According to the about page, this group holds mathematical modeling in high esteem. A central idea being that the mind itself, individually and, by extension, groups of minds, can be mathematically described and modeled.
I would be interested to hear how one claims to correlate the results of a model to the workings of the mind. It sounds to me more like the result of industrious researchers mixed with computing power which is sufficient for the task of repeatedly tweaking a complex model until the product resembles an observed reality. Afterward, chosen variables can be modified singularly or in groups, such that some brilliant claim or conclusion can be drawn from the model.
With this confidence in the ability of science to model the mind, true believers must disdain the claim that economic modeling for management purposes is a useless endeavor. After all, the economic model is a layer above the internal mind modeling claims made here. From this starting point, one could never expect a fair analysis of the Austrian theory.
So much could be said on this; what shall I choose.
First, I recognize that Mises made some claims which, particularly when analyzed outside the purely academic context, are a reach. However, the minutia which are used by a purist to discover and articulate baseline ideas with words, which can only be symbols of ideas at best, are not where I find value in the school of thought. I am more interested in the practical and applicable knowledge that is the fruit and product of the analysis, which happens to be solid because the originators were willing to rigorously test their assertions, seeking ways to describe and model the theory.
Yes, I said model. The idea of choosing a narrow, purpose oriented term like “happiness” is designed to create and sustain resources for an intellectual model. It is to select a fairly useful term, while stripping away the baggage that distorts its purpose in the model; which is akin to isolating a variable mathematically.
Additionally, the claim that the Austrians make, which must be hard to swallow here, is that a mathematical model is useless in the field of economic prediction for the purpose of successfully managing an economy. The problems with this concept of modeling are really quite simple.
A model will not incorporate all variables. If a model incorporated all variables and each had values, it would become a copy of reality. If it is a copy of future events, then it is unbounded by time. In addition, there is the question of whether the model “knows” the future, or is describing a potential reality. If only a potential reality, then the information is useless unless the information about actions can be disseminated, but this dissemnination process would then have to be incorporated into the model, which would then be distorted. If anyone disagreed, the modeled decisions would have to be applied by force… Where does this lead and where does it end?
All variables are not known.
If all variables were known, which they cannot be, their present and subsequent values in the model cannot be known, because the values are subject to human action; i.e. individual choice at a point in time based on concurrent conditions (which are unknown variables having unknown values).
Models produce averages, which are then conceived to be the answer for each actor, which is irrational. The model itself doesn’t actually claim that all actors will enjoy the average results, and yet the results are rendered, communicated and applied as averages.
Even if a model were able to incorporate all known variables, apart from an active system on the ground which can actually control a variable that the model incorporates, moving the variable would be a fruitless exercise, other than for curiosity sake.
Models are owned by men, who pursue their own “happiness”. They will have an agenda. If the model has any use for wielding influence, it will be applied through a system. The goal will be to use a system to enrich the players in the process, which then reduces the model to a tool of manipulation and theft.
Therefore, we find that modeling in economics, as a method of managing an economy, is futile. However, modeling the effects of a controlled variable at play in the system, is quite attainable. The Austrian theory of the business cycle is described in part by this sort of modeling.
The Austrian theory clearly describes the mathematical effects of currency manipulation. These effects lead to a boom bust cycle, which we have observed repeatedly. The ability to control the variables of money quantity and the distribution of new money, enables economists to “model” the effects. In the economists’ arrogance or disdain for the producers, they see themselves as managers of a system, when in fact they are simply pillagers who have successfully created a pillaging system with the aid of central banking and coercive government intervention.
Therefore, the presuppositions in the Austrian School provide a foundation for communicating that models cannot be created to successfully manage an economy. A model that is used to describe productivity in a genuinely free market without government intervention, would be useless. The outcomes would reduce to things like the industriousness and ingenuity of the actors.
A “brilliant” model is only attainable and useful when there is the ability to control the system by way of unavoidable force applied to the producers. When that case is exists, we find that the power to act in this way is always used oppressively.
