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Austrian Economics: Obsolete Scholasticism?

Actually, Scholasticism sounds pretty good, if you look up Wikipedia.

Mabel doesn’t like it, though. I think she’s saying that in the twenty first century, we should be using modern techniques, equations and software and the scientific method.

Mabel accuses AE of Scholasticism
Which is one step removed from Mysticism.
It’s computers you need
That work at high speed,
But Dave thinks AE is sheer Wisdom.

Here’s her comment on my previous article, [which is comments on a previous article, if you want to be thorough], hot off the presses.

Hi Dave,

Compliment taken, and thank you for your response as well.

My cards on the table: I think the contemporary followers of AE have solidified around positions that prevent the fullest realization of what AE has to offer – which realization would be oh so good for Western Civilization. If you are open to the possibility of coming to that conclusion yourself, then perhaps we have something to learn from each other. If not, no offense; and I will look for allies elsewhere. Your blog, your call.

0. I think (correct me if I am wrong) that “matrix” suggests CGE modeling to you. If so, your response started off on an incorrect presumption. SFEcon has no linear programming in it. It is an engineering dynamic emulator of the distributed intelligence that generates prices, from which all else about economic adjustment follows. SFEcon’s matrix structure is detailed at their site: from the homepage, click on THEORY; then go down the outline and click on A GENERAL MATRIX STRUCTURE.

It seems to me that Hayek (1945) subsumed I/O matrices in his specification of a solved calculation problem:

“The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.”

1. Column 0 is a negative sum on physical asset acquisitions times their respective prices. Assets are acquired in the amounts that they are so as to maximize profits at current prices. There is no specification as to why maximal profits are desired. Self-interest on the part of the assets’ owners works as a motive, as does the diktat of benign economic command. All the mathematical system knows is the motive, not the motivator.

2. I did not post in response to your “humble article”, but I now see that you use a simple problem to illustrate why the calculation problem is unsolvable. Mabel’s problem with this sort of reasoning is its presumption that your mind will only be changed by a more robust, but also verbal counter-argument. To the contrary: if you say something cannot be done, you are stating a premise in the form of a general negative. That’s fine. But it then obligates YOU to state what you find wrong in an objective demonstration that someone has done what you say cannot be done.

There are five of these demonstrations written in ordinary MS Excel workbooks staged at the SFEcon site. Click EXEMPLARS from the homepage, and choose a workbook with whatever size I/O structure you wish. These workbooks will allow you to input I/O data of your own choosing. The program will then compute equilibrium prices for you, as well as the shapes of the technical and utility tradeoffs for which your I/O data are optimal. (Note that Hayek subsumed utility functions with his reference to “marginal rates of substitution” in 0 above.) You can then change the shape of a utility function, and watch the model go through all the chaotic states and disequilibrium prices leading up to a new general optimum.

3. An a priori assertion that these demonstrations must be deficient because sufficient demonstrations are impossible is circular reasoning around a vanishingly small circuit. I find that to be trite. I, for one, hear these assertions a lot (but have, let it said, yet to hear one from you). Sorry about the helmet. Make specific comments about a specific demonstration and I will take it off.

4. Asking for a “rebuttal” to someone’s “reasoning” is insisting on verbal dispute. I observe economists to me mired in Scholastic arguments that cancel one another out, while refusing to create and compare objective, dynamic, mathematically determined representations of what they hold as true. You cannot, for example, make an objective, dynamic, mathematically determined representation of a general negative.

5. I make no claims regarding prediction. I do not say the subject irrelevant, but you will have to tell me how it relates to the calculation problem as defined by Hayek above.

6. I have read Rothbard on the depression and regard it highly. I agree that he makes good use of quantified observations. If we have a disagreement here, it has to do with my narrow use of “objective”. The economy is a complicated, nonlinear, dynamic system. Assertions about the economy that are not objectively realized in mathematically determined, complicated, nonlinear, dynamic systems might be intelligent and useful, but they are not objective in my chosen use of the word.

7. My favorite example of harebrained Austrianism is asserting that Hayek foreclosed the possibility of economic calculation in 1945, when we are told (e.g. by Bruce Caldwell) that Hayek spent the 47 years left to him trying to solve the calculation problem. Another gem is Lew Rockwell recounting Mises’ assertion that markets should be explicable in rational terms, rather than by “magic” or “some force that is beyond human comprehension”, and then correcting Mises with his counter-assertion that markets are “miracles”.

