mandag 12. november 2012

A Critique of Azizonomics on Misesian Methodology

Upfront I will concede that Austrian methodology, and the notion of a logic of human action ie. "Praxeology" seemed strange and very wacky to me in the beginning. I was pretty comfortable with the idea that economics is counterfactual and other positions taken by Mises and Rothbard, but the view of theory and history was probably the hardest to cast off.

I admit, I was bitten a bit by "scientism", wanting or believing science should be predictive. And even today, I might disagree with some beliefs of modern austrians and specifically LvMI staff. Still these are largely minor disagreements and I feel that I have something to say about this piece by Azizonomics(Who has produced some great work, like this graph).

"No, it is not universal or complete[theorising based on data], 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."

Already here Aziz is on shaky grounds.

The GDP measures certain things, and in certain institutional arrangements (usually in a totalitarian society like the modern West it measures most activity). But there is also alot that it does not measure, and it cannot even know if this is accurate.

The bureaucrats at the statistical departement might even be changing methodologies to sooth their employers: the state. Or they might measure price-increases correctly, in fact this is impossible and thereby any reliance on GDP makes the whole point rather moot. Is the GDP rising because prices are rising or because people are wealthier ? There is no scientific way to decide.

And here is the point, Aziz concedes that its not universal or complete. But Austrians are looking for economic laws, they are essentially interested in constructing universally correct knowledge.

So playing with statistics because they exist is fine, but that does not qualify as science.

"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."

1. Rothbard did philosophically ground praxeology in experience

2. Mises point is not that he has not experienced, but that it was a-priori because human being could not conceive of it otherwise.

3. It is not the elimination of experience or subjectivity that is desired. It is theory that must be based on logical cohesion and factual assumptions. Experience guides the economist in what they want to study (would Mises or any other Austrian be interested in money or socialism, if they did not have some experience that made this relevant to them ?). Subjectivity is also important, but not in theory. The theory cannot be subjective in regards to validity, but human desires, needs and valuations are subjective.

Much as it shocks the modern mind, positivism is bunk (In fact, in opposition to Mises I believe it to be bunk in natural sciences as well). Said in another way, the data can never guide Aziz, because implicitly he must have some theory of what GDP is or what "price" is in the example of corn prices.

"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."

This is correct. But we are not attempting to establish deductive predictions about the future, but deductive truths about reality that are valid. Whether "the end of Bretton Woods" followed increase income disparity is of course an empirical question. But the heart of the matter is, does more inflationary monetary arrangements or rather does inflation increase income disparity ? And the Austrian deductive answer to this is : YES.

No, analysis of Bretton Woods can confirm or disconfirm this hypothesis. If magic machines were invented five years after the collapse of the "gold-link" of Bretton Woods that provided every family with a 5 $ "make any product out of CO2" then income disparity might not have increased due to the extreme abundance everyone would experience. But this would not disprove the logical claim or its validity, only countering the logic by pointing out its faulty assumptions or incorrect logical step at some point will do.

"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."
I thought this was funny, because Minsky was precisely ignored by mainstream economists for developing his theory by verbal logic. Bad logic or assumptions several places, but still.

"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?"

The "what else" is data or information. The praxeologist is applying the theoretical framework onto certain data, and then the derived beliefs (precisely because it is contigent upon data) about the future are not a necessary logic of action ie. praxeological. Or rather, the praxeologist does not imagine that statements about the future can or are categorically in the same category as "the subjective value theory" or "the law of demand".

"Of those economists who predicted the 2008 crisis, a significant number were Austrians:"
I should do a post on that list, that comes from Steve Keen(I know, i know, he didnt create it). Its disingenious and skewed towards Post-Keynesians.

"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"

"Misesians" who forewarned imminent crack-up boom should read Mises definition of inflation, it takes into account the demand for money and Rothbards "America`s Great Depression" details the phenomenon of excess reserves in the Great Depression.

Furthermore, one can reasonably wonder what kind of inflation we have had since 2009. The claim that we have had deflation or even 2-3 % inflation is based a "general price level" or "price index" which is meaningless.

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

I have yet to read Menger translated book "Investigations into the Methods of Social Sciences", so I will reserve judgement on this.

I can however conclude that Aziz fails to knock down apriori-deductive method, although that would have been an awesome achievement in just a blogpost.

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