The Real Problem With Non-Austrian Economics
Thorsten Polleit argues in case of Misesian apriorism (praxeology) within economics at the this web site. The article has many good points and should for that reason be read, but I have two problems with it.
First of all, it bases the case for praxeology on Kantian epistemology. A better case can be made using Aristotelian/Objectivist epistemology, like Murray Rothbard did, and like I did in my University essay in Theoretical philosophy(not online).
Secondly, in my experience, neoclassical micro economic theory or New Classical or New Keynesian macro economic theory is not particularly empirical. They are at least as aprioristic as praxeology, and in one sense they are in fact even more aprioristic.
While Kantian and Aristotelian/Objectivist Austrians will argue over whether the origin of the praxeological axioms can be viewed as empirical or not, they are certainly empirical in the sense that we do meet them in applied form in our daily experience. I for example act daily, face a scarcity of time and other resources, and face a uncertain future, and thus face opportunity costs in every action I take, but ultimately choose one action based on my assessment of what will be most beneficial for me, and so on.
By contrast, neoclassical micro economic theory is to a large extent completely disconnected from the empirical reality that real people face. Instead, it ludicrously asserts that economic action can be described as functions of differential equations and various other advanced mathematical functions such as Lagrange multipliers and matrix algebra.
These advanced mathematical functions have absolutely nothing to do with the actual economic reality we see, and so will at best once they've been translated again into English (or other verbal languages, such as Swedish) simply come to the same conclusions that we already knew before we performed these equations. Often however, these mathematical equations are worse than useless in enhancing economic understanding, they in fact necessitate the adoption of a false description of reality. One example of this is the focus on equilibrium (a focus necessitated by the fact that the first order condition of a Lagrange multiplier is that the partial derivative is zero, which in this context translated into English means that no further economic gains can be made, or in other words that equilibrium is reached), which in turn means that there are no room for one of the key elements of economic reality, namely entrepreneurship.
Thus, while the praxeology of Austrian economics means a aprioristic understanding of actual economic laws, the mathematics of neoclassical economics means a aprioristic understanding of....well, advanced mathematics. But it does not in any way help you gain a deeper understanding of the subject matter economics is supposed to be about, namely the causal relations of real world economic life.
More or less the same thing is true for New Classical macro economics (including Real Business Cycle models) and to a only somewhat lesser extent also New Keynesian macro models.
It is true that non-Austrian economists usually, apart from having substituted real economic theories for mathematics, also do empirical research, in the form of econometric regression analysis. While I completely reject the usefulness of things like Lagrange multipliers in understanding economic reality, I am actually contrary to many other Austrians, open to a limited degree of usefulness of econometrics. The reason is that while praxeology helps us understand the causal connections of real life economic experience, it does not say anything about how applicable different applied phenomena's are in today's economic reality. And as the purpose of economics is to help us understand the economic reality we actually face, not just the economic reality we could conceivably face, one must analyze the actual data to see how applicable various causal connections. And econometrics can have a limited degree of usefulness in that task, as long as one is aware of the limitations of econometrics. Namely that first of all, an econometric study is just a local study of a particular data series, not necessarily applicable to other data. For example, during one period of time changes in interest rates may have had a very large impact on investment activity, but during another period of time it will only have a very small impact. Similarly, while a certain causal factor may be very important in one country, it may be of lesser importance in another country. And secondly, one have to take even this local result with a grain of salt, as it is impossible in practice to statistically control for all other conceivable causal factors. Understanding these limitations, econometrics can have a limited usefulness in understanding the relative importance of different causal factors. However, if one does not understand these limitations and try to apply econometric results in radically different contexts then the ones where they were derived, then it could reduce, and not enhance, our understanding of the economic reality we face.
But the point here is that in the distinction of aprioristic versus empirical, Austrian and non-Austrians do not differ in any radical way. Both rely on both aprioristic theory while also performing empirical analysis of actual economic events. The main problem with non-Austrian economics, is that they have substituted actual economic causal relations for mathematical functions, a problem which is greatest in the aprioristic version of non-Austrian economics.
