Is the Austrian School of Economics Pseudoscience?

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LogicExplorer
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Is the Austrian School of Economics Pseudoscience?

Post by LogicExplorer » Fri Jan 12, 2018 3:50 pm

This was one of the questions we were discussing in the Logical Fallacies thread. However, that thread went so far into politics that I think it's better left alone. People feel very certain about their political opinions, yet, by the very nature of politics, they can't be based on conclusive evidence. So, as would be predicted by the Bayes'es theorem, people are never going to agree on politics, regardless of how much evidence they are faced with. As far as I can see, some form of statism (belief that the government is necessary for a civilized society) is a part of the vegan philosophy itself, regardless of it pretending to advocate freedom. Also, the way people discuss politics here is quite dishonest: they presuppose that great knowledge of history is somehow necessary for understanding social sciences, and then they use what appear to be extremely biased analyses of minor historical events to support their point (like pointing to some rare occasions where the government managed to "stop" terrorism, when the government is obviously what causes terrorism in the first place by encouraging discrimination). One of the ironic things in epistemology is that people feel certain about their political opinions, but they feel uncertainty when reasoning about math, yet they are many times more likely to be wrong about politics than about math.
So, is the Austrian School of Economics pseudoscience?
For those who are unaware, the Austrian School of Economics is a heterodox school of economics that mostly rejects econometrics and attempts to predict the behaviour of large groups of people using an axiomatic system (like the Euclid's Five Axioms) called praxeology. Mainstream schools of economics, like the Keynesian School, rely mostly on the empirical data, and they also often attempt to do experiments, to come up with new theories. But, despite the Austrian School mostly rejecting econometrics, its theories appear to align with empirical data even better than the mainstream economic theories do. Most notably, its theories correctly predict that inequality is negatively correlated with the economic freedom index, while the Keynesian economic theories predict that the correlation is positive. That's why many libertarians, right-wingers and anarchists subscribe to the Austrian school of economics (because it predicts that less government intervention in the economy will cause less inequality).
BrimstoneSalad thinks that the Austrian school of economics, because of it being based on axioms rather than experiments, is not a real science, but a religion and an ideology.
I would argue that the Austrian school of economics is, in fact, even more reliable than the mainstream economics is. Here is why:
1. Science doesn't have to be based on experiments.. It's, for example, impossible to do an experiment in astronomy or in historical linguistics. We can't change the mass of the Moon or the velocity of the Moon to see what effects it would have on its orbit. Likewise, we can't go back in time to insert a new root into Proto-Indo-European to see how it will evolve. Yet, we can be much more certain that the Newton's Law of Gravity and the Grimm's Law are correct (or at least that they are excellent approximations to what actually happens) than that anything that's derived from the experiments in the nutritional science or in the psycholinguistics is correct.
2. Background assumptions (which are essentially axioms) are often necessary in science. To understand why, suppose you wanted to explain the observation that the words for "two" and "ten" start with the same phoneme. There are basically two types of explanations you can propose, each with different set of axioms:
a)The words "two" and "ten" start with the same letter because they are related semantically. "Ten" means "two hands". The phoneme 't' means "two" in English. The same is seen, for instance, the word "tide". There are two states of tide: the sea level can be either lower than usual or higher than usual. Also, the word "try" can imply two states: you can succeed or you can happen not to succeed in something you try. The same is seen in other languages. The words for "two" and "ten" start with the same sound in German, Russian, Latin, Greek, and so on. That's because they mean similar things.
