This is the human action podcast where we debunk the economic political and even cultural myths of the days
Here's your host dr. Bob Murphy
Welcome everybody to the human action podcast. I am going to go solo this episode and
Responds to a recent post from Brian Kaplan
Before I dive in let me just apologize for my voice. I feel a lot better than I sound put it that way
But yeah, I had a bad cold that's moving around my system and right now it's smack dab in my voice box
So the background to this is a Matthew Gagnon had emailed
Brian and Brian let him do a guest post at Brian's. I don't know if it's a substack or what his
blogging platform is and
Was asking Brian. Hey long ago in 1997
You wrote this essay called why I'm not an Austrian economist in lots of us in the Austrian school have
Discussed Brian's critique back then in the backstory is that when Brian was younger
He was a huge Austrian right and he went to conferences and was giddy around Murray Rothbard and so forth and then
When he learned mainstream neoclassical economics and his formal studies
Became I don't know if disillusioned is the right word but realized oh wait
There's a whole universe out there of good economists and you know the Austrians don't have a monopoly on that and then that's what he wrote
That's why I'm not an Austrian economist essay to explain why he no longer was a card-carrying member even though he still
Respected, you know a lot of his Austrian friends and colleagues
Okay, so this guy Matthew Gagnon's then asking Kaplan. Hey, it's
Uh many years later
How do you still feel about that? So thought this was an interesting thing and a few people have asked me
to chime in on this so sure why not
Then of course if you want to see Brian's original post I can link to it in the show notes page here
All right
So in response to Gagnon saying nearly three decades of passage you wrote your essay
Distancing yourself from the Austrian school
What do you still hold these views and then Kaplan says my fundamental position has barely changed
I'm great friends as many Austrians and I think they make some good points
But their attempt to philosophically debunk mainstream economics and provide a new foundation for the discipline is a failure
Okay, so let me just respond even right there. You might have thought okay
We're just getting warmed up, but what he just said right there. I think is
mistaken and
It just his framing of the issue
Partly explains why I think Brian and I are
disagreeing on this and why
many of today's card-carrying Austrians would not agree with Brian's take care and
specifically it's he's saying the Austrians attempt to philosophically debunk mainstream economics and
Provide a new foundation for their discipline or for the discipline and so the reason I think that that's
Framing it wrong or at least the standard Austrians today would disagree with that is
It was not the case
that
economics developed and then in
the 1940s
Mises shows up and says oh, I don't like this instead of you guys doing it the way economics has been built
Instead, why don't you do it this way and we'll call it praxeology that I have all of my
methodological
Problems with the way you guys have developed economics until I came on the scene that is not at all what happened
All right, Mises in his early career
When he was explaining the method of economics
He was not
Offering it as a prescription. He was not saying
This is what I think you guys ought to be doing instead. He was trying to distill to codify
How economics had developed to that point and if you're interested in reading more of this and seeing
Evidence rather than me just asserting it the single best
Place I can point you is Hans Hoppe's essay
on the
The method of the Austrian school. Okay, so I'll link to that
And there's a lot that he does in that little essay
but it's among other things
What Hoppe does is he says that this method of praxeology of
I mean, there's there's various ways of doing this intuitively like using thought experiments, right?
Just thinking through the logical deductions of various concepts
Okay, so in the specifically Misesian framework you start with the action axiom and then you start deducing things from that
but just in general the idea of
Like hey, how should we think about tariffs?
