Enlighten me about the Austrian school of economics, please

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Master_Pedant
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21 Dec 2011, 3:32 pm

Awesomelyglorious wrote:
We have an idea of a model, but... reality is messy.


When institutional reality bites, all you have to do is model the macroeconomy as a representative agent. :wink:


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marshall
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21 Dec 2011, 10:30 pm

Awesomelyglorious wrote:
marshall wrote:
I agree that creating a truly predictive quantitative model is impossible without shielding the information from economic players who could use the information to alter their behavior. This issue comes in to play in situations where behavior is governed by speculation. It's incredibly hard to model when a bubble will burst for instance. I'm not sure this means all quantitative models are useless dressing though. They can help with understanding even if they aren't truly predictive. I have trouble with verbal arguments because it can be so easy to miss something via a slight-of-hand. The Austrian and classical Keynesian logical descriptions of business cycles each seem to tell half the story while ignoring the other half. Austrians talk about the problem of credit bubbles and malinvestment leading up to a crisis while ignoring the destructive feedback that can happen when demand plummets afterwards. Keynesians do the opposite.

The issue is two things:
1) Quantitative models cannot handle qualitative variables/qualitative relationships. So, if you had a cultural theory of the business cycle, you may not be able to provide quantitative analysis, even though such a theory could hypothetically be correct.
2) The focus on quantitative models causes as a matter of method economists to ignore things hard to quantitatively analyze, even if those things are important. One professor I had cited technology as an example of something REALLY IMPORTANT for economists to understand that economists had been avoiding because they couldn't put it into a straight-forward model.

I don't think the quantitative analysis adds all of the value you think it does. I mean, philosophers use formal logic a lot but it's mostly castles in the air. (Economists use math a lot to build castles on the air as well) Math as an approximation causes people to mistake the math for the insights being expressed in the math, so people forget approximations are approximations. What has generally been found is that most "great ideas" in economics during the Neo-classical period could have been expressed without mathematics, and in all likelihood I wouldn't even be surprised if a verbal explanation was generated before the math, translated into math, and then most people translated the math back into verbal making this rather pointless.


Well my opinion is neither verbal nor mathematical models should be used by people who don't think deeply. In order to gain insight from a mathematical model one has to understand its limitations. Using any kind of mathematical model as a black box is pretty foolish. However, I find there are often just as many implicit limitations to verbal causal arguments.

I suppose my preference for a semi-mathematical understanding is due to the visual nature of my mind. I'm inherently distrustful of language. Language is often sneaky. One problem is causal linkages in economics are often circular, leading to the ever present chicken-egg dilemma. I see this in a lot of arguments citing causes for the so-called business cycle. I think a mathematical understanding of certain relationships via differential equations helps answer questions regarding stability that a simple causal chain of reasoning might miss.

I reject the notion that mathematical models are castles in the air, akin to philosophical logic. In economics, mathematical models can't easily be taken as axiomatic, but this doesn't mean they can't elucidate any information beyond what verbal arguments can.



visagrunt
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23 Dec 2011, 11:45 am

Master_Pedant wrote:
visagrunt wrote:
No, I do not care to challenge your perception.


Jesus Christ, WHY THE HELL COMMENT IN THE THREAD THEN??! ! This obtuseness is ridiculous.


It's not obtuseness, it's irony.


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marshall
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23 Dec 2011, 12:32 pm

visagrunt wrote:
Master_Pedant wrote:
visagrunt wrote:
No, I do not care to challenge your perception.


Jesus Christ, WHY THE HELL COMMENT IN THE THREAD THEN??! ! This obtuseness is ridiculous.


It's not obtuseness, it's irony.


The OP was a bit of a flame bait and kind of ignorant but I'd still like to have a discussion.

I've come to view Austrian economics the same way I view neo-Marxist economics. Both groups seem to have made some valid logical arguments and they have both made contributions despite having an ideological bent. Of the two Austrians seem a little more sophisticated. Hayek is interesting to read. It seems a lot of Keynesian and neoclassical economists are stuck in their ways as well and haven't been willing enough to incorporate new ideas. The lack of objectivity in the field bothers me a bit.

The video MP posted is quite fascinating if anyone has the patience to watch it.



Awesomelyglorious
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23 Dec 2011, 6:27 pm

marshall wrote:
I suppose my preference for a semi-mathematical understanding is due to the visual nature of my mind. I'm inherently distrustful of language. Language is often sneaky. One problem is causal linkages in economics are often circular, leading to the ever present chicken-egg dilemma. I see this in a lot of arguments citing causes for the so-called business cycle. I think a mathematical understanding of certain relationships via differential equations helps answer questions regarding stability that a simple causal chain of reasoning might miss.

