This thread contains the best explanation I’ve seen of the Austrian position, and it actually makes a lot of sense. In economics, there is simply not enough variables to do a controlled experiment. So you have to use deduction and reason in order to understand events. Insisting on using Popperian falsifiability where such a procedure is not possible, creates the well known keys and lamp post fallacy.
This looks like a good place to post what I think is the best critique of the Austrians out there: Bryan Caplan (who is sympathetic to the Austrians) does a good job of arguing that the Austrian foundations fall into two categories 1) not different than mainstream economists 2) wrong.
It starts here Why I am not an Austrian economist, continues some back and forth between Walter Block and Hülsmann (an Austrian) and Caplan:
There’s more here (links from the appendix 1). Some of these are in .doc form.
I should also point out that I do think the Austrians are more correct than mainstream economists on several issues, but I don’t think these follow from their epistemology.
I will also add that this discussion highlights that LWers should be particularly good at seeing the epistemic flaws of the Austrians since they are 1) a rejection of the use of probability theory as a fundamental part of decision theory 2) a rejection of utility functions 3) abuses of language (they frequently attempt to argue “by definition”).
Firstly, “controlled experiments” is simply an ideal which is no more achieved in the physical sciences than in the social ones. The various experimental methods employed by scientists differ only in the degree to which they’re uncontrolled. Popperian falsifiability has been criticized in all scientific contexts for these reasons. I believe that Quine’s discussions of this issue are the best-known… suffice to say, the Austrians need to come up with a better reason for dismissing the scientific method as applied to economics versus the scientific method as applied to other disciplines—but alas, this would probably require them to wade into the kind of messy empirical issues which they seem to abhor.
Secondly, even if scientific knowledge of economic phenomena could be rejected for the above reasons, the fact is that Austrian economists still routinely make empirical predictions based on praxeological reasoning which seem incredibly difficult to support based on that reasoning alone. See the OP’s part about Mises on price controls—no purely praxeological account can determine that price controls will cause non-price rationing. So the criticism is that Austrians do not actually practice what they preach, largely because if they did so they would have very little to say about the real world.
That is a reasonable criticism of mainstream economics. I am skeptical that it has anything to do with Austrian economics. Probably someone sat down with an unshakable belief that the Austrian economics meant something and extracted this claim.
I don’t see why I should care about the correct attribution of this complaint. The Austrians are so bad at communicating that this interpretation has not helped me extract anything else from them. If other people can extract other useful claims from the Austrians, they should isolate and promote those claims.
I’m not looking for Popperian falsifiability. I’m looking for Bayesian inferential updating. If the argument is that no evidence of any form could ever change the Austrian’s probability estimate of a certain theory, I charge the Austrian is either being overconfident or violating the conservation of expected evidence.
Even extremely messy evidence can still be evidence. In economics, messy evidence that is messy in a stable way can be very good evidence. For instance, Mises explains that we can never find examples of irrationality, because preferences can never be frozen in time. So the preference reversal involved in the Allais Paradox is perfectly rational. But even if it’s a rational preference change, those constant changes are stable over time. If you ask a person which gambles they prefer a second time, they’ll give the same answers, and so on. By saying “it’s not a controlled experiment so it doesn’t count,” the Austrian misses out on a key insight about how people can be milked. The Austrian tells us that this person wants to be milked!
If the argument is that no evidence of any form could ever change the Austrian’s probability estimate of a certain theory, I charge the Austrian is either being overconfident or violating the conservation of expected evidence.
Not true; such a position can be perfectly Bayesian: You would just believe that P(E|~H) = P(E|H). In other words, “On average, learning E tells you nothing about H, and vice versa.” Such an H wouldn’t be very useful, but it’s Bayesian. (I had to point this out on a post by Bob Murphy critical of Bryan Caplan, but I can’t find it ATM.) All Bayes prevents you from doing is taking both E and ~E as evidence for H. That is, believing both that P(E|H) > P(E|~H) and P(~E|H) > P(~E|~H). That would violate conservation of probability.
By saying “it’s not a controlled experiment so it doesn’t count,” the Austrian misses out on a key insight about how people can be milked
Please refer to the OB discussion on the Allais paradox, where the participants’ actions were justified quite well by poster “gray area” early on, and never answered by Eliezer_Yudkowsky. Long story short: the choice one is making fundamentally changes depending on whether it’s one-shot or indefinitely repeated. The money pump doesn’t manifest until you actually offer the choice multiple times at which point people not surprisingly pick up on it. But that money pump is just not happening in the one-shot version; ergo, no money is being pumped and nobody is being cheated, nor liking it.
