The interaction goes both ways, you use a model to interpret the world and use data to see if that interpretation is relatively successful in describing the issue at hand. If it isn’t, then you theorize as to why it might not be, amend the model and test it again. And so on and so forth, nobody really looks at the world and decides that alarm clocks cause the sun to rise or whatever. In fact, a lot of neoclassical models are criticised for not paying enough attention to the real world, not the opposite.
Your example is incorrect. While the angles of a Euclidian triangle equal 180 degrees, whether the axioms (and postulate) of Euclidean geometry accurately describe the physical universe is not a purely logical matter. It could be that Euclidian triangles only exist as abstractions with no physical instantiation. That is, a non-Euclidian geometry, with non-Euclidean triangles, may more accurately describe our universe.
You could just as easily use non-Euclidean geometry as an example of synthetic a priori if you’d rather (I know Kant may disagree). And given that the two don’t fully contradict one another, both can be regarded as affirmations of reality.
Your claim that a theory is “(apodictally) [sic] certain” seems to merely mean that a theory be logically deduced from postulates; all theoreticians do that.
“Your claim that a theory is “(apodictally) [sic] certain” seems to merely mean that a theory be logically deduced from postulates; all theoreticians do that.”
<= Well; if that is what ‘they all do’; than there wouldn’t be a problem, not would there? The problem, however, is two fold.
(1) Not ‘all’ do that and (2) some postulates don’t make sense.
‘Interest is caused by liquidity preference’ doesn’t make sense.
Again; I’m not saying none in the mainstream get this distinction. But there is still an effort of trying to find quantitative economic laws; which doesn’t make sense. ‘Mathematical scrutiny’ is irrelevant in economics; comprehension of the data is. Building models to quantify behavior, draw regressions to predict future data, trying to model consumer behavior, try to measure consumpersurplus, etc. is all done by data and all of it is completely irrelevant.
On rereading; I’m not sure what your point is. Could you clarify it why you criticize me as such?
But there is still an effort of trying to find quantitative economic laws
Not really. This is a statement that is asserted over and over again here and quite frankly it’s a load of crap. Math is used as the language of economics, certain concepts might be too complex for verbal logic to adequately describe, and it makes assumptions and deductions explicit. But nobody tries to find quantitative economic laws, rather, the try to estimate the size and significance of various economic forces. The alternative is throwing our hands up when we’re confronted with conflicting economic forces and saying “we don’t know”.
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Can you provide a respected theory which does not conform to the hypothetico-deductive model (i.e., logically deduced consequences from a hypothesized postulate)?
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If postulates don’t make sense, then that can be criticized; even Austrian epistemology can be criticized based upon its axioms. There is no difference.
In principle, all patterns in the universe can be modelled mathematically, including human behavior. Hence, outright claiming maths is “irrelevant” seems premature. If you believe that models are “irrelevant,” then I don’t believe you’ve explored models too well (even the supply-and-demand Cartesian graph counts as a mathematical model). One could argue mathematics is simply a purified version of your logical arguments, with neoclassical supplementing their arguments with data. Could the law of demand be empirically falsified (e.g., Giffen good)? You bet.
The point is that whereas Austrians talk about things like “man acting to satisfy his wants”, everybody else says “people maximise utility”. Or when Austrians say stuff like “man acts to eliminate uneasiness” what everybody else says is “individuals will act until an equilibrium is reached”. And in both cases a whole lot of reasoning follows from this and further assumptions and observations. That’s not to say the two are the same, mainstream theory could be falsified, if for example, agents didn’t act until MB = MC (which sometimes they don’t, but for the most part, the theory holds up pretty well) whereas I don’t think Austrians would say that their reasoning could be falsified.
