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Source link: http://archive.mises.org/10164/salerno-comments-on-the-mainstream/

Salerno comments on the Mainstream

June 18, 2009 by

Current Austrian economists are the true heirs to the neoclassical economics that thrived up through the 1930s. It was in the spirit of Carl Menger and stressed the discovery of true causal laws that explained real economic phenomena such as business cycles. By the 1950s this Mengerian-neoclassical mainstream had been hijacked by positivists, Keynesians and mathematical modelers who have held sway ever since. One happy result of the current financial crisis and depression is that the Austrian Theory of the Business Cycle, perhaps the greatest fruit of this neoclassical style of reasoning, is once again commanding the attention of finacial investors, media commentators and the economics profession itself. Causal-realist economists associated with Mises Institute like Bob Murphy, Mark Thornton, Tom Woods and others have been ubiquitous online, on the radio and in articles and best-selling books offering a clear and coherent explanation of the real causes of the housing boom and subsequent financial crisis and depression based on the Austrian theory. In sharp contrast the mathematical pretenders to “mainstream economics” are still frantically trying to understand the very very concept of a business cycle with ever more arcane and inscrutable models. For example, below is an abstract for a recent article on “Fluctuations in Overlapping Generations Economies” from the Berkeley Electronic Journal of Economic Theory by Mich Tvede, University of Copenhagen:

“In the present paper stationary pure-exchange overlapping generations economies with L goods per date and M consumers per generation are considered. It is shown that for an open and dense set of utility functions there exist endowment vectors such that N-cycles exist for N less than or equal to L+1 and L less than or equal to M. The approach to existence of endogenous fluctuations is basic in the sense that the prime ingredients are the implicit function theorem and linear algebra. Moreover it is sketched how the approach can be applied to show that for an open and dense set of utility functions there exist endowment vectors such that sunspot equilibria, where prices at every date only depends on the state at that date, exist.”

It is articles like these that hasten the day when the Misesian-Rothbardians will reclaim their rightful place as THE new neoclassical mainstream.


Dr. Joseph T. Salerno

{ 47 comments }

Joseph Mises June 18, 2009 at 4:10 pm

I’m taking intermediate macroeconomics next semester, and I’m intimately familiar with the mathematics of this abstract.

I don’t see where they tie-in! Professor Thorton can you explain what he’s trying to prove?

Joseph Mises June 18, 2009 at 4:12 pm

*Thornton

Oops.

Richie June 18, 2009 at 4:17 pm

This is some of the most ridiculous mathematical “economics” I have read in quite a while. This is nothing but a bunch of mathematical mumbo jumbo from wanna-be scientists who pat themselves on the back for being so smart. I once considered grad school in economics, but once I found the Austrians, I laughed it off. Reading crap like this, I’m so glad I did.

Ken June 18, 2009 at 4:20 pm

“In the present paper stationary pure-exchange overlapping generations economies with L goods per date and M consumers per generation are considered. It is shown that for an open and dense set of utility functions there exist endowment vectors such that N-cycles exist for N less than or equal to L+1 and L less than or equal to M. The approach to existence of endogenous fluctuations is basic in the sense that the prime ingredients are the implicit function theorem and linear algebra. Moreover it is sketched how the approach can be applied to show that for an open and dense set of utility functions there exist endowment vectors such that sunspot equilibria, where prices at every date only depends on the state at that date, exist.”

Having spent some time recently perusing the economics (particularly, but not exclusively, game-theoretic) literature on signaling, I am surprised to find how (relatively, at any rate) little actual empirical work has been done, despite the proliferation of mathematical models.

Jorge Borlandelli June 18, 2009 at 4:24 pm

Joseph Mises

That is exactly the point!!! Who knows what Mr.Tvede is trying to prove. Mr.Tvede can only talk to other “mainstream” economists whose language is now pure mathematics. I would suggest that all papers by “mainstream” economists should be translated to English before publication!!!
Cheers

Joseph Mises June 18, 2009 at 4:43 pm

I’m in tears right now. lol

What the heck does any of that mean???

I don’t see how linear algebra and sunshine vector equiliabria tie in!?!

So far, I’ve only encountered derivatives and the partial derivatives in economics. Honestly, it’s really sketchy. My engineering friends are all becoming Austrians because they think economics is bull…..ogna

Joseph Mises June 18, 2009 at 4:45 pm

No but seriously, can someone tell me what that abstract is dealing with? Maybe someone from the faculty at the Mises Institute? Salerno?>

Richie June 18, 2009 at 5:27 pm

String Theory Economics?

