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Mondays with Murray: The Problem with Empirical Studies

Last week I discussed the fallacies with the analysis of one of the chief propagandists for Keynesian economic policies, Paul Krugman, as he joyously celebrated possible errors in an empirical study that attempted to prove that government “austerity” programs helped the economies of countries that undertook them. Krugman and others believe that these errors disprove the worth of austerity programs (which in their minds relates to cutting government spending, though “austerity” in this sense has largely been a myth), and thereby prove the worth of the government deficit spending that Keynesians advocate.

In that piece I wrote:

The problem lies in methodology. Keynesians believe that their economic policies can be proven and that others can be debunked simply be performing empirical studies. ”Country A had massive deficit spending. The economy of Country A improved. This proves deficit spending is good.”

Students of the Austrian school know that the ideas of economics are derived from logical deductions based on the axiom of human action. All humans act, and act according to a set of preferences they hold. Everything we know about economics can be logically deduced from this fact. No studies are needed, nor are they relevant.

Rothbard describes this well in an Appendix to Chapter 1 of his economic treatise Man, Economy, and State, where he discusses the Austrian method of economic analysis, known as praxeological analysis:

This analysis takes as its fundamental premise the existence of human action. Once it is demonstrated that human action is a necessary attribute of the existence of human beings, the rest of praxeology (and its subdivision, economic theory) consists of the elaboration of the logical implications of the concept of action. Economic analysis is of the form:

1. Assert A- action axiom
2. If A, then B, then C; if C then D, etc. – by rules of logic
3. Therefore, we assert the truth of B,C,D, etc.

This is an important distinction to make between the Austrian school of economics and the more “mainstream” Keynesian view, which emphasizes models and formulas of all kinds for determining the “proper” level of government intervention in the economy. This ignores individual human action entirely, tossing logic out the window along with it.

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I think it's mistaken to

I think it's mistaken to dwell on a priorism, for this reason.

Economics does share with math and logic conclusions which must follow from premises.

However we're talking to people that don't understand economics mostly, and especially with Keynesians.

If you're having an argument with someone who doesn't understand logic, it does little good to accuse him of ad verecundiam. While it's true their argument cannot prove their assertion, and it would be nice if they understood that, but in the immediate situation you may have to resort to examples.

It's not wrong to do so, further we have an advantage. We know the right answer before we start. We just need to demonstrate it. Yes I understand it can be annoying to essentially have to show that 2+2=4 by putting two cupcakes next to two more cupcakes, then counting all the cupcakes.

We know 2+2=4.

Keynesians count cupcakes each time in case the answer might be different.

That said, when Keyesians say in this particular circumstance, aggregate demand is low or whatever, that 2+2=7, we know it's wrong, but we can still count cupcakes for them to show that, no, even when aggregate demand is low, 2+2=4.

I agree Keynesians deny logic and causation. The fundamental flaw is while empiricists, they do not consider the effect of an action over time. Of course if you measure an economy by GDP, which is increased by government spending, then deficit spending increases GDP. That's merely tautological. What they fail to understand, and one can only conclude deliberately so, is the effects over time, in subsequent years of that spending. Eventually it must even retard GDP, because the piper must be paid.

Nice

Timely piece - well composed.

Truth is, both Keynesian and Austrian economics can work

if they are both dedicated to fully, rather than a hybrid between the two.

Example: Austrian economics would call for very low government spending/low taxes. This provides more money to the populous which then allows businesses to thrive. The problem with Austrian economics is, in times of crisis, businesses contract, lay off people, and the economy can shrink even further. In times of crisis Austrian economics does not work as it gives no remedy to avoiding a financial crisis. It forces the society to live through austerity and at a lowered level of service until a point in which society "bottoms out" and the free market booms again.

Example: Keynesian economics would call for higher government spending in the short term. In the event of a crisis when businesses contract, government can take out low interest loans and put this money back into the economy in terms of unemployment, or direct employment. The problem with Keynesian economics however in times of non-crisis, is that populations are over taxed at a later date to pay for the past government debt.

Under Austrian economics, you see a much more horrible depression, but a much more rewarding boom cycle. Under keynesian economics, you see mild depressions, but anti-rewarding boom cycles. Under both economic models however, those on the bottom tend stay on the bottom, while those on the top, are not effected.

If your goal is relative stability, then keynesian economics is the way to go, however if your goal is to one day become financially rich, the clearly austrian economics is the way to go.

Unfortunately, what we have seen lately is a combination between the two. Keynesian economics in times of bust, and austrian in time of boom. That means, the government foots the bills when we need it, but no one wants to pay it back when the bill comes due. This is distabilizing for a society, but fantastic for the the individual who is already wealthy, get's all the benefits of society, and does not want to pay for those benefits.

