
Economists don't know what they're talking about - mixmax
http://www.maximise.dk/blog/2009/07/economists-dont-know-what-theyre.html
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splat
I'm not sure where Tobiasen gets the idea that the Austrian School is a "major
school of economics." This may have been true in the 1930s, but today, at
least in the academic world, it's treated (justly or not) as a fringe theory
(just look through the index of any standard economics textbook for even a
single mention of the names "Mises," "Hayek," "Rothbard," or "Menger").
Furthermore, the only Nobel laureate who hails from the Austrian School (as
far as I am aware) is Friedrich Hayek--an impressive figure, no doubt, but
still just one man.

While Tobiasen's criticisms of macroeconomic models are valid for the
Keynesians, I don't think they hold very well for the Austrians. Tobiasen
points out the failure of mathematically complex economic models to develop
into accurate macroeconomic forecasts. Austrian models, however, are
intentionally devoid of mathematics. Mises, Rothbard, and other Austrian
economists spent almost as much of their time on the philosophy of economics
as they did on their study of economics itself and one of the fundamental
philosophical tenants of the Austrian School that they developed is that human
action is too complicated to model in a mathematically precise way; _a priori_
logical deduction is the only way to reason about economics in a meaningful
way. Furthermore, the Austrian School does not make the same assumption that
the Keynesians do that "people act as rational beings." The only assumption
that the Austrians make is that humans act to achieve desired goals--the
Austrians do not posit that humans necessarily act in a rational manner.

~~~
mixmax
Hi, I'm the author of the post. First, thanks for a great comment. This is the
reason I keep a blog - people like you that challenge my views and teach me
(and hopefully others) things I didn't know before.

A few questions, since you seem to know the subject quite well:

\- Can't it be said that the Austrian school of economics is just out of
vogue? It seems like it has been swinging back and forth in popularity for the
last thirty years?

\- What's your take on using chaos theory, complexity and behavioral economics
to model macroeconomic behaviour? It seems to me that it's on the way up.

~~~
splat
I'm glad you enjoyed my comment! When I wrote it I had no idea it would reach
the original author! As a disclaimer, I should first point out that I make no
claim to knowing the subject "quite well." Economics is a hobby of mine, but
my training is in astronomy.

In response to your first question, I think the status of the Austrian School
in the academic economic community is quite a bit lower than "out of vogue";
the approach that the Austrian School takes toward the study of economics
differs substantially from the mainstream economic community. Modern economics
tries very hard to be a "real science"--it creates models, makes predictions,
collects data, and sees if the data match the predictions made by the model.
And the mainstream academic community has done pretty well with most of this
process. The only part they seem to have a lot of trouble with is matching the
data to the predictions. Unfortunately, macroeconomic data is influenced by so
many factors that it is devilishly difficult to isolate the effect of a single
variable. An economist who argues that a variable _x_ has a particular effect
will be met with arguments by ten other economists that, no, in fact, the data
indicate that it was variables _y_ , _z_ , and omega. Essentially, the
mainstream economic community has developed economics into a process of
inductive reasoning--collect data and use the data to reason out what's going
on.

The Austrians reject this methodology. Because macroeconomic data is
influenced by so many different variables (millions of people acting in
millions of different ways for millions of different reasons), they claim that
it is simply impossible to draw any meaningful conclusions from macroeconomic
data--in essence, you see in it whatever you want to see. Instead of inductive
reasoning, Austrians turn to deductive reasoning. Thus, Austrians see
economics as a subject closer to mathematics than to science. (Though, as I
mentioned in my first comment, the Austrians reject mathematical argument as
being inadequate to model the complexities of human action; Austrian reasoning
is primarily verbal, which draws criticism from the mainstream academic
community of being too imprecise to be useful.)

The issue is deeper than the current fashionable theory of economics. In the
1920s and 1930s the Austrian School held a respectable position with
mainstream economists. At the time economics was as much deductive as
inductive, so the two schools of thought were on equal footing. But as the
Keynesians developed their mathematical models, economics became heavily
inductive and began to see the Austrian methodology as unscientific. Ever
since, various other schools of thought have enjoyed popularity, but the
fundamental methodology hasn't changed. Of course, the recent failures of the
mainstream economic community to predict this crisis and the success of Peter
Schiff in predicting it has brought renewed interest to the Austrian School.
I'm not sure, however, that even this will be sufficient to change the
fundamental approach taken by the mainstream economic community. As you wrote
in your post, "old habits die hard."

