Arnold Kling  

Austrian Economists and the mainstream

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Pete Boettke highlights that Frederic Sautet asks, Why Aren't Austrians at the Discussion Table [Our thanks to Pete Boettke for correcting this attribution in a comment below.]


• H1: We are simply delusional as to what Austrian economics (AE) can explain. It explains far less than what we believe.
• H2: AE contributions are very important, but they have already been incorporated into the mainstream (this is what Gary Becker told me once).
• H3: AE is a school of chiefs with no soldiers. These chiefs are perceived to have lots of wisdoms but no conjectures about the world that could be tested by the community.
• H4: Verbal logic is not adequate to explain economic relationships. In the absence of formal logic, one cannot really test propositions. In other words, syntactic logic matters more than semantic logic.
• H5: Science is not about absolutes, but about refutation. If AE is about (apodictic) certainty, then it is not a science, but a pastime.
• H6: AE (i.e. praxeology to use Mises’ term) is the only correct approach to social science, but because of their belief in H1 to H5, other economists don’t get it.

The hypothesis that comes closest to my point of view is (H2), but I do not believe that mainstream economics has gone nearly far enough. Ultimately, I think that a lot of Austrian ideas will rise to the top in economics, but perhaps without giving Austrian economists a seat at the table.

Boettke alludes to my view, which is that Austrian economists themselves do not want to compromise or work with mainstream economics. When someone agrees with many but not all Austrian ideas, many Austrian economists think that this deserves not encouragement but denunciation. You don't get a seat at the table that way.


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CATEGORIES: Austrian Economics



TRACKBACKS (1 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/366
The author at Conjectures and Refutations in a related article titled The Marginal Futility of Austrian Economists writes:
    “There is no Austrian economics — only good economics, and bad economics.” – Milton Friedman Via Arnold Kling, I see that Frederic Sautet is wondering why Austrian economists are such a marginal voice in the field of economics... [Tracked on September 27, 2005 8:21 PM]
COMMENTS (8 to date)
Mark writes:

I think H2 is definitely part of the answer. The most important single contribution from the Austrians, to my mind, is clearly Hayek's work on the coordination process and the role of the price system therein--as summed up in several of the papers found in Individualism and Economic Order. That work in turn flowed out of the socialist calculation debate he engaged in with Lange and others--this was the big debate of the 1930's and '40's that he won. That work is clearly something that has been "incorporated into the mainstream."

But I also think H1 is part of the answer. Austrian trade cycle theory, for example, is extremely limited in its explanatory power (as is any other theory which attempts to explain all fluctuations as flowing from a single cause).

Craig writes:

H4 strikes me. According to the Austrians, government fiscal deficits will cause interest rates to rise. When they don't rise, the answer is that they should have and absolutely must.

Any philosophy that ignores conflicting empirical observations (time after time after time,) should be questioned. But the Austrians insist that the logic of their arguments overrides the real-world results.

Ruth writes:

Agree with Craig. Also your comment "When someone agrees with many but not all Austrian ideas, many Austrian economists think that this deserves not encouragement but denunciation. You don't get a seat at the table that way."

This attitude in endemic in libertarian circles. I am in the category you mention, and others have come after me like a pack of hounds on more than one occasion. How to win friends and influence people it is not.

Peter Boettke writes:

Dear Arnold,

Please note that the entry you comment on from The Austrian Economists was written by my colleague Frederic Sautet and not by myself.

My view is more aggressive than Frederic and that is that we should not wait for an invitation, but just crash the party. In fact, some of us already have --- at least on some important margins in our profession.

Peter Boettke

James writes:

How is the budget deficit / interest rate connection exclusively Austrian?

When I took macro from a Keynesian, we learned that a budget deficit in times of full employment will result in increasing interest rates. This implies a change in the IS-LM geometry and an accompanying increase in interest rates. If the Fed is committed to an interest rate target, it will increase the money supply. When I took monetary economics from an Austrian, we learned that if the Fed is committed to an interest rate target, deficit spending is effectively an increased demand for credit. In order to maintain the target interest rate, the Fed will have to print money.

