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Source link: http://archive.mises.org/8871/fundamentals-are-fundamental/

Fundamentals Are … Fundamental

October 30, 2008 by

For non-Austrian School economics, any observed trend or correlation trumps the fundamentals. If the observed data appear to refute a fundamental law, the observation is reaffirmed and the law suspended. But such an epistemology is nothing more than poking in the dark — or poking in the data. FULL ARTICLE

{ 19 comments }

Michael A. Clem October 30, 2008 at 10:42 am

Loved that analogy about the two piles of dirt. It seems that higher epistemological concepts are harder to understand and retain than lower epistemological concepts. This may be an obvious, even trivial statement, but it clearly explains the difficulties people have with the various philosophies, sciences, and economics.

fundamentalist October 30, 2008 at 10:57 am

Great article! It illustrates why I am a fundamentalist.

maera October 30, 2008 at 11:10 am

Yes, the piles of sand make a good conservation of mass experiment to test for the development of abstract thought. Could we go through the pro-bailout articles to unearth a shocking truth about our elites’ mental capacities?

Inquisitor October 30, 2008 at 11:41 am

One needs to study philosophy to understand how incredibly dogmatic the seemingly and supposedly undogmatic “let the data speak for itself!” is in reality, and how much more bold are its epistemological and ontological claims. Then one realizes the seemingly unburdened doctrine of positivism is one of the most loaded systems out there.

Greg October 30, 2008 at 12:53 pm

Do not confuse the relationship between future contracts and the actual commodity. They are two separate products. Try trading future contracts based on the funtamentals the supply and demand of the actual commodity and you will get your clocked cleaned playing the future contract.
The day of an oil user buying a future contract to hedge their position on a future delivery has passed. Instead, we have a large number of people trading these contracts on 10 separate markets with not intention of taking delivery and are just playing the trade. These traders buy at 10AM, sell before noon, buy again at 1:30PM and sell before 3:30PM. And never be in postion at the end of the day.
Because the spot price is tied to the future price, when speculation pulls the price high, you do get a build in supply (the current condition where tankers are full with no place to go). But prior to the price fall, you have Goldman Sachs who have positions in oil coming out and predicting oil is going to $200. It creates a rally, they sell and it leaves the majority of the players holding an empty nest. As the price falls, players that are leveaged must sell to cover margins and the price falls further.
Leverage is the key difference between buying a barrel of oil or buying a futures contract. When you buy the oil, you pay $65 a barrel. When you buy the future contract you pay only $12. Becasue of this leverage, price fluctuations in the futures market is magnified and cause imbalance in the spot market.

Dalton Amile October 30, 2008 at 1:19 pm

Mr. Fedako:
You can’t be serious……there are countless examples of combining individual units (1, 2, 3, etc.) and making a new, single unit. Combining two sand piles into one sand pile = one new, larger, but STILL ONE sand pile!!

Epistemology is subject to the same normative analysis that everything else is. Only numbers are truth; “at its deepest level, reality is mathematical in nature.” Pythagoras of Samos

David Spellman October 30, 2008 at 3:42 pm

We do too live in a utopia! You got it backwards–one plus one equals three. At least when the Fed can create new money. Heck, one plus one can equal $700,000,000,000 in a pinch.

Rasoul Namazi October 30, 2008 at 4:02 pm

I have an objection to make. You presuppose the supply and demand concepts as a priori; like some metaphysical monades, unchangeable and immortal. I think this idea goes directly against the Empiricist approach of Free Market Thinking Founders (I am thinking about Adam Smith, John Locke and David Hume). Supply and Demand theories are correct because they can explain the Reality. If they dont, they would be refuted: this is the emiricist philosophy of science. Marx’s theory is false because it doesnt work in Reality, not because it was againt the supply and demand “Theory”. And vice versa, the supply and demand theory is not true because it is logical or coherent, but because it is coherent with Reality and Real Data.

