1. Ie, it is really factually incorrect to think of him as some kind of Carlylean sage, sitting in his tower and stroking his long white beard. He was more or less the Ben Bernanke of postwar Austria. When you realize that the party in charge of postwar Austria, at least before the Nazis took over, can basically be described as Catholic fascists, you may have a sense of the cultural gap.
If Mises comes across as a crazy man to you, a large part of that is the fact that he comes from a world no one living today could even begin to understand. How many of your best friends are Catholic fascists? Is there a Catholic fascist party in your city? If not, how in the name of great Jesus Christ could you imagine life under fascist Catholicism? Mises is not just a little red pill which you can swallow with water. He is like beans – he needs to be soaked.
If you don’t care for this effort yourself – it is, I admit, difficult, not to mention completely unproductive – by all means, stick with the Rothbard. Rothbard, for all his faults (and they are considerable) is at least a child of the 20th century. Mises was not. And it is not really fair, I don’t think, to judge him for living up to the standards of his time rather than those of ours. The two do conflict, after all. And if you are prepared to judge their differences on chronological grounds alone, you have really wandered quite a ways from the path of reason.
Human Action was written during World War II by a man in his sixties, an exile from his own country and continent, who had fled two brutal and bloody revolutions both of which he had long predicted, who was still socially and intellectually ostracized in America for his unfashionable opinions. I respect your right to disagree with him, but I’m afraid I’ll have to ask you to give him a freakin’ break.
Dave,
I apologize for the fact that you are older and more sensible than me. I suppose at the least I have to respect your right to be respectful!
TGGP,
Oh, there’s no reason at all to assume there is one. But if there is, you kind of have to just use it.
Otherwise people will suspect that you suffer from what’s sometimes called “NIH syndrome.” This has nothing to do with the National Institutes of Health.
CharimanK,
No, I donÂ’t think you’re hanging out on anti-Semitic webistes, though I am beginning to wonder a bit: the operative phrase in my sentence was “or what?” That is, assuming that you were not getting your stuff from some weird Jewish-economist-hating website, where were you getting stuff such as:
> In Human Action, Ludwig von Mises proclaims a “correct” praxeological understanding of
> [snip]
>education
>snip
>Blah blah blah. Yawn. This is not science. Ludwig von Mises is just another wanker with a grandiose worldview
If by “Mises proclaims a correct praxeological understanding” of “education” you mean that Mises promised to tell you everything you need to know about education simply by reading his book, I am almost completely certain he said nothing of the sort. And since you have repeatedly assured us that you have not read his book, I am pretty sure you have no basis for claiming this.
If thatÂ’s what you meant, the guess that you got this from some crazy webstie is as good as any other guess I can make. ItÂ’s bizarre.
Of course, if all you mean is that Mises promised to explain what economics has to do with education, well, yeah, have you looked over your tuition bill recently? Economics does have something to do with education. If youÂ’re objecting to that, your objection is bizarre.
Either way, it was a weird thing for you to say, and I wonder where you got it. If not from a (make-believe?) Jewish-economist-hating website, where on earth did you get this?
You wrote:
>But it does bother me when you talk about Misesian praxeology as some sort of incredibly useful mathematical toolbox, as if it were as useful as the statistical ensemble formalism in physics.
Again, you seem to be referring to me but are not actually referring to anything I have written here. I (and others) on this thread have stated explicitly, and discussed in some detail, the fact that Mises and the Austrians tended to avoid mathematics in their economic presentations.
I in particular have discussed the reasons for this in great detail. I certainly nowhere described “Misesian praxeology as some sort of incredibly useful mathematical toolbox.”
Again, it is hard to have a conversation with you if you claim I have said the exact opposite of what I actually did say. You are free to disagree with me, but if you choose not to read what I have written and attribute to me specific things I did not say, well, communication is difficult.
