Spreading Hayek, Spurning Keynes

Again, I don't understand the hostility. I wasn't in fact trolling, I was trying to get into a discussion about why economics gets people so riled up and then you came along and reinforced the point I was making without actually adding to the discussion.

The thing is that I find myself charged up over the topic as well, which makes me wonder why exactly it's such a hotpoint issue, and why it makes people (myself included) feel like they are qualified in a field in which they are clearly not. I mean that in the sense that I (nor, likely you) have any formal economics education beyond reading columns, articles, and perhaps attending econ 101 many years ago.

My fundamental quibble is that for the multiplier to kick in, the central spending authority must not only invest in certain things (the part our real-world stimulus failed), but it must invest successfully in projects that also bring value to society. A Keynesian stimulus isn't just paying 10 men to dig holes and 10 men to fill them in, it's paying 20 men to build an important road or something, usually infrastructure, of other importance that will bring wealth to a society. To get the multiplier you must both put money into the otherwise-jammed society and obtain something of value for the money. Skip the second part and you just lost a full 1x factor off your multiplier.

This is where I say that even Keynes could tell you this stimulus would fail. For instance, there is a local road that even as I type is being "repaired" with stimulus money. But it didn't need repair. Where a $1 of stimulus here is supposed to produce, say, $1.20 in "stimulative value", now we're only getting the $0.20 in value. That's not stimulus. That's actively worse than letting the funds sit there, actively worse than the worse case that Keynes fears; now you're destroying capital. Not only does that not help avert the worst case, you actively bring it closer! And this is the "good" part of the stimulus that is actually infrastructure, too.

Granted, not every project wastes %100 of the capital, but an analysis of the actual stimulus shows the vast bulk of it does; most of it essentially puts useless and wealth-destroying institutions on life support so they can continue destroying wealth. You don't have to guess what the resulting consequences are, you just have to look around.

As an Austrian I believe (with some reason) that a central government is not capable of deciding which projects are actually valuable, any more than a central authority can set prices of any other kind. Moreover, in a relatively efficient economy (it doesn't have to be perfectly efficient), the big infrastructure wins would already have been built, leaving only the dregs behind, things that weren't already built because the economy has decided they aren't of value.

So I think right at the heart of Keynesian economic policy is an enormous "... and magic happens here...", right where the stimulating government entity determines how to allocate the stimulation. Which, if you note, rather precisely and correct predicts how the stimulus fails in the real world, which is that it was very inefficiently applied regardless of whose standards you apply, Keynes or otherwise. A Keynesian must believe that this was a poor application of the stimulus concept, but that hypothetically a government usually gets it right, despite my inability to come up with examples of said; an Austrian like me gets to continue believing that governments are foundationally and structurally incapable of efficient allocation of resources.

Really? She conducts controlled experiments on economies? Gives stimulus money to one city and simultaneously does not give money to an identical city in the same economic climate, something like that?

Austrian economics is heavily into modeling, even though they don't usually call it that. In fact, its immersion in the ontological, methodological and epistemological issues around economics (and some nearby social sciences) is in many aspects unique in comparison with the more mainstream approaches.

The thing is, most "Austrians" traditionally avoid conventional mathematical models, as well as formal notations, preferring to use plain textual reasoning. In some aspects it's good: they do not limit themselves only to what is easily rendered to math (correlations go well with maths, causal relations not so well (but perhaps manageable), formalizing teleological reasoning about human choice-making is much harder).

In other aspects, the lack of formal notations is really bad: most modern economists have mathematical, not philosophical training, and to an unaccustomed eye the Austrian texts actually do look like non-sensical hand-waving. It takes quite some studying to see the actual rigorous structure and careful choice of terms behind those walls of text -- and I won't go into why there aren't that many incentives for most people to study those kinds of books.

I actually think Austrians would gain a lot from adopting more formal notations (perhaps not of the kind adopted by mainstream nowadays). After all, Hayek himself have failed to finish his own book on the theory of capital (which is one of the distinctive concepts in the Austrian economics), because of the sheer complexity of it. Keeping rigor and precision without the formal language is really hard; and formalized representations might be better suited for independent review and verification.

However, in case of economics, the problem domain doesn't lend itself for easy formalization.

> Does Austrian economics make an testable predictions? Is it based on empirical data?

These are some hard questions about Austrians that pop up quite often. It's true that at its heart much of Austrian economics is based on deductive reasoning from a priori assumptions (the correct analogy, they say, is mathematics, not physics). Theories do not follow from the facts; instead, the observed facts are explained on the basis of the theories we find reasonable, and the best theories are those that provide the best (i.e., the simplest and the most general) explanations. This is not really a uniquely Austrian approach, but I believe it's a good way to approach their research.

However, there's not a single strong view on apriorism even within the Austrian school. Mises indeed was quite a radical a-prioist. Hayek and Menger much less so -- and that, I believe, for a good reason.

Economics, especially macroeconomics, is a little too big to say which such certainty that "... he is most definitely an expert in the field."

We're talking about the problem of recovering from a leverage based bubble, an area where Ben "Helicopter" Bernanke (Chairman of The Fed) is an expert. If you look at what Wikipedia cites for Krugman's areas of specialty, they will touch on some of the issues of this but they don't seem to be directly related: http://en.wikipedia.org/wiki/Paul_Krugman