This article will argue that much of the Austrian school of economics is not valid, although it may be resuscitated if certain key steps are quickly taken.
- The fact that it is not falsifiable makes it not scientific, but not necessarily invalid or useless. Philosophy and logic can be used with great power, sometimes with a power exceeding that of science, in the process of finding desirable action or truth.
- While some schools of philosophy and logic can be useful in finding desirable action and truth, Old Austrianism is comparatively weak in such endeavors for certain reasons.
- Makes predictions which are substantially useless for application by actors in the short run because of reliance on long term logic and rejection of short term measurement and statistical forecasting.
- Uses axioms which are inherently uncertain because of the rejection of the operationalized validation mechanisms found usually throughout the sciences.
- Kills discovery process because axiomatic induction is methodologically rejected.
See the video below:
David gives the most eloquent critique I have heard of the Austrian method. It is not the insistence on axiomatic thinking which is the problem. It is not the exclusion of statistics which is the problem. The problem is the fundamental absence of the scientific process, and in particular the testing phase.
Murphy’s rebuttal was actually to concede the point on the absence of a testing phase, but to assert that this does not damage the validity of the Austrian method.
The problem is that the lack of a testing phase does damage Austrian economics. The human condition includes the imperfect ability to ascertain, process, retain and act upon information. The only way to cope with this is to implement a mechanism for revision when error is encountered because error is inevitable.
The way this would work is that whenever Austrianism makes a less than optimal prediction the presuppositions of Austrianism are revised to better account for observed reality. In rejecting the scientific method Austrians are bound to the efficacy of their current presuppositions.
This problem is extremely important in practice! The Austrian can make predictions, but to gather a timetable for that prediction is impossible from pure long run logic. Furthermore people are not rational which jeopardizes all Austrian predictions in theory.
If geometry were not invoked into engineering and found to produce successful and accurate results it would be found wanting. Interestingly, we know from the science of physics that theoretical geometry doesn’t hold in the material universe in certain cases. Namely, at the quantum and superlarge levels.
Geometry, which is like Austrianism in that it is pure logic, is only useful and valid to the extent that it is used and validated in the real world. If a physicist insisted that classic geometry holds in those certain cases in which it has been observed not to hold, simply because he insists on the validity of certain axioms, he would be called a foolish and dogmatic geometer rather than a physicist. He would be less useful then one who would revise and improve his theories to account for new observations.
Furthermore, there is no Austrian epistemological justification for the use of pure logic. The action axiom may be true, but how would Austrians prove it without observation?
In conclusion, Austrianism has great retrospective explanatory power and is entirely accurate for forecasting, but uses such an ambiguous and long term method of forecasting that it is essentially a useless tool in practice. Furthermore, it resists improvement because of a rejection of the scientific method. Austrians instead opt for a purely logical mode of thought, but they present no epistemological justification for doing so.