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A PDF version of this post is attached for an easier read.===============================================================Debunking Austrian economicsLately I've been looking into Austrian economics. So far it seems to be a well-put together theory. Actually, I don't see anything particularly new. So far I've heard nothing that conflicts with the intro to economics course and others I've taken. Before I delve further I must say that I am not a trained economist, but a trained scientist. As a trained scientist, the one thing we’re trained to do above all else is how to tell truth from fiction (Well the best we could). Basically we ask “where’s the evidence?” and interpret what we see the best we can (a rudimentary understanding of logic and reason helps). It’s not a complicated skill; it just requires a willingness to detach oneself from their favored beliefs for evidence. Simple? Yes. Easy? No. I will admit, Austrian economics is appealing to those with certain political/moral leanings and repulsive to others with different political/moral leanings, but let’s do the best we can to put aside our feelings and try to arrive at the truth. The primary source to learn about Austrian economics is the Ludwig von Mises Institute (http://mises.org/). They do more than teach economics, but promote libertarian ideas. Putting aside libertarian promoting and looking exclusively at economic theory, the question must be asked: is it true? And once again “Where’s the evidence?” I think it's best to believe in as many true things as possible. Recently I came across this article on Rational Wiki (http://rationalwiki.org/wiki/Austrian_school). To make a long story short, I've been to this site many times in the past and they do a good job at debunking pseudoscience, despite the occasional snarkiness and foul language. If it is true that it is a pseudoscience, then you must be intellectually honest and reject it no matter how attached you are. However, if it turns out to be true, then you must accept regardless of how repugnant you feel it to be. So what we should do is try to debunk it. If it can withstand then it’s correct (or in science we would say the most accurate description of reality thus far). Normally I can debunk most pseudosciences, but I find this one challenging. And I'm asking for help in this one. If anyone has anything else to contribute, please do so and provide references. Once again I'm no trained economist, but I'm a trained scientist. Also you need no scientific training to debunk pseudoscience. You just need to find inconsistencies and have a rudimentary understanding of logic and reason. -----------------------So here's what I found on the topic of debunking Austrian economics. First I'll start with a brief overview of Austrian economics. Second I'll present arguments made against it. Third, I'll analyze those arguments. I’ll also provide references so that you can check my work and point out were I'm wrong. Plus you can provide references I've missed.1) Brief overview of Austrian economics For this I will be treating the Mises institute and the quotes for those associated as the most authoritative source of defining Austrian economics. Taking their words at face value. Therefore, any subsequent defining that conflict with the Mises institute will be considered a misunderstanding or incorrect.The best, fast, and concise summery of Austrian economics can be in this YouTube video: What Austrian Economics IS and What Austrian Economics Is NOT with Steve Horwitz ( ). For a more in depth yet still simple explanation of Austrian economics refer to this YouTube channel, Praxgirl (https://www.youtube.com/user/praxgirl). I’ve read Human Action and she does the best job I’ve seen on explaining the content of the book. It’s sufficient enough too look at her video series on praxeology to understand the theory laid out by von Mises. And of course we can’t forget Wikipedia (http://en.wikipedia.org/wiki/Austrian_School). It’s important to note is that Austrian economists place a higher emphasis on methodology and less on statistical correlation than other economists, which are more conclusion oriented. In particular a lot of economics is oriented on statistics and teasing out correlations and cross-correlations through adjustments of data; a cursory look at some economic literature will reveal this quickly (search http://scholar.google.com/ for more). Austrian economists seem to be more skeptical of statistical data asking “does the correlation imply causation?” which is typically harder to answer in a situation where you cannot do controlled experiments or experiments that have too many extraneous variables. They also have a higher emphasis of microeconomics over macroeconomics from what I can tell. If we accept Human Action by Ludwig von Mises (text: http://mises.org/books/humanaction.pdf, audio: http://www.audible.com/pd/Nonfiction/Human-Action-Audiobook/B006FYJTZC/ref=a_search_c4_1_1_srTtl?qid=1389313718&sr=1-1) as an authoritative piece on the subject, all of Austrian economic theory rests upon a small set of axioms. The axioms are: - Individuals Act. Which means when organizations choose, it means that individuals in the organization with the power to choose on the behalf of others. Or everyone in the organization unanimously chooses. Individuals not only choose to act, but do so purposefully. Side note: from this axiom deductive reasoning is used to derive other conclusions in other words this is praxeology in a nutshell.