Well, if you took the way a lot of mainstream economists talk about oh the reason our discipline is so
Scientific is because we make a hypothesis and then that has testable implications and we go look at the data and see
But no, if you're in favor of free trade, it's not because you looked at a bunch of regressions
It's because you just thought through like you read some Bastiat essays
Where maybe you read, you know, David Friedman and his Iowa car crop
Example in case you don't know what that is. It's a clever
idea that
Apparently David Friedman invented it, but Steve Lansberg popularized it in one of his books
And so I think it was armchair economics was Lansberg's book that popularized this notion. And so the idea was
Just to give you an example of what I mean
That's why I'm going on this tangent
that if you think that
International if if you think that the benefit of protectionism is that it protects us jobs
And so that's why we might want to have a tariff on Japanese auto imports to provide jobs for
Detroit auto workers
You can think of it in a different way and say oh just there's different technologies
for making cars and one technology is US workers go to factories in Detroit and we send in some
Steel and glass and rubber and blah blah blah and then cars come out. That's one technology
That's one way we've discovered of how to produce automobiles for Americans to drive
But there's another way we've done it
And a bunch of farmers in Iowa grow some crops
Then they put them on a ship
The ship goes across the ocean
And then it comes back and it's got a bunch of cars on it. They're all of Japanese design
And that's another technological way we have for using our workers and resources to make cars
And so at that level of abstraction, you know, you're just looking at two different technologies
The fact that one of them involves
You know shipping it across the ocean and then it quote transforms in the Japanese cars when it comes back is incidental
Okay, and so on that level like you see
penalizing the second technology would simply
Hurt the Iowa farmers, right? So it's not that you're you're
benefiting one group of
Or is this not that you're helping us workers in general with the high protective tariffs
No, you're helping Detroit auto workers, but you're there by penalizing the Iowa farmers, right? So that's the idea
so
Another example is Henry George had a famous quote. I might not get the exact quote, right?
But saying what's interesting is during war time
What we do to our enemy is what we do to ourselves during peacetime when it comes to
So-called protective trade barriers, right? If you're at war with some other country and you have a superior Navy
What do you do you blockade them you try to stop stuff from getting into their country?
So if protectionism is right, aren't you doing them a favor and now now we're gonna
raise the wages of their workers and
You know provide the stimulus to all of their infant industries by us keeping
Cheap imports from seeping into their cut. No, everyone knows when you're at war with some other country and you blockade them
you're hurting them
right and it's also not because
You're stopping their exports and so they can't raise for an exchange. No, it's that vital
Imports that they need for their country, you know, you're preventing from getting in there. You're starving them out or whatever. Okay, so
just examples my point is
Whatever you think of international trade, if you know, maybe you're like
Tariffs because of they can reduce income taxes where I'm staying with all that stuff
95% of the arguments are gonna be in the form of thought experiments and just conceptually framing the issues and
Making sure oh, wait a minute. There's this other effect. We got to keep track of and very little of it is gonna be
Let's make a model that's gonna have testable implications and then go look at the data and not because
We're blind and just put our head in the sand. We don't want the real world to get feedback on our
Dogmatic assumptions. That's not why it's that when it comes to social sciences
Things are so complex and it's so difficult to have a truly controlled experiment that that method just isn't very reliable
Right to this day
Keynesians and Austrians disagree about
The Obama stimulus the Keynesians will look at the exact same data
Unemployment and you know GDP growth and blah blah blah and say, yeah, the Obama stimulus saved or created this many millions of jobs
And the Austrians can look at the same data and say, what are you talking about? No, it didn't did it
Right, it's because we're comparing it to the counterfactual
Given the way the Keynesians view the world. They're gonna say had it not been for the King the Obama stimulus package
this many
Jobs would have been lost and unemployment would have jumped up this amount
But because of the Obama stimulus package unemployment only rose to such and such
Whereas the Austrians can say no given our model of how the world works
The Obama stimulus package made things worse and I would say we have
Good reason to say that because in this particular example
The Keynesians going into that it was the famous Christina Romer and Jared Bernstein analysis is the chief
economic advisors to you know incoming Obama administration and
They made the case for the stimulus package showing if we do nothing
Unemployment might reach this level and guess what they did the stimulus package and unemployment was worse than what they warned
What happened in the absence of the package?