Mike D. October 30, 2008 at 4:34 pm

Jim
It is a fundamental principle in any scientific model that the model should fit the data and not the other way round. This is why an observation of the sun’s gravitational field bending light is a critical experiment. If the experiment had produced negative results then the Theory of General Relativity would have been falsified.
The reason that conventional economic is at odds with observed economic data is that the conventional economic models are wrong – not the data. When the conventional economic models do not explain what is going on, the economists make ad hoc changes or introduce bogus arguments, such as attributing large price movements to speculators, shortages to hording, high prices to price gouging etc. rather that admit the model is wrong.
Austrian Economics does not have this problem because the Austrian Economic Model is better at explaining economic behavior than conventional economics.
Mises.org has correctly predicted, ex ante, the result of 1% Fed Funds rates, price gouging laws, changing the short sale rules etc. Meanwhile, conventional economists are still trying to come up with ex post explanations as to why their predictions, or policies, if you happen to be the Fed or the Treasury, did not produce the outcomes that they expected.
The Fed just lowered rates to 1%. Austrian theory has a very clear prediction of what is going to happen, contrary to the conventional economic view.

Robert October 30, 2008 at 8:10 pm

Economic theory cannot be built upon “new math”. Any first year engineering student understands the concept of unit volume in a consistent system of measures. To wit: 1 unit volume of sand plus 1 unit volume of sand equals 2 unit volume of sand. Spread it far and wide, neither adding nor removing any sand mass, and the total amount of sand still measures 2 unit volume. Dimensional analysis in engineering is key to maintaining consistency and understanding within any static or dynamic system.

My guess, as a non-economist, is that the fundamentals of unit dimensional analysis hold for economics as well. The only difference is that the physical world of engineering has no tools for dealing with the magic of unlimited, new, mass unit volumes (fiat money in the case of central banks) appearing from nowhere. I, too, support the view that fundamentals are….well…fundamental.

“Make everything as simple as possible, but not simpler.” – Albert Einstein

Mr. Einstein certainly understood systemic complexity. Many of the smooth talkers of monetary theory go too far and become enthralled by their clever machinations attempting to prove one and one are one. Nothing could be further from the truth.

Rasoul Namazi October 30, 2008 at 8:42 pm

I think Mike has a point.

Inquisitor October 30, 2008 at 9:31 pm

Rasoul, you really ought to read Hoppe, Mises, Roderick Long, Barry Smith, Martin Hollis &c, on this. Hume and his buddies are old news. To say a concept cannot be a priori and “empirical” (as in, apply to the real world) is to beg the question and is itself an a priori statement, one that risks being vacuous on the positivist rendition of all such truths being either vacuous/merely syntactic… Yes, if the fundamental facts of reality (at a deep level) somehow changed, in some unthinkable way that supply and demand no longer operated as meaningful concepts, that is possible. Yet, no such thing has happened. Or even read Menger, the founder of the Austrian school on this, who is an empiricist in the genuine Aristotelian sense of the word. That a fact is “empirical” does not preclude it from being necessary… only the anachronism known as radical positivism insists otherwise.

I urge posters on this blog to actually READ Mises and others on epistemology rather than try to reinvent the wheel/inject their own scientistic biases into what Jim is saying, who I am sure is familiar with Mises’s arguments. If Mises is too brief then go straight on to Hollis or Hoppe, where there is no such excuse. Austrian econ has the virtue on being founded on correct principles and axioms, not of being more “consistent with the data”. The data can be interpreted in ANY way. This is not physics. Get over your obsession with an epistemology that does not even exist in the natural sciences any more.

fundamentalist October 31, 2008 at 8:37 am

Rasoul Namazi: “Supply and Demand theories are correct because they can explain the Reality.”

That is rarely true. Supply/Demand curves say that people buy less of an item at higher prices and producers produce less at lower prices. But if you have ever done any statistical analysis of actual data, you’ll find the opposite of the Supply/Demand curves. Generally, you’ll find that people buy more as prices increase. Take gasoline, for example. There were many periods in the recent past in which gasoline consumption was higher than the previous year in spite of much higher prices. That doesn’t mean that the Supply/Demand curves are wrong. They are abstract concepts that hold only when all other things are held constant, which they never are. You have to do a lot of data manipulation in order to get downward sloping demand curves and upward sloping supply curves from actual data.