There are two other economic models that are prevelant in the world. The first is the fascist. In this economic model, we see monopolies in each and every sector. Coke-a-cola would be the only softdrink, google the only search providor, etc. All prices are fixed, and a portion of the profits goes to the government. While we do have indirect fascism through financial contributions to individual politicians, we do not have an actual fascistic economic model. Fascism is good IF the prices set are reasonable and the goods are at least par, facism is bad when prices are fixed high, and product quality is low, leaving you no other choices. Facism is the ultimate capitalist dream of the owners of these businesses.

The final economic model is the communistic model. In this model, all products created are done so under government power. Prices are set by the government (i.e. everything you buy is a tax). There is little to no hope for advancement of classes in a communistic society, and the top of the society is often filled with power and excess while preaching that the proletariat are equals and no one gets special treatment. This is the worst dream of capitalists, in that there is no ability to manufacture and sell goods, however it is the dream of the individual who is already poor and without the means to purchase goods. It brings those on top to the level of the poor, while raising the poor to the level of the middle class. In other words, there is only one class (aside from the ruling class).

Your comparison of Austrian

Your comparison of Austrian vs. Keynsian assumes that the boom-bust cycle is caused by forces OUTSIDE of gov't intervention, yet it is this very same gov't intervention that causes the cycle!!!

Without artificial credit expansion, there wouldn't be a general boom-bust cycle that affects EVERYONE negatively. There would only be frictional adjustments in SPECIFIC industries, resulting from the individuals changing their value scales as things like technology advance.

Keynesiam economics is the CAUSE of the cycle; it doesn't make the bust more manageable. Austrian economics PREVENTS the cycle; it doesn't make it worse.

"I do not add 'within the limits of the law,' because law is often but the tyrant's will, and always so when it violates the right of an individual."

My response, point by point

"Example: Austrian economics would call for very low government spending/low taxes. This provides more money to the populous which then allows businesses to thrive. The problem with Austrian economics is, in times of crisis, businesses contract, lay off people, and the economy can shrink even further. In times of crisis Austrian economics does not work as it gives no remedy to avoiding a financial crisis. It forces the society to live through austerity and at a lowered level of service until a point in which society "bottoms out" and the free market booms again."

Under a system without government central planning and intervention in the market, financial "crises" would be few and far between, relatively small and self-correcting. The remedy *is* the free market.

"Example: Keynesian economics would call for higher government spending in the short term. In the event of a crisis when businesses contract, government can take out low interest loans and put this money back into the economy in terms of unemployment, or direct employment. The problem with Keynesian economics however in times of non-crisis, is that populations are over taxed at a later date to pay for the past government debt."

The problem with Keynesian economics is that it removes resources from the private sector, causing distortions in the economy. There is no "right' way for Keynesian policies to "work" (other than the fact they "work" for the central planners and the sectors that see the new money first.

"Under Austrian economics, you see a much more horrible depression, but a much more rewarding boom cycle. Under keynesian economics, you see mild depressions, but anti-rewarding boom cycles. Under both economic models however, those on the bottom tend stay on the bottom, while those on the top, are not effected.

If your goal is relative stability, then keynesian economics is the way to go, however if your goal is to one day become financially rich, the clearly austrian economics is the way to go."

I don't know what universe you live in, but Keynesian policies have shows us MORE frequent and longer recessions and depressions with central banking than before it. "Stability" should not be a goal - in a healthy economy, prices will always FALL as goods and services become more abundant.

"Unfortunately, what we have seen lately is a combination between the two. Keynesian economics in times of bust, and austrian in time of boom. That means, the government foots the bills when we need it, but no one wants to pay it back when the bill comes due. This is distabilizing for a society, but fantastic for the the individual who is already wealthy, get's all the benefits of society, and does not want to pay for those benefits."

This is largely accurate, and I don't have much disagreement with the rest of your post. Thanks for reading!

http://lionsofliberty.com/
*Advancing the Ideas of Liberty Daily*

I am more in agreement with

I am more in agreement with PR above because you are advocating faith in the free market to take care of the depression but offer no proof that it will.

Keynesianism at least offers a mechanism to combat it.

I had a long discussion with an old school friend about this issue a few months back and this is basically what he told me. Keynesian economics has more flexibility to adapt to different economic realities. But then he wasn't taught Austrian economics so his views might be a little skewed. I just don't find your answers convincing enough.

Austrian vs. Keynesian

Austrian theory is based in logic. Keynesian theory is based in faith. Faith in the central planners to know where to plunder and where to subsidize. Faith in central planners leads to distorted markets which fuel the perpetual boom and bust cycle.

