Some Fundamentals of the Austrian View.

Economics Economics Questions
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Inquiry & Analysis.

I am interested in a discussion of the foundations of the Austrian view- as the participants of this forum understand them. I have been reading in this area and I have a lot of material at my disposal; so I am not seeking links or suggested reading; I have fundamental questions and I need a living person to engage me- not just a pointer to another text or dissertation. I realize the kind of discussion I want is not everyone’s cup of tea. But if some of you reading this post are interested in an analytical exploration of ideas and experience, I invite you to join me in a sincere discussion.

The very first topic of discussion I would like to open regards the view of participants concerning the ‘ergodic axiom;’ or, how do Austrians (theoretically) anticipate future events?

with kind regards,

kalinz

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With regards to supposedly anticipating, or predicting, future economic events [if that is what you are referring to] , there is nothing in Austrian methodology that allows “Austrians” to consistently predict them, no more or less than there is in any other economic school.

Von Mises even devotes a whole chapter of Human Action to the fallacy of the economist as being someone able to predict future events.

Of course this has not prevented “Austrians”, particularly those in the investment advisor profession, from claiming to make successful predictions about future events. [:)]

As far as I am aware, Von Mises’ contention was that the Austrian methodology should be used to explain/understand only past events, and present day, unfolding events to some degree , not to make predictions about future events [i.e economic forcasting].

Speaking as a “post” Austrian, myself,[so my opinions don’t really count [:)] ], I believe that no-one [i.e economist , investment advisor , tea- leaf reader] can consistently, successfully predict future economic events- and I also believe this to be pretty consistent with what Von Mises himself said.

However, others [“Austrians”] may well disagree with both myself and my interpretation of Von Mises’ writings on this subject, and, I’m sure, would be more than happy to engage further on this.

Regards, onebornfree.

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onebornfree- thank you for your post (and I hope you will follow up with more comments).

What I am thinking here concerns decision making- based on anticipation of future outcomes. To elaborate a little: when an austrian economist makes a decision about the role of the state in markets, trade, & commerce, what criteria does he employ at the most fundamental level- to predict what the future might look like based on the decision-makers choices- as in to have a truly free market, or to have one with the state as a major player. For instance, if Von Mises denies the ability to know the future outcomes of decisions- how does he posit truly free markets and deny the role of the state as desirable?

I find your comment (that you do not believe the knowledge of future events to be viable)- very interesting. It seems the foundation of Classical Theory is based on this very idea- the future can indeed be known by decision-makers. I am truly in the dark on the most elemental notion of this in the Austrian school. Please elaborate more.

kindest regards,

kalinz

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kalinz,

I am not familiar with the ergodic axiom. Could you define or link me to a good source that provides a definition? I’m not very far into my economic conceptualization and have begun my inquiry with logic, epistemology, and ontological realism. I’ve read introductory books on economics so excuse me for not having read Human Action yet as I’m preparing my familiarity with methodology, and what I’ve noted already, beforehand. What you say here seems somewhat in the area I’ve currently been researching, maybe, maybe not.

I have begun reading a paper by Uskali Maki today in which he is exploring explanations in the ontological realist sense and how this is a form of prediction. I haven’t read the whole paper, so, you’ll have to excuse my incompleteness on what he will eventually get to I’m sure, but I didn’t want to pass this post up in order to also engage with another person in an area that may have to do with my current exploration.

Maki had this example using the quantity theory of money of a prediction derived from an explanation:

index:

M is stock of money

P is price level

source

What I read here is: an increase of the stock of money results in a rise of the price level with all else unchanged in the economy. With the money stock increased by a given priced percentage with all else unchanged provides an overall conclusion with the price level rising that given price percentage that the money stock increased by. [critique if need be] Yet due to contingent factors this is only a probability and it will vary and involve approximations.

Therefore this explanation leads to a prediction based upon all else staying the same with the changes noted in the equation.