Our monetary system is Keynesian and Keynes wrote about the destructive effect of inflation at least as early as 1919.
“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
The Economic Consequences of the Peace, John Maynard Keynes, 1919
The point is missed when the Austrian effort to articulate presuppositions is attacked on the grounds that they are presuppositions.
Evidently the claim being made here, by implication, is the presupposition that the actual economy can be modeled. But that has never happened. Listen to Greenspan explain how the “housing boom” was neither predicted by the models nor anticipated by him or his staff. Either the model was useless, even with the control of currency and positive law, or the system was used to pillage, or both.
The role of an economist should be to observe and describe the economy, not attempt manage it. The Austrians understand this role and acknowledge that certain things cannot be known at all, and that other things cannot be known or controlled, unless accompanied by violation of the rights of the individual.
Mises and other Austrian economists sought a way to put into words why, in actual reality, a successful controlling model has never been created and cannot be created. Quibbling over presuppositions, which happen to be supported by experience and evidence, as a basis for discrediting the Austrian Theory is weak thinking indeed.
I have little interest in creating a model of the economy so that I can control it with a magic government wand. I am a Public Choice libertarian. I have an interest in updating my beliefs according to the evidence.
The problem is not that Mises and Rothbard have presuppositions, it is that they consider their priors immune to all inference. As soon as you invoke experience and evidence as justifications for their presuppositions, you have distanced yourself from their position, which is that no evidence could ever confirm or disconfirm their theory.
I understand this point, but the presupposition has a purpose beyond itself. It is not intended to exist as a statement of truth which cannot be refuted. Its purpose is to acknowledge the lowest step in the Austrian analysis for which we can describe our understanding. That point is the touchstone for what we cannot know and for that which we cannot go beyond because of the nature of the things in question.
The Austrian view observes certain outcomes which can be quantified and then works backward through regressions to describe what we can know about why these observed and knowable outcomes are indeed the outcomes.
In essence, the claim being made in the Awful Austrians piece is that the theory should not claim to not know or be incapable of measuring anything in the regression toward the foundation of the thought, else the measurable conclusions should be disdained.
The implication then is that these things described by the presuppositions can indeed be measured or quantified, or else that they are irrelevant to the question and something else is the correct next measurable regression in the theory.
For instance, as a Public Choice libertarian, do you recognize the mathematical and logical truth that when inflating a costless money supply, if everyone receives the new money on the same day, then inflation serves no purpose? If you do, step back through the regressions from this level until you discover some part of the theory that is unsustainable. If that point is at the presuppositions which in essence are describing what cannot be known, then where is your argument?
The presuppositional construct is a method of attaching symbols to concepts regarding which we can only see the shadows. The evidence they reject is that which irrationally claims to confirm or disconfirm their starting point, not the following layers of theory which exist within our quantifiable apprehension.
And, come to think of it, no, I do not agree that the inflation example is a mathematical and logical truth, unless one assumes self-interest to actually mean selfishness. Otherwise, a banker may say, “I love all you little goofballs so much, I’m not going to raise the interest rate the full price of inflation. Go ahead and have some of my mone.” Then the inflation would have an effect.
But if self-interest is selfishness, then it’s not an unknown variable, and I can think of many experimental results to confirm or disconfirm it.
Swimmy, I think perhaps you are not following the argument regarding inflation.
If one created a simple model wherein everyone had x currency units today, and then tomorrow an additional quantity of costless new money was created, such that each person had 2x currency units, then inflation would serve no purpose. Each person’s purchasing power would be unchanged.
What is the mathematical and logical error you see in that model?
In the example there are no debts. Savings in money terms are the dollars held, therefore the savings rate is unchanged. Savings in corn or cattle are unaffected by the change in money quantity.
Prices change based on the law of supply and demand.
Consider Bernanke’s recent comments about the control the Fed has over the economy.
