One of these days I’m going to write my own version of Why I’m not an Austrian Economist. Perhaps after a year or so in graduate school.
As a result of the Austrian’s epistemology, they are completely against any sort of model. It’s reality or bust. The fact is, they can’t do economics without resorting to a model of some sort. Austrians won’t admit this—agents are somehow ontologically fundamental entities, so they claim they are studying reality per se. Since they claim to eschew models, Austrians eschew the rigor of mathematics in the models they implicitly create, which just makes things go haywire.
There are a variety of Austrian mistakes related to not understanding that economics (and science in general) is model building. For example, some Austrians claim that neoclassical economics fails because it relies on calculus, which relies on continuity, but humans can’t perceive infinitesimal changes. Austrians also rail against aggregation, but, again, that’s just because they don’t understand that they are building models.
Bryan Caplan published the essay I linked to above in a journal (at least in some form. I haven’t read the journal version), and the Austrians responded in force. The two sides have gone back in forth a couple of times. All of their articles, except the original and the first response to caplan, are available for free on mises.org. In their replies, the Austrians do a good job of showing that they don’t know probability theory very well. Caplan tries to illustrate why we are uncertain even about logical truths (his example was the pythagorean theorem), and Block doesn’t seem to get the point.
I have to note that Hayek wasn’t an Austrian in the methodological (i.e. epistemological) sense. If you read his Use of Knowledge in Society closely, you’ll see that Hayek is fine with the neoclassical project, he’s just telling them to be careful with their models. In particluar, Hayek, who understands the socialist calculation problem better than Mises, tells those on the side of the socialists, sure, you can centrally plan an economy if you know the marginal rates of substitution (MRS) of all goods. From then on out, it’s a matter of calibrating your industries to produce the correct amounts. However, that’s a big if—you don’t know these MRS’s, and you never will. The main point that Hayek emphasized is that prices contain all of this information. Some self-proclaimed Austrians reject this point (e.g. Hulsmann) because, and I’m quoting a lecture from memory (it’s been a while, so it’s definitely not verbatim):
Today’s prices only hold information about things that happened in the past. They have no bearing on what that price is going to do in the future, and thus are worthless for making decisions about what to do in the future.(1)
But, of course, today’s prices are the most important piece of information for predicting future prices.
(1)He does not mean that prices are irrelevant for finding what something costs, at least at this moment, rather, he means that currents prices tell you nothing about the state of the world in the future, whereas they may tell you a lot about , e.g., whether there was a recent conflict in the middle east (oil prices).
I disagree with one of caplan’s main points. he questions why entrepreneurs would be unable to predict government policy in the same way that they predict other dynamics in the marketplace. This is trivially obvious: government isn’t constrained by profit. There are a few ways to be profitable, but millions of ways to unprofitable.
I agree that Hayek doesn’t fall into the same methodological trap. Which is why hardcore Mises/Rothbard Austrians spend a little time eschewing his work on knowledge. (See especially the last handful of quotes.)
Caplan indeed has quite a back-and-forth with Hülsman and Block. Especially of note for those on this site will be this paper (pdf) advocating a Bayesian interpretation of probability, something Austrians resist vehemently.
To be fair to the Austrians, mainstream economists aren’t always keen on it either. Caplan recounted a story to us in class: Robin Hanson apparently submitted a paper to a journal about beliefs. The editor responded that using probabilities to represent people’s beliefs was “crude charlatanism.”
Small quibble: I think it’s unfair to many Austrians to imply that their school inherently eschews the type of mathematical formalisms that many prominent Austrians did, in fact, reject. Or at least, insofar as they do so, it’s based on more than simply saying that the map doesn’t reflect the territory, and therefore we must throw it out—they make elaborate arguments about how the map’s systematic inaccuracies make it a poor representation of the territory. (Apologies if I’m using the map/territory metaphor poorly.)
