Horwitz, Economy, and Empirics

Steven Horwitz’s defense of Austrian empirics makes several sensible points:

  1. Some Austrians have no methodological objection to empirical work.
  2. Mainstream economists have a dogmatic, narrow view of what counts as “empirical evidence.”
  3. Some Austrians have done good empirical work.

Unfortunately, Horwitz combines these sensible points with a serious case of what my colleague Daniel Klein calls “myside bias.”[1] Horwitz is right to point out neglected Austrian achievements, but trivializes major Austrian shortcomings. He is right to point out mainstream economists’ methodological blinders, but neglects two decades of the mainstream’s growing methodological pluralism.[2] He is right to emphasize the importance of actors’ beliefs, but neglects behavioral economists’ tremendous progress in empirically studying actors’ beliefs. Last, Horwitz doesn’t even consider an awkward fact about recent Austrian empirical work: There’s nothing distinctively “Austrian” about it. Austrians like Peter Leeson and Chris Coyne are achieving mainstream academic success by making claims mainstream economists can accept without further ado. Good for the Leesons and Coynes of the world. But if Austrians can translate their empirical insights into mainstream language and sell them to a broad audience, why don’t they use mainstream language in the first place? Austrian contributions will continue to be undervalued as long as they continue to spend most of their time talking to each other in their own eccentric dialect.

Major Austrian Shortcomings

Horwitz admits that some Austrians are methodologically hostile to empirical economics. But he paints these Austrians as an irrelevant fringe:

Austrian economics was part of the academic discipline of economics long before Ron Paul and the recent public attention, so if one wants to judge it, one should be looking at the work published in the professional journals and books by the dozens of Austrians teaching at universities in the United States and around the world.

Critics like Josh Barro are mistakenly relying on “the pronouncements of various advocates of Austrian economics on blogs and Internet forums, rather than engaging with the professional research being published in the peer-reviewed journals by practicing Austrians.”

But what would Barro discover if he followed Horwitz’s advice? There are two main outlets for distinctively Austrian research. The first, The Review of Austrian Economics, was edited by Rothbardians for its first ten years (1987–1997) before passing to other Austrians more to Horwitz’s liking. The second, The Quarterly Journal of Austrian Economics, has been edited by Rothbardians since its inception in 1998, and is still being published. Similar Rothbardian/non-Rothbardian ratios hold for Austrian books. Critics could reasonably conclude that Austrian resistance to empirical research is even worse than they imagined.

Horwitz might protest that Rothbardians aren’t “real Austrians” or “real academics.” But they might say the same about him.[3] Outsiders’ natural reaction isn’t to take sides, but to note that self-styled Austrians are earnestly debating the relevance of empirical evidence. How can anyone blame these outsiders if they conclude that Austrians are exceptionally hostile to empirics?

Mainstream economists will be even more puzzled by Horwitz’s take on Mises:

Some Austrians argue as if one can deduce all of economics in one’s armchair, but Mises was pretty clear that this core of economics was fairly limited. He points out that even the notion that labor is unpleasant is not part of that core, but rather an auxiliary assumption we make based on observation. So too is the existence of things like money.

Horwitz correctly describes Mises’ position.[4] Yet unless you’re an Austrian, the position Horwitz ascribes to Mises sounds extremely unempirical: He builds economics on a short list of “apodictic truths,” adds a few banal empirical assumptions like, “there is disutility of labor” and “money exists,” then claims to deduce lots of substantive conclusions that are definitely true as long as all the banal assumptions are true. Given Horwitz’s sympathetic discussion of Mises, one has to wonder how far Horwitz really is from the armchair deductivists he dismisses.

Behavioral Economics: The Triumph of Subjectivism

Horwitz tells us that:

Austrians are trying to open up what counts as “empirical” to a broader range of evidence than is methodologically permissible in the mainstream of economics. Austrians can make use of econometric evidence in a limited and careful way (and a few have), but they are more likely to make use of primary source historical evidence and non-econometric quantitative data to make their arguments.