Is that something within the realm of your original post? Even if not, if you could still direct me to my initial questioning in this post. Thanks.

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I don’t think any Austrian has said that predicting the future is impossible. If that was the case, you’d have to say that being an entrepreneur or an investor is a waste of time. What’s impossible is consistently predicting very short-term events regarding complex systems like the stock market.

There are Austrians who have been very successful in predicting long term trends like Peter Schiff and Jim Rogers. In fact, Schiff, who I have been following for a while, is a living proof that the idea that consistent prediction is impossible is untrue.

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You’re familiar with Mises’s treatment of probability in terms of case and class variations?

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Think of it as a little kid [us] looking into a giant pot of food [the future].

“When will it be ready, son?”

“Dunno.”

“What will it taste like?”

“Dunno.”

“Well you don’t know anything, do you, son. I’m going to throw in a barrel of salt to sweeten it.”

“Wait minute. I do know that the more salt you put in, the saltier it will be, not sweeter.”

“Oh really. And exactly how much salt will make it too salty for me to enjoy?”

“I don’t know. But salt makes it saltier, that I do know. And I know a whole barrel will certainly do the job.”

End of parable.

That’s the situation. The economy is way too complicated and full of unknown future events to be able to say exactly when and what will happen. But we can say that salt makes it saltier than it would be otherwise. Meaning for example, that artificially low interest rates will lead to a boom and bust sooner or later. What exactly, down to three decimal places, is “too low” an interest rate? We can’t know that. But we can know that close to zero percent is definately too low.

I think Peter Schiff is so successful because the gov’t in recent years has not been very subtle in it’s use of “salt” They have been throwing it into the soup by the warehousefull, not by the spoonfull. He is a smart person, a student of Austrian Economics, who understands what leads to what, and the govt makes his job easy for him by overkill. I mean a trillion dollar deficit. Is that a borderline case, like 3 tablespoons of salt?

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I forget who pointed this out (I believe it was Mises) but the above is incorrect, specifically the “by the same proportion” part, because it ignores marginal utility, which affects all goods including money. It also ignores that increases in M affect P over time, and in some sectors more than others, depending on the preferences of whoever receives the money first. We can say that an increase in M will result in a rise of P, but we cannot determine which parts of P, nor can we say by how much except that we know it must be LESS than a proportional rise.

IOW, if you were to double your cash holdings, would you then be willing to pay double for everything? Obviously not, and this is true for everyone.

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you’re right. It was pointed out by Maki later in the article that this proportionality equation doesn’t fit Austrian economics. I did mention I wrote that out without completing the article and Maki later uses that same equation to point out how Austrian economics explains that formula differently thereby adjusting it. You’re correct it would be a more qualified explanation to rid the “by the same proportion” part. If that was gone along with keeping what I did manage to write in later in that post: Yet due to contingent factors this is only a probability and it will vary and involve approximations. It would be more accurate.

Though that formula of uniform proportionality is inaccurate, which I’m very glad you pointed this out, it doesn’t swerve from the gist I was trying to portray which is of prediction derived from explanation such as what you wrote: it must be LESS than a proportional rise.

Thanks for pointing this out![Y]

Edit: It’s explained similar to how you put it on page 19 of the pdf with a citing to see von Mises; 1953 included.

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Here’s an article about the ergodic axiom. It seems that Keynes and Mises both rejected it, but aside from that they diverged radically.

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More faq:

Q: But what about interest rates? Isn’t the govt providing a valuable service, fine tuning the economy to make sure interest rates are at their most desirable?

A: Huh? Most desirable for who?

Q: For the economy, silly.

A: Is the economy a person?

Q: The economy, you silly amateur, is the aggregate of all the people in the country.

A: So a certain interest rate is good for everybody in the country?

Q: Sure. And the govt, in its infinite wisdom, knows exactly what that is.