But they just spun it and said oh geez the economy was in a worse shape than we realize
It's really good that we did that stimulus package. Okay, so my point is
That you can't settle these things
Using the so-called scientific method the way it's taught in sixth grade
Because there's not controlled experiments really to do it correctly
You would need to have a time machine and go back and say okay. Let's have the exact same
Situation and now we won't do the Obama stimulus package. Let's see what happens and then you could truly see
What is the impact of the stimulus package?
But in practice we can't do that all we know is there were 19,000 different things going on one of which was the
Obama stimulus package and then this was the outcome and
so depending on your worldview and your
Existing framework of your model of how the economy works
You're gonna pick and choose. Okay, so that's the idea
So again, if you want to see more what hop it does is he?
Quotes from various
19th century economists
to show that this idea of
Hey, the way we proceed in economics is by thinking through the logical implications of certain concepts or principles
To come up with a body of economic law
That's not it's not the same. It's not just pure math
But it's also not physics or chemistry or even history. It's something else and what it well it's economics and
And hop it does a good job of showing that you know Mises was not
Inventing this out of whole cloth that he was just again trying to distill and codify
What the method was among the good economists coming out of the classical tradition and
So yes, it's some point. It was true during the 20th century that the mainstream
professional economists in academia and
You know advising government and so forth
Pivoted away from that and they
Engaged in what we would call physics envy and tried to make it look very scientific and oh, yes
You were just like the physicists
Even there they were kind of aping
Decades prior of physics they weren't actually copying what the cutting-edge physics of the day was
But that was not
Where economics came from? Okay, so again, it's my point is just Brian is making it look like
The economics profession grew up and then the Austrians came along and said, oh, we think you guys are idiots
You should do it this way and that's that's not really what was going on though the Austrians in the Massessonian tradition. I
Think can correctly claim that no we have maintained
the mantle we've we've carried the torch of
Classical sound economics and just improved it with you know subjective value theory like the shortcomings of the classical approach
And it's the mainstream now that branched off and started doing
Methodologically dubious things and I think we could say and look what they have to show for it, right? It's not that
They got rid of the business cycle right what in US history
What are the two worst examples of the business cycle? It's a great depression and a great recession
and that happened, you know after the Fed was created and
Even in the second example it was after they said, okay, okay. Give us a mulligan. We got it
That won't happen again. And oops. Yeah, I did
Okay, so it's it's not at all clear that the economic profession has anything to show for
them aping the methods of the natural sciences
whereas, you know the physicists can
Pat themselves on the back
You know, they can say hey do what you will with it. Maybe it's a good thing or a bad thing in terms of morality
But we showed you how to blow stuff up, you know, we can do a look at modern computers
there's a lot of stuff that
The natural sciences have achieved
Whereas the economics profession, it's not at all clear what they have to show for their devotion to the scientific method and
empiricism and I think to this day even Brian Kaplan and
You know David Friedman I debated David Friedman at porkfest one year and this I'll link to that too folks on
this
Narrow question of the method in economics that the best stuff from Friedman and
Even I would say the best stuff from his dad
It's not empirical studies. No, here's what the elasticity of the demand for potatoes is and that's why blah blah blah
You know the the solid free market understanding of how the world works and why
Interference with the market is going to lead to undesirable consequences
95% of that comes from just thinking through
The implications of certain
You know the effect on incentives and things like that. So again, you need
Some general backdrop of empirical feedback. You need to understand that people like leisure and
Things like that and oh, yeah, sometimes employees steal from you. So you got to be careful and did it
Okay, but my point is the way the mainstream economist explains
What it is they do in economics and what the method is and they make it sound like it's we come up with our hypothesis and have
Testable and that that's not what they do in practice
Even among them like why were they attracted to economics in the first place?
Okay
Moving through this
Mathieu asked Brian has your perspective evolved in light of new developments in the field or through interactions with your colleagues and Brian says
The biggest non fundamental change is my view of Austrian business cycle theory
My original critique relied heavily on the rational expectations assumption
And as I put it so now here Brian's quoting from his 97 essay
Given that interest rates are artificially and unsustainably low
Why would any business and make his profitability calculations based on the assumption that the low interest rates would prevail indefinitely?
