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The Foundations of Modern Austrian Economics; Edited by: Dolan, Edwin G.
18 paragraphs found.
Part 1, Essay 1

The question of what constitutes a legitimate problem for analysis receives careful attention in Kirzner's paper on the methodology of Austrian economics (see his "On the Method," below). Kirzner noted that the Austrian tradition assigns two tasks to economics. The first is that of "making the world intelligible in terms of human action." The second is "to explain how conscious, purposeful human action can generate unintended consequences through social interaction" and to trace these unintended consequences. These tasks are both more and less ambitious than the tasks undertaken by orthodox economics. The Austrian-type explanation is more ambitious than the orthodox explanation in the sense that a picture painted in terms of human purposes is more complete than one painted only in terms of events. The Austrian enterprise is also more ambitious because it insists on laying bare the true causal relationships at work in the social world and is not content to simply establish empirical regularities among dubious statistical aggregates.


The other strand of the Austrian critique concerns the definition of the legitimate boundaries of economics as a science. At one point in discussing Austrian methodology, Rothbard (see his paper "Praxeology") distinguished among three branches of intellectual inquiry. Economics is the discipline devoted to the logical implications of the axiom of human action. Technology deals with the choice of certain means for the achievement of certain ends. History deals with ends adopted in the past and means used (to try) to achieve them. Now, from these definitions, it is immediately clear that econometrics can serve no purpose in economics per se. That is the substance of the previously mentioned line of criticism. Yet this argument leaves open the possibility that econometrics could be a legitimate tool of technology and history. In collecting statistics on, say, past fluctuations in the prices and quantities of cotton, econometricians are not measuring constants in human behavior or testing economic theory, and they delude themselves if they think they are. Nonetheless, in principle the econometricians' work, properly interpreted, may be valuable to noneconomists. For example, a historian trying to interpret patterns of economic activity in the southern United States might want to know the approximate ex post elasticity relationships in the cotton market in certain periods. Alternatively, a textile manufacturer, seeking profit maximization by the best means available, might employ an econometrician as a technologist to advise him concerning inventory strategy. In short, if econometricians would stop insisting that they were engaging in the discovery of economic laws, a variety of purely instrumentalist justifications for their work could be found without forcing a head-on confrontation with Austrian doctrine.

Part 2, Essay 1

Part 2, Essay 1
Praxeology: The Methodology of Austrian Economics
by Murray N. Rothbard


Praxeology is the distinctive methodology of the Austrian school. The term was first applied to the Austrian method by Ludwig von Mises, who was not only the major architect and elaborator of this methodology but also the economist who most fully and successfully applied it to the construction of economic theory. *1 While the praxeological method is, to say the least, out of fashion in contemporary economics—as well as in social science generally and in the philosophy of science—it was the basic method of the earlier Austrian school and also of a considerable segment of the older classical school, in particular of J. B. Say and Nassau W. Senior. *2


If, in the broad sense, the axioms of praxeology are radically empirical, they are far from the post-Humean empiricism that pervades the modern methodology of social science. In addition to the foregoing considerations, (1) they are so broadly based in common human experience that once enunciated they become self-evident and hence do not meet the fashionable criterion of "falsifiability"; (2) they rest, particularly the action axiom, on universal inner experience, as well as on external experience, that is, the evidence is reflective rather than purely physical; and (3) they are therefore a priori to the complex historical events to which modern empiricism confines the concept of "experience". *15


Friedrich A. Hayek trenchantly described the praxeological method in contrast to the methodology of the physical sciences, and also underlined the broadly empirical nature of the praxeological axioms:

The position of man...brings it about that the essential basic facts which we need for the explanation of social phenomena are part of common experience, part of the stuff of our thinking. In the social sciences it is the elements of the complex phenomena which are known beyond the possibility of dispute. In the natural sciences they can only be at best surmised. The existence of these elements is so much more certain than any regularities in the complex phenomena to which they give rise, that it is they which constitute the truly empirical factor in the social sciences. There can be little doubt that it is this different position of the empirical factor in the process of reasoning in the two groups of disciplines which is at the root of much of the confusion with regard to their logical character. The essential difference is that in the natural sciences the process of deduction has to start from some hypothesis which is the result of inductive generalizations, while in the social sciences it starts directly from known empirical elements and uses them to find the regularities in the complex phenomena which direct observations cannot establish. They are, so to speak, empirically deductive sciences, proceeding from the known elements to the regularities in the complex phenomena which cannot be directly established. *17