Ben June 18, 2009 at 5:43 pm

It’s amazing to me that economists attempt to pass themselves off as scientists. As a doctoral student in Chemistry, I know a thing or two about science. Looking at anyone’s analysis on the current economy, any reference to the CPI, Unemployment, GDP, or Inflation would lead me to respond that their analysis and conclusions are meaningless. You have what we like to call in the scientific world “bad data”. Today’s modern economist is are a mystery to me. A lot of these guys are incredibly brilliant mathematicians. They construct these elaborate models to try to explain the economy. Despite their in depth knowledge of math, they completely ignore the fact that their models always make bad assumptions. I’ve worked in theoretical chemistry. We don’t even have an exact solution to a 3 body problem (A helium atom, 1 nucleus and two electrons). We have a good approximation. Work your way on up an order of magnitude and we lose all credibility while our models break down. We know what a proton does. We know what an electron does. We kinda know what a few of them together do.

We have trouble accurately modeling small molecules with a single theory. As long as economists are woefully ignorant and continue to believe that they can mathematically model a system of billions of unique participants, the field is hopeless.

Ben June 18, 2009 at 5:49 pm

Joseph, that’s odd. All of my engineering friends believe you can easily model anything in economics. Considering that economists are simply social engineers, it only makes sense. Engineers want to model, construct, and make things work.

In Chemistry, we see phenomena in certain systems that we refer to as “self assembly”. Your DNA assembles itself. Your cells have all kinds of macromolecules that interact and recognize each other. A lot of people believe that a free market is chaotic and full of disaster. The reality is, it’s a process in which individuals organize society on their own.

I’m sure that some nations will come out this embracing capitalism. The United States will ultimately be forced to unless it’s content to live in decades of poverty. Given how spoiled we have been the past 30 years, I doubt there is the political will for that to persist.

axiomata June 18, 2009 at 5:53 pm

There’s a related article posted at the Wharton School of Business titled “Why Economists Failed to Predict the Financial Crisis”

An excerpt:

“Over the past 30 years or so, economics has been dominated by an “academic orthodoxy” which says economic cycles are driven by players in the “real economy” — producers and consumers of goods and services — while banks and other financial institutions have been assigned little importance, Allen says. “In many of the major economics departments, graduate students wouldn’t learn anything about banking in any of the courses.”"

LINK: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2234

Bruce Koerber June 18, 2009 at 6:02 pm

Classical Liberalism Protection
Thursday, June 18, 2009

It Was Weiser That Undermined The Austrian Neoclassical Heritage.

It seems to me from what I have read that the neoclassical heritage of the Austrian School was hijacked after Bohm-Bawerk’s death and the elevation of Weiser to the position of ‘spokesperson’ for Mengerian economics. He was clearly a positivist.

There are always points in time where events turn. What could possibly have happened in the 1930′s that was more significant than the hijacking by Weiser after 1914?

Joseph Mises June 18, 2009 at 6:37 pm

Ben – Specifically, three of my friends, one a mechanical engineer at SEAS, and two, chemical physic majors (interdisciplinary major) take the exact same argument you made in your first post. It’s virtually the same.

A couple other engineering buddies haven’t looked deep into mathematical economics, but they dismiss most of the “principles of econ” class as fluff and see Austrian economics as more accurate.

RWW June 18, 2009 at 7:15 pm

I’m sure that some nations will come out this embracing capitalism.

I seriously doubt it.

The United States will ultimately be forced to [embrace capitalism] unless it’s content to live in decades of poverty.

That’s not the thought process going on in most voters’ heads.

Justin June 18, 2009 at 7:19 pm

This is “Scientism.”

It’s useful for Elites to use complex mathematical jargon to explain economics because it makes the lay person feel to dumb to understand. The lay person then abdicates all economic thought to the elites.

Economics does not have to be overly complicated at all. Anyone can understand it as long as it is taught using common language. Hayek is great doing that. Some more modern economists that take the vernacular approach are Thomas Sowell and Econtalks, Russ Roberts.

I made my wife listen to Sowell’s Basic Economics audio and guess what, it all made sense. We don’t need complex Supply and Demand curves, just a well reasoned argument with real world examples.

Tyler S June 18, 2009 at 8:01 pm

Stuff like this is supposed to model real life? I’ve read scientific papers on the psychopharmacology of drugs for Parkinson’s disease that read like children’s books when compared to this article. What does he (and his academic cohorts) think he is accomplishing?

