The Austrian School of Economics - Pluses and Minuses

[iNow]

I thought it time to create a thread specifically for this conversation. It keeps hijacking nearly every thread which even vaguely references economics, so I'm hoping this thread will create a good way to keep our other discussions focused.

 

So, let's talk about it. The Austrian School of Economics:

 

 

http://en.wikipedia.org/wiki/Austrian_School

...is a school of economic thought that emphasizes the spontaneous organizing power of the price mechanism or price system. Austrians hold that the complexity of human behavior makes mathematical modeling of the evolving market extremely difficult (or undecidable) and advocate a laissez faire approach to the economy. Austrian School economists advocate the strict enforcement of voluntary contractual agreements between economic agents, and hold that commercial transactions should be subject to the smallest possible imposition of forces they consider to be coercive (in particular the smallest possible amount of government intervention).

 

<...>

 

Austrian School economists advocate strict adherence to methodological individualism, which they describe as analyzing human action from the perspective of individual agents.[9] Austrian School economists argue that the only means of arriving at a valid economic theory is to derive it logically from basic principles of human action, a method called praxeology. Additionally, whereas mainstream economists often utilize natural experiments, Austrian economists contend that testability in economics is virtually impossible since it relies on human actors who cannot be placed in a lab setting without altering their would-be actions. 'Mainstream' economists are generally critical of methodologies used by modern Austrian economics.

 

 

 

So, what are the pluses and minuses of this ideology in terms of economics? Please, share your thoughts here. Let's help each other to find common ground and better understand the way others think about these issues.

[abskebabs]

There are numerous advantages, but what I think is the chief one is its consistent application of a logical method of deduction to produce the theorems of Economics from very basic notions implicit in the concept and nature of action in the real world. This naturally may sound very contentious and nonsensical, to those with a positivistic view of science, as it did to myself when I first encountered them.

 

The following is a set of easy to read sources that I think provide a good example of how this method of elucidation is actually utillised. At best, it may give you an idea of where I'm coming from:

 

The first is a series of comics, although not finished, starting from very basic considerations:

 

Human Action Comics #1

 

Human Action Comics #2

 

Human Action Comics #3

 

Human Action Comics #4

 

I think they also provide an interesting, while amusing glimpse into the intellectual history of the development of Economics.

 

Another great, and more broad source designed for the layman is:

 

Economics for Real People by Gene Callahan

 

The following provides a fairly good overview of the school:

http://mises.org/about/3223

 

Incidentally, unlike much of neoclassical economics, wholly unrealistic assumptions are not utilised, though theoretical constructions are used in a fairly strict way according to the Method of Imaginary Constructions.

 

This is all covered in Human Action.

 

Arguably, and as noted in the Wikipedia article Hayek was closer to the "mainstream" because of his more amicable methodological stance, and for the fact that he was in many ways, or at least tried to be; a general equilibrium theorist. Hence why John R. Hicks, an author I currently am looking at, considers much of his work in Capital and Interest theory to be along the same lines. Knut Wicksell to a lesser extent(since his work was used in Hayek's elaborations of Misesian business cycle theory), and Phillip Wicksteed to a much greater extent can be considered "proto-austrians".

 

I don't think I have the patience or the time to debate these issues any longer, at least not for now; these discussions have taken a surprisingly long amount of time from my studies, which I think I should get back to. You did make a thread to dedicate to the subject however, so I thought these links would be useful for your discussion.

 

Have a good one;)

[Sisyphus]

...and it's disadvantage is it's over-reliance on metaphysics. "Actors" are metaphysical beings, separate from their bodies. They are unified, rational minds. From here are its axioms derived, and conclusions are reasoned to rather than tested. It throws up its hands in despair at the thought of supposedly impossible empiricism, instead relying on statements like "you can't imagine it otherwise," the ultimate refrain of the unimaginative and wrong dogmatists since the beginning of philosophy, from geocentrists to medieval theologians to deniers of quantum mechanics.

 

What a human actually is, as far as empirical science can tell us, is a complicated mass of organic molecules, a product of biological evolution mindlessly and persistently sifting towards ever-more complex reproductive strategies. Consciousness is an emergent phenomenon, but no consistent rules govern its behavior, and in fact the very notion of a "being" as a unified whole appears to be largely illusory. It is no more bound to obey the axioms of Cartesian dualistic metaphysics than a soda machine.

 

That's not to say that nothing can be known at all about how humans tend to behave, just that it can't be reasoned to, at least not with sufficient accuracy. Empirical psychology and neuroscience, though still far from perfected disciplines, offer the most promising windows into human - and thus economic - behavior, yet these things are apparently rejected by the Austrian school, or simply not considered, their basis contradictory to what has already been decided cannot be otherwise.

[iNow]

There are numerous advantages, but what I think is the chief one is its consistent application of a logical method of deduction to produce the theorems of Economics from very basic notions implicit in the concept and nature of action in the real world.

 

<...>

 

Have a good one;)

Thanks for the links, but if I were to distill your post into bullet-point form, all you really said is that the Austrian system is good because it uses logic.

 

Unfortunately, I find that a rather unsatisfying response, as the same can be said of other economic models/theories as well. Additionally, logic alone is a rather poor guide, especially when the basic premises and assumptions on which the conclusions are built are questionable to the point of often being flawed.

 

I wonder if you (or others) can further elucidate the pluses in a few short sentences. I've got some information about the minuses, but the gap in my awareness pertains to the pluses of this ideology. I want to hear from some folks about what is good about this system before I add some things to this discussion about what we know to be bad.

[bascule]

I think the important issue with the Austrian school is: is it pragmatic?

 

I am very tired of hearing about its idealistic virtues. Pick a country that can adopt it today, and push it there.

 

I don't think the country is America. I also think most of Europe would laugh at the suggestion. Even Switzerland.

[iNow]

Along similar lines, implementing it here and not anywhere else on the globe would put us at a significant disadvantage. We are, after all, a global economy connected to ALL of the worlds economies. If we pursue the ideas of the Austrians, we would be slaughtered by our competitors who did NOT adopt the approach.