“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
(Ben Bernanke, “Deflation: Making Sure ‘It’ Doesn’t Happen Here” [Remarks before the National Economists Club, Washington, D.C., 21 November 2002])
The law of supply and demand is based on the selfishness assumption. Yes there is an argument that even upward-sloping demand curves will eventually slope downwards, but I can always find some margin or theoretical example for which it’s not true over some interval.
Why would the law of supply and demand not rest on marginal utility, rather than selfishness? Just because I have a selfish desire doesn’t mean that I can satisfy the desire. Utility and means mix together with self interest to render choices regarding use of scarce resources.
My argument is that the it’s irrelevant whether the presuppositions can be known with certainty. You can attach a probability estimate to them, allowing for the uncertainty of your missing variables, discount the evidence from experimental and behavioral economics accordingly, and update your priors accordingly. If your unconditional probability assignment is such that the uncertainty influenced by those missing variables discounts all such evidence by 100%, I really want you to show your work.
Austrians recognize that there is an unquantifiable variable in economics, namely human action, which heavily influences economic outcomes. You want to insert an arbitrary (estimated) variable value, i.e. probability estimate, in a model to account for something that Mises claims cannot be accounted for based on experience and historical fact.
Since you seem to believe that the variable value can be known and quantified for modeling purposes, what is it? What are the attributes of the variable collection which represent human action in economics?
Mises claims that human action is present, significant and cannot be measured. Are you claiming human action is absent, insignificant or measurable?
If you can set up the conditions to prove your case experimentally, then you have an argument.
How are your assumptions, i.e. probability estimates, inserted in a model going to provide feedback that will enable a valid update of the priors? Is that not circular reasoning?
If the claims made by Mises and the Austrians went no farther than to say human action cannot be measured and therefore nothing in economics can be measured, you would have an argument simply because their thinking would be inadequate. This is not the case.
To the contrary, Mises thinking regarding economic calculation in the socialist commonwealth clearly shows that human action coupled with ownership is a required component of a healthy and sustainable economy. Human action is necessary and yet cannot be measured or predicted, except that people are going to act in such a way as to satisfy their own self interest, which is conditional and subjective.
If experience and fact can be used to account for human action in economics, then Mises claims are false.
If they cannot, why discount his theory because he acknowledges a real-world constraint using a presuppositional argument?
If human action could not be predicted, the results of experiments into the Allais Paradox, preference reversal, conjunction fallacy, and on and on, should be a random walk. Since they’re not, human action can be to some measure predicted. If an Austrian believes all such research should be discounted by 100%, I’m taking issue with whatever prior gives that result.
And no, using priors in the way I described is not circular reasoning. Recall Bayes’ Rule for updating on evidence: P(H|E) = P(H)P(E|H)/P(E)
To be as clear as possible, let’s use the following example. We want to test the hypothesis “People act rationally and self-interested.” As a definition for rationality, let’s say people’s STABLE preferences disallow intransitivity.
Say I start with a prior for the hypothesis, P(H)=0.9. The likelihood that we see experimental evidence of intransitive preferences given this hypothesis must be fairly low, but there could always be experimental error, so P(E|H)=0.05. This estimate is where my priors come in as I described above. If I think it’s equally likely for an experiment to show evidence of intransitivity as transitivity, even given my hypothesis, P(E|H)=0.5.
I discount by my estimate that there will be experimental evidence of intransitive preferences regardless. P(E) = P(H1)P(E|H1) + P(H2)P(E|H2). Given P(Intransitivity results | People are rational) = 0.05, P(Intransitivity | People are irrational) = 0.95, we have, for the case of the believer P(E) = 0.05 0.9+0.1 0.95 = 0.14 and, for the case of the skeptic, 0.5 0.9+0.1 0.5 = 0.5. So, for the believer, evidence of intransitivity gives 0.90.05/0.14 = 0.32, and for the case of the skeptic, 0.9 0.5/0.5 = 0.9, ie, no updating.