b)One phoneme in one language usually corresponds to another phoneme in a related language. The words for "two" and "ten" start with the same sound in all Indo-European languages except in Tocharian and Armenian and they don't start with the same sound in any non-Indo-European language except the Nayi language, the Balinese language, the Thai language and the Evenki language (I'm not sure that's factually correct, but you see the point). That's because the Proto-Indo-European language happened to have the words for "two" and "ten" that started with the same sound. The same is true for words that have semantically nothing to do with "two". English 't' corresponds to Greek 'd' in the pairs of the words "two"-"duo", "ten"-"deka", "tree"-"dendron", "tame"-"damnemi" and many more.
The explanation 'a' bases itself on a background assumption that's contrary to almost all of the background assumptions of linguistics (that the symbols are arbitrary). The explanation 'b' bases itself on the same background assumptions the mainstream linguistics is based on. If you start exploring languages using the background assumptions the explanation 'a' uses, well, let's just say you are bound to get the wrong answers and have a very hard time figuring out what you did wrong using the empirical data. If you don't start with the right background assumptions, it doesn't matter much how empirical you try to be, you will get the wrong answers and you will probably be able to shoehorn every single apparent counter-example into your theory. The same is true in natural sciences, at least when they are young. Aristarchus started with the background assumption that the cosine of the angle between the Half Moon and the Sun would be inversely proportional to the distance to the Sun, that the laws of geometry we see on Earth apply to the celestial bodies, and that by orders of magnitude more massive celestial bodies can't orbit around the less massive ones. Ptolemy discarded that because of his background assumptions that our intuitions about the star parallax being visible if the Earth were rotating around the Sun and that we would be able to feel the Earth's motion. Having access to hundreds of years more of empirical observations didn't help him. The same appears to be going on in economics today. When economists observed that the Great Depression occurred, they had three basic ways of explaining it, each with its own background assumptions:
a)The prices in the free market with no regulation don't provide accurate information because people are bad at making long-term decisions. Adding some regulation and increasing the government spending will fix the problem.
b)Such economic recessions didn't happen before the government started regulating the banking system. If we don't have privatized banking system, there is no incentive to keep the value of money constant, which is necessary for the economic development. We need to get rid of the nonsensical regulations of the banks.
c)The harvests of rare metals were record low for years before the Great Depression. The government can't do much here.
If you pick the incorrect background assumptions, you will probably never find out why your predictions come to be wrong. Trying to do economics without believing that a large group of people would behave as if all people in it are rational may be very much like trying to do historical linguistics without believing in regular sound correspondences between related languages. You will get everything wrong potentially without realizing it.
3.Mainstream economics doesn't appear to follow the scientific method either, despite claiming to. In science, a theory that makes incorrect predictions again and again will be discarded. That doesn't appear to be true in economics. Keynesian theory predicts that increasing the government spending during the period of recession would speed the recovery up, that recessions are caused by a decrease in overall spending. This has been tried over and over again. Almost every time, the government spending increases to a level well above the level before the recession, and the recession continues for years. I'd guess that what the politicians and the economists think when they subscribe to the Keynesian theory is similar to the Pascal's Wager. If the government regulation is really necessary for efficient markets to exist, and we remove the regulation that seems nonsensical, we lose everything. If it's necessary and we add some new regulation, we gain a lot. If, on the other hand, the Keynesian theory is incorrect, and we still add some new regulation, we lose little or nothing. If the Keynesian theory is incorrect, and we remove some regulation, we gain little or nothing. And, as with the religion, there is no way to estimate what you lose if you are wrong nor to estimate the probability that you are wrong. And, as with the religion, there is an infinite number of conceivable sets of government regulations and very large number of ways to enforce them, so the probability that you choose the right ones is basically zero.

