My take on Bryan Caplan's criticism

Economics Economics Questions
1

I recently went through Bryan Caplan’s criticism of Austrian economics (AE) and I’d like to express my opinion on it. I find some of them to be (at least partially) true and some reconciliation is possible.

First of all, even though Caplan seems to place himself among mainstream economists, I find it odd because he clearly isn’t like the everyday economist. Keynesian views are kinda mainstream nowadays and he seems to at least partly depart from such views.

What I find accurate

It seems to me Caplan is right about the assumptions Rothbard places on continuity, utility and indifference. Rothbard is more or less unable to accept a (mathematical) model for what it is and for its intended purposes. And there are plenty of examples within sciences that prove this: various phenomena are explained using internal states which only serve as a model and we don’t pretend to actually know them in detail (e.g. entropy in physics)

However, dropping these assumptions doesn’t seem to hurt core AE results, but it allows the use of calculus, which is a very powerful tool.

He also seems to point out various fallacies rooted within AE, such as the supposed distortion of markets that inescapably affects investors (we would expect good business to anticipate downturns caused by state intervention). Instead, I think the following arguments form a more realistic point of view:

  • State intervention allows bad business to be born, live and make profits.
  • Downturns in the market are actually ill-defined, i.e. a particular economic disaster is classified as such based on arbitrary criteria (populist, statist point of view).
  • Some businesses actually continue to thrive during downturns.

What I don’t find accurate

Caplan misses the point when drawing conclusions about things such as welfare, intervention and economic calculation. He arrives at the erroneous conclusion the results of state intervention are at most indeterminate. AE is also wrong to conclude such actions provably lead to disaster. In my opinion, a realistic statement would read: State intervention is extremely likely to lead to disaster, given the circumstances. At best, the state can perform like any other investor, but the scope and specifics of its actions make it very unlikely that it will succeed. However, it’s difficult to quantify (or prove) this likelihood.

He’s also wrong to think statistical and historical data can provide meaningful results. Unless such “experiments” are proved beforehand to be well-behaved, controlled (i.e.: that they elicit a good response to what’s being tested and suppress external “noise”) and reproducible, they’re practically useless as scientific tools. No other reputable science claims to have tested theories based on uncontrolled and non-reproducible tests. Why should economics be exempt? The mere difficulty or even impossibility isn’t a compelling argument for accepting bad evidence!

Conclusion

This was a short take on Caplan’s point of view. Overall, I think his contribution is useful, as it puts AE on the right path by correcting various inconsistencies and errors.

What do you think?

2

The problem is that the models are used to say “we know this in detail”. Further: comparing models of forces and reactions among items vs modeling the thought processes of each individual are different categories altogether. What is the measuring device we could possibly use for our “psychic states” (psychic in this sense used as the psyche, and not as Dionne Warwick’s Psychotic Friends Network) that holds for every individual?

3

Well, that’s my point as well. You can’t measure U (utility) meaningfully at all, but you can say dU/dQ < 0 (which is also a basic tenet of AE when stated in a finite differences version). dU/dQ can be measured for a specific good and individual in comparison to other substitute goods by merely observing the preferences of that individual acting in the market at that moment in time.

On the other hand using exact values for utility isn’t a no-brainer after all, as long as it’s used to illustrate concepts or to provide examples in a pedagogical sense.

I think the main problem of mainstream economists is not that they use such models per se, but that they do hasty generalizations based on them. Justifying state intervention could not be accomplished using only data and models, unless there’s an underlying assumption that:

  1. a particular data set is a worthy, just goal (e.g. minimum wage and other arbitrary indicators)
  2. coercion should be used to accomplish the goal
4
5

Economists have been proving daily for 70 years that they assume every conceivable detail about everything. Just listen to any economist talk about the economy.

Math is language and technique for precision, not logic. Using it can’t possibly help us abstractly understand any subject. It is not necessary to formally know even 1+1=2 to calculate. Otherwise, you would be incapable of orienting and acting in space and time. Math is for precise calculation, recording and presentation of those values that economists supposedly do not use or creating formulas that do nothing until values are used.