Mises argues that we can never have any evidence of intransitive preferences because preferences are not stable. Thus, the preference reversal evident in choosing Gamble 1 in Part 1 and Gamble 2 in Part 2 of the Allais Paradox can never be evidence of intransitive preferences. But, I argue that if we show, in study after study, across the majority of people, that the preference for Gamble 1A and Gamble 2B is stable over time—seconds, weeks, months, years, lifetimes even!--that we should discount the skeptic argument P(Intransitivity results | People are rational) from 0.5 to something lower, akin to P(E|H) = 0.05.
But that’s not where it begins. I’m saying that experimental evidence of such preference stability should change your probability estimate of P(Preferences are stable) from 0.5 (This variable is mystical, completely unknown, sublime and unknowable even to a superintelligent AI with the capability of doing a nanosweep of your entire noggin) to something much higher, like 0.9 (I am pretty damn sure this preference is stable because the evidence says so and evolutionary psychology suggests it’s universal). Even if you want to leave it highly unknown, P=0.51, this will change your update according to the evidence. So it’s not circular reasoning. It’s using priors/updates on one hypothesis (preferences are stable) to update on another hypothesis (people are sometimes irrational).
If you’re arguing that we should remain radically uncertain even in the face of such evidence, I want to know the priors you assign. Saying “it’s unknown” isn’t enough. How unknown is it? I have trouble believing it’s really a 50⁄50 split. Are we really equally likely to see most people choose Gamble1A and Gamble 2B in every experimental study with highly statistically significant results across times and cultures as we are to see a random walk? If so, how come we never see random walks?
Human action can indeed be to some measure predicted.
For instance, if I conducted an experiment with 100 people wherein I presented each person with the opportunity to place their bare hand on a red hot burner on a stove, including leaving it there for one minute, I predict 100% would say no. I could even model that experiment.
However, this kind and degree of predictability is meaningless in the context of economic modeling.
What if the person who is being presented with the choice in the Allais Paradox just lost their mother to death, as well as losing their job in the same week? How does this affect the model? What does that research show?
How does one account for decisions made without adequate consideration, or when the decision maker doesn’t understand the problem? What about the follow on effects of choices made in the past which encumber via contract, or cause emotional or financial pain, such that the decision is not rational or the risk assessment is distorted? Or the reverse when the rewards have been great in the past?
How many life choices exist in such pristine, simple and clear conditions as the Allais Paradox?
Are not our choices, responsibilities, assets, liabilities, obligations, future earnings, job markets, work relationships, preferences, skills, talents, capital, regulatory environments, choices of other people, comparative advantages, currency fluctuation, taxation, inflation, religious beliefs, IQ, education, weather, genetics, resource allocation, scarcity, social stability, time constraints, competing demands, influence of peers, influence of media, family relationships, beliefs about the future, and more, all knit into each decision made?
Are you really claiming that the minor complexities presented in such a simple model as the Allais Paradox rise to the level of mathematically illuminating, for the purpose of useful economic modeling, the myriad decisions inherent in daily life? After all, everything in life depends, at some significant level, on exchange of productivity, which is generated as a result of the decisions of life.
My point is that the models relating to human action which are herein employed as proofs, are not sufficiently complex to be useful or meaningful in economic modeling.
You criticize the Austrian school on the basis of presuppositions which are designed to note the limits of our ability to construct theories or predict future events. At the same time, all that is offered to suggest we are not limited are simplistic and wholly inadequate models which do nothing to solve the problem. As long as Mises claims we can’t know or test these things and no one else shows that we can, I have to agree with Mises.
Besides, if these things were knowable, Mises would never have accepted stopping at this level. He would have anticipated and likely discovered and modeled the information so as to press another layer deeper, in hopes of gaining a greater mastery of the subject.
Everyone who is doing economics is working on the assumption that there are some useful regularities about human behaviour. None claim a model that perfectly predicts the behaviour of every individual. What distinction are you drawing here between the regularities that the Austrians assume about human behaviour, and the regularities that other economists assume?
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.
According to the about page, this group holds mathematical modeling in high esteem. A central idea being that the mind itself, individually and, by extension, groups of minds, can be mathematically described and modeled.