Comments (18)
Rafe Champion
Thorsten Polleit has written a very interesting and lucid account of a priorism however the reference to Popper as a positivist is wide of the mark. The Popper reference that is linked in the paper is only fair average in quality but it correctly states that Popper adopted the term "critical rationalism" for his philosophy because he rejected the strong forms of positivism/empiricism and the inductivist philosophy of science. He rejected positivism in the philosophy of physics and (like Mises) he attacked historicism in the sciences of human action.
A lot can be gained from both Mises and Popper but it is essential to learn from the works of Popper and not from his critics. Who can take seriously the image of Mises that is projected by his bitter opponents, and the same applies to Popper. Certainly he over-played his hand with falsification and he has paid for that by the false characterisation of his position as "falsificationism", not a term he ever accepted as a fair summary of his bigger picture.
Published: April 26, 2008 7:02 PM
David Johnson
Very few people are going to give any credence to Objectivist epistemology. While I'm not a huge fan of Kant, using Rand to bolster your arguments will take the discussion out of the realm of economics and into the realm of absolutist political ideology.
Published: April 26, 2008 7:16 PM
Inquisitor
Those people then need to justify their position. A lot of anti-Randianism is idiotic prejudice.
Published: April 26, 2008 7:34 PM
Dan Mahoney
As long as we're sniping here (see the preceding comments), it should be pointed out that characterizing Lagrange multipliers and matrix algebra as "advanced mathematical functions" is going to cause a lot of eye-rolling among those unsympathetic to Austrian economics.
Published: April 26, 2008 8:23 PM
Michael A. Clem
By contrast, neoclassical micro economic theory is to a large extent completely disconnected from the empirical reality that real people face.
Maybe I should have read this post before posting in the other thread. Oh well...
Published: April 26, 2008 11:31 PM
Owen
The way I read the article, under Praxeology it is not necessary to provide endless empirical evidence to "back-up" an argument but rather sound logic should be enough to make a-priori assertions.
Sure makes some people who endlessly ask for empirical evidence...a little silly really.
Published: April 26, 2008 11:40 PM
Michael A. Clem
The way I read the article, under Praxeology it is not necessary to provide endless empirical evidence to "back-up" an argument but rather sound logic should be enough to make a-priori assertions.
Sound logic is enough, assuming that the original premises or axioms are correct. So the two vulnerabilities are flawed premises or flawed logic.
Published: April 26, 2008 11:46 PM
Andrew
I do agree that a correlation with Objectivist epistemology may result in antagonism from the almost hysterical opposition that Rand seems to illicit from many people. Rand seems to serves as a psychological litmus test as to who is capable of dissecting her work in a detached and objective manner. Many a confused socialist, Naomi Klein, have conflated Rands work and rejected in one polemic swipe, claiming she advocated a "utopia of greed". The truth however, is far from that, as we know Rand opposed materially driven and ostentatious behavior as irrational and improper. She advocated a productive and intellectually discipline existence. Such a pity she is so misunderstood by many who cant be bothered to read her work.
Published: April 26, 2008 11:46 PM
Per-Olof Samuelsson
"The main problem with non-Austrian economics, is that they have substituted actual economic causal relations for mathematical functions."
Stefan, isn't this a grammatical lapse (stemming from "thinking in Swedish" rather than English)? Isn't what you mean to say the exact opposite, namley that they have substituted mathematical functions for actual causal relations?
(In Swedish we say "substitute X with Y", when the English say "substitute Y for X".)
Published: April 27, 2008 12:56 AM
Per-Olof Samuelsson
Inquisitor: "A lot of anti-Randianism is idiotic prejudice."
I agree, about 110%.
However, the issue here is not the wide-spread antagonism to Ayn Rand (because this issue belongs in the department of phychopathology, not in economics).
The issue is whether fundamental truths are derived from reality (as Objectivism holds) or whether they are derived from the innate structure of the human mind (as Kant holds, and, unfortunately, Mises too).
