Examining bad economic theories.

I used to hear my business based colleagues on the right talk about facts in the context of their orthodox opinions on the economy and politics. I’ve always agreed with them that we need to base theories on facts. If a theory can’t be tested then it is not even a hypothesis but just a string of false premises. If a set of solutions can’t be tested and its assumptions challenged and revised then, even if it has a few sound underlying theories, the solution is likely to fail. Our problem is that every problem is part of a system, and so there are unintended, cascading or intended rolling and crescendoing results for most actions. We need to consider that some effects multiply, and that this can be a thing for both good and ill, and sometimes both good and ill results are manifest in the same system at the same time.

Bad Economists are no better than leeches

Economics is a cross between art and science, so it is difficult to “prove” a set of theories will always work, but it is easy to prove that they won’t work. It’s kind of like medicine, it is easy to show that excessive bleading will kill the patient, but difficult to show that a particular medicine will always cure that patient. Sometimes bleeding can “thin” out the blood, which might be a good thing for certain underlying physical conditions. However, people used to bleed people based on that observation under conditions where bleeding would just kill them. Doctors were called “leeches” because they used them to bleed sick people. It is said that Robin Hood was bled to death when the sought a cure from a Doctor who was working for one of his enemies. Many economists are no better than “leeches” and magicians because their understanding of economics is at the leech level. And many of them get paid to kill their patients while assuring them that they are providing a cure.

Correlation versus Myth Making

Doctors are usually content if they can show a statistical association between treatment and response. Demonstrating statistical success is usually enough to satisfy most of us when it comes to medical treatment. Better to have a 70% chance of success than no chance. Most practitioners of applied economics (business) are happy if they can predict well enough in advance to make a few dollars. We learn to account for what we don’t know as risk, and what we do know as issues into funds prepared to pay for them when they hit. We use all kinds of rule of thumb measures to try to calculate probabilities. Most of them aren’t very statistically accurate. One takes a high guess, subtracts the low guess from it, divide by 6 if we have any kind of mean guess, or by 3 if we only have three guesses; and we call that a standard deviation. Then we assume that the problem we are analyzing is random and treat our guessed variance as if it were a real standard deviation. Sometimes that works.

That is bad enough. It is “rule of thumb economics” and since most risks are unknown and so any guess is better than no guess, it is probably an appropriate approximation for risk analysis. Better an educated guess than not being ready for the unknown. Murphy’s law really is a kind of law. It is risk because we don’t really know it is actually going to happen.

Bad economic theories don’t even pretend to have quantitative analysis

However, when you start hearing someone poo-pooing numbers, anyone in any business needs to start ringing alarms, Quasimodo style, as Esmeralda is about to be lynched by a crowd and the Church of Notre Dame burned. When a theory neither claims any relationship with “cure”, or worse denies there is such any such relationship, in medicine that is usually known as “fraud.” In economics it is known as an “Austrian School” theory and in business it is known as a swindle. I still remember how I started putting my money out of tech stocks when I started hearing “economic geniuses” talking about the irrelevance of either a business plan nor profitability to making money from an Internet Initial Public Offering (IPO). The conclusion I heard in the subtext of their arguments was that all that was needed was a set of marks with sufficiently deep pockets and enough time to flip the properties a few times before the fraud was discovered. I was right.

At least Monetarists could put numbers on their theories, which is why Milton Friedman never claimed to be a Monetarist. He knew the risks associated with spinning invisible cloth. Business is always risky and certain theories are never guaranteed to work out in the real world. But that never stops some people from creating bogus theories. The best example was a guy I both kind of like, and kind of feel was a charlatan. Ludwig Von Mises. I’ve always had a suspicion of people with Titles of Nobility dating back to my finding out the reality of their usual derivation after years of being told that I was descended from this or that dark ages felon. Somehow I like my fisherman ancestors better nowadays.

