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Without time for translation (maybe interpret too lazy), this time goes in English…

The tension between Austrian economics and empirical tests is well known. While this kind of tension has been a long stand, this strain may have been exaggerated or misinterpreted (maybe by both sides, critics and some defenders); there does not seem to be too much distance between the empirical work of Austrians and contemporary works in epistemology as sometimes seems to be implied.

After the Popper-Kuhn-Lakatos-Feyerabend debate, it is not so clear that empirical tests are the correct approach to assess a scientific theory. Popper argued that there is no data analysis that can be independent from theory, introducing the problem of theory laden. Economic indicators, for instance, were built with a given theoretical framework, namely Keynesian inspired macroeconomics. How much confidence provides an empirical confirmation of a Keynesian model using Keynesian inspired indicators? Or, how much confidence provides an empirical rejection of an Austrian theory using Keynesian inspired indicators? It is a theory what points out what should be considered relevant data in the first place. Furthermore, because the capital theory was set aside, proper economic indicators related to the Mises-Hayek prediction are not easily available. The fact that fundamental aspects of the capital theory, a protagonist of the Mises-Hayek business cycle theory, do not find a place in our models does not make the theory wrong any more than it makes our models incomplete. [See Horwit’z comment on the relevance of capital theory]

Additionally, Kuhn argued that data interpretation, not only data selection, was dependent of the theoretical content in different paradigms, and that same terms can mean different things for different scientists.[1] Empirical tests, according to Kuhn, may work inside a paradigm, but not to resolve a dispute between theories from different paradigms because the test needs to take the paradigm for granted (namely, the paradigm is not testable). Lakatos sustained that scientists embrace a nucleus surrounded by a protection belt of assumptions. But as (Machlup, 1955) foretold, this imposes a challenge to the problem of verification in economics because a theory cannot be tested independently of empirical assumptions, which in turn can have different degrees of generality. How to empirically distinguish if there is a problem in the theory or inside the set of assumptions? Importantly, not all assumptions are observable, as (Mises, 1943) and (Lachmann, 1943) discussed, the business cycle theory assumes that expectations behave in a particular way with respect to changes in interest rates; this expectations, however, cannot be observed.[2] Feyerabend, then, concluded that is not through empirical tests, but persuasion and critical discussion the way scientists convince each other; in a debate between paradigms, each group uses their own paradigm to argue on their defense. It is theory versus theory, rather than theory versus data, what the scientist has to deal with. When one looks at “Austrian empirical work,” one may argue that, after all, Austrians are closer to post-popperian epistemology than what the critics say Austrians should do.

This, of course, does not mean that there is no role for empirical work. It means that such studies, as (Machlup, 1955) argued, should be approached as an exercise of illustration of the theory rather than as a strict empirical test.[3] One may test an assumption given the theory, but one cannot test the theory just by itself. Even under this situation interest work can be done. (Young, 2005, forthcoming), for example, measures predictions from the Mises-Hayek business cycle theory. In both cases he finds a statistical significant result. (Young, 2005) finds that labor moves along stages of production as Hayek argued should be the case.[4] The stages of production, however, is an analytical construct of the theory, it is not observable. That is the reason why Young needs to assume how to separate between different stages and their order in the production process. Namely, the structure defined by the stages of production is a set of assumptions. But these set of assumption allows illustrating Hayek’s pattern predictions of the business cycle. Also, (Young, forthcoming) finds that capital structure for the U.S. between 2002 and 2009 was affected as the Mises-Hayek business cycle predicts. Both of Young’s work, should be mentioned, focuses on specific predictions from the Mises-Hayek theory.[5]

A brief but important clarification may be in order. It is referred as a different paradigm the relationship between ‘Austrian economics’ and the ‘neoclassical synthesis’. The difference between ‘Austrian economics’ and ‘neo-classical economics’ is, for instance, different than the difference between ‘neo-classical economics’ and ‘neo-keyneisian economics.’ The later are differences within a paradigm, but do not necessary represent different paradigms as long as they see through the same terminological glasses. This is not, however, how the problem is usually approached in the literature, for instance in (Blaug, 1975; Bronfenbrenner, 1971) when trying to analyze Keynesianism as a change in paradigm. It is assumed that ‘neo-classical’ and ‘neo-keynesian’ economics represent different paradigms. This is also one of the reasons why under this approach it is hard to find scientific revolutions like the ones in astronomy or physics in the history of economics. But if ‘Austrian economics’ and the ‘neo-classical synthesis’ were to be different paradigms, then this helps to understand, among other things, the challenges in communications between these two groups; problem that is far less present between ‘neo-classical economics’ and ‘neo-keynesian economics.’ Regarding the fact that an argument may be put forward that the ‘neo-classical synthesis’ replaced ‘Austrian economics’ and, as such, this reflects an advance in economic’s science, it should be remembered that a change in paradigm does not necessary mean a step forward in the sense of getting closer to the truth, it may well mean a step backwards as well. See (Kuhn, 1962, p. 170).


[1] See Horwitz, S. G. (2000). Microfoundations and Macroeconomics: An Austrian Perspective (2003 ed.) Routledge; Thomsen, E. F. (1992). Prices & Knowledge. (2002 ed.) Routledge. Also Kuhn, T. S. (1962). The Structure of Scientific Revolutions (1996 ed.) The University of Chicago Press, pp. 101-102.

[2] Other non measurable, or non observable, assumption is the stickiness of prices. See Shah, P. J. (1997). The Theory of Business Fluctuations: New Keynesians, Old Monetarists, and Austrians. Advances in Austrian Economics, 4, 33-62..

[3] (Anderson, 1949; Robbins, 1934; Rothbard, 1963) are three examples of empirical research regarding the Great Depression that could be considered an illustration of the business cycle theory. Econometric studies, of course, are not the only way to perform empirical work.

[4] Should be mentioned that not everyone agrees with Young’s approach. See Murphy, R. P., Barnett II, W., & Block, W. E. (2009). Testing Austrian Business Cycle Theory? A Rejoinder to Andrew Young. Journal of Business and Economic Perspectives, 35(2), 73-86. and Young, A. T. (2010). Illustrating the importance of Austrian business cycle theory: A reply to Murphy, Barnett, and Block; A call for quantitative study. The Review of Austrian Economics, 24(1), 19-28.

[5] Other econometric studies are Bismans, F., & Mougeot, C. (2009). Austrian Business Cycle Theory: Empirical Evidence. The Review of Austrian Economics, 22(3), 241-257.; Carilli, A. M., & Dempster, G. M. (2008). Is the Austrian business cycle theory still relevant? The Review of Austrian Economics, 21(4), 271-281; Keeler, J. P. (2001). Empirical Evidence on the Austrian Business. The Review of Austrian Economics, 14(4), 331-351. Also see the comments in Rizzo, M. J. (1978). Praxeology and Econometrics: A Critique of Positivist Economics. In L. M. Spadaro (Ed.), New Directions in Austrian Economics (pp. 40-56). Sheed Andrews and McMeel.

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