(None of the linked articles are among what I’d recommend, however. I can’t say if that’s because I can’t understand them and am biased, or because they are mostly hot air and rhetoric.
I cannot comment on Austrian economics as I don’t know what to believe about any economic theory at all, but here, in 1998, Krugman criticises it as a morality fable that doesn’t, in Bayesian terms, pay rent in anticipated experience—and in modern times, he sustains his criticism of its descriptive and predictive worth. Here is some other economist’s brief slam of Austrian epistemology.
Generally the Less Wrong ‘mainstream’ seems to dismiss it out of hand for its non-empiricism and incompartibility with Traditional Rationality.)
Very enjoyable, but not particularly rigorous compare and contrast of Keynesian and Austrian economics here and sequel.
My favorite quote (put in the mouth of Hayek in the second video around 3:40): “If every worker was staffed in the Army and Fleet, we’d have full employment—and nothing to eat.” (This is aimed at the Keynesian argument that WWII ended the Great Depression.)
Personally, I’m doubtful either theory is better—they both run on fundamental assumptions about what is happening in the market. But if the actual market resembles neither assumption, both predictions will be very misleading.
When it comes to monetary theory, there are no controlled experiments possible. So, one has to deduce from first principles. Separately, there is the issue of experts disagreeing, sometimes on basics. Look at what is going on right now, with Krugman disagreeing with Sumner. So, who does one follow: The Nobel Laureate or the man the Federal Reserve seems to be following? Perhaps neither? We certainly cannot follow both.
The leap from “controlled experiments are not possible” to “one has to deduce from first principles” is huge and unsupported. The results of controlled experiments do not exhaust the available empirical evidence by a long shot. We have a lot of data about the effects of monetary policy from around the world. True, inferring causality from this data is not nearly as straightforward as inferring causality from a randomized controlled trial, but it’s still a lot more reliable than deduction from first principles, I would think.
Think about how your argument sounds when applied to cosmological theories about the very early universe. We have a number of different theories that cannot be simultaneously right, and we cannot conduct controlled experiments. Would you endorse deduction from first principles in this instance as well?
Please see my reply above to pragmatist.
To add a bit, the rigor in monetary economics today is so far behind physics, it is not fair to compare the two subjects.
I know it’s been a while since this comment, but I wanted to comment that sound deduction (ie, logical reasoning) on top of correct premises trumps other forms of evidence, even well-controlled, large-sample experiments.
As an analogy, I find fascinating the MWI vs Collapse debate at LW—Eliezer has concluded MWI wins as an outcome of pure reasoning. No empirical evidence required. It will be (is?) wonderful if (when?) we factorize large numbers quickly and that is evidence of MWI, but as above, it would be (is?) superfluous. If the reasoning offered by Eliezer is coherent (I don’t know enough to judge), case closed. Please correct me if I have misunderstood. Thanks
Edit: MWI paragraph added.
Inferring causality from a time-series of various economic variables is incoherent. There first needs to be a deductive understanding of what the causal relationships are between economic variables. That is what is meant by “first principles” here—perhaps the disagreement is semantic.
Data about effects of economic policy tells us nothing if one has not already pre-supposed causal relationships between certain variables (ie, which variable is affecting which). If one had not done so, how does one know which variables to link with which other one? The causality which is being claimed to be derived is actually assumed or it is a result of the data-mining effect.
Thus, the first principles analysis: What is an economy?
I will read the Moldbug article, although I have to say I’m not optimistic, given my past experience with his writing. But I do want to disagree on this:
Inferring causality from a time-series of various economic variables is incoherent… Data about effects of economic policy tells us nothing if one has not already pre-supposed causal relationships between certain variables (ie, which variable is affecting which). If one had not done so, how does one know which variables to link with which other one?
I think you are either underestimating the tools at our disposal for causal discovery, or you have an evidential standard for causality that is way too high. Are you familiar with Judea Pearl’s work on inferring causation from probabilities? Check out this sweet post by Eliezer if you’re not.
ETA: I’m only a few paragraphs into the Moldbug piece and my hackles are already rising. He has already declared that a conscious being must be rational “by definition” and that other peoples’ desires are unknowable, also “by definition”. I don’t think either of these claims are true (assuming the words have their usual meanings), let alone true by definition. This doesn’t bode well, but I’ll keep reading.
Thanks. I have read that post by Eliezer before. The issue with monetary economics is the number of variables. Money is one half of every single transaction, in a sophisticated economy.
Re definitions, the meaning of rational there is that the person acts based on his internal map of the world (this is how Mises used the word way back when and it is part of parlance in Misesian economics). It does not mean what LW thinks it means.
Re unknowable desires, it is a way of saying that economically relevant desires are revealed by economic actions. Demand means being willing and able to pay.
Semantic issue in both cases :)
I mean that in a monetary economy, one always buys goods and services with money. One side of the transaction is money, whatever it is. Sophisticated here means an economy that has progressed beyond barter and developed a medium of exchange and a store of value, ie, Money.
