Guest Post: A Critique of the Methodology Of Mises & Rothbard

Tyler Durden's picture

Submitted by John Aziz of Azizonomics,

I find myself in the middle of a huge blowup between Max Keiser and Tom Woods over Mises, Menger and Austrian economics and feel that this is an opportune moment to express some doubts I have regarding contemporary Austrian methodology.

I am to some extent an Austrian, on three counts.

First, I subscribe to the notion that value is subjective; that goods’ and services’ values differ according to different individuals because they serve various uses to various users, and that value is entirely in the eye of the beholder.

Second, I subscribe to the notion that free markets succeed because of the sensitive price feedback mechanism that allocates resources according to the real underlying shape of supply and demand and conversely the successful long-term allocation of labour, capital and resources by a central planner is impossible (or extremely unlikely), because of the lack of a market feedback mechanism.

Third, I subscribe to the notion that human thought is neither linear nor rational, and the sphere of human behaviour is complicated and multi-dimensional, and that attempts to model it using linear, mechanistic methods will in the long run tend to fail.

It is not, then, the overall drift of Misesean-Rothbardian economics that I find problematic — indeed, I often find myself drawing similar conclusions by different means — but rather the methodology.

I reached my views — some of which new evidence will eventually wash away — through a lot of theorising mixed with much careful observation and consideration of case studies, historical examples and all sorts of real world data. I love data; and one of the things that attracted me toward thinking and writing about economics is the beautiful superabundant growth of new data opened up to the world by computers and the internet. No, it is not universal or complete, and therefore building a perfect predictive model is not possible, but that is not the point. If I want to know how the corn price in the USA moved during the first half of the twentieth century, the data is accessible. If I want to know the rate of GDP growth in Ghana in 2009, the data is accessible. If I want to know the crime rate in France, the data is accessible.

Miseseans choose to reach their conclusions not from data, but instead from praxeology; pure deduction and logic.

This is quite unlike the early Austrians like Menger who mainly used a mixture of deductionism and data.

According to Rothbard:

Praxeology rests on the fundamental axiom that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals. This concept of action contrasts to purely reflexive, or knee-jerk, behavior, which is not directed toward goals. The praxeological method spins out by verbal deduction the logical implications of that primordial fact. In short, praxeological economics is the structure of logical implications of the fact that individuals act.

And Mises:

Our statements and propositions are not derived from experience. They are not subject to verification or falsification on the ground of experience and facts.

This is completely wrongheaded. All human thought and action is derived from experience; Mises’ ideas were filtered from his life, filtered from his experience. That is an empirical fact for Mises lived, Mises breathed, Mises experienced, Mises thought. Nothing Mises or his fellow praxeologists have written can be independent of that — it was all ultimately derived from human experience. And considering the Austrian focus on subjectivity it is bizarre that Mises and his followers’ economic paradigm is wrapped around the elimination of experience and subjectivity from economic thought.

If, as I often do, I produce a deductive hypothesis — for instance, that the end of Bretton Woods might produce soaring income inequality — it is essential that I refer to data to show whether or not my hypothesis is accurate. If I make a deductive prediction about the future, it is essential that I refer to data to determine whether or not my prediction has been correct.

Exposing a hypothesis to the light of evidence augments its strong parts and washes away its weaker ones. When the evidence changes, I change my opinion irrespective of what my deductions led me to believe or what axioms those deductions were based upon. Why reach the conclusion that central planning can induce civilisational failure through pure logic when the historical examples of Mao’s China and Stalin’s Russia and Diocletian’s Rome illustrate this in gory detail?

This is elementary stuff. Deduction is important — indeed, it is a critical part of forming a hypothesis — but deductions are confirmed and denied not by logic, but by the shape of the evidence. In rejecting modelling — which has produced fallacious work like DSGE and RBCTbut also some relatively successful models like those of Minsky and Keen — praxeologists have made the mistake of rejecting empiricism entirely. This has confined their methods to a grainier simulation; that of their own verbal logic.