Your use of the term “wanker” does bring to mind some Aussie “libertarians” I know who enjoy trolling American websites throwing out nonsensical statements just to get a rise out of the Yanks.
ItÂ’s kinda weird, CK.
Dave
I have a critique of the Austrian Business Cycyle Theory.
Robert,
I like that you’re using the tools of Austrian economics to look critically at some of its claims!
I think the core of the paper is this sentence in the conclusions: “… no presumption exists that entrepreneurs will systematically direct more resources to producing higher-order goods and away from lower-order goods when the interest rate is lower.”
I think you are right about this, but it rather puts the causal cart before the effective horse. It would be more accurate to say that the natural rate of return on higher-order processes is higher than the natural rate of return on lower-order processes.
This is because every lower-order process is trivially a higher-order process. A process that generates return in 2 years can also be used to generate return in 4 years, just by running it twice. In a free market, there is demand for return at all terms. Therefore, in a free investment market, the natural yield curve will necessarily slope upward – the interest rate at short terms cannot exceed the rate at long terms, but the converse is not the case.
If we are to talk about interest rates which are the result of market forces, explaining them in terms of supply and demand strikes me as the natural way to go. If we are to talk about how interest rates which are set by Ben Bernanke at breakfast feed back into the money markets like a bad sewer line, I think the Austrian case is already made!
I make this argument in somewhat more detail here.
Obviously, this is more or less the same point as Hayek made with his triangles. But it is stated purely in terms of financial processes, which I find much simpler. I think the economists of the ’30s were a little too obsessed with trying to factor money out of the picture entirely.
Mencius says: Probably the most important product of the Austrian edifice is not the ABCT, but simply the conclusion that any quantity of money is adequate – there is no need for the money supply to expand “to meet the needs of trade.”
Most of the modern models (e.g. rational expectations) that try to build everything from the ground up are basically neutral in money – it takes some ingenuity to come up with a model where monetary quantities do anything at all. The debates over the gold standard and such are usually only presented as part of economic history or the history of economic thought. Though I’ve read the historical accounts of Keynes and Friedman’s ideas, I must admit I don’t understand the deep behavioral reasons behind why they thought dilution was necessary.
Term transformation, as I understand it, is a separate issue from a gold standard, and I don’t see anything intrinsically wrong with it – in fact, it seems so obvious that I find it hard to imagine a banking system that wouldn’t invent it. There are obviously problems with bank runs and panics, but the benefits – a world where ordinary people can get multi-year loans, can buy cars and houses – far outweigh the costs.
PhysicistDave: Notes on the Theory of Choice by Kreps is what I used, it’s compact but covers the fundamentals.
“NIH syndrome.” This has nothing to do with the National Institutes of Health.
Not invented here? What’s that got to do with anything?
Mencius, you neglected to mention Post-Keynesianism in your list of quack economic theories, so are they alright in your book?
tc,
Here’s why: you can’t have term transformation without dilution. Term-transforming banking is so unstable that it will vanish instantly unless it is protected by a mechanism for indefinite monetary dilution. And if that protection exists, it is unavoidably dilutive.
For example, one such mechanism in today’s financial system is “deposit insurance.” A bank run is not of course an insurable risk, nor do “deposit insurance” systems such as the FDIC collect anything like the quantity of premiums they would need if it was. What makes the FDIC work is its informal, but no less real, protection from the Fed’s printer.
What happens when you try to do term transformation without adequate protection? The Great Depression is a perfect example. It was caused by a financial system which still maintained a link to gold, but guaranteed far more notes of current maturity than it had gold to back them. This was done to some extent under the “classical gold standard,” in which the Bank of England and similar institutions played the dangerous game of raising interest rates to draw gold back in when it started to flee. After the massive dilutions of WWI and the ’20s, this strategy, which was always dubious, was no longer effective.
You might enjoy working through this post, in which I explain the game theory of term transformation in a virtual financial system. Bottom line: it bites.
