This page has been archived and commenting is disabled.

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.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 08/28/2012 - 21:13 | 2745300 Manipuflation
Manipuflation's picture

The FED can still also CHARGE banks to hold excess reseves as I understand it.  That seems to be a real key policy decision to watch.  The banks are doing well enough as they are not only setting their own interest rates, they are getting an extra infusion from the positive rates the FED is offering on the excess reserves that the TAXPAYERS gave the banks in the first place via Hank Paulson and Co via the NYFED via the titanium 0 key on the Bernank's computer.  It's a perpetual slow motion bailout.  Damn!  What a scam.

Tue, 08/28/2012 - 20:57 | 2745250 suteibu
suteibu's picture

The fact that no inflation resulted from the efforts of the Japanese to Keynesianize its collapse is not a defense of the Keynesian model.  While inflation was abated, it was done at the expense of incomes, jobs, and a massive debt overhang.  The nation would have been better off if banks and other "too big to fail" companies had gone out of business.  But, they were bailed out.  At that point, inflation would have been the best course.  Why, because it is the natural cleansing course, ridding the body economic of toxic policies and actions.

Just because inflation can be forestalled does not mean that anyone has control over the economy, despite the pompous beliefs of pseudo-science economists.  At some point, it all collapses and reverts to the mean. 

There was a time when the world was astonished by the rapid rise of Japan, Inc.  Japanese manufacturing models were all the rage.  From an historic perspective, however, Japan's meteoric rise was a blip and has been proven to be unsustainable.  This is more an indication of the failure of the ability of anyone to control large scale economies which, it seems, Austrians recognize to a greater extent than Keynesians and other modern theories.  Keynesianism is not an economic theory in its current form, but a political tool which has been used by the Japanese and now by the rest of the developed world to try to pave over failed economic policies.  It will fail everywhere it is tried because it does not consider the effects of the micro-economy on the macro theories.  In short, the average working guy will reach a point where he will act in his own interests and against the interests of those who think they have control.  For instance, consumers save rather than spend, demand collapses and so does economic activity.  Deflation results.  No economist has yet come up with a way to create demand by increasing supply and still maintain price levels.

Like all economic theories, this article fails because it assumes something (the ability to control the micro-economy) that is false.

Tue, 08/28/2012 - 21:14 | 2745280 khakuda
khakuda's picture

Terrific response. Much much better than "Bernanke sucks or BTFD bitchez"

It is unbelievable that the take away US policymakers got from the disastrous Japanese experience is that they didn't do enough QE. The obsession with preventing prices from falling to clearing levels then wondering why things are stagnant is stunning.

Tue, 08/28/2012 - 21:18 | 2745312 suteibu
suteibu's picture

Economic theories are boring.  The reason they are boring is because they are all wrong.  Every new one presents a faddish opportunity for someone in political power to gain more control.  Your grandfather was a better economist than anyone.  He probably told you not to borrow money and to live within your means.  While this advice will not win Nobel awards or political favor, it will lead to a sound economy which grows in pace with technological and societal progress.  Anything else is crap.  One might as well use science to describe God as to gain control over the macro-economy.  Of course, macro-economics has taken on a rather religious flavor.  So....

Tue, 08/28/2012 - 21:23 | 2745324 suteibu
suteibu's picture

Stunning, indeed.  Sadly, even the Japanese haven't learned after 2+ decades.

Tue, 08/28/2012 - 22:34 | 2745519 treasurefish
treasurefish's picture

Wasted breath.  Teaching Liberal Keynesians basic, common sense is like teaching a brick how to swim.  The ducks already get it.

Tue, 08/28/2012 - 21:09 | 2745294 Palmer Eldritch
Palmer Eldritch's picture

Third, I subscribe to the notion that human thought is neither linear nor rational

Obviously you wrote this article, which is neither.