The most common argument against the Austrian School of Economics is that it supposedly ignores the paradoxes of the game theory, such as the Braess Paradox (that many drivers choosing what's the fastest path for them can in fact lead to the traffic getting slower than if some of them had chosen suboptimal paths), that individuals rationally pursuing their self-interests can lead to sub-optimal results. However, such paradoxes are, just like the Simpson's paradox, very unlikely to occur at a large scale. Also, in the case of the Braess Paradox, the government is unlikely to solve the problem, because the government quite often blindly builds new roads in an attempt to fix the traffic.

So, I hope I've explained why I think that Brimstonesalad's epistemological philosophy is wrong, and that I correctly inferred what his epistemological philosophy is (that I correctly understood what he thinks is the difference between science and pseudoscience). I haven't posted for quite a while and I have reexamined my beliefs thoroughly. I have come up with some arguments for my position and thought about some counter-arguments I might encounter. The post is quite long, but I don't think I am doing the Gish-Gallop fallacy. It's just a few arguments, but explained in detail. I'd like to hear opinions from some other people from this forum, I guess there are some more people here who are at least as educated about the topic as I am or as Brimstonesalad is.

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Post by LogicExplorer » Sun Jan 14, 2018 7:58 am

I'll try to summarize the post above.
The most important question here is whether it's more important for a science to be empirical or to be based on sensical background assumptions.
The philosophical assumptions of empiricism, such as "I think, therefore I exist." and "My senses are sometimes accurate source of information about the outside world.", obviously don't take us very far (Flat-Earthers would also accept them).
I realize that while sometimes the background assumptions of a science are easily understood (someone who knows nothing about physics or geometry would probably understand and accept the Newton's Three Axioms and the Euclid's Five Postulates), sometimes they aren't (the de Broglie's Law, the Church-Turing thesis and the regular sound correspondences between languages are hard to explain to someone who knows nothing about the topic). But if you don't start with the right background assumptions, it doesn't matter much how empirical you try to be, you will get the wrong answers and you will probably be able to shoehorn every single apparent counter-example into your theory. That's what appears to be going on with the mainstream (Keynesian) economics.

carnap
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Post by carnap » Thu Jan 18, 2018 3:00 am

I don't think the Austrian school is necessarily pseudo-science....but some of your claims here are inaccurate.
LogicExplorer wrote:
Fri Jan 12, 2018 3:50 pm
Keynesian theory predicts that increasing the government spending during the period of recession would speed the recovery up, that recessions are caused by a decrease in overall spending. This has been tried over and over again. Almost every time, the government spending increases to a level well above the level before the recession, and the recession continues for years.
Government spending is a means to an end....its not the end in itself. The point of increasing government spending during a recession is to increase aggregate demand with will increase GDP long-term. The fact that recessions aren't immediately resolved by increases in government spending doesn't negate the theory as that isn't a prediction of the theory. You have to look at what the theory predicts for the given amount of government stimulus and when you do that the various "experiments" over the last few decades match the predictions of the theory. In contrast the ideas advocated by people that supposedly support "Austrian economics" haven't worked out as predicted.

While I don't necessary agree, people like Friedrich Hayek are well meaning and provide interesting arguments for their positions. But today "Austrian economics" has become little more than a vehicle to promote policies that benefit the aristocracy. All the intellectual substance to the original ideas has been lost.
LogicExplorer wrote:
Fri Jan 12, 2018 3:50 pm
I'd guess that what the politicians and the economists think when they subscribe to the Keynesian theory is similar to the Pascal's Wager. If the government regulation is really necessary for efficient markets to exist, and we remove the regulation that seems nonsensical, we lose everything. If it's necessary and we add some new regulation, we gain a lot. If, on the other hand, the Keynesian theory is incorrect, and we still add some new regulation, we lose little or nothing.

Keynesian theory really has nothing to do with governmental regulations. Not all regulations are even economic in nature, for example, regulations intended to reduce pollution.

Also the "fathers" of the Austrian school didn't disagree with regulations, they acknowledged that market failures can occur and regulations were needed to resolve them.

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Post by LogicExplorer » Sat Jan 20, 2018 12:00 am

