With regards to cardinal utility, a lot of economic theory actually does use “real” cardinal utility. That is, they use cardinal utility functions in which magnitudes, rather than mere order, matters (mathematically, these functions are equivalent iff the magnitude of differences between two points is preserved) . That seems clearly incompatible with the Austrian claim.
As for mathematics, other heterodox economists have made similar claims, at least in terms of the usefulness of econometrics and economic predictions. Look at Sheila Dow or Tony Lawson’s writings on open systems versus closed systems.
I really just do not understand what people mean when they say that. If “AE does not use […] empiricism in its methodological approach”, for example, (a) how do you explain the fact that “ME&S” begins to implement into its body of theory and heavily rely on a few “empirical” claims just 70 or whatever pages into its 1,400 or more total pages, (b) how do you explain the fact that “AE” does not even refer to co-operation, society, or, therefore, the market, until it admits the clearly “empirical” datum that the distribution of the abilities among individuals is non-uniform?
The term “mathematics”, atleast when economists use it, is extremely ambiguous. What you really mean is that “AE does not use” any of the current systems of mathematics “in its methodological approach”.
I never wished to presume to tell you what you want to call that particular approach. I was just trying to put things in context, this isn’t some novel approach that is being attempted. What you call the “GMU approach” is really just the norm as far as publishing and teaching go.
Esuric,
Regarding utility, I think it’s one thing to state that mainstream economists believe generally believe in ordinal utility but fail to consistently grasp its implications or simply believe that rigour is a substitute for realism in this area (or whatever), it’s quite another to flatly state, without any qualifications that they think utility is cardinal and all that that entails.
As goes psychological explanations, you’re quite correct in saying that prices work to coordinate production, few economists would deny that. But I think that you’re overselling markets if you think that large changes in variables such as consumer confidence won’t disrupt coordination. Of course, you could argue that such shifts in confidence aren’t very signficiant empirically, but then you’re going to have to deal with the the real world (see Butos’ review of Garrison’s book). On a related note, as I said in my previous post, if you wish to deny the existence of mass irrationality and speculative bubbles as other explanations, I’m sure there are many people who would agree with you. But there’s a whole literature out there on this subject and platitudes such as “markets clear” or whatever, just won’t do.
And to go in a full circle back to the point I was making to Lilburne. If you think that pointing out the fallacies of policy makers and the dead economists that inform them is more important than scholarly work, nobody is stopping you from doing just that. But it’s a bit disingenuous to attack theories that have been dead for a long time only to act as if you’re up to date on the cutting edge of macroeconomics. Perhaps I’m being a little harsh, I don’t intend to be, I just think it’s more than a little misleading when you attack macroeconomists in the way that you have.
Out of interest, do you have any proof that the Fed is working with the Phillips curve? I was speaking to my macro teacher the other day and he told me that generally it’s central banks that have some of the most advanced DSGE models (for letters curiously absent from a large topic on mainstream macro), given the amount of research that is conducted by central banks, I can’t really believe that the Fed of all places is still going to be working with theories that have been out of fashion in academia for nearly half a century.
A quick final note: you seem very enthusiastic about Kuhn’s theory of science. I wouldn’t, there’s been a lot of talk about how mainstream macro is in dire condition, but not much has changed. And if a new paradigm does come about, you can be sure that it won’t be one friendly to markets.
On a less specific note, a lot of the posts on this topic seem to exemplify the problems some Austrians (at the risk of causing conflict, let me use the term Rothbardians from here) have with communication. Praxeology, thymology and a priorism really aren’t that big of a deal. The first two terms are simply fancy words for theory and history respectively and the last is something that is by no means specific to Austrian economics and isn’t worth writing home about anyway. And rejecting math a priori is just as problematic as accepting it a priori is, if you’ve got a thorough understanding of the math and still don’t believe it to be applicable then that’s acceptable if you do think it’s applicable but accept that your comparative advantage is in verbal economics then that’s also acceptable but wholesale rejection is just dogmatism.
Perhaps if the profession were more philosophically inclined then the amount of writing on epistemology would be worthwhile, but (and thankfully in my opinion) the profession is not nearly as philosophically inclined as you people wish it was.
As far as the need for empirical evidence to corroborate economic theory, anyone opposing such research as being “un-Austrian” should remember that Ludwig von Mises founded the Austrian Institute for Business Cycle Research with F.A. Hayek in 1927, and that Hayek was a research assistant to Prof. Jeremiah Jenks of NYU from 1923-24.
