“Austrian” economics is a heterodox school of thought – its theorems and, more crucially, its methods at arriving at those theorems are not embraced as mainstream by the majority of the economics profession. Economics is, like all academia, a largely government controlled and funded science and it is probably no surprise that a school of thought that lays bare the consequences of government action is met with little enthusiasm. Nevertheless it is appropriate to examine and rebut some of the substantive objections to “Austrian” economics so that proponents of this school of thought can more sharply attune themselves when responding to them.

“Austrian” Economics is Old!

The charge that “Austrian” economics is old or outdated rests on the fallacy that progress always moves in a single direction and that everything that is known today either contains or is built upon that which is known yesterday. Hence there is no need to examine the “old” stuff. Yet the history of knowledge has seldom been one of a continued and unbroken progress. Rather, crucial insights have been lost and areas of study have been shunted on to false and wrongheaded directions, both in the natural sciences and in the social sciences, with intellectual vested interests often replacing open minded hypothesising. The history of science abounds with false paradigms of which flat earth theory and the geocentric universe are only the most patently obvious; more recently, however, it has been suggested that the conclusions reached by the theory of relativity are better explained by traditional classical physics1, and libertarians themselves have pointed out that the conventional approaches to medicine in areas such as HIV/AIDs and cancer is more concerned with propping up the profits of big pharma than in developing a genuine scientific understanding of these ailments. This is not, of course, the place to validate any of these challenges but they do serve as a warning that what we might regard as absolutely true and correct today may not be and that we have led ourselves down a blind alley. Speaking more generally, the twentieth century was possibly the most bloodthirsty and unstable in history, contrasted with the less eventful and unfairly stigmatised “dark ages” where state power was less firmly entrenched. Democracy has become the leading orthodoxy whereas faith in earlier systems of government is at an all-time low, even though democracy’s ethical superiority is far from clear. In economics itself, Rothbard has suggested that the foundation of economic thought built by Adam Smith obliterated many important insights of the earlier thinkers such as Cantillon and Turgot, even going so far as to blame Smith for the injection into economics of the labour theory of value2. The revolution in Keynesian thought and positivist methodology in the first half of the twentieth century also pushed economics from a path on which it shared much in common with the earlier “Austrian” school. Indeed the curious and scarcely challenged acceptance of Keynes’ General Theory completely blew from the water the “Austrian” explanation of business cycles as it applied to the Great Depression. As Henry Hazlitt later quipped, “what is original in the book is not true and what is true is not original” and the entire tome was never properly debated – merely accepted3. Indeed, economics today suffers from a distinct splintering into hermetically sealed units that seldom interact with each other or acknowledge a common foundation. In addition to the wedge between micro and macroeconomics, we seem to have labour economics, industrial economics, oil economics, financial economics, international economics, and so on. Most of these bubbles are little more than statistic-gathering lobbying channels to favour key industries rather than areas of study that are influential upon core economic theory. Furthermore, intellectual thought has often had a dismal record at being ahead of reality – until the 1990s Marxism was rife in academic circles and as late as 1989 Paul Samuelson, in the 13th edition of his bestselling economics textbook, stated that the Soviet economic system was “proof that…a socialist command economy can function and even thrive”. To ignore an old area of thought, or to refuse to dust the cobwebs off long-ignored treatises is not necessarily an exercise that is conducive to the preservation and growth of knowledge and, indeed, more than risks violating the first duty of the scholar – to preserve that which is already known to be true. More Menger and Mises would do far more for the economics profession than 2014 journal articles by PhDs and Nobel Prize winners.

“Austrian” Economics is too Political!