- When people choose to perform the action of exchange (voluntarily) they do so that is mutually beneficial. And voluntary exchange can only occur if all individuals involved unanimously agree. Those who disagree will not participate or participate under coercion (example: being robbed, which is not voluntary).- There are influences that affect those exchanges. Example if there’s a tax on something to make it more expensive people either buy less of it or if there’s a subsidy to make it cheaper people buy more of it. In short, institutions and social structure has an effect.- Collectively, if many parties are exchanging with each other (voluntarily) a spontaneous and (unexpectedly) ordered system of exchange emerges called a market. Thus the market system or capitalism (if you want to use that term) isn’t an invented system, but a natural outcome of many simple voluntarily social interactions of exchange.- When people value things it is subjective and personal rather than objective. Example, the value paradox. Why are diamonds more valuable than water? You don’t need diamonds too live, but you need water? Why are reality shows more popular than educational shows, when you clearly get more from educational shows? Why does anything cost as much as much as it does? Marx tried answered this my using labor as the measure of value. For more on Marxist theory refer too Das Kapital vol. I, vol. II, and vol. III and Wage, Labour, and Capital for the totality of Marxist theory (text: http://www.marxists.org/archive/marx/works/download/pdf/Capital-Volume-I.pdf, audio: https://librivox.org/capital-volume-1-by-karl-marx/; http://www.marxists.org/archive/marx/works/download/Marx_Capital_Vol_2.pdf; http://www.marxists.org/archive/marx/works/download/Marx_Capital_Vol_3.pdf; text: http://www.marxists.org/archive/marx/works/download/Marx_Wage_Labour_and_Capital.pdf, audio: https://librivox.org/wage-labour-and-capital-by-marx-karl/).However, a good summary is the Communist Manifesto and Marxism: Philosophy and Economics by Thomas Sowell (text: http://www.marxists.org/archive/marx/works/download/pdf/Manifesto.pdf, audio: https://librivox.org/the-communist-manifesto-by-karl-marx-and-friendrich-engels/; text: http://www.amazon.com/Marxism-Philosophy-economics-Thomas-Sowell/dp/0688064264, audio: http://www.audible.com/pd/Nonfiction/Marxism-Audiobook/B0098NSM7S/ref=a_search_c4_1_1_srTtl?qid=1389319086&sr=1-1).I’ve read all 6 books and despite what Noam Chomsky says, it is sufficient enough to read Communist Manifesto and Marxism: Philosophy and Economics alone and understand all of Marxist economic theory. In essence, Austrian economics rejects intrinsic value theories (http://en.wikipedia.org/wiki/Theory_of_value_(economics)) such as the one proposed by Karl Marx.- Prices transmit information about the goods/services involved in exchange. They are needed by individuals to make decisions on whether to consume more or less of something or to produce more or less or something. Thus prices are essential for a properly functioning market.- Private property rights are also essential to a properly functioning market. If there is no private property, meaning that individuals possess no property, then what can people use for exchange? Thus if property rights cannot be assured they will act accordingly and the market system will be impaired. Side note: von Mises isn’t the most eloquent of writers and many may find him dry (I suggest reading the text co-currently with the audio, there will be equations), but to sum up what’s in Human Action, most of it is economics 101, a thorough explanation of the limits of economic science as compared to other sciences that can run controlled experiments, a comparison of economics to other sciences like the natural/physical sciences (example, according to Human Action, economics has no constant relationships as you would see in physics like Newton’s universal law of gravitation, http://en.wikipedia.org/wiki/Newton's_law_of_universal_gravitation), an explanation of praxeology (basically a framework of study that assumes humans act purposefully), and he critiques marxism and socialism when the opportunity presents itself.Based on these axioms and other basic economic laws (example: the law of supply and demand), he proposes to use deductive reasoning to arrive at various economic conclusions. Therefore, hypotheses that conflict with the deduced conclusions are either incorrect or an axiom or basic economic law must be rejected. Most likely the hypothesis is to be rejected. So far these axioms don’t seem out of line with mainstream economics. Therefore, to reject them is to reject the fundamental assumptions of mainstream economics. Due to the lack of constant relationships in economics it would be impossible to make quantitative predictions with any significant precision (examples: timing the market, the price will be this at a particular point in time. Or this change in interest rates will yield this percent change in loans issuances. Etc.), however qualitative predictions can be made (example: if supply increases and demand stays the same the price will drop. Or if demand increases, but supply stays constant the price will rise). This leads us to the Business Cycle