Austrian contradiction.

Economics Economics Questions
1

I’ve noticed a contradiction from many Austrian economists. On the one hand I’ve heard it said that all aggregate measures of an economy are useless (GDP for example). On the other hand I’ve heard many Austrians take credit for predicting the collapse of 2008. My question is how can you make predictions without using aggregate measures?

I actually agree with the Austrian philosophy but this is bugging me. I also agree that GDP is crap but I think there are some useful statistics. I think data that is fairly simple or verifiable can possibly be useful. For example I would use total tax revenue to replace GDP. Also I think trade deficit data is fairly accurate since there is a natural sanity check (the total has to add to zero for all countries).

2

Austrians based their prediction on Austrian business cycle theory, which studies the effects of aggregation by part of the government (i.e. lowering of the rate of interest) on the individual (i.e. malinvestment). In any case, I don’t think Austrians necessarily disagree with aggregate measures as a way to get a general picture of the health of an economy; Austrians would argue against the idea of using these measures as a reason to intervene or act in an effort to raise or lower the value of that aggregate measure.

3

From this website:

http://mises.org/about/3224

Austrian economists realize that the future is always uncertain, not radically so, but largely. Human action in an uncertain world with pervasive scarcity poses the economic problem in the first place. We need entrepreneurs and prices to help overcome uncertainty, although this can never be done completely.

Forecasting the future is the job of entrepreneurs, not economists. This is not to say that Austrian economists cannot expect certain consequences of particular government policies. For example, they know that price ceilings always and everywhere create shortages, and that expansions of the money supply lead to general price increases and the business cycle, even if they cannot know the time and exact nature of these expected events.

Government Numbers

One final area of theoretical concern that distinguishes Austrians from the mainstream is economic statistics. Austrians are critical of the substance of most existing statistical measures of the economy. They are also critical of the uses to which they are put. Take, for example, the question of price elasticities, which supposedly measure consumer responsiveness to changes in price. The problem lies in the metaphor and its applications. It suggests that elasticities exist independent of human action, and that they can be known in advance of experience. But measures of historical consumer behavior do not constitute economic theory.

Another example of a questionable statistical technique is the index number, the prime means by which the government calculates inflation. The problem with index numbers is that they obscure relative price changes between goods and industries, and relative price changes are of prime importance. This is not to say the Consumer Price Index is irrelevant, only that it is not a solid indicator, is subject to wide abuse, and masks highly complex price movements between sectors.

And the Gross Domestic Product statistic is riddled with composition fallacies inherent in the Keynesian model. Government spending is considered part of aggregate demand, and no effort is made to account for the destructive costs of taxation, regulation, and redistribution. If Austrians had their way, the government would never collect another economic statistic. Such data is used primarily to plan the economy.

From “Bogart” on this forum:

No, no aggregate measures of the economy make sense and are fudged wildly by the honest federal employees who assemble them. The economy is not a bunch of aggregates but the product of a huge number of transactions entered into freely by a giant number of people.

4

  1. Simply because a number is generally inaccurate doesn’t mean it doesn’t at least reflect SOMTHING. For instance I have a thermometer that is fairly innaccurate by about 5-7 degrees, however this does not mean that it is totally inaccurate. By this logic the stock market does not and cannot reflect healthy growth, but wouldn’t you say that a crash represents a large loss in confidence in somthing.

  2. Explanding upon the end of my last statement, it doesn’t take GDP figures to show that there was a massive loss of confidence in the housing market and huge ripple effect throughout the economy.

  3. Even if unemployment numbers are fairly innacurate, a sudden increase with absolutly no change in any of the ways it is measured or some odd increase in population (lets just call that and things like it “unexpected variables”) this is probably a bad sign.

I think that, that answers your question.

5

Where’s the contradiction?

6

GDP isn’t “inaccurate”, it’s largely meaningless except, perhaps, as a measure of monetary inflation and public sector growth. Private sector growth is not measured by the frequency with which dollars change hands (monetary velocity) - changes in the velocity reflect fluctuations in the demand for money but decreased demand for money does not necessarily imply a healthy economy… demand for money is zero in a hyper-inflationary economy.

Many of the articles on the mises.org daily utilize consumer confidence and unemployment numbers to exposit on the ailing economy. These numbers may have some use in determining what has happened. The Austrian critique is that these numbers are of no use for central planning schemes.. no aggregate numbers are of any use in devising methods for planning the economy to achieve some chosen end (e.g. “keeping inflation in check and maintaining full employment”).

Clayton -

7

We predicted which industries would collapse: real estate, finance, and their suppliers.

8

Hey, Stranger and Esuric.

I’m concerned about you guys.

9

How Enlightening…

10

A more certain one would be the tendency of Internet Austrians to claim that the failures of a command economy prove Mises and Hayek right despite the fact that Mises would have opposed the idea that empirical observations could do so, that being at odds with a priori logical deduction.

11

oh really? to give demonstration of by action is one dictionary meaning of proof. if you want to quote some people and we can argue about which way they meant what that they wrote, we can try that…

hell, maybe i’ll agree with you that some ‘internet austrians’ get things wrong… It’s not as bad as the gods of marxism being flat out ridonculous.

12

Mises used pure logic to unravel socialist confusion in 1920, before most of the great socialist experiments. Bohm-Bawerk did the same in 1896:

  • “How is it conceivable that, under Socialism, a young oak sapling which will be an oak tree, with the value of an oak tree, in two hundred years, can be made equal in value to an oak full-grown now? The central authority directing the national production must base its entire arrangements and dispositions on a calculation of present and future goods having different values, if its dispositions are not to be quite inept and monstrous. If it does not put less value on future goods it must find that a process which promises a greater number of products in the far future is more remunerative than a process which yields a small number in the present or near future, and it must, accordingly, always turn its productive powers to remote productive ends, however remote they are, as being, technically the most fruitful. The natural consequence would be very much as we have pictured it–misery and want in the present.” -Positive Theory of Capital, pp. 386, Interest under socialism.

Logic has never been kind to the socialists.