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Is there not a difference between ignorance of the future and the ability to access the odds of certain developments or events? Especially if you have the theories of the Austrian masters to guide one through the thick fog of uncertainty.

I have written a long critique of Ebeling's post here:


Matthew Mueller suggests that I left an important element out in remembering our difficulty in predicting the future; that theree is a similar problem of interpreting the past.

Why? Because historical understanding also has to go through the filter of the ideas, ideologies, and general interpretive schema of the historian.

I do not disagree with this all. Indeed, I happily concur.

How the historical story is told is significantly dependent upon the analytical framework, the theoretical system, that serves as the historians "pair of glasses" through which he tries to give intelligibility to the period and events he is explaining.

There are histories,for example, of the Great German Inflation of 1914-1923 that offer greatly different accounts of what happened and why. Why the difference? Because one economic historian has looked at this period more through "quantity theory" eyes and another through the lense of a more Keynesian approach.

The Austrian story of Fed monetary policy in the 1920s is often different from the accounts that some Monetarist give of that decade.

The list could go on-and-on.

Furthermore, the interpretive schema will change as time goes by. Why? Because as more distance seperates the next generaton of historians from the prior one, they see the same past events from a different angle.

Think of an historian telling the story of post-World I in Europe in, say, 1938 in comparison to an historian interpreting that period in 2008.

We know how more of the story turned out. The historian in 1938 could not see the events of his time in the same way and with the same interpretive weights in the way the historian in 2008 might.

And how the historian of 2008 sees the post-Soviet era so far will look very differently from how it will seem for an historian in 2058.

The world is always seen through human eyes that have very imperfect knowledge and are influenced by the context of one's own time and ideas -- whether looking forward to the future or backward to the past.

Richard Ebeling

Here's a brand new article by Richard, as excellent as usual, despite dealing with pretty, well, scary things.

Great comments, Richard. Thanks for that.

Nice reply Mr. Ebeling. Would you then agree that it is non-sensical to privilege the Austrian account of business cycles in interpreting the history of the 1920's and 1930's over other interpretive schemes? Now, this theory may appeal to the economic judgment of Austrians, but as a device for understanding history, by your own admission, we have no grounds for believing this to be a more accurate frame of reference than other accounts.

Mr. Mueller:

Well, I would not be a "true" Austrian if I assumed that "the facts" could ever "prove" or "falsify" a theory (oh, God, I just know some Popparians are going to come after me now. Sweet, Jesus, save me!)

One uses the theory to interpretively arrange, order, and make intelligible the facts. (Recall the motto from Goethe that Hayek places at the beginning of "Studies in Philosophy, Politics and Economics": "It would be best of all if it was realized that all that is fact is already theory.")

How, then, does one determine what interpretive story is better at tell the historical tale? I will readily admit that is not an easy one to answer.

It goes back to the confidence with which one holds (and can persuade others) of the logical reasonableness of the (implicit and explicit) theory (theories) one is using as the analytical schema.

Indeed, how shall one decide, for example, between the Austrian and Monetarist stories of Federal Reserve policies in the 1920s leading up to the Great Depression? And which one is more convincing, complete, "satisfying," etc?

That will, eventually, in my opinion, go back to reasoning through what we know about the logic and processes of the market. Why money and money's influence should be studied into terms of a microeconomic temporal sequence analysis. And why microfoundations (of, say, the Austrian sort) is cogent, relevent, and more consistent with what we may want and expect from an economic theory.

This task is made somewhat easier due to the fact that economists do share a segnificant set of theoretical and logical assumptions.

For example, I don't think many economists would agree with the following statement: "The quantity of money INCREASED by 40 percent over a two-year period, the demand for money and general output remained fairly constant over this period, and therefore prices DECREASED by fifty percent."

Richard Ebeling

Should Austrian economists merely be economic historians passively sitting on the sidelines, not engaging in debate, but merely document the downfall of the economy after the fact? Maybe Austrians should. Maybe being an Austrian economist means that one is an economic historian.

