What "Mainstream" Economists Do Not Generally Believe

Economics Economics Questions
1

It gets a little tiresome going around individual topics and pointing out the cartoonish depictions or plain falsehoods about “mainstream economics”, so I figured I’d make a topic pointing out the most egregious misconceptions. Two points to keep in mind, the economics profession is far from being a monolithic establishment, different researchers and institutions can differ on multiple facets from questions asked to methods used through to conclusions reached.

  1. Contrary to many an Austrian claim, economists don’t hate markets, in fact, even amongst the most leftwing of the mainstream there is usually a profound appreciation for the power of price adjustments in bringing resources to their most valued use (first welfare theorem). Most textbooks will go to great pains to point out the power of the market to reach an efficient allocation of resources under certain conditions. However, unlike Austrians the mainstream argue that prices don’t always reflect the underlying economic conditions (e.g. externalities) or that in certain conditions individuals will have the incentive to withhold information.
  2. One bit of conventional wisdom thrown around these parts is that mainstream economists believe in some benevolent state. This may well be an assumption that will sometimes be invoked as a benchmark for comparison. But any textbook discussion government intervention in the market will usually go to great length to point out there exists good theoretical reasons why the government might not be able to deliver the desired result and an empirical record of the government fucking things up beyond all recognition (of course, there are also examples of governments actually doing a better job than the market).
  3. A lot of the talk of econometrics around here gives the impression that its purpose is to find quantative relationships that are time invariant or whatever. Or to sort through data without any underlying theory in order to find some sort of relationships between economic variables. Whilst this may occur, it’s more commonly used to test the applicability of a model given a certain data set. The fact that an economic model is logically consistent has no bearing over whether or not it is relevant. You guys can assert that the ABCT is a priori true but without taking a data set and testing a model, you’re left quibbling over how many houses have been left abandoned in order to gauge its applicability.
  4. The awful caricature of macroeconomics as some mechanical Keynesian bullshit belongs in principles level classes. ISLM at times provides a nice model for getting the intuition of the macroeconomy under your belt without any complicated math. But Austrian criticisms miss all of the most interest parts of intermediate macro: games between central banks and firms, expectations etc. I can’t comment on modern macro research because I don’t know nearly enough about it, but it certainly flies under the radar of every Mises Daily that purports to be commenting on the modern economics profession.

I’ll update this if anything else comes to mind… But yeah, if you’re going to comment on these issues, do yourself a favour and enroll in an economics degree or pick up a textbook.

2

Thank you for this. It’s been really sad to watch a lot of people around here strawman all of mainstream economics when the themselves have never opened an economics textbook.

If Austrian economics really wishes to thrive it needs to expand its outlook and possibly meld with other schools of economics.

3

source?

Example of someone denying this?

Examples?

So? All you did in that entire paragraph was basically agree with an assertion you claim is made by the Austrian camp, make the claim above about something else econometrics tries to do, and then claim ABCT doesn’t do that so it’s irrelevant. Can you please demonstrate how simply claiming what econometrics aims to do proves that it actually achieves it, or that it is even possible to do so?

Examples?

And if you’re going to attempt to defend an entire class of industry professionals and claim to speak not only for their side but their opponents as well, you might want to provide some actual sources backing up even one of your claims.

4

“of course, there are also examples of governments actually doing a better job than the market”

Please cite some examples.

And how do you know this to be true?

How is “better” defined?

What comparisons were made?

5

  1. I agree that economists - as a profession - tend to be more pro-market than the population average.

  2. The beef I have with mainstream economics is the treatment of the government as exogenous to economic theory. The status quo is simply treated as “the way it is”. This is sensible for business economics since that is, in fact, the reality with which business must cope. But for philosophical economics, it just doesn’t make sense. Governments are as much a part of the world of human action as any other entity and the conditions which governments create (such as a monopoly on law and security services) cannot be hand-waved as exogenous to the study of economics.

