Are you spending your way to disaster?

[miko2d]

Thrawn: I thought one of the doctrines of the Austrian school was that trend prediction was impracticle, because the involvement of human beings made the system chaotic.  If you can't use the economic calculations for trend prediction what value can they have, except for a historical/archival context?

 By the tone of that statement is sounds that you perceive it as conflicting with something said earlied in this thread.

 Trends certainly exist - at least for a while. Trend detection is certainly possible. What is not possible is by looking at the trend only to make prediction when and why it would change.
 So yes - austrian school does not recognise the use of trends and any eggregates (so called "macroeconomics") for prediction. Only for historical purposes.

 According to Austrian school, human action is not chaotic but supremely rational. It is directed by reason. That means that in identical conditions a person may choose to act differently. So you cannot make repeatable experiments, you cannot isolate some factor and fix the rest. There are no quantitative constants in human action like speed of light or charge of an electron.

 Just because certain condition solicited certain responce in the past or elsewhere, there is no basis to believe that similar conditions will cause a responce of the same magnitude or even substantially similar.

 That does not mean that there is no way to make definite statements about human (and hence market) behavior. Just that no quantitative statements are possible.
 There are several apriori axioms in the foundation of the Austrian theory of human action (prexeology) of which economics (part dealing with exchange) is a subset.

 Here are examples of those axioms:
 - A human will value greater amount of a resource more than lesser amount.
 - A human will value subcequent unit of a resource obtained less than previous unit of the same resource.
 - A human will prefer to receive satisfaction sooner rather than later, everything else being equal.

 There are few others like that which allow to develop a whole theory.
 The subject of that theory is human mind and we cannot possibly observe and experiment on it like the natural scienced do. The simplest thing and the most basic concept - like "choice" we cannot possibly observe in nature. How do we know that people are making choices rather than follow predetermined paths like automatons or rolling balls? Not by observing humans.

 We know because we directly know our own mind and we know that we make choices and we assume that all human minds work in similar way. So this theory is not based on reality in any way like physical theories are. It cannot be proved or disproved by observation of reality. What it can do is explain reality and reality may illustrate theory.

 Why do we believe that the theory correctly describes reality? Simple. The reality of human action is determined by the nature of human mind and the theory is also based on the nature of the human mind, so they correspond to each other.

 The thory does not deal with the ends - that is left to phsychology, religion, etc. It assumes that humans have ends as given and only deals with the means.
 It tells shat should or should not be done to achieve certain ends, not what ends ought to be sought.

 The predictions that the theory can make about the reality are very limited. They are much more to tell you what cannot be done rather than tell you in details how to do something.

 The theory can predict that the trend is unsustainable but not when it will end. The theory can predict that by fixing price of a resource below market price you get shortage of that resource, etc.

 That is a very rough overview. If you need a better resource, I could gladly provide a reference.

 miko

[Thrawn]

I think I understand what you are saying.  To clarify, Austrian school claims that predictions about economic trends can be made, but that the prediction can not be fixed in time.  Where as other schools claim that predictions about economic trends can be made and fixed in time.

If this is the case, it would be interesting to know how the other schools can fix their predictions in time and what there record for accurate predictions is.


"That is a very rough overview. If you need a better resource, I could gladly provide a reference. "

I've add the link you provide to "http://www.mises.org/austrian.asp" in my favorites list, but I regret I havn't had time to read it yet.

[miko2d]

Thrawn: I think I understand what you are saying.  To clarify, Austrian school claims that predictions about economic trends can be made,

 More accurately, you can use regression analysis math to detect thrends in any process that may have trends and the procedure is not specific to economics. The only prediction one may make about a trend is that if it was going in some direction, there is some chance that it will keep doing so for a while.

 Austrian school does not contend the view that in economics one can find thrends in various measurements for brief or even prolonged periods of time.
 The trends exist because human preferences usually do not change quickly over time.
 So for a while a trend that you've detected may persist and you may use it to predict/guess short term future. Like dollar may be going up or stock market may be goind gown or steel price may be rising, etc.
 But just observing the trend does not tell you anything when and how human preferences may change so it is just a guess whether the trend can persist, for how long and how it will change.
 Only theory and familiarity with specific details of economic life can provide some direction here.
 A steel use may increase becasue population is buying cars or because the lumber price increased and steel is replacing it. So the steel price trend will react differently in each case to teh same events. First may be inerrupted if oil price goes up. Second may be inerrupted is lumber price goes down. Which may happen if people's preference for preserving forests changes to preference for cheap lumber.