[padren]

 

The first is a series of comics, although not finished, starting from very basic considerations:

 

Not to nitpick, but the Keynesian Money Supply stimulation analogy is pretty heavily flawed. When you increase money supply and give it to people who will spend it quickly you aren't "faking them out" but are taking little pieces of each person's dollar in the economy, putting together to make whole dollars, and giving them to those who will stimulate the economy.

 

Consider this scenario:

 

There are 10,000 shares in a company, all of which are owned and no one wants to sell any of them. The company is in trouble, but they can bring in help who will make the company more profitable so they survive the rough patch - only problem is that person wants 1,000 shares, and no one will give them up.

However, they could agree to print 1,000 more shares, which make every share worth somewhat less, but would slice an equal amount of value off every share out there without any physical redistribution. The person may reject the offer of 1,000 shares, since they were asking for 10 percent of shares - not an arbitrary magic number, at which point they'd have to print 1,111 total shares so the old share holders don't give a single one up yet the newcomer gets 10% of total shares.

 

That way the whole mess of trying to have someone who owns one share ending up with a fractional share is avoided. Everyone suffers a 10% loss, but the reason is to get something more for that 10% or at least stop the value from plummeting more than 10%.

 

 

 

Personally I think the idea of increasing money supply is a poor tactic at best and really just a form of triage - and all together unfit to solve chronic conditions. However, taxes that result in a redistribution of wealth for trickle-up economics can do the same thing without increasing the money supply.

[toastywombel]

Not to nitpick, but the Keynesian Money Supply stimulation analogy is pretty heavily flawed. When you increase money supply and give it to people who will spend it quickly you aren't "faking them out" but are taking little pieces of each person's dollar in the economy, putting together to make whole dollars, and giving them to those who will stimulate the economy.

 

Consider this scenario:

 

There are 10,000 shares in a company, all of which are owned and no one wants to sell any of them. The company is in trouble, but they can bring in help who will make the company more profitable so they survive the rough patch - only problem is that person wants 1,000 shares, and no one will give them up.

However, they could agree to print 1,000 more shares, which make every share worth somewhat less, but would slice an equal amount of value off every share out there without any physical redistribution. The person may reject the offer of 1,000 shares, since they were asking for 10 percent of shares - not an arbitrary magic number, at which point they'd have to print 1,111 total shares so the old share holders don't give a single one up yet the newcomer gets 10% of total shares.

 

That way the whole mess of trying to have someone who owns one share ending up with a fractional share is avoided. Everyone suffers a 10% loss, but the reason is to get something more for that 10% or at least stop the value from plummeting more than 10%.

 

 

 

Personally I think the idea of increasing money supply is a poor tactic at best and really just a form of triage - and all together unfit to solve chronic conditions. However, taxes that result in a redistribution of wealth for trickle-up economics can do the same thing without increasing the money supply.

 

Its all about free-markets! We need a flat tax! And less government so that wealth can grow! jk jk jk jk lol

 

I agree redistribution of wealth through taxation is a more effective way of stimulating the economy than printing large amounts of money and giving it to the population, as in Keynesian economics.

 

Although, I would argue that Keynesian economics is a much better system than laissez fair capitalism, which is the system that Keynesian economics replaced in America.

 

We must remember that the reason Keynesian economics was accepted by the FDR administration was because at that time the redistribution of wealth through taxation would of been labeled as communism, out of fear. Remember, the Soviet Union was gaining power rapidly at that time. Much of the American elite feared Communism.

 

The problem with Keynesian economics is that the more money the government prints, the less that money is worth. Meaning the more times you implement that system the less and less effective it becomes. Essentially it turns out to be a flat-tax, because it diminishes the value of everyone's dollar equally.

Edited October 25, 2009 by toastywombel

[padren]

The problem with Keynesian economics is that the more money the government prints, the less that money is worth. Meaning the more times you implement that system the less and less effective it becomes. Essentially it turns out to be a flat-tax, because it diminishes the value of everyone's dollar equally.

 

I think that is pretty much what I was saying - and I do understand the fear of being labeled 'communist' for redistributing wealth via tax, even if it is to protect the value of that wealth.

 

Just a curious thought - have people ever attempted schemes to take added money back out of circulation? Technically, it would be hard because obviously the dollars have to have value before they are taken out, so it's expensive... but money seized in drug busts could be taken out of circulation instead of extravagant coast guard yachts. It would probably be a drop in the bucket though.

[The Bear's Key]

Just a curious thought - have people ever attempted schemes to take added money back out of circulation? Technically, it would be hard because obviously the dollars have to have value before they are taken out, so it's expensive... but money seized in drug busts could be taken out of circulation instead of extravagant coast guard yachts. It would probably be a drop in the bucket though.

How about an expiration date set and printed on such money? That way, it's only good for so long and then it's gone from the system.

 

I'll elaborate further after work, sometime tomorrow likely.

[padren]

How about an expiration date set and printed on such money? That way, it's only good for so long and then it's gone from the system.

 

I'll elaborate further after work, sometime tomorrow likely.

 

The printed currency isn't the problem. The problem is: when you print more money, you add it into circulation and it becomes legal tender. Once it is in the system, you can replace bills or whatever, but how do you spend a $20 bill that expires tomorrow? If you plan ahead, you still have to give it to someone, who will end up stuck with it on the day it expires, and they'll effectively loose $20.

 

So, getting currency in: easy. Getting it out: Someone will have to part with it to get it out and not gain something of equal value. Trade the expired note in for gold? How then is the gold acquired? With a non-expired $20 bill. The government may as well just as well taken it's own $20 out of the system, which came in via taxes. You could destroy some percentage of collected tax, but it would be hard to justify to tax payers why they are paying extra taxes to have it literally burned.

 

That's why I was thinking the "drug seizure" option since we already seize those funds anyway. Of course, then that will be effectively pulling it from DEA agents etc, who would be miffed.