I find it astounding that someone this smart can be this fundamentally stupid. 

ta,

Tue, 08/28/2012 - 23:00 | 2745561 Zero Govt
Zero Govt's picture

I agree human thought is neither rational nor linear ...and thank fuck for that, as it would cause chaos (as rules/laws do)

our brains are moody and driven by desires, emotional/animal drives and fears.. exactly as wired throughout nature

when change, the one and only constant assured in the Universe, and the (exact) future is unpredictable why the fuck would you want to rationally order everything? It's like setting up some china bowling pins for getting bowled over (smashed)

Tue, 08/28/2012 - 21:18 | 2745313 dumpster
dumpster's picture

blah blah blah

Tue, 08/28/2012 - 21:37 | 2745364 Confundido
Confundido's picture

John Aziz doesn't understand Austrian economics at all. I am not going to write about the subject. Von Mises wrote EXTENSIVELY about it and the fact that he's dead serves Aziz his purpose to gain popularity by being controversial...that's sad....Well, at least I know that from now on, I will not care to read this guy any longer...

Wed, 08/29/2012 - 02:47 | 2745787 Hobbleknee
Hobbleknee's picture

He also misquoted Mises.

Tue, 08/28/2012 - 21:40 | 2745379 riphowardkatz
riphowardkatz's picture

"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 methodswill in the long run tend to fail."

Then why should I read what you write? What an ignorant statement. Human thought is not rational, now read my big long piece of garbage piece anyway eventhough you are too f'ing irrational to understand it and I was too irrational to even make something you could understand.

Stop writing irrational stuff for an irrational audience go live in a cave and be irrational with yourself. 

Tue, 08/28/2012 - 22:41 | 2745518 GoodMorningMr.V...
GoodMorningMr.VanRumpoy...'s picture

An interesting post that stumbles over the assumption that economics is a "science". Economics is no more a science than "Political science". Economics is a relation of philosophy. It's based more on logic and reason than some sort of panacea formula. All circumstances can't be accounted for and all permutations of human behavior can't be reflected in a data point purporting to represent something. Yet some delusional economists like to pretend economics is a hard science.

The last time society was led to believe that bodies of knowledge coined "social sciences" were actual sciences like chemistry, we ended up getting eugenics laws.

Tue, 08/28/2012 - 23:02 | 2745546 Zero Govt
Zero Govt's picture

John Aziz, interesting article, thanks :)

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

This is your core statement (belief?) which needs 'amending'

Replace 'data' with knowledge and you'll be on the right track in future


 

Tue, 08/28/2012 - 23:09 | 2745573 spooz
spooz's picture

So now, how can I work this into my goal of uniting Libertarians and Progressives into a third party based on Rule of Law? Is there life outside duopoly? 

I know, too hopey changey.

Tue, 08/28/2012 - 23:27 | 2745605 malek
malek's picture

Aziz, you seem to be a number fetischist.

I give you a few counter examples:

If I want to know how the corn price in the USA during the first half of the twentieth century - try the same for the silver price during that period. It seems the data effin' doesn't exist.

GDP of Ghana in 2009 - oh right, they adhere to the same methodology as all other countries. Or someone read tea leves in Ghana and made up a number.
It all boils down to Napoleon's quip: "History is a series of lies agreed upon."

the crime rate in France - should have about the same validity as the unemployment rate in the USA.

My professor of metrology once taught me: display precision (of cleanly printed numbers) is not the same as measurement precision.

But not all number limitations are a precision problem.
Try to find numbers that prove that it's a good idea to adhere to the rule: "the oldest member of the assembly presides"

Wed, 08/29/2012 - 00:19 | 2745685 SilverSpeaks
SilverSpeaks's picture

Value is subjective: every time, every place, and every EXPERIENCE. Last time I took a crap it was different than the time before. There wasnt any piss on the toilet seat so I sat down. The time after that it was in a public place so i squatted because my grandfather used to say, its better to crap on the floor than sit on a public toilet. Next time was also in a public place, but there were seat warmers and covers so I sat down.

Wed, 08/29/2012 - 00:48 | 2745712 jimmyjames
jimmyjames's picture

This is completely wrongheaded. All human thought and action is derived from experience;

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.

************

BS-all human thought and action is derived from the availability of the money supply-

All you need to look at is the housing bubble and in fact any bubble-

Humans react in mass and sentiment is the most powerful of all market forces-

Mises and Rothbard were correct-

Wed, 08/29/2012 - 01:02 | 2745724 lolmaster
lolmaster's picture

Terrible guest post written by a moron. Austrian with empiricism = Chicago style = stealth Keynesianism = slavery.