I would agree that no one will be able to predict in advance how severe the recession will be, especially not knowing in advance what additional interventions the government will engage in to delay recovery. But I think an Austrian could debate whether the economy has experienced a credit crunch or not with out compromising one principles. For example, a credit crunch is defined as banks being unwilling to lend to borrowers. This being the case one could look at bank credit and loan data gathered by the Federal Reserve to determine if the amount of credit and loans were decreasing. If it were not it would be difficult to argue (although Tyler Cowen keeps attempting to do so) that the economy has in the recent past entered into a credit crunch. How is this pretense of knowledge?

Or why couldn’t an Austrian look at the Federal Reserve balance sheet, for instance, to make some sort of prediction as to whether Fed actions are inflationary or not? It would be on thing to predict 7.8% year-on-year inflation in February 2009, it is another to say whether there is inflationary tendency or not of Fed actions.

Let me just note that Richard's last response to Matt is a good example of why McCloskey's work remains relevant for Austrians. Rhetoric and interpretation matter and matter a lot. One need not go "post-modern" to recognize that facts don't decide the matter in and of themselves.

One of the useful reminders of these types of exchanges is the fact that no matter what one says, it is always impossible to say everything that needs to be or could be said.

We operate with more implicit assumptions than we usually imagine.

Thus, "Tom's" comment in reply to my posts about history and its interpretation and the difficulty of predicting and analyzing current and proposed policies.

Yes, it is reasonable and I would say desirable for economists -- includiing Austrian Economists -- to analyze and critically evaluate current events and policies proposed.

I've been doing that, well, it seems "forever" -- or at least since I was a teenager and read Hazlitt's "Economics in One Lesson" and Bastiat's "What is Seen and What is Unseen," and knew that I now understood "everything."

(OK,I was, perhaps, a little too confident back then. After all I hadn't read Mises and Hayek fully by then!)

But seriously, one of the primary purposes of studying economists -- besides knowledge for its own sake, which also has value -- is to have a better understanding of at least some of the causalities in the world. And with this knowledge try to make informed judgements and decisions about which means seem most appropriate to attain what ends.

Austrians do have a theory of monetary and credit expansion through the banks. If this theory has validity, then it has "power" for us to intreprete what has , perhaps, happened in terms of cycles, and to suggest (in terms of those Hayekian "pattern predictions") what might happen if monetary policy follows course "X."

And, yes, it is also possible to "look at the facts," try to figure out (with the assistance of our theory) what actually is going on right now.

But things are not always easy in that department. Over on "The Marginal Revolution" blog there is a lively debate going on about the facts and their "meaning." Is there a "credit" crisis or not. Reading through the comment posts as well as the contributors to the blog itself, and deciding just how to read the Fed's and the banking industry's balance sheet to sort out what is the status of available credit in the system is no "cut and dry" matter.

But it is reasonable and responsible of people who consider themselves "informed" about economics and its applications to use that knowledge to interprete current affairs and discuss the public issues that concern all of us.

Richard Ebeling

(just repeating my comment made in the original post)

What will happen in the future depends on what is happening now in the intervencionism side.

Sure, if the FED did not intervene (injecting a "junkie" out of trouble?) we could be 100% sure that massive systemic financial failures would ocurre with a colapse of the quantity of money and deflation of prices.

But as we know the present "regime" wil avoid that at all costs, so the expectation should be that all Central Banks wil inflate the reserves positions of the banking system which will translate to the creation of credit/money.

So, the game is like: what will be inflation taken granted that the intervencionism will inject X amount of reserves ant keep the interest rate at negative to inflation CPI.

Carlos Novais

This comment is probably a bit off topic, but if the Austrian school "insists that the laws of economics are essentially logical relationships, not empirical ones; that economics can "predict" but only in qualitative terms, not quantitative ones; that economics can only make "pattern" predictions", does that entail a rejection of the very idea of VM cardinal utility model of preference?