[Sisyphus]

The solution would just be to tax more than you spend in times of prosperity, thus decreasing the money supply and making up for the tax cuts and stimulus spending in hard times. And yes, politically this would be very hard to do, as the political pressure is always to tax less and spend more. And that's putting aside the problems that deflation inherently causes, and whether they are better or worse than the problems of inflation.

 

This probably should have its own topic, though.

[iNow]

Thanks for all of the awesome discussion above, guys. This is part of the reason I really like it here so much... So many intelligent thoughts and good faith discussions with people. However, I think Sisyphus has a valid point, and that much of the above might warrant its own thread.

 

With that said, here is a pretty powerful evisceration of the Austrian school, and one of the things I like about it is that it comes from a group who is... at their core... libertarian and against government involvement.

 

I'll quote a few parts which stood out to me, but it's worth the full review at the link below:

 

 

http://www.infoshop.org/faq/secC1.html#secc16

The Austrian school is close to neoclassical economics in many ways. The key difference is that it rejects the notion that the economy is in equilibrium and embraces a more dynamic model of capitalism. It is rooted in the notion of entrepreneurial activity, the idea that entrepreneurs act on information and disequilibrium to make super profits and bring the system closer to equilibrium. Thus, to use their expression, their focus is on the market process rather than a non-existent end state. As such, it defends capitalism in terms of how it reacts of dis-equilibrium and presents a theory of the market process that brings the economy closer to equilibrium. And fails.

 

The claim that markets tend continually towards equilibrium, as the consequence of entrepreneurial actions, is hard to justify in terms of its own assumptions. While the adjustments of a firm may bring the specific market it operates in more towards equilibrium, their ramifications may take other markets away from it and so any action will have stabilising and destabilising aspects to it. It strains belief to assume that entrepreneurial activity will only push an economy more towards equilibrium as any change in the supply and demand for any specific good leads to changes in the markets for other goods (including money). That these adjustments will all (mostly) tend towards equilibrium is little more than wishful thinking.

 

<...>

 

There is another reason to think the Austrian self-adjusting perspective on capitalism is flawed and this is rooted in their own analysis. Ironically enough, economists of this school often maintain that while equilibrium does not exist their analysis is rooted on two key markets being in such a state: the labour market and the market for credit. The reason for these strange exceptions to their general assumption is, fundamentally, political. The former is required to deflect claims that "pure" capitalism would result in the exploitation of the working class, the latter is required to show that such a system would be stable.

 

<...>

 

If unemployment is included in the Austrian model (as it should) then the bargaining position of labour is obviously weakened and, as a consequence, capital will take advantage and gather profits at the expense of labour. Conversely, if labour is empowered by full employment then they can use their position to erode the profits and managerial powers of their bosses. Logically, therefore, we would expect less than full unemployment and job insecurity to be the normal state of the economy with short periods of full unemployment before a slump. Given this, we would expect "pure" capitalism to be unstable, just as the approximations to it in history have always been. Austrian economics gives no reason to believe that would change in the slightest. Indeed, given their obvious hatred of trade unions and the welfare state, the bargaining power of labour would be weakened further during most of the business cycle and, contra Hayek, unemployment would remain and its level would fluctuate significantly throughout the business cycle.

 

Which brings us to the next atypical market in Austrian theory, namely the credit market. According to the Austrian school, "pure" capitalism would not suffer from a business cycle (or, at worse, a very mild one).

 

<...>

 

Ironically, therefore, the Austrian business cycle is rooted in the concept of

dis

-equilibrium in the credit market, the condition it argues is the standard situation in all other markets. In effect, they think that the money supply and interest rates are determined exogenously (i.e. outside the economy) by the state. However, this is unlikely as the evidence points the other way, i.e. to the endogenous nature of the money supply itself. This account of money (proposed strongly by, among others, the post-Keynesian school) argues that the money supply is a function of the demand for credit, which itself is a function of the level of economic activity. In other words, the banking system creates as much money as people need and any attempt to control that creation will cause economic problems and, perhaps, crisis. Money, in other words, emerges from

within

the system and so the Austrian attempt to "

blame the state

" is simply wrong.

 

<...>

 

While its open and extreme support for free market capitalism and its inequalities is, to say the least, refreshing, it is not remotely convincing or scientific. In fact, it amounts to little more than a vigorous defence of business power hidden behind a thin rhetoric of "free markets." As it preaches the infallibility of capitalism, this requires a nearly unyielding defence of corporations, economic and social power and workplace hierarchy. It must dismiss the obvious fact that allowing big business to flourish into oligopoly and monopoly (as it does, see section C.4) reduces the possibility of competition solving the problem of unethical business practices and worker exploitation, as they claim. This is unsurprising, as the Austrian school (like economics in general) identifies "freedom" with the "freedom" of private enterprise, i.e. the lack of accountability of the economically privileged and powerful. This simply becomes a defence of the economically powerful to do what they want (within the laws specified by their peers in government).

 

Ironically, the Austrian defence of capitalism is dependent on the belief that it will remain close to equilibrium. However, as seems likely, capitalism is endogenously unstable, then any real "pure" capitalism will be distant from equilibrium and, as a result, marked by unemployment and, of course, booms and slumps. So it is possible to have a capitalist economics based on non-equilibrium, but it is unlikely to convince anyone that does not already believe that capitalism is the best system ever unless they are unconcerned about unemployment (and so worker exploitation) and instability. <

more at the link

>

 

 

 

As for my own "criticism," I really can't find myself taking an ideology seriously when they explicitly reject empirical evidence and falsification. As it shows in the wiki article posted in the OP:

 

 

The main criticism of modern Austrian economics is that it ostensibly lacks scientific rigor. Austrian theories are not formulated in formal mathematical form, but by using mainly verbal logic and what proponents claim are self-evident axioms.

 

<...>

 

This criticism of the Austrian school is related to its supposed rejection of the use of the scientific method and empirical testing in social sciences in favor of self-evident axioms and logical reasoning.