Building models to quantify behavior, draw regressions to predict future data, trying to model consumer behavior, try to measure consumpersurplus,
But this work is important for both policy and scientific purposes. Take the case of the minimum wage, the usual reasoning would imply that minimum wages would result in a surplus of labour, unemployment. But when the data was looked at under certain circumstances, theory proved to be misleading and alternative reasoning suggested that it might be beneficial.
Now, the example is still under dispute, but the point remains that humans are fallible and without constantly checking our models against the real world there’s no assurance they’ll be accurate. Nor would any economist in their right mind generalize these results to “minimum wages are always good”, it’s a challenge to the a priori assumption that minimum wages are bad, and that’s all.
Take the case of pharmaceutical regulation, there’s a big deal now being made about increasing pharmaceutical prices and an Euro price for drugs has been suggested.
In terms of efficiency, on the one hand, current discriminatory pricing schemes may well lead to deadweight losses, unless of course they increase consumption, in which case they cause increases in static efficiency. However, on top of this, there are also losses in terms of dynamic efficiency that might be caused by pharmaceutical price regulation, but we’re not sure on the size of these losses and as such the costs in terms of drugs and innovation. What about concerns over equity? To what extent does willingness to pay coincide with income, and if it doesn’t, what causes said discrepancies?
So what’s the result of pharmaceutical price regulation in this aspect? Well, we don’t know unless somebody gets down to do some serious empirical work.
So; you are saying that wikipedia is wrong when they define an economic mode like this: "In economics, a model is a theoretical construct that represents economic processes by a set of variables and a set of logical and/or quantitative relationships between them. "
So what’s the deal with for example constraint optimization models and prospect theory?
And so econometrics - ’ Econometrics is concerned with the tasks of developing and applying quantitative or statistical methods to the study and elucidation of economic principles.'- is ‘actually’ just ‘using math as the language of economics, because certain concepts might be too complex for verbal logic to adequately describe’?
To try to find the size and significance of various economic forces is something you need a priori theory for. If that is ‘all’ the mainstream does, then, indeed, there is no difference. E.g. to try to find the size and significance of a minimum wage law is an empirical question. The empirical question is not wether or not minimum wage law will increase unemployment relative to the size it would have been. Again; if this describes what you do when you talk about economics than there is no quarrel. I’m not attacking ‘the mainstream as such’; I’m criticizing people who think that the way to do economics is using econometrics and/or quantitative models.
But nobody tries to find quantitative economic laws, rather, the try to estimate the size and significance of various economic forces.
They study history, they should really be called econometristorians
Oh; but I’m not saying that they don’t do that. E.g. the perfect competition model has conclusions that (as far as I can see) follow logically from the assumptions. But the assumptions are blatantly irrelevant because they are irrelevant abstractions. That’s the whole difference between precise and non-priecise abstraction. There is nothing wrong with abstracting away certain features; but the perfect competition model abstracts away from everything that is relevant when you talk about competition.
I’m not claiming they do not logically deduce certain things from postulates. Only; sometimes these postulates don’t make sense.
That is true; and that is exactly the Austran critique on (for example) the perfect competition model. It is true that when the assumptions of the perfect competition model hold, the conclusions follow logically. However; these assumptions are completely irrelevant in the world we live in. That’s why the Austrian start from ‘self-evident’ postulates and deduce from there .
Well; ‘in principle’ is just begging the question. Is it? At this moment in time there is no proof what so ever in either way wether or not this is possible or impossible as far as I know. And it’s an interesting question for austrian economics when it would be possible and when people were actually doing it.
If ‘mathematics’ is simply purified version; sure; no problem. I don’t care wether or not you see ‘from the action axiom it follows that acting beings have ends and use means’. Or A = Action B = Ends and C = Means and from A => B and C or whatever how you want to put it. But again; that’s not what ‘models’ do. They try to predict the future even if the assumptions are unrealistic. (At least; that’s the way Friedman describes models in his book essays on positive economics. ) I’m sure that not all mainstream doesn’t do this kind of utter irrelevance any more - but it doesn’t follow that there is still an epistemological problem.