Regarding empirical data, consider that most of the ideas in economics are expressible as statements about the sign of the first partial derivative of two variables. Are such claims really subject to empirical testing? Let me give a noneconomic example. The surface area of an ordinary six-sided cardboard box is defined by A = 2(xy + yz + xz). Suppose I claim that the first partial derivative of A with respect to x is greater than 0. In economics-speak, "Ceteris paribus, wider boxes have more surface area." How many cardboard boxes would be a sufficient sample size to falsify my claim? An infinite number would be too small, right? Now suppose that I claimed that ceteris paribus, an increase in the demand for any good, including credit, would result in an increase in the price of that good. How is that different?

Bruce Bartlett writes:

I agree with the statement that Austrians tend to take the view that if you are not with them 100%, then you are the enemy. Personally, I gave up on them 25 years ago when I realized that they were incapable of dealing meaningfully with relevant policy issues. For example, how can you rationally discuss tax policy with people who believe that all taxation is per se theft? They simply don't accept the ideas of better and worse. If you are not for abolishing taxation, then you might as well be for 100% tax rates, the way the Austrians see it.

I continue to believe that true Austrians--i.e., Mises and Hayek--have many useful things to teach. But they would be bannished from today's Austrian School by many of its current devotees because they didn't favor anarchism. For the most part, totay's Austrians have little in common with those who created that school of thought. They are radical anarchists who would be better considered Rothbardians.

There is nothing wrong with being a follower of Murray Rothbard or favoring the abolition of all government. But it makes it very difficult to have a diaglogue except among other true believers, and it confuses people when the true Austrian School is presented as something it clearly was not.

gary lammert writes:

The Austrian Economists and in particular, Lugwig Von Mises, understood the consequences of excessively low interest rates and imprudent lending practices. These parameters have led the global economy to an unnessary extremely imbalanced position as suggested by equity valuation fractal analysis.

The macroeconomic world appears to operate and, operate
exquisitely, according to three saturation fractal growth phases,
followed by a saturation fractal decay phase. The idealized time unitsthat compose the three growth phases and decay phase, as delineated in the main page of the Economic Fractalist are x/2.5x/2x and 1.5x respectively.

Because equity valuation fractals exactly represent the complex
money-debt-asset system, the larger the equity index, the more
perfectly representative the index is of the underlying global
macroeconomy. This is why the Wilshire 5000 , TMWX, which represents the near summation US equity position is useful in fractal analysis. Even though other Euro-Asian equity markets have had better performance, it is the American economy represented by TMWX that has driven recent global economic growth.

Each day new valuation information is added and the consistent fractal patterns and overall fractal puzzle gains greater clarity.
Periodically review of the entire fractal evolution provides possible new insights. In this context a most remarkable balanced fractal picture has come into focus. It is a fine extension of the prior estimate of future fractal evolution rather than a departure. The echo housing bubble created by the lured debtor of last resort, the American consumer, has crested. This plateauing has been confirmed by such proxies as IYR and HGX and the greater TMWX index. US overconsumption, overvaluation, asset inflation,and servicing of debt
have become predominant factors over ongoing new debt and money creation in the complex money system.

Since 12 March 2003, the beginning of the current major three phase fractal growth period, the idealized fractal evolution has been simply exquisite. In general, major growth fractal units of significant length, e.g., weeks and months, are determined by low valuation points and the connecting underlying slope line which contain all interval points. The below data for TMWX can be easily confirmed by using 'Big Charts'.

First growth fractal (x): 103 days (12 Mar 2003 -6 August 2003)

Second growth fractal (2.5x) 258 days (6 Agust 2003 - 13 August 2004)(note nonlinear drop on August 6, 2004 denoting the hallmark of a second fractal)

(The exact idealized time frame is 103 x 2.5 = 257.5 days. Notice that the closing low is actually lower on 12 August 2004 with an intraday lower low on 13 August for exactly 257.5 days-exactly matching the idealized low).

The idealized expected third growth phase and the idealized decay cycle would be:

Third growth cycle idealized (2x) 206 days
Decay cycle idealized (1.5x) 154.5 days

Notice that the sum of the first and second growth cycle equals the sum of the third growth cycle and decay cycle: 103 + 257.5 = 206 + 154.5 = 359.5 (The first and last day are double counted requiring a subtraction of 1)

Now look what has happened in the real fractal evolution of the third growth cycle starting 12 August or 13 August 2004. It has been composed of three subfractals:

First subfractal: (y) 51-52 days 12/13 August - 25 October 2005

Second subfractal (2.5y) 129-130 days 25 October 2005 - 29 April 2005 (note nonlinear drop on April 15,2005 denoting hallmark nonlinear devaluation of the second fractal)

Third subfractal (2y) 103-104 days was ideally completed on Friday 23 September 2005.