In a matched-maturity system, people can get multi-year loans if there are multi-year lenders. Since people also want to, for example, save for their retirements, this works out. Supply will always meet demand at some price. Effectively, what you’re saying is that free-market interest rates for some transactions would not be low enough. This is basically William Jennings Bryan economics. I’ll take my cross of gold, thanks.
I don’t think the neoclassicals have any huge argument with this analysis. They just stay away from the whole subject. It is rather embarrassing, if not actually incriminating. There is still some institutional memory of this era.
tggp, I’m not even aware that there’s a coherent body of “Post-Keynesian” thought.
Modern macroeconomics is all one great swamp of pseudoscience as far as I can tell. All their numbers are fudge factors, all their theories are either tautological or overfit. I see no reason to believe that any of it has any predictive power or analytic importance. As far as I’m concerned they should all be seeking new careers in the lawn care industry.
tc,
Friedman knew that expansion of the money supply was not necessary (see his essay “Optimum Quantity of Money”): he was willing to tolerate a slow but steady expansion for pragmatic political reasons. Keynes was bad at math — see my discussion way up-thread.
Thanks for the book recommendation ? I?ll look into it (probably after I finish the book I just started on rational expectations theory ? gotta keep learning, you know).
Dave
Dave,
That Friedman essay is not on line, but everything I’ve seen on Friedman indicates that his reasons for believing in a slow but steady dilution were basically the same as Irving Fisher’s. (Ie, they were driven by various unsupported beliefs about price indexes, typically involving the word “real.”) See, for example, this summary. What’s the source of your belief that this was really a political prevarication? I can’t say I find it shocking or even unlikely, but I’m curious.
Mencius does accurately quote a key conclusion from my paper. The rest of his comment is confused. He does not understand, for example, the Austrian concept of the order of a good. He also does not understand my use and critique of this concept.
Incorrect Austrian economics attracts many advocates and fans that do not understand its analysis. Austrian economics is supposed to be more than shallow moralizing about the supposed evil of the government.
Robert,
For an “independent” economist, your ex-cathedra tone is impressive!
Austrian economics is a method, not a cult. You are attempting to revise Mises. Mises revised Menger. What’s not to like?
I will say it again: the whole Hayekian obsession with capital structure is a dead end. The purpose of finance is to abstract over the details of production. The buyer of a loan does not care how the borrower will generate a return. He cares about (a) the term of the loan, and (b) the probability of default.
The Misesian locution of “more roundabout” methods of production is quite concrete enough, although it strikes me as a rather awkward Anglification of something German. A more roundabout method of production is one that has to be financed by a longer-term loan. Period. This is entirely sufficient to explain why maturity mismatching exists and how it leads to financial crises.
Mencius:
I’m a little too lazy to “look it up” (I’d have to stretch to reach) but, from memory, It was originally Bohm who referred to roundaboutness.
The association of roundaboutness, i.e., lengthier methods yielding more efficient production, is, technically, neither inevitable nor even, specifically, an example of economic regularity. It’s simply the practical outcome of the fact that, originally, a thing is done or a product produced by what appeared, at the outset, as the “best way” for the simple reason that, had a better way (for whatever reason or combination thereof) been apparent, it, instead would have been selected. So, too, in the normal course of events, the process of achieving better returns via more lengthy processes requiring greater investment is closely related, say, to the recognition that a better product can, in very many cases, be produced by the simple expedient of using more, better, or more durable material, likewise increasing the capital requirement.
It does happen, now and again, though with some rarity, especially through discovery or invention, that better and/or cheaper is actually achieved without increased (and possibly even decreased) investment. But, of course, even in such cases, the new, better method must wait for implementation until such time as the effect of its knowledge (the “advantage” of the “failure monopoly” conferred by the new on the old) has been exhausted.
Gene,
Sure. My point was just that whatever the German word for “roundabout” is, it probably doesn’t sound as dorky.
