How to Argue Poorly

By Simon Grey, on March 28th, 2011

Its principles are as follows:

1. The business cycle is a completely virtuous cycle. Slumps are the price we pay for booms. Recessions are the just punishment for the excesses of previous expansions. The fact that the rich reap the rewards regardless, and the poor are the ones punished regardless, is of no importance to the Austrian school. Every graph of the financial crises showing crashes and bubbles is just God’s continuing morality play. Government intervention in this “virtuous” cycle prevents God and/or nature from rendering justice with the “tough love” everyone needs – and thus is evil. The Austrians are always in a state of continual frustration because no nation in the world seems to be willing to wait out financial crises and depressions trusting in the “magic of the market” to fix everything – that mirable dictu, keeps crashing and suffering from persistent instability. Instead of waiting for God’s judgement, people – to the amazement of the “Austrians” – still resist walking calmly to the grave from starvation or homelessness!! They say: “if this is virtue, then the Devil has ascended Heaven.” Nonetheless, the “virtuous business cycle of capitalism” has a certain seductive power. Not because it offers any solutions, but because it explicitly offers nothing: Welcome to God’s Plan.

I have never heard any Austrian economist ever say at any time that the boom-bust cycle is a “virtuous cycle.” It has been described as a natural cycle, where an artificial boom always leads to a bust. And history has demonstrated that interference tends to be much, much worse than letting simply waiting for the free market to run its course (cf. FDR’s Folly).

2. The Austrian School rejects a scientific foundation to economics. The failure of any political regime to endorse the virtuous business cycle theory of the Libertarians gives rise to all sorts of political backwardness and numbness to reality in its supporters – listening to them frequently arouses a generous desire to help them with a wake-up “dope slap,” after such tortured jewels as: “the people are too stupid to understand,” or “the people are entitled to nothing,” and other too-vulgar-or-racist-to-repeat sentiments. So few believe them, in fact, that they have become hostile to any group or government or institutional level of analysis at all. Instead they advocate strict adherence to “methodological individualism” – analyzing human action exclusively from the perspective of individual agents. Austrian economists also argue that mathematical models and statistics are an unreliable means of analyzing and testing economic theory, and advocate deriving economic theory logically from “basic principles” – read “divinely inspired principles” – of human action. They have even given their methodology a name, “praxeology.” Additionally, renouncing science altogether, the Austrians reject experimental and empirical research altogether. They reject testability and falsification en toto. The great virtue (not!) of a theory that rejects testing and falsification is, of course, that it cannot be disproved!

Actually, the complaint with the mathematical models used by mainstream economics isn’t the math; it’s the assumptions and definitions. Also, you seem to ignore the fact that all scientific disciplines are inherently axiomatic. This is also true for mathematics. Anyone who has done a precursory examination of “official” statistics can easily see how Orwellian the system has become. As such, analysis based on the official statistics is bunk, because the underlying assumptions are bunk. Besides which, economic phenomena is simply too complex to be perfectly and completely explained by simplistic models.

3. The role of the state in Austrian and now Libertarian theory is more confused than its transparently false propositions on the business cycle. The first Austrian, von Hayek, was actually a social democrat and strongly supported standard social democratic policy on the key role of the state in providing services that were market failures. He differed only on whether the post office should be public or private. But latter day Austrians at the Von Mises Institute take this notion for a ride off the sanity cliff, calling for the end of public schools, roads, post offices, Internet, media of any kind, health care, retirement, fire stations, etc, etc, etc.

Actually, the Austrian school was founded by Menger, Bahm-Bawerk, and Wieser, so 0 for 1 there. Also, private schools out-perform public schools, private highways out-perform public highways, private delivery (e.g. UPS, FedEx, DHL) outperforms the USPS (in fact, FedEx subcontracts for USPS because they’re so much more efficient), private providers of internet and media are superior to public-provided alternatives, private health care is measurably superior to public health care (and that’s with all the expensive regulation and taxation in place), private retirement aren’t effectively bankrupt (unlike, say, social security), and the few private fire stations that exist are superior to their public alternatives. The Austrian argument is that the state is inferior to the market at providing pretty much any and every service and good imaginable, which is why it is unnecessary.

