Saturday, January 22, 2011

Austrian Economics: an example of greedy reductionism.

Greedy reductionism is a term coined by Daniel Dennett for pretense of explanation in simpler terms while ignoring or underestimating enormous complexities or layers of understanding.

Cosma Shalizi, in Must Macroeconomic Theories Have Microfoundations?, explains seven ways people insisting on microfoundations (which I think includes Austrians insisting on "action" or "rational man" explanations) are foolish or go wrong.

Brad DeLong (who does permit comments) notices and calls attention to a physics aspect of the article in The Microfoundations of Condensed Matter Physics Was a Doomed Research Program Until the 1920s. The comments are well worth reading.

12 comments:

Joanna Liberation said...

This is very nice. Mike's post is incredibly illustrative.

First there is wikipedia greedy reductionism definition, so Austrian School is supposed to be an example of greedy reductionism. No arguments here, just a prelude to Casma Shalizi article.

Which is delightful, could actually be written by Mises himself! Except maybe for his last point:

Points 1, 2, 3, 4 and 5 simply
state the obvious, but it gets real interesting when in point 5 Casma can't see why errors in macro-level theory "should always be the preferred option in economics". Very good! Maybe there are micro-level errors after all! Accordingly, "maybe the simplification of always solving for the equilibrium is wrong". Perfect! Mainstream economics long-term equilibrium equations assumption of homo economicus is a perfect example of a micro-level error, which "accumulates when one goes to the level of whole economies". Wonderful! Finally, Casma finds an analogy that "classical physics predicts that matter should be unstable". Another excellent example of greedy reductionism based on primitive (classical) micro-level models!

Then in point 6 Casma continues to state the obvious, but remember when Mike accused Austrians of developing their theory post-hoc? Now it seems Mike agrees that economists should do that. And that is correct, after all, also virtually all mathematical proofs have been developed post-hoc. But you have to have micro-level theory correct first!

Finally, in point 7, Casma believes that macro-level causal model is easier to develop than micro-level one. Certainly! Greedy reductionism example! But why something should be "more suitable for policy-making" just because it is easier? Beats me...

Now back to Mike's post again. Somehow, Casma "explains seven ways people insisting on microfoundations (which I think includes Austrians insisting on "action" or "rational man" explanations) are foolish or go wrong."

No Mike, Casma has actually done a pretty good job at showing how mainstream's micro-level theory in particular is foolish and wrong, and even provided an excellent physics analogy.

I just love this site!

Joanna Liberation said...

BTW, Mike, Austrians do not sign up for the "rational man" assumption. That's precisely the erroneous homo economicus micro-assumption of mainstream economy which results in all the artificial equilibrium equations. Austrian do sign up for the "action" assumption though. In other words, people are certainly irrational, but they still act purposefully all right.

LK said...

Austrians do sign up for the "action" assumption though. In other words, people are certainly irrational, but they still act purposefully all right.

The foundational idea for the Austrian praxeology of Mises and Rothbard is the human action axiom.

This proposition is that all human action is rational because all action is by definition purposeful

But this is just a peculiar redefinition of a term "rational".

The resulting idea, that all human action (by sane, non-mentally ill humans, of course!) is “purposeful”, is a pretty trival observation that can also be held by Marxists, communists, Keynesians, neoclassicals, monetarists, or any other economist you care to name.

And there is nothing much you can deduce from it without other premises either, since the most simple, useful deductive argument like the syllogism requires 2 premises to infer anything.

But once you get into praxeological arguments they quickly come to use synthetic propositions - either present or hidden - that can only be verified empirically:

http://socialdemocracy21stcentury.blogspot.com/2010/10/mises-praxeology-critique.html

The "apodictic certainty" claimed for praxeology actually vanishes like a puff of smoke.

Joanna Liberation said...

LK, mainstream models understand "rational" man as a monetary-maximizing individual. This is actually the only objective definition of "rationality". Other than that, "rationality" is as precise a concept as "thinking hard". People are virtually never pure monetary-maximizers so they are virtually never rational according to this definition (hence my usage of "irrational"). Obviously, for Austrians the dichotomy is redundant. Austrians would simply say people are subjective value maximizers. Austrians don't care if they happen to be same as monetary values or not. Austrians won't call anyone irrational (stupid) just because he does not maximize his monetary gains.

Yes, the idea that humans act purposefuly is pretty trivial, that's precisely what self-evident assumptions should be.

Thanks for the praxeology critique, I'll get back to you.

Joanna Liberation said...

LK, here it is http://critiquesofcollectivism.blogspot.com/2011/01/apodictic-certainty-of-praxeology.html

LK said...

