Is Austrian Economics the Best Explanation of Economics?

Let's find out.

The following remarks were designed to provide material for debate at an international conference of liberals (in the English sense of this term: see the end of the Preface). My purpose was simply to lay the foundations for a good general discussion. Because I could assume liberal views in my audience I was largely concerned to challenge, rather than to endorse, popular assumptions favourable to these views.

- K.P. Conjectures and Refutations, p. 467

A public challenge to the critical rationalist community.

Contents

  1. Austrianism’s Factual-Factuals
  2. The Contradiction between AE and Constructor Theory, According to AE
  3. The Challenge
  4. (Unfortunately) Necessary Ground Rules
    1. The Terms of Engagement
    2. The Actual Content of the Critique
  5. Conclusion



Austrianism’s Factual-Factuals

So did you know that when Austrian Economics (AE) enthusiasts use the word “counterfactual”, they have something entirely different in mind than Chiara Marletto? In the first paragraph of the zeroth chapter of her constructor-theoretic book The Science of Can and Can’t: A Physicist’s Journey through the Land of Counterfactuals, she writes:

These things are central to our understanding of physical reality, both at the everyday level and at the level of the most fundamental phenomena in physics… They are facts not about what is — the ‘actual’ — but about what could or could not be. In order to distinguish them from the actual, they are called counterfactuals.

The Science of Can and Can’t, p.10, (emph. added)

Counterfactuals are a powerful imagination tool we can use to think about causality, and are a core way we reason about every aspect of physical reality. Put differently, if you’re not using counterfactuals correctly, you’re not reasoning correctly.

What exactly are counterfactuals though, and why are they so valuable? As Wikipedia notes, “Counterfactual thoughts include things that…could never happen in reality because they solely pertain to events that have occurred in the past”. Thinking along these lines is how we intuitively think about the causal influence of something. For example, by imagining a fantasy make-believe made-up world without that something, we can begin to think about the casual influence of that something in our very-real, non-fantasy, actual world.

This is all very abstract, so let’s consider some examples:

  1. What would my life be like if I decided not to go to university? (To reason about the causal impact of university on your life)
  2. Would the streets still be wet if it wasn’t raining? (To reason about things that cause streets to be wet)
  3. Alice gives Bob one hundred dollars. Is it still causing harm to Alice if the government asks her to give money to Bob, compared to if the government taxes coerces her into giving money to Bob? (To reason about the mechanisms by which taxation causes harm.)

However, I was in a conversation with an Austrian-Economist-slash-Critical-Rationalist recently1 - let’s call him Ludwig - and for some reason, he didn’t like these counterfactuals very much. He said that within AE, they don’t waste their time with such counterproductive anti-factual counterfactuals.

“They don’t care about your kind of counterfactuals”, he said, “because to create them, you have to imagine a bunch of false assumptions such that the kind of world you’re imagining no longer even functions like our one”2. Ludwig then provided some examples of the kinds of counterfactuals AE deems permissable:

Scenarios like the price of a good being higher, or the supply of a good dropping, or there being only one provider of jobs in a given labour market, or the demand for a good goes up. The imagined counterfactuals still take place in a world that functions like ours, but where something like a particular price is different.

I admit that I can’t tell the difference here at all. I guess according to AE, the price is allowed to change, but not the weather? Ludwig said that within AE, I’m not allowed to imagine certain things - like the world where it didn’t rain - because to do so is just to “assume a bunch of false things like ‘such and such can be kept constant’” (like the force of gravity), and as soon as I’ve done that, I’ve made up a “fake imaginary world”, which has literally no significance whatsoever upon the actual world (who’s going to tell Marletto?)

Here is probably a good place to mention that not only does AE’s definition of counterfactuals disagree with Marletto, David Deutsch, and thus Constructor Theory itself, it also disagrees with Judea Pearl, Wikipedia, The Stanford Encyclopedia of Philosophy, Merriam-Webster, and the Google Search Engine.

So while Marletto says that counterfactuals are “facts not about what is — the ‘actual’ — but about what could or could not be” - Ludwig says Austrians don’t deal with such trite piffle. Austrian deal only with factual - factuals:

[Austrians] imagine things like specific events being different than what they are, lower prices, different demands etc. [They do] not imagine that the world functions differently than it does. (emph. added)

Okay, sorry, but how is this different again? You’re saying I’m allowed to imagine that the price of oil is 100x the price it is today - and all the attendant carnage that would cause - and somehow, that’s not imagining the world is “functioning differently than it does”? If it’s not functioning differently, then why is oil so much more expensive? But if I imagine that it didn’t rain yesterday, now I am all of a sudden “imagining the world is functioning differently than it does”? Because it didn’t rain? And why are the Austrians telling me what I can and can not imagine?