Mises acknowledged that most of his ideas came from Menger and Bohm-Bawerk – the latter was, after all, his teacher. However, by acknowledging this once and then building his own edifice without constant references to prior work, he created a structure which is much easier to understand and verify.
I think you are missing my argument as to why the natural yield curve slopes upward. At least in an unhampered financial market, longer-term loans will carry higher rates because every short-term process is a long-term process, but not vice versa. There is no need to resort to Hayekian analysis of the details of productive processes, as both you and Robert do.
Compare the market for 5-year loans to the market for 1-year loans. All the 1-year producers can participate in the 5-year market, but not vice versa. 1-year investments can be turned into 5-year investments by simply iterating. Moreover, if the interest rate is the same, these investments are also more desirable to the lender, who has the opportunity to withdraw every year, not every five.
So true 5-year loans, and thus “more roundabout” 5-year productive processes, will simply not exist unless they can offer a higher rate (risk-adjusted, of course). Capisce?
Mencius:
I’m not quite sure where you’d get the idea that I don’t agree with anything you’ve expressed there. Certainly nothing to do with the variation in rates for loans in the two different time categories. Or of anything Hayekian (as opposed to Misesian). I’ve never read a single work of Hayek’s except for some excerpted passages or occasional quote. Especially, I remember reading something he’d said very pointedly to emphasize that he made no claim to different or further development of economic science beyond those of Mises. I’ve got nothing specific against him–quite a much more successful popularizer than LvM, fersure, but my schtick is for more, not just the same, no matter how well written. Intellectual (at least within my grasp) novelty is what I’m after, my man, and when I can’t find it any more, I may just have to do it myself!
Gene,
I think the sentence I disagreed with was this one: the association of roundaboutness, i.e., lengthier methods yielding more efficient production, is, technically, neither inevitable nor even, specifically, an example of economic regularity.
More efficient production is production with a higher yield, ie, a higher interest rate. So all I was saying is that yes, actually, I do think it is inevitable.
Of course, this only applies in an imaginary free market. You know – one in which interest rates are set by supply and demand, rather than rotary-winged aircraft. And of course in which maturities are not systematically transformed, though I believe that follows from the above. While it’s clear that no such market has ever existed, that doesn’t stop us intrepid Austrians!
Otherwise, yes, I don’t see anything I particularly disagree with…
I don’t disagree that typically the interest rate per two years will exceed the interest rate per one year. That’s not on point.
Mencius’ co-termination method does not work with my example. Mencius does not seem to consider that the flow of inputs over time in a production process might not be uniform. The flow of outputs might also be non-uniform. And so Austrian capital theory is mistaken. It follows that Austrian Business Cycle Theory is mistaken too.
“I didn’t know any better.”
And you still don’t. Apriorism has nothing to do with psychology; it is an epistemological concept. Please give Brand Blanshard’s Reason and Analysis a read or Hollis and Nell’s Rational Man. Positivism is dead in philosophical circles, so the only ‘retardeds’ out there are those who still think it is credible. One may disagree with Mises’ Kantianism, but then again very few actually understand what he said, at all.
As for Caplan, why not check out Block’s (and others’) replies to him?
Schumpeter may be termed an Austrian, as may Robbins, but this is controversial.
Rothbard was an Aristotelean, Mises a Kantian. Conflating their methodological views is silly. Both believed in apriorism, but the way this plays out differs greatly according to the philosophical tradition one belongs to.
Robert,
I am certainly not an unconditional believer in the ABCT. I think the general principle – that maturity transformation under official protection is the general cause of the “business cycle” (which might be better understood under the name “banking cycle”) – is sound. Below this point many different economists in the broad Austrian cluster have come up with different details. I would not endorse any or all of them.
For example, as I’ve said, I don’t find capital theory particularly productive or useful – I think it descends into assumptions about psychology that Austrians at their best try to avoid. So it’s entirely possible that we just agree.