Remembering that the sum of the first two growth fractals equal the the sum of the third growth fractal and the decay fractal, the decay fractal should be equal to:

Expected Decay Fractal: 51.5 +129.5 minus 103.5 (-1 for double counting) = 77.5 days.

Notice the sum 51.5 + 129.5 + 103.5 + 77.5 (-3 days for double counting) = 359 days.

This most remarkably agrees with the above idealized expected third growth cycle and idealized decay cycle within half a day.
Macroeconomically this might be explained by continued (excess) growth capacity to be had from ongoing debt creation and credit from existing asset valuation. The idealized third fractal incorporated this excess growth et, al. and rearranged itself into a new integrated sequence - with exactly the same number of days to the end of the idealized cycle.

This total cycle equivalent day fractal rearrangement potentially
provides a much better solution for the final decay fractal sequence. Retrospectively, using this solution, the recent fractal valuation behavior of the last 2-3 months becomes understandable and perfect in its evolution.

The base containing the 3 August 2005 Wilshire high starts on 18 July 2005 and is 16 days in length - vice 14 days. The evolution is 4/8/6 days. Rather than being the actual primary decay base, it appears to be a bridging intermediate base whose second fractal sequence contains the actual base for the primary devolution.The expected low of a second fractal with base of 16 days is on day 40(2.5x). This last Friday, September 23, was day 34 of this 40 day sequence. Using a 16 day base, there should be 6 more days to a low.

Likewise including the TMWX secondary peak(in reference to March 2000), 3 August 2005, is a potental interlocking confirmatory base sequence starting on 29 July 2005. This base sequence is following the classical x/2.5x/2x/1.5x and is 7/17/14/and 5(as of 23 September 2005) of 10-11 days. Noticed that the expected low occurs on the same 40th day(or one day earlier) of the 16/40 x/2.5x sequence as delineated
iin the preceding paragraph.

The potential real first decay fractal base is contained within these two above interlocking fractal patterns and appears to be 3/7/2 (as of September 23) of 7-8. The primary decay base would consist of 15-16 days starting on the lower high of 12 September 2005.

The idealized decay pattern would be either( for a total of 78 days from the 103-104 day third fractal third subfractal lower high):

15/37.5/37.5 x/2.5x/2.5x or
16/40/32-33 y/2.5y/2y.

By this fractal reckoning the first decay base low will be reached in 5-6 more days and the entire three phase fractal decay cycle will be reached in 77 more trading days. Considering the enormity of imbalances, entitlements, and outstanding debt, this devolution could potentially represent the 147 year nonlinear fall into the abyss. The collapsing financial picture will tax the American banking system with its inadequate fractional cash reserves in its ability to redeem deposits of concerned savers.

This is not investment advice. It is a rather specific prospectively
identified potential pattern that can be tested. Again as the daily fractal valuations evolve, further prognostic refinements may be indicated.

However, the odds that the preceding identified daily Wilshire's
fractals since March 2003, characterized by easily identifiable
valuation lows, are occurring by chance and randomness alone -
resulting in exquisitely perfect quantum fractal patterns must, from a statistical point of view, approach zero. Based on this significant statistical improbability, the macroecomony may very well operate via its own predictable and scientific fractal law. Time will tell. Lugwig von Mises qualatatively knew the deluge that was coming in the late twenties and avoided official governmental positions.
Interestingly 1929 collapsed in a very identifiable fractal pattern.
Gary Lammert http://www.economicfractalist.com/

ReplyForward

Bill Stepp writes:

Bruce Bartlett asks:

...how can you rationally discuss tax policy with people who believe that all taxation is per se theft? They simply don't accept the ideas of better and worse. If you are not for abolishing taxation, then you might as well be for 100% tax rates, the way the Austrians see it.

Rothbard discussed all forms of taxation in his book _Power and Market_ without using the A word, although he did begin the book with a discussion of private defense services.
Austrians generally (hopefully always) maintain that lower taxes are preferable to higher ones.
The fact that they take this to its logical conclusion (some would say to a reductio ad absurdum) shouldn't obscure their economic arguments against taxes.

Most Austrians, especially Rothbardians, are irked by the idea, often upheld by conservative, free market proponents, that tax cuts must be "revenue neutral" and "pay for themselves."
I have news for you: the State doesn't own other peoples' property.

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