Austrians believe that modeling for purposes of prediction is fruitless. Modeling for the purpose of control is unethical and oppressive because property rights are violated.
Other economists believe they can successfully model and manage an economy. They deal in numbers without taking into consideration human action at a level that has explanatory power. Monetarists, Keynesians, etc. ignore human action and generally treat the notion as unimportant. Austrians claim human action cannot be modeled, but knowledge of human action is required in order to model.
Austrians, for example, are able to model the effects of unrealistically cheap money, which is the source of malinvestment which leads to a boom bust cycle. We are experiencing the bust now.
With Austrians, things that can be modeled are modeled. Things that cannot be modeled or achieved are accepted, rather than, like the Keynesians, arrogantly claiming knowledge which is proven wrong time and time again.
Every time we have a bust, we are first told it should never have happened because after the last bust the bankers were given the tools necessary to prevent the bust. Then we are told that they just need a few more tools in their bag in order to fix the problem and ensure it never happens again. Then it happens again, each time bringing us nearer to the hyperinflation of 1920s Germany or today’s Zimbabwe.
The economists which claim to be able to manage our economy for our good are either liars or incompetents or both. And we are supposed to accept their critique of the Austrian baseline?
Claiming the presuppositions are wrong is fine, if one can show that these need not be presuppositions because they can indeed be measured and worked into a predictive model… This proof I have not observed in a research model, let alone in the applied science, which we live with daily.
Models are used for prediction in all sorts of domains. Each of us has a mental model (or “theory of mind”) of how others behave to a significant degree of accuracy. Economics often covers situations well outside the range of the evolutionary adaptive era for which our intuitive mental models don’t work as well. If modeling were truly useless, it wouldn’t matter if it was used “for the purpose of control” because it wouldn’t get you anywhere.
I wish Matthew Mueller’s Post-Austrian Economics blog was still up, because he made a good point about the unfortunate entanglement of austrian economics with political libertarianism since Rothbard. This results in some of its adherents viewing people who think their method is flawed as political enemies. For the record, I still read sites like mises.org & Lew Rockwell (though to a lesser extent recently due to all the competing distractions on the internet and my banning from the comments section of the former) and appreciate the work they do in bringing economics to a wider audience even if they can exhibit the flaws they point out in Rand’s circle.
There is a difference between modeling and manipulating.
To model, is to create a framework that describes something.
To manipulate is to choose one or more elements among the known attributes of the model which can be controlled and then use that to coercively accomplish goals; then set the model up to “show good things are happening” based on the all wise management of the modeled system by the managers.
You note “a significant degree of accuracy”. The point is that the degree of accuracy that can be attained is insufficient for the purpose.
Austrians believe that modeling for purposes of prediction is fruitless.
So if someone does successfully make a prediction about human behaviour, for example that a price increase will reduce sales, that falsifies the entire edifice of Austrian economics?
That is not an economic model or prediction of utility for the purpose. It will remain to be understood what happens to all other prices and production when this single adjustment is made. In addition, the question arises why the price is being adjusted. For example, what decisions were made and what conditions changed, either actually or by way of changes in understanding, which caused the prices to change?
Besides, your example is in reference to the law of supply and demand.
I would be cautious saying “Modeling for the purpose of control is unethical and oppressive because property rights are violated” purely because I wouldn’t want people to get the idea that Austrian Economists consider economics as normative. Austrian Economics may point out that the economic calculation problem shows that central planning is impossible, but it’s libertarian political philosophy that talks about things being ‘ethical’ or ‘unethical’. I think it’s important to keep the distinction between economics and political philosophy very clear.
Thanks nateemmons. I appreciate the distinction being made.
My reason for mixing is the centrality of private property and the consequent violation of property rights, using the standard of theft or fraud, that follows manipulation of currency, favored business license or heavy taxation for the purpose of redistribution. My interest in the school of thought is less theoretical and more practical application; i.e. how the body of knowledge affects the decisions by government that we then have to live with.