 

 

In essence, it's all about deduction... starting with a set of axioms which may or may not have any validity or accuracy. They are so against empirical testing and evidence based claims that some even go so far as to say... when something happens in reality which shows their ideas incorrect or wrong... that reality itself is wrong, not the theory. That fundamentally goes against every scientific and analytical bone in my body, hence my heavy criticism of this economic school of thought.

[abskebabs]

...and it's disadvantage is it's over-reliance on metaphysics. "Actors" are metaphysical beings, separate from their bodies. They are unified, rational minds. From here are its axioms derived, and conclusions are reasoned to rather than tested. It throws up its hands in despair at the thought of supposedly impossible empiricism, instead relying on statements like "you can't imagine it otherwise," the ultimate refrain of the unimaginative and wrong dogmatists since the beginning of philosophy, from geocentrists to medieval theologians to deniers of quantum mechanics.

 

What a human actually is, as far as empirical science can tell us, is a complicated mass of organic molecules, a product of biological evolution mindlessly and persistently sifting towards ever-more complex reproductive strategies. Consciousness is an emergent phenomenon, but no consistent rules govern its behavior, and in fact the very notion of a "being" as a unified whole appears to be largely illusory. It is no more bound to obey the axioms of Cartesian dualistic metaphysics than a soda machine.

 

That's not to say that nothing can be known at all about how humans tend to behave, just that it can't be reasoned to, at least not with sufficient accuracy. Empirical psychology and neuroscience, though still far from perfected disciplines, offer the most promising windows into human - and thus economic - behavior, yet these things are apparently rejected by the Austrian school, or simply not considered, their basis contradictory to what has already been decided cannot be otherwise.

 

I want to reply to this post specifically and may come back to reply to others when I have time.

 

First of all you have misconstrued what kind of science economics is. It pays no attention to what factors or characterisations one can make in order to explain why man acts in a certain way. This is the task of psychology, not economics or praxeology.

 

It rather, starts off from the notion that man acts, hence has a set of ends ranked in terms of preference or urgency taken as a given, and wishes to apply whatever means he may find to achieve these ends. This is not controversial and has formed the backbone of Micro-Economics since Lionel Robbins wrote "The Nature and Significance of Economic Science." It investigates the necessary structure of action.

 

More importantly, It is not interested in humans as physiological or psychological beings, but as acting beings. In that sense, economics applies to any kind of acting being, human or not. The same is true for mathematics or computer science. Computer science does not ask whether a computer is a circuit board or a human writing on paper. The rules unfold as they unfold regardless of the nature of the computer. If the rules are violated, the laws break down regardless of the nature of the computer.

 

What you have called a disadvantage,, a reliance on metaphysics is the entire point.

 

Finally, the empirical and nominal notions, you cite as the requirement of establishing what you think would be an actual economic science actually have nothing to do with the real questions economics seeks to answer and elucidate.

 

You have the comics, with episodes 2 and 3 linked above. Can you explain to me how making "measurements" or arranging statistical data would ever solve the diamond-water paradox, or even the imputation problem?

 

Finally, I'll link the piece of work I recommended you to have a look at in my PM. I think others will appreciate it too:

 

http://mises.org/journals/scholar/long.pdf

 

It clarifies how little Misesian Economics has to do with the Cartesian brand of rationalism.

[iNow]

It rather, starts off from the notion that man acts, hence has a set of ends ranked in terms of preference or urgency taken as a given, and wishes to apply whatever means he may find to achieve these ends. This is not controversial and has formed the backbone of Micro-Economics...

Actually, I think you are glossing over a VERY controversial part of this approach. The system you advocate... the system argued heavily for by Mises and his students... attempts to treat peoples preferences as... essentially equal in value and only different in terms of rank.

 

However, since much of this work regards humans as acting beings, then it becomes critical to accurately reflect their thought processes and decision making schemes... For... if this foundation of your position is questionable, inaccurate, or flawed, then your whole argument collapses. Following what led me into this point, we know WITHOUT A SHADOW OF A DOUBT that humans treat their preferences as cardinal... That our preferences have different intensities and subjective value... that what we choose to act upon is about much more than a simple ranking... Our preferences and motivations are also about the intensity of the desire.

 

The approach you advocate attempts to ignore that humans have different intensities for their various preferences... You attempt to treat all human preferences as equal, just differentially ranked relative to one another... and that is simply an errant and inaccurate view of human behavior... an errant and inaccurate premise which destroys the credibility of your assertions.

 

In short, your system again... being based on logic and deduction... begins with a flawed premise which is non-representative and not reality-based, hence the conclusions derived from it are equally flawed. How do you respond?

 

 

 

http://en.wikipedia.org/wiki/Ordinal_utility

Another entirely different problem is whether ordinal utility is indeed an observable variable in real world. For example, in closed hypothetical system like above, there are only orange and apple to choose from. Therefore, when an individual choose orange, one can definitely say that an orange is preferred over an apple. However, in real world, when a consumer purchases an orange, it is often impossible to say what good or set of goods or collection of behavioural choice (including not purchasing anything at all or doing something else) were discarded as options.

Edited October 25, 2009 by iNow

[toastywombel]

iNow I agree we do have a great forum where these ideas can be expressed without name-calling or labeling, most of the time

[Sisyphus]

 

It rather, starts off from the notion that man acts, hence has a set of ends ranked in terms of preference or urgency taken as a given, and wishes to apply whatever means he may find to achieve these ends. This is not controversial

 

No, that is precisely what is controversial. There is a huge set of assumptions about the nature of human beings bound up in that, unsupported by empirical science. That man is a unified mind with rational, simultaneous goals, etc.

 

It's real crime, however, is not in making those particular suppositions (which, like Newtonian physics with planetary orbits, gives neat and good enough solutions in many situations), but in pretending they are inevitable, thus closing off the whole school of thought from the very beginning. This is exactly how medieval theologians worked.

 

More importantly, It is not interested in humans as physiological or psychological beings, but as acting beings. In that sense, economics applies to any kind of acting being, human or not. The same is true for mathematics or computer science. Computer science does not ask whether a computer is a circuit board or a human writing on paper. The rules unfold as they unfold regardless of the nature of the computer. If the rules are violated, the laws break down regardless of the nature of the computer.