Know what would happen is that entrepreneurs would realize that interest rates are only temporarily low and take this into account and
then now Brian in
Modern times here is responding to his quote and saying as I've learned more empirical psychology
I've become more open to the idea that the rational expectations assumption is false
Even when incentives for rationality are high upshot
I'm less inclined to dismiss Austrian business cycle theory out of hand
But instead of making me accept their specific story
I'm now more open to a vast range of macroeconomic stories that rely on irrationality and that that that okay, so he goes through
Okay, so my response there is
I agree with Brian that the
Standard way canonical Austrian business cycle theory is explained to people and I've done this too is
Long I'm paraphrasing here, but the story often goes like this and then I'm gonna explain the issue with it
So yeah, the story goes
Hey in the Austrian tradition
Interest rates serve a vital function in coordinating production and consumption decisions over time loosely speaking
if the public if is
More willing to defer immediate gratification for long-term gratification
Then they save more that lowers interest rates that freeze up resources today for investment in longer projects
And that's how everything is synchronized. And so the public's willingness to defer gratification
Physically freeze up resources for longer projects so that those that higher volume of goods and services
Comes out of the pipeline down the road in a further date in the future it all sinks together
So the producers are acting on behalf of the changed preferences of the pop of the consumers, right?
But now that I've said that framework what happens if the reason the interest rate drops is not because of genuine saving on the part of
the public, but just because the banks create more money and
enters the economy through the
Credit markets and so that pushes the interest rate artificially low
So that still gives the same signal to the entrepreneurs to go ahead and expand the production structure the length of it
But the public actually hasn't become more patient. And so now there's a mismatch between the public's
desire for the flow of consumption over time and what the producers are
making the capital structure start
Producing and that's what it leads to it, you know a temporary period of prosperity
where it seems that
You know businesses are bidding away workers from consumer lines and so wages are rising
Everything seems profitable
But that's based on an illusion and ultimately there's capital consumption going on behind the scenes to make it
Physically possible to do that for a few years, but eventually the crisis hits
Okay, and then you say oh, and so the the banks get skittish
They stop pumping in all this new artificial credit interest rates rise to the actual fundamental level and then the businesses realize
Oh, we shouldn't have engaged in such grandiose projects and the crisis sets in right so what I just said there is a
Decent version of if you were going to explain the Austrian business cycle theory to a lay audience for the first time
Just to give them the essentials of it
So Brian is right that in that story. It's a little bit
dubious because you might say, okay, maybe that could have happened a few times but eventually
Don't the entrepreneurs especially like if they listen to your YouTube channel Murphy or whoever
Don't they know that that's part of how it works now. And so if the banks
Pumping artificial credit and lower interest rates
Don't the entrepreneurs realize that and so won't they only
Invest, you know taking that into account and so won't that offset. Okay, so that's
fine in so far as it goes but
There have been a couple responses
over the years to that so one thing is the
To sort of give like a prisoner's dilemma
analysis that
Says it
Given that the banking system is handing out cheaper credit
If you just refrain from taking it your competitor is going to go in and take it right so it's not that
Everybody's gonna just not take the loans
Given that the banks are now reducing the rate of interest and handing out more and so that's certainly not
They the issue it's not that the banker or the business people cannot say. Oh, no, we're only gonna borrow the same amount
Okay, so then
Beyond that though
There's the problem that I
specifically raised
against this objection to the Oscar business cycle theory is that it's ignoring
the
Coordinating function of market prices in the first place
Like I mean because if it were really the case
That all the business people could just look at the raw data and say, oh, okay
I looked at M2 and the base stock and blah blah blah and the Fed did this and so really even though the market interest rate right now
Not a given maturity or whatever of a treasury or whatever you want to use at your benchmark is
3%
Really if we back out all of the monetary inflation and so forth the credit expansion
Really, I should behave as if the market interest rate is 4.8%
Well, but how if you could do that
Well, then you wouldn't need interest rates in the first place right central planning would work if
Business people could do that
Okay, so the idea is you can't have it both ways if market prices are communicating information
And helping everybody coordinate and align incentives and so forth
And then somebody comes along and says oh and now there's this distortionary force