Admittedly, this opinion goes against what seems to be reflected on the almighty Wikipedia, and I realize that pinning down the essential features of a school of thought is a pursuit which is fraught with problems, but my impression is that there are a substantial number of Austrians who do not reject modeling per se (as was the case of Hayek), and labeling this tendency as a deviation from Austrian thought strikes me as a No True Scotsman argument. Perhaps someone more familiar with the Austrian school could correct me on this, however.
It may be unfair to lump the specific fallacy presented above as the essence of Austrian economics, or as something its true believers follow. But there undoubtedly is a strain of dedicated Mises/Rothbard followers who insist on it, and these are the Austrians I’m criticizing. I’ll refer to this link again. Many major Austrians are ready to pounce all over Hayek at a moment’s notice.
P.S. Hey, gonna go ahead and guess you’re the same Peter Twieg from my class. This is Tim McGowan.
Oh, hey Tim. :D Not particularly surprised to see other classmates in these parts, but it’s still a neat occurrence.
And of course I recognize the dogmatic tendencies of the Mises Institute crowd, but I guess my broader worry is that their particular style becomes conflated with Austrian economics in general. It’s my impression that these failings aren’t recognized in GMU’s self-identified Austrian faculty, but I could be wrong.
Personally, I’m not too familiar with that group of Austrians other than that they typically claim to get everything from Mises, and this may also be wrong. So, yes, what I said may only apply to the Mises Institute crowd.
I know that some Austrians don’t reject the formalism. When I was at the Mises Institute, Block called Lachmann a “calculus Austrian.” I should have been a bit more clear, I tend to use the term Austrian to refer to those who are Austrians in the methodological sense. The line is, of course, fuzzy, but there are some clear cases of Austrian and non-Austrian on this definition.
Or at least, insofar as they do so, it’s based on more than simply saying that the map doesn’t reflect the territory, and therefore we must throw it out—they make elaborate arguments about how the map’s systematic inaccuracies make it a poor representation of the territory.
My understanding of the Austrians is that using a map at all is intellectually sinful. They want to study the territory, not some representation of it. However, this intrigues me. Do you know of any relevant citations or links?
actually I believe they rail against aggregation because the cumulative error becomes large enough to render the output meaningless in many cases (GDP, CPI, etc).
I’m pretty sure I’ve heard Austrians give that argument before, but I don’t think it’s the only one. I remember Block talking about how Austrian Business Cycle theory needed to be revised because of problems with the Hayekian Triangle.
I found the working paper. See, in particular, sections 1 and 2 and the summary. There’s too much to quote concisely, but Block’s main point in section 2 is that the aggregate Hayekian triangle doesn’t have any microfoundations. He wants to be able to derive the aggregate Hayekian triangle from the Hayekian triangles for each specific good for each specific agent. But this isn’t a reason to reject the model outright—very few scientific models have complete microfoundations (all the way down to physics). That doesn’t mean they won’t make accurate predictions. Microfoundations tend to help, of course, but they aren’t necessary.
Disclaimer: I am not an advocate of the Austrian Business Cycle theory. This was just for illustrative purposes.
I have to note that Hayek wasn’t an Austrian in the methodological (i.e. epistemological) sense. If you read his Use of Knowledge in Society closely, you’ll see that Hayek is fine with the neoclassical project, he’s just telling them to be careful with their models.
Thanks for clarifying this. I’ve heard so many good things about Hayek that I’m meaning to dive into his oeuvre at some point. But I’d also gathered that some Austrians were a-priorists, as the OP says, so I’m not interested in spending more time looking at their thinking. The OP had me worried that these ends conflict, but you’ve reassured me that they don’t.
AFAIK Hayek’s early stuff on business cycle theory is no good, but I don’t think there’s anything especially Austrian about it other than that Austrians seem to be the only ones that believe it.
If the post doesn’t look right, use the edit button. I’d rather have edit than preview any time. Not that they are mutally exclusive, but edit easily substitutes for preview.
Your right, and I used the edit button (about 5 times). Editing without making a note about why just seems deceitful though, yet that is essentially what we do when we use it as a de facto preview button. Oh well, minor thing.