The methodology of modern positivism and empiricism comes a cropper even in the physical sciences, to which it is much better suited than to the sciences of human action; indeed, it particularly fails where the two types of disciplines interconnect. Thus, the phenomenologist Alfred Schutz, a student of Mises at Vienna, who pioneered in applying phenomenology to the social sciences, pointed out the contradiction in the empiricists' insistence on the principle of empirical verifiability in science, while at the same time denying the existence of "other minds" as unverifiable. But who is supposed to be doing the laboratory verification if not these selfsame "other minds" of the assembled scientists? Schutz wrote:

It is... not understandable that the same authors who are convinced that no verification is possible for the intelligence of other human beings have such confidence in the principle of verifiability itself, which can be realized only through cooperation with others. *26

In this way, the modern empiricists ignore the necessary presuppositions of the very scientific method they champion. For Schutz, knowledge of such presuppositions is "empirical" in the broadest sense,

provided that we do not restrict this term to sensory perceptions of objects and events in the outer world but include the experiential form, by which common-sense thinking in everyday life understands human actions and their outcome in terms of their underlying motives and goals. *27
Ibid., vol. 1, The Problem of Social Reality, p. 65. On the philosophical presuppositions of science, see Andrew G. Van Melsen, The Philosophy of Nature (Pittsburg: Duquesne University Press, 1953), pp. 6-29. On common sense as the groundwork of philosophy, see Toohey, Notes on Epistemology, pp. 74, 106-13. On the application of a similar point of view to the methodology of economics, see Frank H. Knight, "'What is Truth' in Economics," in On the History and Method of Economics (Chicago: University of Chicago Press, 1956), pp. 151-78.
Part 2, Essay 2

Part 2, Essay 2
On the Method of Austrian Economics
by Israel M. Kirzner

One of the areas in which disagreement among Austrian economists may seem to be nonexistent is that of methodology. Yet I shall attempt to point out that even with respect to method there are differences of opinion among individual thinkers. Some light may be cast on these differences by drawing attention to two distinct strands of thought that run through the writings of Austrian economists on the question of method. By separating these strands and then focusing on each in turn, we may discover and define different perspectives on economic method and perhaps more clearly understand how these different perspectives grow out of the unique view of method shared by all Austrian economists.


The general outline of the Austrian position on methodology is well known. Austrian economists are subjectivists; they emphasize the purposefulness of human action; they are unhappy with constructions that emphasize equilibrium to the exclusion of market processes; they are deeply suspicious of attempts to apply measurement procedures to economics; they are skeptical of empirical "proofs" of economic theorems and consequently have serious reservations about the validity and importance of a good deal of the empirical work being carried on in the economics profession today. These are the general features of the position that we know very well; yet within this general view we can distinguish two independent strands of argument. It is upon this debate that I should like to focus my attention in this paper.


It is worth reminding ourselves that the two tasks Lachmann identified are to be found in Carl Menger's writings. In the third part of his 1884 book on methodology Menger pointed out that actions do have unintended consequences, and he made it very clear, as Hayek had done, that economics is the science that is able to explain how these unintended consequences emerge in the market place. *43 But Menger was also aware of the other task Lachmann emphasized. In a letter Menger wrote Léon Walras, cited by T. W. Hutchison in several of his writings, *44 Menger insisted that the economist is not merely after the relationships between quantities, but the essence of economic phenomena: "the essence of value, the essence of land rent, the essence of entrepreneurs' profits, the essence of the division of labor." *45 This view is what Kauder meant when he described Menger as holding that economics deals with social essences, *46 and what Hutchison called "methodological essentialism." *47


Critics of Austrian methodology often argue that since praxeology deals with unobservables, it is inherently incapable of telling us anything scientific about observables. The latest (and perhaps the clearest and most sympathetic) statement of this argument was by James Buchanan, in his contribution to the Hayek Festschrift,*52 when he drew attention to the distinction between (1) the logic of choice (what he called the abstract science of economic behavior) and (2) the predictive science of human behavior. Buchanan argued that if we treat economics as the logic of choice, it cannot in principle lead to refutable hypotheses because no particular preference ordering has been specified, and to that extent it cannot tell us anything about the real world.


It is helpful in pursuing this strand of thought in Austrian methodology to constrast the Austrian use of purpose with the rationality hypothesis often employed by economists. For many non-Austrian economists this hypothesis is invoked with apologies and is considered something of a necessary evil. It is used to get theoretical results and is justified on the grounds that these results seem to fit the facts of the outside world although the hypothesis is philosophically suspect. Thus we find Gary Becker eager to demonstrate how certain fundamental theorems of economics do not require the rationality hypothesis—that rather embarrassing piece of excess baggage. *53 For Austrian economists, on the other hand, the notion of purposefulness is not merely a useful tool to obtain results but an essential element of economic reality that cannot be omitted. Making reference to human plans and motivations is an essential part of the economist's scientific task.