Like Horwitz, I often find mainstream economists methodologically dogmatic. But I haven’t found Austrians to be any better. While each group has some open-minded members, both tend to dismiss certain kinds of evidence. When I present my evidence on voter irrationality[5] for example, Austrians often respond with lectures about the “rationality of all human action” or even Hume’s problem of induction.

Horwitz could rightly reply that Austrians are becoming less dogmatic. But the same holds for mainstream economists. Over the last two decades, many mainstream economists have embraced surveys, interviews, and narrative history.[6] Even more importantly, mainstream economists have embraced empirical psychology. Horwitz is correct to point out that some Austrians have adopted some of these tools as their own. But plenty of other Austrians view them with indifference or hostility.[7]

Austrians’ lack of interest in empirical psychology is especially telling. Horwitz highlights the importance of “subjectivism”:

Economics is radically subjectivist in the sense that human action depends upon the perceptions of the world held by the actor. All explanations of praxeological phenomena, i.e., any application of economics to the real world, must start with the actor and her beliefs about the world, including the limits to our knowledge and ability to optimize.

All true. But Horwitz ignores the existence of a massive intellectual movement that spent the last forty years developing these insights: behavioral economics.[8] If you really want to learn about human’s “beliefs about the world,” the “limits of our knowledge,” or our “ability to optimize,” read Daniel Kahneman’s magnum opus Thinking, Fast and Slow. Kahneman elegantly and carefully explains dozens of major discoveries about how people think. Compared to this fountain of knowledge, Austrian talk about subjectivism is empty generalities.

What’s “Austrian” About Austrian Empirics?

Horwitz points our attention to the recent success stories of Austrian empirics. We have several Austrian teams’ work on Hurricane Katrina. We have Edward Stringham’s work on endogenous rule formation. We have Chris Coyne’s analysis of foreign policy. We have Peter Leeson’s work on pirates (and much much more). It is easy to see why Horwitz would present this work to mainstream economists and proudly say, “Look what we Austrians have been up to lately.”

My question: How would Horwitz respond if mainstream economists replied, “Sure, it’s great work. But what’s Austrian about it?” Take Peter Leeson’s work on pirates. Is he using the fascinating topic of piracy to convince readers that the Austrian framework explains the world economy better than textbook microeconomics? No. For all its virtues, Leeson’s project is modest and orthodox: using textbook microeconomics to explore the fascinating topic of piracy. Historians of thought unaware of Leeson’s pedigree might completely miss his Austrian origin story. Most would conclude that Leeson’s main inspiration was the Journal of Law and Economics, circa 1970–1990. That was a great era for economics, but few who lived through it saw much “Austrian” about it.

Austrians are wise to embrace their school’s recent empirical work. But where does it all end? Yes, Austrians can continue to learn interesting things about the world, explain their findings in mainstream language, and rise in the economics profession. But if that’s all you do, what’s the point of calling yourselves “Austrians”? What’s the point of mastering Austrian concepts and terminology you barely mention in your actual publications?

The obvious reply is, “Austrian concepts and terminology help us understand the world.” If that’s so, why don’t Austrians focus on empirical questions we can’t answer without their unique concepts and terminology? The Austrian empirics that Horwitz urges us to read for ourselves show that Austrians can do very good empirical research. What these empirics don’t show is that uniquely Austrian insights make empirical research better.

Notes

[1] Daniel Klein. “I Was Wrong, and So Are You.” The Atlantic, December 2011.

[2] Horwitz does however acknowledge this progress in his interview with The Daily Bell: “Those who control the levels of power in the discipline don’t think we are completely scientific in many cases. They are better than they were 25 years ago in graduate school, though.”