If I make a change in the substance of a post, I note the change. I was mostly pointing out that you can immediately click on edit to fix clumsy wordings and misspellings when you notice them right after posting. I dislike sites with no editing because I can’t fix misspellings that I don’t catch in time.
One of these days I’m going to write my own version of Why I’m not an Austrian Economist. Perhaps after a year or so in graduate school.
As a result of the Austrian’s epistemology, they are completely against any sort of model. It’s reality or bust. The fact is, they can’t do economics without resorting to a model of some sort. Austrians won’t admit this—agents are somehow ontologically fundamental entities, so they claim they are studying reality per se. Since they claim to eschew models, Austrians eschew the rigor of mathematics in the models they implicitly create, which just makes things go haywire.
There are a variety of Austrian mistakes related to not understanding that economics (and science in general) is model building. For example, some Austrians claim that neoclassical economics fails because it relies on calculus, which relies on continuity, but humans can’t perceive infinitesimal changes. Austrians also rail against aggregation, but, again, that’s just because they don’t understand that they are building models.
Bryan Caplan published the essay I linked to above in a journal (at least in some form. I haven’t read the journal version), and the Austrians responded in force. The two sides have gone back in forth a couple of times. All of their articles, except the original and the first response to caplan, are available for free on mises.org. In their replies, the Austrians do a good job of showing that they don’t know probability theory very well. Caplan tries to illustrate why we are uncertain even about logical truths (his example was the pythagorean theorem), and Block doesn’t seem to get the point.
I have to note that Hayek wasn’t an Austrian in the methodological (i.e. epistemological) sense. If you read his Use of Knowledge in Society closely, you’ll see that Hayek is fine with the neoclassical project, he’s just telling them to be careful with their models. In particluar, Hayek, who understands the socialist calculation problem better than Mises, tells those on the side of the socialists, sure, you can centrally plan an economy if you know the marginal rates of substitution (MRS) of all goods. From then on out, it’s a matter of calibrating your industries to produce the correct amounts. However, that’s a big if—you don’t know these MRS’s, and you never will. The main point that Hayek emphasized is that prices contain all of this information. Some self-proclaimed Austrians reject this point (e.g. Hulsmann) because, and I’m quoting a lecture from memory (it’s been a while, so it’s definitely not verbatim):
But, of course, today’s prices are the most important piece of information for predicting future prices.
(1)He does not mean that prices are irrelevant for finding what something costs, at least at this moment, rather, he means that currents prices tell you nothing about the state of the world in the future, whereas they may tell you a lot about , e.g., whether there was a recent conflict in the middle east (oil prices).
edit: We really need a preview button
I disagree with one of caplan’s main points. he questions why entrepreneurs would be unable to predict government policy in the same way that they predict other dynamics in the marketplace. This is trivially obvious: government isn’t constrained by profit. There are a few ways to be profitable, but millions of ways to unprofitable.
I agree that Hayek doesn’t fall into the same methodological trap. Which is why hardcore Mises/Rothbard Austrians spend a little time eschewing his work on knowledge. (See especially the last handful of quotes.)
Caplan indeed has quite a back-and-forth with Hülsman and Block. Especially of note for those on this site will be this paper (pdf) advocating a Bayesian interpretation of probability, something Austrians resist vehemently.
To be fair to the Austrians, mainstream economists aren’t always keen on it either. Caplan recounted a story to us in class: Robin Hanson apparently submitted a paper to a journal about beliefs. The editor responded that using probabilities to represent people’s beliefs was “crude charlatanism.”
Small quibble: I think it’s unfair to many Austrians to imply that their school inherently eschews the type of mathematical formalisms that many prominent Austrians did, in fact, reject. Or at least, insofar as they do so, it’s based on more than simply saying that the map doesn’t reflect the territory, and therefore we must throw it out—they make elaborate arguments about how the map’s systematic inaccuracies make it a poor representation of the territory. (Apologies if I’m using the map/territory metaphor poorly.)