Why would you assume I need to be told that? Why would you assume that I would believe something so ridiculous as the notion that most universities haven’t taken the academic approach? You have a habit of divining deficiencies in the understanding of others with little grounds of doing so. Address what I say, not whatever vague biases you think you can perceive underlying what I say.
Strawman. Read what Esuric wrote again. He didn’t flatly state that without any qualifications. He pointed out ways in which they continuously use cardinal utility.
Presuming a lack sophistication in Esuric’s position based on a couple of posts, and broadly gesturing at “literature out there” won’t do either.
Esuric is specifically talking about what his professors are saying NOW. And who ever said anything anywhere at any time in this thread about being on the “cutting edge of macroeconomics”? Nobody except that strawman in the corner.
The only misleading being done here is by the strawmen you’ve been erecting.
I’m curious how using these terms is part of some “Rothbardian” problem when praxeology and thymology are both Misesian terms.
As Garrison has pointed out, Keynes was a non-empiricist theoretical economist. I’d be interested to hearing a case for him being a praxeologist as well, as would be implied by your conflating theory-in-general with praxeology. And thymology is NOT a fancy word for history; as Mises wrote, it’s a branch of history. It’s interesting that you rail against imagined affronts toward mainstream-macroeconomists-in-general, yet you blithely dismiss as superfluous two key terms which Mises, someone who loathed neologisms unless he thought they were absolutely necessary, carefully selected for the clarification and furtherance of scholarship, and you do so with no supporting arguments or evidence whatsoever.
Who said it was? Yet another imagined bias.
Another blithe, unsupported assertion.
Read what Jon said above.
XYZ, if you’re back, I’m glad you’re back; I was hoping you’d come back, because, as I’ve expressed in the past, I think you are brilliant and have a LOT to offer. But posts like your last two don’t do any good for anybody or anything. Are you here to actually teach and learn? Great. We’d love to have you. Are you here to put people in their place? To resume incessantly hounding people for vaguely perceived general biases? To display your learning without actually sharing it in an instructive way? Then I’m sorry, but we’re not in the market for that kind of exchange.
This is laughably false when met with the fact that Esuric seems to have not read a basic text book on price theory (like Varian’s for example) while still speaking as if he knows what he’s talking about, and then proceeds to give his professor’s own opinion as if its the opinion of mainstream economics:
If it is not a fancy word for history (which I for one believe it is) then all it is is a fancy word serving to further divide Austrian economics from the mainstream community by the creation of different languages in order to describe the same thing.
Please, there’s no need to obfuscate my position considering we already had this very same discussion. You assumed that I wasn’t aware of monotonic transformations, and then I reminded you that the mainstream does indeed use cardinal utility for inter-temporal choice (you began rambling about infinite dimensions). We also discussed perfect substitute production functions, which you chose to defend, for whatever reason. Do you want to have this debate all over again, and this time will you actually stick around?
Surplus analysis implies cardinal utility–it’s that simple. Many (keyword) mainstream economists take their theoretical constructs too seriously. Either way, their framework is logically untenable.
The point is that the mainstream continuously puts the carriage in front of the horse. Speculation and “mass irrationality” are always the result and never the cause of a malformed capital structure and relative disproportionalities. Speculation is often a rational way individuals try to protect their wealth from artificially depressed market rates and inflation. For example, the change in the banking structure is no coincidence. Complicated and opaque derivatives were created in order to avoid regulations after the first Basel accord, and the shift from loans to securities was, again, a direct result of inflation. This is how the mainstream compensates for its purely static approach.
I agree, and I’ve already explained why: the government created incentive structure. No one has really addressed that point yet; they continue to claim that Austrians are just making excuses (very convenient).
If you’re going to indulge in your petty habit of disparaging the knowledge-level of Esuric (someone who, in the course of actually SHARING his knowledge and teaching others, has evinced a lot more learning than you have), then at least try to back it up.
More blithe dismissal of Mises’ excruciatingly careful decisions regarding the taxonomy of science after a lifetime of study and reflection. Thymology doesn’t specifically describe ANYTHING mainstream scholarship avowedly pursues, otherwise Mises wouldn’t have chosen to use it, because, again he was loathe to use neologisms unless absolutely necessary. Mises chose the word because it’s not history-as-such, and neither is it what had come to be called “psychology” (which is the term he originally used for that branch of study).
To avoid overlap I’m going to try to answer as many people as possible in one go, if I don’t adequately answer your point, just be sure to point that out.
Lilburne, I think you’ve got the wrong impression of that remark, I didn’t for a second think that you would believe that universities haven’t taken the academic approach. As I said in my previous post, that remark was more for context then anything else. With hindsight it comes off as somewhat condescending, I can assure you I didn’t intend it to be.
