Then what’s the point?
Business cycle theory itself is an ex post facto explanation of why past business cycles have happened in the past but explicitly rejects crystal-ball gazing regarding future business cycle events.
someone should probably tell that to the posters here claiming that bernanke is flooding the market with cash and setting up the foundation for the next boom-bust cycle.
or is that level of crystall-ball gazing alright?
I think this is why the majority of Austrian economics is praxeological in nature. We can reach praxeological conclusions regarding how human beings will behave in the future, for example, that they will prefer to possess things which seem more valuable to them than things which seem less valuable to them. This preference is purely subjective and, therefore, cannot be directly observed except in the case of one’s own preferences but we can observe the revelation of preference in others when they leave behind or exchange away less valuable things and seek or exchange for more valuable things. Of course, this praxeological line of thinking is completely devoid of any concrete application to the real world, particularly with respect to predicting the future course of human events. Nevertheless, praxeology is valuable for comprehending why the market process emerges as it does, just as evolutionary theory (which is, by and large, un-testable in the physics laboratory sense) is valuable in understanding why the natural world has emerged as it has over the last four billion years. You cannot use evolutionary theory to predict how species will evolve in the future. But it does explain how they have evolved in the past.
Clayton -
ABCT explains how inflationary expansion by central banks has systematically led to discoordination in the structure of production, including labor, as well as the misallocation between consumer demand and producer capacity. This does not lead to the conclusion that every expansion of the money supply will result in a subsequent economic collapse since central banks have certainly learnt from their own past and are cleverer today than they were 100 years ago. Nevertheless, the Austrian approach would reject any claim on Bernanke’s part that his money printing will not result in another business cycle. It is obvious, therefore, that if Mr. Bernanke does not want to risk causing an economic collapse, he should not print money.
Clayton -
To make an analogy that I think make things easier to picture:
There’s the old, historically innacurate but engaging anecdote about both NASA and the Soviets facing the issue of the fact that pens wouldn’t work in zero gravity. NASA spent and invested in millions of dollars to solve this problem building a pen that could write in zero gravity. How did the Russians solve the problem? They used a pencil.
My gripe was about economists taking the “NASA” route almost every time.
My point was much more narrow, about the way economists seem to do and use maths. Hence for instance as in the above case, the grinding out of long winded calculations, to gain a trivial result one could gain otherwise by simply using one’s logic, is encouraged over doing the latter, for whom marks are penalised in a test. This is by no means the only case, I noticed that my microeconomics professors often made a big deal about “proofs” that displayed nothing more than circular reasoning arriving back at the terms they started their manipulations with(unlike a genuine mathmeatical proof that gains a theorem with some new insight and unpacked informational content). But again, I’m fairly sure such pointless mental masturbation is rewarded and encouraged(and this is definitely not the case in physics; even in theoretical physics, which is my background, I was precisely penalised by one of my viva examiners for this in my first “practice” presentation of my masters thesis).
I’m not sure if your complaint is with the way economists use it, so much as the education system. However, I think your original complaint was a bit unfair, understanding that I wasn’t in class with you. Sure, in a simple case, it may be easy to see the end of the calculation, but everything you will encounter is not a simple case. That’s why teachers want you to work it out carefully.
“What bullshit of Samuelson’s are you talking about? His contributions to economics are numerous so it’s important to distinguish between those contributions which reveal his true insight and those areas where he was, perhaps, simply being partisan. The thing is the Soviet Union example, as far as I can tell, was simply an extrapolation of bad Soviet data into the future, whatever your opinions on formalism there is always need for some sort of speculation but also some numerous difficults involved.”
The thing is, he extrapolated bad Soviet data til the very end, in the late 80s he was saying that the Soviet Union could surpass the West. Late 80s, when anyone could turn on the TV and see the USSR was crumbling.
So you say “he was fed bad data!”. He was limiting himself quite a lot, he could have done something extremely simple to actually know about the real conditions of the soviet economy. He could just have asked one of thousands of people who fled the Soviet Union about how things there were like. Or could seem some video footage that were already common of the long lines.
But no, he prefered to drink the kool aid of his own equations, hoping they would shape reality somehow. In essence, he forgot that economics is, afterall, about people.