To get to the point, modern “Trickle Down” economics is not based on experimentation. Von Mises is quoted as saying about his own theories:

“Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification and falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts. They are a necessary requirement of any intellectual grasp of historical events.”

http://mises.org/ESANDTAM/PES1.ASP

A Priori

Wikipedia has a nice article on the subject:

A priori knowledge or justification is independent of experience (for example ‘All bachelors are unmarried’); a posteriori knowledge or justification is dependent on experience or empirical evidence (for example ‘Some bachelors are very happy’). A posteriori justification makes reference to experience; but the issue concerns how one knows the proposition or claim in question—what justifies or grounds one’s belief in it. Galen Strawson wrote that an a priori argument is one in which “you can see that it is true just lying on your couch. You don’t have to get up off your couch and go outside and examine the way things are in the physical world. You don’t have to do any science.” There are many points of view on these two types of assertion, and their relationship is one of the oldest problems in modern philosophy. [http://en.wikipedia.org/wiki/A_priori_and_a_posteriori]

This argument that economic theories should be developed “a-priori” assumes that economics can be like Mathematics and developed following its own logic and without any need to actually prove a real world relationship or verify the theories later. And indeed, when I was reading up on Von Mises, other economists of his generation were criticizing him because he didn’t ever go out into the real world and test his theories. Folks like Popper especially criticized this “a priori” and assertion of non-falsifiability as unscientific. And indeed, Von Mises developed his theories before World War I, used to mixed results in Austria in the 1920′s and led to him being hounded out of the country and his employer (Dolfuss) being assassinated. He learned nothing from the great depression, science or for that matter from his own experience. There is no evidence that Von Mises ever modified any of them based on his experience except maybe his feelings about tyranny and Fascism, since he was an avid Dolfuss employee but later wrote compellingly on Nazism.

Now this is a very Emmanuel Kant type of thinking. I like Kant; he has helped me through many an otherwise sleepless night to finally fall asleep. I used to bore through “A Critique of Human Reasoning” over and over again trying to figure out what he was saying. Wikipedia also notes that; “According to Kant, a priori knowledge is transcendental, or based on the form of all possible experience, while a posteriori knowledge is empirical, based on the content of experience.” So in the sense that Von Mises theories were based on transcendental truths, perhaps they really should be a priori. However, if one is looking for some wisdom to guide the real world, a little testing of those theories in applications can’t hurt. And if they fail, then maybe there is something wrong with the theory.

That which is unverifiable or unfalsifiable is also unprovable

Indeed, Mathematics “works” because the real world follows often follows the rules of mathematics. The theories may be based on a priori formulas, but those formulas apply in predictable ways. Economics on the other hand follows complex formulas that obey Mandelbrots observations but don’t follow any rules consistently. Maybe Austrians who are his disciples wouldn’t be so arrogant if they’d spend more time studying chaos theory. But more importantly any teaching that can’t be “verified or falsified” also can’t be proved to be true and so if economics is as Von Mises described it is no better than a set of pretty theories. When the rest of us humans try to develop economic theories about the world, or apply them to real life, we need to find ways to verify or falsify those theories because otherwise they are completely useless.

On the other hand, Mises idea of “praxeology” has some merit as a theory of human action that makes sense in some circumstances. It subsequently became a basis for game theory and other modeling efforts of human behavior. When researching this post (which I started almost a year ago) I came across efforts to rebrand some game theory as “austrian school” – which is typical right wing behavior. More influenced by egoism than any rational logic. Anyway he notes:

“von Mises believed that a theory constructed to predict how humans will act (what ends they will seek) in a “complex” situation could not arise from studying how they acted in “simple” situations. Furthermore, there are limits to how much can be learned from even a “simple situation”. As a criticism to empirical studies seeking to find justification in the economic action of individuals, von Mises proposed that only the human actor knows the ends toward which he acts. Observers may try to “understand” why an actor behaved in a particular way, but this reason must be inferred from a complex set of data which can only be gathered once. Reproducible experiments are not possible because both the actor and the observer have been altered by the experiment.”

http://www.absoluteastronomy.com/topics/Praxeology

However, while Von Mises was right to criticize excessive reliance on empiricism, the fact remains that if his own theories cannot be proved, then they remain useless. Subsequent theorists have gone on to use behavioral theory as a genesis for mathematical modeling which allows them to test the theories. These theorists have developed game theory, chaos theory, and other mathematical models to explain human behavior, and these theories can be compared to real world behavior and either falsified or proved. Von Mises was wrong to try to go about generating theories without seeking a means to test them.