I was told I was still confused. What is one to do? I asked further questions - and was met with what usually happens when you try to understand the details of Austrian Economics (see for instance Robin Hanson, Noah Smith, and again Wikipedia, making the same point). Torrents of confused and confusing circumlocutions, along with frequent and forceful reminders of my confusion, and bizarre (and unrequested) long historical digressions on how John Maynard Keynes is just like the worst person ever.

This is not the kind of high-quality reasoning I would expect from those who enthusiastically pronounce they possess the “best explanation” in all of economics - but again, as Ludwig was quick to remind me, I’m very confused. So let me entirely grant his point, I’m very confused. But at least someone as confused as I can agree with Ludwig on the importance of making it public knowledge that AE does not accept the typical uses of counterfactuals.

The Contradiction between AE and Constructor Theory, According to AE

Why is it important that this become more widely known? Because it poses an inescapable contradiction between Austrian Economics and Constructor Theory, and thus is a significant problem for the growing number of critical rationalists who are beginning to describe Austrian Economics as a branch of constructor-theoretic physics.

To make the contradiction in-your-face explicit: According to Marletto, the co-progenitor of Constructor Theory, counterfactuals are “not facts about what is”. According to AE, counterfactuals are only facts about what is. They both claim to be studying physical reality. One side has to give. Discuss.

~

Austrian Economics makes very large claims for itself. It is described by its proponents as “a universal theory” that explains each and every economic interaction between each and every possible combination and arrangement of individuals, one that is entirely derivable from first-principles (and thus not falsifiable, or empirically testable in any way). Oh and also is the only economic theory “which doesn’t violate any rules of epistemology”.

But why describe AE merely as a branch of physics? Why stop there? If it’s all “derivable from first principles”, that means it’s not a part of physics, nor metaphysics, nor even philosophy - but mathematics (cf. Popper, C&R, p.266). Even physics isn’t entirely derivable from first principles.

Also, what are these rules of epistemology again, which all economic theories except AE violate? Besides “Thou Mustn’t Imagine Counterfactuals”, could someone please list them for me? These inviolable “Rules of Epistemology”, whatever they turn out to be, sure do sound very similar to another communities’ inviolable “Laws of Rationality”…

The purpose of this post is to attempt to reduce my confusion by proposing a simple test that any best-explanation-which-doesn’t-violate-the-rules-of-epistemology should be able to pass with ease, humour, and grace. And if it does, I promise I’ll curl up around the mantelpiece, with my missus and my Mises, and eagerly dive in to the friendly and inviting world of Austrianism.

The Challenge

As previously mentioned, there are many critical rationalists who are now claiming that Austrianism is the best explanation - in the technical, Deutschian, hard-to-vary sense - of Economics. Well, frankly, I don’t buy it.

But I’m completely confused! Who cares what I think! Fortunately, there’s an easy test we can propose, something which would convince someone even as economically-ignorant and confused as I, and all others who are humbly trying to decide if this AE business is all just smoke-and-mirrors. And hopefully, through this exercise, we can reduce a little confusion for these others as well.

It turns out that way back in 2012, Scott Alexander wrote a completely comprehensive and utterly thorough demolition of Austrian Economics, which has remained unanswered for eleven years. Anyone wondering if they should read Mises and the rest, is well-advised to read this first. It’s digestible, funny, highly-informative, non-technical, comprehensively argued, skimmable, Popperian - and final.

The first attempt at a response, here, addressed only a tiny sliver of his arguments, messed up his itemized numbering, summarized away the majority of his main points, and largely just agreed with him for the rest of it. The second attempt, here, is basically just a document saying “go read this libertarian paper” over and over again - which of course is antithetical to the explanation-seeking critical rationalist (and the few links I clicked on agreed with Scott, not the reply).

So here is the challenge. Simply write a clear response to Scott’s critique. Go systematically down through his list, pointing out the flaws in his argument, and explain to us lay-people - we who have yet to learn how to bastardize the counterfactual - how Mises, Rothbard, Hoppe, Hayek, Hazlitt, and all the other Patron saints of the Marginal Revolution, all solve the various problems Scott Alexander poses to their cherished theory. If the Patron saints can’t do that, then they can’t be said to have the “best” explanation - because Scott’s would be better.