Jim Fedako June 18, 2009 at 8:58 pm

Tyler S –

“What does he (and his academic cohorts) think he is accomplishing?”

My bet: In the end, defending government.

Current June 19, 2009 at 5:02 am

Well, I’m an engineer. I have noticed that quite a lot of engineers seem to follow Austrian economics.

I think that the reason is that after some practice in engineering a person gains a skill at judging the level at which a phenomenon can be understood. We look at mainstream economics and judge that it can’t be understood at the detailed level intended by the mainstream.

Another aspect of it is that engineers are all involved in the structure of production. Our work is separated by years in time from the point when it will be consumed. It seems ridiculous to say that this is irrelevant.

Emil Suric June 19, 2009 at 5:12 am

It would be stupid to deny the usefulness of quantification and mathematics when it comes to economic theory and principles; as long as we understand that human action can never truly be completely quantified. But statistics has proven to be a useful tool in explaining current phenomena. The problem occurs when economists build there theories around the current data, rather than using current data to support their theories. Quantification can only support, never validate, or invalidate, economic principles. The quantity theory has proven a vital tool for all schools of economic thought; as long as marginal utility is not forgotten/dismissed. This entire economic calamity can easily be portrayed through applying quantity theory+utility theory. All investigation is first and foremost a logical endeavor, and blind faith in programs such as SPSS obviously has negative ramifications; but a complete dismissal of mathematical principles also stagnates economic progression.

Richie June 19, 2009 at 6:58 am

Here is a link to the entire paperl, and please tell me how this qualifies as “economic progression”.

http://www.econ.ku.dk/english/research/publications/wp/dp_2009/0905.pdf/

Current June 19, 2009 at 7:14 am

I think Eric Suric’s got it right.

Ralph Fucetola JD June 19, 2009 at 7:50 am

ROFL – “In many of the major economics departments, graduate students wouldn’t learn anything about banking in any of the courses.”

And they probably think currency gets its value from legal tender laws…

RWW June 19, 2009 at 8:31 am

The problem occurs when economists build there theories around the current data, rather than using current data to support their theories.

Could you give an example of an economic theory that requires the support of data?

Michael A. Clem June 19, 2009 at 10:19 am

Economics does not have to be overly complicated at all. Anyone can understand it as long as it is taught using common language.
I would modify that to say that the basics don’t have to be complicated, and thus, relatively understandable by the general public. But like any true science, a legitimate economic science would also have its share of detailed complexities and technical jargon that would be difficult to follow if you’re not an economic expert. That’s just the way science is.
The trouble with modern mainstream economics is that they’ve tried to get technical without a solid foundation of basics to work from.

JAlanKatz June 19, 2009 at 11:56 am

Ok, I’m a radical believer in Austrian economics. I’m also a math teacher (and when it comes up, I teach my students about the limits of what calculation can do.) But, in all honesty, it doesn’t do the Austrians any good for supporters to actively go around showing ignorance of mathematics. How does someone get the right to laugh at mainstream economists if they cannot understand what the mainstream is doing?

Further, Austrian economics is not any less mathematical than mainstream economics, if by mathematical we refer to thinking like a mathematician. Understanding real analysis and linear algebra is not a hinderance, but a help to anyone wanting to understand economics, especially Austrian economics, since in Austrian work, the thought patterns required (careful, deductive proof) are exactly what these courses teach and practice.

Current June 19, 2009 at 12:04 pm

“Could you give an example of an economic theory that requires the support of data?”

A great many Austrian theories do.

To start with, to talk about human action you must observe that there are other humans. Then you must observe that they are motivated as you are.

You must observe:
* How human needs relate to time (or you may consider this a priori, I don’t).
* That practical capital good are often specific.
* The time structure of production.
* The properties of the exchange and goods that cause money to evolve.
* The nature of information movement in markets
* The relative ease of calculating with money amounts compared to calculating only with subjective judgment.

Richie June 19, 2009 at 12:15 pm

” it doesn’t do the Austrians any good for supporters to actively go around showing ignorance of mathematics.”

No, we merely say that applying mathematics to economic theory is highly questionable.

“Further, Austrian economics is not any less mathematical than mainstream economics, if by mathematical we refer to thinking like a mathematician. Understanding real analysis and linear algebra is not a hinderance, but a help to anyone wanting to understand economics, especially Austrian economics, since in Austrian work, the thought patterns required (careful, deductive proof) are exactly what these courses teach and practice. ”

Here is Dr. Bill Anderson:

“…while one can make logical deductions in observations of human action, it is impossible to make those deductions with the precision that mathematical reasoning requires.”