Thanks for a response. I am glad there are other people here who try not to blindly trust politicians on the issues of economics.
The fact that recessions aren't immediately resolved by increases in government spending doesn't negate the theory as that isn't a prediction of the theory.
Strictly speaking, yes. But this is a sort of an ad-hoc hypothesis, and actually quite a nonsensical one. See, to increase the government spending, you need to increase the taxes. So, that means less money for the private buisnesses. Since the private buisnesses have the incentive to invest money carefully and the bureaucrats don't (since it's not their money), you essentially end up with less money spent carefully and more and more money spent carelessly.
But today "Austrian economics" has become little more than a vehicle to promote policies that benefit the aristocracy.
I mostly agree. When the right-wingers appeal to the principles of the Austrian economics and promise to reduce the size of the government, they nearly always end up increasing the size of the government. But this has little to do with the economic theories they adhere to, since the Austrian School doesn't propose HOW the politicians could decrease the government size (which is hard, because decreasing the size of the government leads to less bureaucrats employed, and they get angry on politicians because of which they've lost their jobs).
Keynesian theory really has nothing to do with governmental regulations.
It's used to justify new regulations, because it predicts that it doesn't matter if the private investment decreases because of a new regulation as long as the government spending increases. Also, the theoretical examinations using the Keynesian principles as a starting point end up with a conclusion that the regulations such as the minimum wage lead to less inequality. I haven't really looked into them much, and I don't think I need to, they are done by the proponents of such policies and the Keynesian theory.
Also the "fathers" of the Austrian school didn't disagree with regulations, they acknowledged that market failures can occur and regulations were needed to resolve them.
Austrian economics was supposed to be a theory explaining why the government interventions don't produce the intended consequences. Of course, they did advocate some policies that would be considered quite mistaken today, like using the gold standard to prevent the government from creating inflation (which they believed caused cyclical unemployment). But, again, unless you are a dictator who can fire as many bureaucrats as he likes without facing serious consequences (and dictators never think that's a good idea because, if they did think that, they wouldn't be dictators), it's very hard to find a way to decrease the size and the power of the government.

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Post by carnap » Sat Jan 20, 2018 10:16 pm

LogicExplorer wrote:
Sat Jan 20, 2018 12:00 am
Strictly speaking, yes. But this is a sort of an ad-hoc hypothesis, and actually quite a nonsensical one. See, to increase the government spending, you need to increase the taxes. So, that means less money for the private buisnesses. Since the private buisnesses have the incentive to invest money carefully and the bureaucrats don't (since it's not their money), you essentially end up with less money spent carefully and more and more money spent carelessly.
This isn't true, you don't need to increase taxes to increase government spending. You can increase government spending by increasing the size of the federal deficit and the "money" can be, in fact, materialized out of thin air because its "created" by the federal reserve. The debt goes on the federal reserves balance sheet and will decline as the government pays it off or as the federal reserve sells it to the public.

Long-term the government may have to increase taxes to pay off the deficit but that actually isn't the only option. Increased economic growth will naturally raise more tax revenue or inflation can erode the value of the debt.

Also a key component of Keynesian theory is to increase spending in infrastructure products that will improve the long-term trajectory of the economy rather than merely giving people tax cuts or just increasing consumer spending.
LogicExplorer wrote:
Sat Jan 20, 2018 12:00 am
It's used to justify new regulations, because it predicts that it doesn't matter if the private investment decreases because of a new regulation as long as the government spending increases.
It makes no such prediction and Keynesian theory doesn't suggest you should increase government spending to offset regulatory costs. Keynesian theory is about boom/bust cycles not regulations. The only aspect of Keynes that has anything to do with the government is that Keynes thought that the government should play a key role in managing the boom/bust cycles of the economy.

The theory very crudely is that the government should pay down deficits when the economy is booming and increase the deficit (i.e., increase government spending) when the economy crashes.

In any case...much of what you're saying here seems to be wrapped up in partisan politics. Republicans dislike Keynes not because they have good arguments against his economic theories (which are very well regarded by economists) but because they don't like the idea that the government can have a positive role in managing the economy. In contrast they tend to love tax-cuts for the aristocracy despite no credible economic theory suggesting such things help the economy long-term.

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Post by LogicExplorer » Sun Mar 18, 2018 11:47 pm

Sorry for not responding for so long, I had some real life problems and I spent a lot of time designing my website about logical fallacies.
the "money" can be, in fact, materialized out of thin air because its "created" by the federal reserve.
I must admit I don't understand what you are saying. The core of the Keynesian theory is that the buisness cycles are caused by the prices and wages being sticky and therefore unable to provide accurate information. The inflation (money created out of thin air) won't cause buisnesses to flourish, it would cause them to go bankrupt because of the things like the menu costs.
Also a key component of Keynesian theory is to increase spending in infrastructure products that will improve the long-term trajectory of the economy.
And how exactly will the government do it better than the entrepreneurs? Entrepreneurs are usually more informed about what people actually need than the government is.
It makes no such prediction and Keynesian theory doesn't suggest you should increase government spending to offset regulatory costs.
OK, let's say you are right about that (it actually sounds reasonable). So what? People keep pretending that the Keynesian theory does make such a prediction. Why should it be important what Keynes actually said?
When we say "Marxism" today, we usually mean some extreme form of socialism. It doesn't really matter that Marx'es utopia was exactly the opposite: it was a stateless society.