Perhaps you’re right. I perhaps was very lucky to have studied in an environment that emphasised problem solving over simply rote learning for my first degree. If more people approached mathematics(and thinking in general) in the way of the following author, the world would be a very different place:
http://www.amazon.com/Mathematical-Puzzling-Gardiner/dp/0486409201
It was writtent by a former lecturer I had in an isolated module outside the main discipline. I failed it first time, but excelled in the resit. Probably one of the most immense growing experiences of my life was to learn to appreciate books like this.
I perhaps was very lucky to have studied in an environment that emphasised problem solving over simply rote learning for my first degree.
This has certainly not been my economic grad school experience. I know for a fact all my professors and TAs have been bright people who value simple approaches to complex problems. If this has not been your experience I would say it has more to do with your institution than the discipline as a whole.
Here is an old (but still popular) ranking of econ grad programs world wide:
http://econphd.econwiki.com/rank/rallec.htm
see where your institution falls.
“By relieving the brain of all unnecessary work, a good notation sets it free to concentrate on more advanced problems, and in effect increases the mental power of the race.” – Alfred North Whitehead
I will never understand the Austrian portrayal of mathematics. It’s downright anti-intellectual. In fact, I’m also sick of critics who argue along lines of, “Economics isn’t like physics; it’s like biology.” Well, if that’s the case, then how does serious biology work?
Using derivatives to understand marginal analysis is so easy that it’s shocking other strategies are even considered. Calculus > Austrianism.
StrangeLoop,
Austrians have nothing against math or number and you know that. What austrians are against is the very loosy and arrogant methodology used by many of the mainstream where any pretty equation or graph goes . And I’ve seen mathmeticians and physicist siding with the austrians because they love math and hate to see it so randomly misused by economists.
Claiming that to be the norm of economic scholarship shows prejudice, not evidence.
I’m not quite sure about that. I’ve encountered open hostility (including in my recent reading of Rothbard).
Essentially, if you’re claiming that an undisciplined methodology is undesirable, then we agree (and I imagine most economists–mainstream or not–would). Such a criticism does not divide Austrians from others. Where the line is drawn, perhaps, needs to be clearly drawn by Austrian methodologists (e.g., is finding the maximum of a function–i.e., optimization–necessarily a dead end in economic inquiry?).
It might be easy, but it’s still wrong. You may not have noticed but even on a conceptual level, both neoclassical and austrian marginal utility are not analogous to each other. The latter referes to a ranking, albeit of the least valued of a good held, or the most valued not served, and these rankings are only made derivative to an ultimate ordinal ranking of ends(with complications arising due to the strict quantiative relations between means and ends and the ratios in which the former can be employed to achieve the latter). Every ranking is made in reference to all others implicitly, and so does every change in marginal utility contains a reference to all others it overlaps. The neoclassical conception of “marginal utility” refers to the partial derivative of the utility function with regard to one of the goods, and floats altogether without such referential content altogether.
In fact, many unsurprisingly, using this definition of marginal utility hardly consider the law a “law” at all, and only a general hypothesis[cf. Baumol, Economics: Principles and Policy p.86-87], with exceptions such as when a man gains more stamps in his collection “approaching” 10. Aside of assuming the relevant consideration of utility (and the one to be relevant for price formation) to be a temporal one comparing past utilities to present when concerning the problem of present price formation, this approach also makes the error of formulating the law of marginal utility with ignorance to human purpose and the quantitative means end relations relevant for achieving action[See Mises, Human Action, p.124-5 for a delightful disquisition on this misunderstanding of the nature of utility].