I would be interested to hear how one claims to correlate the results of a model to the workings of the mind. It sounds to me more like the result of industrious researchers mixed with computing power which is sufficient for the task of repeatedly tweaking a complex model until the product resembles an observed reality. Afterward, chosen variables can be modified singularly or in groups, such that some brilliant claim or conclusion can be drawn from the model.
With this confidence in the ability of science to model the mind, true believers must disdain the claim that economic modeling for management purposes is a useless endeavor. After all, the economic model is a layer above the internal mind modeling claims made here. From this starting point, one could never expect a fair analysis of the Austrian theory.
So much could be said on this; what shall I choose.
First, I recognize that Mises made some claims which, particularly when analyzed outside the purely academic context, are a reach. However, the minutia which are used by a purist to discover and articulate baseline ideas with words, which can only be symbols of ideas at best, are not where I find value in the school of thought. I am more interested in the practical and applicable knowledge that is the fruit and product of the analysis, which happens to be solid because the originators were willing to rigorously test their assertions, seeking ways to describe and model the theory.
Yes, I said model. The idea of choosing a narrow, purpose oriented term like “happiness” is designed to create and sustain resources for an intellectual model. It is to select a fairly useful term, while stripping away the baggage that distorts its purpose in the model; which is akin to isolating a variable mathematically.
Additionally, the claim that the Austrians make, which must be hard to swallow here, is that a mathematical model is useless in the field of economic prediction for the purpose of successfully managing an economy. The problems with this concept of modeling are really quite simple.
A model will not incorporate all variables. If a model incorporated all variables and each had values, it would become a copy of reality. If it is a copy of future events, then it is unbounded by time. In addition, there is the question of whether the model “knows” the future, or is describing a potential reality. If only a potential reality, then the information is useless unless the information about actions can be disseminated, but this dissemnination process would then have to be incorporated into the model, which would then be distorted. If anyone disagreed, the modeled decisions would have to be applied by force… Where does this lead and where does it end?
All variables are not known.
If all variables were known, which they cannot be, their present and subsequent values in the model cannot be known, because the values are subject to human action; i.e. individual choice at a point in time based on concurrent conditions (which are unknown variables having unknown values).
Models produce averages, which are then conceived to be the answer for each actor, which is irrational. The model itself doesn’t actually claim that all actors will enjoy the average results, and yet the results are rendered, communicated and applied as averages.
Even if a model were able to incorporate all known variables, apart from an active system on the ground which can actually control a variable that the model incorporates, moving the variable would be a fruitless exercise, other than for curiosity sake.
Models are owned by men, who pursue their own “happiness”. They will have an agenda. If the model has any use for wielding influence, it will be applied through a system. The goal will be to use a system to enrich the players in the process, which then reduces the model to a tool of manipulation and theft.
Therefore, we find that modeling in economics, as a method of managing an economy, is futile. However, modeling the effects of a controlled variable at play in the system, is quite attainable. The Austrian theory of the business cycle is described in part by this sort of modeling.
The Austrian theory clearly describes the mathematical effects of currency manipulation. These effects lead to a boom bust cycle, which we have observed repeatedly. The ability to control the variables of money quantity and the distribution of new money, enables economists to “model” the effects. In the economists’ arrogance or disdain for the producers, they see themselves as managers of a system, when in fact they are simply pillagers who have successfully created a pillaging system with the aid of central banking and coercive government intervention.
Therefore, the presuppositions in the Austrian School provide a foundation for communicating that models cannot be created to successfully manage an economy. A model that is used to describe productivity in a genuinely free market without government intervention, would be useless. The outcomes would reduce to things like the industriousness and ingenuity of the actors.
A “brilliant” model is only attainable and useful when there is the ability to control the system by way of unavoidable force applied to the producers. When that case is exists, we find that the power to act in this way is always used oppressively.
Our monetary system is Keynesian and Keynes wrote about the destructive effect of inflation at least as early as 1919.