The godfather of the Federal Reserve - Nelson Aldrich - married into the Rockefeller family and John D. Rockefeller Jr. named one of his sons - Nelson Aldrich Rockefeller - after him. To treat the incestuous relationship of big business and government as something which should simply be ignored because it messes up our beautiful equations is absurd.

  1. The empirical questions tackled by economists like Steve Levitt are viewed as a form of historical analysis by Austrians. Basically, this kind of study is about constructing single-use models that attempt identify cause and effect according to certain starting assumptions (such as, rationality). The problem comes in when you attempt to make forecasts - or imply forecasts - on the basis of such models. At this point, you’ve descended into quant voodoo… “Whenever a business’s P/E ratio has gone below 1.0, it is sure to go into bankruptcy.” Past behavior is no guarantee of future performance.

  2. I have nothing to say here. I never attempt to criticize advanced mainstream macroeconomics on its own terms.

Clayton -

6

Why is it that mainstream textbooks, such as Mankiw’s, parrot such obvious bullshit as the free rider problem?

7

The Keynesian complaint is that central banks and government intervention are just accepted at the beginning of all conditional parameters. That is what takes the “oomph!” out of the austrian capital and credit cycle theory because it can bastardize the economic reasoning for savings. And while it doesn’t make sense to demonize an entrice concept of empirical study, it certainly does to criticize it on its foundational flaws.

EDIT: My money and banking book was written by a former FED governor and told straight lies about the institution. Congress wrote it, intricate decentralized design, unique in the central bank world, legitimiate not color of law, etc. Mishkin, the author, was at the Fed from 06-08 and just after he left “the perfect storm hit.” Why the fuck should i believe him if i can see on youtube that Peter Schiff knew in Nov. 06 exactly what was going on? The book obfuscated the concepts of derivatives to make them sound harmless if “disclosure agreements are made and agreed to” and, as usual, the divies as well as true disruptive effects of credit expansion due to intertemporal price signals.

My Public Finance & Public Policy class was a welfare economics class trying to make the case that efficieny and equity aren’t related and gave us theories to invade the economy and helped people to "find’ the “reasoning” to intervene in the market for virtually any “market failure.” Where society doesn’t maximize utility based on these government perspectives well then there is reasoning to intervene.

For example.: “If you don’t get your flu shot, then other people have a higher chance of getting sick, and therefore prices go up in the market and they miss class and their grades go down. Conversely, If you do get your flu shot then prices and risk of contamination go down and grades will go up!” So, here we have reasoning to make flu vaccination mandatory because the science of economics said so. =/

I’m not gonna go through the logical fallacies that are present there, but it really is in a college textbook by Jonothan Gruber (“Public Finance & Public Policy”) and that is what they multiple choice test you on.

8

You are basically confirming all the prejudices. Thanks for that.

9

We skipped the part on ‘government failure’ in the text book.

Also; it’s true that logical coherence doesn’t mean relevancy. However; it is also true that logical incoherent nonsense means irrelevancy.

We don’t need to test the ABCT. We do, however, need to comprehend the real world to check for it’s relevancy in comprehending a real world phenomena. You know; as explained by Mises. As done by, for example, Tom Woods for the recent meltdown. That’s economics. Not ‘testing’ anything.

Also; Milton Friedman his argument for positive economics is crap.

10

John James, if you want me to post examples of the factual inaccuracies regarding what the mainstream does and does not do, you can forget it! Fact of the matter is that from my many years reading Austrian articles and blog posts these are fallacies that I often see repeated. If they don’t apply, forget it and move on.

11

The problem comes in when you attempt to make forecasts - or imply forecasts - on the basis of such models. At this point, you’ve descended into quant voodoo… “Whenever a business’s P/E ratio has gone below 1.0, it is sure to go into bankruptcy.” Past behavior is no guarantee of future performance.

See, I kinda agree with this in principle, but I still think that as much as we should take all forecasting with a serious grain of salt, “quant voodoo” is definitely better than nothing!

12

So basically you’re going to make outrageous claims and blanket statements about an entire academic field and provide exactly zero supporting evidence for anything you say. K.

13

Has any Austrian on or off this site ever said this?