It is not necessary to define a framework through mathematical models in order to practice empirical economics. Keynes was cited by Rothbard in support of the notion that economics should not be fixated on mathematical models:

It is a great fault of symbolic pseudo-mathematical methods of formalizing a system of economic analysis, that they expressly assume strict independence between the factors involved and lose
all their cogency and authority if this hypothesis is disallowed: whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we can keep “at the back of our heads” the necessary reserves and qualifications and the adjustments which we have to make later on, in a way in which we cannot keep complicated partial differentials “at the back” of several pages of algebra which assume that they all vanish. Too large a proportion of recent “mathematical” economics are mere concoctions, as
imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.

And I agree. But nowhere did any of the figures cited by Rothbard; not Keynes, nor Wild, nor Frola, nor Menger endorse a wholly deductionist framework. All of these theorists wanted to work with reality, not play with logic. Create a theory; test; refine; test; refine; etc.

Praxeologists claim that praxeology does not make predictions about the future, and that any predictions made by praxeologists are not praxeological predictions, but instead are being made in a praxeologist’s capacity as an economic historian. But this is a moot point; all predictions about the future are deductive. Unless predictions are being made using an alien framework (e.g. a neoclassical or Keynesian model) what else is the praxeologist using but the verbal and deductive methodology of praxeology?

It has been the predictive success of contemporary Austrian economists — at least in identifying general trends often ignored by the mainstream — that has drawn young minds toward Misesean-Rothbardian economics.

Of those economists who predicted the 2008 crisis, a significant number were Austrians:

Yet Miseseans including Peter Schiff damaged their hard-earned credibility with a series of failed predictions of imminent interest rate spikes and hyperinflation of the dollar by 2010.

That is not to say that interest rate spikes and high inflation cannot emerge further down the line. But these predictive failures were symptomatic of deduction-oriented reasoning; Miseseans who forewarned of imminent hyperinflation over-focused on their deduction that a tripling of the monetary base would produce huge inflation, while ignoring the empirical reality of Japan, where a huge post-housing-bubble expansion of the monetary base produced no such huge inflation. Reality is often far, far, far more complex than either mathematical models or verbal logic anticipates.

Like all sciences, economics should be driven by data. For if we are not driven by data than we are just daydreaming.

As Menger — the Father of Austrianism, who favoured a mixture of deductive and empirical methods — noted:

The merits of a theory always depends on the extent to which it succeeds in determining the true factors (those that correspond to real life) constituting the economic phenomena and the laws according to which the complex phenomena of political economy result from the simple elements.

Praxeology is leading Austrian economics down a dead end.

Austrianism would do well to return to its root — Menger, not Mises.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
flacon's picture

I've noticed there have been risings of the Austrians lately - the "true" Austrians (Menger) verses the faux Austrians (Mises). I'll have to do more research about this topic. 

Nothing To See Here's picture

Highly disappointing article. Data always comes from measurement. Measurements can be reliable in physical sciences, but not in social sciences where psychological and abstract factors are involved. This is why Austrian economics are also sometimes called the psychological school, since they are the only economists who seem to grasp that this field of study must be based on human action (per the Mises book) rather than on a pretense of human measurements.

Flakmeister's picture

Economics is the continuation of Ideology by other means.....

AurorusBorealus's picture

And that is the problem with draping these things in the rhetoric of science.  Science is first and foremost an empirical endeavor... or it is not science at all.

Dr Benway's picture

Any ideology that ignores reality and empiricism in the favor of theory and pipedream is not only foolish but highly dangerous.

Misesians have their head completely in the cloud and live in an ivory tower.

economics9698's picture

Schiff, and other Austrians know a standard boom, bust cycle is 3-5 years depending on the central bank, etc.

I do not recall Schiff making a 2010 prediction but I could be wrong.  All the Austrians I know are pointing to 2012/13 being the bad years and I would say that is pretty fucking accurate.

Nothing To See Here's picture

Real Austrians don't pretend that they can make quantitative predictions. They will only go as far as to make qualitative observations.

Quantitative methods are at the root of socialism and of the pretense of knowledge which drives central planning.

treasurefish's picture

This article was worth reading for having the opportunity to read this comment alone.

strannick's picture

Dear Eggheads;

We all love Austrians. However, when it comes to the ivory tower, hair-splitting, sholastic, how-many-angels-fit-on-the-head-of-a-pin debates, you lose us. While Im sure your intoxicated by your new ascendant noteriety', please keep it simple for us stupids. We appreciate that debt doesnt cure more debt, that the first users of new money get the biggest bang for the buck, and the rest. Please stick to the basics and dont lose your audience in your academic gobbledegook. 