In response to your second question, I think that behavioral economics will be
useful for the study of human psychology and, to a lesser extent,
microeconomics, but I'm not convinced that it will be terribly useful for
modeling macroeconomic behavior. Behavorial economics studies what small
groups of humans do in very specific laboratory conditions. How well the
conclusions from these experiments extend to the real world where millions of
humans are doing in a wide variety of conditions is impossible to say--it's
just not something that can really be tested.

Chaos theory, similarly, I believe will be quite useful in limited contexts.
Chaos theory is very good at telling us what, in general, a system will do
over a long time period. But it does not provide much information as to what
the system will do at any particular time. More importantly, chaos theory does
not shed much light on the question of _why_ the system behaves as it does. In
any science, predicting outcomes is important, but it is always secondary to
understanding the system. We study science to understand the world; we make
predictions to verify that our understanding of the world is correct. At the
root of things, understanding why the world works as it does is the important
part and chaos theory cannot provide you _a priori_ with that explanation.

For the Austrian School, I think the study of complexity theory might hold
some promise. In essence, what Austrian economists have argued since the days
of Ludwig von Mises is that the problem of macroeconomic modeling is
undecidable. It has (to my knowledge) never been proven, but if it were, it
would make a compelling case for the Austrian methodology.

------
caffeine
We're doing the Keynesian thing again because during the last couple of
economic disasters, the "throw more shit at the fan 'til it starts spinning
again" approach gave many people the vague impression that it might be
working. Interestingly, the idea violates the basic economic assertion that
nothing can be truly free. The problem is that this approach is essentially a
laxative. If you have an otherwise sound economy in which value flows have for
some reason stopped, you administer the laxative, wait a while, and hopefully
the economy comes back.

In an unfortunate turn of events, the world's economists (and worse, the
politicians who listen to them) have mistaken a laxative for a panacea: the
cure to all ills! This laxative is regularly administered as a cure for
influenza, mumps, and boils on the nose, among others. Often, the mumbo-jumbo
and rattle-shaking and hoodoo accompanying this administration is quite
convincing; and when the ill departs of its own accord, as most do, patients
and doctors both are ecstatic that their trusty laxative has cured another
case of tendonitis.

Why a laxative, you ask? It's simple - we have discovered (rather ingeniously)
that the best indicator of the patient's health is the amount of crap they are
able to produce! More laxative, more crap - healthy patient.

At the moment, we are suffering from rather severe dehydration, prompted by a
hangover and now worsened by the effects of our charlatan doctors. We don't
need laxatives, we need water. In particular, we need intelligent decisions
about allocating available capital. Flooding the market with "artificial
capital" is not the way to obtain those intelligent decisions. The patient is
parched, and we're administering laxatives and diuretics. It's bad medicine.

------
laut
Just because there are two schools of thought that disagree it doesn't mean
that nobody knows.

Regarding the great depression, in the wikipedia article you link to, it says
that the Austrian explanation is expansion of money supply not "fall of money
supply".

By the way Austrian economics is not mainstream. Mainstream economics is
Keynesian.

What governments are doing is following the Keynesian recommendations. The
Austrian school points out the flaws of the the recommendations. They predict
the failures of these measures and are ignored or ridiculed (Peter Schiff for
instance). The Austrian predictions then come true. Then what do governments
do? Follow the Keynesian recommendations again.

~~~
gojomo
Well, if your culture tells you that a drought is because the gods are angry,
and you must dance to bring the rains again, and you dance and the rains do
not come -- you must not have danced enough yet. Dance more, and eventually
the rains will return. It's always worked before.

------
known
If it moves, tax it. If it keeps moving, regulate it. And if it stops moving,
subsidize it. --Reagon

------
321abc
A counterargument:

[http://www.amazon.com/Economics-Does-Not-Lie-
Defense/dp/1594...](http://www.amazon.com/Economics-Does-Not-Lie-
Defense/dp/1594032548)