As for inputs, outputs and termination schedules, a healthy financial system which is connected to a healthy productive economy will include an indefinite, generally undescribable, and most certainly gigantic variety of them, constantly changing with changes in productive technology and consumer preferences.
I think very few useful aprioristic generalizations can be drawn about this system. But the one thing we can say for sure is that, in a healthy and unhampered market, if a set of investment terms are Pareto optimal and fit any reasonable set of lenders and borrowers, there will be a market for loans under these terms. This includes the maturity schedule of securities, their seniority, their covenants, etc, etc, etc.
I hope you will find these statements uncontroversial.
“I think the general principle – that maturity transformation under official protection is the general cause of the “business cycle”
While it certainly is a major factor, as you point out so well via the financial machinations in Nitropia, I fail to see how in our present fractional reserve banking system even enforcing strict lending rules to eliminate maturity mismatches in bank balance sheets would necessarily eliminate the “business cycle” of the credit markets.
Would not there still exist the danger of credit contraction and deflationary depression due to the mis-pricing of risky loans? Defaults on tulip deliveries or mortgages in speculative and overheated markets could still result in bank insolvencies even if the loans for tulips and houses were funded by issuing notes of the same maturity as the loans?
Forrest,
If you can make entrepreneurs err systematically, you can get any kind of disruption you can imagine.
Entrepreneurs err all the time. But they are participants in a Darwinian market which tends to reward winners and expel losers. Their systematic errors tend to be relatively small and correctable. Moreover, they are likely to be limited to specific markets (an unanticipated failure in the wheat crop, or whatever) and the financial system as a whole can diversify around them.
The problem with maturity mismatching is that it creates panics and crashes without any kind of systematic entrepreneurial error, and the panic is contagious across the whole financial system.
“they are likely to be limited to specific markets”
Unfortunately, when that systematic error is in the market for stocks the disruption actually can affect the whole financial system even while the speculation is entirely fueled by hot short-term money.
I agree with you though that the maturity mismatch carried on the books of most financial institutions multiplies and greatly exacerbates the risk of a general credit collapse and deflationary depression irrespective of which particular market panic initiates it.
Actually I am pretty sure that in a world with a fixed money supply, the “stock market” as a whole would display few interesting patterns, especially in the short term.
The set of miscalculations that can affect the pricing of a single equity, single commodity, etc, is limitless. The set that can affect, say, interest rates as a whole (the kind of information that moves the stock market as a whole) is small. For example, if we were to find out that the world was to be destroyed by an asteroid in 2028, I would be surprised not to see some fluctuations in the market for 30-year loans!
We are used to these kinds of correlations because we are used to a noisy, unstable financial system. So we have headline indexes like the Dow, which go up and down, etc. If equities were genuinely uncorrelated, stock price indexes would be pointless and boring – except in the case of very dramatic real events, such as asteroids, epic technical breakthroughs, wars, etc.
To Austrian-school economists, the economy is always in disequilibrium. That is, agents’ plans are never all mutually consistent. Some of these plans are embodied in capital goods. Opportunities always exist for an alert entrepreneur to restructure some capital goods that currently embody plans that will fail.
Empirically, the market in second-hand used capital goods is thin. Nor can such an entrepreneur always convince those providing financing. I see no reason to agree that “markets for loans” will exist for “a set of investment terms” that are Pareto-improving. Austrian-school economists generally oppose organizing welfare economics around the concept of Pareto-optimality anyways.
I often find advocates and fans of Austrian economics promote a mystical irrationalism. Mencius, with his comment about the ” indefinite, generally undescribable, and most certainly gigantic variety” of some aspect of the economy, seems to fit my findings. But I don’t see where he engages the content of the literature of Austrain school economics. I think I engage some of the literature.
Robert,
My reference to Pareto optimality was not a plea for welfare economics. It was just a statement that non-Pareto-optimal contracts are unlikely to exist in the free market, for obvious reasons.