AldousHuxley's picture

All of these theories deal with absolute wealth growth, but problem today is beyond the basic necessities of life.

 

Today's problem is status.

 

Which of these theories solve the problem of relative wealth?????

 

People don't give a shit if they are 100 times richer than African tribesmen. They sure covet their neighbor's new luxury car, house, wife and will cheat others to one up it.

treasurefish's picture

Ron Paul; Mises solves it for you.  There is no problem with freedom.  Is there?  My ambition in life is to become a successful family farmer, and raise my children in paradise on 10 acres of land.  If I achieve this status, then I will be successful.  I don't see that as a problem, that is, until the Liberal rule-keepers say I can't grow my grass to high or have certain animals.  Their view of status is very different than mine.  All goes back to Common Law and individual freedom.  Central planning is for the slaves.

LetThemEatRand's picture

So "Liberal rule-keepers" are the problem?  What about the rules imposed by so-called Conservatives?  Seems to me that those who commonly use that label have issues with what you may grow on your land, the water that you may use there, the brand of seeds you may use, and many other issues.  Perhaps you used the word "Liberal" reflexively, but if you mean to distinguish Ronald Regan or any other self-described conservatives from your hated self-described liberals when it comes to bullshit rules, then you need to do some further research.

 

LetThemEatRand's picture

Reagan on women's rights to reproduction versus the State telling them what to do:  http://www.issues2000.org/celeb/Ronald_Reagan_Abortion.htm

Saro's picture

Upvotes for you all around because the liberals vs. conservatives canard is so, so tired.

LetThemEatRand's picture

We may have a different vision of what freedom means -- as did the Founding Fathers even amongst themselves -- but if we could just break this Blue Team/Red Team, Liberal/Conservative matrix, we could all have a beer, scotch, vodka, joint or water or whatever together and talk meaningfully about the proper role of limited government and get somewhere.  What a great day that would be.  

SWRichmond's picture

If I want to know how the corn price in the USA moved during the first half of the twentieth century, the data is accessible. If I want to know the rate of GDP growth in Ghana in 2009, the data is accessible. If I want to know the crime rate in France, the data is accessible.

Miseseans choose to reach their conclusions not from data, but instead from praxeology; pure deduction and logic.

This is quite unlike the early Austrians like Menger who mainly used a mixture of deductionism and data.

The data is tainted by market interventions.  Market interventions are now the rule rather than the exception.  You may rely on "data" if you wish; in this environment, I will choose not to or, which might be worse, be selective about which data I rely on and which I ignore.

Any longtime reader of ZH and many other sites knows that there are no markets, there are only interventions.

Freewheelin Franklin's picture

Which of these theories solve the problem of relative wealth?????

 

Marxist LTV, of course. We can ALL eat boiled rice, wear gray jumpsuits, and live 5 to a one room apartment.

 

Freedom, Man!  

Hugh_Jorgan's picture

Aldous, there is no way to solve the issue of relative wealth. It sounds to me like it is time to make your decision on who's law is supreme. God's or man's?

Society waxes and wanes in it's fear of the true Creator deity. We are living a time of deficeit in that regard and look where we are.

Man will covet and kill. Man will lie, cheat and steal. This world will NEVER be anything but a little better at times, and at times a little worse. It is all this world can ever be. It is up to every individual to make the conscious decision to strive daily to resist their human weakness in the belief that he will benefit the system somewhat here and now, and benefit himself beyond this world if he does so with a greatful heart.

Your choice.

JeffB's picture

Lilburne has a pretty nice set of slides going through basic Austrian concepts in comic book style here: https://picasaweb.google.com/Lilburne2

I picked up a copy of Henry Hazlitt's classic, Economics In One Lesson: The Shortest and Surest Way to Understand Basic Economics at my local library. It was a 50th anniversary edition, but his insightful observations and analysis were every bit as relevant today as they were then. Our politicians and economist are making the same tragic mistakes they were making then and the examples he gave were still quite useful even if they occurred decades ago.

