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Master's thesis about the Austrian Business Cycle theory

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tke Posted: Wed, Dec 16 2009 5:03 AM

I wrote my master's thesis about the ABCT at a largely Keynesian department.

If anyone are interested, it can be found here:

http://www.duo.uio.no/publ/okonomisk/2009/95211/MasteroppgavexTordxKoplandxEid.pdf

Comments, criticism etc is of course welcomed.

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Will give it a read but I doubt I'm competent to critique it.

Interesting though -- how did your professors react?

The difference between libertarianism and socialism is that libertarians will tolerate the existence of a socialist community, but socialists can't tolerate a libertarian community.

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tke replied on Wed, Dec 16 2009 6:20 AM

My supervisor was fairly negative to the Austrian school. Initially, I set out to write a more general comparison between the Austrian school and the mainstream, but he recommended to narrow it down to the business cycle theory, saying that the battle against mathematics in economics is a lost cause anyway.

When it comes to the ABCT he seemed to find it interesting, although he was not convinced by the reasoning and said that Hayek's theory has been refuted many times in the 30's. However, in the end he was in general very positive to the thesis, even though i dont think he was too convinced by the theory itself.

 

 

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Giant_Joe replied on Wed, Dec 16 2009 12:47 PM

tke:

My supervisor was fairly negative to the Austrian school. Initially, I set out to write a more general comparison between the Austrian school and the mainstream, but he recommended to narrow it down to the business cycle theory, saying that the battle against mathematics in economics is a lost cause anyway.

When it comes to the ABCT he seemed to find it interesting, although he was not convinced by the reasoning and said that Hayek's theory has been refuted many times in the 30's. However, in the end he was in general very positive to the thesis, even though i dont think he was too convinced by the theory itself.

This sort of thing tends to happen with academics and professionals. They learn a theory in school, get comfortable with it, use it in their work and living, and believe in it. When something comes along to prove that theory inconsistent, they'll get uneasy and they won't like it.

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chloe732 replied on Wed, Dec 16 2009 5:14 PM

I am reading this paper with great interest.  I, too, am not qualified to provide a scholarly critique.  I do want to thank you for the post.  I made this paper part of my permanent Austrian library.  

"The market is a process." - Ludwig von Mises, as related by Israel Kirzner.   "Capital formation is a beautiful thing" - Chloe732.

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DD5 replied on Wed, Dec 16 2009 5:38 PM

Just skimmed for abut 2 minutes.  I don't think the following is accurate:

 

tke:

Austrians, on the other hand, object to the use of empirical tests of the models, because they claim that historical data can never reveal universal theorems regarding humans.

and

 

tke:

The idea of testing models is rejected on the basis that a test must be based on historical data.

 

You make it sound as if Austrians are somehow less scientific then mainstream.

The fact is that mainstream economics is engaged in pseudo-science.  It is easy to show that their "scientific" method is no science at all for the simple fact that they are unable to conduct controlled experiments.  CASE CLOSED.  Thus, by rejecting praxeology as their main methodology, they not only misconstrue their subjects under investigation, but they cannot even live up to their own methodological standards.

 

 

 

 

 

 

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tke replied on Thu, Dec 17 2009 7:14 AM

I think the quotes are quite accurate: Austrians don't reject theory based on data because data is always the result of a "complex" state of the world that will never again occur. But i don't really see why this makes it sound like Austrians are less scientific, its just a different method (read my chapter 3).

Certainly, I think Austrians are very justified in their critique of econometrics, but then again, one of the main things econometricians are dealing with is exactly the fact that simultaneity and identification problems are always present in the social sciences.It is too easy to say CASE CLOSED. It is a complex world out there, but that doesn't mean that it cannot tell us anything.

On the other hand, praxeology is not a perfect method either. You are basically depending on the reasoning of the scientist, but what proofs are there really that Mises' and Rothbard's conclusions are true? The fact that all events in the social sciences consist of complex events is of course a challenge to all social scientists, including Austrians.

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Hey man, that's some really good stuff you got there. I haven't read the whole thing yet, I've just skimmed through it, but what I have read is great. I'm saving your thesis for later.

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tke:
On the other hand, praxeology is not a perfect method either. You are basically depending on the reasoning of the scientist, but what proofs are there really that Mises' and Rothbard's conclusions are true?

Did you ever take any logic courses at your University?