[3] At least in his interview with The Daily Bell, interestingly, Horwitz comes far short of disowning Rothbardians: “They do some things in academia but they also have public outreach, publish online, provide resources on their website and are involved in broader libertarian politics. The folks at the Mises Institute are more skeptical about academia; they tend not to believe that that’s where the fight is. They don’t try to engage the mainstream in economics. They are in their own world with respect to academic economics. It did surprise me somewhat that they were upset given that they haven’t made academics their primary focus and GMU has. But, hey, who’s leading the charge in academia; it’s these guys over here [George Mason University-connected Austrian economists].” Walter Block accuses Horwitz of wanting to purge his intellectual opponents, but does not actually advocate purging Horwitz: “Had I followed the path of the Horwitzs of the world, I would have long ago broken with Hoppe, Demsetz, Murphy, Machaj, Davidson, Howland, Bagus and others with whom I have disagreed.” Walter Block, “Contra Horwitz,” LewRockwell.com, January 2010.

[4] And Murray Rothbard’s position as well. See e.g. Murray Rothbard, Man, Economy, and State. Auburn, AL: Ludwig von Mises Institute, 2009, p.43n27.

[5] See. e.g. Bryan Caplan, The Myth of the Rational Voter: Why Democracies Choose Bad Policies. Princeton, NJ: Princeton University Press, 2007.

[6] A few prominent examples of mainstream research using surveys, interviews, and/or narrative history: Edward Glaeser, David Laibson, José Scheinkman, and Christine Soutter, “Measuring Trust.” The Quarterly Journal of Economics 115(3), 2000: 811–846; Edward Glaeser and Bryce Ward, “Myths and Realities of American Political Geography,” NBER Working Paper No. 11857, 2005; Alan Blinder, Elie Canetti, David Lebow, and Jeremy Rudd, Asking About Prices: A New Approach to Understanding Price Stickiness. New York: Russell Sage Foundation; Truman Bewley, 1998; Why Wages Don’t Fall During a Recession. Cambridge, MA: Harvard University Press, 1999; George Akerlof, William Dickens, and George Perry, “The Macroeconomics of Low Inflation.” Brookings Papers on Economic Activity 1, 1996, pp.1–76; Gordon Tullock, The Social Dilemma of Autocracy, Revolution, Coup d’Etat, and War. Indianapolis, IN: Liberty Fund, 2005.

[7] See e.g. Austrians’ reaction to my introspective defense of the concept of indifference.

[8] Daniel Kahneman, Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2012. See also Richard Thaler, The Winner’s Curse: Paradoxes and Anomalies of Economic Life. Princeton, NJ: Princeton University Press, 1994.

Also from This Issue

Lead Essay

  • The Empirics of Austrian Economics by Steven Horwitz

    Professor Horwitz makes the case that the Austrian school of economics isn’t just a bunch of armchair theorists. Ludwig von Mises’s “praxeology” should not prevent and has not prevented economists from doing vital, real-world, empirical work on subjects including monetary policy, disaster recovery, communist political economy, and even piracy. Horwitz takes us on a tour of some of this work and suggests that the Austrian school can offer mainstream economics a number of vital insights.

Response Essays

  • How Austrian Is It? by George Selgin

    George Selgin argues that part of the disagreement at hand is semantic: Where von Mises and other Austrians used the word “economics” to denote what we now call “theoretical economics,” we need not be bound by this convention, particularly not if it tends to obscure. That said, a real disagreement remains, because many in the Austrian school have failed to grasp that a deduced theorem of economics can still be “in the (common) sense”—that is, it may still have no explanatory power over events in the real world. When such cases arrive, Selgin finds that Austrians are all too often flummoxed.

  • Complementary Approaches by Antony Davies

    Antony Davies expresses admiration for Austrian-school economics as a “complementary approach” to the problems he tries to solve using modeling and mathematics. He finds Austrians at their most incisive in their critique of modern macroeconomics, which is based not on individual behavior, but on an “accounting identity.” He argues that both quantitative and non-quantitative methods can reveal important truths, and he suggests that Austrians should deploy the former in refuting their opponents’ theories.

The Conversation