Not just that some VM axioms are false, but no axiom scheme exists which would transform ordinal preferences (qualitative) to cardinal rankings (quantitative)?

Is this what the Austrians mean by "uncertainty"?

Sorry for asking what must seem basic questions.


Austrians argue a lot about both prediction and the logical status of economic theory. Some of the lingo makes it seem like there is this big methodological chasm separating the warring parties. There is less there than meets the eye, however.

If you're making an argument, then there is the bit of the argument that is "theory." The more carefully the theory has been worked out the more it takes on the character of tautology. That is so because the more carefully it's been worked out the more explicit and self conscious you are about your assumptions and logic. In the extreme, you've got it down to pure a priori reasoning. Some folks emphasize how there is this a priori core, while others emphasize how we never really have it *fully* worked out and therefore rely on empirical judgments to close the gap. My feeling is “Eh!” (Shoulder shrug.)

In any case, you have the problem of lining up your assumptions with reality. Do the assumptions apply? That's a judgment for which we have no algorithms or magic formulas. In some lab sciences, the constancy of nature lets you measure lots of constants for lots of what you're studying. Before complexity theory, in fact, some smart observers thought the lab sciences were really just organizing those measurable regularities. You know, positivism and all that. Well, we don't really have that in the social sciences. Julian Simon once wrote a piece on constants in economics, listing several. I suppose he was probably right, but even then it’s a short list. So you have to rely on your sense of what is more and less important in a situation, and what the different magnitudes are. Armed with “a priori” theory and your empirical judgments you can make predictions. The only such predictions that are consistent, reliable, general and inter-subjectively valid are kind of vague. They give you the pattern, but not much more. That’s what Hayek called “pattern prediction.” More precise predictions can be made, but they are more likely to fail and they depend more on idiosyncratic insight of the predicting person. They are more like wild guesses and less like “scientific” predictions. We should probably restrict terms such as “economic theory” or “economic science” to predictions that are general and reliable, to “pattern predictions.” (Schutzians: To predictions relying on relatively, but not completely, anonymous ideal types.)

You ask about VNM utility. That’s not generally considered a part of “Austrian” theory. It’s “normative” because it describes a kind of ideal of self-consistent behavior. Real people are not self-consistent however. Plus, as you seem to realize, VNM works only when you can apply probabilities with out any gaps or omissions. In much (most?) of social life we don’t really have such probabilities available to us, even in the subjective sense.

You're very polite to apologize for asking a "basic" question. In fact, of course, it's not basic, but fundamental. Not the same!

A less philosophical comment (something my brain can comprehend!):

Richard, you state that " Austrian could (or did) claim to know when the cycle would turn, or what would set it off, and how the downturn would or could play itsef out..."

I disagree. Several Austrians (Mish at his Global Economic Trend Analysis blog comes to mind) looked at the time structures of the subprime, alt-prime, and ARM mortgages taken out during the last 6 years or so and predicted that we would start to see trouble in 2006 and that this would continue for several years.

In fact, in 2004, a friend of mine in the private wealth management industry showed me some data on mortgages outstanding, and even to my untrained eye it was clear that the combination of the number of ARM resets coming due in 2007-2008, and the ratio of income to outstanding loans for the average borrower, was almost certain to cause economic problems.


We at the Austrian economists blog don't place that much faith in Reason!

Speculators and managers in financial markets are like a school of fish; they swim without knowing where they are going or why they have changed course.


When I criticize the attempt at prediction in economics I mean the particular type of prediction preached and practiced by “mainstream” economists.

In other words, a focus on mathematical and statistical modeling methods that attempt to “ape” a certain conception of the methods of the natural sciences. What Hayek called “scientism,” the misplaced application and dogmatic insistence upon the use of the methods of the natural sciences in the social sciences.

What I am suspicious of is not the attempt to anticipate the future – we all must do this in a social context in which the actions of others have relevance for the outcomes of our own planned actions – but the particular way mainstream economists try to go about it.