Your only explanation of how these supposed fallacies are false is to assume the unacceptable position that “we” would expect “good” business to anticipate downturns.

That list is too long, but I will give perhaps the best example: “The science of economics has made progress…”

6

You’re right, but would it be wise to simply ignore anything outside AE just because those who came up with these things misuse them?

There’s quite a thin line between math and logic. And I think you’re wrong about the role of mathematics in understanding. Just look at people like Godel and see what profound implications their works have on theories in general. Perhaps “math” is a misnomer and a too widely encompassing term, but the point remains the same: math isn’t only about calculating raw values.

Yes. Why shouldn’t we expect good business to anticipate downturns? If it were so incredibly difficult, we wouldn’t have seen Mises, Rothbard or other Austrian-oriented economists warning us of the impending doom or anticipating recessions.

That is simply false. Mainstream economics certainly contains much bullshit since Keynes & friends. But judging things by putting them into categories isn’t a fortunate approach.

7

I’m not articulate enough to address the other points, but regarding this one:

Someone in another thread mentioned something along these lines (and I think it makes sense): even good companies participate in malinvestment with easy credit and easy money because they would fall behind their competitors if they didn’t. Regardless of whether they see the long-term consequences, they can’t avoid taking advantage of the situation in the short term, because it would hurt their business when their competitors suddenly have artificially high levels of capital.

8

I don’t see how you draw this conclusion. Consider a time like now, when we are in a liquidity trap. The State has access to debt at 0% interest while the market rates go through the roof (and would be even higher were it not for even more state intervention). Even if they did just as well at making investment decisions as the market as a whole (hypothetically buy a broad based S&P index fund), they would do better than the market as a whole just based on their privileged access to leverage alone.

9

Bryan Caplan isn’t familiar with formal logic, perhaps? There was a great distinction made by Jevons in his Pure Logic, as qualitative logic yielding quantitative results.

Continuous utility functions, monotonic or not, are not preference orderings, because preference orderings are the underlying concept, preceding the concept of number. And most of modern logic follows this, but most economists except game theorists (backward induction is really just deduction, except in the sense of mathematical inference, which is substitution of equivalents).

The big problem: The assumption of completeness required for unique utility functions is violated by Godel’s incompleteness theorem. There is always a preference outside my list if my axioms are finite in number, but my function won’t show it. Only computable logical operations can be made functions (as Frege advanced logic since Jevons and De Morgan), but of course, preferences are not computable ahead of time.

I do not know my preferences ahead of time for all things that might not exist, leading to changing utility functions as time progresses. But a utility function IS my WHOLE preference list! If it changed, then it was not my whole preference list, and my previous calculations are off. But we assumed that my previous calculations are not off, because it IS my Whole preference list. But we know its not. Contradiction.

If we begin with incompleteness, as Menger and Mises do, then we go step by step, and only look at the marginal quantities, or one argument and one predicate. We do not see the whole utility function, and we avoid contradiction. General equilibrium is never a problem, and none of the contradictions therein cause problems.

Gossen was first to prepare the equivalency conditions of partial derivatives in nonlinear optimization of a life function E. But then, he discussed how such a calculation of E is not possible, but only possible after the fact . He discussed marginal quantities (ten chairs can be a marginal quantity as much as one chair, but never half a chair: the integral is a approximation) and economic calculation. He then goes into monetary calculations step by step, treating the equilibrium as a process. Menger, without knowing Gossen, went much farther, by starting off with marginal quantities. These fine points are important.

In fact, it is incompleteness which yields Discontinuous time-discounting in experimental economics, as observed for many people, for instance. Try explaining that with completeness as an assumption (required for utility function analysis).

Without completeness, there are many utility functions (actually infinity) per each preference ordering, because of not 1:1 correspondence of classifications of objects and classifications of classifications. Its just like complex numbers can yield many (infinitely many) geometries, but all geometries reference complex numbers, or simpler real numbers, or simpler natural numbers, etc, which are all included in complex numbers. We cannot use geometry to derive number systems, but number systems to derive geometries.

