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Tuesday, June 16, 2009

Mailvox: Empiricism and the Austrians

Josh has a question:

How do you deal with the criticism that Austrian economics aren't based on empirical evidence and are thus only nice little theories with no relation to the real world?

I'd point them to Rothbard's excellent commentary on the subject contained in AGD. Then I'd invite them to contemplate the case of Japan in light of his perspective. Contra the assumptions of the empiricists implicit in Josh's question, Austrian theory competes rather well in the field of predictive validity, especially of late. Most people would look at Rothbard's bold assertion that historical statistics cannot be used to test theory and roll their eyes, but never stop to consider the way in which - ironically enough - empirical and scientific experience both tend to support the verity of Rothbard's logic.

Suppose a theory asserts that a certain policy will cure a depression. The government, obedient to the theory, puts the policy into effect. The depression is not cured. The critics and advocates of the theory now leap to the fore with interpretations. The critics say that failure proves the theory incorrect. The advocates say that the government erred in not pursuing the theory boldly enough, and that what is needed is stronger measures in the same direction. Now the point is that empirically there is no possible way of deciding between them. Where is the empirical “test” to resolve the debate? How can the government rationally decide upon its next step? Clearly, the only possible way of resolving the issue is in the realm of pure theory—by examining the conflicting premises and chains of reasoning.

This reasoning is at the heart of my doubts about Keynesianism, evolution, psychology, the Dark Triad of physics and other quasi-sciences; the intelligent observer has probably already figured out that it is my Austrian School perspective, not my Christianity, that is the primary source of my doubts about neoDarwinism. Now, it's true that the praxeological approach to methodology has its limits too; the practical superiority of the physical sciences vs medieval philosophy shows that logic must sometimes bow to empiricism. The mistake of modern scientistry is its failure to understand that in certain cases, empiricism is inherently unreliable and a logical approach will be more effective... although at times one is forced to conclude that this is less a failure of understanding on the part of scientists and more a reluctance to abandon their posture of intrinsic intellectual superiority.

The havoc wrought by the appearance of a black swan is no more than the inevitable consequence of forgetting that past results are no guarantee of future performance. This applies to scientific theory as well as to the financial markets.

UPDATE - Reason's Tim Cavanaugh points out the very problem with empiricism the Austrians describe in Paul Krugman's defense of neo-Keynesian economic stimulus:

I'll just point out that Krugman's case for additional stimulus uses the same logic as Caliph Omar's decision about the good and bad books in Alexandria. If we don't stimulate and the economy tanks, it's because we're not stimulating; if we stimulate and the economy tanks, it's because we're not stimulating enough. There's no way to refute premises stacked in this way.

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