It’s amusing that you think objections against the free market like “asymmetrical information” and “externalities” are either unknown to us or haven’t been addressed before. Most of us are well-acquainted with neoclassical literature. So far as I’m concerned, the real issue is whether you’ve ever bothered to read any Austrian literature.

Austrians have attacked the notion that intervention in the market by the state can have positive outcomes; never once have we ever claimed that our opponents believe the state is a God-like entity unless they’ve explicity stated that as a position they hold (Mises refutation of etatism in The Theory of Money and Credit comes to mind)

That’s fantastic! You should send this anonymous textbook to Paul Krugman, Ben Bernanke, and Joseph Stiglitz, because they seem to hold views on government intervention which ignore the “empirical record of the government fucking things up beyond all recognition” that they should’ve covered in their college classes.

An example, please. You get a gold star if you give me a service provided by the government that isn’t “necessitated” by the free rider “problem”.

If econometrics isn’t the study of statistical data to either discover economic theory/functions or verify it then I better go get a refund on my textbook.

All of us here know what econometrics is. Need I remind you that many of us are taking economics in college, have taken it in college, or have read neoclassical textbooks? Why do you insist on treating us we’re like a bunch of slack-jawed dullards who don’t know anything besides Rothbard or Mises?

So you’re in agreemeent with Milton Friedman that it doesn’t matter if an economic theory is illogical as long as it explains statistical phenomena and can be “proven” with econometrics?

I’ll leave the rest of this nonsense to someone with more patience.

14

There’s something subtly humorous about a discussion where it’s the mainstreamer who rejects empiricism in his arguments and the Austrian who pushes it.

15

There’s something subtly humorous about a discussion where it’s the mainstreamer who rejects empiricism in his arguments and the Austrian who pushes it.

There’s also something kind of humorous about people asking for examples which are being provided by other posters in the very same topic,but since you guys are all asking for examples I’ll take the bait! I’m fine with providing empirical evidence, the problem is that I’m not sure exactly what evidence I would have to provide to make a case for the points I made above. In the OP I outlined some misconceptions about mainstream econ that I’ve seen repeated in various message boards, articles, podcasts and the like. I’d have to go through years of posts to find enough evidence to support for my case, at which point it’d be very easy for anybody to simply state that those examples are outliers.

So if you give me a clear statement of exactly what evidence you want me to give, I’ll go for it. Until then, I don’t think it’s reasonable to expect me to spend hours of my time, during exam season, digging up quotations from year old forum posts.

16

It’s amusing that you think objections against the free market like “asymmetrical information” and “externalities” are either unknown to us or haven’t been addressed before. Most of us are well-acquainted with neoclassical literature. So far as I’m concerned, the real issue is whether you’ve ever bothered to read any Austrian literature.

Buddy I was a card carrying Austrian for a while, I’ve read the usual - ME&S, de Soto, Socialism etc. as well as most of Hayek’s stuff. Whether or not I think that you guys have read the literature (I don’t think a lot of people here have, but that’s a question that’s going to be difficult to find evidence for either way) I don’t think the objections have been adequately answered (otherwise I would agree with the Austrians). The main strength of these arguments is that they agree on the central Austrian premise that prices do a fantastic job of allocation resources when they convey information about the underlying economic realities. Of course, when for technological reasons or for perverse incentives prices don’t reflect these conditions the market system is bound to be suboptimal.

Now, I didn’t want to get into an argument about whether or not these arguments are correct. I just wanted to point out that under these conditions economists generally believe market failure will ensue, but otherwise markets will reach an efficient allocation of resources.

Austrians have attacked the notion that intervention in the market by the state can have positive outcomes; never once have we ever claimed that our opponents believe the state is a God-like entity unless they’ve explicity stated that as a position they hold (Mises refutation of etatism in The Theory of Money and Credit comes to mind)

A lot of Austrians like to trumpet public choice theory as a counter to some mainstream arguments. Which I don’t think is fair, public choice is more mainstream than it is Austrian, its mathematical and relies of formal models. More importantly, many on the insights Austrians have reached have already been reached in the mainstream. Hoppe spends many, many pages going through a theory as to why democratic leaders will have a higher than optimal discount rate. Of course, that conclusion has already been reached by mainstream public choice academics.