Again; the problem is not ‘wether or not to use data’; but how to use data. The law of demand, for example, is not empirically falsified by ‘a giffen good’. That proves that the mainstream has a different vision - an ‘objective’ one in stead of the subjective one Austrians use - on what the law of demand is. In a nut shelf: the price of a good gets factored into the value people attach to it. (One could describe this, I think, as signaling effects.)
When an Austrian sees something that the neoclassical sees as a ‘giffen good’; he would see a good that people value differently because of the price increase and it’s an interesting empirical question why. I gave the hypothesis of possible signaling effects here; others might work too. And that, indeed, would be an empirical question. But the law of demands isn’t subject to empirical ‘testing’.
So what’s the deal with for example constraint optimization models and prospect theory?
What do you mean what’s the deal? You’re going to have to be a little more specific than that. Perhaps numbers are put on the examples as illustrative tools, but the concepts themselves are qualitative not quantitative.
To try to find the size and significance of various economic forces is something you need a priori theory for. If that is ‘all’ the mainstream does, then, indeed, there is no difference. E.g. to try to find the size and significance of a minimum wage law is an empirical question
Theory is used to examine empirical phenomena, there’s no question about this. For example, from the introduction of Woolridge’s undergraduate Introductory Econometrics: A Modern Approach “Formal economic modelling is sometimes the starting point for empirical analysis, but it is more common to use economic theory less formally, or even to rely entirely on intuition”. See, there’s no talk of blindly taking “pure data” and trying to find economic relationships. He also states “econometrics is based upon the development of statistical methods for estimating economic relationships, testing economic theories, and evaluating and implementing government and business policy”. And that’s what key, mainstream economists understand that the relationship between theory and empirics goes both ways, one needs theory to do empirical work, but the data should also inform the models being used.
The empirical question is not wether or not minimum wage law will increase unemployment relative to the size it would have been. Again; if this describes what you do when you talk about economics than there is no quarrel.
Yes it is, like I said, basic economic theory suggests that minimum wage will lead to some decrease in the work force (or it won’t have any effect), but humans are fallible and theory is often incorrect or incomplete. In this case, the latter may well be true, but fortunately people were able to spot the error in economic reasoning, theorize as to why it might have been wrong and then gone on to test these theories. As any good science should do…
Well; nobody ever acts until ‘MB = MC’; because that wouldn’t make sense. If you were to say: ‘MB > MC’ than we’re talking sense here.
But besides this technical point; sure, so simplified assumptions might work for certain issues. I have no problem with that. When I describe economics I often say something similar as MB = MC, but in a technical sense, that’s just blatantly wrong, because there is no equality in that kind of evaluation.
The chain of reasoning can not be empirically falsified. See; when you say that a triangle has 3 corners, you don’t think this is empirically falsified when you encouter a circle. You say; oh, but this theory doesn’t apply to this concept. The same kind of reasoning applies to the Austrians insights. They are apodictally true; but not always relevant. A reflex is not an act; so therefore the theory of ends and means does not apply to it.
What can be empirically verified or falsified is wether or not a certain theory is applicable in a certain historical period. And we need more empirical work there. But the theories them selves are true as such.
In so far the mainstream does similar things; rock on. In so far the try to make theories based on historical data and predict the future as such, they aren’t doing economics.
‘Policy purposes’ is not economics, it’s political entrepreneurship. Which is something completely different. To the extend policy makers want to ‘predict’ the outcomes of certain policies, you can use historical data and such; but this is not economics. It’s like a entrepreneur using prices to make predictions - sometimes it fails, sometimes it doesn’t. This can be better or worse; but I wouldn’t consider this to be economics as such. And even if you do consider this to be economics; it’s important to realize the epistemological nature of it.