The issue is that all a mathematical understanding is going to do is that it will just capture the chicken-egg situation that the verbal argument already captures.

I mean, as it stands, all the math often is, is just a concoction. I am not going to say that math is "utterly useless", but we're not on the level of physics in the utility of math in economics. If we were, the case for math would be obvious, but where we are now, it's just not powerful.

I can see your point on the nature of your mind though. I do well with language and I can think through a problem much better in language than with math, as I only use math to make certain things clear but not to do much heavy lifting.

Quote:
I reject the notion that mathematical models are castles in the air, akin to philosophical logic. In economics, mathematical models can't easily be taken as axiomatic, but this doesn't mean they can't elucidate any information beyond what verbal arguments can.

In theory, a mathematical model can. Also, in some practice it can. Modelling risk requires math. The issue is just how much of the more social scientific elements are better expressed as math. I mean, many financial models make a lot of sense to do mathematically because they usually just focus on quantifiable issues. There are some gains from knowing about the elasticity of demand as well. However, many models beyond that are just useful extrapolations or oversimplifications of social realities.



Awesomelyglorious
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23 Dec 2011, 6:42 pm

marshall wrote:
The OP was a bit of a flame bait and kind of ignorant but I'd still like to have a discussion.

I've come to view Austrian economics the same way I view neo-Marxist economics. Both groups seem to have made some valid logical arguments and they have both made contributions despite having an ideological bent. Of the two Austrians seem a little more sophisticated. Hayek is interesting to read. It seems a lot of Keynesian and neoclassical economists are stuck in their ways as well and haven't been willing enough to incorporate new ideas. The lack of objectivity in the field bothers me a bit.

I agree with you on Hayek. I like his essay "The Use of Knowledge in Society". I also find his theories on the social order interesting, such as that expressed in "Rules and Order" and "The Fatal Conceit". I also think his writings on the philosophy of science in "The Counter-Revolution of Science" to be somewhat powerful, as I think his case against positivism on grounds of what we already know is reasonable and powerful. I think interpreting Misesian Praxeology through the lens of Hayek's pragmatism is the only reasonable interpretation(Y'know, that Mises defaulted to his a priori because of the existence and abundance of this kind of knowledge and his somewhat legitimate gripes about other sources of knowledge), and that Rothbard's interpretation is insane, even if it is truer to what Mises thought.

Honestly, I think the big take-aways from Austrian economics are spontaneous order, and issues with knowledge in economics(which relates strongly to entrepreneurship, but also to policy). However, I can understand a distrust because often conversations purely focused on Austrian economics sound more like philosophy, as there are the "big names" and a lot of major concepts are pulled in from philosophical ideas from Austrians, and even Austrians who cite a lot of philosophy when they are supposed to be talking about economics.

I have not read much neo-Marxist economics though. I still wish I knew more on the topic. Do you know of a good way to get introduced to this subject? I mean, I recently read the tome "Main Currents in Marxism" by Leszek Kolakowski, but while I have some feel for Marxist intellectual history now, I actually still don't have as much as I'd desire for Marxism as a system of thought, as the style was "Here's a big thinker and how they differed from other Marxists and a few intellectual quirks"

Quote:
The video MP posted is quite fascinating if anyone has the patience to watch it.

I am not surprised, as the Minsky model is interesting, but I don't have the patience to watch most videos.



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28 Dec 2011, 8:40 pm

marshall wrote:
The video MP posted is quite fascinating if anyone has the patience to watch it.


Were you expecting anything less? :P


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minervx
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28 Dec 2011, 9:02 pm

WilliamWDelaney wrote:
Based on what I have read about it so far, the Austrian school of economics strikes me as anti-scientific. It seems to be based entirely on ideology and some childishly simple-minded assumptions about human behavior that have never been observed to be true in practice. Its models of how markets actually behave seem to have been created by a third-grader, cribbing ideas from third-rate philosophy texts more on the basis of catchy language than syllogistic credibility. In short, my current perception of it is that it is worthless trash.

Anyone care to either change that perception or correct it for accuracy?


Delaney, you are correct.

The Austrian school of economics (which even Friedman rejected) rest its arguments heavily on philosophy rather than numbers.

Even regarding economics, the Austrian call for the elimination of a national bank would sink the economy in a depression.

Stagflation is really bad. But deflation is equally as bad. The money supply was contracted by at least 1/3 during the Hoover Administration, resulting the depression.

I'm not advocating the status quo, but a national bank which increases the money supply by a consisten 2-3% each year would be better than no Fed at all.



marshall
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29 Dec 2011, 12:07 pm

Awesomelyglorious wrote:
Quote:
I reject the notion that mathematical models are castles in the air, akin to philosophical logic. In economics, mathematical models can't easily be taken as axiomatic, but this doesn't mean they can't elucidate any information beyond what verbal arguments can.