Let us turn to the second basic tenet of Austrian methodology, the proposition that there is an inherent unpredictability and indeterminacy with regard to human preferences, expectations, and knowledge. I have already pointed out that this proposition does not have the same introspectively obvious ring of truth that the idea of human purposefulness does. Are we really so certain that human wants and human preference-orderings and the manner in which they undergo modification are inherently unpredictable? In fact, I wish to suggest that asserting this creates something of a dilemma for the Austrian economist.


Hayek's argument is straightforward. In disequilibrium man's knowledge is imperfect, some people are making mistakes; equilibrium is the situation in which nobody is making mistakes. A movement from disequilibrium to equilibrium must therefore be one in which men gradually learn to avoid mistakes, so that their actions become more and more coordinated. Where do we derive our confidence that this type of learning in fact takes place? Hayek stated very clearly that this is an empirical hypothesis. If we reject this hypothesis, then we reject the basis for viewing the market process as an equilibrating mechanism—that is, reject the claim that economics can tell us anything definite about the unintended market consequences of human actions. We may still be able to make the world intelligible—that is, we may explain that what happens happens because human beings pursue their purposes. We can assert that their interacting decisions generate certain changes in knowledge, but we shall no longer be able to say in which particular directions knowledge changes, and we can no longer postulate a determinate process toward equilibrium. We shall, to put the matter succinctly, not be able to go beyond the first Lachmann task in order to pursue the program advanced by Hayek. If, however, we confine ourselves to the enormously important task of making the world intelligible in terms of human purposes, we need not accept Hayek's empirical proposition about the coordination of plans and the progressive elimination of mistakes. But if we are to explain the unintended consequences of human action, that is, if we are to assert that there is a tendency for entrepreneurial profits to be eliminated, or for prices to move in one direction rather than another, we must be able to say something about the manner in which human knowledge and human expectations undergo modification. If one accepts this particular empirical hypothesis, one has surely weakened, perhaps irreparably, the second basic tenet underlying Austrian methodology.


We have identified two requirements of economic explanations that Austrian economists consider important. We have also identified two basic tenets that seem fundamental to Austrian methodology. It turns out, however, that while one of these basic tenets, that of human purposefulness, is sufficient to sustain one of these two requirements (that of making the world intelligible in terms of human action), the second, which asserts the unpredictability of human knowledge, is inconsistent with the requirement that economic explanations trace the unintended consequences of human action. It seems therefore that the future progress of the Austrian school in applying its basic methodological tenets requires some decision about the extent to which the second tenet about the inconstancy of human purposes and knowledge can be upheld as a general proposition.

Alexander Gerschenkron, "Reflection on Ideology as a Methodological and Historical Problem," in Money, Growth, and Methodology, ed. Hugo Hegeland (Lund: C. W. K. Gleerup, 1961), p. 180.
Part 3, Essay 2

Certain consequences of what has been said seem to concern the modus operandi of the market, but one appears to be significant for the methodology of all social sciences.

Part 3, Essay 6

Finally, there is the related question, which Mises did not develop fully, of the proper definition of the crucial concept of the money supply. In current mainstream economics, there are at least four competing definitions, ranging from M 1 to M 4. Of one point an Austrian is certain: the definition must rest on the inner essence of the concept itself and not on the currently fashionable but question-begging methodology of statistical correlation with national income. Leland Yeager was trenchantly critical of such an approach:

One familiar approach to the definition of money scorns any supposedly a priori line between money and near-moneys. Instead, it seeks the definition that works best with statistics. One strand of that approach...seeks the narrowly or broadly defined quantity that correlates most closely with income in equations fitted to historical data.... But it would be awkward if the definition of money accordingly had to change from time to time and country to country. Furthermore, even if money defined to include certain near-moneys does correlate somewhat more closely with income than money narrowly defined, that fact does not necessarily impose the broad definition. Perhaps the amount of these near-moneys depends on the level of money-income and in turn on the amount of medium of exchange.... More generally, it is not obvious why the magnitude with which some other magnitude correlates most closely deserves overriding attention.... The number of bathers at a beach may correlate more closely with the numbers of cars parked there than with either the temperature or the price of admission, yet the former correlation may be less interesting or useful than either of the latter. The correlation with national income might be closer for either consumption or investment than for the quantity of money. *69