 

Alright, so ask yourself if those universal laws apply to a computer, or a cancer cell, or a chair. How is "acting being" defined, if not via Cartesian mumbo jumbo?

 

What you have called a disadvantage,, a reliance on metaphysics is the entire point.

 

I've gathered that much. I'm saying that makes it fundamentally flawed.

 

You have the comics, with episodes 2 and 3 linked above. Can you explain to me how making "measurements" or arranging statistical data would ever solve the diamond-water paradox, or even the imputation problem?

 

Observation is a necessary part of science, but it is not science in itself. As for the diamond-water paradox, the cartoon answers nothing, at best restating the problem with the additional burden of more assumptions about the human actors.

 

Finally, I'll link the piece of work I recommended you to have a look at in my PM. I think others will appreciate it too:

 

http://mises.org/journals/scholar/long.pdf

 

It clarifies how little Misesian Economics has to do with the Cartesian brand of rationalism.

 

I haven't read it yet, though I intend to. I may as well admit that my reluctance (besides having much else to do) has to do with annoyance at constantly being redirected to a single source. I have to ask: have you ever studied economics not from an Austrian perspective? If not, how do you justify that?

Edited October 26, 2009 by Sisyphus

[iNow]

Actually, I think you are glossing over a VERY controversial part of this approach.

 

<...>

 

How do you respond?

 

To the person who neg repped me for the above quoted post #15 saying that my argument was weak and silly... If my argument is so weak then why did you choose to neg rep me instead of rebutting/debunking it openly? I have a genuinely desire to correct faults in my understanding. If you see any, please have the integrity to point them out openly so I may respond/correct any misunderstandings. Thanks.

[toastywombel]

I want to reply to this post specifically and may come back to reply to others when I have time.

 

First of all you have misconstrued what kind of science economics is. It pays no attention to what factors or characterisations one can make in order to explain why man acts in a certain way. This is the task of psychology, not economics or praxeology.

 

It rather, starts off from the notion that man acts, hence has a set of ends ranked in terms of preference or urgency taken as a given, and wishes to apply whatever means he may find to achieve these ends. This is not controversial and has formed the backbone of Micro-Economics since Lionel Robbins wrote "The Nature and Significance of Economic Science." It investigates the necessary structure of action.

 

More importantly, It is not interested in humans as physiological or psychological beings, but as acting beings. In that sense, economics applies to any kind of acting being, human or not. The same is true for mathematics or computer science. Computer science does not ask whether a computer is a circuit board or a human writing on paper. The rules unfold as they unfold regardless of the nature of the computer. If the rules are violated, the laws break down regardless of the nature of the computer.

 

What you have called a disadvantage,, a reliance on metaphysics is the entire point.

 

Finally, the empirical and nominal notions, you cite as the requirement of establishing what you think would be an actual economic science actually have nothing to do with the real questions economics seeks to answer and elucidate.

 

You have the comics, with episodes 2 and 3 linked above. Can you explain to me how making "measurements" or arranging statistical data would ever solve the diamond-water paradox, or even the imputation problem?

 

Finally, I'll link the piece of work I recommended you to have a look at in my PM. I think others will appreciate it too:

 

http://mises.org/journals/scholar/long.pdf

 

It clarifies how little Misesian Economics has to do with the Cartesian brand of rationalism.

 

The article you cited to support your argument is essentially the blue-print for Hayek Economics.

 

Hayek Economics has failed over and over again. Just like most people on this forum have already mention it creates a short-term boom of wealth, then a long slump which is again followed by a short-term boom of wealth. The boom and bust cycle leads to the wealthy becoming wealthier and the poor becoming poorer, because the booms and busts hurt the poor much more than they hurt the wealthy.

 

Just look at the largely unregulated free-markets around the world. These countries have weak central governments and strong corporate control.

-Mexico

-Haiti

-Bosnia

-Zimbabwe (along with most of Africa)

 

These are failed states with hardly any effective social policies, and they are among the poorest countries in the world.

 

Hayek economics came back to America with the rise of Ronald Reagan ("We are going to let the bull loose") and the Neo-Conservative/ Neo-Liberal Free-Market movement. These policies continued with Bush, Clinton (NAFTA), and George W. Bush (CAFTA). Since 1980, the average salaries of United States citizens has remained the relatively the same, while the cost of food, energy, and health care have risen dramatically.

 

Furthermore because of these free-trade/ free-market policies the amount of jobs in the United States has not kept up with population growth at all. Clinton was aware of this, which is why he re-wrote the laws for tracking unemployment, so that only people collecting unemployment benefits were counted. The unemployment rate (which is around 9.8%) is actually much greater because of this.

 

However, because of the large increases in the major stock market indexes (Dow, S&P, and Nasdaq), many believed that the wealth being created, by the wealthy investors, in the stock-market would balance out the job losses and lack of wage increases. The flaw behind this economic ideology (even admitted by Alan Greenspan) was the belief that the wealthy would re-invest the wealth they make back into the public, this never happened and the bubble eventually busted open.

 

The Hayek system greatly benefits the wealthy, but does not benefit the majority of society, the whole idea of its success depends on the generosity of the wealthiest members of society. How is it logical to base an economic system on an assumption about morality of the most powerful people in the society? It isn't.

Edited October 26, 2009 by toastywombel

[padren]

Maybe some of the pro-Austrian camp people can clarify a few questions for me on that school of thought:

 

1) How does the difficulty in modeling economics due to the complexity of individual "actors" translate to deregulation? While I can definitely agree that regulation will stifle economic growth, that fact does not negate the need for regulation nor provide an alternative solution regulation. Mostly what I hear is "the busts will correct themselves in time" but without regulation you can't ensure that isn't being abused to profit off the boom/bust cycle.

 

2) Since the Austrian school of thought appears to define regulation as government interference in favor of laissez faire - what is the difference between a government and a strong private union? Most people who favor laissez faire economics seem to dislike unions, though I am not sure if it is a principle of Austrian economics to as a rule be anti-union. But what is any union - of workers or legislators - other than a strong bargaining group?

