On Austrians... And Against the Chicago School

There is a short editorial in Mint today that praises the Chicago school of empirical economists – also called “positivists” – and concludes that these are the best people to run America’s affairs by sitting in the White House with the Obama administration.

The editorial concludes:

“These are precisely the kind of economists the new president needs, ones who can look at economic data and suggest out-of-the-box solutions, instead of tired theories that serve no end.”

This viewpoint is dangerously wrong. It rubbishes economic theory while glorifying the number crunchers of The State, the kind of guys we have been seeing in India for 60 years, reeling out all the data on anything and everything. Professor PC Mahalanobis, who was Nehru's advisor on the Second Five-Year Plan, was a statistician; a number cruncher.

In reality, you need theory to interpret statistical data. All statistics are necessarily “historical,” in that they are measurements of past events. Unless backed by sound theory, no one can predict anything about the "uncertain future" from mere data.

The Chicago school, it is true, base their world-view on empirical testing of theories; on statistical measurements of reality. Yet, I do believe that this is precisely where their greatest error lies. It is this obsession with data and empiricism that has led the subject of Economics along a totally wrong road. Because their basic theories are wrong.

Theories matter. Theories are the link between sensation and perception. We do not “perceive” reality correctly if our minds are full of wrong theories. Just as the man-on-the-street sees a bonny baby and concludes it is a “problem” because his mind is full of Malthusianism. Or a Marxist looks upon entrepreneurs as “exploiters of labour.”

According to the Austrian school of Catallactics (I no longer use the word “economics”), the pathway to knowledge in the Science of Exchange is through introspection. That is, we look inwards into our own minds. The Chicago school looks outwards at reality, measuring it to find laws. This is an imitation of Physics. It is “scientism.” It merely mimics science. It is what Friedrich Hayek called "a pretension to knowledge."

The Austrians look for “laws of thought” that are common to all human beings, because all human beings possess the human mind. And this mind has an unchanging “logical structure.” Once we discover the laws of thought in our own minds, we have the means of understanding “human action” – because all human action in market exchanges is deliberate, and therefore guided by these laws of thought.

Thus, the great laws of demand and supply are not found “out there” by “empirical measurements” of market prices and quantities; rather, they are found inside all our heads. We think like that only.

Similarly, the Law of Diminishing Returns is not activated by some feature of rasgullas. Rather, the rasgullas remain the same; it is we who feel “fed up” after eating three. This is a “law of thought.”

The great Law of Human Association cannot be understood through Ricardo’s “comparative advantage” example of two nations trading two goods; the law can be correctly conceived only when it is applied to two trading individuals.

Individualism, Subjectivism and Apriorism: these are the pillars of Austrian methodology. All predictions are “qualitative” not “quantitative”: we can say demand will rise when prices fall, but we can never apply a number to it – like Manmohan’s famous 9 per cent growth rate.

Further, these “laws of thought” require no empirical proof. They are true a priori. Just as the laws of mathematics, also grounded in the “logical structure of the human mind,” need no empirical proof. We cannot admit to anything “logical” except that 2 + 2 = 4. Similarly, we cannot admit to anything except that the Laws of Catallactics appear “logical” to our minds. Their predictions of patterns and qualities therefore apply with “apodictic certainty.” But these remain “if this – then that” laws, outside the pale of empiricism and positivism. Both Statistics as well as Mathematics are useless to inquiries into Catallactics. As Friedrich Weiser put it: "Our method involves looking outwards from within the consciousness."

And what is the use of Catallactics? Of course, we are of no use to Obama. Or to any “planner.” To us, "economic planning" can never work for the "knowledge" required can never be collected. As Friedrich Hayek said, "What Cannot Be Known Cannot Be Planned." The market works on the basis of widely dispersed "fragments of knowledge" - not centralized statistics. And not everything is known. Knowledge is not "perfect."

Students are advised to read Hayek's brief paper, "The Use of Knowledge in Society" by clicking here.

To Austrians therefore, the State has no role to play in The Market. We advocate a clear separation between State and Market – and a return to the “private money” of gold. We advocate a complete cessation of government collection of market data, as not only useless, but also because they impose compliance costs on businesses. Further, there cannot be any “planning” without “data.”

My great hero in practical government is Sir John Cowptherwaite, who refused to collect statistical data in colonial Hong Kong – because they might be of use to some socialist crank some day. And see how Hong Hong flowered under his light rule. And unilateral free trade. And low taxes. And all this, without a central bank!

A good read for students: Murray Rothbard’s article “Statistics: The Achilles’ Heel Of Governments.” To read the article, click here.