It is the attempt to quantify the unquantifiable that is irrational. ‘Nuff said.
Of course the economy is always in disequilibrium. Stock prices, which are the prices of capital goods, are always going up and down. The question is why the movements of 10,000 variables which should, according to the efficient market hypothesis, be uncorrelated, actually display interesting correlations.
Misesian economics has an answer to this question. The answer may not be quite right, but I think it is in the right ballpark. Neoclassical economics tries to pretend it doesn’t exist.
It is certainly not obvious that markets will exist for all Pareto-improving contracts. In fact, since new financial instruments and new markets are constantly being formed, one would think this proposition is false. I think that is a position consistent with a view of economies set in historical time.
Today Mencius pretends that an observation that “non-Pareto-optimal contracts are unlikely to exist in the free market” is a rephrasing of his statement. I know enough logic to know that he is wrong, whatever a “non-Pareto optimal contract” is supposed to be.
Anyways, Austrian capital theory and Austrian Business Cycle Theory are false. As I’ve shown.
Pareto optimality is likely to be preserved because, if there is a Pareto gain, one side or other of the deal is likely to snap it up.
I said “for any reasonable set of borrowers and lenders.”
> It was just a statement that non-Pareto-optimal
> contracts are unlikely to exist in the free
> market, for obvious reasons.
“Unlikely” is the wrong word. Free market is weakly Pareto-optimal at every moment of time. It is always pushed towards strong Pareto-optimality by its embedded evolutionary algorithm.
> Anyways, Austrian capital theory and Austrian
> Business Cycle Theory are false. As I’ve shown.
Sorry, but you didn’t. ACBT does not rely on notion of goods order, but merely on the fact that availability of credit not backed by any real wealth allows entrepreneurs to invest into projects which have higher probability of failure – which they do. The cycle is triggered by the inability of the central bank to sustain injection of such credit without causing run-away inflation, with subsequent failure of most of these high-risk ventures from financial starvation – resulting in destruction of real wealth.
The ERE-based example is irrelevant, as such economy cannot exist in the real world. This is a case of oversimplification, about as useful as the notion of a sperical horse in vacuum – applying steady-state reasoning to dynamic phenomenon is just silly. When you start from an invalid premise, you cannot get valid proof. Logic 101.
Mencius says, “Of course the economy is always in disequilibrium.” And he says, “Pareto optimality is likely to be preserved.” I see.
Averros is misrepresenting Austrian theory and my argument. I never say an economy can be an Evenly Rotating Economy in the real world. I criticise ABCT as it is put forth by, say, Hayek, Rothbard, and Garrison. They all use the concept of an ERE to explain the theory, without holding that the ERE can be a description of reality.
In this theory, the production processes embody a trade-off between investment and consumption. The cause of a crash is that this trade-off supposedly fails to match the choices of consumers between savings and consumption. The consumers want more consumption and less savings. This theory relies on specific (false) claims about the logical relationship between interest rates and the production processes that entrepreneurs tend to adopt.
I can’t begin to say how silly I found this comment about Mises and the Austrian school.
Personally, I’ve studied physics and IT long before I got involved with economics, especially because all the widely published articles about economics were based to 95% on the Keynesian world view or something very closely related, which – to my scientifically trained mind – immediately smelled like a huge pile of shit. Therefore, I assumed that all of economics was worthless.
Then one day I read Hazlitt, then Bastiat and Rothbard and given that at that point, I had over 10 years real-life experience in international business, I was stunned at how accurately they described the economy and business processes.
Meanwhile, I’ve studied enormous amounts of psychology, history, politics, evolution and evolutionary psychology, unfortunately also religions and their impact on society and I’ve accumulated much more real-life experience by working on 4 continents with people from India, Latin America, Russia, the US, most of Eastern and Western Europe and occasionally Arabic countries.