from credit expansion
Where it's giving the wrong signal. It's not enough just to say oh the entrepreneurs would know that they would take it into account
so in fairness
You know, you could have a sort of a hybrid
Compromised position and say yes the business people take that into account
But still the signal is noisier now than otherwise would be and I actually did try to model that
It ended I ended up not getting it published, but
At some point, you know, maybe in my redoting
Retirement years I'll go back and try to nail that thing down and get it published
But the idea is you could come up with some kind of model about yes
The signal becomes noisier and so it still distorts things and I think that might actually be
Accurate and the other kicker in this is suppose the central bank is
Trying to inflate in order to stimulate the economy
They could do a burst of it and if that doesn't have the desired effect they could just keep doing more and more
Right, and I think you actually saw that during the Obama years with the various rounds of Qe
That I think in the beginning the Fed thought oh this is gonna juice things and then it didn't have the
Effect that they had anticipated and so they kept dumping in more
So I think Brian is right to the business people once they catch on to what's happening can anticipate
But again, it doesn't that doesn't mean they can perfectly offset it and then the last thing I'll say is I
Mean you can call this Brian talks about like
Behavioral science and the Austrians need to study more psychology and I
Mean, I don't I don't think so
Here I just want to appeal to the fact that there are different types of people in the market, right?
So to give you a real-world example
After the housing bubble
collapsed, I
Was talking to
The guy who actually built the house I was living I was a Nashville at the time and he was saying
You know he was an older guy and he's saying that. Oh, yeah, I've lived through
Previous housing busts and I saw this coming, right?
So he was a builder and this guy was like in his 60s at this point and so he said that yeah in like 2006
He knew we were in a housing bubble and so he started backing off
That he wasn't starting a bunch of new projects. He was just kind of wrapping up
He was keeping his inventory low in other words and so he was finishing projects and selling them off
before starting new ones and
In our neighborhood, there were a bunch of houses that were like half finished and they just came to a dead stop once the crisis hit
And then you know, they were just in a dead stop for a while
And then late, you know, they had to get liquidated and sold and then somebody finally did something with it
And so he was telling me that oh, yeah, the the kids doing that you call them kids
But they were you know, probably like in their late 20s. He was just saying they just they've never lived through a housing bubble before
They didn't realize it was a bubble
And so they were just making money hand over fist and just starting and getting levered and starting as many projects as they could
Not having the experience so the point being in the real world
Yes, the more experienced wiser entrepreneurs might avoid the temptation of cheap credit
But they can't stop other people from stepping forward and saying oh, yeah, I'll borrow money at that rate and with these
Calculations, okay, we can do this and that right. So that's that's kind of the idea that I
If Brian wants to call that, you know going and studying the psychology literature, okay, but to me I don't I don't think
That's really what you need to do
And also I again going back to
The conception of what economics is
Starting with general principles and just deducing them logically that's what praxeology is
And that's a distinct field from psychology. So I don't
Agree with Brian that oh, yeah, the the Austrians need to bring in insights from empirical psychology. I think that's
Then you know, that'd be like saying in geometry class. Oh, we need to bring in
Developments in psychology and like no that would just you'd be misunderstanding what geometry is
Okay, so at the end here, I'll just read these and then give my quick reaction
Brian says if I had my way how would Austrian economists reform their behavior all the following
There's gonna be six of these things one stop being amateur philosophers
Quantitative probability theory is fine in difference curves are fine
To learn and internalize a lot of empirical psychology
Three use a psychology they learn to reformulate their criticisms of mainstream neoclassical economics
For stop worrying about what Hayek Mises and Rothbard really meant history of thought just doesn't matter much
Five use Hayek Mises and Rothbard not to find the answers and the answers are isn't caps
But to fuel your imagination
Intellectually Hayek is virtually my least favorite Austrian economist
But by the power of imagination to my continuing amazement this rambler inspired both Wikipedia and crypto
And then finally six
Direct your imagination toward radical libertarian policy ideas. I doubt I have written either open borders or build baby build
Those are two of Brian's books. If I'd never read the Austrians
Well, there's nothing distinctively Austrian about either book reading Austrian economists has helped me see unconventional free market possibilities
I would otherwise have overlooked it cannon should help Austrians do the same
Okay, so my reaction