Beyond Praxeology into AustroFascism

Economics and human advances come through the use of logic, politics, and human interaction and innovation, not through “a-priori” principles. Von Mises may have been right in some of his theories, but his underlying theories were shaped by his pride and prejudices not through the solid mathematics behind those principles — he didn’t advance any. Human behavior is subject to various predictable and unpredictable forces. And like all modern conservative ideologies his was a tool of the right wing against ordinary people.

Most of my sources try to minimize his activities during the period when he was “secretary at the Vienna Chamber of Commerce from 1909 to 1934, and served as an advisor first to Dolfuss and then after Dolfuss was assassinated to Otto Von Hapsburg (pretender to the throne). There is no sign of liberal beliefs in any of Von Mises behaviors. And I submit they brought down Austria’s downfall, along with his own independence as an Austrian — he had to flee the country.

Mises was also a close political adviser to the Austrian government, and to future statesmen and finance ministers. To gain an idea into the political importance of this period, consider this passage from Mises’s Notes and Recollections: “My activity from 1918 to 1934 can be divided into four parts: Prevention of Bolshevist Takeover. Halting the Inflation. Avoidance of Banking Crisis. Struggle Against Takeover by Germany.”

The Meaning of the Mises Papers Hans-Hermann Hoppe

And he failed in all these endeavers except mitigating a banking crisis by pushing off the costs onto Austrian Workers.

If you read the Von Mises Archives critically and sift through all the self serving and damage controlling propaganda. Even works that appear to castigate Von Mises are actually damage control. For example Mises wrote in 1927:

It cannot be denied that Fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions and that their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history. But though its policy has brought salvation for the moment, it is not of the kind which could promise continued success. Fascism was an emergency makeshift. To view it as something more would be a fatal error” (Mises 1978: 51).

http://socialdemocracy21stcentury.blogspot.com/2010/10/mises-on-fascism-in-1927-embarrassment.html

The author rightly castigates Von Mises for this view, while praising his prescience in forecasting the short-sighted and self destructive consequences of Fascism. And he then quotes Von Mises:

“In another passage, Mises contended that the violence and authoritarianism of fascism had been provoked by the equally violent and brutal nature of revolutionary socialism: “The deeds of the Fascists and of other parties corresponding to them were emotional reflex actions evoked by indignation at the deeds of the Bolsheviks and Communists. As soon as the first flush of anger had passed, their policy took a more moderate course and will probably become even more so with the passage of time” (Mises 1978: 49).

But this is actually spin on the authors part, because Von Mises in 1927 was so afraid of “Bolshevism” that he was fighting off the legitimate aspirations of the labor movement of his day and would continue to do so until he fled after Dolfuss’s assassination by Adolf Hitler. Von Mises attitude towards “workers” and “bolshevists” was of a piece with his elitism and shared right wing attitude. He was against Hitlerian and Mussolini Style Fascism, but for Fascism as a means to “save[] European Civilization.” And that blinded him to the real dangers of Fascism. He really believed that it would “take a more moderate course” with time. And that illusion proceeded from his arrogance, elitism and economic royalism. Indeed during the Dolfuss Regime he was a supporter of Dolfuss’ attempts to run Austria as a Catholic Fascist Government and get Mussolini to back him against Hitler. From 1927 to 1934 then, Von Mises was apparently not only defending Fascism, but practicing his own form of it.

…to 1934,…serving as a principal economic adviser to the Austrian government during the Austrofascist regime of Engelbert Dollfuss.

And their relationship was close:

“Engelbert Dollfuss became chancellor of Austria in May 1932, five months short of his 40th birthday, after serving just over a year as minister of agriculture. He had a parliamentary majority of just one and in October 1932 he reactivated the War Economy Enabling Act of 1917 so that he could govern by decree. Always much more interested in social reforms than in democracy, Dollfuss’s first decree under the revived 1917 Act was to make the shareholders of the Creditanstalt, Austria’s largest bank, liable for the insolvent bank’s losses.”

