Tuesday, September 3, 2013

Bob Murphy's Confusion about Models



Bob Murphy warns Austrian economists to be careful when attacking mainstream economists about their models. I object. He writes:
Austrians need to be a little careful when they make sweeping condemnations of the “unrealistic models” of their opponents. After all, when “our side” teaches comparative advantage, we use the completely unrealistic 2-good 2-country model. When we explain Menger’s theory of the origin of money, we tell simplistic stories that have no basis in history. When we explain Bohm-Bawerk’s views on capital accumulation, we often start with ludicrous Robinson Crusoe tales. And even Mises himself pounds home the fact that his “evenly rotating economy” is not only false, but internally inconsistent.

Murph really has a problem differentiating models.  The Austrian models that Murphy references are all thought experiments. They are designed to mentally isolate specific cause and effect factors that can't be isolated in the real world. There is no Austrian economist in the world that believes the  “evenly rotating economy" is designed to reflect a real world situation. Indeed, Murphy correctly writes that "Mises himself pounds home the fact that his 'evenly rotating economy'  is not only false, but internally inconsistent."

Thus, there is no problem in the manner Austrians design models. They are not attempting to paint a detailed picture of the real world. However, Austrian "opponents," as Murphy calls them, are attempting to design models that reflect the real world in detail, and, indeed, they often believe these models can predict the future (or at a minimum "prove" correlations). This is all vomit to an Austrian.

Austrian models never attempt to make a detailed forecast of an economy. Indeed, Austrians believe this can't be done because all factors can not be known in advance. The models of Austrian "opponents" are of an entirely different type. They assemble empirical data, create equations (that is, create the model) and attempt to forecast the future or to "test" their models. Austrians object to this because the data can not be complete, the full economy is just unknowable. Thus, the Austrian charge that the mainstream models are unrealistic, is true. The models can't possibly do what the designers of the models believe they can.

This, however, has nothing to do with the deductive models created by Austrians, which are not attempting to make precise forecasts of a given economy at a given place and time or to "test" theory. Thus, the charge that Austrian models are unrealistic and therefore unuseful, does not hold for Austrian models. They are nothing like mainstream models that attempt to forecast the future. They are simply attempting to create mental experiments to understand how different factors play out in the economy.

For Murphy to warn Austrians about their models and to tie this in, in any fashion, with mainstream models, which are of a totally different nature, is absurd.

Robert Higgs in his comment today on the death of Ronald Coase, outlines quite accurately the nature of mainstream modeling:
Ronald Coase (1910-2013) died yesterday at the age of 102. Since Coase became an economist, in the early 1930s, the economics profession has been altered enormously in fundamental ways. Most notably, perhaps, (1) the degree of analytical formality (especially the mathematical specification of theoretical models) has increased greatly in every part of the field; (2) Keynesian and other types of macro theories have become central parts of economic theory; (3) econometric testing has become an integral part of the profession’s evaluation of its theoretical models; and (4) interest in and writing about economic history and the profession’s greatest contributors in previous eras have waned greatly.
This trend is what Austrians object to, when they warn about unrealistic models. Austrian modeling is completely different from these trends that Higgs' correctly identifies in mainstream economics.

11 comments:

  1. I really find Murphy's statement shocking. Austrian models, as Robert points out, are used to determine cause and effect relations by isolating their operations. We can establish the origin of interest in time preference and see how MVP determines wages by removing the other determining factors. Keynesians and neo-classical people don't use models to understand the laws of economics but either as positive representations of how the world really works or as normative goals. Again, really surprising display of confusion from Murphy.

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  2. Robert Wenzel, with all of these strange errors by Bob Murphy these days should I be worried about the study guides he created for "Human Action" and "Man, Economy & State" or no?

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  3. Good point that Austrian models never attempt to make a detailed forecast of an economy. They simply predict "imminent" hyperinflation and economic collapse.

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    1. @Wolfgang

      Further evidence you have no understanding of Austrian theory. Austrians do not pretend to make the precise forecasts that Keynesians and econometricians do, but that doesn't mean we are without say.

      For example, it is impossible to know today, whether it will snow on February 15. 2017, but we know it will likely be the winter season when it will snow, as opposed to August 15, 2017. In economics, we know a period of rapid money growth can be a "season" of strong inflation rather than such a period occurring when there is drain in money supply. In other words, we are not the fools that econometricians are and will not point out the exact dates of complex phenomena such as hyper-inflation or snow in 2017, though we know very well the seasonal conditions which must be present for such occurrences.

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    2. Jerry, please share with us which Austrian model, which aspect of the Austrian edifice, "predicts imminent economic collapse." Can you cite a page number from the Mises or Rothbard treatises, please? It can't be that you're just an ignoramus whose knowledge of Austrian economics comes from reading an inane mainstream article on Yahoo, can it?

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  4. I've never been impressed with Bob Murphy. It's unfortunate that he's appeared on mainstream news to present the Austrian perspective.

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  5. murphy is right.you are again, as so often attacking a straw man.who said that classical economists are trying to necessarily predict something?you have zero idea about the methodology of economics if you think there is a gapping difference between austrian and chicago models.you can use ABCT to try to predict something just as much as the IS/LM.you shouldn't, but you can.there are economists of all schools who go down the rabbit hole.but i would say that most prominent economists know the limits of their modeles and their predictive power.

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    1. Murphy writes of "sweeping condemnations" of "opponents." He nowhere writes or implies he is referencing only the 1930s IS-LM model. The Austrian critiques of "unrealistic" models is against the categories of modern day models referenced by Higgs, which would certainly fall under the category "sweeping."

      The IS-LM model is a poor model, but I don't think you will find any Austrian critique anywhere of it that charges that it is "unrealistic," especially in its earliest forms, in the sense that Murphy is implying that Austrian models are "unrealistic." Nowhere, no how. You don't know what you are talking about. Show me one reference to an Austrian critiquing IS-LM in the sense that Murphy suggests that Austrian models can be critiqued.

      As for your reference to Chicago models, it is further proof that you have no idea what the hell you are talking about. Milton Friedman was a positivist who designed his models to be empirically checked, completely different from Austrian models. Friedman's positivist models are an object lesson in the types of models that the Austrians would differentiate from their own and call "unrealistic."

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    2. "i would say that most prominent economists know the limits of their modeles and their predictive power"

      lol....really? Well then, we have nothing more to worry about as the most prominent economists will naturally start recommending the Federal Reserve stop manipulating interesting rates, "targeting" inflation, & "balancing" it with unemployment.

      Mind bringing some candy back with you on your return trip from fantasy land? I hear it's quite good, specifically the kool aid.


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    3. omg this could be an endless thread on this topic, as it often happens in murphys comment section and don't want to go there.i dislike the use of functions for describing economic agents as much as the next guy(i've seen a fair amount of BS results from these models in college) but I think you overreact here.every model you build you want to be checkable, that's kind of the point.you also check econ data that fall in line with ABCT for your analysis.if you would suggest to friedman that the FED should be abolished and any policy it follows is worse then no policy, he would very probably agree with you. but that was not the question he was concerned with.in his models the FED is a given, a constant, because...well b/c it exists! so he tried to look for the best possible policy(or least worst)with that in mind.

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  6. Austrian models show the qualitative laws of economics. The models of the mathematicians try to predict quantitatively.

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