To these as
far as the stop being amateur philosophers
Quantitative probability theories find indifference curves are fine again. I
Brian is misunderstanding the critique on the indifference curve stuff. Okay that
The Austrian so I'll be back up in mainstream economics
Well, a common way to explain consumer behavior is you map out indifference curves
And then you have the person's budget constraint, which is the other income and then you take into account the price like let's say
It's two goods as they got on the x y axis and you draw some curves showing
each particular line
shows
All the bundles of good x and good y that provide the same amount of utility and so that's why they're indifference curves
Because it's saying the individual would be indifferent all along this particular curve
And so if you move to the northeast
Jumping up to higher and higher curves
You're gaining more utility because you assume that these are goods and so the individual wants more of both
Okay, but then the actual shape of the curve
Shows that the trade-off right so as as you go
To the northwest the curve gets really steep
Because it's showing as you get less and less of good x
You need more and more units of good y in order to keep you indifferent
And then if you keep going to the right the curve gets very shallow
For the opposite reason that if you're going down on the y axis, you're getting less and less of good y
You need more and more units of x to keep you indifferent, right? So that's kind of the idea
And so then you go ahead and you do that you map that out and then you say oh
So how do we know what the consumer is actually going to buy or demand?
Then you say oh well, what's the consumer's total money income and then what if the consumer spent it all on good x?
and so that gives you your
You know your max x-point with a zero y and
Then what if you spent all the income on good y and so that gives you your you know zero comma y coordinate?
And then you just connect the two
With a straight line
right and so all of those
Bundles on that straight line are the budget set. They're all affordable
Given the consumer's income and the prices of the two goods
And so then the question is just one of geometry now. He said oh so the optimal bundle
The you know the bundle that is affordable and maximizes utility is wherever that budget line is
Tangent to an indifference curve
Okay, and so that's the way
you
proceed with
consumer theory
Like at the undergrad level certainly in an intermediate level, you know for the the students that are econ majors
At the under but it's still at the undergrad level
Okay, so that's the way you do it and so the Austrians have a lot at least in the Misesi and Rothbardian vein
Have a lot of problems with that
In terms of just the big picture head lane is to say it's it's explaining consumer choices
By reference to indifference and they're saying that's no people don't choose on the basis of indifference
They choose on the basis of preference, right? So in the standard Misesi and approach
Action is choosing one thing over another and that's the starting point and so they don't like
the just the
Basin consumer choice theory on indifference and so in response to that
Brian in his original 97 essay just
It starts talking. Well, no, there's lots of times you could be indifferent between things and you know
I might have like two. I think this is the example. I might have two sweaters
You know, I have to put on a sweater. I'm going outside and they might be hanging in my closet
Or maybe they're in my drawer and I really don't care
but you know between the two of them and I just pick one and
Yeah, that's that's fine, but even there it's not that you're choosing
Because of the indifference, right? So he's missing the point
It's not saying that everyone has to have a strict preference based on every single
characteristic of something
Right and this kind of ties into like of the definition of a unit of a good
So if you want to say a guy of eight units of water and the first unit of water
I'm going to vote to drinking in the second unit
I'm going to vote to bathing and the third I'm going to devote to cooking and the fourth
I'm going to devote to washing my dog and the fifth to my washing my car and the sixth to watering my lawn
Right, you can do that and each thing is devoted to a less important end
And that's where like the law of diminishing margin utility comes in
But when we say they're like what do you mean? They're
Units of water because if you actually look to them physically
There's going to be some differences like let's say it's gallons, right? There's a third gallon and the fifth gallon
They're not
Exactly the same volume of water right like if a chemist really got specific they could say oh no this thing is
Actually 1.01 gallons and this one over here is actually 0.998 gallons
but
What makes them interchangeable units of water is that from the actors point of view they're equally serviceable
Right, that's the criterion
But it's not that you would choose one or the other because of indifference, okay, so again, it's just I think Brian is
misunderstanding the critique
And
Then I guess the last I'll make two more points. So one is I agree with Brian that yeah
The reason I think it's important for the Austrians to remain remain an
Independent vibrant school of thought is that there are a lot of insights that I would have missed
Had I not studied the Austrian tradition?
