Mainstream Economics: Empirically False

I have a bone to pick with Keynesian economists. It is not that they are overseeing the systematic destruction of our economy, although I do object to that. It is not that they are widely trumpeting the necessity of the plunder of the American people on behalf of big bankers, although I do disapprove of such doings. I will even leave aside for today their willful destruction of the so-called “money” that I am forced, against my will, to use.

The quarrel I have with them today is that, in all their nefarious schemes, they insist on claiming for themselves the mantle of “empirical science.” I have a deep personal affection for “empirical science,” and so I beg to be allowed to speak a word or two in its defense.

By what right do I challenge this claim of the economists? I am an experimental physicist by profession. If there is such a thing as empirical science at all, I believe that experimental physics fits the definition, so I have had some experience with it myself. Now I do not dispute that economics is a science. Austrian economists do not dispute that economics is a science; it is just that they understand it to be a logical science, the science of human action.

Austrian economists deny that economics is an empirical science, that is, one whose theories can only be known to be true by experimental verification. Economics is a science in the same sense that mathematics and logic are sciences. Its claims are based on logical deduction from indisputable axioms, and may be illustrated historically, but never verified or falsified experimentally. In the same way, we do not ask for experimental verification that a straight line is the shortest distance between two points on a two-dimensional plane.

The Austrian economists have not fallen victim to the invasion of logical positivism that has wrought so much havoc in our intellectual landscape. The logical positivists wished to eschew metaphysics, to escape transcendence, to leave behind forever the tyranny of an immaterial world of ideas. And so they devised a rigid criterion of knowledge: you cannot know anything you cannot empirically verify.

Suddenly, time-honored and venerable disciplines, such as history, ethics, and theology, found themselves unwelcome guests at the table of scientific discourse. Even mathematics itself felt its foundations shaken. But with little delay, logic came to its own rescue! The logical positivists’ criterion did not meet its own demand: logical positivism is self-refuting.In short order, it became an amusing relic in the annals of undergraduate philosophy.

But scientists never got the memo, and there persists to this day a widespread prejudice that the only “real” sciences are empirical sciences. And Keynesians want to be scientists too! So they criticize Austrian economists for not being scientific – though, of course, in the only sense of “scientific” they recognize, the positivist sense. No hand-waving nonsense for Keynesians! No floating on the ethereal heights of logic and deduction like those superstitious Austrians! They are empirical scientists, grounded in the hard and unforgiving reality of facts and experimental verification.

But just here is where I wish to raise a “point of order,” as they say. After all, I am not a professional economist. I am a physicist. But for this reason I know what to do with the theories of an empirical science. In an empirical science, if we are to retain any criteria at all, we must at least agree to abandon theories that routinely fail in their predictions. This is a small thing I ask of the Keynesians, if they wish to stand in the ranks of empirical scientists. So let us consider the record.

How did I hear about Austrian economics in the first place? Undoubtedly like many people, I became aware of it through the presidential campaign of Ron Paul. He talked about inflation, sound money, the Federal Reserve, the business cycle, and also that we were heading for a major economic disaster if we didn’t mend our ways. Of course, he was ridiculed by the other candidates for his views: “What is he talking about?” The mainstream press systematically ignored him. But I heard what he had to say. It made sense.

I did more research on the topic, and found the Mises Institute and its seemingly infinite storehouse of resources. I became a believer in the Austrian theory of the business cycle. Austrian economists were unanimously in agreement with Ron Paul in predicting a serious financial catastrophe as the inevitable consequence of our fiscal and monetary policies.Many adherents of the Austrian School predicted some of its details, such as the bursting of the housing bubble: Gary North, Bill Bonner, Peter Schiff, and Frank Shostak, just to name a few.

But what about the Keynesians? How did their theories fare in predicting what most economists now agree is the greatest financial disaster since at least the Great Depression? One would think that an empirical theory worth its salt could have predicted a crisis of such epic proportions – if it could predict anything at all.

But what did we hear from them, from even the best and brightest? Alan Greenspan repeatedly denied the existence of a housing bubble. Through the first half of last year, Ben Bernanke and Henry Paulson continually assured us that the economy was fundamentally sound, the banks were solvent, and that the subprime crisis was well contained. If the mainstream economists were really concerned, they didn’t let on. Nouriel Roubini was the lone exception, and he was only given coverage because he represented a contrary opinion, a curiosity.

Then, suddenly, everything hit the fan, and we were all assured that if these same people who weeks ago denied that anything was wrong didn’t immediately get 700 billion dollars to do whatever they wanted with it, then the entire world economy was going to collapse in a matter of days.

I asked a Keynesian about this the other day in a Q&A session. He had been debating Walter Block and was critical of Dr. Block’s Austrian view of the scientific status of economics. I simply wanted to know, if his discipline was so empirical, if he had in fact predicted this current mess, since the Austrians certainly had. He responded,

Economies are like the weather, very complicated systems. We don’t get things right every time. You don’t fire your weatherman just because he’s wrong once in a while.

Well, if the weatherman misses with his temperature forecast by five degrees, that’s one thing. If he misses the fact that a class-five hurricane the size of Texas is speeding directly for New York City – not only fails to predict it but explicitly denies its existence up until the moment it hits – I’d find another weatherman.

Austrian economists said a hurricane was coming. They didn’t know precisely when, but it was coming, and it was a big one. Keynesians denied its existence.

Austrian economists don’t claim to be doing empirical science. Keynesians do. What is ironic to me as an empirical scientist, is that it is the Austrians who get their predictions right, while Keynesians seem to have been caught like deer in the headlights.

This pattern is nothing new to the current crisis. It was Ludwig von Mises who predicted the Great Depression, while Irving Fisher, still highly revered by the Keynesians, proceeded to lose his fortune.

It was the Keynesians who assured us that we were headed for a severe recession (which never materialized) after World War II if the government cut back on its spending.

It was Fed chairman Arthur Burns who assured Murray Rothbard that a continuation of the inflationary recession was impossible.

Time after weary time, it is the mainstream and Keynesian economists (who ridicule and ignore Austrian economics as unscientific) whose predictions are utterly refuted by the events of history. Yet they continue to propound their eternal nonsense and use government coercion to force their bankrupt ideology on everyone else. As Paul Feyerabend said, “I have no objection to incompetence but I do object when incompetence is accompanied by boredom and self-righteousness.”

I would also add that I object when incompetence, boredom, and self-righteousness are accompanied by government coercion. But that is a digression.

What I mean to insist on here is that Keynesian economists, who claim to be empirical scientists, ought to abandon their theory. The entire history of civilization stands as a monumental falsification of it. Or please, at the very least, stop degrading the good name of empirical science with such rubbish.

This article first appeared on Mises.org.

March 13, 2009

From Lewrockwell.com, here.