Perhaps Sometimes Water Flows Up
My biggest failure in writing these blogs is that I haven't delved into some of the deeper problems and philosophies that make economics such an unusual and difficult science. At first, I didn't think there would such an audience for this kind of discussion, not here or anywhere. However, you continue to prove me wrong, and so let's look at some of the background issues that plague economics. This is a long post. You have been warned.
First, I want to touch on why these issues are important. Look around today and you can readily identify that you are indirectly a victim of bad economic theory. These ideas include protectionismm, inflationism, welfarism, various broken window fallacies, and many more. Since economic ideas, good or bad, can have such a tremendous effect on your economic well being, any person that cares about their wealth and the wealth of future offspring should take the time to consider the foundations of these ideas.
Health care has passed. I am not surprised:
"They caused the problem. They'll do whatever they want to fix it, including making the problem worse. That's government". - whereaminow. March 19,2010.
The Democrats are facing a violent backlash. Again, I am not surprised:
"Hatred toward, or paranoia about, a person's government is not a trait monopolized by any one ideological group. It is an individual's reaction to a real or perceived threat to control over his own destiny. " - whereaminow, March 8, 2010
People want to get fired up about health care, about Liberals vs. Conservatives, about any issue where we can identify it as a two-sided issue. But before you run off to facebook and post something you will regret, take the time to understand how we ended up here. If you don't, you are certain to find yourself confused and angry over and over again. If you don't understand economics and politics, how can you ever expect to change things for the better?
Praxeology vs. Empiricism
Before Milton Friedman, the dominant position among economists was that economic truths can be determined apodictically, that is to say that there are certain things about our objective reality that are true or self evident. If our premises are sound, we can then deduct certain consequences that must also be true. This was not only the position of the Classical Marginalists like Menger, and eventually his student Ludwig Von Mises, but also of J.M. Keynes.
Let's look at some statements that I believe are self evident truths about our objective reality as it applies to economics:
Two parties that engage in a voluntary transaction must perceive that they will benefit, or else the transaction would not take place.
How would we falsify this statement? Can we say that people will enter into voluntary transactions even when they will not benefit? Which planet do these persons reside on, because it certainly wouldn't be on the Planet Earth. But how could we prove such a falsification is wrong? Should we stand at the grocery line and ask each consumer if they feel better off with the food they bought than they did before they bought it?
That which the party to a transaction foregoes must be lower in value to them than that which they gain.
So a consumer that buys groceries must value the food more than they value something else they could purchase with the money they have available. Again, this describes the objective reality of our world just as saying "two objects can not occupy the same space at the same time."
There are things that we can say about our world that match reality that are not merely hypotheses to be tested or definitions of commonly understood terms. We call these statements axiomatic.
However, this is not the dominant position in economics today. To say that the revolt against logical deduction started with Milton Friedman is unfair. Friedman, a champion of Capitalism and father of the Chicago School, merely attempted to apply Karl Popper's insights on what he called "Logical Positivism" (a contradiction in terms as I will show you) to his own economic insight. The followers of Keynes, particularly Paul Samuelson and his followers Paul Krugman and Brad DeLong, are the most prominient Economic Positivists today, and are often referred to as Neo-Keynesians to mark the distinction between their ideas and Keynes' classical approach. Nearly all universtiy economists in every country today are influenced by Positivism.
(As a side note of humorous implications, if you are an avid reader of Krugman or other positivists, notice how often they make statements which appear to be apodictic. They will often claim that their opponents' ideas are not rigorously tested, but that there own insights are self-evident. Ah, the irony.)
So it would help to understand what is Positivism. Then you'll start to understand why Krugman writes as he does, why the mainstream economists rarely disagree on major spending issues, and why they are so completely wrong so often.
Positivism is based on the idea that we can not know anything about our objective world that is of any value without testing it. In the Positivists' playbook, there are two types of statements: Hypotheses and Definitions. Let's look at this statement:
If you double the amount of money in an economy, while the amount of producer and consumer goods remains constant, prices will increase.
To a Positivist this is a Hypothesis. It must be tested before we can say it to be true. So the Positivist solution is to double the money supply and see what happens. However, should the money supply rise as the axiomatic statement indicates, what can the Positivist do? They can then say, "Well there are certain variables that we did not account for. Once we account for them, we can show this to not be true." And so, they will try the experiment again.
We can say:
If you raise the minimum wage above the existing price of labor, to say $1,000 per hour, unemployment will follow.
Again, to a Positivist this is not a truth of our objective reality. And if this policy does result in widespread unemployment, that only means they have not accounted for certain variable factors.
You can be rescued from Logical Positivism with your old friend logic. A Positivist can say that every statement is either a Hypothesis or a Definition. A Definition, according to Positivists, must be in the form of an If, Then. (A definition of any other kind is merely an agreed upon meaning on the arrangement of symbols and as such, carries no significance in their eyes.) But what kind of statement is: "every statement is either a Hypothesis or a Definition?" And since Logical Positivism asserts that everything must be tested before we can be certain of its veracity, how do we know that Logical Positivism itself is correct? Shall we look at every statement in history and measure it up to Positivist standards?
Water always flows down
Logical Positivism is an exercise in turning the sublime, like "water always flows down", into the ridiculous, "perhaps water sometimes flows up."
There are great benefits to being a positivist. Can you guess how many people Ludwig Von Mises had on his research staff in Vienna, at the height of his intellectual activity? The answer is zero. He worked from a priori maxims, self-evident truths of our objective reality, and attempted to deduce logical outcomes of various economic policies. (More on this method in a bit.) If everyone were a Misesian, most mainstream economists would be unemployed.
A final blow against positisivism is the case for Ethics. Positivists do not recognize ethical statements as having any value. They are normative statements purely subjective to the tastes of individuals. One of the most curious aspects of Positivism is that its supporters, often liberals and progressives, use Positivits arguments as Ethical arguments. This is clearly a contradiction. If Positivists believe that ethical statements have no value, then Liberal arguments for health care, climate science, welfare, and a host of others, based on Ethical beliefs have no value either. Water truly flows up in a Positivists' world.
All economic action is purposeful action - Ludwig Von Mises
So what type of science should economics be? Should it be based on empirical testing or on logical deduction? I don't think that either should be ruled out completely as useless. One of the cheap shots you will see leveled at the Austrian School is that they do not believe anything should be tested empirically. Simply not true. Take this statement for example:
Children prefer Burger King to McDonald's.
Is this the sort of economic statement that is axiomatic? Or should we perhaps test this idea somehow before we are sure it is true? And even then, should we declare it true through testing for all time, or should we revisit it as tastes change?
Or this statement:
Americans visit India more often than Australia as a tourist destination
These are not apodictic statements like "all economic action is purposeful action." Where the Austrian School differs from the Positivists is that they have a clearer understanding of where is the difference.
For Austrians, the study of economics begins by finding self evident truths about our objective reality and logically deducing from there. The a priori maxim of the Austrian School is that "all economic action is purposeful action." The science of praxeology (the study of human action) is the foundation of the economics of Ron Paul, his mentor Murray Rothbard, and Rothbard's mentor Ludwig Von Mises. The conclusions derived through this type of analysis differ dramatically from the ideas of the mainstream economic schools, both the Chicago School and the Neo-Keynesians. (Even though, ideologically, the Chicago School and the Austrian School share many commonalities.)
I hope this discussion enlightens a few Fools. It doesn't reverse the Health Care bill or end Federal Reserve control of our currency, but if you want those things to happen you can't achieve your goals unless you understand what you are up against.
David in Qatar