Theory. The interest rate is the price for borrowing money. Therefore, if it decreases lending is encouraged and saving is discouraged. And if it increases lending is discouraged and saving is encouraged. In other words it is a signal on the state of savings and the state of purchasing power. Therefore, if interest rates are set low by an authority it sends a signal to the market that there is sufficient savings to use as credit for use in business expansion (a boom). This creates an imbalance of between savings and investment. Thus when credit is contracted either through insufficient savings to lend or a demand collapse by preference shift to savings or a paying down of debt or other means credit is contracted and there is no means to sustain expansion, leading to liquidation of malinvestments (a bust). In short, the artificial manipulation of interest rates (price signals) causes a qualitatively predictable boom-bust cycle. 2) Arguments against Austrian economics The disturbing thing I’ve found in the arguments against Austrian economics it the lack of professional critiques of it compared to critiques of other pseudosciences. In my experience I’ve seen far more attention paid to evolution vs. creationism or intelligent design, various forms of alternative medicine vs. mainstream medicine, and every manner of mysticism vs. science debate you can think of, but for some reason I don’t see much debate of Austrian economics. And no, political debates on less regulation vs. more regulation or capitalism vs. socialism doesn’t count. I mean a debate about the core theoretical tenants of Austrian economics. A quick Google search for “debunking keynesian economics” turns up a lot of diverse critiques, but “debunking austrian economics” actually turns up articles for debunking Keynesian economics (for me at least). This can best be illustrated with this site (http://krugmandebate.com/) as far as I can tell this debate hasn’t occurred, at least at the time of this writing. But with that being said I did find a few arguments and so far these are the best I can come up with. The first one if from a blog by someone by the pen name Lord Keynes (https://www.blogger.com/profile/06556863604205200159) (http://socialdemocracy21stcentury.blogspot.com/2013/12/debunking-austrian-economics-101-updated.html). It’s quite a dry and length one, but quite nuanced and the best rebuttal of Austrian economics I’ve seen. The second one is from Rational Wiki (http://rationalwiki.org/wiki/Austrian_school) and they sum up the main points of the by Lord Keynes and others, which will be mentioned. The others are a blog by Recovering Austrians (http://recoveringaustrians.wordpress.com/top-ten-austrian-economic-lies-and-mistakes/), not sure who this is, but the also have 2 other good posts on the topic (http://recoveringaustrians.wordpress.com/deconstructing-austrian-economics/, http://recoveringaustrians.wordpress.com/2012/01/30/the-austrian-school-is-a-classic-example-of-crank-science/). Another page (http://www.huppi.com/kangaroo/L-ausmain.htm) from Steve Kangas, his site (http://www.huppi.com/kangaroo/LiberalFAQ.htm) is also a good source on the common liberal answers to certain questions for anyone interested in further references. And a blog by Bryan Caplan (http://econfaculty.gmu.edu/bcaplan/), professor of economics at George Mason University (http://econfaculty.gmu.edu/bcaplan/whyaust.htm). His blog was one of the rare professional critiques of Austrian economics I’ve come across. They essentially restate some of the common critiques already laid out in detail by Lord Keynes.There is also a video series on the YouTube channel by Austrian Critique that sums up the most common critiques succinctly (https://www.youtube.com/user/AustrianCritique/). When you look at the series please try not to be put off by the mechanical voice over or the use of ad hominem attacks on Austrian economics, but continue and listen at the content. It’s actually quite informative. And this YouTube video Austrian "Faith"-Economics, Debunked (Fascista Libertarian-Frei Marketische) ( ) further compressed the main critiques. Once again try not to be put off by the snarky tone or the use of the suggestion of an ad hominem by using “Fascista Libertarian” in the title.The critiques are as follows:- Austrian economics rejects empiricism and evidence and the scientific method for praxeology and a priori deduction based on premises that can be open to any sort of mystical thinking. This is a huge one. If you reject empirical evidence you don’t have science. If this is true, then Austrian economics MUST be rejected. - Austrian economics reject statistics and econometrics. Statistics looks at past events and gives the expectation of a future event occurring. Austrians reject the use of historical data to draw expectations of the future in favor of praxeology and a priori deduction.- Austrian economics rejects macroeconomics (or at least the standard measures used) and other standard economic measures.- Austrian economics rejects economic calculation. While economic calculation is regarded as impossible due to a lack of sufficient data they later contradict themselves by saying individuals perform economic calculations all the time in their economic transactions.- Praxeology is an inappropriate method for economic study.