Theory at MIT

I have been telling students for about a decade to find their research topics by "looking out the window" or to look at projects where at first glance it appears that "history defies what logic dictates" and then show how the defiance is only apparent and not real upon further examination.  In other words, applied economics, applied political economy, economic history, economic ethnography, and econometric analysis has been the direction I have pushed most students.

But the reason for this is NOT that I have abandoned the Austrian emphasis on economic theory.  It is precisely because I think a lot of theoretical questions have been worked out by the great Austrian economists such as Mises, Hayek, Rothbard, and Kirzner that we can do applied work utilizing their brilliant framework.  The purpose of theory, I often say, is to do history.  It is our pair of eyeglasses and the empirical world is our book, and the purpose of our eyeglasses is to aid our task of reading.  We don't talk endlessly about the make up of our eyeglasses, we use them to see better.  Another set of phrases I have used to communicate my position to students are: "think deductively, but write inductively"; or, "think as a Misesian, but write as if you were a Popperian".

In addition, making refinements in theory is a very tough business and requires extreme intellectual talents.  Few people possess the mental capacity to make original contributions in economic theory.  Many might want to make do so, but the vast majority will fail in their attempt.

Both the claim that we already have "good theory" and that it takes a rare intellect to make contributions to economic theory lead one to my emphasis on PhD students to do applied work in economics and political economy.  I also believe that many theoretical contributions "on the margin" come from the tacking back and forth that one engages in when doing applied work.

But I share the following opinion with the theorists at MIT: "Empirical economics is fine for exploring things that have already happened."  But for questions of what could happen, or for questions of what might be ideal arrangments we need theory.  We also need theory to even engage in the task of understanding what has happened, i.e., empirical economics.  But younger Austrians already have a good set of theoretical lens through which to see the world that was handed down to them from Mises and Hayek, Rothbard and Kirzner.  Time to use it to read the human book and persuade others with the power of our set of eyeglasses.  But we should NEVER forget that our ability to read is only a function of the advancement of the theoretical eyeglasses that were made.

Comments

[matthew mueller]

I think the refinement of economic theory is the best and most rewarding task one can commit himself to. And while you may believe Austrian economics provides students with the perfect toolkit to tackle applied economic problems, many do not. I see it as pointless to encourage students to do applied work with an Austrian tool kit if that tool kit is either misunderstood or dismissed by the mainstream profession. If Austrian economics is to make any professional headway, it must commit itself to a clarification and further refinement of many of the concepts the school works with. What is more, many of the tools Austrians work with are still the subject of much heated debate (look at the way Salerno and Boettke talk to one another). Karen Vaughn wrote a great book on Austrian economics. The reason why it wasn't written 20 years earlier was because she had trouble coming to an understanding of what Austrian economics really is. While all Austrians will agree that Rothbard, Kirzner and Hayek are Austrian, many will disagree over the relative weight that should be accorded to each in the presentation of Austrian principles.

Also, I think it is unfair to say students should not concentrate on making contributions to economic theory because only rare intellects can handle such a task. I go back to the Liberty Fund interview with Ronald Coase. He said that when one discovers something new, it is in a rather crude and inchoate form, not even fully understood by the person himself. But over the years, he comes to refine it and present it more clearly and convincingly. If a student wants to broaden or develop the insights of Rothbard or Lachmann, we can expect his efforts to be both imperfect and rough at the beginning. But with a little encouragement, he may come to make some pathbreaking discoveries.

To conclude: I think Karen Vaughn is right -- There is as yet no "Austrian economics". Austrians do not (and will never) agree with each other on everything, and that is a good sign. Secondly, the only way to advance the school is to encourage its younger students and adherents to push the paradigm further into new territory. This may lead one to abandon sacred Austrian tenets, or it may persuade one to incorporate insights from other schools. But I think for Austrian economics to properly evolve, it must challenge its students to concentrate on refinements in the theoretical framework.