I'll do my best to summarize. In a logic course, you learn that there are several kinds of arguments. They are:
1. Invalid - an argument where the premises don't necessarily prove the conclusion(s).
2. Valid - an argument where the premises necessarily prove the conclusion(s).
3. Unsound - a valid argument, but the premises are not true, which means that the conclusion isn't necessarily true.
4. Sound - a valid argument with true premises, which means that the conclusion necessarily is true.

An example of a valid argument would be:
1. All P's are Q's.
2. All Q's are Z's.
3. Therefore, all P's are Z's.

In the above, if we accept that all P's are Q's and that all Q's are Z's as true, then all P's must be Z's. So if all P's are Q's and all Q's are Z's, then the above argument is sound. If you disagree, you're committing an error in logic.

Mises and Rothbard try to build up economics on this basis - they try to form sound arguments. For example, humans act, the scarcity of time exists, therefore humans must have value scales (after all, with time constricting which actions you may take, you have to choose).

I'm sure you've read Human Action. In it, Mises discusses why theoretical economics is superior to empirical economics. For some more perspectives on economics and epistemology, may I suggest:
Epistemological Problems of Economics
(Mises)
Theory and History (Mises)
Ultimate Foundation of Economic Science (Mises)
Investigations into the Method of the Social Sciences (Menger)
Economic Science and the Austrian Method (Hoppe)
Counter-Revolution of Science (Hayek)

I haven't read any of the above myself, my only real introduction to the Austrian approach is through the beginning of Mises's Human Action. That said, I do plan on reading some of these when I have the time.

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DD5 replied on Thu, Dec 17 2009 9:52 AM

tke:
On the other hand, praxeology is not a perfect method either. You are basically depending on the reasoning of the scientist,

 

Nothing is perfect.  But the mainstream approach also depends on the reasoning of the scientist.  The scientific method itself rests on a priori assumptions and does not relieve the scientist of any such reasoning.  The use of logical deductions can never by circumvented. 

tke:
but what proofs are there really that Mises' and Rothbard's conclusions are true

The proof is in the correctness of the logical deductive method.  Like the proof of a geometric theorem.

Again, according to their (mainstream) own alleged scientific standards (scientific method), the theories based on mathematical models and statistical empirical data are NOT scientific, for the simple reason that no control parameters can be applied.  Basically, no experimentation to refute the theory can be performed.  ZERO!  Thus, they are  no more scientific then the theory of intelligent design.  

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DD5:
The proof is in the correctness of the logical deductive method.  Like the proof of a geometric theorem.

Exactly. Saying that we need to test Mises's and Rothbard's conclusions is equivalent to saying that we need to test thousands of different kinds of triangles to really be sure that all triangles have three sides, three angles, that the sum of the three angles is 180 degrees, etc.

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tke replied on Thu, Dec 17 2009 12:16 PM

krazy kaju:

Did you ever take any logic courses at your University?

Yes, where im from a philosophy/logics course is mandatory for anyone attending universities. Also, as an economist, I've also had an extensive amount of mathematics as Austrians know very well.

Obviously, logical reasoning is invaluable both in every day life and in science. I also agree with Austrians that mainstream economists also mainly base their conclusions on logic. However, the question is whether an extensive system of mechanisms, economic theory, may be derived from logical deductions alone. I think this is problematic.

Yes, if all P's are Q's and if all Q's are Z's all P's will be Z's, but in economics ( the social sciences) it is seldom straightforward to show unambigiously that P's are Q's as soon as P and Q become complex. For example, assume the following:

1. The supply of a good increases when the price of the good increases.
2. Labor is a good and wage is its price.
3. Labor supply increases if wages increase.

This looks fine, but as anyone who has taken a microeconomics course are aware of, this is not necessarily true. There are income and substitution effects:

Substitution effect: Wage up --> sparetime more expensive --> work more

Income effect: Wage up --> make more money without working more --> work less

Hence, logic is good, but may easily fail. And furthermore, the mistakes may be very hard to identify.

 

I have read most of human action and taken extensive notes, also to some of the other titles you mention. From this, the way i understand austrian methodology is the following:

Based on axioms and corrolaries the economic theory is deduced by verbal logic. If someone disagrees, whether by instict, empirical tests, etc, the theory will not be refute. However, it may make the austrian scientist go through his logic once more, to make sure that it is valid.