To answer the obvious question first. Who am I to issue such a challenge? Mises et. al. wrote a rebuttal to all of modern economics. By my own logic, shouldn’t I be required to write a point-by-point refutation of Mises?

Well, I’m not the one running around claiming simultaneously A) There is nothing more valuable than rational criticism, that B) Austrian Economics is perfect, airtight, derivable from first-principles, fool-proof (I certainly hope so), logically sound, critique-resistant, and axiomatic while C) a point-by-point critical analysis and full-throated refutation of Austrian Economics has gone completely ignored for eleven years, and further, while D) being unable to answer simple questions regarding the definition of words like “counterfactual” without spouting off irrelevancies about John Maynard Keynes again. I don’t have an economic theory - I’m completely ignorant of economics, and the only thing I’ve read about Keynes is his Wikipedia article. I am thoroughly unequipped to respond to the titanic figure of Ludwig Von Mises. I have no position or stance on which macroeconomic economic theory is the correct one, and have never claimed otherwise. I’m just confused.

A second obvious question to answer. Is Scott actually responding to Austrianism, or just libertarianism more broadly? After all, his post is titled “The Non-Libertarian Faq”, isn’t it? To test this, I asked a few Austrians if they agreed with the following characterization of their position (which comes from Part A: Economic Issues):

In a free market, all trade has to be voluntary, so you will never agree to a trade unless it benefits you.

Further, you won’t make a trade unless you think it’s the best possible trade you can make. If you knew you could make a better one, you’d hold out for that. So trades in a free market are not only better than nothing, they’re also the best possible transaction you could make at that time.

Labor is no different from any other commercial transaction in this respect. You won’t agree to a job unless it benefits you more than anything else you can do with your time, and your employer won’t hire you unless it benefits her more than anything else she can do with her money. So a voluntarily agreed labor contract must benefit both parties, and must do so more than any other alternative.

If every trade in a free market benefits both parties, then any time the government tries to restrict trade in some way, it must hurt both parties. Or, to put it another way, you can help someone by giving them more options, but you can’t help them by taking away options. And in a free market, where everyone starts with all options, all the government can do is take options away.

The first said “It’s 100% AE”, with the qualification that the “musts” should be turned into factual statements. (The fricken is-ought thing again…) The second said it was completely wrong, but would be correct if you added the single word “think” to each sentence - as in “you will never agree to a trade unless you think it benefits you” etc. I don’t think it makes much difference (or should I have said “This doesn’t make much difference”?), because you shouldn’t even notice individual words if the idea is clearly stated enough, but it seems to be a point important to them. Seems a tad pedantic, but I’m looking forward to hearing more about this in their rebuttal.

So yes, he’s critiquing genuine Austrianism in his piece. And even if he wasn’t, Austrians purports have an explanation for everything, so they should be able to explain this too.

(Unfortunately) Necessary Ground Rules

I’ve seen a few argumentative slight-of-hands used by proponents of Austrianism of late, so while it’s dispiriting to have to establish epistemological ground rules for a contest geared towards critical rationalists, it unfortunately appears to be necessary.

The Terms of Engagement

1. Before going through his list, start with a brief summary of his position as a whole. This is just so we (“we” the readers, we the incrementalists, the skeptical lay-public, the hopelessly confused) know you’ve understood his entire position, not just the small section of his argument you happen to be refuting in that one particular moment. If this part is inaccurate, we needn’t bother understanding the rest of your response, because you haven’t understand his.

Additionally, Scott helpfully lays out his FAQ using the following structure.

So the response should contain a list of rebuttals, in this format:

For completeness, we have included Scott’s Table of Contents below, detailing all the subject areas you’ll be required to cover:

The Actual Content of the Critique

(Jump to the relevant section in Scott’s blog)

  1. Introduction
  2. Economic Issues
    1. Externalities
    2. Coordination Problems
    3. Irrational Choices
    4. Lack of Information
  3. Social Issues
    1. Just Desserts and Social Mobility
    2. Taxation
  4. Political Issues
    1. Competence of Government
    2. Health Care
    3. Prison Privatization
    4. Gun Control
    5. Education
  5. Moral Issues
    1. Moral Systems
    2. Rights and Heuristics
  6. Practical Issues
    1. Slippery Slopes
    2. Strategic Activism
    3. Miscellaneous and Meta

(And for bonus points, instead of arguing against Scott, which doesn’t require logical entailment between each clause, show in the Appendix of your submission each step of the derivation which proves he’s incorrect. This should resemble a logical proof, because it is one. Starting of course with the Action Axiom, provide the chain of statement which end with the result “Scott is incorrect”, where each intermediate statement is logically entailed (i.e is connected by “and thus…”) by the preceding statement. This is what you all mean when you say everything is “derivable” from the Action Axiom, right? The Bayesians misuse probability, while the Austrians misuse logic, it seems.)