In fact, I think there’s been a communication problem with regards to the whole post. I hope you can understand that in my position as a critic of the “established wisdom” of the fora I have to tread a thin line between being too condescending and hostile, apparently I’ve come down on both sides of the line and made you feel that I’m not here for honest, open discussion. My apologies for this, but these sorts of understandings are all part of discourse over the internet, and as such I’m going to have to ask you to give my posts a charitable reading.
I hope we can keep this civil and constructive.
It was originally this line that I took issue with (Esuric had posted other similar arguments elsewhere, I’m going to have to ask you to take my word on this because I don’t feel like going after the posts) "The differences in capital, as you’ve already acknowledged, are huge, but there are fundamental differences between the notion of value (cardinal vs ordinal)", with respect to the bolded part, I read it as him saying that Austrians believe in ordinal utility and “mainstream” economists believe in cardinal utility. If what he really meant was that mainstream economists don’t fully understand that utility of subjective or that they implicitely use cardinal utility, that’s not a novel argument, but statements like that above are wont to mislead people and I felt I should correct it.
Of course, I’m still not convinced by this particular argument above. Consumer surplus analysis uses dollars (euros, pounds or yen if you want) as it’s unit of comparison, not utils (I’ve used about 4 different micro textbooks, I’ve not seen utils used in any of them). In fact, concepts and tools such as Pareto and Kaldor-Hicks efficiency were designed as a way of making welfare judgements whilst accounting for the fact that utility is not apt for interpersonal comparison.
I didn’t realy presume that he lacked any sophistication, at least not in comparison to somebody with his level of training. Of course, he’s only now beginning to flesh out what he meant when he used the term mysticism to describe a certain type of explanation.
Esuric, is it really logically necessary that speculation and “mass irrationality” are the result of the malformed capital structure (or business cycle more generally, I suppose) and not the cause of the cycle? It may be an empirical tendency, but this merely brings us back to what I was saying earlier. You’re going to have to do your research if you want to make such claims, I don’t think sweeping generalizations cut it in the world of academic discourse. Lilburne claims that I’m “broadly gesturing” and he’s correct, I wouldn’t for a second presume to be up to speed on this literature. But, if you want to write off a whole type of explanation as “mysticism”, you might want to be acquinted with the major works in this area.
I’m not necessarily saying that you lack sophistication, rather, I think the focus on a priorism may well lead you to hold a very bare model of real world economic actors with their cognitive deficiencies.
Well, Esuric has claimed that most of his professors are post-Keynesians. Using them as a representative sample of the mainstream isn’t exactly fair since post-Keynesianism is a heterodox school. I don’t wish to single him out here either, Lam goes to UMass Amherst, and if he started a sentence with “the mainstream is bullshit, just look at what my professors believe…” I’d be even more sceptical.
But the point I was trying to make is that the economics of Keynes has been dead in academia for nearly half a century. The General Theory would certainly not be recommended for too many undergraduates, let alone graduate students. You might want to say that Keynes holds a lot of sway in public discourse, and that would be closer to the truth and attacking the fallacious theories of dead economists who inform practical men is certainly a task worth doing. But, and you’ve echoes similar sentiments Lilburne, there has to be a pursuit of truth outside of any value judgements. And when it comes to this if you want to write off modern macro, it might not be such a bad idea to move on from theories that died 40 years ago and to focus on recent work that’s being published in top journals or graduate level textbooks.
I don’t want to get into a discussion on methodology. But just quickly, Mises’ book on these subjects was called Theory and History, so perhaps using those terms to describe praxeology and thymology loses some of the nuance that Mises had hoped they’ve have but I’m not completely off base. If you’d like to offer an alternative intepretation go ahead.
Much in the same way that some mainstream economists (from what I’ve read it’s only really economists from past generations who do this) will put a lot of focus on the fact that their model is “falsifiable”, Austrians put far too much emphasis on a priorism which only really means that they’ve defined some terms in certain ways and spun out a few tautologies. This will often lead to problems where the theory loses a lot of explanatory power (I believe Kirzner took issue with Mises’ attempt to prove that time preference is a priori true).
