Question, Challenge, FIGHT!

[meus-ovatio.livejournal.com]

Just a quick question that I have been trying to answer: for those who are inclined to simulate interest in economics (and we all know any proclaimed interest in economics is just like any proclaimed interest in opera: fake and class-grubbing), what I'm trying to figure out is how Austrian economics takes credit for anything.

The problem being that the grand scope of human economies are beyond empirical analysis, thus we must proceed by certain truths. At what point, though, does this programme allow one to say "We were right?" If it is indeed true that all empirical analysis is fraught with under-determination and faulty correlation, how does the Austrian claim efficacy?

Comments

[luvdovz.livejournal.com]

Interesting question. And sounds pretty universal. I mean we could go beyond just Austrian and posit the question: how does any economics claim efficacy?

[meus-ovatio.livejournal.com]

Theoretically speaking, those economics which play the game by going on to the field in the first place, at least place themselves in a position amenable to being falsified.

[luvdovz.livejournal.com]

I can think of a few of those, yes. Some of them ended in bad failure.

[nevermind6794.livejournal.com]

Lots of historical study and statistical wizardry, with some underlying theory that helps interpret those hard numbers.

[ytterbius.livejournal.com]

It doesn't have to. It just has to be simple enough to "understand" in a short time and without great attention to detail.

[meus-ovatio.livejournal.com]

Yes mom, we know, you really like opera, not all the "important" and "cultured" people who tolerate your presence within the confines of the theater.

[telemann.livejournal.com]

Don Giovanni is my favorite, but then the Magic Flute is a close 2nd.

[the-rukh.livejournal.com]

I don't think religions ever said they had to prove truthiness, hence the faith thing.

Since it's cartoon month:

[underlankers.livejournal.com]

^Berke Breathed was right.

how does the Austrian claim efficacy?

[debergerac.livejournal.com]

dunno. let's ask the austrian...

Re: how does the Austrian claim efficacy?

[telemann.livejournal.com]

rofl.

You know I soOOO wished this could be a QOD.

You are in the lead no doubt for number of QODs ;) Too bad you can't convert them to frequent flyer miles ;)

[capthek.livejournal.com]

You blame anything that disagrees with your theory on things outside of your theory.

Much like young earth creationists.

[squidb0i.livejournal.com]

He just claims it - and never relinquishes hold on that claim no matter what.

[nevermind6794.livejournal.com]

They do it by claiming economics should be treated as more like a philosophy; that certain truths can be derived logically with no need for mathematical proof.

[policraticus.livejournal.com]

Have you read Hayek's Nobel Prize lecture?

http://nobelprize.org/nobel_prizes/economics/laureates/1974/hayek-lecture.html

I want to do this to avoid giving the impression that I generally reject the mathematical method in economics. I regard it in fact as the great advantage of the mathematical technique that it allows us to describe, by means of algebraic equations, the general character of a pattern even where we are ignorant of the numerical values which will determine its particular manifestation. We could scarcely have achieved that comprehensive picture of the mutual interdependencies of the different events in a market without this algebraic technique. It has led to the illusion, however, that we can use this technique for the determination and prediction of the numerical values of those magnitudes; and this has led to a vain search for quantitative or numerical constants. This happened in spite of the fact that the modern founders of mathematical economics had no such illusions. It is true that their systems of equations describing the pattern of a market equilibrium are so framed that if we were able to fill in all the blanks of the abstract formulae, i.e. if we knew all the parameters of these equations, we could calculate the prices and quantities of all commodities and services sold. But, as Vilfredo Pareto, one of the founders of this theory, clearly stated, its purpose cannot be "to arrive at a numerical calculation of prices", because, as he said, it would be "absurd" to assume that we could ascertain all the data.4 Indeed, the chief point was already seen by those remarkable anticipators of modern economics, the Spanish schoolmen of the sixteenth century, who emphasized that what they called pretium mathematicum, the mathematical price, depended on so many particular circumstances that it could never be known to man but was known only to God.5 I sometimes wish that our mathematical economists would take this to heart.

Austrian school economics doesn't claim to be specifically predictive. Instead it argues that an organic approach to the economy is the best because we operate with limited knowledge and by trying to "fix" thing we may very well make things worse. According to them there is no "optimal" state of the economy. There are no pipes to unclog or any dials to adjust. The economy is us.

[meus-ovatio.livejournal.com]

Have you read Hayek's Nobel Prize lecture?
Dear lord, don't remind me.