Rasoul Namazi October 31, 2008 at 2:42 pm

Inquisitor.
I think you are using some kind of Argument of authority: “because X said so, your are wrong”, rather than “you are wrong because…”
I dont know how any principle can be true without any link to the reality. (you use the term “axiom” too, which by definition cant be empirical). It seems like some Hegelian mythology wich proves principles by some other principles in a circular fashion. I hope you dont defend brilliant Austrian Economics by some pseudo-derridaian ideas like “The data can be interpreted in ANY way”, because it means that Austrian Economy is some other kind of volontary interpretation of facts which is no superior to other pseudo-sciences like Marxism.

Fundamentalist.
“That doesn’t mean that the Supply/Demand curves are wrong. They are abstract concepts that hold only when all other things are held constant, which they never are.” I dont see any problem here. All you need is to find some other data which is hidden, to prove you theory “is consistent” with Reality, and if you CAN’T, it means that your theory is simply wrong.

Inquisitor October 31, 2008 at 3:39 pm

‘I think you are using some kind of Argument of authority: “because X said so, your are wrong”, rather than “you are wrong because…” ‘

Hardly. In fact if anything, you are.

“think this idea goes directly against the Empiricist approach of Free Market Thinking Founders (I am thinking about Adam Smith, John Locke and David Hume).”

See? That is an appeal to authority. I am urging you to actually read what major Austrian thinkers had to say on the matter. We are well informed of what the empiricists had to say. Most philosophers are.

“I dont know how any principle can be true without any link to the reality. (you use the term “axiom” too, which by definition cant be empirical).”

And where did you acquire this definition of “axiom”? What does it mean for something to be “empirical”? If an axiom is not “empirical” then how are inferences from it in any way connected to reality? What made you decide axioms have no connection to it? Answer: this is all problematic if one tries to divorce the a priori from reality, as positivists do. Too bad for them their philosophy collapses on its own weight. Like I said, read Mises or any of the thinkers I mentioned. Or for that matter, any anti-positivist from the last 100 years.

“It seems like some Hegelian mythology wich proves principles by some other principles in a circular fashion. I hope you dont defend brilliant Austrian Economics by some pseudo-derridaian ideas like “The data can be interpreted in ANY way”, because it means that Austrian Economy is some other kind of volontary interpretation of facts which is no superior to other pseudo-sciences like Marxism.”

Ipse dixit. The data CAN in fact be interpreted in anyway, and this is all the more problematic for the data of the social sciences. Which is why the positivist programme collapsed in the first place. It needs to make a huge number of theoretical assumptions that themselves are NOT “empirical” (here I am using their own warped definitions; e.g. time-invariant causality.) There is NO such thing as data that speaks for itself. If you want to know how Austrian econ is grounded, READ Mises or Hoppe or Hollis &c. Austrian econ is open to revision via he revelation of errors in the concepts it makes use of as well as its axioms and deductions from the former two. Stop judging it by the standards of the positivists.

“All you need is to find some other data which is hidden, to prove you theory “is consistent” with Reality, and if you CAN’T, it means that your theory is simply wrong.”

Yeah, and maybe some OTHER data is revelant that you don’t know of. Stop trying to steamroller over these problems by injecting the biases of natural sciences into the social sciences. It does not work, never has and never will. In practice economists will not abandon sound theoretical interpretations due to recalcitrant data. They need to be shown why a theoretical revision is needed. At best, recalcitrant data hints at a malformed concept, absent axiom or botched deduction.

fundamentalist October 31, 2008 at 3:50 pm

Rasoul: “All you need is to find some other data which is hidden, to prove you theory “is consistent” with Reality, and if you CAN’T, it means that your theory is simply wrong.”

