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Did the ECB write the neoliberal rule book, or did it import it?
by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jan 31st, 2011 at 10:55:36 AM EST
[ Parent ]
I think they're faithfully implementing the original Austrian version.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Jan 31st, 2011 at 11:06:58 AM EST
[ Parent ]
I hope not.

From the usual source:

The Austrian praxeological method is based on the heavy use of logical deduction from what they assert to be undeniable, self-evident axioms or irrefutable facts about human existence. The primary axiom from which Austrian economists deduce further certain conclusions is the action axiom, which holds that humans take conscious action toward chosen goals.[43] Austrian economists focus on goal-directed action and say that it is undeniable because in order to deny action, one would have to employ action in the act of denial.

Methodology is the one area where Austrian economists differ most significantly from other schools of economic thought. Mainstream schools such as the neoclassical economists, the Chicago school of economics, the Keynesians and New Keynesians, adopt "empirical" mathematical and statistical methods, and focus on induction to construct and test theories--while Austrian economists reject this approach in favor of deduction and logically deduced inferences. According to Austrian economists, deduction is preferred, since if performed correctly, it leads to certain conclusions and inferences that must be true if the underlying assumptions are accurate. However Austrian economist Robert Murphy has stated that those using Austrian theories can still err in their interpretations of history, even if based on a theory formulated by deduction.[44] Caplan makes a similar point about quantitative significance, explaining that a theory, such as one which logically relates minimum wage and unemployment, tells nothing of the approximate quantity of change in unemployment one can expect upon minimum wage increases.

Austrian economists hold that induction does not assure certainty like deduction, as real world economic data are inherently ambiguous and subject to a multitude of influences which cannot be separated or quantified, one cause or correlation from another. Austrians therefore claim that mainstream economics has no way of verifying cause and effect in real work economic events, since economic data which can be correlated to multiple potential chains of causation.[45] Mainstream economists counter that conclusions that can be reached by pure logical deduction are limited and weak.[46]

Critics of the Austrian school contend that by rejecting mathematics and econometrics, it has failed to contribute significantly to modern economics. Additionally, they contend that its methods currently consist of post-hoc analysis and do not generate testable implications; therefore, they fail the test of falsifiability as prescribed by the scientific method.[10][47] Austrian economists counter that testability in economics is virtually impossible since it relies on human actors who cannot be placed in a lab setting without altering their would-be actions.

So are they assuming inflation is an inevitable outcome of conscious economic choice? I.e. thinking causes inflation?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jan 31st, 2011 at 01:43:01 PM EST
[ Parent ]
the "Austrian theory" of the business cycle--a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire.

- Krugman

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Feb 1st, 2011 at 08:21:21 AM EST
[ Parent ]
Slate Magazine: The Hangover Theory by Paul Krugman on December 4, 1998
A few weeks ago, a journalist devoted a substantial part of a profile of yours truly to my failure to pay due attention to the "Austrian theory" of the business cycle--a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire. Oh well. But the incident set me thinking--not so much about that particular theory as about the general worldview behind it. Call it the overinvestment theory of recessions, or "liquidationism," or just call it the "hangover theory." It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion.


The many variants of the hangover theory all go something like this: In the beginning, an investment boom gets out of hand. Maybe excessive money creation or reckless bank lending drives it, maybe it is simply a matter of irrational exuberance on the part of entrepreneurs. Whatever the reason, all that investment leads to the creation of too much capacity--of factories that cannot find markets, of office buildings that cannot find tenants. Since construction projects take time to complete, however, the boom can proceed for a while before its unsoundness becomes apparent. Eventually, however, reality strikes--investors go bust and investment spending collapses. The result is a slump whose depth is in proportion to the previous excesses. Moreover, that slump is part of the necessary healing process: The excess capacity gets worked off, prices and wages fall from their excessive boom levels, and only then is the economy ready to recover.

Except for that last bit about the virtues of recessions, this is not a bad story about investment cycles. Anyone who has watched the ups and downs of, say, Boston's real estate market over the past 20 years can tell you that episodes in which overoptimism and overbuilding are followed by a bleary-eyed morning after are very much a part of real life. But let's ask a seemingly silly question: Why should the ups and downs of investment demand lead to ups and downs in the economy as a whole? Don't say that it's obvious--although investment cycles clearly are associated with economywide recessions and recoveries in practice, a theory is supposed to explain observed correlations, not just assume them. And in fact the key to the Keynesian revolution in economic thought--a revolution that made hangover theory in general and Austrian theory in particular as obsolete as epicycles--was John Maynard Keynes' realization that the crucial question was not why investment demand sometimes declines, but why such declines cause the whole economy to slump.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Feb 1st, 2011 at 08:52:53 AM EST
[ Parent ]


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