 

In short, any coalition can demand certain terms by contract in any business arrangement with a partner, and the size of the coalition may make it worth it to that partner to agree to the terms.

What is the difference between a private coalition, and a government (coalition of citizens) saying "you must agree to x,y,z" for us to bank with you? The distinction seems arbitrarily defined to me as they both seem laissez faire.

 

3) What's the deal with the water-paradox? I'm not familiar with any economic models that claim water and diamonds have two distinctly set values under all conditions of scarcity and utility to all people - and any that would I could hardly suspect would be in use by any economist. It's common sense that if you are dying of thirst, water is worth far more than diamonds, and if you are drowning, you'll be happy to give it away for free. I can understand if it was a conundrum for people a long time ago but it's pretty common sense.

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Merged post follows:

Consecutive posts merged

First, I hope someone can help me answer the questions above, so I am not posting to distract from them - but I had some other thoughts this morning.

 

 

The first is, resource production under a laissez faire system at it's most fundamental level seem to always come back to the need for society-wide contracts, which are effectively regulation: this is because resource acquisition is rarely a direct result solely of the land or labor owned by the purveyor. In other words - most resources cannot be harvested without effecting that which is outside the producer's scope of ownership, well tapping effects the water table, as done tapping river water if you are fortunate enough to have land next to a river.

 

Hunting and providing meat or producing leather products from game on your property reduces the habitat in a much wider area since the resource wanders around - at times migrating huge distances.

 

Fishing depletes or otherwise adversely effects the ecosystem in oceans and lakes.

 

In each of the cases the user is depleting a resource that exceeds their own territorial claims and takes from everyone else who is trying to do the same thing. Under a laissez faire model the only way to gain an advantage is to out-harvest the competitors to acquire stores before the coming rarity forces costs to go up. You could say that buffalo pelts were a great example of laissez faire economics in practice.

 

Generally people will call this an example of "hidden cost" being passed on to people outside the transaction - the producer and consumer agree to a price, but third parties pay the cost for future rarity - and if that cost was involved in the transaction it would not lead to the exhaustion of the resources.

 

Now, that could be the case, but that is effectively regulation and it is no longer laissez faire.

 

How does this not become a regulated system under Austrian Economics? How are these issues addressed?

 

 

 

The next factor aside from resource extraction, is side effect impacts on the community. Under a true laissez faire system, if a bunch of people produced and sold electricity from coal fired plants, if the community got fed up with the smog, they would embrace whatever electric company promised clean air plants and it would all regulate itself.

 

However, that implies the almost fatal flaw that information is objective. In the real world, one plant producer may be absolutely certain that health risks associated with smog only arise if it is burned at too low of a temperature - claim their system is safe and everyone else is poisoning the population.

Another may increase the pressure of the exhaust to shoot it straight up higher, claiming the wind carries it further and it disperses to safe levels before settling at human altitudes so they are safe and it's the other guys.

 

The problem here is (A) neither is a scientist, (B) neither has an unbiased assessment. Maybe they would both be wise to hire scientists to investigate their own plants to certify their safety or implement recommendations should it fail the inspection.

 

A laissez faire model allows for such self -correction, however all it is doing is attempting to acquire objective information. As we all know, any scientist can have their reputation called into question, make mistakes or have biases, or be picked from a wide range of scientists for their bias.

Now, before you say "picking a scientist for their bias is fraud, not an example of a working free market" remember that "bias" is not a black and white term. Each plant owner has a right to be skeptical of just any old scientist, and they need to be vetted to be free of bias. However, if a plant is fundamentally flawed, any scientist who is objective will say outright "I can look at your plant, but I am sure the temperatures you use cannot help reduce health risks." because they are objective. If the plant's actually sound and the scientist is biased, they may just say the exact same thing because they are not objective.

 

You get in a mess because in a laissez faire self-regulating model, everyone has a short-term incentive to bias the facts. The more directly involved with the facts, the better you understand them and the better you can regulate that industry. At the same time, the more directly involved you are with the facts, the less likely you will regulate them effectively, due to personal bias even free from malice. Not evil bias, or conniving, just the simple bias of being so up close to the system, and spending so much time trying to figure it out you have already used selective sampling to identify patterns - some accurate, some flawed - that you are certain about and don't even realize it.

 

 

The only solution I see, which is my admitted bias, is to regulate as a society because it is the passions due to direct involvement that make those involved the worst people for the job. Nobody is as dispassionate as a government employee. (okay, they often are, it's a joke)

 

It is correct to say such regulation will interfere with even healthy transactions and hinder innovation, however, I cannot help but to see it as more stable over time. It is still corruptible, but it is far more resistant to corruption because it is so much farther removed.

 

It's the trade off of precision and accuracy - those in the industry can be more precise but they won't always be accurate and when they are inaccurate they will be way off, creating booms and busts. Regulations may be less precise, but they are more likely to be aimed at the right general area - to be accurate.

 

 

What I don't understand is how regulation is considered alien to an economy under laissez faire economics. In resource acquisition, the actions of the one effect the whole. In processing, the same still applies. In Wall Street style trading, the money being traded belongs to the people who put their money in those banks and invested with those firms. Everyone has an interest, and everyone has the right to use their own special kind of leverage to see their concerns addressed.

 

When big companies do it, it's markets being markets and they're capitalizing on their market share. When citizens do it, it's labeled dirty populist politics and stagnating regulation. When you take citizen's money and put it in your bank, why wouldn't you have to come to a contractual agreement on the terms? Should those terms involve good-faith inspections by a third party (federal agency) than those are the terms demanded. A car rental agreement may be draconian and inhibit me from doing perfectly reasonable things, but it's their right to insist on my accepting of their generalized contract.

[iNow]

I don't see a lot of positives to this approach. Does anyone else care to weigh in?

[ecoli]

I don't see a lot of positives to this approach. Does anyone else care to weigh in?

Fairly critiquing and supporting Austrian economics has become my speciality of late. Which part is bothering you?

 

Is it the notion of an unregulated economy?