If I may use myself as an example, in the late 1990s I was asked to speak at a conference on the Russian economy and prospects for foreign investment. The other speakers got up and gave glowing forecasts about profit opportunities and a rising Russian stock market.

Finally, when it was my turn, I said that I had been looking at the Russian governmen’s international debt structure --- when payments were coming due and in what amounts, and what Russia’s export earnings were in hard currency as well as their existing hard currency reserves.

I also gave my interpretation of the likely responses and actions from decision-makers in the Russian government (Boris Yeltsin was president at that time), given these financial constraints.

In other words, I combined my understanding of “the facts” and my understanding of how markets work, with a “subjectivist” interpretation of the likely actions of others based on my “understanding” of the ends, means, and probable responses by the relevant actors.

(The method of interpreting the “subjective meanings” of others is an application of the “ideal type” methodology developed by, first, Max Weber, and then refined and extended by Alfred Schutz – a method utilized by Ludwig von Mises in his 1957 work, “Theory and History,” in explaining the logic of how expectations are formed in the social arena.)

I suggested that Russia was rapidly heading toward a currency crisis and a major fall in the Russian stock market. And the Russian leaders, from by "reading" of them, were likely to react in the following way. .

I concluded that now was most certainly not the time to invest in the Russian economy. And I said this crisis was likely within the next six months. Russia’s currency and stock market collapse occurred three months later.

And more recently, my “reading” of the market by using the same methodology led me to believe that the stock market was going to seriously “go south” in the autumn of 2007. So, I bailed out of the stock market in August of last year.

I must confess, over the last year I’ve not made much money, but I’ve lost virtually nothing during the last 14 months.

(A friend of mine – not an economist – did not act so wisely. He recently told me that he did not get out of the stock market, and 15 years of his accumulated retirement money is now worth about $1,000. He expects to still be teaching when he is 95 years old!)

So, yes, economic theory, “the facts,” and “subjectivist interpretations” of the possible actions of “others” can enable a form of prediction of the future.

Richard Ebeling


Are you being consistent? First you say "no *Austrian* could (or did) claim to know when the cycle would turn, or what would set it off." When Justin challenged that claim you replied, " I mean the particular type of prediction preached and practiced by “mainstream” economists." And you give an example of an Austrian economist -- you -- predicting the downturn well enough to get out of the market in time. Don't you need to amend your position a little? If we hold you to just exactly what you said, aren't you contradicting yourself?


You will recall that when Harry Truman came out of his first meeting with the newly formed President's Council of Economic Advisors, he told the press that he wanted a "one-handed economist." In the meeting, Truman said, the economists kept saying, "Well, on the one hand. . . But on the other hand. . . "

I stand with my fellow economists, and refuse to be a "one-handed economist"!

Can we "predict" in economics? Well, on the hand hand, yes, but on the other hand, no.

Our general theory of economic processes offers "logical" predictions: "Given the market demand and supply for a good, if the demand were to increase while the supply of the good remained the same, then that good's price would tend to rise."

(With the caveats the the supply curve is not a horizontal line, and that suppliers may need the expectation that the change in demand will last long enough to justify the additional costs of expanding output, and the a particular time frame is needed to "gear up" additional production given the technologial particulars of the product, etc., etc.)

The core of our predictive ability is based on our knowledge of the "laws' of economics, which are based on the "logical relationships" derived from our conception of the behavioral characteristics of the human agents(Mises's "logical structure of the human mind" that guides actors to act in particular ways under conditions of scarcity. . .).

Overlayed on this are our "subsidiary assumptions" (the secondary postulates added to our "axomatic" premises concerning "action").

For example, are there private property rights? Is there a medium of exchange to faciliate transactions -- and if so, of what kind? What is the institutional order in which markets function (if there are functioning markets, and what does "functioning" mean?) -- free trade, interventionism (and if so, of what type and degree), semi-socialism (with each of these "systems" terms obviously having to be defined generally and in the actual institutional context of "real world" transactions). Etc., etc.

Then, based on this: What specific goods are bought and sold? What are their economic and technological qualfities and characteristics? Etc., Etc.

