Was hoping I could get some feedback and insight from this message I got from this Econ Grad. We were debating mainstream econ v. AE. While I have been a studier of AE since the late 90’s I have no formal education in economics. Thanks in advance for everyone’s time.
From our discourse:
"Assuming you have been drawn to economics due to the recent financial crisis then I assume you havent been up on the mainstream literature of the past couple of decades. Of course Austrians look like geniuses by “predicting” the current collapse but thats simply because their theory is a theory of collapse, eventually they are going to get it correct. If their theory is so obviously true why werent people clamouring for a cut back in the bubble before it got out of hand. The answer is that they have a mediocre methodology even if they have the correct conclusions. A methodology that has little to offer the field of economics during times of prosperity. This is why the method fails, it cannot gain adherents in good times and therefore cannot direct the debate in bad times.
If macroeconomic modelling is such nonsense (and to a degree it is) then why cant the austrians beat the mainstream economists at their own game? Either by producing mathematical models that can compete or providing us with mathematical proofs/explanations of the bankruptcy of mathematical modelling. If they really disagree with the method of mainstream macro then they need to attack it head on by pointing out specific studies within the literature and writing up solid counter attacks, many mainstream economists would welcome this. Instead they endlessly regurgitate their basic beliefs on mises.org over and over and over again while being completely out of touch with anything that is going on in mainstream macro. Not very convincing to those that dont already agree with ABCT
While this post has been critical of ABCT I will admit I still agree with the conclusions, I have been convinced (biased?) by recent events and many of the calls the Austrians have made in the past 5 years. But honestly, the Austrians really have to step their game up if they want to convince people that have a solid understanding of mainstream economic methodology."
Message
Re: economics etc
Ya like I came to economics through austrian economics and went into econ for undergrad because I love economics. I do not completely endorse mathematical modelling because there is a ton of stuff that goes on that is really absurd, ie assuming specific shape of the utility curve simply to produce calculatable functions. But there are cases where you set up a model do a bunch of mathematical calculation and you do get to a result that is actually shown to be true by the data. Now I’m not entirely sure if this is due to the ability of the model to derive accurate results or because there is a certain amount of selection bias going on in the creation of models, ie I’m sure PhDs work through a ton of models that dont work and get thrown out, the ones that mimic what we believe to be true econometrically stick around, at least until they are proven false. Im not a PhD so I do not really have the understanding or knowledge to make that call but there are lots of interesting results within mathematical modelling that let you look at economics in a way that I believe is beneficial even if its not austrian.
I just wish austrians were a little less arrogant I guess. They have created this deductive methodology without really realizing that it is not more powerful than mainstream economics (which also relys on deduction to a great degree) and does not take into account frictions that have been established through important econometric work. So if you simply are ignoring frictions in your deductions and do not use econometrics to back up your beliefs, its pretty trivial for those that disagree with you to disprove your theories even if you have a methodology that is impervious to econometric evidence. Whether or not the austrians agree with econometric methods is inconsequential, whats important is what those on the fence believe and someone who spends 20 years collecting statistical data looks a lot more convincing than someone who sticks their fingers in their ears and ignores all opposing statistical/mathematical evidence, to be a little hyperbolic towards Austrians
I believe in Austrian economics but you should just take it with a grain of salt (like all economics). You really need to focus on the assertions they are making and try and find any hidden assumptions that they may not be explicitly declaring. I apply this method to all economics and try and keep an open mind when reading all points of view. Austrians really lack an appreciation for the complexity of macroeconomics and the only reason I write this to you is to keep you open minded if you actually go into an econ program.
Where oh where have the Monetarists gone? Where oh where can they be?
I would simply ask this question:
Can you increase wealth in society by increasing the amount of currency? Or equivalently, Can you increase the wealth in society by devaluing the currency? Does the same hold true for both the long and short run time frames? In other words: Can you create wealth through destruction?
If a follower of one of the Classical Schools answers No for the long run but Yes for the short run then ask how? Only the Austrian Theory of the Business Cycle provides an explaination of how new money unbacked by savings leads to a boom then a bust. And only the ABCT shows how money devaluation can lead to the boom and bust cycle without significant across the board price increases.
Austrians really lack an appreciation for the complexity of macroeconomics and the only reason I write this to you is to keep you open minded if you actually go into an econ program.
Excuse me? Have you not read about the complex structure of production in AE? discounting humans and limiting production to K^2+L^3 douglas cobb is complex?
Do you know a lot about econometics? What about that one study that proved that sun spots “cause” the business cycle? And the fact that age or experience is always squared?
all of this is assertion… he does not explain why the methodology is bad, why it has little to offer, or why it fails. He just simply states that the methodology is bad, has little to offer, and it fails.
I do not claim that macro modeling is wrong. I claim that the theory that the model illustrates is wrong. And if the model is illustrating false theory, then it is nonsense. But to say that Austrians are against models just shows how little he knows of the subject he is critiquing. For example, look at Man Economy and State, there are a bunch of models and charts that illustrate proper economic theory. we never bash Rothbard for using such models. And another example, look at Garrison’s explanation of Capital theory or what he calls, Macro Austrian Econ(vid below).Again, the critique we have against mainstream macro models is that the models are illustrating false theory.