A: Wait a minute. If I want to borrow money, what rate is better for me, a higher one or a lower one? And what is better for the bank? So how can you say that rate X is ideal for us both. The borrower would be better off at at X minus something, and the bank better off at X plus something. So in a sense X is bad for us both.

The reality is that we have to know the unknowable. What would the interest rate be had the govt not butted in? Say it is Y. If X is different than Y, then someone is worse off, me or the bank, but someone. If X=Y, who needs the govt beaurocracy with thousands of paid employees living off tax money to do what would have been done without them?

In any case, once more the govt has either robbed Peter to help Paul and itself [if X is not = to Y] or just robbed Peter to help itself [if X=Y].

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Thank you everyone for your posts. I want to address each person in the best way I can, and I look forward to more of your views. I think a central tract relevant to each person should incorporate an approach to the significance of the ergodic axiom. Smiling Dave has posted a link above- an excellent book review containing a concise expression of this key constuct of Classical Theory- for purposes here, we may understand the ergodic axiom is as follows:

Treat economics as a science- and develop it with rigor as a system, applying to the system the condition that in an interval of sufficient duration, previous states (or very close approximates) will occur- as in statistical methods used in dynamics. Thus treated, economics as hard science allows the economist to predict future outcomes- as the astronomer predicts the celestial orbits.

So we see how this enables market practitioners who have data samples from the past to employ statistical methods to predict the future, in effect, to know the future. In this way, decision-makers can, based on the data, know future outcomes and make rational choices.

Should not each of us ask, how else can one make rational choices, unless he somehow uses the past to ‘know’ the future? And remember, all efficient market models rely on this aspect of Classical Economics.

So now, I circle back to my earlier query… how does Mises (or the Austrian School) make (or justify) rational decisions about targeting future outcomes… as in promoting the decision to have a free market as opposed to a mixed one… and I ask this based on the search for a guiding principle in Austrian economics which can be articulated by the participants here- again, in their own words, so to speak.

I continually read Mises, but his text does not answer my questions as I read, and only living persons in real time answer questions as formulated specifically.

Warm regrards to all

Kalinz

P.S. Smiling Dave- your latest post appeared while I was writing this one- so I add this post script for you; I am posing these questions with some very basic contrasts in mind, note: pure reason (rationalism) versus scientific method (reason plus empiricism) versus more abstract mathematical method (efficient market models). I am looking for the Austrian articulation of method more than of specific results on any given issue- as in statist versus anti-statist. That is, the fundamental method which guides all thought and conclusions.

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From what I’ve seen, the Austrian school claims that it works like high school geometry. it assumes self evident axioms, and using classical deductive reasoning such as found in any good book on simple logic, reaches conclusions.

Any one with a mind realizes that the only possible way to refute this is to either 1] show that a given axiom is false, or 2] show that the rules of deduction have not been followed. But since the axioms are pretty obvious, and the deductions pretty carefully done, it’s very hard to do this.

So the usual criticism is to call it “unscientific” because it doesnt use heavy math, or gather data and draw conclusions from that. Oh well.

So I guess “pure reason” is the answer.

It claims that the scientific method is not very useful in studying economics, because the scientific method is ultimately based on experiment. In an experiment, you examine two situations that are absolutely identical in all repsects but one, and see how that one change affects things. Well, how are you going to do that in an economic universe? Tell people to go back in time and do the housing bubble all over again, but this time put in one new regulation?

As for abstract Math, it has a bad name in Austrian circles, mainly because other economic schools have tried to use it in the most absurd ways. I think personally that bottom line, the reason that Math is scorned in AE is that for the simple things, you dont need Math. And for the intricate things for which Math might conceivably be useful, their very complexity means that you will never find a formula that nails the situation down.

I’ve seen people saying that Math needs numbers, and the essence of economics [that I like vanilla ice cream a little more than chocolate ice cream] is not something that can be numbered [I don’t like vanilla “1.36 times” more than chocolate]. But I think there is a field of math that studies this kind of thing, lattice theory. I’m not sure if the results there are applicable to economics, or are besides the point. Just saying.