So my specifically my work in capital and interest theory I can quote translate
The ideas of Bumbawerk
Into a mainstream neoclassical model. That's what I did in my dissertation. I have a mathematical appendix to my verbal dissertation
Where I have a standard mainstream model with all the bells and whistles and I
Codify what I mean
If I may I thought it was pretty cool like I showed a
Too-good model
Where interest is not the marginal product of capital like I showed what the expression was for the interest rate in that world
Where there's two goods and then I said, oh, but let's suppose consumption and capital good are the same thing
And then I just showed my equation reduced to
the equilibrium real interest rate equals the marginal product of capital if there's only one good and
So I was trying to show the mainstream when you're walking around in your models that we were taught at NYU and the you know standard
For graduate students to learn in mainstream neoclassical economics. You're taught that oh, yeah an equilibrium
The real wage rate equals the marginal product of labor, right?
Like the derivative of the production function with respect to L and the real interest rate
Equals the marginal product of the production function with respect to capital
And so that's why
most mainstream economists right now think
Interest is due to the marginal product of capital and wages are due to the marginal product of labor and
That is completely anathema to the Austrian tradition and
So what I showed in my dissertation was oh, yeah
The mainstream economists are relying heavily on this one good model workhorse
If you had just two goods
That all goes away so you can see, you know
The verbal logic of what Bambavra is talking about and I can illustrate it for you in a mainstream neoclassical model with utility functions and blah, blah, blah
Okay, so I would never have gone down that path had I not read the verbal
Tradition of the Austrians talking about the pure time preference theory and having the verbal critique of
What Bambavra called the naive productivity theory?
It wouldn't have occurred to me to even think about that but once I knew
Verbally, wait a minute something screwy here and I was looking at the mainstream equations because the math wasn't wrong, right?
So the stuff we were learning
At NYU in terms of the standard course work
Was correct and so I was just sitting there like as a grad student trying to figure out what the heck is going on
Because Bambavra critique of the naive productivity theory of interest was correct
And yet the equations we were learning that you know the calculus was right
And I was what the heck and that's what I had my epiphany and realize oh
It's because if there's only one good which they had is a simplifying assumption in these mainstream models
Then all the stuff from Bambavra worries about just collapses
Okay, so if you're curious I can I'll link to stuff
I've written elsewhere and not as much of a technical thing
a pair of byland had a
recent
Collected collection of essays come out and my essay in there goes over the stuff if you're curious
I'll link to that. But anyway
My point is that yeah that I would not have
And I by the way, I published that in a it's a journal the history of economic thought
But I published that just as a separate paper
You know and Paul Samus. It was even the referee on that. Okay, so I'm saying
It's not that I was just talking to the choir of the Austrians and mainstream people would think that it wasn't rigorous
Like I got it published in Paul Samus and signed off on it and said, yeah, this is right as far as it goes
but you know, I have my
Things I would say in response, but he was acknowledging the validity of what I wrote
Okay, so again, I wouldn't have even thought about that had there not been this Austrian tradition that had been carried forward
And so then that kind of leads into
Brian saying stop worrying about what Hayek misses the Rothbard really meant history of thought just doesn't matter much. I
Don't know what to say. I mean to me
that's like if somebody said history doesn't matter much and
Yeah, people writing about political science or whatever. You don't really need to study history
There's nothing there. All you need to know is just read the latest
thinkers in terms of political philosophy and science and you know the way to
design government institutions and so forth in terms of the literature of the last 10 years is really all you need
I mean that would be
completely naive and
Foolish and so likewise
If it makes sense to know history in every other arena of life
Why wouldn't you want to know the history of your discipline if you're an economist?