I think that Auburn economics professor, Roger W. Garrison does a great job of explaining the Austrian Trade Cycle in a Power Point Slide presentation he gave to a class that you can watch on YouTube: http://www.youtube.com/watch?v=zhoFOyy7rbo

He uses Hayek's equations and formulas to explain how and why the central banksters manipulation of the money supply and of interest rates causes the misallocation of resources giving us the resultant booms and busts.

They don't give measurements and numbers down to the penny like the Treasury sometimes does, but it's common sense stuff that is easily grasped. More importantly those using its methodology are quite accurate in predicting the results of Fed actions years in advance.

The Austrians were jumping up and down screaming about the catastrophe the Fed's policies were going to bring down on us in the years preceding the crisis which finally hit in 2008. Some got wealthy. Others got to say "I told you so."

The YouTube compilation of interview clips, Peter Schiff was Right, Bernanke Was Wrong is a prime example of the Austrians being ridiculed for warning of the dangers during the boom phase following the Fed easy money injections.

Despite all of the Fed's pretty equations, armies of statisticians at their disposal, and data coming out of their ears they, and the mainstream economists were caught with their pants around their ankles, completely befuddled about what had happened despite their repeated reassurances that everything was fine.

Nobel Laureate Paul Krugman summed it up in his NY Times article, How Did Economists Get It So Wrong? - NYTimes.com

Peter Schiff, in his inimitable style wouldn't let the Fed off the hook when they did their analysis after the fact and claimed that they had nothing to do with causing the housing bubble. They gave data and statistics "proving" it wasn't their fault.

Peter Schiff's article on Seeking Alpha took Bernanke to task for that bodacious claim. See the excerpt below:

 Fed to People: It's Not Our Fault

"...As proof that the Fed caused the housing bubble, I offer a commentary that I wrote in May of 2004 and which was published as an opinion piece in the Orange County Register.

You can read the entire commentary here.

However, let me reproduce some key quotes:

That so many are currently opting for ARMs reflects a level of real estate speculation unparalleled in American history. Homebuyers have been lured into this foolish choice by... a Fed chairman desperate to keep the real estate bubble inflating. Unfortunately, the longer the Fed remains "patient" with regard to raising short-term interest rates to appropriate levels, the more homeowners that will be lured into the ARM time bomb.

The real losers in this whole fiasco are likely to be those who did not even participate in the mania. As over-leveraged borrowers walk away from properties in which they have no equity, the Fed will most likely attempt to bail out both debtors and bank depositors (and the government sponsored enterprises that insured the loans) with the most inflationary monetary policy ever undertaken in the history of central banking. The savings of an entire generationwill be wiped out, as it will have been squandered to perpetuate the biggest real estate and consumer debt bubbles of all time.

 "Now if I could have seen that coming as early as May 2004, why couldn't the Fed? Even with the full benefit of hindsight, Bernanke still cannot recognize the Fed's mistakes. ..."

People may not like the seemingly subjective nature of the deductive reasoning used in Austiran economics, and don't think it's scientific enough, but I disagree. I think when they observe what is going on in the economy and how people act, and have acted in the past, and come up with reasonable models of how and why things work that not only make intuitive sense, but fit the data as well, that we shouldn't dismiss them out of hand, even when they disagree with the powers that be.

One of the pillars of science, of course, is the scientific method. I submit that we've in essence tested the respective hypotheses of the mainstream economists and the Austrian economists over the last decade (& in prior decades as well), and the mainstream economists theories blew up in their faces, and the Austrians looked like geniuses in the aftermath.

I've read that some economists said that Mises likely would have won the Nobel Prize in Economics had the prize existed at the time he warned of the Fed's errors that caused and then exacerbated the Great Depression.