Once again though, this question hinges on what evidence it would take for me to convince you that a sizeable number of Austians hold this misconception about the mainstream, which still isn’t clear.

That’s fantastic! You should send this anonymous textbook to Paul Krugman, Ben Bernanke, and Joseph Stiglitz, because they seem to hold views on government intervention which ignore the “empirical record of the government fucking things up beyond all recognition” that they should’ve covered in their college classes.

This is almost any textbook in any number of disparate fields of economics. What is particularly telling about your post is that you list two out of three economists whose political views are not considered highly within the economics community, especially Paul Krugman. Krugman and Stiglitz are both recognised to be very insightful economic thinkers who have made profound contributions to their field. However, they’re way, way out to the left of the distribution of political views and aren’t really taken seriously in these areas.

By the way, pick up Pop Internationalism, you find Krugman making many examples of government making things worse in the area of international trade. If you ask me Krugman give into this part of the leftist agenda even if he didnt necessarily believe it.

An example, please. You get a gold star if you give me a service provided by the government that isn’t “necessitated” by the free rider “problem”.

Government provided highways would be a start, labelling requirements would be another. I could keep going but since you only asked for one, I think I’ve made a decent enough case that the free rider problem isn’t a necessary condition for government intervention. I don’t know why people here seem to think it isn’t a problem, it’s like you guys have never been to a party where you’re expect to bring your own drinks.

If econometrics isn’t the study of statistical data to either discover economic theory/functions or verify it then I better go get a refund on my textbook.

Out of interest, which textbook is this? I used Wooldridge during my undergraduate and I never came out with that intepretation. By the way, atheoretical looks at economic data to find relationships is a pretty heterodox approach. And funnily enough it’s one being pushed by a few Austrians (Rosser being a fantastic example).

So you’re in agreemeent with Milton Friedman that it doesn’t matter if an economic theory is illogical as long as it explains statistical phenomena and can be “proven” with econometrics?

Well that’s not quite what Friedman said. He said that if a theory has unrealistic assumptions but made correct predictions then it’s a useful model. And no, I don’t particularly agree with that, but not many other people do either! Of course, he also thought that math was a good idea precisely because it provides a constraint on your reasoning.

17

Of course, when for technological reasons or for perverse incentives prices don’t reflect these conditions the market system is bound to be suboptimal.

This notion of “optimality”, in my opinion, is the mainstream’s greatest weakness – I have an article on exactly this topic to be published next week (“Market Imperfection and its Implications”).

In real world markets, how do we know what’s optimal? Let’s, for the sake of simplicity, say that optimality is represented by an equilibrium in a certain market. We can assume that the market is not at equilibrium (a point that an Austrian will agree with, since Austrians do not believe that markets ever achieve equilibrium). But, how do we know where that equilibrium lies? Hayek, in “Economics and Knowledge”, argues that to know where an equilibrium lies an economist has to have available all information – this includes objective fact, but also subjective knowledge (preferences). Knowing that nobody has access to all knowledge/information, deducing an equilibrium point at any given moment in time is impossible. Furthermore, we know that the nature of this subjective knowledge (and thus objective fact that basis itself off this subjective knowledge) is always changing, meaning the theoretical market equilibrium point is also always changing.

If an economist (and thus bureaucrats) cannot deduce where an equilibrium point lies at any given moment, much less track the movement of the equilibrium point over time, then how does the economist/bureaucrat pretend to be able to impact the market in such a way to move it towards some supposed “optimality”. The point is: we don’t really know what’s optimal and what isn’t.