Read the rest of his piece here, title “Mathematics and Economic Analysis”:

http://mises.org/daily/926

RWW June 19, 2009 at 12:27 pm

Current:

A great many Austrian theories [require the support of data].

Well then, you shouldn’t have any trouble giving an example of such a theory. Go ahead.

JAlanKatz June 19, 2009 at 12:31 pm

Given the context, it’s hard to say how I react to the Anderson quotation. I see two ways to interpret it. One is simply affirming that the elements of economics are not quantifiable. This interpretation seems defensible as it appears in the concluding paragraph of an essay making this point, and is followed immediately by an example also illustrating this point. In that case, I agree wholeheartedly. The only problem is that this interpretation doesn’t fit the words exactly. On the other hand, it can be interpreted as saying that the reasoning in MES or HA is different from the reasoning involved in developing the theorems of a branch of mathematics. In that case, I respectfully disagree. While I acknowledge Dr. Anderson’s superiority in matters economic, I don’t acknowledge it in matters mathematic, and I think he’s misdescribing the latter. There’s a simple explanation for this – the math courses an economist takes tend to be highly calculational, and many economics courses are simply applied math courses. The economic does not emphasize the theoretic, proof-based side of math, which is almost all there is to math outside of the things that an economist studies.

On your first point, I entirely agree that directly applying mathematical results to economics has to be done carefully and is frequently problematic. I don’t think it’s fair to describe all the comments on this article as making that point, though.

Current June 19, 2009 at 12:55 pm

RWW:

Mises uses all of the empirical points I mention in most of his works. Including Human Action and Theory of Money and Credit.

Once Mises goes into what he call Catallactics he uses empirical evidence. It is though very local evidence such as that I’ve mentioned above.

A good example of this is Capital theory. We observe that capital equipment is not homogeneous, we observe that it is differentiated.

As far as I can see this need not be so praxeologically. We humans could have been born into a world where the land provides all we materially desire. (Of course it is impossible that it would provide all that we could desire).

RWW June 19, 2009 at 1:08 pm

True — “capital equipment is not homogeneous” is a non-numerical datum. For some reason I was making the common mistake of conflating “data” with “numerical observations.”

RWW June 19, 2009 at 1:12 pm

Ah, it was because Emil Suric’s comment used the word “data” in that sense.

Current June 19, 2009 at 1:31 pm

I think that data in the numerical sense may still be useful.

The problem I’ve noticed with other sorts of economists is that they don’t recognize that capital structure is important. They say “yes, I know capital goods aren’t perfectly substitutable but it’s a good assumption”. It would be useful in my view to do some empirical research to find out how good an assumption it is.

Doing that though would not yield any new economics though.

It is possible though that empirical research can be useful too to find deductive errors. I think that Austrian economics contains some of these sorts of errors. Empirical work may be a useful – though very indirect – way of tackling this.

JAlanKatz June 19, 2009 at 3:18 pm

Current, the problem is the fundamental insight that theory affects observation. The results of empirical work are not brute facts that we then form theories around. Rather, the theories we hold affect how we interpret the data – in other words, facts don’t come with their own interpretation. If I’ve made a deductive error somewhere in my theory, I don’t see how evidence can point it out to me if I’m going to understand that data in accordance with my theory. Take the example of psychic income. We derive the existence of psychic income from the observation that there are demand schedules which, without psychic incomes, seem to violate the laws of supply and demand. This means we’re interpreting the data in accordance with our absolute knowledge of this law. We could have also considered the data to be evidence that we have a mistake in our deduction of this law, but we don’t.

Next, suppose we did somehow identify such a mismatch between observation and theory. How would we go about identifying where the mistake was in the theory? There could be multiple points in the derivation where a change would explain the data. How will we choose which one to change? Probably by reevaluating the deduction and checking carefully for errors – but we could have done that in the first place without the empirics.

See on this Quine’s “Two Dogmas.”

Emil Suric June 19, 2009 at 3:58 pm

RWW said:
“Could you give an example of an economic theory that requires the support of data?”

The fact that I used the word support suggests that theory doesn’t require data. Like I said before, data merely serves as a useful tool which may, or may not be helpful; though very often it is quite helpful. It serves no purpose to simply dismiss mathematics, and claim that economics has no place for it whatsoever.

Emil Suric June 19, 2009 at 3:59 pm

RWW said:
“Could you give an example of an economic theory that requires the support of data?”