Thanks for the reply, since you brought up Man Economy and State, from our discourse he wrote:
While mathematical modelling in macro does not necessarily make stronger arguments than the typical logical deductive method of the Austrians, there is nothing really all that special about Austrian axiomatic deduction, they do not deduce a complete system of human action contrary to many claims made by the Austrians. Their prose is still riddled with many unsupported assumptions that seemingly come out of nowhere. I’m over halfway through Man, Economy, and State and the most surprising thing I discovered was that the Action Axiom plays a very small role in their deductive method. They have simply deduced the law of diminishing marginal returns from the action axiom (people have a limited amount of time to order their preferences and therefore order them from least preferable to most preferable) and then spend the next 500 pages deducing mainstream micro in a similar fashion to how micro was taught to me throughout my program.
Thanks again for the responses as they are helping me to understand mainstreamers v. AE…
woah! I think he has highly misunderstood praxeology and economics if he thinks the only thing deduced from it is diminishing marginal utility. the whole backbone to economics is praxeology
“Of course Austrians look like geniuses by “predicting” the current collapse but thats simply because their theory is a theory of collapse, eventually they are going to get it correct. If their theory is so obviously true why werent people clamouring for a cut back in the bubble before it got out of hand. The answer is that they have a mediocre methodology even if they have the correct conclusions. A methodology that has little to offer the field of economics during times of prosperity. This is why the method fails, it cannot gain adherents in good times and therefore cannot direct the debate in bad times.”
It cannot gain adherents therefore it fails? That is ludicrous. This guy is saying some weird stuff (edit). The austrians don’t seem to have interventionist fantasies that the mainstream are still stuck on. While the mainstream is still stuck on public goods, austrians realize that “public goods” is a meaningless distinction and unscientific. It could go on and on I think.
I didn’t mean you, sorry if you took it that way. I think that another main difference or at least tension is that the mainstream are positivists and the austrians have a disdain for positivism.
“If they really disagree with the method of mainstream macro then they need to attack it head on by pointing out specific studies within the literature and writing up solid counter attacks, many mainstream economists would welcome this. Instead they endlessly regurgitate their basic beliefs on mises.org over and over and over again while being completely out of touch with anything that is going on in mainstream macro.”
All of this is B.S.
“Either by producing mathematical models that can compete or providing us with mathematical proofs/explanations of the bankruptcy of mathematical modelling.”
How do you come up with a mathematical proof showing that mathematics is not useful in a given area? That’s absurd. There are plenty of explanations out there, so he is just not paying attention.
“But honestly, the Austrians really have to step their game up if they want to convince people that have a solid understanding of mainstream economic methodology.”
Lol ok then he won’t read anything on mises.org or the libertarian journal so how can he know whether or not the Austrians are “stepping up”?
Read everything by Bob Murphy which you can get your hands on. Among the contemporary Austrian scholars, he has the best grasp of current mainstream economics and he is pretty adept at dismantling it from within.
I had the same difficulty your friend is having in understanding why the Austrians are so damned “stuffy” but the reason is simple… they’re not talking about the same thing that the mainstream economists are because they don’t believe in using economics arguments as a cover for violating private property rights. Hence, all collectivistic and aggregating arguments go right out the window. The whole idea of “econometrics” is inherently statist… what use are econometrics except to plan and tax an economy?
For example, your friend says that Austrians have nothing to say about times of prosperity… how to make the economy ‘go faster’ or something like that. But he fails to understand that that’s because Austrian economists eschew the very idea of making the economy go faster. It is a totalitarian idea. Who has the right to interfere in the business of peaceful, productive people in order to get them to ‘go faster’? If you start from a respect for private property rights, then 90% of macroeconomics is useless at best because to act on it would require violating property rights en masse.
Finally, many of the Austrian criticisms of mainstream theory are based on taking them at their word. For example, Austrians maintain that socialism is impossible. Mainstreamers point out that modern governments actually manage to do pretty well at intervening all over in their economies if measured by nothing else than GDP/tax revenues. But that’s not what Austrians are arguing against. Sure, governments may be very good at maximizing their revenues and they may be incredibly adept and clever at managing the minute details of people’s lives to achieve this goal (think VAT) but this is not what mainstream political apologists have said at the outset is the goal of the modern democratic socialist government. The modern democratic socialist government is supposed to be the embodiment of “the people” or “the general will” and thus its interventions into the economy are supposed to be self-disinterested and have the net effect of increasing overall prosperity. To later change the argument to say that, well, governments increase their own revenues and in the process end up increasing overall prosperity is shifting the goal posts. Government is rational vis-a-vis its own prosperity. The Austrian (or even public-choice) contention is that government is not rational vis-a-vis the prosperity of its subjects.
Thanks Clayton, very informative. I sent him a message about first principles and human interation being voluntary. I don’t think I was far off in my points, this thread is helping a lot!
For some time I’ve been scratching my head when it comes to these criticism but had the feeling it goes back to ideology. Obviously why would anyone with libertarian, anarchist, voluntaryist, anarch-capitalist etc ideology care about economic theory based in statism. Thanks to all again, more is welcomed.