LK, mainstream models understand "rational" man as a monetary-maximizing individual. This is actually the only objective definition of "rationality" ... People are virtually never pure monetary-maximizers so they are virtually never rational according to this definition (hence my usage of "irrational").

Basically correct. Humans are not necessarily rational economic agents.

That is why Post Keynesian economics rejects the New Classical theory of rational expectations.

LK said...

Regarding your post:

"Second, LK notes that some Austrians do not follow Mises' praxeology in its pure form or are critical. This is also true, so what?"

It is significant. If you are supporting pure Misesian praxeology and its methodology, then you are holding a position that has been abandoned by increasingly large numbers of the serious Austrian economists, for good reasons too.

“Suddenly, LK states that ‘there seems to be little point in the use of empirical data by Misesians’"

I don’t state it “suddenly.” Read the whole quote and context:

“But, as Mises argued, empirical data, even if they appear to support the inferences of praxeology, do not in any sense verify praxeological inferences. This means that any Austrian who invokes empirical evidence that appears to confirm the inferences of praxeology, or who implies that such evidence supports Misesian theory, has in fact not verified those inferences in any way. Consequently, there seems to be little point in the use of empirical data by Misesians.”

And that is correct.

“Hence, LK has nothing against Mises axioms.”

Wrong.
I have just described above to you (and you seem to agree) that the human action axiom is a trivial proposition. You are not going deduce anything from it without other premises, and praxeological arguments quickly require synthetic propositions, either hidden or present.

LK said...

"Then suddenly LK says "it is clear from all this that Mises’ praxeology does in fact have severe flaws in its verbal chain of logic and argumentation". What verbal chain of logic and argumentation flaws? Where?"

Mises' argument for free trade by comparative advantage (or the “Ricardian law of association”) is a perfect example:

http://socialdemocracy21stcentury.blogspot.com/2011/01/mises-on-ricardian-law-of-association.html

Joanna Liberation said...

LK, I wouldn't care less if Mises himself abandoned praxeology for "good reasons", if nobody knew what those "good reasons" were. Here's the difference between us, if I cared what most people say, I would be a liberal, like you. So save all the arguments like "most people say praxeology sucks" for a different audience.

Are you really saying there is no use for empirical data other than for economics theory deduction?

Axioms, synthetic propositions, they are all assumptions, and what matters is if they are evidently true. I appreciate your zeal in finding "hidden" assumptions, but in order to disprove Mises you need to find false assumptions. So, first of all, you'd have to actually state explicitely what those "hidden" assumptions are. There is not a single "hidden" assumption stated explicitely in your post, and only one explicit stated by Mises himself. Instead, you just keep referencing some other guys who are supposed to know such hidden assumptions. I bet you are a believer, but please keep in mind that libertarians use use less "disgust, empathic concern, and neuroticism" and more "utilitarianism, need for cognition, and systemizing" than liberals do, so again, save such arguments for a different audience.

Thanks for another post, I'll get back to you.

LK said...

"Are you really saying there is no use for empirical data other than for economics theory deduction?"

What does this even mean??
Empirical evidence is relevant in vast areas of the human natural and social sciences.

Unless you are doing some subjects like areas of pure mathematics that have no relevance to the real world, where you can in fact proceed by pure deduction, empirical evidence is usually very important.

"Axioms, synthetic propositions, they are all assumptions, and what matters is if they are evidently true."

An assumption is different from a mere proposition.

A synthetic proposition does not have to be "evidently true".
E.g.,

"There is organic carbon-based life on Europa (Jupiter's moon) living in 2011."

That proposition is neither "evidently true" nor "evidently false" - we have no way of knowing its truth, except by going there and looking.

"I appreciate your zeal in finding "hidden" assumptions, but in order to disprove Mises you need to find false assumptions. "

I have just given a list of false hidden assumptions underlying Ricardo's argument for comparative advantage, taken over directly by Mises:

http://socialdemocracy21stcentury.blogspot.com/2011/01/mises-on-ricardian-law-of-association.html

LK said...

This might be of interest to readers of this blog:

"The Types of Pro-Free Market Libertarians
Pro-free market", http://socialdemocracy21stcentury.blogspot.com/2011/01/types-of-pro-free-market-libertarians.html

Joanna Liberation said...

LK, apologies for delay, I was on vacation. As for your critique of Ricardo's assumptions.

First off, Ricardo stated them explicitely in his work, so they were never "hidden".

Second, I can't see how Mises argument is allegedly "dependent" on Ricardo. After all, you yourself quote Mises saying Ricardo's assumptions do not hold.

Third, even though Ricardo used factor immobility assumption (both of the conditions you specify) in his basic models, comparative advantage does not need them:
http://www.cato.org/pubs/journal/cj23n3/cj23n3-6.pdf