Indeed, neither is it surprising that the concept important for neoclassicals for price determination is the MRS and not this “floating” partial derivative marginal utility[For an example of this admission of the arbitrary character of this partial derivative and subsequent application along these lines using the MRS, see Varian, Intermediate Microeconomics, p. 65-66 in the 7th edition(International Student Edition)]. The former at least mimics the referential character of the Austrian formulation of law of marginal utility, allowing for the quantity traded to be arrived at the tangency point of the indifference curve for any given price, allowing for general derivation of a demand function from solving the Lagrangian optimisation problem of utility with the budget constraint. What’s funny, is this derivation, as a consequence of the chain rule; is invariant of the form of the utility function following any transformation, monotonic or not, or whatever. e^-u(x,y) allows the same demand functions to be derived as for u(x,y), and similarly, to get the actual marginal consideration between 2 goods as one of them increases, the relevant consideration is the diminishing character of the MRS. Interestingly this characteristic was admitted to be a rabbt out of a hat by John Hicks himself in Value and Capital[see Hicks, Sir John Richard; Value and Capital, Chapter I. “Utility and Preference” §8, p23 in the 2nd edition.]. We can understand it rather as a necessary way to replicate the character of the marginal utility law for the Austrians from the mathematical framework of representation disconnected from action utilised by the neoclassicals, since it allows the “referential” marginal utility. Note also, the diminishing character of the MRS, in just the same way the MRS itself is invariant under all transformations as a consequence of the chain rule, can itself be achieved by using negative, increasingly increasing, diminshing utility functions of whatever type you please.
Furthermore, we cannot be anything more than uncertain about the necessary meaning of these mathematical operations on the utility function, since only the latter was established with regard to actual preferences(although not for ends or means, but abstract “bundles” of goods), and this was done via a relation of representation, not of equivalence(On this point, see the following paper by Dan Mahoney).
So yes, perhaps it is “shocking” you don’t seem to understand the mathematics you claim to be applying. The Austrians on the other hand have far less of a problem applying mathematics to real things like production. On this point cf. Rothbard’s masterful account of the law of returns on p.466-478 of Man, Economy and State. (His derivation, like Stigler’s is algebraic, I guess as a matter of taste I would have employed calculus to arrive at the equivalent result).
Wow. Looks like someone has an affinity for using the passive voice (“neither is it surprising??”) and talking like they’re in the 19th century. Disquition!? trying a little hard, eh?
Honestly, I am only picking up half of what you’re throwing down here. It’s very hard to understand the points you’re making. No offense, but if you pose questions like this in class its probably why your TA gets flumuxed and it certainly isn’t his fault.
Anyways, I’ll just take this opportunity to warn StrangeLoop to avoid going down the road that post is headed. I know on HeroicLife’s old Austrian Econ forum I got into a similar argument about the “real meaning of neoclassical utility, ordinality, etc” that lasted for days before everyone just gave up and quit posting. And that hasn’t just been my experience. That’s essentially what Bryan Caplan had to do when arguing the same topic with Block and Hulsman after his “Austrian Search for Realistic Foundations Paper” was published. This entire line of conversation is an unsatistfying time suck.
That’s why these days I don’t even bother getting into it. I figure live and let live. If some rothbardians (not all austrians actually believe this stuff) really want to believe that they don’t use neoclassical choice theory because they just have a deeper understanding of mathematics than everyone else on the planet that’s fine with me. But I still think it is funny that after all the huffing and puffing about methodology, ordinality, rankings and ties, the conclusions of rothbardian price theory are almost identitical to those of neoclassical price theory.
I say almost because, as Caplan notes, rothbard’s approach seems to have a problem with handling income effects of price changes. Of course, that didn’t stop Rothbard from lifting the conclusions he desired from neoclassical sources, even if he couldn’t be bothered to derive those conclusions himself using his own value scale framework (i’m thinking about the backward bending supply curve for labor). This isn’t a small problem. Especially considering that whether income effects even exist, let along whether they can actually be replicated in the rothbardian framework, was debated by Rothbardians as recently as 10 years ago!!!. What a lovely and clear theory that is, right? Neoclassical economists settled this internally at least 50 or 60 years ago. Welcome to the 1950’s guys!!!
Anyways, like I said, not all Austrians are Rothbardians. You won’t find any mention of value scales in Peter Leeson’s work. Seek out those Austrians imo.
But this all just a long winded way of saying that the introduction of this topic my cue to exit, stage riggggghhttt.
Post Script for absk:
“So yes, perhaps it is “shocking” you don’t seem to understand the mathematics you claim to be applying”
Strange Loop and the entire mainstream economics profession, right? But neither is it suprising to moi that thee believes that thou is not only smarter than the TA teaching his econometrics class, but the entire economics profession as a whole. Zounds!!!
