An economic waka

What are you doing?
Curious, she inquires.
Explicating the
Austrian Business Cycle.
How rapidly she departs!

Mailvox: Empiricism and the Austrians

Josh has a question:

How do you deal with the criticism that Austrian economics aren’t based on empirical evidence and are thus only nice little theories with no relation to the real world?

I’d point them to Rothbard’s excellent commentary on the subject contained in AGD. Then I’d invite them to contemplate the case of Japan in light of his perspective. Contra the assumptions of the empiricists implicit in Josh’s question, Austrian theory competes rather well in the field of predictive validity, especially of late. Most people would look at Rothbard’s bold assertion that historical statistics cannot be used to test theory and roll their eyes, but never stop to consider the way in which – ironically enough – empirical and scientific experience both tend to support the verity of Rothbard’s logic.

Suppose a theory asserts that a certain policy will cure a depression. The government, obedient to the theory, puts the policy into effect. The depression is not cured. The critics and advocates of the theory now leap to the fore with interpretations. The critics say that failure proves the theory incorrect. The advocates say that the government erred in not pursuing the theory boldly enough, and that what is needed is stronger measures in the same direction. Now the point is that empirically there is no possible way of deciding between them. Where is the empirical “test” to resolve the debate? How can the government rationally decide upon its next step? Clearly, the only possible way of resolving the issue is in the realm of pure theory—by examining the conflicting premises and chains of reasoning.

This reasoning is at the heart of my doubts about Keynesianism, evolution, psychology, the Dark Triad of physics and other quasi-sciences; the intelligent observer has probably already figured out that it is my Austrian School perspective, not my Christianity, that is the primary source of my doubts about neoDarwinism. Now, it’s true that the praxeological approach to methodology has its limits too; the practical superiority of the physical sciences vs medieval philosophy shows that logic must sometimes bow to empiricism. The mistake of modern scientistry is its failure to understand that in certain cases, empiricism is inherently unreliable and a logical approach will be more effective… although at times one is forced to conclude that this is less a failure of understanding on the part of scientists and more a reluctance to abandon their posture of intrinsic intellectual superiority.

The havoc wrought by the appearance of a black swan is no more than the inevitable consequence of forgetting that past results are no guarantee of future performance. This applies to scientific theory as well as to the financial markets.

UPDATE – Reason’s Tim Cavanaugh points out the very problem with empiricism the Austrians describe in Paul Krugman’s defense of neo-Keynesian economic stimulus:

I’ll just point out that Krugman’s case for additional stimulus uses the same logic as Caliph Omar’s decision about the good and bad books in Alexandria. If we don’t stimulate and the economy tanks, it’s because we’re not stimulating; if we stimulate and the economy tanks, it’s because we’re not stimulating enough. There’s no way to refute premises stacked in this way.

ABC abandons the pretense

It’s long past time the media stops pretending they aren’t taking sides:

On the night of June 24, the media and government become one, when ABC turns its programming over to President Obama and White House officials to push government run health care — a move that has ignited an ethical firestorm!

If this doesn’t convince you that the America of old is dead, I don’t know what will. Tell me the one again about the “watchdog” press and how important it is for the nation’s fredom, will you?

Obama: not all bad

His administration appears to be demonstrating it grasps at least a modicum of the concept of cause-and-effect:

The Obama administration has turned back pleas for emergency aid from one of the biggest remaining threats to the economy — the state of California. Top state officials have gone hat in hand to the administration, armed with dire warnings of a fast-approaching “fiscal meltdown” caused by a budget shortfall. Concern has grown inside the White House in recent weeks as California’s fiscal condition has worsened, leading to high-level administration meetings. But federal officials are worried that a bailout of California would set off a cascade of demands from other states.

I’m a little shocked, I have to confess. I just assumed they’d bail out California and then profess surprise and horror when 40 other states showed up with similar demands. On the other hand, they’re pushing for nationalized health care and handing over broader powers to the Federal Reserve, so perhaps it’s just broken-clock syndrome at work. It’s probably wort nothing that there does appear to be plenty of wiggle room in the language towards the end of the piece, just in case of a real financial emergency….