Bryan Caplan  

Questions for Austrians

Future money and today's NGDP... Friday Night Video: Tim Grosec...
On my latest conversation post at Cato Unbound, I pose some questions for Steve Horwitz:

1. What are some important, substantive economic claims that can be known a priori?

2. What are some important, substantive economic claims that can be logically derived from a priori knowledge plus a small number of uncontroversial empirical assumptions (e.g. the disutility of labor or the existence of money)?

3. Economists use multivariate statistics for a reason: to adjudicate between multiple competing hypotheses. Can you name an important, substantive empirical issue where Austrians have grappled with this conundrum? How convincing were the Austrians' results?

4. What are some important, substantive mainstream empirical conclusions that most Austrians either (a) don't know, or (b) don't suitably appreciate? What's going wrong--and what's the solution?

I invite Austrian readers to answer the same questions, subject to the same rule I asked Steve to follow:

I implore Steve to bluntly share his own views--not discuss the range of answers that various Austrians, living and dead, might offer. At risk of sounding prickly, I regard any response containing phrases like, "Hayek would say..." as unresponsive.

Comments and Sharing

COMMENTS (5 to date)
RPLong writes:

This is actually a brilliant argument, Prof. Caplan. I went through the exercise myself, and admit that the end result played right into the argument you express in your Cato Unbound piece. True fact.

Greg Jaxon writes:

In the beginning, God divided the Bid from the Ask and Spread filled the void; Into the spread, a buyer and a seller entered the first Leg of Arbitrage. And God saw that one was short and the other long, yet each had more Utility than before.

Thus have Spreads guided the flows of all economic Goods since the dawn of Man. ;-)

When multivariate statistics observe a spread and suggest it will sustain a given volume of arbitrage, Austrians understand why human actors enter those markets and engage in said arbitrage until the spreads no longer sustain it.

Austrians sometimes don't appreciate how both sides in a trade are motivated to act (understanding one end can blind us to the other).
So we hear about the saver's time preference, but not the borrower's marginal productivity of capital.

Statistics can instruct us about aggregates where they can be well-defined, but all empirical acts are entirely unique individual events. No statistical argument can conclude that the ensemble of economic actors will certainly move to a new state unless it can prove the existence of a chain of well-motivated events leading from the current to the next state of the economy.

As to the existence of money, which kind do you mean? The constant marginal utility of the units on the price axis, or the things that circulate?

Vangel writes:

3. Economists use multivariate statistics for a reason: to adjudicate between multiple competing hypotheses.

When has this ever yielded conclusions that would be better than a priori reasoning used by Austrian economists? Do you mean to imply that economics can be like the hard sciences in which it is quite possible to hold various factors constant and only examine the particular variable that we are interested in?

david writes:


It works very well when a single ideological framework is widely accepted to reasonably describe a variety of models with only different parameter values, e.g., the difference between old Friedman-era monetarism and New Keynesianism. Then parameter values are decisive. You may notice that old monetarism is today mostly dead.

You see this amongst Austrians too, actually. There are those who accept parameter estimation and try to modify Austrian theory (Roger Garrison, Tyler Cowen, etc.), and those who reject estimation as valid altogether.

James writes:


1) Humans have preferences and act to satisfy them in order of subjective importance.
2) Since in this world, many preferences can only be satisfied through processes which consume scarce resources, humans will allocate each successive unit of a resource to successively less urgent wants. Ergo diminishing marginal utility. You already know this.
3) The competing hypotheses that Austrians seem attracted to are those for which the world has generated next to no data: would anarchy last or lead to something worse that we have now, does IP law enhance welfare, would free banking lead to business cycles in the absence of 100% reserves, etc. I've changed my mind on the basis of such arguments and I know others who have as well. What do you mean when you ask if the results are convincing? This looks like a no true Scotsman situation waiting to happen.
4) Generally, Austrians seem really good on the hard boiled stuff that the mainstream gets right. High taxes and transfers create perverse incentives, price controls and restrictions on trade are harmful, etc. There's nothing that could be called Austrian financial economics so Austrians are probably behind the mainstream there.

This probably reflects the fact that mainstream financial economists rely so heavily on the use of general equilibrium models and econometrics but don't have a ready explanation for why this is the right approach.

Why object to "Hayek would say that..." type comments? I thought the topic of discussion was Austrian economics but you seem to be changing the subject to the personal opinions of one Austrian economist named Horwitz.

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