This does not constitute a coherent argument and it entirely ignores the actual arguments made by Austrian economists regarding untenable assumptions and general problems associated with mainstream price theory and welfare analysis. Even if mathematics is useful as a demonstrative tool in economics, which I believe it is, the arguments put forth by Mises, Kirzner, and Lachmann still hold.
Basic problems with mainstream price theory:
- All information is given; there is no room for discovery.
- Human action presupposes disparity in subjective valuations (preference), i.e, it cannot occur when an individual is truly indifferent.
- Consumer choice is contingent upon given prices (in the budget line) which, in turn, forms market price. This yields an infinite regress.
- Cardinal utility is implicitly and explicitly employed (inter-temporal choice).
if you think that sentence was intended as an argument against any austrian critique, and not a commentary on absk’s apparent ego-tripping, then i think you may be posting too late in the evening. take a nap, then give it another shot.
Personally, I always check my cognitive faculties before posting by replicating euler’s proof of euclid’s theorem. true story!
Student, yes perhaps I do indulge myself with my language nowadays. I find reading older works of literature like I have been introduces me to a vocabulary that also allows me to broaden in a sense the scope of my thinking, but i guess I am being rather “19th century” if you want to use that term in a derogatory sense as it appears.
Furthermore, a lot of the points I made above are rather original to a critique I’ve been writing(not original to RB or Mises, but inspired by parts of their work though) I presented at a conference and will be presenting to some of my own professors. Neither have I been rude in any of my discussions with my professors, in fact considering one of the points I made using Mises critique’[p.124-5], my econometrics professor acknowledged problems with standard consumer choice theory in describing certain kinds of scenarios like these. I respect that, even though I thought the solution he proposed was rather ad hoc and unsatisfactory, as he alluded to work in consumer demand theory that has been used to produce mathematically exceptional (often discontinuous) utility functions that can account for this kind of behaviour.
In any case when I first saw your post I was looking forward to a good counter argument. Some old forum members like “Neoclassical” could at least provide that. But if you can only resort to ad hominem attacks then whatever. (zounds…)
Actually, my post wasn’t all complaints about your writing. I said that after all the huffing and puffing about methodology, rothbard’s alternative framework yielded nearly identical positive conclusions to that of neoclassical theory. Are your criticisms different in this regard?
Specifically, do you think your “original critiques of neoclassical choice theory” will overturn any of the typical neoclassical predictions? For example, think about the slutsky equation. Neoclassical choice theory predicts that price changes will be associated with and income effect and a substitution effect. And depending on the size of each of these effects the real-world consequences of a price change of a single good could be ambigious. Do you expect anything different?
So what about you? Do you think your original critiques of neoclassical choice theory will overturn any of the typical neoclassical predictions? For example, think about the slutsky equation. Neoclassical choice theory predicts that price changes will be associated with and income effect and a substitution effect. Do you expect anything different?
Actually, my post wasn’t all complaints about your writing. If your critique of neoclassical choice theory is original, you could really take me to school in one respect. Specifically, I said that after all the huffing and puffing about methodology, rothbard’s alternative framework yielded nearly identical positive conclusions to that of neoclassical theory.
So what about you? Do you think your original critiques of neoclassical choice theory will overturn any of the typical neoclassical predictions? For example, think about the slutsky equation. Neoclassical choice theory predicts that price changes will be associated with and income effect and a substitution effect. Do you expect anything different?Actually, my post wasn’t all complaints about your writing. If your critique of neoclassical choice theory is original, you could really take me to school in one respect. Specifically, I said that after all the huffing and puffing about methodology, rothbard’s alternative framework yielded nearly identical positive conclusions to that of neoclassical theory.
So what about you? Do you think your original critiques of neoclassical choice theory will overturn any of the typical neoclassical predictions? For example, think about the slutsky equation. Neoclassical choice theory predicts that price changes will be associated with and income effect and a substitution effect. Do you expect anything different?Actually, my post wasn’t all complaints about your writing. If your critique of neoclassical choice theory is original, you could really take me to school in one respect. Specifically, I said that after all the huffing and puffing about methodology, rothbard’s alternative framework yielded nearly identical positive conclusions to that of neoclassical theory.
