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Thoughts on AE and Interpreting Data.

This excellent blog article http://gainsfromtrade.org/2014/01/31/sloppy-economics-and-part-time-austrians/ got me thinking.

One sees on the internet critiques of AE to the effect that plenty of Austrians contradict themselves.

On the one hand, Austrians claim that historical data never proves anything. Here’s Mises in HA, for example:

The experience with which the sciences of human action have to deal is always an experience of complex phenomena. No laboratory experiments can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event being equal to a case in which the element concerned did not change. Historical experience as an experience of complex phenomena does not provide us with facts in the sense in which the natural sciences employ this term to signify isolated events tested in experiments.

The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future events. Every historical experience is open to various interpretations, and is in fact interpreted in different ways.

The postulates of positivism and kindred schools of metaphysics are therefore illusory. It is impossible to reform the sciences of human action according to the pattern of physics and the other natural sciences. There is no means to establish an a posteriori theory of human conduct and social events. History can neither prove nor disprove any general statement in the manner in which the natural sciences accept or reject a hypothesis on the ground of laboratory experiments. Neither experimental verification nor experimental falsification of a general proposition are possible in this field.

Complex phenomena in the production of which various causal chains are interlaced cannot test any theory. Such phenomena, on the contrary, become intelligible only through an interpretation in terms of theories previously developed from other sources.

In the case of natural phenomena the interpretation of an event must not be at variance with the theories satisfactorily verified by experiments. In the case of historical events there is no such restriction. Commentators would be free to resort to quite arbitrary explanations. Where there is something to explain, the human mind has never been at a loss to invent ad hoc some imaginary theories, lacking any logical justification.

A limitation similar to that which the experimentally tested theories enjoin upon the attempts to interpret and elucidate individual physical, chemical, and physiological events is provided by praxeology in the field of human history. Praxeology is a theoretical and systematic, not a historical, science. Its scope is human action as such, irrespective of all environmental, accidental, and individual circumstances of the concrete acts. Its cognition is purely formal and general without reference to the material content and the particular features of the actual case. It aims at knowledge valid for all instances in which the conditions exactly correspond to those implied in its assumptions and inferences. Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification or falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts. They are a necessary requirement of any intellectual grasp of historical events. Without them we should not be able to see in the course of events anything else than kaleidoscopic change and chaotic muddle.

TL;DR: The real world of economic activity is too complex for anything to be gained by looking at the data. There are always multiple explanations for everything that happens, and no way of proving [from within the data] which one is right.

So that’s one idea you find in AE, and yet, it’s contradicted every single day by Austrians, who go ahead and explain events based on their theories. What a minute. What’s the point of doing that, when there are a million other theories that explain the events equally well?

Take, for example, America’s Great Depression, by Rothbard. He elaborates on how the principles of AE explain the Great Depression. But aren’t there, according to AE, too many variables for any one explanation to be proven the right one? So why bother writing the book at all?

The article linked to above makes the same mistake. He claims to prove from data that minimum wage laws cause unemployment. But Austrians say that it is impossible to prove anything from data!

Here are some thoughts on these deep matters.

Let’s take a look at what a great mathematician said about mathematical knowledge, which is in a similar situation in some respects to AE. As is common knowledge, a mathematician will not consider something proven unless it is proven by deductive reasoning from first principles. He considers empirical data as totally useless when it comes to proving anything. You can measure a million triangles, draw a million diagrams, and he will reject them all as proof of the Pythagorean Theorem, for example. And if you say you found a triangle that is a counterexample to the theorem, he will scoff at you.

For instance, modern math claims it has a proof that one cannot trisect an angle with straightedge and compass. There was a time when people would publish constructions for doing so, and the mathematician scoffed before even bothering to read them. Of course there will be a mistake somewhere. My theory says so!

And yet, here is the renowned George Polya talking about mathematical knowledge:

Can our knowledge in mathematics be based on formal proofs
alone? This is a philosophical question which we cannot  
debate here.

It is certain that your knowledge, or my  
knowledge, or your students’ knowledge in mathematics is not
based on formal proofs alone. If there is any solid  
knowledge at all, it has a broad experimental basis, and this
basis is broadened by each problem whose result is
successfully tested.

Wait, what? It’s certain? Solid knowledge of math has a broad experimental basis? What is he talking about? Each problem brings us broader knowledge? That’s not what they told me. Once Pythagoras published his proof, they tell you in math class, it was game over. No need to test anything.

And yet, when a wise man writes something that sounds wild, it behooves to try and make sense of it.

Psychologists sometimes say, when to comes to knowledge, that it is of two types. There’s knowing something, and there’s knowing something in your very bones. Humans are made in such a way that mere intellectual knowledge is a totally different thing than knowledge that springs from an integration of all that goes on in you, including all of your feelings, your past experiences, your deep emotional insights, and your values. [Taken from T. I. Rubin]

When it comes to psychology, that is obvious. But Polya is telling us that the same is true with math.

Here’s Angus Taylor, author of a respected Advanced Calculus textbook. He writes in his introduction:

Learning in calculus is cumulative. It is also evolutionary. The student does not coma all at once to a one and only correct understanding of new ideas. At each new level of his maturity he can gain a fresh appreciation of things he has already been taught.

So what can take away from all this?

It remains true that data does not serve as proof of economic theories. So that an article that claims data proves that minimum wage laws create unemployment is mistaken. But although it does not prove anything in a strict sense, the data serves an educational purpose. Seeing it, we feel a little deeper in our bones what has already been proven by praxeology. Aha! just as AE predicted. Are there other possible explanations? Yes. Is that data a proof? No. But it’s nice to see that the real world seems to fit the pattern AE predicts for it. It increases our confidence, our knowledge of the bones, adds to our economic experience, everything the above wise men have talked about.

So Rothbard’s book, and any other Austrian exploration of real world data, is a valuable contribution. It does not prove, but it reinforces. It explains. It adds to our confidence that our intellectual deductions are right. To paraphrase Prof. Polya, it is certain that your knowledge, or my knowledge, in AE is not based on formal proofs alone. If there is any solid knowledge at all, it has a broad experimental basis, and this basis is broadened by each excursion into the historical data whose result is consistent with AE.

[And of course, it teaches us about the Austrian take on why there was a Great Depression.]

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