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Smiling Dave- Okay, very good.

Pure reason. Rationalism. Now, for me, things come into better focus.

Yes, I agree with you when you say- if the axiom is true, and the rules of deduction are followed- one cannot refute the conclusion. So, if the Austrians do employ this method successfully (and yes, since elementary logic is not difficult for most thinking people once they focus a bit) Austrians must begin with axioms which are either self-evident, or preface the main argument with establishing the truth of the axiom they plan to use to launch the main argument.

Now we are in a better position to turn toward an examination of the statist versus the free market controversy. In fact, if you are willing, I would like to play the devil’s advocate with you. Let’s begin by recognizing explicitly the fundamental Austrian axiom which is used to begin the anti-statist argument. But you should be the one to do that- to formulate the statement for us.

My intention is to look at your axiom and to see if it is indeed self-evident- and that is your challenge- to formulate it such that it is self-evident. Otherwise, you must then establish your primary axiom by way of reasoning from some still more primitive self-evident truth.

And as a reminder to everyone- allegory, metaphor, and such ancillary literary devices, while sometimes very convincing- and pleasing to read, do not constitute rigor, because they shift the elements of the argument to different classes which do not actually apply, however aptly employed.

I very much look forward to this engagement. Your turn, Smiling Dave.

Sincerely,

kalinz

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Murray Rothbard did a much better job building up AE from absolutely nothing [axioms like “people will prefer to pay less for something than more”] in Man Economy and State. And Mises’ Human Action is all about that too.

Sadly I cant work my way through them, attention span ain’t what it used to be. A Dilbert strip is more my speed.

I did read Economics in One Lesson by Hazlitt, from where I learned why the state is only harmful. Its an easy read, short book, free too.

Here: http://jim.com/econ/

The gist of the argument, as I understood it, is in my earlier posts. You can strip them of the metaphor and story line and see the logic underneath. Or you could read Hazlitt, who certainly does a better job than me.

Ah what the hell, let me try.

  1. taking money from a productive person by force and giving it to an unproductive person will not improve economic conditions

  2. In fact, it will make things worse, because the productive person will have less incentive to work further, and less cash to work with and invest. Thus there will be less produced and thusthere will be less to go round for everyone.

3.Every thing the state does is nothing but taking money from a productive person by force and giving it to an unproductive person

  1. conclusion from 1, 2 and 3: The state can only make things worse.
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  1. taking money from a productive person by force and giving it to an unproductive person will not improve economic conditions

Is the above statement true in many situations? Maybe. Is it without doubt true in every possible situation? Not so clear at all. (As an example, if the father of four children, refuses after a divorce to provide any financial assistance to those children, and a judge then rules he must [by law]provide support according to his means- it might be that he will help the economic community by helping his children to become productive citizens (though while very young, these children could not be characterized as economically productive). In the real world, this is an example of forcible transfer of money from the productive to the unproductive, and in my view- in the longer term likely to be contributive to the improvement of economic conditions. Conclusion: this statement cannot be regarded as a self-evident truth is all possible cases.

  1. In fact, it will make things worse, because the productive person will have less incentive to work further, and less cash to work with and invest. Thus there will be less produced and thusthere will be less to go round for everyone.

If the first statement is not all inclusive of all possible cases, and it is not self-evident as an all ecompassing truth- then the second statement does not follow in all cases necessarily. Therefore it cannot be part of the fundamental foundation of the anti-statist position. Even if it is an empirical fact in many cases, it is not a logical truth is all cases.

  1. Every thing the state does is nothing but taking money from a productive person by force and giving it to an unproductive person

With all due respect, Smiling Dave, the above statement in does not follow from the first two at all; and worse yet- it is blatantly false. (In December 1942 the forces of Imperial Japan attacked the United States at Pearl Harbor, U.S. territory in Hawaii- and the United States’ Congress declared war. Subsequently the state prosecuted war against Japan for four years in defense of American freedom. (As an almost natural byproduct of this war, the US economy economy emerged from the depression and became the dominant economy of the world.)