So what about you? Do you think your original critiques of neoclassical choice theory will overturn any of the typical neoclassical predictions? For example, think about the slutsky equation. Neoclassical choice theory predicts that price changes will be associated with and income effect and a substitution effect. Do you expect anything different?Actually, my post wasn’t all complaints about your writing. If your critique of neoclassical choice theory is original, you could really take me to school in one respect. Specifically, I said that after all the huffing and puffing about methodology, rothbard’s alternative framework yielded nearly identical positive conclusions to that of neoclassical theory.
So what about you? Do you think your original critiques of neoclassical choice theory will overturn any of the typical neoclassical predictions? For example, think about the slutsky equation. Neoclassical choice theory predicts that price changes will be associated with and income effect and a substitution effect. Do you expect anything different?Actually, my post wasn’t all complaints about your writing. If your critique of neoclassical choice theory is original, you could really take me to school in one respect. Specifically, I said that after all the huffing and puffing about methodology, rothbard’s alternative framework yielded nearly identical positive conclusions to that of neoclassical theory.
So what about you? Do you think your original critiques of neoclassical choice theory will overturn any of the typical neoclassical predictions? For example, think about the slutsky equation. Neoclassical choice theory predicts that price changes will be associated with and income effect and a substitution effect. Do you expect anything different?
Using derivatives to understand marginal analysis is so easy that it’s shocking other strategies are even considered. Calculus > Austrianism.
They see me writing…I’m trollin’..My math is so loud…they hate it…
Math is not economics. It’s that freaking simple. Economics is a teleological science, it has to do with purposivity and not any BS like ‘maximization functions’ which do not exist.
It’s still a work in progress tbh (on that matter I do sincerely apoligise for saying I finished it above, it’s the most ambitious piece of work on economic theory I 've attempted yet, and it’s been taking me a very long time, so I do often want to say I’ve finished it…), there are some aspects of what you mentioned with the income and substitution effect that I intend to go into more detail on, but even more so as regards to the backward bending supply curve for example, I show can be derived without having to consider leisure as some sort of strange homogeneous good with inferior proerties and normal properties depending on the level of a person’s income. Instead this property is derived simply acknowledging that consumption is the end of all production, and that it takes time which must fit within an actor’s general time-horizon(a concept Rohtbard introduces in MES, but doesn’t use explicitly for any analytical purposes).
So I guess my answer is: I’m not completely sure yet. Many results are similar, but with different nuances in their formulation and interpretation. Like i said, even though the MRS is a concept without connection to action, due to its referential characteristic, in actually being formulated in a way that allows one to compare both partial derivatives of the utility function in a ratio, it nicely allows one to replicate or mimic some(but not all) of the price clearing conclusions of Bom Bawerkian - Wicksteedian price theory. In a sense this should not necessarily be out of this world surprising.
One of the basic results of logic is the possibility to derive true results from false premises, e.g. all books are dogs, all dogs have pages, therefore all books have pages. A mistake of many positivists is thinking that one can start with premises that one already knows to be false as opposed to real hypotheses(ever seen an atom?), and thinking that one can treat these premises as constructing reliable theories when they yield correct predictions. Doing so is an abject misunderstanding of the scientific method. (Not that I’m claiming either MRS or parital derivative marginal utility to be “false”, it’s just that we cannot be anything more than unsure about the actual meaning of these identities with regard to actual action, and given what I have alluded to above, we have good reason to have strong reservations about this not being the case).
Finally, perhaps as a “peace offering” in this argument of ours, I can tell you something where I think we do have common ground. I do really think many Austrians(especially younger ones) need to brush up on mathematics and learn it well. A lot of people had much more difficulty with my presentation than I anticipated. Avoiding mathematics was certainly nothing done by the likes of Mises and Rothbard. Indeed I’m pretty sure Mises himself said the best way to avoid the pitfalls of mathematical economists was to properly master mathematics(I think he said the same vis a vis psychology and psychologism).