Wed, 08/29/2012 - 01:44 | 2745745 Manthong
Manthong's picture

A lot of enlightened thought here..

Unfortunately, it's all akin to fish in an aquarium postulating about the hydrodynamics of the ocean.

Wed, 08/29/2012 - 02:15 | 2745763 Monk
Monk's picture

The two are merely two sides of the same coin, i.e., a capitalist system that needs increasing resource consumption coupled with increasing money supply. What we are seeing is the effect of increasing money supply. Watch out for the effects of increasing resource consumption.

 

Wed, 08/29/2012 - 12:09 | 2746817 web bot
web bot's picture

I think your comment is brilliant and spot on.

+1000

Wed, 08/29/2012 - 02:21 | 2745769 Rogue Trooper
Rogue Trooper's picture

Well I can sign up for that Rand :) The Dallas Fed paper the other day summed up the conumdrum perfectly in my view.  We will all see how this plays out.

Wed, 08/29/2012 - 02:44 | 2745776 Hobbleknee
Hobbleknee's picture

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

John Aziz,  if you're going to quote someone, do it properly.  You changed a word and left out an entire sentence in the middle of your quote with no punctuation to indicate you did so.  And it's blatant why you did so. The meaning of the quote that you butchered was that Austrian economics is like mathematics.  2+2=4, and you don't have to "experience" that to know it's true. It's a "priori" as Mises states.

Wed, 08/29/2012 - 03:00 | 2745790 AnAnonymous
AnAnonymous's picture

The article sums up why Austrian economics could be in the next big thing in the 'American' world: full of fantasy, allowing wild groundless speculation, and better, can accomodate any preset conclusions, that 'Americans' are looking so much for.

Fantasy, like propaganda, get worn out. People no longer believe in it as time passes by. A new propaganda/fantasy shippment has to be delivered in order to maintain the faith and the conning.

Maybe these times are times for austrian economics.

Wed, 08/29/2012 - 03:15 | 2745806 NidStyles
NidStyles's picture

Praxeology and basing your qualatative arguments on A Priori is about as data filled as you can get in Economics. All the hard numbers in the world don't mean a thing if the public sentiment decides to go against what you evaluations are. This is why Mises and Rothbard were stringent about the data they used when and if they used data. 

 

"...all predictions about the future are deductive"

That statement right there tell's me that the author presumes to be able to read other men's thought's on the subject matter. Austrian School proponents, such as myself, make projections are merely taking the data presented in front of them and continuing the trend lines with possible outcomes. That is the direct opposite of deductive reasoning. Deductive reasoning is removing all possibilities until only one remains. 

Why is that chumps on the Internet that have never spent a second reading any of the material they attempt to criticize also are incapable of using a damn dictionary? Aziz, you're a fucking moron, learn to research before you make baseless assumptions and vague ignorant articles such as this one. You don't even deserve one star for this trash. That is me being polite. 

Wed, 08/29/2012 - 07:08 | 2745927 falak pema
falak pema's picture

Mengers and Mises; quarrels of fervent methodological chapels within the new church of economics. Economics as pseudo science continues to fascinate people since MArx wrote Das Kapital to prove how much Capitalism like religion, and its new class of "divine" rules, would take over the role of Caesar and Napoleon as moving force in society. 

Just as the Universal church forged the minds of men in  selling to the fold the holy grail to eternal redemption, instrumentalisaing GOD to achieve its political aims of theocracy, the Economic church today tries to capture the minds of men to achieve the new holy grail of materialistic man : monetary wealth in our lives.

Be the new aristocracy of the new age of neo-feudalism. 

Until man hits the new asymptote of finite world; which makes fiat pumped economics a pipe dream selling monetary dope to junkies of the hyper consumer age. We are sheeple as we love being led by the noses by hidden manipulators of each new power manipulation gimmick; pulled like shorn wool over our sheeple eyes by the high priests of the new cabal.

Mises and Menger notwithstanding; like their rivals "floating rate" Friedman and good ole "kick up your statist ass" Keynes. 

Since when did Praxeology say we needed to kiss Oligarchy ass time and time again?

But that would imply that sheeple would metamorphose into thinking  "we the people!"

