Bryan Caplan  

Austrian Myside Bias

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My Cato Unbound reply to Steve Horwitz on empirical Austrian economics is up.  I concede that Horwitz...

makes several sensible points:

  1. Some Austrians have no methodological objection to empirical work.
  2. Mainstream economists have a dogmatic, narrow view of what counts as "empirical evidence."
  3. Some Austrians have done good empirical work.
Unfortunately, Horwitz combines these sensible points with a serious case of what my colleague Daniel Klein calls "myside bias." Horwitz is right to point out neglected Austrian achievements, but trivializes major Austrian shortcomings. He is right to point out mainstream economists' methodological blinders, but neglects two decades of the mainstream's growing methodological pluralism. He is right to emphasize the importance of actors' beliefs, but neglects behavioral economists' tremendous progress in empirically studying actors' beliefs. Last, Horwitz doesn't even consider an awkward fact about recent Austrian empirical work: There's nothing distinctively "Austrian" about it. Austrians like Peter Leeson and Chris Coyne are achieving mainstream academic success by making claims mainstream economists can accept without further ado. (notes removed)
An alternate title of my piece could have been, "Josh Barro's got a point."

[Horwitz claims] that [c]ritics like Josh Barro are mistakenly relying on "the pronouncements of various advocates of Austrian economics on blogs and Internet forums, rather than engaging with the professional research being published in the peer-reviewed journals by practicing Austrians."

But what would Barro discover if he followed Horwitz's advice? There are two main outlets for distinctively Austrian research. The first, The Review of Austrian Economics, was edited by Rothbardians for its first ten years (1987-1997) before passing to other Austrians more to Horwitz's liking. The second, The Quarterly Journal of Austrian Economics, has been edited by Rothbardians since its inception in 1998, and is still being published. Similar Rothbardian/non-Rothbardian ratios hold for Austrian books. Critics could reasonably conclude that Austrian resistance to empirical research is even worse than they imagined.

My favorite part faults the Austrians for their lack of interest in empirical psychology:

Horwitz highlights the importance of "subjectivism":

Economics is radically subjectivist in the sense that human action depends upon the perceptions of the world held by the actor. All explanations of praxeological phenomena, i.e., any application of economics to the real world, must start with the actor and her beliefs about the world, including the limits to our knowledge and ability to optimize.

All true. But Horwitz ignores the existence of a massive intellectual movement that spent the last forty years developing these insights: behavioral economics. If you really want to learn about human's "beliefs about the world," the "limits of our knowledge," or our "ability to optimize," read Daniel Kahneman's magnum opus Thinking, Fast and Slow. Kahneman elegantly and carefully explains dozens of major discoveries about how people think. Compared to this fountain of knowledge, Austrian talk about subjectivism is empty generalities.

I anticipate a lively discussion after the other two reaction essays by George Selgin and Antony Davies go up.



COMMENTS (11 to date)
Vangel writes:

But Horwitz ignores the existence of a massive intellectual movement that spent the last forty years developing these insights: behavioral economics.

Behavioural economics is not science because there is no way to get any data that can handle the complexity of real world economics. That is the problem that the people pushing empiricism seem to ignore; the world is far too complex to model it with a few simplifying mathematical formulas and pop psychology.

The way I see it what matters are the predictive abilities of the methodology. On that front everything in the field of economics is far behind the Austrians. You might not like to hear this but it is what it is.

RPLong writes:
Horwitz correctly describes Mises’ position.[4] Yet unless you’re an Austrian, the position Horwitz ascribes to Mises sounds extremely unempirical: He builds economics on a short list of “apodictic truths,” adds a few banal empirical assumptions like, “there is disutility of labor” and “money exists,” then claims to deduce lots of substantive conclusions that are definitely true as long as all the banal assumptions are true. Given Horwitz’s sympathetic discussion of Mises, one has to wonder how far Horwitz really is from the armchair deductivists he dismisses.

I am highly critical of Rothbard's rejection of all mathematical language in economics. Having said that, your position as expressed by this paragraph looks a lot like the inverse of Rothbard's position.

What I mean is, virtually all economic theory is logical reasoning drawn out of a few apodictic truths and a stack of banal assumptions. It matters naught whether we use mathematical logic or verbal logic. So long as the logic is sound, the point shall hold. So long as it is unsound, the point shall fall. One side dismissing the other over the particular way the logic is expressed seems extremely trivial to me.

Other than that, I thought it was a strong article.

Costard writes:

Vangel +1.

Psychology is also the study of a complex system, and subject to the same limitations as economics. The two fields are similar in terms of the diversity of thought and the opposition of different schools. There is consensus in neither, and a persistent failure to predict outcomes in both. I've heard of the blind leading the blind -- but never as a mode of scientific discovery.