The good thing about this is that Austrians take the problem of spurious effects very seriously: A working theory is only a theory that makes sense. But the problem is of course that it is very hard to be certain that the logic deductions are unambigious. Hence, clear cut formal reasoning is needed, is this is what explains why there is so much maths in economics.

I know, Mises and Rothbard have fundamental axioms that mainstream economists rarely care about, but this does not make them immune to make mistakes further down the road when the chain of reasoning involves many steps. Even the foundational axioms may actually be less obvious and universal than they seem to be at first glance. On this, read Nozick's "On Austrian Methodology"- a very interesting critique which Block has praised and responded to ("On Nozick's on Austrian methodology").

Many thinkers through history have based their theories on logic, and they always had some explanation for why it was superior to the logic of others. This is of course not necessarily damning against Austrians, but I think it should be a reminder that one must be utterly careful when it comes to any reasoning based on logic only.

One final point: Think of Rothbard and Ayn Rand, did't both of them base their political theories on logic and fundamental axioms? Still, they ended up on different conclusions (no state vs laissez-faire). Doesn't this, by logic, mean that one of them (or both) must have made some mistake in their reasoning?

 

 

 

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tke replied on Thu, Dec 17 2009 12:27 PM

DD5:

Nothing is perfect.  But the mainstream approach also depends on the reasoning of the scientist.  The scientific method itself rests on a priori assumptions and does not relieve the scientist of any such reasoning.  The use of logical deductions can never by circumvented. 

True, mainstream surely depends on logical reasoning. However, mainstream takes empiricical results seriously. Theory determines what to test, tests alter theories and so on. Empirical results will not persuade any true Austrian. Only theoretical arguments will, but it may be extremely difficult to discover flaws, or to alter long and complex chains of reasoning that "everyone" believe to be true.

DD5:

The proof is in the correctness of the logical deductive method.  Like the proof of a geometric theorem.

Again, according to their (mainstream) own alleged scientific standards (scientific method), the theories based on mathematical models and statistical empirical data are NOT scientific, for the simple reason that no control parameters can be applied.  Basically, no experimentation to refute the theory can be performed.  ZERO!  Thus, they are  no more scientific then the theory of intelligent design.  

Mathematical theorems may be proved rigorously , this is not the case with long chains of economic, verbal reasoning. The logical deductive method is always correct, human reasoning is not. Reality may be useful in correcting reasoning thats on the wrong track.

Again: Read ch3 in my thesis

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Esuric replied on Thu, Dec 17 2009 12:55 PM

With regards to the so-called "Cambridge controversy" I feel that you did an inadequate job. Roger Garrison and Lachmann explain why there really is no controversy at all for the Austrian school. Rather, it merely invalidates mainstream neoclasslical homogeneous production functions.

 

"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."

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Is Sraffa's paper published in Contra Keynes and Cambridge the only one?  If there are others, does anybody have access to them? (They don't seem to exist on JSTOR.)

 

EDIT: Nvm, I found them.  There is a short rejoinder, as well.

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tke replied on Thu, Dec 17 2009 1:09 PM

Esuric:

With regards to the so-called "Cambridge controversy" I feel that you did an inadequate job. Roger Garrison and Lachmann explain why there really is no controversy at all for the Austrian school. Rather, it merely invalidates mainstream neoclasslical homogeneous production functions.

Yes, I accommodate that critique. Due to lack of time i based the Austrian responses on Kirzner entirely. Thanks.

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Esuric replied on Thu, Dec 17 2009 1:10 PM

tke:
Yes, I accommodate that critique. Due to lack of time i based the Austrian responses on Kirzner entirely. Thanks.

Caplan's critique shows that he really doesn't understand the ABCT at all. The term "low interest rate" in Austrian economics is a purely relative term; 15% may be too low, and 4% may be too high, it's all about the position of the market rate relative to the natural rate. Saying that " a businessman would factor-in  artificially low interest rates when he engages in calculation" is as meaningless as saying that the price of corn is too high in a purely socialist economy, that is, where the government entirely owns the means of production. Perpetual monetary intervention renders the interest rate useless as a price mechanism--there is no possible way to rationally allocate.

Rational expectations is quite absurd.

The paper seems really interesting and I will enjoy reading it. Just have to finish finals first.

"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."

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tke replied on Fri, Dec 18 2009 4:00 AM

Yes, i think it is quite strange that Caplan, who has read a lot of AE, would make such a naïve critique. Block (and others) have responded very well to earlier authors making the same argument.

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Jseth90 replied on Sat, Dec 19 2009 11:29 AM

tke:

 For example, assume the following:

1. The supply of a good increases when the price of the good increases.
2. Labor is a good and wage is its price.
3. Labor supply increases if wages increase.

This looks fine, but as anyone who has taken a microeconomics course are aware of, this is not necessarily true. There are income and substitution effects:

Substitution effect: Wage up --> sparetime more expensive --> work more

Income effect: Wage up --> make more money without working more --> work less

Hence, logic is good, but may easily fail. And furthermore, the mistakes may be very hard to identify.

 

To me this doesn't show a failure in logic. If 3 is unsound, like you have correctly shown, then according to logic 1 or 2 must be incorrect. Firstly 1 is not correct, think of a inferior good or something of the sort, so 1 is a generalization which cannot be stated for all goods (i.e. labour). This is unlike perhaps:

1. Humans act to achieve an end

2. Humans have scarce amount of time to fufill their ends (24 hours a day)

3. Humans cannot be in two places at once

4. Humans must then choose which ends to satify first, second, third...due to some preferencing

etc. etc. etc.

 

This is deduction, 1, 2, 3 cannot be falsified thus 4 is a sound argument (though my arguments have obviously left some things out but its all in Man, Economy and State first chapter).

Your 1 can be falsified very easily which led to the wrong conclusion which you yourself proved to be wrong!

 

 

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Student replied on Sat, Dec 19 2009 12:40 PM

DD5:

The fact is that mainstream economics is engaged in pseudo-science.  It is easy to show that their "scientific" method is no science at all for the simple fact that they are unable to conduct controlled experiments.  CASE CLOSED.  Thus, by rejecting praxeology as their main methodology, they not only misconstrue their subjects under investigation, but they cannot even live up to their own methodological standards.

If this definition of "science" were true, then a lot of other things would simply not be pseudo-science. For example, how many controlled experiments can be conducted in cosmology or astronomy or biology? How many controlled experiments have been conducted to test the theory of evolution? the big bang?

If you told a "mainstream" economist that he was no more of a scientist than a physicist or a biologist, then I'm sure he would probably thank you.

And if you told me that you actually believe most of physics/biology/etc were unreliable psuedo-science, then I can reommend you some good medication. ;) jhaha ust jokin', playa.

Bottom Line:

IYou are expecting far too much certainty from science if you expect it to be only characterized by controlled experiments that easily falsiy one theory or another. I  should especially  note that your argument is really a boiled down form of the "falsification" arguments advanced by Karl Popper over 50 years ago. And indeed he did claim that much of the "natural" sciences would be considered unscientific under this scheme, specifically arguing that the theory of evolution was unscientific. But one of the many reasons his views fell out of favor in the philosophy of science is that controlled experiments are incredibly difficult (if not impossible) to conduct. By that I mean that it is almost impossible to isolate all variables except the one you are interested in studying. As a result, it is near impossible to "falsify" any particular theory through experimental testing (one could always argue that it was one of the uncontrolled variables that led the experiment to yield results that were inconsistent with your theory).

It may help if you google the Duhem-Quine Thesis:
http://en.wikipedia.org/wiki/Quine-Duhem_thesis

The more you read about the philosophy of science, the more you will find that man's quest for "truth" about the world around him is neccisarily marked by uncertainty and guesswork. Economics is no exception.

Ambition is a dream with a V8 engine - Elvis Presley

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abskebabs replied on Sat, Dec 19 2009 6:07 PM

Student:

For example, how many controlled experiments can be conducted in cosmology or astronomy

Strictly this is a bone of contention recognised and acknowledged by many physicists, including my professor on my General Relativity course. However, it is generally recognised that astronomy could not be considered science until it was fitted and explained within a Newtonian framework, justified experimentally on the Earth. The cosmological predictions correctly made by special relativity were certainly verified by astronomical observation, and "reasonably" it's validity was acknowledged, even though later experimental tests more strictly confirmed its consequences.

 

Same goes for GR as far as it has been tested, but in so far as there is still doubt there is still debate. It probably doesn't help that very few people in the world, myself included, understand GRConfused

"When the King is far the people are happy."  Chinese proverb

For Alexander Zinoviev and the free market there is a shared delight:

"Where there are problems there is life."

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