The problem I have here is the ganging up on the Austrian school in general because of a methodology used at the base of the theory. Mises said certain things cannot be done; he didn’t say don’t do them. If someone believes his presuppositions are wrong then simply prove it by doing what he claimed cannot be done.
To criticize Mises presuppositions is to claim a different set of presuppositions; i.e. we can experimentally measure the concept labeled human action and that there is nothing meaningful about human action that is antecedent to the study of history. I would say to the one making the claim, if this is the presupposition you would have us accept, please show your work.
If there was ever a Popperian refutation of the econometric/quant modelling of human behaviour we are surely living through that now.
No matter how many people know that water is H2O, it will not affect the fact. Once we have people telling us they can plug in probabilities for human actions, we have the start of monumental folly.
Every wise investor understands what Soros calls reflexivity. There is a role for math clearly but I find this post obsession about what to me seem fairly dull objections to the Austrian school miss their larger picture which seems to me overwhelmingly supported by current market experience.
It should not be a surprise to note that some of the most successful money managers/traders I work with have a strong Austrian bias, at least in the understanding of the monetary system and its systemic flaws and the predictable response of government… all using shiny models of course. Ahem.
I believe Mises said that socialism would fail at a time when the left (I do not imply Mises was thus on the right) was wowed over the success of Russia etc. and logically his theory would suggest money would be debased over time and that wealth would increasingly, and unjustly flow in Cantillon fashion to the earlier recipients of new money. Well, that to me means bankers, property developers, lawyers etc and this is so.
Today we are seeing rates near zero and government supporting long bonds and it is no surprise, to an Austrian trader, that we are seeing enormous trading profits in these areas of investment banks. This is an example of the Cantillon effect.
I would recommend we take the powerful parts from the Austrian theory and use them in real life. They surely work but it is also true that many who call themselves Austrians are of a ‘perma-bear’ disposition so be careful who you listen to. Look for form.
Austrians believe that modeling for purposes of prediction is fruitless. Modeling for the purpose of control is unethical and oppressive because property rights are violated.
Other economists believe they can successfully model and manage an economy. They deal in numbers without taking into consideration human action at a level that has explanatory power. Monetarists, Keynesians, etc. ignore human action and generally treat the notion as unimportant. Austrians claim human action cannot be modeled, but knowledge of human action is required in order to model.
Austrians, for example, are able to model the effects of unrealistically cheap money, which is the source of malinvestment which leads to a boom bust cycle. We are experiencing the bust now.
With Austrians, things that can be modeled are modeled. Things that cannot be modeled or achieved are accepted, rather than, like the Keynesians, arrogantly claiming knowledge which is proven wrong time and time again.
Every time we have a bust, we are first told it should never have happened because after the last bust the bankers were given the tools necessary to prevent the bust. Then we are told that they just need a few more tools in their bag in order to fix the problem and ensure it never happens again. Then it happens again, each time bringing us nearer to the hyperinflation of 1920s Germany or today’s Zimbabwe.
The economists which claim to be able to manage our economy for our good are either liars or incompetents or both. And we are supposed to accept their critique of the Austrian baseline?
Claiming the presuppositions are wrong is fine, if one can show that these need not be presuppositions because they can indeed be measured and worked into a predictive model… This proof I have not observed in a research model, let alone in the applied science, which we live with daily.
Models are used for prediction in all sorts of domains. Each of us has a mental model (or “theory of mind”) of how others behave to a significant degree of accuracy. Economics often covers situations well outside the range of the evolutionary adaptive era for which our intuitive mental models don’t work as well. If modeling were truly useless, it wouldn’t matter if it was used “for the purpose of control” because it wouldn’t get you anywhere.