Admittedly, this opinion goes against what seems to be reflected on the almighty Wikipedia, and I realize that pinning down the essential features of a school of thought is a pursuit which is fraught with problems, but my impression is that there are a substantial number of Austrians who do not reject modeling per se (as was the case of Hayek), and labeling this tendency as a deviation from Austrian thought strikes me as a No True Scotsman argument. Perhaps someone more familiar with the Austrian school could correct me on this, however.
It may be unfair to lump the specific fallacy presented above as the essence of Austrian economics, or as something its true believers follow. But there undoubtedly is a strain of dedicated Mises/Rothbard followers who insist on it, and these are the Austrians I’m criticizing. I’ll refer to this link again. Many major Austrians are ready to pounce all over Hayek at a moment’s notice.
P.S. Hey, gonna go ahead and guess you’re the same Peter Twieg from my class. This is Tim McGowan.
Oh, hey Tim. :D Not particularly surprised to see other classmates in these parts, but it’s still a neat occurrence.
And of course I recognize the dogmatic tendencies of the Mises Institute crowd, but I guess my broader worry is that their particular style becomes conflated with Austrian economics in general. It’s my impression that these failings aren’t recognized in GMU’s self-identified Austrian faculty, but I could be wrong.
Personally, I’m not too familiar with that group of Austrians other than that they typically claim to get everything from Mises, and this may also be wrong. So, yes, what I said may only apply to the Mises Institute crowd.
I know that some Austrians don’t reject the formalism. When I was at the Mises Institute, Block called Lachmann a “calculus Austrian.” I should have been a bit more clear, I tend to use the term Austrian to refer to those who are Austrians in the methodological sense. The line is, of course, fuzzy, but there are some clear cases of Austrian and non-Austrian on this definition.
My understanding of the Austrians is that using a map at all is intellectually sinful. They want to study the territory, not some representation of it. However, this intrigues me. Do you know of any relevant citations or links?
Did you? If so please link.
Not yet. I ended up in grad school for statistics instead of economics, so that may have derailed me.
actually I believe they rail against aggregation because the cumulative error becomes large enough to render the output meaningless in many cases (GDP, CPI, etc).
I’m pretty sure I’ve heard Austrians give that argument before, but I don’t think it’s the only one. I remember Block talking about how Austrian Business Cycle theory needed to be revised because of problems with the Hayekian Triangle.
I found the working paper. See, in particular, sections 1 and 2 and the summary. There’s too much to quote concisely, but Block’s main point in section 2 is that the aggregate Hayekian triangle doesn’t have any microfoundations. He wants to be able to derive the aggregate Hayekian triangle from the Hayekian triangles for each specific good for each specific agent. But this isn’t a reason to reject the model outright—very few scientific models have complete microfoundations (all the way down to physics). That doesn’t mean they won’t make accurate predictions. Microfoundations tend to help, of course, but they aren’t necessary.
Disclaimer: I am not an advocate of the Austrian Business Cycle theory. This was just for illustrative purposes.
Thanks for clarifying this. I’ve heard so many good things about Hayek that I’m meaning to dive into his oeuvre at some point. But I’d also gathered that some Austrians were a-priorists, as the OP says, so I’m not interested in spending more time looking at their thinking. The OP had me worried that these ends conflict, but you’ve reassured me that they don’t.
AFAIK Hayek’s early stuff on business cycle theory is no good, but I don’t think there’s anything especially Austrian about it other than that Austrians seem to be the only ones that believe it.
If the post doesn’t look right, use the edit button. I’d rather have edit than preview any time. Not that they are mutally exclusive, but edit easily substitutes for preview.
Your right, and I used the edit button (about 5 times). Editing without making a note about why just seems deceitful though, yet that is essentially what we do when we use it as a de facto preview button. Oh well, minor thing.
If I make a change in the substance of a post, I note the change. I was mostly pointing out that you can immediately click on edit to fix clumsy wordings and misspellings when you notice them right after posting. I dislike sites with no editing because I can’t fix misspellings that I don’t catch in time.