 

If so, then the Austrian point is not that lassez-faire produces optimal results. In fact, they don't, I believe, make the same assumptions of neo-classical econ (that is, that actors are rational). The premise of supporting a (true) free market is that no matter how stupid and irrational people are, having one or a group of regulators (pretending to act without self interest) changing how markets behave will rarely have better aggregate results than a whole lot of people knowingly acting in self interest.

 

This is not to say a super smart, benevolent regulators couldn't produce better results than a free market but there are several (as of yet) insurmountable problems with this desire.

 

1) this regulator will never act without self-interest (See public choice theory)

 

2) This regulator doesn't have any special knowledge. Although students of the dismal science would have you believe otherwise, we don't know how economics works.

 

3) Historically, situations where regulators are given lots of power have turned out disastrously bad, due to 1 and 2. These indicates that we have not solved problems 1 and 2 in real ways and are present even when regulators exist but don't have as much power.

 

4) regulators are not blamed for regulation failures. This is also part of public choice theory, in a way. Its a political reality that politicians, and therefore regulators, will want to disseminate their responsibility for failures in regulation. Therefore, problems are often ignored or blamed on myths, such as the "free market."

 

 

We also run into the problem, when critiquing Austrian theory, that the branch is not as unified as opponents like to think.

 

In my estimation there are two main camps: Rothbardian anarchocapitalism and the somewhat milder Hayekian economics (who was a microeconomist).

 

Rothbard generally believed in the principle that any regulation involved the use of force, and shouldn't be used. Government's power, in general, stemmed from force and so the anarchism is the best solution for free markets.

 

A more popular Hayekian version is that government is needed to protect property rights and enforce contracts, but that other regulation isn't needed (unless it can fit under the frame of property rights - which is potentially a lot of regulation).

 

I lean towards this second view.

 

 

One major problem of Austrian economics, in the modern view is that it's approach is largely non-scientific, to the point where many of its proponents are anti-empirical. As such, they fall easily to the post hoc ergo propter hoc fallacy.

 

However, I do believe that there logic for doing so is based on solid grounding. von Mises's Praxeology tells us that it is impossible for humans to "take ourselves out" of the study of human sciences, which makes us ill-fit to study economics scientifically.

 

As such, they often stress the unpredictable nature of economics and how neo-classical economic policy, which utilize models in which unknowns are often assumed away, will almost always have unpredictable results. (Austrian microeconomists will often be seen talking about how policy "incentives" human action, often in ways we don't expect).

 

This last point is not so unusual, except in mainstream circles. It's one point on which Hayek and Keynes profoundly agreed, however (Read the Black Swan).

 

 

One last quick note on something I don't think the Austrolibertarians stress enough: how institution formation is a natural consequence of human evolution (similar in principle, to market formation) and that governments are not the only institutions that can use force and screw up markets. Maybe governments are not all that bad (but can be).

[bascule]

Is it the notion of an unregulated economy?

 

As an American, I will say my problem is the need to move to a less regulated economy. That was the grand experiment undertaken by Greenspan, and in his post mortem following the financial crisis, Greenspan notes his experiment was a failure.

 

Greenspan was a central regulator who tried to move us away from central regulation. If he couldn't do it, who can?

 

Say what you want about central regulation... it's unrealistic America can move off of it.

 

Have you seen the video in this thread? It provides an excellent synopsis of the entire debacle from the '90s on:

 

http://www.scienceforums.net/forum/showthread.php?t=45258

 

I'm not going to say the Austrian School is "wrong" outright, but I find it immensely impractical to attempt in a country like the US. It's been tried to move us closer to a free market system and the result was the financial crisis.

 

If so, then the Austrian point is not that lassez-faire produces optimal results. In fact, they don't, I believe, make the same assumptions of neo-classical econ (that is, that actors are rational). The premise of supporting a (true) free market is that no matter how stupid and irrational people are, having one or a group of regulators (pretending to act without self interest) changing how markets behave will rarely have better aggregate results than a whole lot of people knowingly acting in self interest.

 

This is not to say a super smart, benevolent regulators couldn't produce better results than a free market but there are several (as of yet) insurmountable problems with this desire.

 

1) this regulator will never act without self-interest (See public choice theory)

 

2) This regulator doesn't have any special knowledge. Although students of the dismal science would have you believe otherwise, we don't know how economics works.

 

3) Historically, situations where regulators are given lots of power have turned out disastrously bad, due to 1 and 2. These indicates that we have not solved problems 1 and 2 in real ways and are present even when regulators exist but don't have as much power.

 

4) regulators are not blamed for regulation failures. This is also part of public choice theory, in a way. Its a political reality that politicians, and therefore regulators, will want to disseminate their responsibility for failures in regulation. Therefore, problems are often ignored or blamed on myths, such as the "free market."

 

What about the issue of systemic risk, such as the state the financial system was in following the failure of Lehman Brothers? Does the Autstrian School have a better answer for that then "let it fail"?

 

Do you think, had we let Lehman Brothers fail, which would've inevitably taken a number of other institutions with it including AIG, Goldman Sachs, and CitiGroup, that we would be in a better position than we are now?

[ecoli]

As an American, I will say my problem is the need to move to a less regulated economy. That was the grand experiment undertaken by Greenspan, and in his post mortem following the financial crisis, Greenspan notes his experiment was a failure.

 

Greenspan was a central regulator who tried to move us away from central regulation. If he couldn't do it, who can?

 

Say what you want about central regulation... it's unrealistic America can move off of it.

I agree that it is impractical to expect us to be able to move to a true free market.

 

However, I disagree that it was the move to a less regulated market that led to the crash. Greenspan's major action was to hold down interest rates after the dot-com bubble. This obviously isn't a free market response. Greenspan, as the chairman of the largest financial regulating body in the country, has strayed far from his Randian roots. Certainly people who claiming that a free market would have been the correct fix (Austrians and others) don't believe Greenspan's actions were are move away from central regulation.

 

The most that could be said is that it was a move towards corporatism, and that can hardly be said to be free market.