Two things. You’re right when you say that there’s a difference between believing in cardinal utility, and implying it for purely demonstrative purposes. My point was that they frequently do a little-bit of both, and sometimes they do a lot of both. Either way, they flatly use cardinal utility for inter-temporal choice. My argument, though, is much broader: the point is that the mainstream’s framework excludes certain indubitable premises, and as such, their conclusions are frequently untenable, eventually leading to absurdity (the fact that students, across the country, are exposed to perfect substitute production functions, finite Markov chains with fixed probabilities, ect). Now some mainstream economists are better than others (Caplan compared to Krugman for example), but because they’re ignorant of Austrian insights, they are unable to understand Austrian arguments. And again, this has a lot to do with various institutions. I realize that I wasn’t entirely clear, so I understand the confusion and apologize.
Yes, but their theories are an amalgamation of previous thought and deductions based on “dead doctrines.” Of course, this is true for every school of thought, which is why we should criticize underlying assumptions. Also, I don’t want to “write off” modern macro, I simply want to include Austrian insights which have hitherto been unchallenged (how inflation causes relative disproportionalities, the complementarity of capital ect). Now if mainstream graduate level economics incorporates such insights, then I apologize for my ignorance.
I take this to be a suggestion. When I write my book/article you’ll be the first one to read it.[8-|]
And what do the dollars/pounds/yen implicitly represent? It seems to imply a measure of value, no? When this analysis is used, say, to measure the costs and benefits of intellectual property in foreign drug markets, they measure the “total surplus” and reach certain conclusions. It shouldn’t feel right to Austrians who believe that value is never measured, but only graded. Now, they are able to defend their position, but, as I’ve mentioned, it leads to loose thinking (anti-trust arguments for example) and is entirely static in its approach. I fail to see how this isn’t a fair criticism.
Indeed, Post Keynesians are a heterodox school of economics. But my professor is an adviser to the CCP and Brazilian president Lula da Silva. He frequently works with the IMF chief economist and Galbraith, and I can assure you that his theories/positions are gaining momentum. Now obviously this doesn’t have much to do with mainstream macroeconomics, but as I’ve already mentioned, their failure will bring about a paradigm shift (of some sorts).
But your point is well-taken. I do have crazy leftist professors.
Esuric, it seems we’re pretty much in agreement now, at least for the most part. I won’t respond to anything that I’m not really in agreement with, at least not in this post, if there’s anything you would like clarification on, just ask.
There are two points I’d like to make here.
First, granted, mainstream economics makes a lot of simplifying assumptions, it then proceeds by relaxing these assumptions and seeing what happens, so to speak. Now, most mainstream economists would defend this practise by pointing to the rigour that is gained as a result of the formalism. Of course, this is essentially what happens when anybody draws a demand curve, be it Varian or Rothbard. Personally, I don’t think there’s any reason to choose - in other words I’m in favour of methodological pluralism. I think something can be gained from both approaches.
Second, I’m not so sure that it’s ignorance of Austrian arguments, you seem to be fond of Kuhn so even if I don’t really agree with a lot of what he says, I think it’s sometimes true there is difficulty in speaking across “paradigms” because terms have different definitions etc. (think of the difference between Keynesian equilibrium and Marshallian equilibrium). To give a more pertinent example, think of the difference between Kirznerian “radical uncertainty” and what mainstream economists speak of when it comes to uncertainty (known probability distribution).
I’m not too sure how this is relevant, yes, mainstream economics owes a lot to Keynes (the Keynesian diversion, as Yeager calls it). At the same time, it’s also a lot different to orthodox Keynesian thought (neoclassical synthesis). My point was simply that people here spend far too much time attacking the economics of Mankiw’s Principles as opposed to his more scholarly work, and I think they’re attacking strawmen and flogging a dead horse at the same time.
You made a key point that was part of my reason for posting, we all need to be more humble about this. Most of us haven’t got past the level of Blanchard’s intermediate text in terms of our economics training. So it’s perhaps not entirely honest for any of us to comment on a lot these issues without a great deal of humility.
By all means do, it’d certainly be an interesting piece of research!
As far as I can see, you’re making two criticisms here.
You’re saying that the approach is very static, something I entirely agree with (and something many economists have taken due note of).
But your other criticism is, I believe, unwarranted. What you’re essentially saying is that doing calculations with pounds/yen/dollars is still committing to cardinal utility. But isn’t this the whole point of the calculation argument? We can’t allocate resources in a way that maximises utility because we can’t measure utility, so we use an objective substitute in the form of money units.
I was speaking to a professor of mine the other day about this. I asked what implications the current crisis has had for mainstream macro after I read an article in the economist. He said there’s been a lot of talk about how macro is off track but very little has come of it other than a few heterodox figures like Minsky and Keynes (or at least the post-Keynesian interpretation of him) have gained a little prominence (Posner, I suppose, would be a good example).
Out of interest, have you read the paper in Austrian Economics in Debates that find common ground between post-Keynesian economics and Austrian economics?