Inferring causality from a time-series of various economic variables is incoherent. There first needs to be a deductive understanding of what the causal relationships are between economic variables. That is what is meant by “first principles” here—perhaps the disagreement is semantic.
If I replace “economic variables” with “astronomy” what part of this sentence changes in implication? Why is this incoherent for some fields? The level of rigor cannot be the only difference: Physics and astronomy have become more rigorous over time, not by discussing first principles, even when moving from Aristotle to Medieval physics to Newtonian physics, but rather by adopting principles based on the empirical data. The same goes for the switch from Ptolemaic systems to Copernicus and then Kepler. It is the empirical data that matters, the apparent time-series of planetary and stellar motion.
Thus, the first principles analysis: What is an economy?
So that’s true, but until the late 1700s (essentially post Newton) no one had any capacity to do so (because no ideas anyone had connected the two at all in a useful way). Would this sort of claim then been valid in 1650?
Re the Q about rent-paying: Yes. You should rightly be skeptical now, but please read the Economics sub-section at Moldbuggery with an open mind. Or if you prefer, start with Rothbard’s ‘Man Economy and State’.
Economics—of all subjects—pays rent.
This doesn’t answer the question. Note that no one is arguing that economics doesn’t pay rent. The question was whether arguing over ’”what is an economy” pays rent or not.
I misunderstood the Q. In my opinion, yes. It is, I think, the intuitive way to get a sound (ie, based on sheer deductive coherence) grasp of the subject.
Well, in a sense every definition carries an implicit assertion that the described object corresponds to a cluster in thing space. See also 37 ways that words can be wrong.
Re Physics, please correct me as required but in the way I use the phrase “first principles” here, Physics does not have any first principles.
Yes it does. They’re just so implicit in our intuition about how the world works that we don’t notice them. For example, consider all the implicit assumptions necessary for statements like “these two sticks have the same length” to be meaningful.
So, who does one follow: The Nobel Laureate or the man the Federal Reserve seems to be following? Perhaps neither? We certainly cannot follow both
If you didn’t accept the wisdom of the Federal Reserve before in its policies and theoretical choices, why would you accept the wisdom of the Federal Reserve after they have supposedly begun listening to Sumner? Why, indeed, does their choice matter at all to someone considering whether to believe Krugman, Sumner, or neither?
Imagine a square matrix in which our n commodities are rows and columns. How much real information is there in this matrix? Obviously, the oil-oil exchange rate is always 1, and the oil-wheat and wheat-oil rates are the same thing. So half our boxes, plus n, become blank.
But this is by no means enough blanking. Because we note an interesting fact—if this entire marketplace clears, it cannot be possible to construct a cycle of exchanges through which one ends up with more wheat, or oil, or silver, or anything, than one started with. This is obviously a desirable trade, and yet in a cleared market there are no desirable trades.
This statement is misleading economics—markets work because individuals preferences do not match the general consensus. Because of comparative advantage, there’s no particular reason to expect individual valuations to ever exactly match the market rates.
Later, Moldbug notes people want accumulate money, but rejects the explanation that it is valued because it is the medium of exchange. It is confusing when the monetary object is actually of some value (i.e. gold or silver), but no one uses the gold standard any more. There’s really no reason to treat fiat money as a good. And all of the discussion assumes that treating money as a good makes sense.
Finally, Moldbug’s discussion of the transition from gold-standard to fiat money without discussing private currency at all seems like more selective history. All selective history is worthless—it’s like throwing out all the data from an experiment that does not agree with your hypothesis.
My response, based on my current understanding, such as it is. Note the qualifier “marketplace clears”. In the process of clearing, a market undergoes price-discovery and any arbitrage opportunities are taken and thus removed. Fiat money is a good, in economic terms. It exchanges for other goods.
Note the qualifier “marketplace clears”. In the process of clearing, a market undergoes price-discovery and any arbitrage opportunities are taken and thus removed.
“Marketplace clears” doesn’t imply that everyone agrees that the price = the value. McDonald’s has cheeseburgers on sale for ~$1. That’s probably the market clearing price. I still don’t think a cheeseburger creates $1 of value for me.
If Moldbug makes a basic econ error (by conflating value and price), then there’s no reason to trust any other part of his “return to first principles of economics.”
Fiat money is a good, in economic terms. It exchanges for other goods.
“exchanges for other goods” is a bizarre definition of good. The hoarding-of-physical-objects metaphor is misleading.
Upvoted for practicing what you preach.
(None of the linked articles are among what I’d recommend, however. I can’t say if that’s because I can’t understand them and am biased, or because they are mostly hot air and rhetoric.
I cannot comment on Austrian economics as I don’t know what to believe about any economic theory at all, but here, in 1998, Krugman criticises it as a morality fable that doesn’t, in Bayesian terms, pay rent in anticipated experience—and in modern times, he sustains his criticism of its descriptive and predictive worth. Here is some other economist’s brief slam of Austrian epistemology.