And, then, overlayed on this are the ideal typifications of the actors -- as individuals and sub-groups, and in various institutional roles as well as people's economic motives and goals. Also, the implicit ideological ideas and beliefs that influence actors and political decision-making.

Plus, based on all of this an "understanding" of people's intentions and a judgement about what their interacting intentions will generate (unintended consequences). And all in a dynamic, moving system of multi-cauasal change, adjustment, and re-adjustment.

Once one thinks about all of this, how can one think, seriously, that of all this "complex phenomena" can be reduced to broad statistical averaged aggregates whose calculated "coorelations" will tell us the "mystery" of the universe (i.e, the economic future).

Especially since what these statistical aggregates hide -- submerge beneath their quantitative surface -- are all the unique and distinct microeconomic "process" relationships that to various degrees never repeat themselves. In other words, history.

Each of us predicts but, in my view, whether as actors or analysts, it is an art, a "feel" a specific "reading" of the "social text" through which we are living and passing, with no way to be sure if in the last chapter it really turns out that "the butler did it."

This is reinforced by the fact that there is no "final chapter" in history. That is partly what I meant in a previous post that each new generation of historians may signficantly interprete periods of the past differently from an earlier generation of historians because they look at that earlier time with more distance (more context) of how it fits in with what followed it.

If I may, let me quote from Wilhelm Roepke (from his "The Problem of Economic Order" [1951]):

"Whereas formerly a good economist was a man who knew how to assess the relation of the actual economic forces and whereas formerly judgment, experience, and a sense of proportion were rated higher than the formal skill of handling certain research techniques introduced illegitimately from the natural sciences into economics -- today, glory goes to him who knows how to express more or less hypothetical statements in mathematical symbols and curves."

Or more recently (1982), as James Buchanan expressed it:

"Economics, as a discipline, became 'scientific' over the quarter century, but I put the word in quotation marks and I deliberately use it perjoratively here. . .It has allowed itself to become captive of the technical tools that it employs. . . Their [mainstream economists'] interest lies in the purely intellectual properties of the models with which they work, and they seem to get their kicks from the discovery of proofs of propositions relevant only to their own fantasy lands."

Finally, I would just add one more observation. As the British economist, John Jewkes, pointed out decades ago, there is no such thing as the "economic future." There is only "the future." Thus, the attempt to design "models" of the economy for predictive purposes is an attempt to determine a part of the future that cannot be separated from all the surrounding social, political and ideological forces and decisions.

I really wonder how many "experts" who followed and predicted price movements in the oil industry predicted in, say, January 1990 that Saddam Hussain would invade Kuwait in August of 1990, precipitating an international war in 1991. Since, surely, these political events had a "noticable" influence on an economic variable -- global oil prices.

Richard Ebeling

Richard, I could not have put it better.

I have had this same argument with economists (professors at noted universities) on their blogs regarding their reliance on complex econometric models. Having some background in econometrics, I pointed out the same problems as you did, specifically how do these models handle the all-to-common "black swans" and the inability for these models to capture every nuance that might be at play.

The usually response, if any at all, is that they have done rigorous analysis and testing of their models, and that given we have "nothing else better", we have to go with these models. For some reason (I have my opinions on this) they are afraid to admit that ultimately, they can't predict the future.

Capitalism is the economics of reason, not of skepticism. Factories are built with one's mind logically focused, thru one's senses, onto an orderly, knowable, independent reality. People who dont trust their minds dont built machines. They are found in mental hospitals. Man's mind is perfect, by a human standard, for human life. Austrian economics needs Ayn Rand's philosophy of Objectivism as a context. Kantan/Popperian subjectivism will destroy Austrian economics in the long run. Libertarianism is a warning.

Despite Mises' explicit appeal to deduction from axioms, he was, properly, an inductivist. Eg, markets coordinating prices, man acting in time, monetary and credit inflation resulting in the boom-bust cycle, values as reality relative to man (ie, value objectivity).

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