As an aside, let’s assume that while we don’t know what’s efficient or optimal, we do know in general what direction the market has to move in to make it optimal (although, in my opinion, this is too much to assume – as I touch upon next, making one market “optimal” necessarily makes another “suboptimal”, or less “optimal” then it was before). Can government help? Government does not economize (see my article “Government Spending is Bad Economics”), and it does not partake in the market process. Thus, any resources government pulls out of the market process to redistribute elsewhere necessarily damages the economization process relevant to the capital goods redistributed. So an alleged artificial improvement to area A will necessarily cause damage to area B. If we know that economization is in general the most efficient means of allocating resources (that is, the choosing amongst means and ends) this also means that in aggregate government redistribution will slow economic progress (progress in whatever direction).

This is why, in my opinion, the Austrian approach to macroeconomics is superior to that of the mainstream. Again, I will discuss this in greater detail in my upcoming article, but the notion of the “market process” is a much better framework to study economic phenomena than equilibrium models. If Post-Keynesian and, to a much more limited degree, New Keynesian economics weren’t as marred in these same macroeconomic models that were produced during the Samuelsonian and Hicksian Neoclassical-Keynesian synthesis, I would even say that their macroeconomic approach is superior to the mainstream approach (at least, if you interpret the Keynesian revolution in a similar way to Leijonhufvud [who, admittedly, is influenced by Hayek, and thus his interpretation of Keynes may be considered Hayekian]).

Finally, one of the great things about Austrian economics is that it does not assume optimality or perfection. As I conclude in “Market Imperfection and its Implications”, “Markets are imperfect. Humankind is fallible. Perfection is either inaccessible or non-existent. Contrary to the mainstream “consensus”, these facts bury interventionism and give basis to the free market.”

Regarding Joseph Stiglitz, you may be interested in this blog post by Peter Boettke on Coordination Problem, “Is Joe Stiglitz Really a Dissenter from the Conventional Wisdom?” While I am not impressed by much of Stiglitz’ more mainstream work (e.g. Making Globalization Work), I was quasi-impressed with The Stiglitz Report (although I think his analysis is damaged by a lot of preconceptions that he holds against markets), and I “defend” him in the comments. Most others, though, did not consider Stiglitz outside of the mainstream. Anyway, while Stiglitz’ political views may be left of the curve, the fact is that he has had a profound influence on policy. Paul Krugman probably less, though (if it was up to Paul Krugman Fed balance sheets would increase to $10 trillion and the stimulus would have been 2-2.5x larger! – see “Krugman contra Hayek”).

18

Then why do you keep bringing up criticisms of the free market that have been addressed in all of those works? But I suppose you answer this question in the next segment on your post.

All of your objections from the threads I’ve read have been answered in detail by members of this community, typically with references to Austrian works. As a previous poster has hinted at, you no doubt reject Austrian criticisms of “mainstream” (what does this term even mean?) economics because they do not attack them “on their own playing field”, i.e. using methodological positivism.

This has been answered in the post by the gentleman above me.

Then why not just cite an example from any number of these textbooks?

Are you calling their views on government policy political as opposed to economic? For example, Stiglitz hypothesizes in his book Freefall that the 2008 “Great Recession” was caused by a leftward-shift in aggregate demand caused by an increase in savings which were not “absorbed” by an increase in investment and that the government should engage in fiscal and monetary stimulus to counteract the economic downturn. How is this not an “economic” view, or are you referring to their opinions on subjects like abortion or gay marriage that are “not considered highly within the economics community”?

I’ll respond to the rest when I have more time available.

19

“of course, there are also examples of governments actually doing a better job than the market”

You can’t even come up with one example?

20

His examples were highways and the labeling of products, both of which are issues I’ve seen addressed in numerous articles and books published by the Mises Institute. I honestly, sincerely doubt he has read any of the Austrian works; in a previous thread he claimed that the Austrain business cycle theory was developed by Mises to explain an isolated recession in Austria, which anyone who is even slightly acquainted with the Austrian School would know is completely untrue. Imagine the justified ridicule someone on this forum would receive if they claimed that the AD/AS model was made just to explain the depression of 1929.

EconomistInTraining, I also don’t understand why you take such a condescending tone with almost all of your posts. Student and Lagrange multiplier manage to state neoclassical positions without coming across as elitists.