“Since our learning is inherently unpredictable through and through, and since our learning influences what we do, and since what we do is the subject of economics, it follows that economics is not a predictive, empirical science like chemistry and physics. Atoms and molecules don’t learn over time. They don’t act. So inductive logic through empiricism is justified. The reason why almost all mainstream empiricist economists couldn’t predict the housing bubble and collapse, is because they are using a faulty methodology. The reason why so many Austrians could predict it, is because they are using a proper methodology.”The assertion that sticks out to me is “economics is not a predictive … science like chemistry and physics.” Even if you subscribe to Austrian aprioristic praxeology (and reject the empirical approach to economics), how can economics not be predictive, yet somehow (magically?) Austrians can predict the “housing bubble and collapse”?
When we turn to Mises and Rothbard, we find a blatant contradiction of this view:
“Praxeological knowledge makes it possible to predict with apodictic certainty the outcome of various modes of action. But, of course, such prediction can never imply anything regarding quantitative matters.” (Mises 1998: 117-118).Mises is quite clear that economics “too can make predictions in the sense in which this ability is attributed to the natural sciences.” So even Mises and Rothbard thought that their economics had predictive power.
“Economics too can make predictions in the sense in which this ability is attributed to the natural sciences. The economist can and does know in advance what effect an increase in the quantity of money will have upon its purchasing power or what consequences price controls must have. Therefore, the inflations of the age of war and revolution, and the controls enacted in connection with them, brought about no results unforeseen by economics.” (Mises 2003: 129).
“Economics provides us with true laws, of the type if A, then B, then C, etc. Some of these laws are true all the time, i.e., A always holds (the law of diminishing marginal utility, time preference, etc.). Others require A to be established as true before the consequents can be affirmed in practice. The person who identifies economic laws in practice and uses them to explain complex economic fact is, then, acting as an economic historian rather than as an economic theorist. He is an historian when he seeks the casual explanation of past facts; he is a forecaster when he attempts to predict future facts. In either case, he uses absolutely true laws, but must determine when any particular law applies to a given situation. Furthermore, the laws are necessarily qualitative rather than quantitative, and hence, when the forecaster attempts to make quantitative predictions, he is going beyond the knowledge provided by economic science.” (Rothbard 2006: 311).
And the claim that Austrian aprioristic praxeology escapes empiricism is wholly false. Why? Because praxeology requires any number of synthetic propositions that are hidden or stated premises in its deductive arguments (Schuller 1951: 188), and only empirical testing of these synthetic propositions will establish their truth, as Karen Vaughn, amongst numerous others, has pointed out:
“... Mises does not deduce all of praxeology from the action axiom. He slips in subsidiary statements that can only be viewed as hypotheses and not certain truth.” (Vaughn 1994: 77).Even some of Mises’s fundamental starting axioms are synthetic and only provable by empirical evidence, such as the “disutility of labor” axiom:
“The disutility of labor is not of a categorial and aprioristic character. We can without contradiction think of a world in which labor does not cause uneasiness, and we can depict the state of affairs prevailing in such a world …. Experience teaches that there is disutility of labor. But it does not teach it directly. There is no phenomenon that introduces itself as disutility of labor. There are only data of experience which are interpreted, on the ground of aprioristic knowledge, to mean that men consider leisure—i.e., the absence of labor—other things being equal, as a more desirable condition than the expenditure of labor. We see that men renounce advantages which they could get by working more—that is, that they are ready to make sacrifices for the attainment of leisure. We infer from this fact that leisure is valued as a good and that labor is regarded as a burden. But for previous praxeological insight, we would never be in a position to reach this conclusion” (Mises 1998: 65).M. Blaug has pointed out that a fundamental hidden assumption underlying Mises’s praxeology is the justification for belief in negatively inclined demand curves:
“[sc. there is a] the fundamental flaw in Ludwig von Mises’ ‘praxeology’: [sc. it is] the notion that purposive choice as a Kantian ‘a priori synthetic proposition’ is more than sufficient to account for negatively inclined demand curves. This ignores the fact that a number of a posteriori auxiliary propositions are also required, such as transitivity or consistency of choices ... To this day, this failure to recognize the limited power of a priori synthetic propositions to generate substantive implications for economic behaviour characterises neo-Austrian writings in defence of Mises” (Blaug 1994: 132–133, n. 14; see also Blaug 1997: 332ff.).But as is now known, even in higher-level neoclassical literature, demand curves are not necessarily downward sloping, even though this is a fundamental assumption of the law of demand:
“Economists can prove that ‘the demand curve slopes downward in price’ for a single individual and a single commodity. But in a society consisting of many different individuals with many different commodities, the ‘market demand curve’ is more probably jagged, and slopes every which way. One essential building block of the economic analysis of markets, the demand curve, therefore does not have the characteristics needed for economic theory to be internally consistent.” (Keen 2001: 25).And it has been behavioural and experimental economics, with their strong empirical character and experimentation, that are relevant to establishing this.