And through all of the turmoil between 1933 and 1934 when he was assassinated Von Mises was by his side:

“Dollfuss announced immediately that he would govern without parliament and banned public meetings. In May 1933 he amalgamated his Christian Social Party and other nationalist groups with the loosely organised militias of ex-servicemen known as the Heimwehr to create the Vaterländische Front (Patriotic Front). He also banned the Communist Party. In June 1933 he banned the Nazi Party too. At the core of his programme was the maintenance of the independence of the Austrian republic; Austria’s Nazis demanded union with Germany under the leadership of Adolf Hitler. Perhaps as a kind of rival in symbolism to the Nazi swastika Dollfuss began to promote the use of the Krückenkreuz (‘crutch cross’, technically known as the Cross of Jerusalem) as a national symbol, a white cross with cross pieces at the end of each arm, outlined in red. Local elections were cancelled and a concordat was signed with the papacy giving more independence to the Catholic hierarchy in Austria. In October 1933 Dollfuss survived an assassination attempt: a pistol bullet that struck him in the chest was deflected by a snuff box in his breast pocket, causing only a graze and a bruise; a second bullet hit his arm.”

And his was a decidedly Anti-Labor movement;

“In February 1934 an uncoordinated rising by socialist militias in Linz, Steyr and Vienna, in response to Dollfuss seizing power, led to workers’ flats being bombarded with artillery. Only a couple of small-bore mountain howitzers were employed and around six insurgents were killed by shell fire. Eight were subsequently tried and executed for armed rebellion. But the spectacle of a right-wing politician who governed by decree employing artillery against the homes and families of left-wing workers sent a thrill of horror and excitement throughout the capitals of Europe. Dollfuss’s next step was to ban all political parties in Austria except the Vaterländische Front.”

http://www.historytoday.com/ad-harvey/austria%E2%80%99s-diminutive-dictator-engelbert-dollfuss

“By 1930, foreign trade to and from Austria moved away from a free market system and became an extension of the autocratic government. Chief among the changes was the closing of the Austrian market to foreign trade in response to the New York stock exchange crisis in 1929. Unemployment grew drastically under the Austrofascist regime (over 25% between 1932 and 1933). In response, the government removed unemployment benefits from the national budget. Additionally, the government created the so-called “Cooperations” of workers and enterprisers charged with undermining workers’ movements. International trade was restricted and eventually banned.”

http://en.wikipedia.org/wiki/Federal_State_of_Austria

A lot of these policies were the handiwork of Von Mises, and we can see echoes of the same policies in our own time. We also see that they were abject failures. No wonder he wanted his theories “a priori.” The guy, and his followers, wanted to take credit for “saving” Austria from the Bolsheviks, while his followers continue to insulate us from the reality that he endorsed and was an Austrofascist as part of that effort. His warnings about the future of fascism in 1927 don’t excuse his activities from 1927 to 1934.

This post has been building for a long time, and it represents some raw material, and avenues for further reading. It’s still in draft form for the most part. The good news is that the more I learn about this guy the more I recognize that its no fluke that libertarianism is anti-labor, pseudo fascist, and authoritarian. It just doesn’t represent Nazi style Fascism, but is more akin to Austro-fascism or the Fascism of Portugal. The bad news is that I still have a lot of research to do before I can present an ironclad case that shows just how bad these so called libertarians really are.

I’m going to have to look for a book titled Contemporary Austrian Studies #11: Dollfuss / Schuschnigg Era in Austria V11, and see if I can get access to Von Mise’s archive of works from that period before I write my definitive post on this. Unless somebody else does. This man, and his ideology, if you ask me, are poison.

Further Reading:
Here someone tries to defend this loopy logic: http://mises.org/philorig/main.asp

http://mises.org/freemarket_detail.aspx?control=137

http://socialdemocracy21stcentury.blogspot.com/2010/10/mises-on-fascism-in-1927-embarrassment.html
http://mises.org/daily/2360