2. Now this next ground rule is very important, so please listen carefully. Scott writes:

Too often I find that if I can convince a libertarian that government regulation can be effective, they respond that it doesn’t matter because it’s morally repulsive, and then once I’ve finished convincing them it isn’t, they respond that it never works anyway. By having sections dedicated to both practical and moral issues, I hope to make that sort of bait-and-switch harder to achieve, and to allow libertarians to evaluate the moral and practical arguments against their position in whatever order they find appropriate. (emph. added)

I’ve had this move pulled on me a few times myself and it’s quite annoying, so to prevent this kind of chicanery, we enforce the following epistemological rule, which we call “The No-Bait-and-Switch Rule”:

The “No-Bait-and-Switch” rule: Moral arguments must be weighed against moral arguments, practical against practical, and so on. NO BAIT AND SWITCH.

More specifically, try, within reason and style considerations, to keep the discussions of each topic as isolated as possible to reduce confusion (mine, yours, others). The intro, where you’re responding to your accurate representation of Scott’s entire position, is the place to unify all the various threads of your argument into a single coherent whole, and rebut his position in toto. The Best Explanation Crown (BEC) will not be granted to those who contestants who frequently violate the No-Bait-and-Switch Rule, and we remind participants that the community of critical rationalist, to whom your response will be submitted for peer review, will be paying close attention for violations of The No-Bait-and-Switch Rule.

(Aside: I conjecture that upwards of 90% of the arguments used by the radically-argumentative online Austrians is based on this one simple trick. Switch from practical arguments to moral ones when challenged on the practical stuff, and then switch back again to practical arguments when challenge on the moral stuff. Clues that they have switched from practical to moral arguments include the frequent use of highly emotionally-valenced words such as “coercion”, “force”, “theft”, etc. The Bayesians have their Motte-and-bailey, and the Austrians have their Bait-and-Switch. You can’t beat an argument like this - but you can ignore it.)

3. You are allowed to use any and all tools at your disposal, including all the material from all the previous responses to the FAQ (full list available here). Form a team here people, collaboration encouraged! You guys seem like you’re good at cooperating - crowd source it on a Google Doc, and allocate sections based on expertise. Or use ChatGPT. Or quote from the Patron saints directly. Or pay private contractors to do it. Or each write your own response, see how they compare, reach a consensus amoungst yourselves as to which response most accurately represents AE, and submit that. The only thing that matters is producing a single document which contains a clear and persuasive response to each argument in each sub-section of each section of his FAQ, as well as his broader thesis more generally.

4. At any point, you can quit the competition, just by changing your mind - and that counts as a total victory. And you don’t even need to change it very much - just from “Austrian Economics is the best explanation” down to “Austrian Economics is a very good explanation, amongst others, which are also worth considering, depending on what it is you’re trying to explain”.

And finally,

5. If you can’t or won’t answer Scott’s exceedingly rational and polite criticisms, and you can’t or won’t change your mind, then while you may still be an Austrian, by the definition of critical rationalist - you aren’t.

Conclusion

Let the games begin! I’ll post a link here to the response when it arrives. But ‘til then, let’s all just have a bit more humility when we talk about how Austrian Economics is The Best Economics, please.

Editors Note: I will not engage with proponents of Austrian Economics unless and until a response is posted which the majority of Austrians agree accurately represents their views, and which the majority of the CR community agrees is a fair response to Scott. I’ll probably still talk about you though. Sorry.

Footnotes

  1. Just to be clear, this person wasn’t Logan Chipkin, a friend with whom I have rather obvious political differences - but I have political differences with most of my friends, that’s usually why we’re friends in the first place after all (agreement is dull). Also I’m looking forward to reading Logan’s new book, Windfall, which I’ve heard is excellent. Go buy it here. ↩

  2. All quotations are literal throughout - not paraphrases, caricatures, or misrepresentations. (emph. added to this one though). ↩