Hayek, Unemployment and Unprovable Theories

I love Hayek. I think some of his explanations of capitalism are just beautiful, and his ideas really helped to defend against communism when it was needed.

But every now and then, I run across stuff like this:

Briefly, we find the curious situation where the Keynesian theory, which is comparatively best confirmed by the statistics because it is the only one which can be tested quantitatively, is nevertheless false. Yet, it is widely accepted only because the explanation earlier regarded as true, and which is still regard as true, cannot by its very nature be tested by statistics.

He is talking about his True Theory of Unemployment at this particular juncture. But before we get into the exact problems with that theory, we need to be clear about the usefulness of an untestable theory.

In most cases, an untestable theory is regarded as unscientific. I am in the Karl Popper camp: For a theory to have any value, it must be falsifiable.

From Wikipedia on Karl Popper:

Logically, no number of positive outcomes at the level of experimental testing can confirm a scientific theory, but a single counterexample is logically decisive: it shows the theory, from which the implication is derived, to be false. Popper's account of the logical asymmetry between verification and falsifiability lies at the heart of his philosophy of science. It also inspired him to take falsifiability as his criterion of demarcation between what is and is not genuinely scientific: a theory should be considered scientific if and only if it is falsifiable.

This idea of falsifiablity is also big for Taleb, and he talks about it extensively in the black swan. For the longest time, swans were believed to be white only, but one black swan disproved this theory.

We cannot falsify the standard theory of unemployment, and I am going to say this makes it a useless theory.

Here it is as described by Hayek:

...ascribes it to a discrepancy between the distribution of labor (and other factors of production) and the distribution of demand among their products. This discrepancy is caused by a distortion of the system of relative prices and wages. And it can only be corrected by a change in these relations, that is, by the establishment in each sector of the economy of those prices and wages at which supply will equal demand.

A beautiful statement, but useless, untestable, and unscientific. And from this, he rails against Keynes even from the grave through his followers, the libertarians.