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Gonzalo Lira on the False Religion of Economics

November 6, 2010

Gonzalo Lira on zero hedge has published an article Gonzalo Lira On The Identity Of The False Religion Behind The Mask Of Economic “Science” about the generally poor record of macro-economic forecasting. Lira’s view is that macro-economic forecasting is a false religion masquerading as a science. Along the way he takes a few shots at the Austrian school. After reading the article it is pretty clear that he didn’t bother to inform himself even at a basic level about Austrian economics.

Consider the following:

Very few people have been asking why economics has failed so spectacularly at predicting the Global Financial Crisis, and very few people have asked why economics cannot seem to solve the Global Depression we are currently experiencing.

While Lira is correct that the mainstream of economics has largely failed to inquire into its failure to see the collapse, a large fraction of the very few people who have been asking exactly that question write for this web site or otherwise use the Austrian macro-economic framework in their thinking.

As for whether “economics” cannot solve the current depression, it is not fair to blame the Austrian school when the Austrian recommendations have not been tried. Whether cutting taxes and spending, raising interest rates (or allowing the market to set interest rates), standing aside as insolvent banks fail, not bailing out over-indebted firms, and putting the banking system on a 100% gold reserve system would work better than what we are doing is a counter-factual proposition and one that Austrians can advance arguments in favor of; but no one can reasonably assert that these things have been tried.

Next, let’s move on to the following:

What does [macro] economics do, as a discipline?

The answer is obvious: [macro] Economics tries to predict the future.

I agree with Lira on the following points: that prediction as such cannot be science, at least not in the same way that economics is a science; and, that we have seen a lot of really inaccurate forecasting leading up to the crash and that most of the post-mortem analysis hasn’t been very useful either.

But is forecasting the defining property of Austrian macro-economics as a discipline? I don’t believe that Austrians would accept that. For Austrians economics is a single unified theory. The theory aims to provide an understanding of the laws of cause and effect in the domain of production and exchange.

Economic science can provide us with true statements about the qualitative relationship between a single cause and its effects. While we can use economics to make predictions, predictions will not be accurate all of the time because predictions have as their domain the real world, in which there are multiple past causes and multiple unknown future causes that will occur within the time frame of the prediction.

Whenever there are multiple causes, combining their influence is a matter of judgment because economics as such does not provide us with any tools for quantifying the effects of each cause. The forecaster must bring into play his own experience and opinions about which causes are most important in any given historical situation. This task falls under Mises’ term thymology.

Neither micro nor macro-economics for Austrians is about forecasting; macro is that part of the theory which deals with the entire economic system. Yet while Lira rips economists for their failure to forecast the collapse, in the several years before 2008, Austrians were above-average at seeing the train heading down the tunnel. See for example Mark Thorton’s article Who Predicted the Bubble? Who Predicted the Crash? in which he provides evidence that a disproportionate number of the economists and financial analysts who did see something coming were using Austrian concepts to reach their conclusion.

I will finish with Lira’s most ludicrous and blatantly inaccurate slur against Austrians:

Austrians argue that the government should cut spending and raise taxes, so as to balance the budget—and magically, the economy will improve, with no loss of GDP.

I challenge Lira to find even a single example of an Austrian economist who has advocated raising taxes as a solution to the bust or to anything else. I did a google search of the Mises.org site on the keyword “taxes” and opened the first page of links. Every one of the had a negative view of taxes or reported on a tax without comment. On top of that, most Austrians don’t like GDP as a measure of economic output. Even the form of the prediction – if spending is cut and taxes are raised then GDP will not fall is a quantitative prediction of the type that Austrian economics cannot make.

While I agree with a lot of the points that Lira makes against mainstream economics, it is clear that he didn’t bother to learn some basic things about the Austrian school before making false and inaccurate criticisms of it.

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