The fact that I used the word support suggests that theory doesn’t require quantified mathematical data. Like I said before, data merely serves as a useful tool which may, or may not be helpful; though very often it is quite helpful. It serves no purpose to simply dismiss mathematics, and claim that economics has no place for it whatsoever.

RWW June 19, 2009 at 5:56 pm

The fact that I used the word support suggests that theory doesn’t require data.

Why bother with something that isn’t necessary?

Bruce Koerber June 19, 2009 at 8:54 pm

Classical Liberalism Protection
Friday, June 19, 2009

“Classical Liberalism” Is Less Encumbered Than “Neoclassical.”

The water has been muddied. We can try to claim to be neoclassical economists but the old baggage of the empiricists is such a burden.

Because of the Protestant Reformation and its coinciding with the power grab by nationalistic leaders lusting for power there was a virtual annihilation of classical liberalism. It almost disappeared and it flew under the radar!

Now is the time to reclaim it and to bring honor to ourselves and to that noble tradition by adopting classical liberalism as the economic tradition of the Austrian School.

Emil Suric June 20, 2009 at 12:39 am

RWW,

imagine for a moment we were able to calculate the natural rate of interest. We would be able to run regressions proving that suppressed market rates of interest inevitably lead to corrections, aka depressions. How would this not be useful? It doesn’t have to be absolutely required to be a useful tool. Simply dismissing mathematics out of some ideology is not helpful at all.

newson June 20, 2009 at 6:19 am

german is useful, too. we should not dismiss it in our imaginary calculation of the natural rate of interest.

RWW June 20, 2009 at 7:37 am

…regressions proving…

Those two words make absolutely no sense together.

RWW June 20, 2009 at 7:39 am

Besides, it has already been proved (in the true sense of the word, not whatever you mean by it) that an artificially low interest rate must lead to corrections.

Andras June 20, 2009 at 12:35 pm

RWW,
How you define corrections? A fall in GDP? But GDP is an inherently flawed keynesian measure!

RWW June 20, 2009 at 12:47 pm

Also a good point, Andras.

Numerical data are useless to economics, though they certainly have their place in the study of history.

Emil Suric June 20, 2009 at 4:22 pm

RWW

“…regressions proving…

Those two words make absolutely no sense together.”

I’m sorry, I should have said, strongly suggests, or supports. I didn’t know we were having some kind of serious debate. Excuse my lack of clarity.

“Besides, it has already been proved (in the true sense of the word, not whatever you mean by it) that an artificially low interest rate must lead to corrections.”

If you could please further elaborate on this point. I fail to see how we have proven this if we’re unable to determine, for sure, that the market rate of interest has been suppressed below the natural rate.

newson said,

“german is useful, too. we should not dismiss it in our imaginary calculation of the natural rate of interest.”

Pure sarcasm, nothing of value in this comment at all. Try to remain civil.

Emil Suric June 20, 2009 at 4:47 pm

Hayek was no ideologue, though he questioned the techniques of quantification and statistics, he did find that they could be quite useful: “The task is made rather easier by the fact that there does exist today, on at least one point, a far-reaching agreement among the different theories. They all regard the emergence of a disproportionality among the various productive groups, and in particular the excessive production of capital goods, as the first main thing to be explained. The development of theory owes a real debt to statistical research in that, today, there is at least no substantial disagreement as to the thing to be explained.” (page 25, “monetary theory and the trade cycle”)

RWW June 20, 2009 at 10:13 pm

I’m sorry, I should have said, strongly suggests, or supports.

No need to “suggest” something that is apodictically certain.

I fail to see how we have proven [that an artificially low interest rate must lead to corrections] if we’re unable to determine, for sure, that the market rate of interest has been suppressed below the natural rate.

The law in question is conditional — it is an “if-then” statement. Its logical form is “If P, then Q.” Whether P is true has nothing to do with the truth of the statement. And even if you could demonstrate that P has led to Q on a number of occasions in the past, it would not prove any universal law.

Hayek was no ideologue…

An ideologue is an advocate of a particular philosophy. I think Hayek qualifies as such.

…though he questioned the techniques of quantification and statistics, he did find that they could be quite useful: “…The development of theory owes a real debt to statistical research in that, today, there is at least no substantial disagreement as to the thing to be explained.”

I doubt anyone here would argue that numerical data can’t inspire new lines of thinking in economics by raising interesting questions. As far as I can tell, this is all Hayek is saying.

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