You clearly haven’t worked with data very much. If you have ever read debates between economists over the empirical evidence for their theory, you’ll find that they can never agree on what data to use, what variables to include, what time period, which manipulation techniques and which analytical techniques to use.

The problem is not that a theory can’t find empirical support. No theory ever lacks empirical support. The fact is that you can prove any theory you want if you approach the data in the right way. That’s the reason empirical evidence is so untrustworthy.

Inquisitor October 31, 2008 at 5:08 pm

Hmm I posted some sources on here but they don’t seem to be showing up… just searching for the names I mentioned will yield articles on the matter, though.

Rasoul Namazi October 31, 2008 at 6:08 pm

Inquisitor

“There is NO such thing as data that speaks for itself. If you want to know how Austrian econ is grounded, READ Mises or Hoppe or Hollis &c. Austrian econ is open to revision via he revelation of errors in the concepts it makes use of as well as its axioms and deductions from the former two.”

I never said such a thing as “Data speaks for itself”. Data is neutre. I am clearly defending a popperian philosophy of science which doesnt believe in Induction. Theory speaks and tries to interpret the Data. As you put it “Austrian econ is open to revision via he revelation of errors in the concepts it makes use of ” I dont see where you dont agree with me! I believe also in Trial and Error: Trial of theories by observing the Data. Moreover, I dont quite understad why you have problem with my definition of Axiom. I dont want to argue about meaning of concepts which is not relevant, but when we talk about axiom, we mean ” a proposition that is not proved or demonstrated but considered to be self-evident” so it is not “empirical”. You dont mean it this way, say what you mean.

I guess our discussion seems a little out of context now. I am clearly defending an Empiricist philosophy of science: Trial of theories and falsification of theories by examining the facts. but I dont know still what you defend. You think there is some a priori, or purely logical way of deducing fondamental principles and concepts of a science (i.e. Ecoonomy)? This is why I said the project seems Hegelian.

PS: And I guess when you say “postivism”, you mean the unity of methods in social and natural sciences. Is it so?

Inquisitor October 31, 2008 at 6:38 pm

This is why I recommended those works, because it will take a lot of work to cover the ground you’re missing on the Austrian method. I’ll attempt to address a few points, though.

The Austrian method proceeds by the formation of theories from its core axiom, the action axiom (an axiom because a denial of the postulate man acts is self-contradictory as it is itself an action; from this are deduced the categories of time preference, utility &c.) It is then combined with various other postulates, e.g. land being more abundant relative to labour, the disutility of labour etc. This might be termed its inductive element (inductive in the Aristotelian, not modern, sense.) It then proceeds from these premises by way of deduction and forms its theories. So there are three ways in which a theory can be wrong: 1) an important concept might be omitted 2) an error can occur in concept-formation (i.e. the inductive stage) or 3) the deduction can go wrong. Rafe Champion has a paper showing how one can plausibly construe the Austrian method on the Popperian system, so you should give it a look. It’s not unfalsifiable, but neither does it follow the hypothetico-deductive methodology. A theory that is repeatedly inconsistent with data might be erroneous in one of those three ways, but if no error exists then it is sound. Barry Smith elaborates on this and calls it retroactive control over the axioms IIRC. Mises defends it in a more Kantian verbiage.

I’m not going to go on at length as to why the hypothetico-deductive method is wholly unsuited to the social sciences, and I recommend you read some of the authors I mentioned before as their works are mostly online. The exception would be Hollis whose works are worth reading regardless (I have Rational Economic Man in mind.)

As for Positivism, the philosophy of the Vienna Circle, it is the culmination of radical empiricism. It is characterized by dichotomizing all knowledge into analytic/formal/a priori knowledge and synthetic/contingent/a posteriori knowledge, thereby excluding the possibility of necessary truths (those which are are a priori synthetic.) It has been criticized from every side as none of it holds together, and yet it is the epistemology of choice of modern economists. It is methodologically monist and holds the hypothetico-deductive method holds for all sciences, incl. economics. Too bad it faces severe issues in trying to prove this.

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