A critique of the Austrian and Chicago schools?

Over at Economist’s View there is an interesting piece from a book named “History of Economic Thought: A Critical Perspective”.

Now I don’t disagree with large parts of this. It is indeed fallacious to state that any CONCLUSION is value free – as it never is.

However, I feel that the piece mixes up its attack on the conclusions of the Austrian and Chicago school with the general neo-classical method – which is, in itself, closer to value free and objective. As the actual article says:

Their science applies everywhere because it applies nowhere. Most theorizing by these schools is purely tautological.

Now this may make the descriptions “unscientific”, but conveniently it also makes them value free.  Remember, the purpose of these “tautologies” is to create statements that we can use to show relationships between things in logical terms – they create a framework that allows us to then apply value judgments and reach conclusions.  Currently, this is one of the main roles of economists – to create a framework that can have value judgments added to it to create descriptions and predictions.  Economists often move a step further and create testable hypotheses, hypotheses that are supposed to describe, or possibly even predict what is going on.  However, another set of value judgments is then required to “prescribe” policy given these descriptions or predictions – this is a bigger step than some economists realise.

Still, for now let us take the implied “argument” that Austrian and Chicago economists are said to use in the above linked article, and see if we can adjust it to suit the way I see things 😛

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Make expansionary fiscal policy work – give it to the technocrats

I have no doubt that my views here will be contentious – but they need to be put forward nonetheless.

I think that Treasury (or some mix of part of Treasury and IRD) should function at arms length in the same way as the Reserve Bank, and that they should set tax rates in the same way that the RBNZ sets interest rates.

Now, let me discuss why.

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Conception of economics: Comment from Andrew W

In the same post that Dr Doyle commented on, Andrew W linked to an article which he wanted us to discuss here (article is here).

As a critique of applied economics I accept the article (as there is definitely issues associated with the desimenation of economic tools into policy making), as a critique of economic science the article is horrendously off the mark.

One of the main issues I have with the article is the way it view economics vs physics – it is far too simplistic.  For example, the article states:

But statistical regularities should emerge in the behaviour of large populations, just as the law of ideal gases emerges from the chaotic motion of individual molecules

That is just the thing – the behaviour of individuals is not equivalent to chaotic motion (although I am sure many people would disagree 😛 ) because individuals make choices.  This additional element makes the whole study of macroeconomics (which I believe they are attempting the criticise) that much more difficult.

The “axioms” that the article criticises are all assumptions about this choice – factors that economists decided over 100 years ago that they would have to assume because they CANNOT observe choices in a sufficient fashion.  Of course, since then empirical and observational techniques have improved such that “the observation of the process of choice” is becoming avaliable.  As a result, these axioms will be (and in fact are being) challenged and changed.

I think it would have been good for the article to look at work on the methodology of economics before assuming that they could just pull out the critique of 17th century science and apply it directly here.

Conceptions of economics: Comment from Dr Doyle

A few weeks ago a fellow named Jeffrey Doyle posted a “history of economic thought” type comment/post on the blog, which can be found here.

Beyond this he also added one additional criticism of “neo-classical economics” – the focus on “monetary flows” instead of energy.  Of course, as a criticism of economic science this is a misnomer – economic science is the study of scarcity, and “monetary flows” are merely a convientent way of representing this scarcity.  Using energy as a representation should – if the models are sufficiently specified – provide the same results.  Now, in when applying models there may be substantial differences, given what is implicitly assumed to be useful or not in different models – while this argument is important for application it is not something I can argue about, as I do not have the scarce intellectual talent to go around and apply a new set of assumptions to an underlying framework of scarcity.

However, my impression is that Dr Doyle is not criticising the individualistic methodological process in economics – he is attacking the “economic unit” used when we study scarcity, something that is constantly occurring and is a healthy part of any discipline.

Arnold Kling rips into economists

Over at Econlog Arnold Kling takes to task virtually all mainstream Macroeconomists for there “description” of the current economic crisis. This combined with my reading last night on reductionism in economics (I think it was Robert Frank Kevin Hoover – although I have now forgotten as it was an essay in a larger book) currently has me on the back foot – even though I’m a strong methodological (and even an ontological) individualist there are obviously issues with the current application of reductionism in economics.

However, let met put down some of the key bits from the Kling.

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2008 Economics Nobel Prize: Paul Krugman

Paul Krugman won the 2008 Economics Nobel prize for his work on trade theory.

This was a surprising result for me, as he is still relatively young and I expected Sargent to win. However, he is a deserving winner – congratulations are in order.

Anti-Dismal goes into more detail, and links to a number of economics blog reactions on the prize, enjoy.

BTW, No Right Turn is correct that it is not really a strict Nobel prize – but I don’t think that fundamentally knocks down its importance.  After all behind the Nobel peach prize I was say the “not-Noble” economics prize comes second in terms of international awareness.