Why Mises’s Praxeological Theories are not Necessarily True of the Real World

Take as an example some Austrian who says: it is a praxeological and necessary truth about the real world that, if human beings by their actions drive a monetary market interest rate below the equilibrium rate, then this must necessarily result in excess capital investment causing an Austrian business cycle (ABC). I stress that this is more a “vulgar” Austrian view, and the actual Austrian economists could present more sophisticated defence of their theories.

But such a “vulgar” Austrian statement as above has no necessary truth about the real world.

Why? The reason is that it is contingent on many factors, which range from basic epistemological ones (such as number (1) below) to social, institutional and economic ones, as follows:

(1) the very existence of other acting human minds in the first place. No philosopher has succeeded in proving a priori that other minds exist: the best you can do is an inductive argument from analogy, which only has probabilistic truth at best;

(2) the existence of economies with money;

(3) the existence of economies with loans made in money terms;

(4) the existence of economies with loans made in money and with interest made in money terms;

(5) the truth of loanable funds theory as determined by time preference, which is highly doubtful given that monetary interest rates are better explained by liquidity preference.

(6) the truth of the view that demand for credit will equal some alleged stock of loanable funds, and this can be reduced to a simple and reliable function of interest rates determining the quantity of credit demanded as plotted on a demand curve for loanable funds, when the demand for credit is highly complex and contingent on many factors well beyond interest rates, such as, for example, expectations and uncertainty;

(7) in Mises’s early business cycle theory (ABCT) and the classic ABCT of Hayek the existence of a unique Wicksellian natural rate of interest: something whose probability is close to zero given the empirical evidence that real world economies do not and cannot obtain a general equilibrium state;

(8) The early Hayekian versions of the Austrian business cycle theory assume an economy starting from a general equilibrium state and returning towards one, which is something whose probability is again close to zero given that real world economies do not and cannot obtain general equilibrium states.

And this list is far from exhaustive.

The intellectual fraud of the “necessary” truth of Austrian praxeological theories can be demonstrated quite clearly, since a similar list of contingently true requirements could be provided for any praxeological theory of any kind.