Austrian school economics doesn't claim to be specifically predictive.
That's cool. So what use is it?

Instead it argues that an organic approach to the economy is the best because we operate with limited knowledge and by trying to "fix" thing we may very well make things worse.
Worse? How?

According to them there is no "optimal" state of the economy. There are no pipes to unclog or any dials to adjust. The economy is us.
So what are we hurting again?

[anosognosia.livejournal.com]

You don't think that, say, the theory of business cycles has any substantial touch-point in the Austrian tradition? Is there no such thing as an Austrian theory of the great depression or the latest recession other than skeptical references to the hubris of other theories?

[rasilio.livejournal.com]

"The problem being that the grand scope of human economies are beyond empirical analysis"

Actually this is not quite true.

Austrian Economics is perfectly fine with after the fact analysis using actual numbers and stuff to say what did happen, they just reject the idea that this analysis has much if any predictive value.

Further they view the aggregate views of the economy that are so popular among econometricians as being invalid.

For example lets take Keynes famous equation..

Y = C + I + G + (X - M)

Where Y = GDP.

It is a useful tool for after the fact research to see what actually happened in the economy and get an estimate for the total size of the economy. However having this tool it gives the impression that Y has an actual real world meaning. This then leads to the view that when the real world economy causes Y to vary that maybe we should do something to manage it and when we try this we find that the equation proves correct, more spending always boosts Y (once external factors are controlled for.

However there is just one problem.

I can't go buy units of GDP at the store, I can't sell them to someone, I can't eat them, or put them in my gas tank. They won't keep me warm in the winter or cool in the summer I can't give them as gifts or donate them to charity.

GDP does not exist. It is merely an abstract tool that can tell us information about the past but not the future, nothing more nothing less. Since it does not exist in the real world all of the plans and schemes that Keynesians or even Monetarists can contrive to control and drive it are doomed to fail because they are attempting to massage an abstract metric to produce a desired result and not actually doing anything to deal with the root cause of whatever problem they are trying to solve. In fact even focusing on the metric is often a problem because it loses sight of the actual real world drivers of it.

A good example of this is virtually everyone's fear of deflation.

Here's the thing though.

The real world is naturally deflationary. As technology advances it allows you to do more with less, leading costs to plummet. For example, they recently ran an IPAD through the same benchmark tests used to measure Supercomputer speeds. It would have been one of the 50 fastest supercomputers in existence less than 20 years ago. So in less than 20 years the price of computing power has fallen by a factor of millions to where people on welfare can afford a supercomputer and rich people can give them to their kids as toys. This is price deflation pure and simple and to a Keynsean or Monetarist it is a horror to be avoided at all costs. To you and me however it is wonderful because it means we can buy cool toys at a cheap enough price to be able to actually think of them as being toys.

"f it is indeed true that all empirical analysis is fraught with under-determination and faulty correlation, how does the Austrian claim efficacy?"

Easy. but not by shifting goalposts like you seem to think in earlier comments.

Austrians have made the claim the predictive models of economics are worthless. Their claim stands until someone who claims otherwise can produce a model which works in all places and times. Austrians get to sat "We were right" every time one of those models blow up in planners faces, and they can be proven wrong by said planners actually succeeding at what they claim to do, that is produce a model which can be proven to have actual predictive value in general cases.

[meus-ovatio.livejournal.com]

I don't care about the Keynesians. I'm asking about Austrians.

[anfalicious.livejournal.com]

Austrians get to sat "We were right" every time one of those models blow up in planners faces\

Umm. "You were wrong =/= we were right". Do Austrians have anything constructive to add or is it all "herp central planning will always fail derp"?

planners actually succeeding at what they claim to do, that is produce a model which can be proven to have actual predictive value in general cases. (http://blogs.crikey.com.au/pollytics/2010/05/12/the-most-important-chart-in-the-budget/)

[gunslnger.livejournal.com]

It claims that it's better, not that it's perfect.
http://www.youtube.com/watch?v=mgq5NRyyE5U
(disclaimer: I haven't watched the video, I'm posting it based on the title alone.)

[meus-ovatio.livejournal.com]

But there is no way of figuring out if they're right.

[root-fu.livejournal.com]

Consensus.

[kylinrouge.livejournal.com]

I don't know about Austrians, but whatever economic school that Reagan Administration followed and the Congress of this country follow doesn't work: http://www.cbpp.org/cms/?fa=view&id=507