“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
The Economic Consequences of the Peace, John Maynard Keynes, 1919
The point is missed when the Austrian effort to articulate presuppositions is attacked on the grounds that they are presuppositions.
Evidently the claim being made here, by implication, is the presupposition that the actual economy can be modeled. But that has never happened. Listen to Greenspan explain how the “housing boom” was neither predicted by the models nor anticipated by him or his staff. Either the model was useless, even with the control of currency and positive law, or the system was used to pillage, or both.
The role of an economist should be to observe and describe the economy, not attempt manage it. The Austrians understand this role and acknowledge that certain things cannot be known at all, and that other things cannot be known or controlled, unless accompanied by violation of the rights of the individual.
Mises and other Austrian economists sought a way to put into words why, in actual reality, a successful controlling model has never been created and cannot be created. Quibbling over presuppositions, which happen to be supported by experience and evidence, as a basis for discrediting the Austrian Theory is weak thinking indeed.
I have little interest in creating a model of the economy so that I can control it with a magic government wand. I am a Public Choice libertarian. I have an interest in updating my beliefs according to the evidence.
The problem is not that Mises and Rothbard have presuppositions, it is that they consider their priors immune to all inference. As soon as you invoke experience and evidence as justifications for their presuppositions, you have distanced yourself from their position, which is that no evidence could ever confirm or disconfirm their theory.
I understand this point, but the presupposition has a purpose beyond itself. It is not intended to exist as a statement of truth which cannot be refuted. Its purpose is to acknowledge the lowest step in the Austrian analysis for which we can describe our understanding. That point is the touchstone for what we cannot know and for that which we cannot go beyond because of the nature of the things in question.
The Austrian view observes certain outcomes which can be quantified and then works backward through regressions to describe what we can know about why these observed and knowable outcomes are indeed the outcomes.
In essence, the claim being made in the Awful Austrians piece is that the theory should not claim to not know or be incapable of measuring anything in the regression toward the foundation of the thought, else the measurable conclusions should be disdained.
The implication then is that these things described by the presuppositions can indeed be measured or quantified, or else that they are irrelevant to the question and something else is the correct next measurable regression in the theory.
For instance, as a Public Choice libertarian, do you recognize the mathematical and logical truth that when inflating a costless money supply, if everyone receives the new money on the same day, then inflation serves no purpose? If you do, step back through the regressions from this level until you discover some part of the theory that is unsustainable. If that point is at the presuppositions which in essence are describing what cannot be known, then where is your argument?
The presuppositional construct is a method of attaching symbols to concepts regarding which we can only see the shadows. The evidence they reject is that which irrationally claims to confirm or disconfirm their starting point, not the following layers of theory which exist within our quantifiable apprehension.
And, come to think of it, no, I do not agree that the inflation example is a mathematical and logical truth, unless one assumes self-interest to actually mean selfishness. Otherwise, a banker may say, “I love all you little goofballs so much, I’m not going to raise the interest rate the full price of inflation. Go ahead and have some of my mone.” Then the inflation would have an effect.
But if self-interest is selfishness, then it’s not an unknown variable, and I can think of many experimental results to confirm or disconfirm it.
Swimmy, I think perhaps you are not following the argument regarding inflation.
If one created a simple model wherein everyone had x currency units today, and then tomorrow an additional quantity of costless new money was created, such that each person had 2x currency units, then inflation would serve no purpose. Each person’s purchasing power would be unchanged.
What is the mathematical and logical error you see in that model?
Prices have to change as well. The prediction that producers will change their prices is based on the selfishness assumption.
Nominal debts and nominal savings both decrease.
In the example there are no debts. Savings in money terms are the dollars held, therefore the savings rate is unchanged. Savings in corn or cattle are unaffected by the change in money quantity.
Prices change based on the law of supply and demand.
Consider Bernanke’s recent comments about the control the Fed has over the economy.