Wed, 08/29/2012 - 07:14 | 2745934 slewie the pi-rat
slewie the pi-rat's picture

i saw this essay or one very MUCH like it on another site

last week i think,  silver bear?

well it's here now!

personally, i think when any "economist" gets overly orthodox about ANYBODY it's time to go for a bike ride

leo can't roll here but canadian mises can?  they're both ideologues!

and here is aziz!  his "bottom line"

all theoretical of course

if you can't see straight what good is a "telescope"?

and when people started playing with them, "what are we seeing" was more imortant than what must we see?  or how interpret when we don't know what that really is all those strange "movements"

so, the engineers figured it out!  and it was "science".  measure, record, do the math, go the the moon, build bigger bombs too

but everyone was seeing the same data!  there were only a few unicorns,  this is economics! 

people completely blow the fuk outa the financial system with "games and the IOUs people play" so they change the direction af banking and no one can look at what is happening now without glasses made before they blew it up?

rilly?

why?

well... because no one can see "economics and  it's splended imperial reaglia" without the proper appartus and ideas!

no one! it is forbidden!

oh.  that again?

yes! and we also must have a war AND the banking system is e.v.i.l.

wowser!  way worse than i thought!  thanks again!

Wed, 08/29/2012 - 08:10 | 2745996 Turin Turambar
Turin Turambar's picture

This guy is confused at best.  Here's a cogent rebuttal:

http://bastiat.mises.org/2012/08/reply-to-aziz-on-methodology/

Wed, 08/29/2012 - 15:41 | 2747598 NidStyles
NidStyles's picture

You were far more polite than I was. I didn't feel that wasting my time to counter this would accomplish much. 

Wed, 08/29/2012 - 08:56 | 2746046 crusty curmudgeon
crusty curmudgeon's picture

I don't care whether the author is as galactically stupid as he appears or whether he has an agenda to try to discredit Mises--either way, if the idiocy isn't readily apparent to anyone reading this nonsense, I suggest such person review a classic text on logic.  In other words, one doesn't need to know a thing about Mises, Menger or the Austrian School to recognize the absurdity of this article. 

I especially like the following "argument" --

1.  Peter Schiff is an Austrian of the Mises variety

2.  Schiff predicted economic stuff that turned out wrong

3.  Therefore, Mises is wrong and Menger was right

Where exactly would you begin to point out the lunacy of this claptrap?  There are so many failures here I don't think one could list most of them in any reasonable period of time.

Wed, 08/29/2012 - 11:13 | 2746608 WeAreJellyfish
WeAreJellyfish's picture

WE ARE ALL DUMB MUTHER SCREWING NAGGER SLAVES TO THE IDEA OF WHAT CURRENCY IS:

 http://youtu.be/zqNUmWvRVW8

Wed, 08/29/2012 - 12:51 | 2746952 pcrs
pcrs's picture

You can't do anything with data in economics. So ou can correlate 1 parameter with another parameter? It means nothing more than that. You scientifically can not deduce a cause and effect relation ship.

To find a cause effect relation ship, there is only one scientific way to do it:

take a random sample from a population:

expose it to suspected cause

taken another random sample from a population

do not expose it to suspected cause

measure the difference. This is the ONLY way to establish cause and effect relation ships.

It would be unethical to do this with humans, so with economics you are stuck with logic. There is no way to derive from data alone that minimum wages causes unemployment. They are correlated? fine, does not mean one causes the other. Only logic can tell you that.

lies, damn lies and statistics

Fri, 08/31/2012 - 04:30 | 2751736 Heyoka Bianco
Heyoka Bianco's picture

 If I want to know the rate of GDP growth in Ghana in 2009, the data is accessible.

Yep, because there's no number more trustworthy, more grounded in fact, than Ghanian GDP stats. The actual data is tangential, it's the interaction of the parts that's important, and there's too much information of too variabble importance to try the hard science route in economics. Indeed,

Reality is often far, far, far more complex than either mathematical models or verbal logic anticipates.

So please to be explaining, Mr. Aziz, what the fuck are you actually arguing? Apparently, data is the "driver", unless it's not. Yeah, I thinking you're daydreaming all the time.

Do NOT follow this link or you will be banned from the site!