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Methodenstreit Comix

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11/02/2005Ivan Pongracic

Vienna & Chicago: Friends or Foes?, A Tale of Two Schools of Free-Market Economics, by Mark Skousen (Capital Press [Regnery Publishing], 2005]

This is a strange book. Skousen himself calls it a "study," but better to call it an essay. A study, according to The Merriam-Webster Dictionary is "the act or process of learning about something," and an essay is a "literary composition usually dealing from a limited or personal point of view."

Too many subjects are dealt with too superficially in this book, and the conclusions reached are too subjective.

Skousen obviously meant to write a popular book, one that could be read by people not attuned to nuance. It is a conglomeration of anecdotes, and thus more interesting to many readers than it would otherwise be. There is nothing wrong with this approach, provided the author has a higher goal in mind and aims for enlightenment. This is where this book is a disappointment for any serious reader.

The task that Skousen has decided to deal with is definitely not easy. Both the Austrian and Chicago schools are so complex, and there is so much disagreement within each of them, that every generalization must be dangerously close to oversimplification. The book is divided into ten chapters, each one dealing with those topics that unite or divide both schools. Skousen first explains the view of each school, then pronounces the winner.

I must first express my dissatisfaction with the editing of the book. There are too many misspelled words and incomplete sentences. Today when computers underline in red every misspelled word, and every grammatical inconsistency in green, it is hard to excuse shoddiness. Perhaps Skousen is just unlucky with his choice of publishers. Irwing Professional Publishing, the publisher of his earlier book, Economics on Trial, placed pages 9 to 39 between pages 40 and 41. In Vienna & Chicago too, somebody must have been AWOL during the editing stage.

But it is not just grammar, spelling, or misprints. Skousen is sloppy with his facts. On page 22, he explains that the "Austro-Hungarian Empire covered the territories of today's Austria … and parts of … Bosnia, Serbia, Yugoslavia, and Italy." Of course, there was no Yugoslavia at the time, nor is there a Yugoslavia now, but more importantly, Croatia wasa part of the empire and gets no mention. Then, on the same page, Skousen makes an even stranger statement: the whole empire was "ruled with an iron fist for over 400 years." On the very next page, he says that it was Maria Theresa who "abolished serfdom and torture, and established public education and public parks." If the empress was ruling from the middle to the end of the 18th century, where was "the iron fist" for the forty years of her rule?

But all of this is less important compared to more serious mistakes. For the first one hundred pages, Skousen paints with a wide brush, so some oversimplifications are excusable. But when he turns to a more detailed analysis, they become less so.

For example, Skousen calls Menger a marginalist but does not distinguish between the varieties of marginalist analysis.

Hayek, in the Introduction to the Principles, explained the distinctive contribution of Menger as compared with the English and French marginalists. Intellectual historian William Jaffe, never mentioned by Skousen, de-homogenized Menger, Jevons, and Walras, and concluded that there was some "essential difference" in the works of the three.

"Menger nowhere concerned himself with relative maximum or minimum values of a function, which [is] the essence of marginalism," writes Jaffe, "In Menger's scheme of thought, positive first derivatives and negative second derivatives of utility with respect to quantity had no place; nothing is differentiable."

The purpose of economics is directed "toward the discovery of the underlying elementary causes of economic phenomena in all their manifold complexity. For the performance of this task what is required is not the mathematical method, but a method of process analysis tracing the complex phenomena of the social economy to the underlying atomistic forces at work." That means, "to discover those laws governing market phenomena which can be traced back to their ultimate genetic determinants in man's physiological, psychological and social nature. Mathematics cannot do this…."

For Menger, economics was about explaining human action in terms of the subjective goals of freely choosing human agents, about the satisfaction of needs and wants, not about building mathematical models. Mathematics must lead into either a mechanistic or behaviorist explanation of economic events, and Menger philosophically rejects such an approach. The rest of Austrian economics can only be understood if the importance of the Methodenstreit is understood. (See Menger's Investigations.)

Herein lies the biggest problem of Skousen's book: the philosophical differences between the Austrian and Chicago schools. Back in Economics on Trial, Skousen admits that Mises's "philosophical approach was [for him] too formidable." But the methodological differences between the two schools of thought (which Skousen deals with in Chapter Four) cannot be properly understood without their philosophical underpinnings. So for Skousen (no surprise here!), "Mises's methodology is quite unreal." After The Theory of Money and Credit, "his later works are largely devoid of historical analysis."