I wish Matthew Mueller’s Post-Austrian Economics blog was still up, because he made a good point about the unfortunate entanglement of austrian economics with political libertarianism since Rothbard. This results in some of its adherents viewing people who think their method is flawed as political enemies. For the record, I still read sites like mises.org & Lew Rockwell (though to a lesser extent recently due to all the competing distractions on the internet and my banning from the comments section of the former) and appreciate the work they do in bringing economics to a wider audience even if they can exhibit the flaws they point out in Rand’s circle.
Thanks for your remarks teageegeepea.
There is a difference between modeling and manipulating.
To model, is to create a framework that describes something.
To manipulate is to choose one or more elements among the known attributes of the model which can be controlled and then use that to coercively accomplish goals; then set the model up to “show good things are happening” based on the all wise management of the modeled system by the managers.
You note “a significant degree of accuracy”. The point is that the degree of accuracy that can be attained is insufficient for the purpose.
So if someone does successfully make a prediction about human behaviour, for example that a price increase will reduce sales, that falsifies the entire edifice of Austrian economics?
That is not an economic model or prediction of utility for the purpose. It will remain to be understood what happens to all other prices and production when this single adjustment is made. In addition, the question arises why the price is being adjusted. For example, what decisions were made and what conditions changed, either actually or by way of changes in understanding, which caused the prices to change?
Besides, your example is in reference to the law of supply and demand.
I would be cautious saying “Modeling for the purpose of control is unethical and oppressive because property rights are violated” purely because I wouldn’t want people to get the idea that Austrian Economists consider economics as normative. Austrian Economics may point out that the economic calculation problem shows that central planning is impossible, but it’s libertarian political philosophy that talks about things being ‘ethical’ or ‘unethical’. I think it’s important to keep the distinction between economics and political philosophy very clear.
Thanks nateemmons. I appreciate the distinction being made.
My reason for mixing is the centrality of private property and the consequent violation of property rights, using the standard of theft or fraud, that follows manipulation of currency, favored business license or heavy taxation for the purpose of redistribution. My interest in the school of thought is less theoretical and more practical application; i.e. how the body of knowledge affects the decisions by government that we then have to live with.
The problem I have here is the ganging up on the Austrian school in general because of a methodology used at the base of the theory. Mises said certain things cannot be done; he didn’t say don’t do them. If someone believes his presuppositions are wrong then simply prove it by doing what he claimed cannot be done.
To criticize Mises presuppositions is to claim a different set of presuppositions; i.e. we can experimentally measure the concept labeled human action and that there is nothing meaningful about human action that is antecedent to the study of history. I would say to the one making the claim, if this is the presupposition you would have us accept, please show your work.
If there was ever a Popperian refutation of the econometric/quant modelling of human behaviour we are surely living through that now.
No matter how many people know that water is H2O, it will not affect the fact. Once we have people telling us they can plug in probabilities for human actions, we have the start of monumental folly.
Every wise investor understands what Soros calls reflexivity. There is a role for math clearly but I find this post obsession about what to me seem fairly dull objections to the Austrian school miss their larger picture which seems to me overwhelmingly supported by current market experience.
It should not be a surprise to note that some of the most successful money managers/traders I work with have a strong Austrian bias, at least in the understanding of the monetary system and its systemic flaws and the predictable response of government… all using shiny models of course. Ahem.
I believe Mises said that socialism would fail at a time when the left (I do not imply Mises was thus on the right) was wowed over the success of Russia etc. and logically his theory would suggest money would be debased over time and that wealth would increasingly, and unjustly flow in Cantillon fashion to the earlier recipients of new money. Well, that to me means bankers, property developers, lawyers etc and this is so.
Today we are seeing rates near zero and government supporting long bonds and it is no surprise, to an Austrian trader, that we are seeing enormous trading profits in these areas of investment banks. This is an example of the Cantillon effect.
I would recommend we take the powerful parts from the Austrian theory and use them in real life. They surely work but it is also true that many who call themselves Austrians are of a ‘perma-bear’ disposition so be careful who you listen to. Look for form.