I've add the link you provide to "http://www.mises.org/austrian.asp" in my favorites list, but I regret I havn't had time to read it yet.

 I suggest "Econimics for real people" by Gene Callahan and "Economics in One Lesson" by Hazlitt as must-read books for any citizen.

 miko

[Thrawn]

More accurately, you can use regression analysis math to detect thrends in any process that may have trends and the procedure is not specific to economics. The only prediction one may make about a trend is that if it was going in some direction, there is some chance that it will keep doing so for a while.

My apologies for not stating earilier my understanding that there is no such thing as usable real time information.  It is my understanding that any datum point must deal with latency periods of transmission of the datum point, reception of the datum point, and correlation of the datum point into useful information.

So by nessecity, any piece of information has a latency period, if I understand correctly.

If this is so, than one would assume that any school of economic therory cannot make any real time statements, but must make statements about trends that took place in the past.


Although I still have difficulty in understanding the utility of the Austrian school of economic theory.  If it can't be used with any degree of accuracy in predicting economic change fixed in time, what's the point.  

An example, "The soviet union will fall because of these and these factors.".  Fine, but before it falls there may be alot of time to aquire wealth.  

Another, "The US economy will fall, eventually, if these factors do not change.".  Without fixing the prediction time, where in do I get the benefit.  Should I spend resources hedging against the fall, even though it might not happen within my life time?

I find it doublely frustrating because the Austrian school seems to make so much sense to me.  It seems practicle, intuitively sound to me, and can seem to withstand all the refutations brought against it.

But perhaps it is better than other schools because at least it recognises it own limitations?


"I suggest "Econimics for real people" by Gene Callahan and "Economics in One Lesson" by Hazlitt as must-read books for any citizen."

I'll put it one my Christman list, thank you.

[miko2d]

Thrawn: Although I still have difficulty in understanding the utility of the Austrian school of economic theory.  If it can't be used with any degree of accuracy in predicting economic change fixed in time, what's the point.  

An example, "The soviet union will fall because of these and these factors.".  Fine, but before it falls there may be alot of time to aquire wealth.

 True - you cannot use Austrian economic theory to make accurate predictions even about a free market. What's more, austrian economic theory states that it is not a deficiency of any theory but a property of the reality and that no theory whatsoever could make more accurate predictions. Kind of the quantum principle in physics.
 Human preferences change and if we could predict how, it would mean that humans do not have free will but are just automathons.

Another, "The US economy will fall, eventually, if these factors do not change.".  Without fixing the prediction time, where in do I get the benefit. Should I spend resources hedging against the fall, even though it might not happen within my life time?

 The theory helps you interpret the facts, which will help you to select which facts to concentrate on. You can be quite accurate in some cases.

 We do know that in 2013 the Social Security will run deficits. We do not know what will happen exactly - tax raise, inflation increase, default on obligations or a combination of those but we can be sure it will be a serious change to the existing trends.

I find it doublely frustrating because the Austrian school seems to make so much sense to me.  It seems practicle, intuitively sound to me, and can seem to withstand all the refutations brought against it.

 That's a price we humans have to pay for having free will. Austrian theory can explain how market may react to any event. Even more specifically it can state how market may not react. It is quite usefull sometimes. Like if your politician is trying to make affordable housing more accesible to the poor by fixing rents, you can confidently predict that everything else being equal you will have less affordable housing for the poor and what is there, will be underutilised.

 Also, it is hard to predict things even with good understanding of the markets because so many things depend on arbitrary intervention. No knowlege of the market will help you predict what the federal reserve or congress or chinese government will do next year with regard to exchange rates, interest, tariffs, etc.
 You can suggest to them the best way to act in order to achieve some goal. You can tell them what is likely to happen or will not happen in responce to some act. But you sure cannot predict what they will do.

 You could have confidently predict that Soviet Union will decline in  wealth. But you could never have predicted that it woulr invade Afghanistan or appoint Gorbachev. At some point it's up to a choice of one or a few individuals. And no theory can predict what that individual will think.
 
But perhaps it is better than other schools because at least it recognises it own limitations?

 Or that is recognises the limitation of human reason.
 You see - however intricate a market economy is, however complex and sophisticated, it is not a product of a human reason or design but a spontaneous process, much like social institutions, human languages, biological evolution and some other phenomena.
 People (positivists, historicists) had hard time recognising that such complex phenomema could arose without being designed by intent and once you mistakenly believe that it was human reason that designed some institution, it's only natural to assume that reason can improve on it.

 miko

[Thrawn]

Thank you for answering my questions.  I look forward to becoming better informed.