Excuse me? Socialism, A Critique of Interventionism, Omnipotent Government, Human Action, to mention only a few, show Skousen's statement to be ridiculous. He also quotes Mark Blaug to show he is not alone in considering Mises "cranky and idiosyncratic." Even Mises's younger brother, Richard, disagreed with his older brother. (Later, to complete the picture of "cranky" Mises, Skousen tells the story, repeated endlessly by Milton Friedman, of how Mises supposedly stormed out of a Mont Pèlerine meeting calling everyone a socialist.)

Although Skousen discusses Austrian Methodological Dualism, it is clear he does not take it seriously. One simply must respect the scientific method and test everything there is to test. Even "Hayek gradually shifted from the Misesian apriorism toward some form of positivist [italics mine] empiricism, but judging from his writings in later years, it was only a marginal and temporary shift."

Hayek must be turning in his grave; he has become a positivist. It gets better: Murray Rothbard, too, becomes a Chicago empiricist, and that is the main reason his books remain "so popular." For Skousen, any historical analysis counts as empiricism! And "modern Austrians" are on his side, since they also "approve" of historical studies.

Just so that we are clear here — readers, please forgive the tedium — praxeology does not mean that the economist does no historical research. It means that theory itself is not generated and proven by means of historical studies. Theory is employed to understand history, and history to illuminate theory. (See Mises's Theory and History.) Doing history without theory answers no questions about causation, and ends in intellectual chaos. And although Skousen himself admits that empirical evidence can go awry, he proclaims at the end of the chapter that Chicago is the winner of the methodological dispute.

Worth mentioning is the chapter on gold and fiat money. After a rather thorough discussion about the pluses and minuses of the fractional reserve system, after declaring gold and silver "as honest money," Skousen seemed like he was going to pronounce the Austrians as winners. I became suspicious, however, when Skousen attacked Rothbard's The Case Against the Fed as too radical. The Fed, according to Skousen, cannot be that bad. After all, the Fed is a part of a serious system. "And most importantly, Fed actions are graded every day in the stock, bond and foreign currency market."

Is Skousen really that naïve? The Fed under the Greenspan leadership has been anything but graded in the financial market. It has been behaving like there is no tomorrow. There is now an increasing number of financial experts calling Greenspan the worst Fed chief ever. According to these individuals, Greenspan intentionally created a bubble over the last decade — several bubbles — that can only end in catastrophe. Preaching deregulation, he created a mountain of bad debt that will create a mountain of bankruptcies and a runaway inflation, with a high possibility of a deep recession, or even worse.

Skousen truly believes that the Fed has created a "price stability" worth his respect. He also believes that an Austrian free banking system would produce too much uncertainty. "And who wants uncertainty in the money system when other secure systems are available?" Then Skousen shows his practical side: "On a practical level, who wants to deal with potentially dozens of different kinds of privately issued bank note?" He fails to mention the solution: market competition will standardize in money as in other industries.

With the Federal Reserve notes established by Skousen as an almost perfect money, he delivers his judgment: "Even though the Austrians have a better theoretical, historical and ethical argument, the Chicago school offers better pragmatic solutions to monetary problems we currently face."

The explanations about the Great Depression? Though it was Mises and Hayek who predicted, in 1927, some very bad times for America, and it was Irving Fischer who failed to see it coming even two weeks before the stock market crash, still "[h]ere the monetarists have the upper hand…" It wasn't what happened in the 1920s that created the Great Depression. It was the Fed failing to reflate the economy in the 1930s. Well, Milton Friedman may be right that by 1932 the amount of money fell by a third, from $45 billion to $34 billion, but by 1938 the amount was back to $46 billion and the Depression was deeper than it had been in 1932.

And so it goes. Skousen gives the Austrians several victories, in business cycle analysis (why not in the explanation of the Great Depression then?), in viewing the economy as a market disequilibrium process, but basically believes (quoting Peter Boettke) that Austrians are "underachievers."

His last chapter is called "The Future of Free-Market Economics" (reminiscent of his last chapter in Economics on Trial). Here he declares the final winner — if only implicitly. "By staying within profession, rigorously developing market theories, and backing up those models with powerful evidence, Friedman and the Chicago school were able to convince a growing number of economists and policy leaders of the correctness of their position."

In this popularity contest (which is what economics obviously is to many modern economists) the Austrians fail. But, Skousen assures us, there is hope. If they worked more on empirically proving that (in effect) "water flows downhill" (my words not Skousen's), if they learn to measure better the unmeasurable (again my words), they could bring the bridge down and integrate "a dynamic prosperous community of scholars in both camps."

The book, as is by now obvious, disappointed me. As an essay, the book might make a good read for many people, but as a study it is a total miss. A final note to anyone working on blurbs for this book: it would be unbalanced to quote me as saying that this book is a "good read."

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