4. Like many cultish theories, libertarian economics rise in popularity reflects public dissatisfaction with the performance of large institutions in many areas of economic and public life. They often correctly identify corporate corruption as a source of the decay of these institutions, but rather than reform the corruption, they become captured by an attractive, but ultimately doomed, ideology that – due to its futility as a guide to leadership – strengthens the very corruption they decry.

That a theory’s devotees are cultish has no actual bearing on its validity.This use of ad hominem argumentation is reprehensible, and does not suffice as a logically valid argument.
If, as noted before, public goods (indeed, the state itself) are vastly inferior to privately provided goods, then what, exactly, is the point of reform? Particularly since abolition is not only cheaper, but more equitably?
And why the emphasis on leadership? People are quite capable of deciding for themselves. And if they aren’t, it still does not follow that the state need exist. Perhaps someone needs to study private charity in America during the 19th century (by which I mean read de Tocqueville).
In all, this attack is simply ludicrous. It is full of falsities and half-truths, and is riddled with logical errors. The lesson to be taken from this display of blatant stupidity is that one is should spend more time reading than writing, particularly when one is ignorant and devoid of the ability to string together a logical, coherent thought.


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The Market Demand for Government Investment

By David Barr, on May 1st, 2009

In my previous article on the bloated private sector, I failed to adequately explain my main point.

For the past 3 decades faith in the free market powers of the private sector have led to a massive misallocation of resources away from public sector investment. A careful reading of price signals reveal a severe under investment in public goods relative to private sector goods. I would further argue that the unstable bubbly nature of financial markets is the result of excessive capital being allocated to the narrow range of goods and services in which the market works well.

The following contrasting sets of investments opportunities demonstrate how the private sector has become bloated while the public sector has been starved of necessary resources.

Public Education vs. Information Technology

The development and rapid proliferation technologies such as the internet, cell phones and other communication tools has brought undeniable benefits. But is the market calling for more resources to be dedicated to these industries. Not really. Over the past couple of decades, the price of computing power and communication technologies has been in nearly continuous free fall. New innovations quickly become commodities while many of the best and most popular innovations from Youtube to Facebook have failed to find a revenue stream.

If some of the investment in IT has been misplaced, what would be a better use of the bright mathematically inclined minds. Over the long run, human capital is the limiting factor in innovation and growth. The wage differential between educated and uneducated workers is a clear price signal indicating demand for education. Yet we have ignored this rapidly rising price signal by failing to provide adequate support to schools at all levels. The rapidly rising tuitions at public universities is another indicator of declining public support for education at precisely the time when this sort of investment is most needed.

Public Health vs. Processed food

Public health spending is one of the ultimate public goods as it benefits the society as a whole. There is no doubt that American’s spend a lot on healthcare, more per capita than any other country. Yet our health outcomes are hardly impressive. Investing a little more in creating an environment that promotes health could save far more in future healthcare and lost productivity due to preventable disease. From teaching basic nutrition principles to providing safe places for people to be physically active to preventing outbreaks of food borne illnesses our public health efforts have been pathetic due to a lack of commitment.

While, we have barely attempted to create a healthy environment, the food industry has had no trouble bringing new food like substances to market. Given this failure it is not surprising that today’s young people may be the first generation in American history that fails to outlive their parents.

Urban Infrastructure vs. Suburban housing

The housing collapse of the last couple of years makes the misallocation of resources in the housing sector abundantly clear. Yet the market has been sending out the same signals for years. Developers always justified suburban car based residential development as providing what the market. Yet a simple look at price data tells a different story. Real estate prices in walkable urban areas have consistently been far higher than in suburban car oriented areas. In the current crises real estate markets in places like Manhattan, DC and San Francisco have held up far better than the rest of the country.

Yet it would be impossible for private developers to recreate high quality urban environments. These places require significant investment in transit, law enforcement, parks and other amenities that require government support. Without public investment private developers could only create a limited range of housing options. Hence the appreciation of urban real estate prices relative to suburban areas.

The market is incapable of providing the full range of investments needed to maintain a healthy growing society. If we come out of the current economic crises with a more balanced distribution between public and private investment we will be in a better position to maintain long term growth.



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