I think historian Thomas Woods, Jr. gives an interesting account of the two depressions we had in the 1920s. One where the government did nothing (other than raise taxes to lower the deficit), and the other where the government intervened mightily and repeatedly. You can view his talk here: Why You've Never Heard of the Great Depression of 1920

 

circusmaestro's picture

Austrians get it right. Reality is made of qualities and quantities but the essence of a living phenomenon is purely qualitative. Quantities are always external to the thing itself whereas qualities are embeded within the phenomenon one tries to apprehend. See Henri Bergson and phenomenologists. Austrians are true phenomenologists. Menger understood that the relationship between the observer and the object always determines the experiment.

flacon's picture

That's a pretty good fucking face book quote. It's mine now: "Quantitative methods are at the root of socialism and of the pretense of knowledge which drives central planning.

 

Awesome! 

White.Star.Line's picture

Spoken like a REAL Austrian Economist!

We really need no further discussion, than Hans Hoppe's statement:
"Fractional reserve banking is nothing more than fraud, backed by armies used for extortion."

granolageek's picture

You have just stated that economics is not a science. Physics is science. Theories live and die by quantative predictions.

Austrian economics is a platonic circle jerk. The Keynesians at least fricking try.

Freewheelin Franklin's picture

Any ideology that ignores reality and empiricism in the favor of theory and pipedream is not only foolish but highly dangerous.

 

Empiracism is only effective if the results can be recreated under controlled conditions.

 

If I use these methods: A,B,C,and D to show that F=ma in my laboratory, you should be able to recreate the same results as I, and reach the same conclusion.

Question: How do you recreate the an economic event such as the Great Depression and the results that WWII had? The answer is, you can't. The only way to use any type of empiricism is to rely on statistical mathematics. And we all konw the limitations of statistics, right?

"While the individual man is an insoluble puzzle, in the aggregate he becomes a mathematical certainty.  You can, for example, never foretell what any one man will be up to, but you can say with precision what an average number will be up to.  Individuals vary, but percentages remain constant.  So says the statistician."

  ~Arthur Conan Doyle

et al:

http://www.quotegarden.com/statistics.html

economics9698's picture

Rothbard cracks me up sometimes.  He was a big numbers guy and did impeccable research into the numbers in many areas of his life's work.  Read any of his books and he is absolutely anal about proving his point with numbers.

You know the old saying, don't believe everything you read.  I think Austrians overemphasize praxeology because they want students to not concentrate on models and theory and UNDERSTAND money and banking.

Nothings perfect.

 

LetThemEatRand's picture

Are you still a government contractor, economics9698?   Do you teach at a public or private university/school?  You are entitled to your opinion in any event, but full disclosure and all that....

AurorusBorealus's picture

It is not a science, rightly speaking, without measurement, data, and empirical method.  Instead you have dogmatic theory, which is precisely the problem with every school of economics.  I have no idea how anyone could possibly contend that human behavior can not be observed and does not provide any meaningful data.  As for the "psychology" school, there psychology is derived from that of Pavlov and Skinner, empiricists-- both of them.

treasurefish's picture

You appear to be what's wrong with this country.  Just saying.  I am very random.  I often buy shit on a whim.  I am not predictable - even if you analyze my DNA, my travels, my tweets, or anything else about me.  Good luck trying.

 

Past observations do not reflect future consumer performance.

Nothing To See Here's picture

Exactly. You disproved the maximum efficiency hypothesis right there...

HardAssets's picture

Yes, the problem in the social sciences - - versus the physical sciences - - is we cannot isolate the various influences on the final result as in a lab experiment - except on a very limited basis. One may imagine that factor X caused condition Y in the macro-economy - - - when it was actually unknown conditions A, B, and C which were the real causes.

Complex analytical methods are of more use at the microeconomic level - - a manufacturing plant or perhaps for a firm.

Just because the Austrians doubt the value of various numerical tricks, doesn't mean they don't look at history. Rothbard wrote a great deal on history and economics - - - including his study of the Great Depression of the 1930s and the Panic of 1819.

I'm sorry, but I've read criticisms of Austrian economics lately, by those who seem to have not understood it.

masterinchancery's picture

Was there some point to this article? Mises and the Austrian school are based on empirical knowledge of how humans behave, on the average, not some gimmicky statistical model. Keynesians love models; the problem is, they don't work; Keynes didn't even have a theory of capital formation, the most important factor in economic development.