The economy is out there; and we observe that, insofar as markets are free, the economy tends to efficiently search-out an optimal resting point. This is clearly systematic behavior. Upon observing such order, the civilized scientist (e.g.: Hayek) accepts the obligation to explain it. Insisting that markets are inscrutable and omnipotent in the face of these counter-indicia fits my definition of harebrained.

8. I am glad that liberty and Austrian Economics are separated, if we can agree that liberty is the prior consideration.

I agree that most people lack “the intellectual capacity, or honesty, or energy, to grasp AE”. That being the case, it seems to me wise for Austrians to get out from behind their hedge of esoteric verbiage and present their causality in a dynamic and visual way that people can grasp and would likely credit. Refusing to consider the possibility of economic calculation forecloses this option.

My humble reply:

0. The thing is, we are talking about two different calculation problems. There’s Mises’s version, and there’s Hayek’s version. Those programs do not solve Mises’s version, which is that the first column, the green inputs, must remain question marks. Whether it solves Hayek’s version I leave to someone else to look into, since I see it as academic. If Mises’s problem remains, I don’t much care if Hayek’s problem is solved or not. But I did see somewhere that given the current state of computing power, and the mass of variables needed to input, it would take several quadrillion years [no exaggeration] to compute the answer. You’ll note that the program you linked to uses 5 variables, not five million or five hundred million.

1. So verbal arguments are old fashioned Scholasticism, hey? That’s idle name calling, meaning carries no weight with me. I kind of see it as putting on voluntary blinders to insist on number crunching as the only possible way to get anywhere. Need we go further than Einstein, who used thought experiments [=verbal arguments] to do what he did in physics.

You may know that Mises claims to have proven that number crunching is not the right tool for economics, because of inherent features of what is being studied, mainly people with free will who don’t obey formulas, but do what they please. So we enter deep waters here when you insist on numbers only, when I think you chose the most flawed method possible to work with, rejecting what I consider the only possible tool to work with, good old logical reasoning.

I’m not sure if you realize it, but mathematics itself is verbal arguments, succinctly stated. There was a time [early twentieth century] when people thought there was some magic to numbers and symbolic logic, that it is a magical machinery that obviates the necessity for verbal arguments. Godel shot that one to pieces, and the picture accepted by the mathematical community world wide nowadays is that all of mathematics takes place within verbal argumentation. A math proof, it is understood today, is a mathematician convincing his peers of something, with verbal arguments. Of course, due to the intricacy of the topic discussed, a lot of shorthand has to be used [Imagine verbally stating Pythagoras’s theorem every single time, instead of A squared plus B squared equals C squared]. But there is no inherent magic in formulas and equations. They are tools used to present and clarify a verbal argument, because, humans that we are, that’s all we have. Maybe Martians have other ways of proving things. Humans don’t.

Economics, however, is much more primitive than math or physics. The truths known to date are more readily understood verbally than as equations. As for all the equations the mainstream uses, they are fallacious, as they assume people obey some formula, which is of course nonsensical. The more insightful mainstream economists have noticed this, and reject 95% of all published economics, all the formula stuff, as nonsense. Deirdre McCloskey writes about this.

2. The specific comment you requested is how do you know, in a socialist economy, what numbers to put into that first column, Expenditures? The State owns all means of production. Thus it doesn’t expend any money when it makes something, because it need buy nothing, because it already owns it. What price will you give the things it uses to produce something, when they are not for sale anywhere, thus have no market price?

3. Could you kindly provide the link to Lew Rockwell’s statement?

4. I’m very pleased that we agree on so much, even though there is a huge gap still.

5. My humble blog tries to present AE in dynamic and visual language, understandable to all. Not everyone has the gift. Some can actually do economics, others can present it in an interesting, easy to understand way. I invite you to look around the place and see what you think.

6. BTW, a professional mathematician might very well argue against that software program by saying something like “That first column cannot be filled in, it can only be question marks.” I’ve heard them saying similar things. You may remember how Bertrand Russell refuted decades of Frege’s work, full of formulas and symbols, with a one paragraph verbal argument. [Consider the set of all sets that are not elements of themselves. Etc.]

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