And also I would say
It's much more important in the social sciences than it is in the physical or the natural sciences
Okay, so there's a sense in which
If you want to teach a bunch of grad students the latest in quantum physics and
Cosmology and so on
I could see
You know if someone said there's no reason to go read Isaac Newton's in the original there's no point in that
Fair enough. I could see someone saying that and that I wouldn't be horrified
but
To say there's no point in going and reading the classical economist
I would disagree and lately for those of you who are fans of this podcast the human action podcast
You know that I have been going back and rereading a lot of that stuff
And it is giving me fresh insights. So that's partly
And I guess this is what I'll wrap up on the two things are related the the methodological issues I have with brian
And then now this thing about the history of thought being irrelevant. Those are related, right? It's because
Economics I believe is and was from the beginning a logical deductive. You can call it science
That's why studying the history of thought is very important particularly in economics more so than it would be
in
You know mathematics or chemistry
I still think it is interesting and useful in those fields as well, but I'm just saying it's extra important in economics
Because it's not that we just have the feedback of oh, yeah empirical results
Make sure that at any given time the models we're using
Are the most correct that we've discovered up till up till now. That's that's not the case you can take
Wrong turns in the development the social sciences just like a lot of people think
Freudian psychology was a bad idea
And and that you know the discipline had to recover from that and I think
The canesian revolution was a bad idea and it's taken a long time for the profession to recover from that
It still hasn't fully
Okay, and so again the reason
these cul-de-sacs
Can happen in the social sciences is because you can have a bad theory
And it's not as obvious as it would be in physics if someone just said oh, I think electrons behave this way
Then if you can just go do an experiment you can pretty quickly show no something's wrong
Where you do see that is like arguments over string theory and stuff where
If it like takes such high energies that they can't test it and so you know different schools can exist even in physics
but ultimately
they have the decisive criterion of
Observational feedback, but again in the social sciences you don't have that because there's not controlled experiments
So
I think
Brian Kaplan is wrong it very much makes sense to go read the past economists
particularly the ones that
Have survived the test of time and are far more
Uh
Important I would say than most of what is published today that given I would say this way
I think
You're going to be a much better economist
if you spent
on the margin
more time reading
uh
Bumbavark and Mises and Hayek and Rothbard
than if you
read
The last five issues of you know the top economics journal
That that's going to give you a better grounding for you to then pick even if you're going to just publish
mathematical neoclassical models
That just in terms of you framing the issues and trying to in your mind
Conceptually come up with what's an interesting question. What is it that we're doing in economics?
And then yeah, I got to use all the bells and whistles of rational expectations and utility functions, blah blah blah
But what do I want to go do?
I would say you're going to get more inspiration and have better guidance reading
The old school austrians
Then just looking at the last few issues of the top journal and then saying oh, I want to take this guy's model and just add
You know this perturbation with it that that's to me
You're just going to be following the crowd rather than doing genuinely innovative important work
Okay, well, I'll stop there. Thanks everybody for your attention. See you next time
Check back next week for a new episode of the human action podcast in the meantime, you can find more content like this on nieces.org