ABCT seems so obvious to me that I don't understand why it hasn't become mainstream. What arguments would mainstream economists use to refute it?
What Went Wrong with Economics
mickanomics:FRIEDMAN That is a very general statement that has very little content. I think the Austrian business-cycle theory has done the world a great deal of harm.
Because Friedman didn't properly understand Capital Theory, which is why he made serious errors in how he tried to evaluate its validity.
Both Jesus Huerta de Soto in " Money, Banking, and Credit Cycles", and Roger Garrison, in "Time and Money", address these errors and show that on the contrary, Friedman's data is consistent with Austrian Business Cycle theory.
here is the relevant footnote with respect to Roger Garrison's response to Milton Friedman:
103. In an article in which he examines data from the crises between 1961
and 1987, Milton Friedman states that he sees no correlation between
the amount of expansion and the subsequent contraction and concludes
that these results “would cast grave doubt on those theories that see as
the source of a deep depression the excesses of the prior expansion (the
Mises cycle theory is a clear example).” See Milton Friedman, “The
‘Plucking Model’ of Business Fluctuations Revisited,” Economic Inquiry
31 (April 1993): 171–77 (the above excerpt appears on p. 172). Nevertheless
Friedman’s interpretation of the facts and their relationship to
the Austrian theory is incorrect for the following reasons: (a) As an
indicator of the cycle’s evolution, Friedman uses GDP magnitudes,
which as we know conceal nearly half of the total gross national output,
which includes the value of intermediate products and is the measure
which most varies throughout the cycle; (b) The Austrian theory of the
cycle establishes a correlation between credit expansion, microeconomic
malinvestment and recession, not between economic expansion
and recession, both of which are measured by an aggregate (GDP) that
conceals what is really happening; (c) Friedman considers a very brief
time period (1961–1987), during which any sign of recession was met
with energetic expansionary policies which made subsequent recessions
short, except in the two cases mentioned in the text (the crisis of the late
seventies and early nineties), in which the economy entered the trap of
stagflation. Thanks to Mark Skousen for supplying his interesting private
correspondence with Milton Friedman on this topic. See also the demonstration
of the perfect compatibility between Friedman’s aggregate data
and the Austrian theory of business cycles, in Garrison, Time and Money,
pp. 222–35.
The Cambridge capital controversy, for example, was not a real scientific debate. You had the Cambridge Keynesians debating the MIT Keynesians, where the former tried to revive the already refuted Ricardian paradigm of class analysis and distribution. Their critique only applied to the mainstream homogeneous production function, and not the Austrian conception of a multi-tier structure of production (Garrison writes about this extensively).
This is taking us far afield of the original point of the discussion, but I will note that the Cambridge Capital Controversy was not restricted to homogenous production functions. Most importantly the CCC questioned whether there is a negative relationship between capital intensity and the rate of interest.
Garrison tried to address Samuelson's argument here:http://www.auburn.edu/~garriro/garrison.pdf
I'll let you decide if he does a good job, but hopefully you will see that CCC was hardly irrelevant to Austrian capital theory.
Ambition is a dream with a V8 engine - Elvis Presley
Jon Irenicus: It must be Samuelson's expertise on capital theory that led him to believe the USSR would continue existing beyond its inevitable collapse? Is it Krugman's Nobel that is responsible for letting him so wonderfully (mis)represent the ABCT making errors an amateur should not make? The fact that someone is 'brilliant' means nothing if they do not take the time to familiarise themselves with the theoretical apparatus at hand. In that sense Austrians are not communicating enough, aside for some people like Garrison.
It must be Samuelson's expertise on capital theory that led him to believe the USSR would continue existing beyond its inevitable collapse? Is it Krugman's Nobel that is responsible for letting him so wonderfully (mis)represent the ABCT making errors an amateur should not make? The fact that someone is 'brilliant' means nothing if they do not take the time to familiarise themselves with the theoretical apparatus at hand. In that sense Austrians are not communicating enough, aside for some people like Garrison.
So you argument is that ABCT is not more generally accepted because mainstream economists are lazy??? And that this is true across multiple economists across multiple decades???? But I guess they were not too lazy to read other economists that attacked mainstream ideas like Friedman and Lucas??? They are just selectively lazy against Austrian Economists???
Well...Okay. I mean, I can't prove that your argument is wrong. But it just seems incredibly self-serving. That doesn't mean it isn't true, but I am personally very suspicious of arguments that rely too much on one's intellectual opponents being morally or mentally flawed.
And I think that's the difference between me and everyone else in this thread. So it would probably just be better to break it all off here.
PS* If you want to mock Paul Samuelson, I would at least google a telling example that was relevant to this particular discussion.
It's true of Krugman at the very least. And in reality, unless they demonstrate sufficient knowledge of AE, one can assume they've not researched it. I'll give Samuelson's article a look to gauge how well he understands it later, but it need not be attributable so much to laziness as it is speaking in a different language even if the words are broadly similar. That is what I had meant.
Freedom of markets is positively correlated with the degree of evolution in any society...
but it need not be attributable so much to laziness as it is speaking in a different language even if the words are broadly similar.
Exactly! That is my argument precisely.
PS* As I was going to mention earlier, I also agree that Krugman's critique of ABCT was glib at best. So I don't consider him a very reliable critic of AE. Of course, Krugman's article was published in Slate, not a journal. if you want to find good critics, look for people that are willing to put their arguments to peer-review. In addtion to those mentioned Gordon Tullock has an intersting article critiquing ABCT (PM me later for link) and of course Bryan Caplan has subjected himself to several rounds of peer-reviewed discussion on his criticisms of AE in general.
I think I'll weigh in here,
J. Grayson Lilburne: That's the "Boettke" approach, and it has its merits. But there's also the LvMI approach, which is to directly reach and inspire brilliant young minds like Esuric. That approach is spreading Austrian economics across the general landscape of ideas like a prairie fire, and it will eventually bear fruits in academia as well, as the "Esuric"s of the world get their PhDs and take the "Keynesians of the chair" by storm.
That's the "Boettke" approach, and it has its merits. But there's also the LvMI approach, which is to directly reach and inspire brilliant young minds like Esuric. That approach is spreading Austrian economics across the general landscape of ideas like a prairie fire, and it will eventually bear fruits in academia as well, as the "Esuric"s of the world get their PhDs and take the "Keynesians of the chair" by storm.
With all due respect, there really isn't such a thing as the "Boettke approach", or even a "GMU approach". In terms of economics at least, all they're really doing is practising it as the rest of the profession does. This includes competing on various different margins, the results hopefully being papers published in top outlets and jobs at highly ranked institutions. Arguably, there's been some success recently with guys such as Leeson getting a JPE and visiting at Chicago and Coyne teaching at WVU.Part and parcel of this process is interaction with contemporaries, especially those working in their own field, with ideas that although not necessarily entirely in agreement are nonetheless interest.
Look, I really don't wish to sound condescending here, but very few of you have attended university or taken an economics degree. I don't wish to imply that you're stupid or have bad intentions. But, I believe your view of the economics profession and science in general is necessarily skewed by the fact that you get most of your information from a single source. Those of you who have gone to your professors and tried to have an open conversation with them about their research or the economics profession wit the presumption that they're far more knowledgable than you, will understand what I mean by this.
As for the OP, I think Student hit the nail on the head. First and foremost, the language of mainstream economics is mathematics and I've yet to see any representation of the ABCT or some variant of it in math.
But arguments concerning the moral depravity (or stupidity) of the economics profession don't seem to cut it as far as I'm concerned (that isn't to say that central banks haven't caused distortions in macro theory). To blame your (used loosely) failures on the moral bankruptcy of a whole profession seems to be a cop out. All the more so when there are precious few attempts at convincing or reaching out to the rest of the profession. In terms of modern macroeconomics all I've seen are Garrison's paper comparing ABCT and RBC, a paper putting ABCT in terms of New Keynesian theory (forget the author) and one giving an Austrian perspective on Kyland and Prescott (once again, I forget the authors). Granted, this may not be your fault, Austrians (for sociological reasons) seem to have mainly focused on political economy and micro theory. But as Student pointed out, and more importantly, you're going to have to find some serious empirical proof (read: metrics) that the ABCT is even relevant, naively assuming that it is doesn't really work).
Look, Keynes has been dead for a long time, Keynesian economics has been dead for about 40 years now, Monetarism followed not long after. If you want to dismiss macro, I think it's wise to have read more than Blanchard's or Mankiw's intermediate textbook. Once again, I mean this with all due respect, but you're attacking strawmen from 40 years ago with all the diatribes against Keynes.
Now, is the ABCT sound? Not entirely. Macroeconomics isn't easy work, there should be no reason to expect that the ABCT would be complete. Butos has raised some interesting points concerning expectations (and has an interesting essay using TSO to develop and Austrian theory of expectations), others have noticed that Hayek's work on the Austrian business cycle has been contradicted by his later work on spontaneous orders and knowledge, in the sense that his theory is very mechanistic (however modern economics such as Lewin, Garrison and Horwitz seem to avoid this). Others still have pointed out that Hayek quickly abandoned his second work on capital theory when it became clear how big the problem was (and that despite the number of people who have attempted to clear it up, none have). Garrison used P&P not PToC for a reason. Hayek himself noted that he doubted the possibility of any general theory of business cycles and others have pointed out that the ABCT was original a description of the housing boom in Vienna (I think).
I'm not saying the Austrian theory is completely worthless. I'm just saying there's a lot of work that needs to be done.
One last point, for all the fuss people make about capital theory, Yeager has argued that a lot of it is unnecessary. As he points out in his essay in Austrian Economics In Debate it's not the case that monetarists don't have a theory of capital, the matter is that it doesn't function into their explanation of booms and busts in such a way as money, for example, does.
Edit: Esuric, regarding your last post, I think there a few inaccuracies there. Regarding rational expectations, all that requires is that agents know the probability distribution of events, few serious economics believe in cardinal utility (hence monotonic transformations and tools such as marginal willingness to pay) and as for the "mysticism" of invoking psychological factors, it isn't really mysticism when there's a lot of literature in the fields of behavioural finance and experimental economics on the subject.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
But as Student pointed out, and more importantly, you're going to have to find some serious empirical proof (read: metrics) that the ABCT is even relevant, naively assuming that it is doesn't really work).
Which would be what I said earlier.
Student:In addtion to those mentioned Gordon Tullock has an intersting article critiquing ABCT (PM me later for link) and of course Bryan Caplan has subjected himself to several rounds of peer-reviewed discussion on his criticisms of AE in general.
He doesn't understand the Wicksellian framework, so he's in no position to critique the ABCT. Saying that actors will realize that the interest rate is too low, and will therefore adjust their calculations, is saying nothing.
"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."
hayekianxyz:Edit: Esuric, regarding your last post, I think there a few inaccuracies there. Regarding rational expectations, all that requires is that agents know the probability distribution of events, few serious economics believe in cardinal utility (hence monotonic transformations and tools such as marginal willingness to pay)
They claim they don't believe in cardinal utility, but continuously presuppose it in their demonstrations. For example, my professor once made the case that exchange can be considered a zero-sum game because as the price rises, the producer gains surplus at the expanse of the consumer, and vice versa. But this only makes sense when you presuppose a standard unit of "surplus," that is, a cardinal measurement of utility. And for inter-temporal choice, they flatly use cardinal measurements. Rational expectations assumes that individuals know all of the potential results of their actions--they don't account for "radical uncertainty."
hayekianxyz: and as for the "mysticism" of invoking psychological factors, it isn't really mysticism when there's a lot of literature in the fields of behavioural finance and experimental economics on the subject.
Does it explain why the price mechanism has failed to coordinate production? Production is not guided by extremely intuitive entrepreneurs who "feel" the demand and supply conditions, but by fluctuations in relative prices.
hayekianxyz:Look, I really don't wish to sound condescending here, but very few of you have attended university or taken an economics degree. I don't wish to imply that you're stupid or have bad intentions. But, I believe your view of the economics profession and science in general is necessarily skewed by the fact that you get most of your information from a single source. Those of you who have gone to your professors and tried to have an open conversation with them about their research or the economics profession wit the presumption that they're far more knowledgable than you, will understand what I mean by this.
You're not saying anything here. I'm about to get my degree, and frequently talk to my professors about their interests. Their business cycle explanations are psychological in nature with a focus on regulation as the remedy (with the exception of one who's into RBC's and technological shocks). And again, I blame the incentive structure and not the economics profession per se.
hayekianxyz:As he points out in his essay in Austrian Economics In Debate it's not the case that monetarists don't have a theory of capital, the matter is that it doesn't function into their explanation of booms and busts in such a way as money, for example, does.
Wonderful, a purely monetary explanation for relative over productions of capital goods and inter-temporal disproportionalities. The demand for money is intrinsically linked to the demand for capital in monetary economies--they are inseparable.
hayekianxyz:Look, Keynes has been dead for a long time, Keynesian economics has been dead for about 40 years now, Monetarism followed not long after. If you want to dismiss macro, I think it's wise to have read more than Blanchard's or Mankiw's intermediate textbook. Once again, I mean this with all due respect, but you're attacking strawmen from 40 years ago with all the diatribes against Keynes.
Right. And when his proposals are no longer taken seriously by policy makers, and when economists stop defending such policies, then maybe Austrian's will move on. Nevermind the fact that the FED is working with the Philips curve. Mankiw's textbook wasn't bad, but his call for negative interest rates as a cure for this depression is pure lunacy.
The New Keynesians failed to see this recession coming, and it will lead to a paradigm shift, whether you guys agree with it or not. A -3% savings rate, nations inflating as fast as they can in order to improve their balance of trade, and belligerently low interest rates, should have made this recession quite obvious.
hayekianxyz:With all due respect, there really isn't such a thing as the "Boettke approach", or even a "GMU approach". In terms of economics at least, all they're really doing is practising it as the rest of the profession does.
There's nothing wrong with calling it the "Boettke approach" in the context of a conversation about specifically spreading Austrian economics. There is an ongoing debate within Austrian circles about the merits of two approaches. An active and leading participant on one side of this debate is Peter Boettke.
hayekianxyz:First and foremost, the language of mainstream economics is mathematics and I've yet to see any representation of the ABCT or some variant of it in math.
ABCT will never be represented in mathematics because, as we all know, AE does not use mathematics or empiricism in its methodological approach, and ABCT, and capital theory, are at the heart of AE. The mainstream will never accept praxeology, the scientific study of human action. It is considered pre-science, or non-scientific by the mainstream. After 90 years, isn't it obvious that mainstream and Austrian thought will never be reconciled? Mainstream economists will continue in their use of mathematics and data gathering. Austrians will always reject the mainstream methodology since Austrians believe such a methodology has nothing to do with economics. What ABCT has on its side is the fact that the mainstream "policy solutions" have been implemented for the past 85 years in the U.S. These solutions are at the forefront right now. How are they working? Why is there a need for Austrian economists to convince mainstream economists that ABCT is correct when we can see the result of mainstream policy recommendations play out in front of us?
ABCT will never be represented in mathematics because, as we all know, AE does not use mathematics or empiricism in its methodological approach, and ABCT, and capital theory, are at the heart of AE. The mainstream will never accept praxeology, the scientific study of human action. It is considered pre-science, or non-scientific by the mainstream. After 90 years, isn't it obvious that mainstream and Austrian thought will never be reconciled? Mainstream economists will continue in their use of mathematics and data gathering. Austrians will always reject the mainstream methodology since Austrians believe such a methodology has nothing to do with economics.
What ABCT has on its side is the fact that the mainstream "policy solutions" have been implemented for the past 85 years in the U.S. These solutions are at the forefront right now. How are they working? Why is there a need for Austrian economists to convince mainstream economists that ABCT is correct when we can see the result of mainstream policy recommendations play out in front of us?
Cheers!
"The market is a process." - Ludwig von Mises, as related by Israel Kirzner. "Capital formation is a beautiful thing" - Chloe732.
With regards to cardinal utility, a lot of economic theory actually does use "real" cardinal utility. That is, they use cardinal utility functions in which magnitudes, rather than mere order, matters (mathematically, these functions are equivalent iff the magnitude of differences between two points is preserved) . That seems clearly incompatible with the Austrian claim.
As for mathematics, other heterodox economists have made similar claims, at least in terms of the usefulness of econometrics and economic predictions. Look at Sheila Dow or Tony Lawson's writings on open systems versus closed systems.
chloe732: AE does not use [...] empiricism in its methodological approach
AE does not use [...] empiricism in its methodological approach
I really just do not understand what people mean when they say that. If "AE does not use [...] empiricism in its methodological approach", for example, (a) how do you explain the fact that "ME&S" begins to implement into its body of theory and heavily rely on a few "empirical" claims just 70 or whatever pages into its 1,400 or more total pages, (b) how do you explain the fact that "AE" does not even refer to co-operation, society, or, therefore, the market, until it admits the clearly "empirical" datum that the distribution of the abilities among individuals is non-uniform?
chloe732: ABCT will never be represented in mathematics because, as we all know, AE does not use mathematics [...] in its methodological approach
ABCT will never be represented in mathematics because, as we all know, AE does not use mathematics [...] in its methodological approach
The term "mathematics", atleast when economists use it, is extremely ambiguous. What you really mean is that "AE does not use" any of the current systems of mathematics "in its methodological approach".
If I wrote it more than a few weeks ago, I probably hate it by now.
J. Grayson Lilburne:There's nothing wrong with calling it the "Boettke approach" in the context of a conversation about specifically spreading Austrian economics. There is an ongoing debate within Austrian circles about the merits of two approaches. An active and leading participant on one side of this debate is Peter Boettke.
I never wished to presume to tell you what you want to call that particular approach. I was just trying to put things in context, this isn't some novel approach that is being attempted. What you call the "GMU approach" is really just the norm as far as publishing and teaching go.
Esuric,
Regarding utility, I think it's one thing to state that mainstream economists believe generally believe in ordinal utility but fail to consistently grasp its implications or simply believe that rigour is a substitute for realism in this area (or whatever), it's quite another to flatly state, without any qualifications that they think utility is cardinal and all that that entails.
As goes psychological explanations, you're quite correct in saying that prices work to coordinate production, few economists would deny that. But I think that you're overselling markets if you think that large changes in variables such as consumer confidence won't disrupt coordination. Of course, you could argue that such shifts in confidence aren't very signficiant empirically, but then you're going to have to deal with the the real world (see Butos' review of Garrison's book). On a related note, as I said in my previous post, if you wish to deny the existence of mass irrationality and speculative bubbles as other explanations, I'm sure there are many people who would agree with you. But there's a whole literature out there on this subject and platitudes such as "markets clear" or whatever, just won't do.
And to go in a full circle back to the point I was making to Lilburne. If you think that pointing out the fallacies of policy makers and the dead economists that inform them is more important than scholarly work, nobody is stopping you from doing just that. But it's a bit disingenuous to attack theories that have been dead for a long time only to act as if you're up to date on the cutting edge of macroeconomics. Perhaps I'm being a little harsh, I don't intend to be, I just think it's more than a little misleading when you attack macroeconomists in the way that you have.
Out of interest, do you have any proof that the Fed is working with the Phillips curve? I was speaking to my macro teacher the other day and he told me that generally it's central banks that have some of the most advanced DSGE models (for letters curiously absent from a large topic on mainstream macro), given the amount of research that is conducted by central banks, I can't really believe that the Fed of all places is still going to be working with theories that have been out of fashion in academia for nearly half a century.
A quick final note: you seem very enthusiastic about Kuhn's theory of science. I wouldn't, there's been a lot of talk about how mainstream macro is in dire condition, but not much has changed. And if a new paradigm does come about, you can be sure that it won't be one friendly to markets.
On a less specific note, a lot of the posts on this topic seem to exemplify the problems some Austrians (at the risk of causing conflict, let me use the term Rothbardians from here) have with communication. Praxeology, thymology and a priorism really aren't that big of a deal. The first two terms are simply fancy words for theory and history respectively and the last is something that is by no means specific to Austrian economics and isn't worth writing home about anyway. And rejecting math a priori is just as problematic as accepting it a priori is, if you've got a thorough understanding of the math and still don't believe it to be applicable then that's acceptable if you do think it's applicable but accept that your comparative advantage is in verbal economics then that's also acceptable but wholesale rejection is just dogmatism.
Perhaps if the profession were more philosophically inclined then the amount of writing on epistemology would be worthwhile, but (and thankfully in my opinion) the profession is not nearly as philosophically inclined as you people wish it was.
On a related note, as I said in my previous post, if you wish to deny the existence of mass irrationality and speculative bubbles as other explanations, I'm sure there are many people who would agree with you. But there's a whole literature out there on this subject and platitudes such as "markets clear" or whatever, just won't do.
What is "irrational" and what is "speculative" ? What is platitudinal about that fact, btw?
Yeah not reflecting on the foundations and validity of your methodology is the bomb...
As far as the need for empirical evidence to corroborate economic theory, anyone opposing such research as being "un-Austrian" should remember that Ludwig von Mises founded the Austrian Institute for Business Cycle Research with F.A. Hayek in 1927, and that Hayek was a research assistant to Prof. Jeremiah Jenks of NYU from 1923-24.
Abstract liberty, like other mere abstractions, is not to be found.
- Edmund Burke