[Mario Rizzo]

The main thing to which I object regarding this post is the title and the implication (by the link) that theory today involves understanding the world. In fact, most theorists just tell stories. Suppose such and such were the case, what are the implications for equilibrium or welfare, etc.? They have little interest in how any of this maps to the real world. They are just playing a (boring to me) game. I believe that most of today's theorists are wasting their intellectual gifts. Many of them are really idiot savants because they have such incredibly bad judgment about where to direct their high level of intelligence. Much of this phenomenon may be due to the ability of those in the field of theory to convince government (and hence universities) to give them money.

[matthew mueller]

Dr. Rizzo,

In order to correctly map the real world, one must operate under the aegis of a viable theory. It is understandable that you are disappointed by the great number of intellectuals consumed in useless economic theorizing. But if you are convinced that concern with the real world is more important, then it would seem to me that the most desirable policy would be to create an intellectual environment that not only tolerated an abundance of competing theories, but also encouraged it.

[dglesvic]

"Logical thinking and real life are not two separate orbits. Logic is for man the only means to master the problems of reality. What is contradictory in theory is no less contradictory in reality." Mises

[Mario Rizzo]

Mr. Mueller,

I believe that theory is definitely needed to understand the world. The problem is that many of today's theorists do not use understanding the world as the standard for evaluating theory. Most of them do not even pretend that the their theory might be useful later in the future for understanding the world, even if it is not useful right now. They are indifferent to what Marshall called "the discovery of concrete truth." Now, as to the competition among theories. What reason do I have to believe that competition will select the "best" type of theory? The effects of competition will depend on the institutional structure within which it takes place. If many theorists are "entertained" by simply telling mathematical stories and they can get govt grants and top tier schools will hire them, why should anything change?

[dglesvic]

Dr, Rizzo,

"Experience merely directs our curiosity toward certain problems and diverts it from other problems. It tells us what we should explore, but it does not tell us how we could proceed in our search for knowledge. Moreover, it is not experience but thinking alone which teaches us that, and in what instances, it is necessary to investigate unrealizable hypothetical conditions in order to conceive what is going on in the real world." Mises

[dglesvic]

So let's not throw out the baby with the bathwater, good theorists with bad.

[dglesvic]

Peter Boettke said, "think as a Misesian, but write as if you were a Popperian".

Actually, Mises said the same thing.

"Economics...adopts for the organized presentation of its results a form in which aprioristic theory and the interpretation of historical phenomena are intertwined...this...procedure...has given proof of its expediency. However...uncritical and superficial minds have again and again been led astray by careless confusion of the two epistemologically different methods implied."

[Brian Pitt]

Matthew,

I am impressed with your curiosity and your willingness to disagree with well-read intellectuals like Boettke, Rizzo, and Horowitz. I will disagree with you here though. As a sociology graduate student, I must confess that an abundance of "competing theories" may not be intellectually healthy. See, e.g., "conflict theory," "symbolic interactionism," "Durkheimian solidarity," "the materialist conception of history," etc.

Now it is one thing for Austrians and Neo-Classicals to quibble about equilibrium; indifference analysis; welfare economics; utility functions; probability; etc. But each side is relatively familiar with the grumblings of the other (Btw, methinks, at the core of their disagreements is politics.)

But it is quite another thing for a seemingly theoretical social science - e.g., sociology, political science, and anthropology - to not have core principles (this excludes rational choice). I admit that these disciplines are very empirically sophisticated. But without coherent theory, how far can they go in understanding the empirical world?

[Rafe Champion]

Surely there is a dialectical relationship between theory, practice, historical studies and current fieldwork. C Wright Mills was good on the craft of scholarship, despite being a Marxist, check out the epilogue to "The Sociological Imagination" - for example: "Three kinds of interludes - on problems, methods, theory - ought to come out of the work of social scientists and lead into it again: they should be shaped by work-in-progress and to some extent guide their work."
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