When the author of the above article says that studying psychology made him question the Austrian School, he either has no clue about the Austrian School and von Mises (which seems obvious) or about psychology or most likely both!
Like most people, he probably totally misunderstands the Subjective Value principle: it does NOT mean that a person tries to optimize economic income !!!
It does mean that every person tries to optimize WHATEVER HE OR SHE DESIRES MOST. That includes power, religious or political ideologies, personal satisfaction etc.
Anyone who thinks that Praxeology is only about economics didn’t get it all.
The most retarded comment (!) was the one about “not getting the Middle Eastern mind”, which supposedly invalidates the principles of Praxeology. WRONG: it simply means that the writer does not know the subjective preferences and the mental framework of Middle Eastern people.
Lots of people do things that are harmful to themselves or their goals. Again, that does not go against the principles of Praxeology, no more than the principles of mechanical engineering are invalidated when an engine fails to work as desired, e.g. because of a mechanical failure.
Praxeology does not try to predict individual human actions – that is impossible – but it serves to predict the outcome of a GOVERNMENT POLICY or any other constraint that is imposed on an entire population and in this, it does wonders, because ON AVERAGE, people tend to move closer to their goals by making use whatever circumstances they find.
A priori reasoning allowed von Mises to predict to an amazing degree the evolution of the Soviet Union as early as 1922 in his book “Socialism”. He predicted even the ultimate collapse of the system.
Applying any other school of thought, this would have been impossible – no monetarist, Keynesian, Marxist or classical economist could have explained why communism MUST fail.
Personally, I’ve used the principles of the Austrian School to accurately predict the outcome of legal changes in Switzerland, various EU countries, the EU itself, Russia, the US etc.
A typical example was the law that made health insurance mandatory in Switzerland: before the vote, I already predicted the entire sequence of events – massive price increase due to increased consumption and massive price hikes by the providers, given that they now have a captive “audience”, recriminations, more government involvement through regulations, rationing, limits for market access (restricting the number of doctors), calls for ever more government involvement leading to ever higher costs.
Everything happened exactly as predicted! So far, the price hike has been over 300% over 12 years (with an inflation of barely 1%). So obviously, the Austrian School provides excellent tools to predict the effect of government policies. What more do you want?
Regarding the “alpha male” comment: the desire to dominate does not necessarily imply the desire to destroy society or rule over retards and poor bastards. Even dominant people can very well understand why a free society is infinitely more productive and more powerful than any other.
Being anti-Libertarian basically just implies that one is pro-monopoly power – a default way of thinking that is totally absurd. Libertarians don’t claim that they want to abolish all power, they simply know that power concentration is a gurantee for inefficiency leading to social and/or economic collapse.
Why should any dominant personality like the principle of a power monopoly? That’s more absurd thinking: unless a dominant person assumes that he can reach the top of a monopolistic hierarchy, he has a far greater interest in the existence of multiple competing power centers, as it might allow him to climb to the top of one of those without being under the heel of a “higher” power.
Generally speaking, entrepreneurs ARE alpha males – I certainly am – but to exercice their skills, they need economic AND personal freedom, hence they are very sensitive to polical power that restricts their freedom.
Typology tells us much about the individual need of people for personal and economic freedom and sure enough, over 50% of the population are safety seekers who value stability over all. However, these people are not stupid (not all of them anyway), they are just pragmatic: if one can demonstrate to them practically that a little instability will improve the long-term stability of society and the economy, they’ll go along with it.
The fact that an economy is in disequilibrium most certainly does not demonstrate the existence of an arbitrageable algorithm which can profit systematically from that disequilibrium.
Prices, such as stock prices, change all the time. That means they are in disequilibrium. In an “equilibrium” economy, the price for March silver would not change between January and March. This does not mean that it cannot be modeled with a central limit-order book, which is Pareto-optimal by definition. As prices change, some players in this market will win and others will lose, but if you have any way of predicting which will be which you should be playing in the market, not observing it.