And that's just it

While I'm certainly not as learned on the various schools of economic thought as some here, even I can see that any system will eventually become corrupted and crumble when it is faith based. Placing faith in your fellow man to do the right thing almost never works out, especially when so much money/power is involved.

That's why so many wacky political/economic theories look so good on paper and draw people in; because they don't factor in the key aspect that can and WILL make it all go to hell; other people.

A signature used to be here!

Austrian economics

Does not advocate for any "system" other than the natural systems that spring up through freedom.

There are no "theories" involved here; this implies that human action is not a fact; that logic cannot be deduced from it. Theories must be tested. Logic does not need testing. It simply is.

http://lionsofliberty.com/
*Advancing the Ideas of Liberty Daily*

This isn't meant in any way

This isn't meant in any way negatively, but you should seriously consider taking the time to learn economics.

One doesn't have 'faith' in math or logic. They simply are. To the extent Austrian economics is predictive, it is in exactly this nature.

In an argument about abortion I can say you are wrong because you don't go to Church and are thus a bad person. Of course you may know that has nothing to do with the merit of the argument, but not understanding logic, you can't use that fact to convince me.

The failure isn't in your point, or argumentation, about abortion, the failure is in my lack of understanding of logic.

If you want to discuss

If you want to discuss academic qualifications then I'm an electronics and Comm. engineer also having done FRM 1 & 2.

My friend did eco hons. before going on to a masters from LSE so he is pretty well covered academically in stating his opinions.

Not to put it negatively but what is your level of education?

Perfect example

Despite being highly educated, you aren't educated in logic either. This is called ad verecundiam, which I mentioned supra. A point is valid or it's not, regardless of the source. A degree only impresses the rubes, who aren't equipped with logic. Tangentially I think the reason logic is not taught in our socialized education system is precisely because it puts you at the mercy of state-approved and state-licensed 'experts'.

My suggestion wasn't meant as a personal attack yet you took it thus. It still isn't personal. My field of formal education was software engineering and philosophy (hence formal and symbolic logics). I studied economics auto-didactically when I realized it's importance. Yet, despite not having a degree I understand more than most economics majors, which you may choose to believe or not.

What you should believe is that you might find learning quite salubrious and enjoyable. I'm not implying you can't understand it, quite the contrary. It may sound fantastic but understanding economics is like Neo being able to see the matrix. Practically everything which you may now think happens for no scrutible reason does in fact happen for a reason. I wouldn't have thought so prior, but now I think economics is arguably the most important area of knowledge. It gives you tools for understanding the world no other discipline offers.

The difference between a Keynesian and an Austrian is the difference between a poor auto mechanic, who fixes cars haphazardly and usually by cannibalizing other parts from the same car, and an automotive engineer who understands how cars function as a system.

Logic is complicated and an

Logic is complicated and multifaceted. While argument from authority is a logical fallacy, we use it everyday in our human experience. Applying logic indiscriminately would lead you to check every part of an aircraft after studying aeronautical engineering for two more years before you would take a seat on a flight.

Now before you say this is a strawman :-D

I'll interject that what you are using, care to admit it or not, is rhetoric.

Not all opinions are equal. Though I would never characterize myself as highly educated, my opinions are based on a very mathematically rigorous foundation and still do not lead me to one conclusion or the other.

Like I wrote below, I am a pragmatist and the current system allows me enough choices to make informed decisions for wealth creation.

I am sure even in an Austrian system I would be able to do so. I cannot establish this as this system has never been used in the modern economy. Thus, I take the conservative view that it is better to continue with the current system and work to improve it.

If I were given a brand new world to work with I would probably be tempted to try Austrian economics.

I apologize for the reply as I found your tone condescending. The internet does not convey tone very well unfortunately =)

Ron Paul would be happier with you than me. Its just that I don't think all the study in the world will convince me definitively one way or the other.

LOL! Of course I'm using rhetoric:D

We're conversing and I have an agenda. That is, you seem intelligent and I think the world would be a better place if you understood economics.

But I'm not using any fallacies rhetorical or otherwise. IMO if you must use a fallacy to 'prove' your point you haven't done so, and you should probably study some more. Your position may be right, but only accidentally; because if you can't argue logically, you don't in fact understand your own position, so you have no way to know whether it's valid or not.

And yes of course people use rhetorical fallacies all the time. It's because they don't understand logic and are rarely faced with anyone who does. The real meaning of rhetoric is conversational logic. It's been used to mean verbal trickery but that's not the real meaning.

Valid rhetoric, like any other form of valid logic may seem to be verbal trickery to the logically defenseless.