When you say; ‘data was looked at under certain circumstances’ it does not disprove that a minimum wage, ceteris paribus, will increase unemployment. It proves that other factors are in place and it might be interesting to look for those factors. But it doesn’t prove that the minimumwage theory is wrong; that one is certain.
Minumum wages are always ‘bad’; even if the ‘data’ suggests otherwise. Data can not disprove the theory. What is fallible is a model that wants to predict the quantitative effects - or definite measurable qualitative effects - but this is not what economic theory is about. Counterfactual thinking and ceteris paribus…
And this is what is completely irrelevant for economic theory. Data can inform models who try to make predictions; but these are irrelevant for economic theory as such; they are relevant for economic policy - which is not the same thing. But even if you; then still: this can not give you theory as such because it ignores the counter factual as such. If it has use; the use is limited. It can, for example, proof that a certain minimum wage doesn’t have that big quantitiave effects and that these effects are ofset by other things.
And this is exactly the wrong kind of use of theory and history - as explained before. This might be useful in addition to economic theory; but you cannot deduce ‘actually; minimum wage actually increases unemployment sometimes’ just because there is a correlation between minumum wage and labor increases. The only thing we can deduce from this; is that other factors are in to play that counter the minimum wage effect. Because it does not make sense to say that an increase in the minimum wage will employment rise.
Well; nobody ever acts until ‘MB = MC’; because that wouldn’t make sense. If you were to say: ‘MB > MC’ than we’re talking sense here.
Well, theory would suggest that agents who maximise utility will attempt to take advantage of any gains from trade, and that’s all that this says. Of course, in reality, the theory is misleading, agents will often leave (very small) gains from trade unexploited. And this is one example where theory fails to describe the real world and must be amended as such.
Your position seems to be that theory can never be wrong, only misapplied. I guess I find the distinction to be silly, theory is only useful to the extent that it helps us understand the real world. What the point to theory that is irrelevant and useless? If you have a model that makes incorrect predictions then clearly it needs to be amended, the only way that this can really be done is by looking at the empirical data and seeing if some effect is overstated or something is missing, and then going back the theorizing about why this may be.
Without feedback from data to the models there’s no assurance that ones a priori theorizing will be any relevance to the real world and a lot of the most interesting questions come from instances where theory and data conflict with one another
Policy purposes’ is not economics, it’s political entrepreneurship. Which is something completely different. To the extend policy makers want to ‘predict’ the outcomes of certain policies, you can use historical data and such; but this is not economics. It’s like a entrepreneur using prices to make predictions - sometimes it fails, sometimes it doesn’t. This can be better or worse; but I wouldn’t consider this to be economics as such. And even if you do consider this to be economics; it’s important to realize the epistemological nature of it.
I was actually referring to scholars working on optimal government policy and the like, but this issue is not important, so let’s not pursue it.
Minumum wages are always ‘bad’; even if the ‘data’ suggests otherwise. Data can not disprove the theory
Wow, you’ve just gone and made a broad, a priori proclamation on an empirical data and contradicted yourself. To put it in your own terms, this isn’t a case of data disproving theory, it’s a case of theory being used incorrectly (namely, it didn’t look at other economic forces that were in effect in these circumstances). With regards to minimum wage, I’ll repeat what I said earlier, if it’s found that minimum wage laws have little to no effect on unemployment, or even the opposite effect that was expected, we should look at why this is so and look to include these elements in our model, so as to make the theory more relevant to the real world.
Well; this isn’t exactly true. Theory can be completely wrong: ‘sun rises cause alarm clocks to go of’ is a theory which is completely wrong. Another thing is that a theory may be logically coherent but irrelevant for the world as such. The perfect competition model and the conclusions who follow from it is such an example. It’s probably correct that everything that follows from it, follows from the assumptions. But the practical irrelevance of this theory is enormous by the sheer impossibility of these postulates. Another mistake in theory can be a wrong deduction from certain postulates; Menger and Bohm-Bawerk definitely made some. Mises probably too. And so on.