Published: April 27, 2008 1:41 AM
Inquisitor
Yes - my point is that it's just stupid to hold back because of some imbeciles' reaction to anything Randian. Aristotelian epistemology is not equivalent to Randian though, so I wonder which in particular Mr Karlsson adheres to.
Regarding empirical evidence, the point is that the theories are prior to it and necessary to interpret it. However, it does not absolve one from providing empirical data when making concrete statistical comparisons... and no Austrian argues that, as is clear from Mr Karlsson's article.
Published: April 27, 2008 4:58 AM
fundamentalist
If you want an excellent example of the mess that neo-classical econs have made of macro, check out this article over at Econ Library: http://econlog.econlib.org/archives/2008/04/modern_recessio_1.html
Published: April 27, 2008 5:51 PM
iceberg
Per-Olof Samuelsson,
If you haven't looked at it already, I very much recommend Prof. Roderick Long's 'Wittgenstein, Austrian Economics, and the Logic of Action', in which Long tackles the split over reflectionism and impositionism in praxeology.
Published: April 28, 2008 4:35 PM
Sag
Stefan,
There is no reference to Rand or Objectivism in Rothbard's essay. Can you provide any link that shows Rothbard's indebtedness to Objectivist epistemology?
Rand seems like an interesting libertarian author. But her philosophic writings struck me as Aristotle and Nietzsche lite with more errors. I would be interested to know what (if anything) Rothbard learned from her.
Published: April 28, 2008 5:18 PM
Bruce Koerber
Dear Stefan,
There is an opening in your statement: "Secondly, in my experience, neoclassical micro economic theory or New Classical or New Keynesian macro economic theory is not particularly empirical." The opening is the statement 'not particularly empirical.'
I will use that opening to suggest a different way of looking at 'empirical.' Consider the following:
"Empirical economists are blinded by and bogged down in minutiae. They are in a state of powerlessness whether they know it or not.
A holistic approach is absolutely necessary since humans all belong to the same species and there are natural laws that describe what they do. They behave subjectively within the spectrum of possibilities, constrained by the natural laws of the human operating system.
A holistic approach cannot start at the physical level nor can it choose the human intellect as its ultimate starting point. Holistically the human being is also a spiritual being. This means that the spiritual reality plus the intellect plus the physical qualities define the human being."
Empiricism is powerless to approach this reality.
(http://divineeconomyconsulting.blogspot.com/2008/03/divine-economy-theory-power-of.html )
With warm regards,
Bruce
Published: April 28, 2008 9:07 PM
Per-Olof Samuelsson
Iceberg: I skimmed through Long's essay, but I don't see that it answers the objection I had to "reflectionist apriorism".
I'd like to give another example to clarify my objection:
One of Mises' great insights is the way inflation works - that the new money reaches some persons before prices have risen and other persons only after prices have risen, so that some persons stand to gain from inflation (in the short run, at least), while others stand to lose.
Once you've understood Mises' reasoning here, you wouldn't dream of rejecting the idea. And when you observe inflation, you will interpret what you see in the light of this insight. And in this sense, it is "a priori" to the phenomena you observe.
But in another sense, it is not "a priori". If it were "a priori" in some "absolute" sense, then why did we need Mises to identify if for us? It would be known to everyone since time immemorial!
Published: April 29, 2008 1:08 PM
Michael A. Clem
Per-Olaf, I would say that it could have been known by anyone who went through the same reasoning Mises did. So a priori ideas are not automatic or instinctive, you still have to work the reasoning out, and Mises just happens to be the first person who did it, or at least, the first person that we are aware of who did it.
Published: April 30, 2008 7:07 PM
Per-Olof Samuelsson
Michael A. Clem: Yes, of course.
Maybe I'm making a mountain out of a mole hill here. As long as it is not Kantian/impositionist apriorism, I ought to be happy.
If the term "a priori" is to make any sense at all, it must be that a fundamental principle is logically prior to the implications and applications of the principle - not that it is somehow imbedded in our minds. And that is why I think it is very unfortunate that Mises "speaks like a Kantian" on this issue.
Rothbard has a good comment about it on page 6 in the essay Stefan linked to.
Published: May 1, 2008 2:25 AM