“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
(Ben Bernanke, “Deflation: Making Sure ‘It’ Doesn’t Happen Here” [Remarks before the National Economists Club, Washington, D.C., 21 November 2002])
The law of supply and demand is based on the selfishness assumption. Yes there is an argument that even upward-sloping demand curves will eventually slope downwards, but I can always find some margin or theoretical example for which it’s not true over some interval.
Why would the law of supply and demand not rest on marginal utility, rather than selfishness? Just because I have a selfish desire doesn’t mean that I can satisfy the desire. Utility and means mix together with self interest to render choices regarding use of scarce resources.
My argument is that the it’s irrelevant whether the presuppositions can be known with certainty. You can attach a probability estimate to them, allowing for the uncertainty of your missing variables, discount the evidence from experimental and behavioral economics accordingly, and update your priors accordingly. If your unconditional probability assignment is such that the uncertainty influenced by those missing variables discounts all such evidence by 100%, I really want you to show your work.
Austrians recognize that there is an unquantifiable variable in economics, namely human action, which heavily influences economic outcomes. You want to insert an arbitrary (estimated) variable value, i.e. probability estimate, in a model to account for something that Mises claims cannot be accounted for based on experience and historical fact.
Since you seem to believe that the variable value can be known and quantified for modeling purposes, what is it? What are the attributes of the variable collection which represent human action in economics?
Mises claims that human action is present, significant and cannot be measured. Are you claiming human action is absent, insignificant or measurable?
If you can set up the conditions to prove your case experimentally, then you have an argument.
How are your assumptions, i.e. probability estimates, inserted in a model going to provide feedback that will enable a valid update of the priors? Is that not circular reasoning?
If the claims made by Mises and the Austrians went no farther than to say human action cannot be measured and therefore nothing in economics can be measured, you would have an argument simply because their thinking would be inadequate. This is not the case.
To the contrary, Mises thinking regarding economic calculation in the socialist commonwealth clearly shows that human action coupled with ownership is a required component of a healthy and sustainable economy. Human action is necessary and yet cannot be measured or predicted, except that people are going to act in such a way as to satisfy their own self interest, which is conditional and subjective.
If experience and fact can be used to account for human action in economics, then Mises claims are false.
If they cannot, why discount his theory because he acknowledges a real-world constraint using a presuppositional argument?
If human action could not be predicted, the results of experiments into the Allais Paradox, preference reversal, conjunction fallacy, and on and on, should be a random walk. Since they’re not, human action can be to some measure predicted. If an Austrian believes all such research should be discounted by 100%, I’m taking issue with whatever prior gives that result.
And no, using priors in the way I described is not circular reasoning. Recall Bayes’ Rule for updating on evidence: P(H|E) = P(H)P(E|H)/P(E)
To be as clear as possible, let’s use the following example. We want to test the hypothesis “People act rationally and self-interested.” As a definition for rationality, let’s say people’s STABLE preferences disallow intransitivity.
Say I start with a prior for the hypothesis, P(H)=0.9. The likelihood that we see experimental evidence of intransitive preferences given this hypothesis must be fairly low, but there could always be experimental error, so P(E|H)=0.05. This estimate is where my priors come in as I described above. If I think it’s equally likely for an experiment to show evidence of intransitivity as transitivity, even given my hypothesis, P(E|H)=0.5.
I discount by my estimate that there will be experimental evidence of intransitive preferences regardless. P(E) = P(H1)P(E|H1) + P(H2)P(E|H2). Given P(Intransitivity results | People are rational) = 0.05, P(Intransitivity | People are irrational) = 0.95, we have, for the case of the believer P(E) = 0.05 0.9+0.1 0.95 = 0.14 and, for the case of the skeptic, 0.5 0.9+0.1 0.5 = 0.5. So, for the believer, evidence of intransitivity gives 0.90.05/0.14 = 0.32, and for the case of the skeptic, 0.9 0.5/0.5 = 0.9, ie, no updating.
