Austrian Economics Forum Spring 2011 #1

It is a new year and a new series in our Austrian Economics Forum.  This semester we are not simply reading through a single book.  We are attempting to put together topical readings each session.  On one side will be the Mainstream approach and then there will be the Austrian counter point to it.  We are hoping that this will generate interest outside of the few dedicated Austrians at NCSU.

The first set of readings centered on Methodology.  The article supporting the mainstream approach was Milton Friedman's "The Methodology of Positive Economics."  Unfortunately, there was a mistake in the copying of this article and only the first two sections were made available.  Nevertheless, the discussion on this article lasted about 75 minutes, leaving us with only 15 minutes for the second article! 

It is amazing how seriously Austrians take Methodolgy.  The unfortunate thing is that the rest of the economics profession does not take methodology seriously.  In fact, most economists never even consider methodology.  It is my contention that even if the Austrians were able to demolish every argument in favor of positivism and were able to replace it with the Austrian approach, there would be few converts to the Austrian School.  Sadly, the profession just doesn't care.

So the discussion centered on the typical arguments that Austrians raise when discussing this subject.  How can postivists really believe in hypothesis testing?  How can the science move forward if we are only observing?  Is introspection merely a tautological definition or can something be learned and understood?  Why should the social science of economics attempt to mimic physics?  Etc.

My thoughts on this subject can be found here in my "Methodology" presentation for FEE in 2010.

The more interesting article was the second.  We chose Roderick Long's "Realism and Abstraction in Economics: Aristotle and Mises versus Friedman" in the Quarterly Journal of Austrian Economics, vol. 9, no. 3, Fall 2006.  It is found here.

We only had 15 minutes left to discuss this article and apparently we all agreed with it, there seemed to be little hope for any discussion.  We found two major points that were particularly noteworthy.

The first centered on a quote by Peter Winch.  Winch's example runs something like this.... Suppose that a positivist has no knowledge of the Chinese language.  He is given "data" in the form of newspapers, articles, etc.  From this data he is able to predict which "words" are fairly likely to occur in the near future.  We can test the "power" of his "theory" by the basis of how well it predicts.  However, there is still no understanding of what is actually being said.  To test an economic theory on the basis of how well it predicts follows this example.  There is no deeper understanding other than complex pattern recognition.  This is why the Austrians have argued so passionately in favor of introspection.

The second point is borrowed from Guido Hülsmann.  Hülsmann says that the big divide between the Austrians and the mainstream is the Austrian emphasis on the use of the counterfactual method.  For example, what happens if there is a price floor compared to if there is no price floor? 

Bastiat uses this approach in the story of the "Broken Window" and Hazlitt makes ample use of it throughout his Economics in One Lesson.  This method is absolutely critical in most Austrian theorizing.  However, to a mainstream economist, once you step outside of the principles level, this method of reasoning disappears. 

Next time, the articles are Frank Knight's "Professor Mises and the Theory of Capital," Economica, Nov. 1941, pages 409 - 427; and Israel Kirzner's response in "Ludwig von Mises and the Theory of Capital and Interest," reprinted numerous times and is found here.

Addendum: Over the weekend, I was chatting with Richard Ebeling and we have come to the conclusion that Positivists do indeed engage in "counterfactual" thought.  Actually, all that they do is count the facts!!!