This is why most progressives yell at you. They can't make valid arguments, so when you seem to be winning via a logical argument they think logic is a 'trick' but they have nothing else to do than yell or say you want women back in the kitchen, or go back to slavery days, or orphans to starve or whatever. You have faced these 'debates' I know.

So back to my agenda:) Austrian economics is like logic. Understanding it is only part of the fight. Because other people don't understand and you're always having to teach people.

But it's a necessary part, because if you don't understand it yourself you are arguing on their field of illogic and irrationality, merely emotional appeals and personal attacks. You won't ever win that battle because they always have stronger emotional appeals to.. appeal to:)

This is excellent

Great summary , faithkillis. It really does all come down to logic, and understanding how to think and deduce logically. Once one develops this skill argumentation becomes both much easier (it's easy to spot logical fallaceis) and more frustrating.

As you said, when those that don't use logic have their arguments destroyed and then think they've been "tricked" because they just can't or won't think logically. Yelling and screaming , straw men and ad hominem attacks ensue.

http://lionsofliberty.com/
*Advancing the Ideas of Liberty Daily*

As if a degree means

As if a degree means anything.

Simple Facts and Plain Arguments
A common sense take on politics and current events.

www.simplefactsplainarguments.com

I don't believe

that he was trying to knock your intelligence, more than challenge your specific studying of economics, or Austrian economics (to me they are the same).

Your friend sounds like he is educated in Keynesian economics, so it's not surprising that his views are generally ignorant of Austrian economics.

I can't recommend reading Man, Economy and State highly enough for those that really want to understand the basic logic of economics. It's a tough read at times but a great read, and very educational.

http://lionsofliberty.com/
*Advancing the Ideas of Liberty Daily*

Intentionally or not it

Intentionally or not it sounded very condescending. If not meant that way I apologize for the tone of my reply.

Look at the other response though. It is almost as if lack of a formal education is worn as a badge of honor here.

The problem is people watching YouTube videos have gaping gaps in their knowledge but can't see them simply because they don't have the necessary education.

Even when you state that it is all math and logic, you fail to take into account an incredibly important aspect which is human behaviour.

I am not FOR Keynesianism per se but I am a pragmatist, so I work with the system in place, rather than dreaming of what may be. I have found Keynesianism a good system to do business in and have no complaints so far. About an Austrian system I cannot comment as I have never worked under it.

In that sense you could call me a conservative as I am comfortable under the current system and don't want to deal with the risks of a new system.

Freedom

Is not a "system", it is simply freedom.

So you advocate for a Keynesian system because simply because it "is". By that extension you must be opposed to any change in policies overall? After all, you aren't used to anything new.

The only "risk" in a free society is the personal risk of failure in the market. In a free society without erroneous regulations, taxes and money manipulation the risk of starting a business would of course be much smaller.

There is no "risk" in having more economic freedom; the only risk is to the crony 'capitalists' that rely on the current system that would otherwise fail in the market.

http://lionsofliberty.com/
*Advancing the Ideas of Liberty Daily*

I understand what you

I understand what you mean.

When you talk or write about a system without making a value judgement, your analysis tends to turn into an apologia for that system.

I am not arguing philosophy, and I am motivated completely by selfish motives when it comes to this debate.

To a great degree I feel economics is just a great game and you are a good player if you know what the rules are and are willing to take risks. Speculating about what the ideal rules should be is interesting no doubt and may even lead to new insights but directly it is unlikely to help you play the game.

PS: This is exactly why I'm on the dailypaul. You learn best when you surround yourself with people smarter than you.

"Faith"

Faith has nothing to do with it. The "belief" in free markets is based purely on logical deductions, not on faith, and not on Keynesian "formulas".

Keynesian economics has more "flexibility", but this flexibility you describe is simply methods of removing resources from the private sector and diverting them to less efficient means at the direction of central planner. There is nothing remotely "reality" based about Keynesian economics.

It "works' for those on the receiving end of the confiscated resources, the "mechanisms' of Keynesian policies are what *cause" the depression in the first place. As the poster above explained, in a free market you would not have economy-wide depressions, but rather in certain sectors as they adjust to new technologies and preferences.

http://lionsofliberty.com/
*Advancing the Ideas of Liberty Daily*

Thank you! Logical and concise, well worth the read.

Hopefully others will take time to read it, as well.

"Hence, naturally enough, my symbol for Hell is something like the bureaucracy of a police state or the office of a thoroughly nasty business concern." ~~C.S. Lewis
Love won! Deliverance from Tyranny is on the way! Col. 2:13-15

Thanks!

Thanks a lot!

http://lionsofliberty.com/
*Advancing the Ideas of Liberty Daily*