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Post by carnap » Fri Mar 23, 2018 4:15 am

LogicExplorer wrote:
Sun Mar 18, 2018 11:47 pm
I must admit I don't understand what you are saying. The core of the Keynesian theory is that the buisness cycles are caused by the prices and wages being sticky and therefore unable to provide accurate information. The inflation (money created out of thin air) won't cause buisnesses to flourish, it would cause them to go bankrupt because of the things like the menu costs.
That isn't the core of Keynesian theory, the core idea is that you can increase the output of an economy during a slump via government stimulus (both in terms of reduced taxes and projects). And sticky prices and wages explain why depressions can occur, they aren't an explanation for the business cycle.

Creating money "out of thin air" doesn't necessary cause inflation in prices, for that to occur the economy needs to be close to full employment. The federal reserve has been "printing money out of thin air" for the last 10 years or so and we still have low inflation and that is because the economy is just starting to get to full employment. This has helped businesses because its kept interest rates low. But increasing prices doesn't, in general, cause businesses to fail. Their costs will increase but they can also increase the price of their goods.
LogicExplorer wrote:
Sun Mar 18, 2018 11:47 pm
And how exactly will the government do it better than the entrepreneurs? Entrepreneurs are usually more informed about what people actually need than the government is.
Most Entrepreneurs fail and most business spending is done by large established firms and not Entrepreneurs. Businesses reduce spending during recessions so its not a matter of the government "doing it better" but rather the government spending to make up for the shortfall from reduced business spending.
LogicExplorer wrote:
Sun Mar 18, 2018 11:47 pm
People keep pretending that the Keynesian theory does make such a prediction. Why should it be important what Keynes actually said?
What people exactly? But I'm not sure why you think that because some people may misunderstand or distort his theories that what he actually said doesn't matter. If you take economics 101 you're not going to learn about the misunderstandings but rather what Keynes argued.

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Post by LogicExplorer » Thu Mar 29, 2018 5:39 pm

Most Entrepreneurs fail and most business spending is done by large established firms and not Entrepreneurs.
If a buisness in a free market starts to lose money, that's the signal that it's spending the wrong way (and that it would be better not to spend money at all). The government is usually worse at spending money than the buisnesses are because they often (or even most often) don't get such a signal. Why do you think socialism fails? I think that's an important question.
Businesses reduce spending during recessions so its not a matter of the government "doing it better" but rather the government spending to make up for the shortfall from reduced business spending.
And maybe the right thing to do during the recessions is to decrease spending. Or do you think there is some evidence that the paradox of the thrift is a real thing?
What people exactly?
From both sides of the political spectrum. Donald Trump, Bernie Sanders...

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Post by teo123 » Fri Mar 30, 2018 5:07 am

Why do you think socialism fails?
Well, Keynes said that the government policies that are good for the economy short-term are detrimental to the economy in the long run, but that it's good to have them because, in the long run, we are all dead. That appears to be a good description of how socialism fails. Socialism always works at the beginning, so people are fooled in the beginning. It's easy for a government to confiscate money, but, sooner or later, there is no more money to confiscate.
Why do you think Carnap thinks that socialism doesn't work?

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Post by teo123 » Fri Mar 30, 2018 7:45 am

So, LogicExplorer, you are building a website about logical fallacies? I've written something about how to recognize pseudoscience on my website, perhaps you can use some of it:
http://flatassembler.000webhostapp.com/pseudosciences.html
Which programs are you using? I was using only a text editor. In HTML5, you can make a website like mine in just 350 lines of code. It looks the same in, as far as I know, all the latest versions of web-browsers (and in many not-so-latest) except Internet Explorer 11.

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