It is certainly true that theory has to apply to the real world; that’s why Mises was so rigorous in trying to find axioms who are relevant in the real world, i.e. the action axiom and a few other assumptions like the relative scarcity of labor over land. But if the logical deduction chain is correct, it can’t be wrong internally. It’s like: if a, then b. A, thus b. Following these assumptions; it will always be the case that if a, then b. You can make a mistake in this chain of reasoning. Or one could have an ‘A’ which is irrelevant in the world as we know it. ‘If we have all the knowledge, then …’ is irrelevant. You can make a completely correct theory based on that assumptions; but it wouldn’t be relevant. That’s why Austrian economics has (1) postulates that make sense and (2) deduct theory logically from them.
Probably one of the clearest expositions of this point of view is in this paper: http://www.peterleeson.com/Was_Mises_Right.pdf I’m not defending anything any different than the points raised in this paper. I suspect that this paper is written for a neoclassical audience, so you might benefit from reading it.
There is no point in theory that is both irrelevant and useless; so let’s get away with perfect competiton model, monopoly model, etc.? Austrian theory is, however, both correct and follows from relevant a priori’s, i.e. postulates that are relevant in the real world.
Well; the point of economics is not to make quantitative predictions, but to make qualitative statements who are always true, even if the data says otherwise, because of the ‘what would otherwise would have been point’. Let us take the minumum wage example again. We say that a minimum wage will increase unemployment even if the data shows that unemployment actually goes down. This doesn’t invalidate the theory. It doesn’t invalidate the qualitative statement. It’s just a basic counterfactual statement that is necessary true. We don’t have to look at the data. We do have to look at the data to know wether or not these effects are offset by other effects that actually increase employment of the marginal worker. (E.g. subsidies).
The clue is understanding that we do_not construct theory to grasp the whole of reality - because this quantitative, not qualitative. We are not making a theory to ‘predict’ the exact unemployment rate the next 2 year; so we don’t ‘need’ (1) the minumumwage, (2) the subsidies, etc. etc. That is not what economic theory is about - the way Austrians look at it. It’s about making simple the complex world that is out there. We try to study effects in isolation and we can have qualitative effects for each and every one of them. The empirical relevance of all of these effects is an empirical question; which is very interesting to study for a certain historical period, but we can’t deduce from this that it’ll be the same in the future.
The key is to understand that there clearly is a difference in what constitutes an economic theory. ‘looking at the empirical data and see what effect is overstated or if something is missing’ is not the method of economic theory (according to Austrians) but the method of applying economic theory to historical data. We do not get economic theory from this; we get historical comprehension from this.
I don’t see how you can deduce economic theory from that behavior that is always and everywhere true. What you do get, is a theory that explains thàt historical period. You can construct a theory that says that the minimum wage law was a really big effect because of x and z, but the subsidies of set this slightly, etc. But that’s not an economic theory; that’s a theory trying to explain a certain historical period. That is not the same thing.
There is some truth in this statement; but probably not the way you think. It is true that the postulates need to make sense - action axiom does make sense, perfect competiton assumptions do not. And there is some discussion wether or not this is strictly empirical or not. I’ll quote Rothbard on this:
Whether we consider the Action Axiom “a priori” or “empirical” depends on our ultimate philosophical position. Professor Mises, in the neo- Kantian tradition, considers this axiom a law of thought and therefore a categorical truth a priori to all experience. My own epistemological position rests on Aristotle and St. Thomas rather than Kant, and hence I would interpret the proposition differently. I would consider the axiom a law of reality rather than a law of thought, and hence “empirical” rather than “a priori.” But it should be obvious that this type of “empiricism” is so out of step with modern empiricism that I may just as well continue to call it a priori for present purposes. For (1) it is a law of reality that is not conceivably falsifiable, and yet is empirically meaningful and true; (2) it rests on universal inner experience, and not simply on external experience, that is, its evidence is reflective rather than physical7; and (3) it is clearly a priori to complex historical events. (‘In Defense of Extreme A Priorism’)
So but in a world where the action and some other broad statements is relevant, a whole bunch of theories follow. Another assumption is the relative scarcity over land; it is true that we can comprehend of a world where it would be the other way around and we can construct economic theory based on that. But that’s not the world where we live in, so that’s not that relevant.