In theory, a mathematical model can. Also, in some practice it can. Modelling risk requires math. The issue is just how much of the more social scientific elements are better expressed as math. I mean, many financial models make a lot of sense to do mathematically because they usually just focus on quantifiable issues. There are some gains from knowing about the elasticity of demand as well. However, many models beyond that are just useful extrapolations or oversimplifications of social realities.

I think risk is one of those things that cannot be easily modeled. Poor understanding of mathematical risk models is largely responsible for the whole 2007-2008 mortgage crisis. The very crude mathematical models used only accounted for risk that was assumed to exist in isolation. It was blind to systemic risk.

To some degree, I think mathematical models are dangerous in the hands of economic players. They give a false air of sophistication to people who use them without understanding their limitations. Economic models have to be premised on certain behavioral/psychological assumptions. It's not that behaviors can't be modeled. The problem is when people alter their behavior based on model predictions. When that happens the model predictions are no longer valid.



WilliamWDelaney
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29 Dec 2011, 1:40 pm

marshall wrote:
visagrunt wrote:
Master_Pedant wrote:
visagrunt wrote:
No, I do not care to challenge your perception.


Jesus Christ, WHY THE HELL COMMENT IN THE THREAD THEN??! ! This obtuseness is ridiculous.


It's not obtuseness, it's irony.


The OP was a bit of a flame bait and kind of ignorant but I'd still like to have a discussion.
That's okay. It's actually quite common for people to dismiss views they disagree with as "ignorance." It keeps them from having to contemplate the troubling concept that their own views might not necessarily be entirely without fault. Since being a myopic ninny is not in the least unusual, you have nothing to be ashamed of.



WilliamWDelaney
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29 Dec 2011, 1:56 pm

Awesomelyglorious wrote:
Honestly, I think the big take-aways from Austrian economics are spontaneous order, and issues with knowledge in economics(which relates strongly to entrepreneurship, but also to policy).
Well, ideas such as game theory are designed to try to shed light on such "spontaneous order," but it simply isn't treated as such. In science, nothing is truly spontaneous as far as anyone knows except some behaviors in subatomic particles that are not well understood. Therefore, what does the Austrian thinker mean when talking about "spontaneous order"?

Quote:
I am not surprised, as the Minsky model is interesting, but I don't have the patience to watch most videos.
Whereas my dilemma is not a lack of patience but more that my "vacations" tend to suck more of my time than my studies ever will. I can't wait for classes to start again, so I can take a rest from cleaning this, repairing that, sorting out this financial dilemma, rescheduling that appointment, keeping dinner dates, etc.. I can't wait to have a relaxing, regular job. Education is stressful and taxing.



Awesomelyglorious
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29 Dec 2011, 10:12 pm

marshall wrote:
I think risk is one of those things that cannot be easily modeled. Poor understanding of mathematical risk models is largely responsible for the whole 2007-2008 mortgage crisis. The very crude mathematical models used only accounted for risk that was assumed to exist in isolation. It was blind to systemic risk.

I'll not disagree with that, but systemic risk is only one kind of risk, and most other kinds of risks are more easily analyzed.

Quote:
To some degree, I think mathematical models are dangerous in the hands of economic players. They give a false air of sophistication to people who use them without understanding their limitations. Economic models have to be premised on certain behavioral/psychological assumptions. It's not that behaviors can't be modeled. The problem is when people alter their behavior based on model predictions. When that happens the model predictions are no longer valid.

I agree with that. That's a central issue too. It's also true that every model created will be used by entities in the model, which makes the effort problematic.



Awesomelyglorious
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29 Dec 2011, 10:17 pm

WilliamWDelaney wrote:
Awesomelyglorious wrote:
Honestly, I think the big take-aways from Austrian economics are spontaneous order, and issues with knowledge in economics(which relates strongly to entrepreneurship, but also to policy).
Well, ideas such as game theory are designed to try to shed light on such "spontaneous order," but it simply isn't treated as such. In science, nothing is truly spontaneous as far as anyone knows except some behaviors in subatomic particles that are not well understood. Therefore, what does the Austrian thinker mean when talking about "spontaneous order"?

I am not denying that game theory has some benefit.

The Austrian, when referring to spontaneous order, is referring to the tendency of society to create order, be responsive, etc, without the conscious intention of a central planning agency. To Austrians, this is very important, as understanding this is central to understanding capitalism, and much of the social structure. Rules in mainstream economics are often taken for granted, as is order. It doesn't require some libertarian free will in order to exist though.