Also, I’d like to comment on the price control example. While I certainly don’t want to defend the Austrians, I also don’t see how this is a point against them: rather, it’s a confirmatory example.
he proclaims that price controls will lead to rationing by non-price means. But this is only true if the provider of the good in question is attempting to maximize profit; if the producer is willing to take a hit in the wallet out of the goodness of his heart for his customers’ well-being, as Mises’ tautological definition of self-interest allows, a small price ceiling could conceivably have no effect.
If the producer is continuing to sell at the ceiling rate, that is still non-price rationing because he is rationing the good based on who gets there first or who he likes most, etc, exactly the thing Austrians are warning about, and exactly the kind of non-trivial insight many people still don’t appreciate.
So I agree with the general thrust of this post, but this is a bad example.
I agree money pumps don’t work forever. Experimental economics bears out, to some degree, that rationality is often a product of incentives. But if people can be milked in the very short run (the Allais Paradox is of course not the only example), this might have some bearing on economic theory.
I disagree that a producer who produces at a ceiling rate rations based on who gets there first. The producer could increase supply in response to the price control. The only thing limiting him from doing so is the size of his bank account.
But if people can be milked in the very short run (the Allais Paradox is of course not the only example)
But they weren’t milked in the short run. They weren’t milked at all! From their perspective, they got two free lottery tickets. Doesn’t sound like a milking to me. They never go through the hypothetical “implication” of the Allais Paradox, that they would start to trade opportunities intransitively, because they never have a chance to. A scientist just throws two choices at them, and concludes that they would make some other stupid choices that, it turns out, they never do.
I disagree that a producer who produces at a ceiling rate rations based on who gets there first. The producer could increase supply in response to the price control. The only thing limiting him from doing so is the size of his bank account.
Yes, and that’s exactly the Austrians’ point! If that is what turns out to happen, then the goods are being rationed by a) the size of producer X’s bank account, plus b) who is among the first n people to reach producer X before he exhausts the limits of his inputs. And that is—wait for it—non-price rationing. That is, it’s not the price of that good that ultimately “rations” who gets it, since there will be people willing to pay the ceiling rate who won’t get to buy at that rate.
So again, I don’t see how these two examples substantiate your case—they’re counterexamples.
If the size of X’s bank account can accomodate all the increased demand, there’s no non-price rationing. Hence why I qualified with the word “small” in the OP.
Yes, you qualified with “small” … and the term you qualified was “price ceiling”. A small price ceiling amplifies this effect. Perhaps you meant to say “A price ceiling that is a small amount below the current market-clearing price”.
In any case, the claim is still wrong. To the extent that the seller reallocates inputs based on non-price-maximizing goals, then non-price rationing is happening. That is, when he ups production, he’s putting inputs to uses they otherwise wouldn’t have been put at their current prices. Non-price rationing has still resulted, just maybe not in the good that was price-controlled.
Yes, you can keep adding on more conditions that get the scenario to work out, but like I said, that would still make it a bad example, considering all that you have to add to delete the insight the Austrian attempts to give.
Ready to cry uncle on conservation of expected evidence and Allais?
Haha. I thought on those CEE and Allais we had a disagreement rather than a confusion, so I didn’t press it. But on those points:
I charged conservation of expected evidence or overconfidence. I’m plenty willing to concede that overconfidence is more likely. My idea was that any claim which takes the form, “No evidence could convince me otherwise,” is probably falling victim to at least one of the two.
Now that I look back, I think we have some confusion over the Allais Paradox point. I’m asserting that the stability across large groups of people of Allais gamble preferences is evidence of a violation of rationality rather than a preference change. (IE, if it could be chalked up to a rational preference change, it shouldn’t be so predictable.) Tversky, Slovic, and Kahneman apply some diagnostic rigor to suss out the various causes of preference reversals. “Milking” (but not “money pumping”) is therefore an accurate diagnosis of what happens in the one-shot game.