Note: Gossen, founder of partial derivative analysis/nonlinear optimization, was aware of this, and remarked on it (although he sometimes added area-value under the curve while at the same time saying this is invalid). Gossen’s diagrams are the literal substance of Edgeworth’s box, but Gossen is much superior to Edgeworth as a theorist, because Edgeworth agreed with Marshall on many important points, leading to error.

Edit: Gossen’s equations could be (are) set up as ratios of marginal quantities, so they are not technically partial derivatives. Today, in modern economics, we use partial derivatives, but that is not the reality–partial derivatives only work assuming completeness of preferences. Gossen assumed a life function E, but made sure to show how this is calculation assuming the person has lived his life and of course, knows all the goods he wanted to sort into optimal quantities. Since the life function E is unknown in life, people consider a series of calculations, not a single calculation (its how he introduced monetary calculation, by showing the noncomputability of the life function E or the comparison of utilities comprising E). Neoclassicals such as Samuelson who like Gossen criticize Gossen for speaking of last “atoms” of a quantity, instead of last “infintesimals”, but it is they who are wrong if they mean to say this is description of reality, or that reality tends to this.

10

This is false. THe line between logic and math is very distinct. Math does not function without logic. Logic comes before math. Logic is to Math just writing is to literature or heating is to cooking. In the absence of logic there is no math.

Math is the product of applied logic. Math is not the only product of applied logic. Logic produces utilities outside of math, like problem solving.

Math cannot replace logic nor does it exist in parallel with logic.

Note: The use of logic was applied to compile this answer.

11

Would you be so kind as to derive geometry from ‘logic’ ?

12

Certanly.

Logic → Math → Geometry.

Do I get a cookie?

13

Yep.

Specifically, on why logic precedes number: logic is required to prove consistency of axioms of arithmetic. I recommend From Frege to Godel: Sourcebook. Contains lots of difficult to find translations.

Look at Roger Penrose’s latest book. Its an introduction to that sort of thing insofar going from arithmetic to geometry. He tried not to be technical, but if looking for technical stuff, read any of the references (the original papers he cites.)

Insofar logic to geometry, consider, for instance, 1:1 is required for some geometries, but logic is only isomorphic. Logic is required to prove number, and number to get 1:1, which then begets the geometries requiring this.

Gossen’s equations if interpreted as he wrote them: ratios of marginal quantities, but not derivatives in the sense of function of anything, we can get the result of partial derivative optimization, but without the nonsensical baggage attached to the idea of function. Condillac, Gossen, and Menger built their systems on the contrast between surplus and nonsurplus, or valuable and not valuable, in reference to specific and non-equivalent marginal quantities.

Modern economics sometimes loses this fine point, and distances itself from logic, creating errors where originally there weren’t any. Its too bad people who like formal logic never do economics (or are socialists, because they never applied logic to economics, only mathematics), and mainstream economists rarely venture into formal logic, unless to explain “exceptions”. Austrians who have been consistent in their use of logic, get caught in the gulf, unfortunately.

14

Because it is insane to expect any random business to anticipate a central bank induced cycle when the people who are doing the anticipating are economists on staff and most professional economists advise the opposite of what is true. At this point in time it has become the economics profession itself causing the business cycle by virtue of sporting the title of “economist” and hiring out as forecasters.

You probably judge the state of economics according to the sum of what is buried in every book. I judge it by what most people who profess it profess.

15

Anyone know a response to Caplan? Especially about the points 2.1, 2.2, 2.3? Those seem like serious flaws of Austrian Economics if cricism is sound

16

2.1 William Barnett

2.2 Hoppe

2.3 no. flat out not heard what Mises and Rothbard were telling him. Think about Menger analysing supply and demand in a discrete and discontinous bizarro world called ‘the horse market’

Block ->Caplan http://mises.org/journals/qjae/pdf/qjae2_4_2.pdf

17

Technically, math is not ‘derived’ from logic. Mathematics is ‘derived’ from its foundational axioms using logic.

Not really relevant, but fun to discuss :slight_smile: