Criticism of the Austrian School from wikipedia

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the5thresistance Posted: Thu, May 6 2010 11:36 PM

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i was on wikipedia and i came across this looks like keynesians got to the page first

Critics have concluded that modern Austrian economics generally lacks scientific rigor,^[7][93] which forms the basis of the most prominent criticism of the school. Austrian theories are not formulated in formal mathematical form,^[94] but by using mainly verbal logic and what proponents claim are self-evident axioms. Mainstream economists believe that this makes Austrian theories too imprecisely defined to be clearly used to explain or predict real world events. Economist Bryan Caplan noted that, "what prevents Austrian economists from getting more publications in mainstream journals is that their papers rarely use mathematics or econometrics."

A related criticism^[95][96] is applied to Austrian School leaders; these leaders have advocated a rejection of methods which involve directly using empirical data in the development of (falsifiable) theories; application of empirical data is fundamental to the scientific method.^[97] In particular, Austrian School leader, Ludwig von Mises, has been described as the mid-20th century's "archetypal 'unscientific' economist."^[98] Mises wrote of his economic methodology that "its statements and propositions are not derived from experience... They are not subject to verification or falsification on the ground of experience and facts."^[99] Also, Murray Rothbard was an adherent of Mises's methodology (and though Rothbard assigned a sort of empirical description to it, he comments that "it should be obvious that this type of 'empiricism' is so out of step with modern empiricism that I may just as well continue to call it a priori for present purposes"^[100]). Additionally, the prominent Austrian, F. A. Hayek, stated his belief that social science theories can "never be verified or falsified by reference to facts."^[101] Such rejections of empirical evidence in economics by Austrian School leaders have led to the school being dismissed within the mainstream.^[95]

Another general criticism of the School is that although it claims to highlight shortcomings in traditional methodology, it fails to provide viable alternatives for making positive contributions to economic theory.^[102] In his critique of Austrian economics, Caplan stated that Austrian economists have often misunderstood modern economics, causing them to overstate their differences with it. He argued that several of the most important Austrian claims are false or overstated. For example, Austrian economists object to the use of cardinal utility in microeconomic theory; however, microeconomic theorists go to great pains to show that their results hold for all monotonic transformations of utility, and so are true for purely ordinal preferences.^[7][15] Caplan has also criticized the school for rejecting on principle the use of mathematics or econometrics. In response, Austrians argue that neoclassical economists fail to recognize hidden (and not necessarily true) assumptions they make to arrive to tractable mathematical models.^[103] Austrians also claim that econometrics is fundamentally based on mathematically and logically invalid summation and averaging of demonstrably non-additive personal utility functions, and therefore is subjective.^[104]

There are also criticisms of specific Austrian theories. For example, in addition to Milton Friedman's criticism,^[105] Nobel laureate and neo-Keynesian economist Paul Krugman argued that Austrian business cycle theory implies that consumption would increase during downturns, and cannot explain the empirical observation that spending in all sectors of the economy fall during a recession.^[84] Austrian theorists argue a recession can result from a monetary contraction or a "credit crunch" that causes the investment boom not to shift but simply to disappear.^[106]

Economist Jeffrey Sachs states that when comparing developed free-market economies, those that have high rates of taxation and high social welfare spending perform better on most measures of economic performance compared to countries with low rates of taxation and low social outlays. He asserts that poverty rates are lower, median income is higher, the budget has larger surpluses, and the trade balance is stronger (although unemployment tends to be higher). He concludes that Friedrich Hayek was wrong when he said that high taxation would be a threat to freedom; but rather, a generous social-welfare state leads to fairness, economic equality, international competitiveness, and strong vibrant democracies.^[107] In response to Sachs' article, William Easterly states that Hayek, writing in 1944, correctly recognized the dangers of large-scale state economic planning. He also questions the validity of comparing poverty levels in the Nordic countries and the United States, when the former have been moving away from social planning toward a more market-based economy, and the latter has historically taken in impoverished immigrants. Easterly also argues that laissez-faire countries were the leaders of "the ongoing global industrial revolution" which is responsible for abolishing much of the world's poverty.^[108]

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Vitor replied on Fri, May 7 2010 12:17 AM

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90% of the critics is positivists crying about austrians summonning rain in their social engineering parade. But of course there is some valid criticism.

Actually it's quite bizarre how some dare to call Mises unscientific, when Mises devoted hundreds of page to discuss episthemology and methodology.

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chloe732 replied on Fri, May 7 2010 12:29 AM

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barack: I watched this twice.  It's so good, the second time I wrote down an outline.  Hoppe explains the Austrian methodology, and defends it quite well against empirical methods.  I think this addresses the issues raised in the Wiki article you reference.  Austrian Methodology - Hoppe.

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xahrx replied on Fri, May 7 2010 9:29 AM

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i was on wikipedia and i came across this looks like keynesians got to the page first

I've seen all of those in different places, it looks like Austrianism is worrying the Keynesians because that page has been greatly expanded upon in recent weeks.  But let's take them one by one, at least from my perspective.

Critics have concluded that modern Austrian economics generally lacks scientific rigor,[7][93] which forms the basis of the most prominent criticism of the school. Austrian theories are not formulated in formal mathematical form,[94] but by using mainly verbal logic and what proponents claim are self-evident axioms. Mainstream economists believe that this makes Austrian theories too imprecisely defined to be clearly used to explain or predict real world events. Economist Bryan Caplan noted that, "what prevents Austrian economists from getting more publications in mainstream journals is that their papers rarely use mathematics or econometrics."

True to a point, but off point by more than a bit.  Yes, Austrians don't use math... because economics is not a mathematical subject.  Might as well criticize a guy for not using a ruler when he's trying measure EMF readings.  It's not the right tool for the subject at hand.  The Austrian's lack of math is a direct result of one of their main, and correct, deviations from the modern schools of economics; that economics is not a quantifiable subject, and that quantitative prediction of the kind you find in quantifiable subjects like physics is not possible.  And further, even if it were possible to quantify subjective valuations one some objective scale, they are not constant.  And even if they were constant, the system is too damn large and complex with too much information to get a hold of anyway.  Or in other words, even if you allow for objective quantification the economy is still like the weather.  Sure, it's a physical system which is technically based on pure, predictable, cause and effect.  However the sheer number of variables involved and the system's sensitivity to initial conditions etc., make prediction impossible.  So this criticism begs the question Austrians are raising against the other schools.

A related criticism[95][96] is applied to Austrian School leaders; these leaders have advocated a rejection of methods which involve directly using empirical data in the development of (falsifiable) theories; application of empirical data is fundamental to the scientific method.[97] In particular, Austrian School leader, Ludwig von Mises, has been described as the mid-20th century's "archetypal 'unscientific' economist."[98] Mises wrote of his economic methodology that "its statements and propositions are not derived from experience... They are not subject to verification or falsification on the ground of experience and facts."[99] Also, Murray Rothbard was an adherent of Mises's methodology (and though Rothbard assigned a sort of empirical description to it, he comments that "it should be obvious that this type of 'empiricism' is so out of step with modern empiricism that I may just as well continue to call it a priori for present purposes"[100]). Additionally, the prominent Austrian, F. A. Hayek, stated his belief that social science theories can "never be verified or falsified by reference to facts."[101] Such rejections of empirical evidence in economics by Austrian School leaders have led to the school being dismissed within the mainstream.[95]

To a certain extent I agree with this, but it is still a mischaracterization of what Austrians in general do, even if some extremists do simply think empiricism doesn't matter.  Austrian articles and analysis are filled with examinations of real events and empirical facts.  However those real events are merely historical data, and it would be just as ridiculous to try and draw falsifiable conclusions from them as it would be to deduce it was going to rain on April 12, 2062, because on weather conditions on April 12 some prior year, and to claim success if it did indeed rain on April 12, 2062.  You can't use historical data in that sense to make falsifiable predictions because the conditions of the 'test' will never, ever, ever be the same or even similar enough to serve the purpose of falsification.  So even if it does rain on 4/12/62, the idea that somehow you're theory is right because of that is ridiculous because it's an invalid, uncontrolled test.  To Austrians, or more to the point to me as Austrian thought has influenced me, the nature of the 'tests' make these predictions ridiculous unless they are backed up by a logically consistent framework for analysis.

Another general criticism of the School is that although it claims to highlight shortcomings in traditional methodology, it fails to provide viable alternatives for making positive contributions to economic theory.

So what?  An alternative isn't necessary for a criticism to be correct.  And sometimes the criticism means there is no alternative.  Caplan's objections have, I think, been hashed out a'plenty already.  Look up his article Why I Am Not An Austrian and the various responses.

There are also criticisms of specific Austrian theories. For example, in addition to Milton Friedman's criticism,[105] Nobel laureate and neo-Keynesian economist Paul Krugman argued that Austrian business cycle theory implies that consumption would increase during downturns, and cannot explain the empirical observation that spending in all sectors of the economy fall during a recession.[84] Austrian theorists argue a recession can result from a monetary contraction or a "credit crunch" that causes the investment boom not to shift but simply to disappear.[106]

Robert Murphy has handily dealt with these objections in the context of the current economic crisis and in responding to many of Krugman's recent artciles.  Good reading.  Krugman's criticisms are off base and due to the fact that he seemingly has never read, or never absorbed, what Austrians are actually saying.  He seems to take the most superficial caricatures of the conclusions of Austrianism and then examine them in the framework of his own ideology while ignoring the main points that support the Austrian conclusions.  Arguing Austrianism with Krugman is like a 10 year old asking his father for money and instead getting an anecdote about how the father one rescued a cat from being electrocuted.  He's just not getting it.

Economist Jeffrey Sachs states that when comparing developed free-market economies, those that have high rates of taxation and high social welfare spending perform better on most measures of economic performance compared to countries with low rates of taxation and low social outlays. He asserts that poverty rates are lower, median income is higher, the budget has larger surpluses, and the trade balance is stronger (although unemployment tends to be higher).

Here you get into extremely arguable conclusions on both sides because what defines a truly free society vs one that's not, and what were the initial conditions?  For example the Scandanavian countries have been doing 'well' for a time under socialism it seems, but that ignores the fact that they built up a shitload of capital to eat through in earlier times when they were more free market oriented.  Same for the US in fact, it was quite some time before the government started 'protecting' everyone from evil corporations, and during that time, some of which was also delfationary, you saw massive growth in real wages and living standards.  Likewise the experiene in Somalia seems to be used to discredit Anarchism quite a bit, but Somalia is not an example of Anarchism.  It's an example of a nation that had been severely depressed under socialism for a long time dissolving into chaos and an Anarcho-ish condition arising, under which many of the traditional economic indicators are actually getting better despite characteristics to the society that many people would rather avoid.  So who's right?  It's a perfect example of how historical data can't really be used to prove this or that.

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Clayton replied on Sat, May 8 2010 1:58 PM

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There was a time when I took Caplan's criticisms seriously because it seems that he deeply understands both Austrianism and mainstream economics. Based on Caplan's own biographical statements, I have concluded that what happened to Caplan is he became convinced of Austrianism early on from his own freelance studies, then he went into a mainstream economics school and got spanked by his teachers. His article on why he's not an Austrian tries to argue that many of the criticisms of the Austrian school fail to understand mainstream economics and, therefore, overstate the differences.

But this really is not true, there is a huge methodological chasm between Austrian and mainstream economics. Austrian economics denies that we can know or even characterize inter-subjective preferences. This means that it's impossible to model human behavior in anything more than a historical sense. That is, we can cook up theories that describe how humans have been observed to behave in the past but these theories are ultimately ad hoc, they are just blind curve-fitting. What we cannot do is causally model human behavior. And this is really what any "science" of human behavior would ultimately be interested in... uncovering the causal mechanisms which explain human behavior so that those models can be extrapolated into the future to make predictions about how humans will behave. Especially interesting are parameterized models where we can vary the parameters and make conditional predictions based on settings of the parameters. This is the sort of modeling that biologists do of animal populations - for example, a predator-prey model which can predict future population of predators and prey on the basis of a handful of parameters. The methodology of Austrian economics precludes this sort of modelling of human behavior and the models used by mainstream economics are not "misunderstood" by Austrians, they really are incompatible with the Austrian approach.

The insinuation that Austrian methodology is "un-scientific" is really a claim that Austrian economics asserts things which cannot be known to be true, that is, that Austrian economics is epistemologically haughty. They start with some "supposedly self-evident axioms" and then deduce conclusions about the real world. By this standard, logicians, mathematicians and theoretical physicists would also be un-scientific. This is nothing other than stealth-positivism - the belief that the only valid statements are those which can be empirically verified or falsified. I would argue, in fact, that it is positivists who are haughty and who fail to humbly circumscribe the limits of their ability to model what is the most complex object we are aware of in the universe - the human being. The idea that we can model the actions of groups of humans, let alone individual humans, can actually be proven false on some mild assumptions about the material nature of the human brain*.

I do believe that Austrian methodology could benefit from more explicit attachment to evolutionary psychology to provide an empirical basis for its foundational assumptions. By taking something as axiomatic, we are implicitly asserting that there is no known or knowable reason why it is the case, it's just something we're taking to be the case. But there are reasons why humans have the preferences they do and these reasons rest in the nature of the physical world, our natural environment and our evolutionary history. Incorporating these factors in order to push back the foundations of economic science can only improve economics and I hope to see more research in this direction from the Austrian school.

Clayton -

*This is my own idea based on an area of mathematics called "Algorithmic Information Theory", I hope to have time some day to jot down the argument and maybe submit it to an Austrian journal

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yessir replied on Sat, May 8 2010 2:36 PM

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Many of these 'critisisms' are actually positive points, if 'economist' stopped and thought about what they were doing for a bit. Forexample,

"Austrian theories are not formulated in formal mathematical form,[94] but by using mainly verbal logic and what proponents claim are self-evident axioms. Mainstream economists believe that this makes Austrian theories too imprecisely defined to be clearly used to explain or predict real world events"

This is actually a plus. Main stream guys convince themselves that they can preceisly determine marginal rate of this and that and equate it with the rate of wages or what not. Or they believe that they can define prices, when really all you can do is provide  range and allow for human negotiation to take place. The 'precise' nature of mainstream economics is illusory and only exists in their textbook, it is not a reflection of reality.

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scineram replied on Sat, May 8 2010 3:04 PM

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Ok, so the Austrian school does not predict anything. Which makes it totally useless.

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Caley McKibbin replied on Sat, May 8 2010 3:06 PM

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Yet Austrians are the most successful by far at predicting real world events.  Ironic.

Saying that Austrians don't use math is sheer stupidity.  Everything is math.  The only difference is math that pertains to reality vs. math that pertains to nothing.  Keynesians and other communist variants like fantasy a lot more than reality- that is the real issue that they have with AE.  Theories pertaining to reality have the annoyingly inconvenient consequence of limiting those bursting creative forces in the minds of the socio-sorcerology professor.  Much preferable is the more... "open ended" sort of "method" wherein anything is possible and, therefore, plenty of opportunity exists for socio-sorcerors to pull big levers and have high paying jobs and endless reearch grants and win awards and feel important.

It should be obvious when people sitting in a comfortable position in the vast "majority" (read: flophouse) would only begin to worry about that "vocal minority" when it seems that minority position might be a little too convincing for the convenience of orthodox hegemony and those hard-won reputations, career opportunities and bloated egos.  Criticizing AE (with empty fluff) is very useful as a distraction from the fact that most mainstream economists are bumbling dolts that have nothing to contribute to knowledge.  It doesn't accomplish anything else, however.

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ViennaSausage replied on Sat, May 8 2010 3:20 PM

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I would argue it has more scientific rigor than the other schools.  Initially science was used to describe the various methods of acquiring knowledge.  However, science is now synonymous with positivism and the empirical method.

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Caley McKibbin replied on Sat, May 8 2010 3:36 PM

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However, science is now synonymous with positivism and the empirical method.

It's synonymous with pretending to use method, yet really using no method and just trying to verify intuitive hunches.  A.k.a verificationalism.

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abskebabs replied on Sat, May 8 2010 3:41 PM

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I think people have a strange problem with a priorism, probably as a consequence of the modern philosophical world view accepted by most that we refer to as "positivism." All science rests on deduction, and some science also makes considerable use of "induction." However, it seems to me that those that criticise the Austrians for not using the "scientific method" fail to realise how much the use of mathematics(for instance) as well as experiment constrains the kind of results one can derive in the natural sciences. No doubt this would highly offend such empiricists if they actually took the time to study the sciences and maths enough to realise this.

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Caley McKibbin replied on Sat, May 8 2010 4:26 PM

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I think people have a strange problem with a priorism, probably as a consequence of the modern philosophical world view accepted by most that we refer to as "positivism."

They don't accept positivism.  They just use it as an ad hoc excuse to reject the universality of economic law.