I’m sorry I was not clear on “small.” I did indeed mean the difference between the ceiling and the market clearing price. I do not understand your point about price rationing. Prices reflect subjective values. If the producer’s motivation is “decrease price to the mandate,” how do the new prices on inputs not reflect that value? The economy rations on goods forgone, yes, but the producer in question is the highest bidder for the use of those goods, so the new prices still reflect people’s values.
I charged conservation of expected evidence or overconfidence. I’m plenty willing to concede that overconfidence is more likely. My idea was that any claim which takes the form, “No evidence could convince me otherwise,” is probably falling victim to at least one of the two.
If that’s what you’re saying, then the situation I gave you still doesn’t count as either. The situation was where you believe that P(E|~H) = P(E|H) for all E and a given H. I showed how it doesn’t violate CEE already. It also can’t be described as “overconfidence”. If anything, its’ under confidence since the person who believes it is deliberately setting it up so as to shy away from any possibility of being proven wrong.
Of course, this position also might not be what Austrians believe, since they claim that the insights (the H’s) from Austrian economics do constrain their expectations, but also that nothing can make them change their belief in them, which would then be a violate of CEE.
I’m asserting that the stability across large groups of people of Allais gamble preferences is evidence of a violation of rationality rather than a preference change.
… Milking” (but not “money pumping”) is therefore an accurate diagnosis of what happens in the one-shot game.
And I’ve shown how that’s wrong. It’s not a preference change, and it’s not irrational. Rather, it’s a reasonable choice when you only get one shot at each choice. All the supposed “proofs” of irrationality or preference reversal require you to first assume multiple repititions of the game and the chance to trade one game for another, neither of which happen in the experiment. And again, they weren’t milked; they got two free lottery tickets.
I do not understand your point about price rationing. Prices reflect subjective values. If the producer’s motivation is “decrease price to the mandate,” how do the new prices on inputs not reflect that value? The economy rations on goods forgone, yes, but the producer in question is the highest bidder for the use of those goods, so the new prices still reflect people’s values.
No, they don’t. For the case of a price cap that is a small amount below the market-clearing price, the noble producer must up his production to handle the additional buyers, which requires him to implicitly sell his labor (to himself) below market prices. (If this were not the case—if his labor were really worth that much—the market price would not have been at its current level, which was the assumption.) Then there is non-price rationing because there is someone who wants to buy his underpriced labor but cannot.
I don’t have the time to post a defense of the Austrians, but I encourage anyone who is really interested in the subject to read this comment thread: http://commentlog.org/bid/4408/Feynman-Rothbard-and-the-Science-of-Economics
This thread contains the best explanation I’ve seen of the Austrian position, and it actually makes a lot of sense. In economics, there is simply not enough variables to do a controlled experiment. So you have to use deduction and reason in order to understand events. Insisting on using Popperian falsifiability where such a procedure is not possible, creates the well known keys and lamp post fallacy.
This looks like a good place to post what I think is the best critique of the Austrians out there: Bryan Caplan (who is sympathetic to the Austrians) does a good job of arguing that the Austrian foundations fall into two categories 1) not different than mainstream economists 2) wrong.
It starts here Why I am not an Austrian economist, continues some back and forth between Walter Block and Hülsmann (an Austrian) and Caplan:
Caplan, Bryan. 1999. “The Austrian Search for Realistic Foundations,”
Block, Walter. 1999. “Austrian Theorizing, Recalling the Foundations: Reply to Caplan,”
Caplan, Bryan, 2000. “Probability, Common Sense, and Realism: A Reply to Hülsmann and Block,”
Block, Walter. 2003. “Realism: Austrian vs. Neoclassical Economics, Reply to Caplan,”
Caplan, Bryan. 2003. “Probability and the Synthetic A Priori: A Reply to Block.”
Block, Walter. 2005. “Rejoinder to Caplan on Bayesian Economics,”
Block, Walter. 2007. “Reply to Caplan on Austrian Economic Methodology”
There’s more here (links from the appendix 1). Some of these are in .doc form.
I should also point out that I do think the Austrians are more correct than mainstream economists on several issues, but I don’t think these follow from their epistemology.
I will also add that this discussion highlights that LWers should be particularly good at seeing the epistemic flaws of the Austrians since they are 1) a rejection of the use of probability theory as a fundamental part of decision theory 2) a rejection of utility functions 3) abuses of language (they frequently attempt to argue “by definition”).
Here are the links to the official and well typeset PDF versions of two of the above Caplan’s articles:
Caplan, Bryan. 1999 “The Austrian Search for Realistic Foundations
Caplan, Bryan. 2000 “Probability, common sense, and realism: A reply to Huelsmann and Block”
I’d point out a couple problems here:
Firstly, “controlled experiments” is simply an ideal which is no more achieved in the physical sciences than in the social ones. The various experimental methods employed by scientists differ only in the degree to which they’re uncontrolled. Popperian falsifiability has been criticized in all scientific contexts for these reasons. I believe that Quine’s discussions of this issue are the best-known… suffice to say, the Austrians need to come up with a better reason for dismissing the scientific method as applied to economics versus the scientific method as applied to other disciplines—but alas, this would probably require them to wade into the kind of messy empirical issues which they seem to abhor.
Secondly, even if scientific knowledge of economic phenomena could be rejected for the above reasons, the fact is that Austrian economists still routinely make empirical predictions based on praxeological reasoning which seem incredibly difficult to support based on that reasoning alone. See the OP’s part about Mises on price controls—no purely praxeological account can determine that price controls will cause non-price rationing. So the criticism is that Austrians do not actually practice what they preach, largely because if they did so they would have very little to say about the real world.
That is a reasonable criticism of mainstream economics. I am skeptical that it has anything to do with Austrian economics. Probably someone sat down with an unshakable belief that the Austrian economics meant something and extracted this claim.
I don’t see why I should care about the correct attribution of this complaint. The Austrians are so bad at communicating that this interpretation has not helped me extract anything else from them. If other people can extract other useful claims from the Austrians, they should isolate and promote those claims.
I’m not looking for Popperian falsifiability. I’m looking for Bayesian inferential updating. If the argument is that no evidence of any form could ever change the Austrian’s probability estimate of a certain theory, I charge the Austrian is either being overconfident or violating the conservation of expected evidence.
Even extremely messy evidence can still be evidence. In economics, messy evidence that is messy in a stable way can be very good evidence. For instance, Mises explains that we can never find examples of irrationality, because preferences can never be frozen in time. So the preference reversal involved in the Allais Paradox is perfectly rational. But even if it’s a rational preference change, those constant changes are stable over time. If you ask a person which gambles they prefer a second time, they’ll give the same answers, and so on. By saying “it’s not a controlled experiment so it doesn’t count,” the Austrian misses out on a key insight about how people can be milked. The Austrian tells us that this person wants to be milked!
Sorry if I’m late to the party.
Not true; such a position can be perfectly Bayesian: You would just believe that P(E|~H) = P(E|H). In other words, “On average, learning E tells you nothing about H, and vice versa.” Such an H wouldn’t be very useful, but it’s Bayesian. (I had to point this out on a post by Bob Murphy critical of Bryan Caplan, but I can’t find it ATM.) All Bayes prevents you from doing is taking both E and ~E as evidence for H. That is, believing both that P(E|H) > P(E|~H) and P(~E|H) > P(~E|~H). That would violate conservation of probability.
Please refer to the OB discussion on the Allais paradox, where the participants’ actions were justified quite well by poster “gray area” early on, and never answered by Eliezer_Yudkowsky. Long story short: the choice one is making fundamentally changes depending on whether it’s one-shot or indefinitely repeated. The money pump doesn’t manifest until you actually offer the choice multiple times at which point people not surprisingly pick up on it. But that money pump is just not happening in the one-shot version; ergo, no money is being pumped and nobody is being cheated, nor liking it.
Also, I’d like to comment on the price control example. While I certainly don’t want to defend the Austrians, I also don’t see how this is a point against them: rather, it’s a confirmatory example.
If the producer is continuing to sell at the ceiling rate, that is still non-price rationing because he is rationing the good based on who gets there first or who he likes most, etc, exactly the thing Austrians are warning about, and exactly the kind of non-trivial insight many people still don’t appreciate.
So I agree with the general thrust of this post, but this is a bad example.
I agree money pumps don’t work forever. Experimental economics bears out, to some degree, that rationality is often a product of incentives. But if people can be milked in the very short run (the Allais Paradox is of course not the only example), this might have some bearing on economic theory.
I disagree that a producer who produces at a ceiling rate rations based on who gets there first. The producer could increase supply in response to the price control. The only thing limiting him from doing so is the size of his bank account.
But they weren’t milked in the short run. They weren’t milked at all! From their perspective, they got two free lottery tickets. Doesn’t sound like a milking to me. They never go through the hypothetical “implication” of the Allais Paradox, that they would start to trade opportunities intransitively, because they never have a chance to. A scientist just throws two choices at them, and concludes that they would make some other stupid choices that, it turns out, they never do.
Yes, and that’s exactly the Austrians’ point! If that is what turns out to happen, then the goods are being rationed by a) the size of producer X’s bank account, plus b) who is among the first n people to reach producer X before he exhausts the limits of his inputs. And that is—wait for it—non-price rationing. That is, it’s not the price of that good that ultimately “rations” who gets it, since there will be people willing to pay the ceiling rate who won’t get to buy at that rate.
So again, I don’t see how these two examples substantiate your case—they’re counterexamples.
If the size of X’s bank account can accomodate all the increased demand, there’s no non-price rationing. Hence why I qualified with the word “small” in the OP.
Yes, you qualified with “small” … and the term you qualified was “price ceiling”. A small price ceiling amplifies this effect. Perhaps you meant to say “A price ceiling that is a small amount below the current market-clearing price”.
In any case, the claim is still wrong. To the extent that the seller reallocates inputs based on non-price-maximizing goals, then non-price rationing is happening. That is, when he ups production, he’s putting inputs to uses they otherwise wouldn’t have been put at their current prices. Non-price rationing has still resulted, just maybe not in the good that was price-controlled.
Yes, you can keep adding on more conditions that get the scenario to work out, but like I said, that would still make it a bad example, considering all that you have to add to delete the insight the Austrian attempts to give.
Ready to cry uncle on conservation of expected evidence and Allais?
Haha. I thought on those CEE and Allais we had a disagreement rather than a confusion, so I didn’t press it. But on those points:
I charged conservation of expected evidence or overconfidence. I’m plenty willing to concede that overconfidence is more likely. My idea was that any claim which takes the form, “No evidence could convince me otherwise,” is probably falling victim to at least one of the two.
Now that I look back, I think we have some confusion over the Allais Paradox point. I’m asserting that the stability across large groups of people of Allais gamble preferences is evidence of a violation of rationality rather than a preference change. (IE, if it could be chalked up to a rational preference change, it shouldn’t be so predictable.) Tversky, Slovic, and Kahneman apply some diagnostic rigor to suss out the various causes of preference reversals. “Milking” (but not “money pumping”) is therefore an accurate diagnosis of what happens in the one-shot game.
I’m sorry I was not clear on “small.” I did indeed mean the difference between the ceiling and the market clearing price. I do not understand your point about price rationing. Prices reflect subjective values. If the producer’s motivation is “decrease price to the mandate,” how do the new prices on inputs not reflect that value? The economy rations on goods forgone, yes, but the producer in question is the highest bidder for the use of those goods, so the new prices still reflect people’s values.
If that’s what you’re saying, then the situation I gave you still doesn’t count as either. The situation was where you believe that P(E|~H) = P(E|H) for all E and a given H. I showed how it doesn’t violate CEE already. It also can’t be described as “overconfidence”. If anything, its’ under confidence since the person who believes it is deliberately setting it up so as to shy away from any possibility of being proven wrong.
Of course, this position also might not be what Austrians believe, since they claim that the insights (the H’s) from Austrian economics do constrain their expectations, but also that nothing can make them change their belief in them, which would then be a violate of CEE.
And I’ve shown how that’s wrong. It’s not a preference change, and it’s not irrational. Rather, it’s a reasonable choice when you only get one shot at each choice. All the supposed “proofs” of irrationality or preference reversal require you to first assume multiple repititions of the game and the chance to trade one game for another, neither of which happen in the experiment. And again, they weren’t milked; they got two free lottery tickets.
No, they don’t. For the case of a price cap that is a small amount below the market-clearing price, the noble producer must up his production to handle the additional buyers, which requires him to implicitly sell his labor (to himself) below market prices. (If this were not the case—if his labor were really worth that much—the market price would not have been at its current level, which was the assumption.) Then there is non-price rationing because there is someone who wants to buy his underpriced labor but cannot.
Was your “Allais Paradox” link meant to go to this article? The Wikipedia page is also good.