- Austrian economists misinterpret mainstream economists. Example, I’ve read from the posts by Professor Caplan and Lord Keynes that Austrian economists accuse other economist of rejecting the subjective theory of value in favor of the objective theory of value.- Austrian economics have failed in predictions. I’m not going to list all of them, but it’s listed here at point 16 by Lord Keynes (http://socialdemocracy21stcentury.blogspot.com/2013/12/debunking-austrian-economics-101-updated.html).- Limitations in the business cycle theory. 3) Analysis of the arguments Austrian economists have not ignored the critiques mentioned above. Tom Woods write on his site (http://tomwoods.com/blog/austrian-economics-is-unscientific/) a quick rebuttal of the critiques. Once again the tone of his works are a bit snippy, but please look at content and not the ascetics. He also refers you to 3 books, which provide responses to common critiques. The 3 books are Economic Science and the Austrian Method by Hans-Hermann Hoppe (http://mises.org/books/esam.pdf), Praxeology and Understanding: An Analysis of the Controversy in Austrian Economics by George A. Selgin (http://mises.org/books/prax-and-understanding.pdf), and America's Great Depression by Murray N. Rothbard (text: http://www.amazon.com/gp/product/0945466056/ref=as_li_qf_sp_asin_il_tl?ie=UTF8&tag=thomacom-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0945466056, audio: http://www.audible.com/pd/History/Americas-Great-Depression-Audiobook/B002V5D00E/ref=a_search_c4_1_1_srTtl?qid=1389322959&sr=1-1). - Austrian economics rejects empiricism and evidence. This is the biggest one all other critiques are small potatoes compared to this. The response of the Austrian economists is no they’re not anti-empirical. The 3 references provided by Tom Woods explain this position in nuanced way. Another blog by Professor Caplan (no Austrian economist) sums up the Austrian position on empirical evidence (http://econlog.econlib.org/archives/2012/09/are_austrians_a.html). Yes he does critique and defend Austrian economics. Basically, its that statistics is limited in that it only shows correlations, but to establish causations we need to know why individuals made the choices that manifested in the correlation. In short they use surveys, interviews, etc. plus statistics to establish causal chains. But, he mainly disagrees with the Mises-Rothbard preference for theory. Being more theory oriented or more hands on are all fine things to do in science as long as you don’t state something that you’re not. Theory can be quite useful in science, as an example look at theoretical physics. An excellent example of the usefulness of theory and deduction was Hawking Radiation, which basically is black body radiation from a black hole due to quantum effects thus leading to a finite life of a black hole (http://en.wikipedia.org/wiki/Hawking_radiation). In short, black holes “evaporate” given enough time. Hawking Radiation theory is considered one of the most secure because it uses deductive reasoning and makes no assumptions beyond what is outside the norm of physics; with that being said empirical evidence is always needed because the current physics in which the theory rests upon could be falsified by more evidence see this paper if you want to look more into the potential ways Hawking Radiation can be falsified (http://xxx.lanl.gov/abs/gr-qc/0304042). So to prefer theoretical economics is a fine thing to do. In fact the need of a theoretical division in economics may signal that the field has grown so much that it needs people just to deduce conclusions on the existing data. However, I’ve come across some rare papers putting the Austrian Business Cycle theory to the evidence (http://www.ribm.mmu.ac.uk/symposium2012/fullpapers/RichardWhittle.pdf; http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.196.6182&rep=rep1&type=pdf; http://www.trincoll.edu/~butos/Pubs%20in%20pdf/1990%20Recession.pdf). To sum it up, these papers find the predicted correlation between interest rates and the boom-bust cycle. Though the degree of these correlations may differ between studies, I have yet to find falsification. If you find some peer reviewed papers falsifying the business cycle theory with empirical evidence please present them. At most they say something to the effect of the Austrian economists have a good working theory, but more studies and metrics are needed to build a working model. It would be nice to see more literature putting Austrian economic theory to more empirical analysis. I wish this were put through a more vigorous peer review process. I have yet to see the attempt. They may have something profound and no empirical theory exists which doesn’t have room for improvement.