 

 

I'm not going to say the Austrian School is "wrong" outright, but I find it immensely impractical to attempt in a country like the US. It's been tried to move us closer to a free market system and the result was the financial crisis.

Similar argument as above. I have not seen sufficient proof that a move towards a free market resulted in the financial crisis. Of course, I admit that I read more free-market blogs than Paul Krugman, but I don't see how Greenspan or Bernanke performed any task that was very different than the status-quo.

 

Certainly certain nuances of their actions fed into the real estate/mortgage bubble and burst. Without specific legislations and key "deregulations" we might not have seen a housing bubble, but as far as I'm concerned these are differences on the margins. Not differences in the principles of how a government ought to operate.

 

 

What about the issue of systemic risk, such as the state the financial system was in following the failure of Lehman Brothers? Does the Autstrian School have a better answer for that then "let it fail"?

 

Do you think, had we let Lehman Brothers fail, which would've inevitably taken a number of other institutions with it including AIG, Goldman Sachs, and CitiGroup, that we would be in a better position than we are now?

 

Does the "let it fail" option look any worse now than it did before the crash? Will it look better or worse in a year from now?

 

I'm not thoroughly convinced that the quick bailouts and subsequent stimulus has saved us. Delayed destruction certainly, but might we not be delaying the inevitable by worsening the next collapse?

 

Clearly this thing isn't done yet. The Dubai real estate market might be next, and then who knows?

 

Would we be worse off with these institutions collapsing?

 

I mean, obviously, these banks constitute a great deal of our financial infrastructure. It would have been a huge loss, especially to my home city of New York.

 

But we have no way to experiment if alternatives would have been worse/better (nor do we have the metrics to determine what better or worse means).

 

Certainly it would have been worse for bank employees. Certainly it would have been worse for people with investments and deposits with these banks. But how much worse and for how long? Who knows.

 

Perhaps less govn't response would have been better for small banks and credit unions, who have a hard time competing against these larger banks, which now get a competitive advantage from government stimulus?

 

I'm getting into heavy speculation now, but isn't that what everyone is doing? Certainly my form of speculation is no worse (and better) about the many spurious claims about how stimulus is helping us... whether its through "job creation" or providing "stability."

 

I'm merely saying that there's another way. Free markets may be politically untenable now - but with the debt skyrocketing further, no end in sight to the Iraq or Afghanistan conflicts, the printing presses in full operation - we want to be really careful about playing victim and blame cards.

 

"Free market" is a dirty phrase these days, while politics and politicians, as always, get a free pass to do whatever they want with no real oversight (except for maybe the political bullshit from the other side).

 

I don't know if we'd be better off if the government had done nothing. And I think there are good arguments for and against. But, I think its too easy to dismiss the claims Austrians (and others) are making and that doing so plays too well into the play books of the politicians.

 

It makes me uncomfortable to see political forces and economic theory so in line.

 

 

Whatever economic theory you like the best, all economists basically agree that economic theory failed because we ignore the basic assumptions (Again I urge a reading of the Black Swan). We focus on the knowns, worry about the known unknowns, and ignore the possibility of unknown unknowns. Our basic models are flawed... but what do we see happening now? We're trying to "fix" our economic problems using the same neat little C + I + G + X − M = (GDP) formulas that got us into trouble in the first place.

 

I just don't see the status quo shifting any time soon and this worries me far more than Obama's specific economic policies or republican's transparent rebuttals. What's happening now is basically what has always happened after a financial crisis - pass reactionary regulation which does little to prepare us for future (unknown) crisis, promote more moral hazards, try to tinker with a big part of the economy without preparing for unknown consequences (health care, in this case), spend spend spend.

 

Has anybody of significance made any effort to change anything substantial? Has anybody done anything real besides try to blame free market theory?

 

</rant>

[bascule]

Greenspan's major action was to hold down interest rates after the dot-com bubble. This obviously isn't a free market response.

 

That he certainly did, and it played a role in the financial crisis. But it was not the direct cause. Unregulated markets, an assumption of too much toxic debt by individual organizations, and complex financial instruments no one understood were the direct causes.

 

Greenspan stringently opposed attempts to regulate derivatives and securities. It was the collateralized debt obligations backed by mortgages which became incredibly toxic after the housing bubble burst which lead to the financial crisis.

 

I have not seen sufficient proof that a move towards a free market resulted in the financial crisis.

 

Have you seen this video:

 

http://www.scienceforums.net/forum/showthread.php?t=45258

 

What role do you think derivatives and securities had in the financial crisis?

 

Does the "let it fail" option look any worse now than it did before the crash? Will it look better or worse in a year from now?

 

No, the let it fail option doesn't look any worse, because it continues to be, in my mind, the worst possible outcome: a total collapse of the worldwide financial system. It would represent total credit gridlock and have some of the most dire economic consequences imaginable. Our daily lives would've been dramatically altered. I certainly wouldn't be looking to buy a new house now, because there's no way I could ever get a mortgage.

 

I'm not thoroughly convinced that the quick bailouts and subsequent stimulus has saved us. Delayed destruction certainly, but might we not be delaying the inevitable by worsening the next collapse?

 

Why is delaying the collapse of something worse than letting it collapse? How could the collapse possibly get any worse, not in terms of vague economic factors, but in the day-to-day impact on everyone's lives?

 

I mean, obviously, these banks constitute a great deal of our financial infrastructure. It would have been a huge loss, especially to my home city of New York.

 

But we have no way to experiment if alternatives would have been worse/better (nor do we have the metrics to determine what better or worse means).

 

Do you have any concept of the total value these institutions hold? (and these figures are after the financial crisis)

 

AIG: $830 billion

Goldman Sachs: $885 billion

CitiGroup: $1.93 trillion

 

Just these three institutions alone command $3.6 trillion in assets. That's approximately 26% of the US GDP. And following the collapse of Lehman Brothers, which had $613 billion in assets at the time, they were all in danger of collapse.

 

What do you think would've happened to the US and the world if multiple financial institutions collapsed leaving $3.6 trillion in debt?