Mises argues that we can never have any evidence of intransitive preferences because preferences are not stable. Thus, the preference reversal evident in choosing Gamble 1 in Part 1 and Gamble 2 in Part 2 of the Allais Paradox can never be evidence of intransitive preferences. But, I argue that if we show, in study after study, across the majority of people, that the preference for Gamble 1A and Gamble 2B is stable over time—seconds, weeks, months, years, lifetimes even!--that we should discount the skeptic argument P(Intransitivity results | People are rational) from 0.5 to something lower, akin to P(E|H) = 0.05.
But that’s not where it begins. I’m saying that experimental evidence of such preference stability should change your probability estimate of P(Preferences are stable) from 0.5 (This variable is mystical, completely unknown, sublime and unknowable even to a superintelligent AI with the capability of doing a nanosweep of your entire noggin) to something much higher, like 0.9 (I am pretty damn sure this preference is stable because the evidence says so and evolutionary psychology suggests it’s universal). Even if you want to leave it highly unknown, P=0.51, this will change your update according to the evidence. So it’s not circular reasoning. It’s using priors/updates on one hypothesis (preferences are stable) to update on another hypothesis (people are sometimes irrational).
If you’re arguing that we should remain radically uncertain even in the face of such evidence, I want to know the priors you assign. Saying “it’s unknown” isn’t enough. How unknown is it? I have trouble believing it’s really a 50⁄50 split. Are we really equally likely to see most people choose Gamble1A and Gamble 2B in every experimental study with highly statistically significant results across times and cultures as we are to see a random walk? If so, how come we never see random walks?
Human action can indeed be to some measure predicted.
For instance, if I conducted an experiment with 100 people wherein I presented each person with the opportunity to place their bare hand on a red hot burner on a stove, including leaving it there for one minute, I predict 100% would say no. I could even model that experiment.
However, this kind and degree of predictability is meaningless in the context of economic modeling.
What if the person who is being presented with the choice in the Allais Paradox just lost their mother to death, as well as losing their job in the same week? How does this affect the model? What does that research show?
How does one account for decisions made without adequate consideration, or when the decision maker doesn’t understand the problem? What about the follow on effects of choices made in the past which encumber via contract, or cause emotional or financial pain, such that the decision is not rational or the risk assessment is distorted? Or the reverse when the rewards have been great in the past?
How many life choices exist in such pristine, simple and clear conditions as the Allais Paradox?
Are not our choices, responsibilities, assets, liabilities, obligations, future earnings, job markets, work relationships, preferences, skills, talents, capital, regulatory environments, choices of other people, comparative advantages, currency fluctuation, taxation, inflation, religious beliefs, IQ, education, weather, genetics, resource allocation, scarcity, social stability, time constraints, competing demands, influence of peers, influence of media, family relationships, beliefs about the future, and more, all knit into each decision made?
Are you really claiming that the minor complexities presented in such a simple model as the Allais Paradox rise to the level of mathematically illuminating, for the purpose of useful economic modeling, the myriad decisions inherent in daily life? After all, everything in life depends, at some significant level, on exchange of productivity, which is generated as a result of the decisions of life.
My point is that the models relating to human action which are herein employed as proofs, are not sufficiently complex to be useful or meaningful in economic modeling.
You criticize the Austrian school on the basis of presuppositions which are designed to note the limits of our ability to construct theories or predict future events. At the same time, all that is offered to suggest we are not limited are simplistic and wholly inadequate models which do nothing to solve the problem. As long as Mises claims we can’t know or test these things and no one else shows that we can, I have to agree with Mises.
Besides, if these things were knowable, Mises would never have accepted stopping at this level. He would have anticipated and likely discovered and modeled the information so as to press another layer deeper, in hopes of gaining a greater mastery of the subject.
I’m having a hard time following your argument.
Everyone who is doing economics is working on the assumption that there are some useful regularities about human behaviour. None claim a model that perfectly predicts the behaviour of every individual. What distinction are you drawing here between the regularities that the Austrians assume about human behaviour, and the regularities that other economists assume?
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.