- Austrian economics reject statistics and econometrics.Unless I’m interpreting the Austrian economists incorrectly, I don’t see this as the case. From what I can tell Austrian economics don’t reject these quantifiable measures of the economy, but view them with more skepticism. They see these as correlational studies, but a proper logical reasoning is needed to establish causation. This would mean that the Austrian school is more rigorous and thus more confidence can be placed in the validity of their conclusions. - Austrian economics rejects macroeconomics (or at least the standard measures used) and other standard economic measures.From here I’ll admit my ignorance on the standard methods in the field of how economists collect, weigh, and analysis their data. But, I don’t particularly see anything wrong with that so long as a proper argument can be made on why this metric was used or constructed this way. This is a perfectly valid thing to do in another field of science so long you state what you’re doing and the goal of the study. And for the rejection of how standard macroeconomics is conducted (example measuring GDP, inflation, unemployment, etc.) once again this goes back to what I just said. Measuring the same thing in different ways is a perfectly valid thing to do. The government has many ways of measuring unemployment, money supply, etc. It all depends on what questions you’re answering.- Austrian economics rejects economic calculation. I’ve read that Austrians economists say socialism cannot work because is cannot sufficiently make economic calculations, but later contradict themselves by saying the entrepreneur can properly calculate. Having read Human Action I think this is a misinterpretation of what Mises was saying. He’s basically saying value is personal and subjective, thus you cannot substitute your judgment for another. In other words person in the best position to know the wants and needs of the individual is the individual. This is not a contradiction, but an analysis of why the market does the best job of allocating resources.- Praxeology is an inappropriate method for economic study.As was said before, deductive reasoning on accepted principles is a perfectly valid thing to do. But, you must remember any conclusions you draw depend on the premises. Also praxeology doesn’t seem to make and assumptions out of line with mainstream economics.- Austrian economists misinterpret mainstream economists.This happens all the time regardless of the field of study. This is just a natural part of being human and communicating ideas. However, I don’t always find that to be the case. I’ve read End This Depression Now! by Paul Krugman (text: http://www.amazon.com/End-This-Depression-Paul-Krugman/dp/0393345084, audio: http://www.audible.com/pd/History/End-This-Depression-Now-Audiobook/B007VQXPWQ?source_code=GO1GB909GSH102413&gclid=CNyiwMX79LsCFYhcMgodCAUAYQ&mkwid=sne4POKYC_dc&bp_ua=yes&pkw=end+this+depression+now+audio&pmt=b&pcrid=35525583609) they seem to do a pretty good description of Keynesian economics. Unless I’m mistaken they haven’t misunderstood Keynesian economic theory though they come to different conclusions.- Austrian economics have failed in predictions. I won’t go too deep into this because I haven’t adequately researched this and enumerated the correct and incorrect predictions as compared to other economic schools of thought. But what I do know is that the Austrian economists’ claim to fame is predicting the stagflation in the 1970s when no one else did. Haven’t validated this yet, but I assume it’s true. Also we can’t forget the YouTube video Peter Schiff was Right (sorry can’t find the original for some reason, it wasn’t originally posted by Mr. Schiff he just mirrored it) ( ).- Limitations in the business cycle theory. Austrians frequently critique Keynesian economics in the role of the Federal Reserve during down times. When it comes to learning about Keynesian economics I find that Professor Krugman does the best job of explaining it in his book End This Depression Now! Basically, the Austrians say Fed interventions will cause a boom-bust cycle, but Prof. Krugman says it’s like jump-starting a car and not necessarily harmful if done correctly. All I can say is that I haven’t seen many peer reviewed studies to say one way or another. I’ve presented a few, but if anyone knows of any research papers showing empirical evidence on the topic feel free to present them. As far as I can tell the critiques shown above may have an element of truth to them, however it is a misinterpretation of the basic Austrian economic theory. This is probably the fault of the economists of the Mises institute in that they didn’t properly explain the theory in a simple enough way thus it was interpreted in a manner that is untrue by the criticizers. However, it could be that the differing political views of the Austrian economists districted the criticizers thus leading them to misinterperate Austrian economic theory. I don’t know which is true; I don’t know their inner most thoughts. The most I can do is take their writings at face value and arrive the best I can to a proper conclusion.-----------------------Conclusion:In conclusion, I can’t debunk this. All the critiques seem to be not true.Nothing about the theory seems inaccurate to me. In fact it looks like plain, boring, standard economics 101 you find in any textbook. Albeit, the people who advocate it seems to have a particular political leaning and yes this economic theory does have political implications. If it turns out I missed something and the truth supports the other political view then, so what? There are many scientific theories that have implications on political beliefs and religious beliefs. If that’s reality, that’s reality, we should just accept the truth.But, as I said before I’m no trained economist. I’m may have I missed something.Is there an error in my reasoning? Is there a piece of information that I missed? Please help out, and provide references.I’m truly stumped and don’t know what to make of it.Debunking Austrian economics.pdf