No. The calculation argument states that in complex open economies, there are far too many fluctuating variables, which makes rational calculation impossible; the opportunity costs are unknown (can’t setup capital combination’s, don’t know what to produce, who to produce for, ect). Money emerges from market activity, and allows for the creation of price indices. But prices (determined by the marginal pair) do not measure value either; they merely act as information signals which help coordinate production. The various prices, along with other information signals (market failures, entrepreneurial profits, ect) allow for rational calculation, but doesn’t eliminate uncertainty/human error. Monetary units are not prices, that is, they don’t convey information. A dollar, 10 dollars, 1000 dollars, doesn’t tell me anything (money is subjectively valued as well).
Value is never measured, it is only graded and is in continuous flux.
No I haven’t. Post Keynesian’s seem to be all over the place. They are, at the same time, early Keynes, later Keynes, Veblen, Schumpeter, Marshall, Ricardo, and none of them at all. There are some similarities though. Post Keynesians talk about uncertainty, but for them, it’s ontological (which is why they support complete regulation). They also use a butchered version of the Wicksellian framework (from Keynes’ Treatise on Money, and Tract to Monetary Reform), and see no place for math in economics.
I don’t understand why you feel the need to say something so obvious. My objection is not aimed towards simplification, since all economists must necessarily do this. My problem with the mainstream is that they ignore, or are unaware of, some assumptions which are absolutely key (mentioned them before), and which would remedy much of their confusion. Also, their mathematical approach only obfuscates the question at hand (a clear example of this is how they present consumer choice). They complicate that which is simple, and simplify that which is complicated.
I understand this, but one of the issues Mises raised was that prices allow entrepreneurs to do calculations that the planning board couldn’t. It is exactly the use of prices that give the entrepreneur access to the information that the planning board lacks. Isn’t this analogous to what is going on in the case of consumer surplus? Instead of comparing (subjective) utility, which can’t be done (I think some people in neuroeconomics are trying to overcome this, I think it’s a dead end) they compare (objective) prices in the form of dollars, yen, euro and pounds.
I think your point about static analysis is spot on, and I really enjoy the work of Douglass North who looks at the way economies change over time.
Prices are a process. What makes them useful is that they are in continuous flux, changing when preferences change, when the subsistence fund changes, ect (information signals). Furthermore, It is a rationing device which allocates scarce goods towards the most urgent needs/employments. In surplus analysis, the objective prices are already established, rendering them useless as information signals (nevermind the fact that they are merely previous prices). Prices as information signals, and prices as a measure of value, are two entirely different things (the latter has proven to be logically untenable). As I’m sure you know, the price is determined by the marginal pairs (first excluded producer and last capable buyer, and the first excluded buyer, and the last capable producer), which means that there are many who value the product above the given price, and even more who didn’t value it enough at that given price. So it cannot, in anyway, “measure of value.” I don’t know how acquainted you are with subjectivism, but marginal utility merely implies (for the Austrians after Bohm-Bawerk) the desire to employ good X for various needs. I may want good X for activity a,b and c, and after c, I may no longer value it all (marginal utility entirely collapses). Thus, prices aren’t the “average measure of value” either, since each individual desires product X for different uses–both qualitatively and quantitatively.
The total surplus is the area under the demand curve and above the cost curve (classical value theory) which tries to show total value denominated in money terms. A portion is given to consumers, another is given to the producers (remnants of classical distribution theory), and the rest is “wasted” (“dead-weight losses”). It is purely a measure of static efficiency which implies cardinal measurements of value. They are trying to capture value within a certain area, but value is a list.
But yes, there is a weak similarity. The producer reads the prices, tries to understand the implications, and uses the relevant information for production. The economist takes partial equilibrium analysis, creates his spurious demand function, takes the cost curve, and tries to show how inefficient the market is.
I might be way off. This is somewhat graspable, but I know I can’t turn it around and actually say it myself. So I have a question to help me fill in what I might be missing while reading this.
Isn’t a difference between producer and economist also implied in the amount of information necessary to perform the job thus a producer will have managerial while an economist does the same in a way (peer review)? Also the producer is working within a system that fails in real-time at times as consumers may reject the product. The producer doesn’t always get it. And in a way, same for the economist. Which goes back to economic subjectivism to help further explain why there are these limitations. Which actually then goes to what you said about an economist, “tries to show how inefficient the market is”, whereas the producer could put the blame on the consumer not buying the products, but it could stand to reason that it’s a terrible product and the economist has terrible theories or simply replace the word “terrible” with “limited”?