Again; the difference is that you think that Austrians try to make kind of economic theory/models that the mainstream does. Obviously; if that were the case, the method of the Austrians doesn’t make sense. But thàt’s not the case. When we talk about economic theory, we do not mean what the mainstream means by ‘models’.
We don’t need ‘data’ to proof or ‘models’; we need to check wether or not the assumptions make sense. If they do and if the logical chain is logically true; than the theory is true - no matter what the data says because the data is always a conglomerate from all different kinds of interactions. Minimum wage laws will always have a negative effect on employment because this follows logically from a certain postulates who are nearly always true. Apparently it is true that in a monopsony labor world a minimum wage wouldn’t have that effect. So we need to check wether or not the labor market is monopsony. If it isn’t; than we know that the minimum wage will have a negative effect; no matter what shows in the empirical data, because this is, again, constructed by a whole lot of different factors that influence the labor market.
And it does not make sense to say that ‘it is found that minimum wage laws have the opposite effect that was expected’ (I’m assuming you say ‘raised employment’). This can not be constructed based on empirical data. You cannot make a causal claim based upon a empirical observation alone. This is like saying: ‘the sun rise causes alarm clocks to go of’, only a little bit fancier. And we know it doesn’t make sense, because there is no sensible theory that can explain this, based upon postulates that are relevant in the real world.
I must add that the minimum wage law - if stated correctly - doesn’t talk about ‘raising unemployment’ but ‘raising unemployment on the marginal worker’. There might be a causal mechanism that a minimum wage law increases the employment of other marginal workers, e.g. lawyers to deal with the minimum wage law. It doesn’t follow however that the minimum wage law theory is incorrect. Just that we live in a complex world where effects can be offsetted by even bigger effects somewhere else.
I’m not using the minimum wage theory incorrectly when saying ‘it will raise the unemployment of the marginal worker’ always and everywhere - where the starting postulates hold - even if the data suggests otherwise. (Because we don’t live in a world where minimum wages aren’t the only factor determining the whole of employment.)
A specific of the minimum wage theory are, for example, the fact that entrepreneurs care about monetary returns. If all of the sudden all entrepreneurs consider their business to be charity programs; than the minimum wage might even have an increased effect in employment. That is true. And as soon as there is a reason to say that this postulate is relevant; we can talk business about the effects of the minimum wage. But the specific assumptions in general are practically universally present and thus it’s always true (when the assumptions hold).
When you say ‘the theory didn’t look at other economic forces’ than we aren’t talking about economic theory, but about a theory that explains a certain historical circumstance. This is history, not economics. It is true that for a theory to explain a historical event, this is important - not economic theory as such. And this is just applicable to that historical circumstance; it isn’t applicable to make any predictions in the future with it.
History is about finding the relevant theories that are relevant to explain certain parts of the historical circumstance. And this is an art; because you need economy, sociology, psychology, etc. when we see a huge increase in the minimum wage and no increase in unemployment, this posits a very interesting question about ‘what the freck happened?!’
It wouldn’t follow that the minimum wage theory is sometimes incorrect. It follows that to explain this historical period we need more theories to eplain what happend than just the minimum wage theory.
That is why Mises did economic theory. To apply it and to comprehend economic history.
That’s why Austrians publish awesome stuf on empirical matters. That’s why a lot of academic Austrians advise young Austrians to really take into account the empirical work done by the mainstream. Because a lot of this is what they can use. And they have an advantage because they have the causal-realist findings behind them to work with the data.