acting-man.com / By Pater Tenebrarum / November 29, 2012
How to Deal with Economic History
In a recent article at the NYT entitled ‘Incredible Credibility‘, Paul Krugman once again takes aim at those who believe it may not be a good idea to let the government’s debt rise without limit. In order to understand the backdrop to this, Krugman is a Keynesian who thinks that recessions should be fought by increasing the government deficit spending and printing gobs of money. Moreover, he is a past master at presenting whatever evidence appears to support his case, while ignoring or disparaging evidence that seems to contradict his beliefs.
Among the evidence he ignores we find e.g. the ‘stagflation’ of the 1970′s, or the inability of Japan to revive its economy in spite of having embarked on the biggest government deficit spending spree ever in a modern industrialized economy. Evidence he likes to frequently disparage is the evident success of austerity policies in the Baltic nations (evident to all but Krugman, one might say).
As readers of this blog know, we are generally of the opinion that it is in any case impossible to decide or prove points of economic theory with the help of economic history – the method Krugman seems to regularly employ. This is why we listed the evidence he ignores or disparages: the fact that there exists both plenty of evidence that contradicts his views and a much smaller body of evidence that seems to support them at an unreflected first glance, already shows that the positivist approach to economic theory must be flawed.
An economist must in fact approach things exactly the other way around, but then again it is a well-known flaw of Keynesian thinking in general that it tends to put the cart before the horse (examples for this would be the idea that one can consume oneself to economic wealth instead of saving and investing toward that goal, or that employment creates growth; it is exactly the other way around in both cases).
So how must one approach the ‘evidence’ of economic history? As we have shown on numerous occasions, an especially dumb method is to look at prices in financial markets and then conclude that these markets ‘know’ something about the future. The proper method is to have a tenable, causal-realist economic theory first, and then employ that in interpreting the facts of economic history. Most historians, even so-called economic historians, have failed in this task. The reason why one must use this approach is that economics is not like physics: there are no repeatable experiments one could conceivably conduct to ‘test’ a hypothesis. Human beings are not rocks, they have minds and volition, they pursue goals and must employ scarce economic means to attain them. One therefore requires a theory of human action before embarking on the task of interpreting economic history. Every incidence of economic history is unique, and subject to a myriad of disparate factors that are interlocking and producing the outcomes observed. It is not even possible to isolate all these factors with precision. And yet, underlying each episode are undoubtedly the laws of praxeology and economics – they constrain both our interpretations of the past as well as our forecasts of the future.