This is not a new argument; it's the same one the Austrians have been arguing against for over a century. If more information - statistical, behavioral or otherwise - was enough to settle an economical dispute, then the German historical school would have won. If good economics is a function of increased data -- we would be getting better at it.

Ryan Langrill writes:

There's a book review of Kahneman's Thinking, Fast and Slow online at the Review of Austrian Economics by some very handsome author, who argues that Austrians should pay more attention to behavioral economics.

Jim Rose writes:
"I invite the reader to try and identify a single instance in which a "deep structural parameter" has been estimated in a way that has affected the profession's beliefs about the nature of preferences or production technologies or to identify a meaningful hypothesis about economic behavior that has fallen into disrepute because of a formal statistical test."

"The Scientific Illusion in Empirical Macroeconomics", Lawrence H. Summers
The Scandinavian Journal of Economics,Proceedings of a Conference on New Approaches to Empirical Macroeconomics. (Jun., 1991), pp. 129-148

pyroseed13 writes:

"Behavioral economics is not science because there is no way to get any data that can handle the complexity of real world economics. That is the problem that the people pushing empiricism seem to ignore; the world is far too complex to model it with a few simplifying mathematical formulas and pop psychology."

The problem with this argument is that Austrians are no better at predicting economic events using their own methodology, as they continue to be wrong about bubbles and inflation. The Austrian position essentially amounts to "No model can perfectly represent the economy so let's dismiss all models," even though Austrians rely on their own simplifying assumptions to draw broad conclusions about the economy. The fact that models do not perfectly represent the economy does not mean that they cannot convey valuable information.

andy writes:

I always took Austria economics as something emphasizing individual approach - as opposed to aggregate approach. The specific approach in microeconomics seems to me rather trivial.
However the rejection of aggregates seems to me quite sound - and actually, I think Rothbard is making a good case there.
It's like - I don't believe in aggregate macroeconomics - but thanks to Austrian economics I think I have very good reasons not to believe it.

david writes:

The amount of "I have no idea what Austrian macroeconomics is, but I like the noises its proponents make so I'm going to endorse its capital theory" is astonishing.

James A. Donald writes:

Macroeconomics is incoherent superstitions and ad hoc rationales. The Austrians have better explanations as to why macro economics is incoherent superstitions and ad hoc rationales, but they don't have obviously better explanations of the business cycle.

Microeconomics is fine, and the differences between Austrian microeconomics and mainstream microeconomics is no big deal - cannot be a big deal, since the truth is readily deducible.

Mainstream economics has a striking tendency to discover fine rationales for what its masters want, a difference most visible in the discussion of monopoly and oligopoly. If a country (Britain, I am looking at you) has anti monopoly laws that prohibit winners and losers, its mainstream economists will discover fine rationales that this improves competition, and is thus the height of support for free enterprise.

david nh writes:

Austrian myside bias no doubt exists but does it have a patch on the mammoth mainstream myside bias?

Why is it an awkward fact that recent Austrian empirical work is not distinctly Austrian (whatever that means, particularly since the mainstream has adopted, without attribution, over the years so many elements that have been part of Austrian economics for decades)?

Horwitz correctly describes Mises’ position.[4] Yet unless you’re an Austrian, the position Horwitz ascribes to Mises sounds extremely unempirical: He builds economics on a short list of “apodictic truths,” adds a few banal empirical assumptions like, “there is disutility of labor” and “money exists,” then claims to deduce lots of substantive conclusions that are definitely true as long as all the banal assumptions are true.

Well, if Mises' deductions are correct (and logic is verifiable) and his assumptions are as banal (and thus as self-evidently true) as you imply, then empiricism has nothing to add as far as those conclusions go. That's the thing about stuff that's necessarily true - it's necessarily true. The value of empiricism is that it serves to inform those areas in which deduction is not sufficient or not applicable.

On the other hand, if you think Mises erred in his logic or his banal assumptions are not self-evidently true, it would seem a simple matter for non-Austrians to refute Mises once and for all. Have a field day!

BTW, how many "empirical" studies refuting the harmful implications of mainstream economics for the minimum wage do you accept? Could it be that you accept the implications of deductive economics in place of whatever "water-running-uphill" empirical work is done?

On the behavioural economics front, see Vernon Smith.

Vangel writes:

Psychology is also the study of a complex system, and subject to the same limitations as economics. The two fields are similar in terms of the diversity of thought and the opposition of different schools. There is consensus in neither, and a persistent failure to predict outcomes in both. I've heard of the blind leading the blind -- but never as a mode of scientific discovery.

What worries me is that so many results in medical papers cannot be reproduced because clever statisticians looking to come up with certain results have so easily manipulated the process to come up with the conclusions that they want. It seems to me that clever economists have no problem using statistics to promote personal beliefs while pretending to be scientific. The can also use the cover of make believe science to stifle honest debate that is based on principles.

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