Generally the Less Wrong ‘mainstream’ seems to dismiss it out of hand for its non-empiricism and incompartibility with Traditional Rationality.)
Very enjoyable, but not particularly rigorous compare and contrast of Keynesian and Austrian economics here and sequel.
My favorite quote (put in the mouth of Hayek in the second video around 3:40): “If every worker was staffed in the Army and Fleet, we’d have full employment—and nothing to eat.” (This is aimed at the Keynesian argument that WWII ended the Great Depression.)
Personally, I’m doubtful either theory is better—they both run on fundamental assumptions about what is happening in the market. But if the actual market resembles neither assumption, both predictions will be very misleading.
The leap from “controlled experiments are not possible” to “one has to deduce from first principles” is huge and unsupported. The results of controlled experiments do not exhaust the available empirical evidence by a long shot. We have a lot of data about the effects of monetary policy from around the world. True, inferring causality from this data is not nearly as straightforward as inferring causality from a randomized controlled trial, but it’s still a lot more reliable than deduction from first principles, I would think.
Think about how your argument sounds when applied to cosmological theories about the very early universe. We have a number of different theories that cannot be simultaneously right, and we cannot conduct controlled experiments. Would you endorse deduction from first principles in this instance as well?
Yes, whenever people try to make this sort of argument I have to wonder how they think we should do astronomy.
I will read the Moldbug article, although I have to say I’m not optimistic, given my past experience with his writing. But I do want to disagree on this:
I think you are either underestimating the tools at our disposal for causal discovery, or you have an evidential standard for causality that is way too high. Are you familiar with Judea Pearl’s work on inferring causation from probabilities? Check out this sweet post by Eliezer if you’re not.
ETA: I’m only a few paragraphs into the Moldbug piece and my hackles are already rising. He has already declared that a conscious being must be rational “by definition” and that other peoples’ desires are unknowable, also “by definition”. I don’t think either of these claims are true (assuming the words have their usual meanings), let alone true by definition. This doesn’t bode well, but I’ll keep reading.
Economies that have multiple currencies are unsophisticated...?
If I replace “economic variables” with “astronomy” what part of this sentence changes in implication? Why is this incoherent for some fields? The level of rigor cannot be the only difference: Physics and astronomy have become more rigorous over time, not by discussing first principles, even when moving from Aristotle to Medieval physics to Newtonian physics, but rather by adopting principles based on the empirical data. The same goes for the switch from Ptolemaic systems to Copernicus and then Kepler. It is the empirical data that matters, the apparent time-series of planetary and stellar motion.
Does arguing over this definition pay any rent?
One can do controlled experiments in physics here on Earth and apply the results to astronomy.
So that’s true, but until the late 1700s (essentially post Newton) no one had any capacity to do so (because no ideas anyone had connected the two at all in a useful way). Would this sort of claim then been valid in 1650?
This doesn’t answer the question. Note that no one is arguing that economics doesn’t pay rent. The question was whether arguing over ’”what is an economy” pays rent or not.
So, can you explain how arguing over the definition of a word can ever pay rent?
Well, in a sense every definition carries an implicit assertion that the described object corresponds to a cluster in thing space. See also 37 ways that words can be wrong.
Yes it does. They’re just so implicit in our intuition about how the world works that we don’t notice them. For example, consider all the implicit assumptions necessary for statements like “these two sticks have the same length” to be meaningful.
So, why does physics have no such first principles but economics does?
If you didn’t accept the wisdom of the Federal Reserve before in its policies and theoretical choices, why would you accept the wisdom of the Federal Reserve after they have supposedly begun listening to Sumner? Why, indeed, does their choice matter at all to someone considering whether to believe Krugman, Sumner, or neither?
From the article:
This statement is misleading economics—markets work because individuals preferences do not match the general consensus. Because of comparative advantage, there’s no particular reason to expect individual valuations to ever exactly match the market rates.
Later, Moldbug notes people want accumulate money, but rejects the explanation that it is valued because it is the medium of exchange. It is confusing when the monetary object is actually of some value (i.e. gold or silver), but no one uses the gold standard any more. There’s really no reason to treat fiat money as a good. And all of the discussion assumes that treating money as a good makes sense.
Finally, Moldbug’s discussion of the transition from gold-standard to fiat money without discussing private currency at all seems like more selective history. All selective history is worthless—it’s like throwing out all the data from an experiment that does not agree with your hypothesis.
“Marketplace clears” doesn’t imply that everyone agrees that the price = the value. McDonald’s has cheeseburgers on sale for ~$1. That’s probably the market clearing price. I still don’t think a cheeseburger creates $1 of value for me.
If Moldbug makes a basic econ error (by conflating value and price), then there’s no reason to trust any other part of his “return to first principles of economics.”
“exchanges for other goods” is a bizarre definition of good. The hoarding-of-physical-objects metaphor is misleading.