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Are Austrian Criticisms of Mainstream Economics Still Relevant?

August 4, 2015

Are Austrian Criticisms of Mainstream Economics Still Relevant?

Occasionally, when Austrians try to distinguish their brand of doing economics from the mainstream, they get hit with accusations that they are attacking straw men; that no one believes what Austrians claim is the mainstream approach.

Is this true? Are Austrians attacking enemies that don’t exist anymore? I say no. While it might be true that many of the top economists may in general agree with broad Austrian methodological conclusions, the typical economist is much more likely to either (a) explicitly deny the Austrian criticisms, or (b) implicitly or casually invoke these fallacies during their analyses for reasons I shall explain below. Let’s look at the evidence.

Econometrics

The position often attributed to Austrians regarding econometrics is that Austrians reject the field completely. But this is not true. Austrians criticize econometrics only when it is either (1) trying to prove or disprove (or “falsify”) pure economic theory, (2) trying to establish universal magnitudes between economic phenomena, or (3) trying to forecast economic data. To Austrians, econometrics is only useful as a tool of history: it can tell us quantitative information about a specific period in the past, and that’s it. Econometric findings are not generalizable to all of the past, and cannot be projected to precisely predict the future.

The second case was one of the principle ambitions of the first econometricians. In Human Action, Mises refers to the University of Chicago economist Henry Schultz. Schultz (a founding member of the Econometric Society) had tried to determine “the” price elasticities of demand for a whole bunch of goods. In other words, he wanted to find out exactly how much the how many more potatoes would be sold if their price per kilogram went up $1. Mises correctly demonstrated why this whole endeavour was doomed to failure: all prices are historical, and are subject to change at any time. There are no constants in economics.

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