Offthebeach's picture

It's inside baseball and is and always will be beyond 98% of pubic skool edjamakeded Amererkins.
I've had to go from Reagan, to Friedman to Cato to Mises. 30 years.

Lets have no enemies in however moving to more freedom.

vast-dom's picture

So because Bernanke & Co's thoughts are TOO linear and irrational and therefore they have stripped ALL price feedback mechanism[s] that allocates resources according to the real underlying shape of supply and demand... Almost works out?

Palmer Eldritch's picture

It's pretty simple why you're seeing this.  the Misesians are winning the intellectual debate and the powerful along with their slave-society quislings are scared of losing their rent-seeking positions.  It's a shame someone as smart as John is becoming one of their useful idiots. 

A useful idiot of an idiot (Max Keiser).... *shakes head*

This all started with a return of The Fekete and his obsession with the Real Bills doctrine.  This fight's been going on for more thn 10 years between the Mises Institute and this guy and his disciples.  It's as old as the hills. 

http://www.garynorth.com/public/6092print.cfm

http://mises.org/daily/1833

It's nothing new.  Fekete's been peddling this with new students for years and the Mises Institute has responded adequately to the situation.

ta,

HardAssets's picture

I agree with 95% of your comment (must be precise !)

I don't think Max Keiser is an idiot - - he's a sharp guy. But he often makes very uninformed statements on Austriian economics.

Don't even get me started on Tarpley.

Palmer Eldritch's picture

Max is a smart guy and a good agent provacateur surebut that's as far as it goes.

but he also subscribes to both the Greenbacker movment and Global freaking warming... that disqualifies him on any other grounds.

 

ta,

 

goldfish1's picture
Economist Appearing On Max Keiser Show Forced To Resign

It’s been confirmed now that economist Sandeep Jaitly has been forced to resign his position from The Gold Standard Institute following his on-air remarks about Ludwig von Mises

http://www.forbes.com/sites/jonmatonis/2012/08/26/economist-appearing-on...

Great article.

hannah's picture

zzzzzzzzzzzzzzzzzzzzzzzzzzzz......zzzzzzzzzzzz.....zzzzzz...zzzzzzzzzzzzzzzzzzzzz.

hannah's picture

zzzzzzzzzzzzzzzzzzzzzzzzzzzz......zzzzzzzzzzzz.....zzzzzz...zzzzzzzzzzzzzzzzzzzzz.

 

*...damn...fell asleep and hit the enter button a second time.

tu-ne-cede-malis's picture

That chart is missing a significant number of Austrians/Austrian-leaning economists. 

White.Star.Line's picture

Noticed that also.
Where is Hans Hoppe? One of world's greatest "historical-based" Austrian theorists?

White.Star.Line's picture

OF course, even he would agree: any system based on computerized, fractional-reserve banking, without regard to anything other than exponential growth of profits, spread all over the world, and accepted by billions of disinterested people, might fail, or it might work......

GMadScientist's picture

hahahahahahahaaaaaaaa.

no one takes you seriously. know this.

Catullus's picture

This is completely wrongheaded. All human thought and action is derived from experience; Mises’ ideas were filtered from his life, filtered from his experience. That is an empirical fact for Mises lived, Mises breathed, Mises experienced, Mises thought. Nothing Mises or his fellow praxeologists have written can be independent of that — it was all ultimately derived from human experience. And considering the Austrian focus on subjectivity it is bizarre that Mises and his followers’ economic paradigm is wrapped around the elimination of experience and subjectivity from economic thought.

So when the Miseans begin with "all human beings must act", how is that "wrongheaded"? Seems to me ultimately the "data" can't disprove what the
Deductive reasoning has just proven. Choose all you want to ignore that axiom because you haven't verified it with your data yet.

And while you're at it, make sure you prove out all of mathematics before you do anything. Collect the data that 2 + 2 = 4. Don't just accept that 2 and 2 is 4 just because someone defined it as such. Go out and collect the data yourself. And if it comes back that 2 and 2 doesn't equal 4, you can let us all know.

Flakmeister's picture

Like the data showing that tax cuts create jobs and deficits don't matter????? 

The dog must have eaten it....

Oh yeah....

Queuing up Dr. Acula in 5, 4, 3, 2, 1....