  1. conclusion from 1, 2 and 3: The state can only make things worse.

In my honest view, this conclusion is invalid, based on all the above.

And a reminder to all: The function of the state is primarily national defense; and thus its role rightly extends beyond affairs of exclusive economic focus.

Smiling Dave, please try again. I want us to be able to come to consesus, if possible.

Regards,

kalinz

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What I think “giving to the unproductive won’t help matters” means is “giving to the unproductive won’t help matters now”. So if I force a guy to pay child support, at time 1 the guy’s productivity decreases while consumption increases. This means that output falls or falls below its potential. More present goods are consumed and used in prejudice to future goods.

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kalinz,

Here’s three axioms:

property is axiomatic (property includes property in ones person and scarce resources; This is distinct from the natural right of property which is a theory involving the concept of justice. NR of property has also been explained as an oak law, ie. ceteris peribus and Newton’s first law are also examples of oak laws, used to determine just(ice) property because such laws exist as long as nothing interferes with them but anyways that is neither here nor there as the topic was axioms)

human action is axiomatic (praxelogic)

consciousness is axiomatic

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OK, one at a time. I won’t quote your whole post, but will refer to the numbers in the post.

  1. If we assume the parent has an obligation [i.e. owes the money] to the child then of course you are right. There is an an implicit assumption that we can make explicit and hopefully settle this. So the revised version with everything spelled out is:

taking money from a productive person by force and giving it to an unproductive person TO WHOM THE MONEY IS NOT DUE will not improve economic conditions

  1. now that 1 is fixed, 2 can follow.

  2. was not meant to follow from 1 and 2. it is a description of what the state does, by definition of the word state.

here’s a quote from http://en.wikipedia.org/wiki/State_(polity)

“A state is a set of institutions that possess the authority to make the rules that govern the people in one or more societies, having internal and external sovereignty over a definite territory. In Max Weber’s influential definition, it is that organization that has a “monopoly on the legitimate use of physical force within a given territory”. It thus includes such institutions as the armed forces, civil service or state bureaucracy, courts, and police.”

There ya go. To paraphrase, a state is that which uses force to boss people around and take their money, and tells them its all legal and great.

Now when they take someones money by force, they give it to someone who would not have gotten the money any other way. Otherwise, why use force? In other words, it went to an unproductive person.

The counterexample you give has two parts. First, the state took peoples’ money and bodies by force and made them fight a war. Even if we assume that the war could not have been avoided, which I highly doubt [what do the japanese need to fight us for?], the state’s armies are less efficient than private armies. Maybe we needed an army, but not a bad one, which is what the state gave us.

The truth be told, Mises himself was of the opinion that a state’s only job was to provide defense. But many Austrians nowadays disagree with that. In my lifetime, all I have seen was total failure of the military to defend us, or to win a war for that matter. We did not win Vietnam, we did not win in afghanistan or Iraq [why are we still fighting there if we won?], and all the wars in my lifetime have been totally pointless.

Which makes me very suspicious about every war.

As for the war saving the economy, yes that is the official myth that is spoon fed to us all. I remember reading that in Samuelson’s book and not really understanding it. In any case the facts are quite the opposite. This site has plenty of proof that its total nonsense. You can do a search in the literature section and in the media section.

Here’s a logical challenge for you. Show me the axioms and line of reasoning that proves the following: taking many many many raw materials out of a country and dropping them out of a plane onto another country, thus destroying the raw materials, will revive a depressed economy in the first country.

  1. having patched up 1,2,and 3, 4 now follows.

Let me add in a “0” here, as well.

  1. I am giving you not the best statement of the axioms, nor the offical Austrian version, but my own. The sources I mentioned in the earlier posts do a much better job.