Austrian economics and even praxeological methodology does not evade a fundamental empirical basis: this point should be stressed to all and every Austrian pushing the sort of nonsense I have quoted above, where they declare that their economics is somehow completely independent of empiricism. They are plainly wrong. Without elementary methods of empiricism, their theory (even as they conceive it) wouldn’t even work, and could provide no certain knowledge.
Of course, it comes as no surprise that there is another strand of Austrian economics where an empirical method is accepted. Hayek never accepted Mises’ apriorism at all, and admitted a role for empirical evidence which is far closer to Popper’s falsificationism (see Appendix 1). Gerald P. O’Driscoll and Mario J. Rizzo have offered a reconstructed Austrian methodology in their book The Economics of Time and Ignorance (Driscoll and Rizzo 1996), allowing a role for empirical testing of interpretive theories to see whether they apply to the real world.
Appendix 1: Hayek on Popperian Method
Hayek talks about Popperian ideas on methodology:
“I became one of the early readers [sc. of Karl Popper’s Logik der Forschung, 1934]. It had just come out a few weeks before …. And to me it was so satisfactory because it confirmed this certain view I had already formed due to an experience very similar to Karl Popper’s. Karl Popper is four or five years my junior; so we did not belong to the same academic generation. But our environment in which we formed our ideas was very much the same. It was very largely dominated by discussion, on the one hand, with Marxists and, on the other hand, with Freudians. Both these groups had one very irritating attribute: they insisted that their theories were, in principle, irrefutable. Their system was so built up that there was no possibility – I remember particularly one occasion when I suddenly began to see how ridiculous it all was when I was arguing with Freudians, and they explained, “Oh, well, this is due to the death instinct.” And I said, “But this can’t be due to the [death instinct].” “Oh, then this is due to the life instinct.” … Well, if you have these two alternatives, of course there’s no way of checking whether the theory is true or not. And that led me, already, to the understanding of what became Popper’s main systematic point: that the test of empirical science was that it could be refuted, and that any system which claimed that it was irrefutable was by definition not scientific. I was not a trained philosopher; I didn’t elaborate this. It was sufficient for me to have recognized this, but when I found this thing explicitly argued and justified in Popper, I just accepted the Popperian philosophy for spelling out what I had always felt. Ever since, I have been moving with Popper” (Nobel Prize-Winning Economist: Friedrich A. von Hayek, pp. 18–19).
There was a poorly phrased sentence in the original post that could be misconstrued, where I say
“this point should be stressed to all and every Austrian pushing the sort of nonsense I have quoted above, where they declare that their economics is not an empirical science.”
That was a poor choice of words on my part. Of course, the Austrians think that their predictions made by praxeology are arrived at using an aprioristic method different from that used in the natural sciences. I have rewritten and clarified the sentence as
“this point should be stressed to all and every Austrian pushing the sort of nonsense I have quoted above, where they declare that their economics is somehow completely independent of empiricism.”
Blaug, M. 1994. “Why I am not a Constructivist: Confessions of an Unrepentant Popperian,” in R. E. Backhouse (ed.), New Directions in Economic Methodology, Routledge, London and New York. 109–136.
Blaug, M. 1997. Economic Theory in Retrospect, Cambridge University Press, Cambridge and New York.
Keen, S. 2001. Debunking Economics: The Naked Emperor of the Social Sciences, Zed Books, New York and London.
Mises, L. 1998. Human Action: A Treatise on Economics. The Scholar’s Edition, Mises Institute, Auburn, Ala.
Mises, L. von. 2003. Epistemological Problems of Economics (3rd edn; trans. G. Reisman), Ludwig von Mises Institute, Auburn Ala.
Nobel Prize-Winning Economist: Friedrich A. von Hayek. Interviewed by Earlene Graver, Axel Leijonhufvud, Leo Rosten, Jack High, James Buchanan, Robert Bork, Thomas Hazlett, Armen A. Alchian, Robert Chitester, Regents of the University of California, 1983.
O’Driscoll, G. P. and M. J. Rizzo, 1996. The Economics of Time and Ignorance (rev. edn), Routledge, London.
Rothbard, M. N. 2006. Power and Market: Government and the Economy (4th edn), Ludwig von Mises Institute, Auburn Ala.
Schuller, G. J. 1951. “Mises’ ‘Human Action’: Rejoinder,” American Economic Review 41.1: 185–190
Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition, Cambridge University Press, Cambridge and New York.