19 August 2011

Kant and the Austrian Economists I

As many of my readers presumably know, there are important differences among different schools of "free market economists."  If you are a Marxist, or for that matter a Keynesian, you'll likely think all free marketers sound pretty much the same.  This, though, is a trick of perspective.

One oft-noted contrast is between the "Chicago School" (associated with Milton Friedman and monetarism) on the one hand, and the "Austrian School" (of Friedrich Hayek and his close ideological kin) on the other.

Here's a full account of the difference, from an "Austrian." I put the label "Austrian" in quotation marks there because, although the school got its start there, by no means do all "Austrians" of today have names that sound, well ... Austrian.  It isn't all Hayek and von Mises anymore!  The author of the article to which I linked you above has the distinctly not-middle-Europe moniker, "Robert Murphy."

Anyway, many of the points of divergence are methodological -- even you might say epistemological.  Murphy quotes Friedman on the question of how economics should work as a science:

The relevant question to ask about the "assumptions" of a theory is not whether they are descriptively "realistic," for they never are, but whether they are sufficiently good approximations for the purpose in hand. And this question can be answered only by seeing whether the theory works, which means whether it yields sufficiently accurate predictions.

Testable predictions.  Newton tells us to assume objects are moving around in a frictionless environment.  They (almost) never are, but assuming that makes the math easy, and the easy math makes for testable predictions. One we test those predictions, we can note that they are slightly off (only "sufficiently" accurate as Friedman says) and then worry about correcting for friction!  So Friedman seeks to create an economic science that is just as genuinely a science as is physics.

Murphy, as an "Austrian," has a different view.  After all, a basic premise of economic theory, he says, is that "people respond to incentives."  Is that itself a testable prediction?  Murphy thinks that it is not, and he is unbothered by its untestability.

Think of falsifiability, the specific notion of "testability" developed by Karl Popper, an Austrian in the non-economists' sense.  How could anyone falsify the claim that people respond to incentives?  I ask you to cut off your big toe.  You ignore me.  I offer you $20 to cutr off your big toe.  You continue to ignore me.  I offer $1,000.  You continue to ignore me.  At what point has my little experiment falsified the view that people respond to incentives?  At none.  It is immune from falsification.

I don't know off hand what Friedman would say about the big toe experiment, but Murphy is unbothered by its lack of result.  This premise isn't supposed to be falsifiable, he says.  It is part of an internally coherent framework for interpreting data, not an empirical datum itself.

This is where a couple of "aha" bulbs went off in my brain.  It seems that Murphy is saying (though without being explicit, for he is writing for a non-academic audience) that the Austrian school has a Kantian philosophical slant.  The idea that people respond to incentives might be what Kant called a synthetic a priori principle.  It tells us about any possible world, any experiencable world, and thus is a premise of science rather than a result.  A bit like the idea that every event has a cause.  That was the first aha bulb.

The second bulb had to do with the American novelist pop-philosopher Ayn Rand, by whom I have to be frank never been enamoured.

But I've gone on a bit long here and I think I'll finish this thought tomorrow.

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Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.