The charge that “Austrian” economics is too political may at first appear surprising given that its primary theorist, Ludwig von Mises, was extremely clear on his support for the wertfrei science and only spoke of his passion for laissez-faire in his capacity as a citizen and not as an economist, or so he claimed. Although it is true that most of those who embrace “Austrian” economists are libertarians in one form or another, this charge is more likely to originate from the fact that “Austrian” economics leads to the radical and stark conclusions that government would not benefit the average citizen, nor would it succeed in doing anything that which most people want government to do. Such results are intolerable for government advocates and hence they try to paint “Austrian” economics as having a political bias. Unfortunately, such an attitude reveals the political bias inherent in their own schools of thought. Indeed, the entirety of the mainstream, with its experimental method and drive towards socially engineered outcomes, is inherently statist, normally considering only which government action is the right one. It seldom asks itself the questions whether any government action is appropriate at all. Most macroeconomic research is funded by the US Federal Reserve and it is hardly likely that such an institution, the actions of which are so central to the “Austrian” theory of the business cycle, will be willing to engage its critics on its payroll. A little more broadly, the defects in Marx’s economic thought – his misconception of economic classes and his inability to defend his labour theory of value against the uniformity of profit levels in capital-intensive and labour-intensive industries – can be attributed not the fact that not that he was simply a bad thinker but that his thinking was subservient to his political ends4. Indeed, one of his staunchest critics, Eugen von Böhm-Bawerk, still praised Marx as “an intellectual force of the very highest order” in the book where he laid waste to Marx’s labour theory of value5. At the very least, therefore, “Austrian” economics is no more politicised than any other school of thought.

Austrian Economics is not Empirical!

The familiar charge that “Austrian” economics is deduced from the action axiom and does not make use of experimentally tested hypotheses is one of the primary dividing lines between the “Austrian” school and the mainstream. The present author has recently explained the “Austrian” method and we will not repeat here what we have examined already. Rather, we will concentrate now upon a more subtle criticism which is that, although “Austrian” economics makes the claim to be a deductive science, it must nevertheless make use of empirical facts and that both Human Action and Man, Economy and State are rife with empirical assumptions. Aren’t “Austrians”, therefore, completely misstating their own method? This criticism, however, confuses core theory on the one hand, which is formal and deductive, with the application of that theory to substantive choices that humans have made on the other. The core of “Austrian” theory – actions, ends, means, choices and the laws that are derived from them such as supply and demand, marginal utility, and so on – are deduced from the action axiom. Yet the interest in our field of study is the effects of the complex phenomena that exist in the world and the existence of certain human choices need to be taken as empirical facts in order to analyse them. If we are to have a theory of money humans must have chosen to use money; if we are to have a theory of banking, the fractional reserve system and of business cycles, humans must have chosen to use banks; if we are to have a theory of production then humans must have chosen to engage in investment and roundabout production rather than leading a hand to mouth existence. Indeed, even the existence of other humans is an empirical fact (albeit a highly certain one) that is necessary for any theory of bilateral exchange. Examination of all of these areas, which make use of the empirically validated, substantive choices that humans have made, are nothing more than application of the core, deductive economic theory to real life situations simply because these are the things that we are interested in knowing about. The conclusions reached would still be true even if those choices had never been made, but the fact that they were made is what brings them to the forefront of our attention.

A related charge from the empiricist camp is that, as a deductive science whose truths are valid a priori, “Austrian” economics can only yield analytical truths – endless tautologies that are merely elaborated definitions of the original axiom. Hence it has nothing new to say and if we wish to learn synthetic truths about reality then we must go out into the world and observe. The so-called analytic-a priori/synthetic-a postierori distinction is a convenient way for methodological objectors to the “Austrians” to attempt to dispose of valid truths that they cannot otherwise refute. If, as it is claimed, nothing about reality can be known without empirical validation, then surely that epistemological claim, which is asserted as a law of reality, applies to itself? To be consistent with what it says, this statement too would have to be tested empirically to see if it is a true law of reality. Otherwise, by its own standard, it is merely an analytical assertion which, while it may be true in and of itself, says nothing of reality at all. Regardless of this however, the wider allegation that “Austrian” economics says nothing of reality is rendered false when we consider that the action axiom itself is a law of reality. Any action demonstrates an undeniable recognition of the harmony between means and ends as they exist in the universe. A human may deny that the matrix of means and ends constitutes reality but this action of denial, which must make use of them, demonstrates that he does not hold this to be so. In denying that the action axiom is a law of reality, the person is trying to create an end in the real universe using available means that are suitable for this purpose. If the action axiom says nothing about reality then neither too do the ends that he attempts to create have anything to do with reality and so they can safely be ignored. If he was in genuine denial that the nexus of means and ends constituted reality then he would keep his mouth shut and refrain from any action whatsoever. If, therefore, the action axiom is a law of reality then so too are the laws that are deduced from them also laws of reality. Indeed it is precisely because the “Austrian” method begins with action in the world that it is firmly grounded as a school that deals with reality and with phenomena as we find them. It is patently not an epistemology that babbles on about metaphysics, imaginary constructs and ethereal musings.

Austrian Economists do not make Predictions!

The previous objection – that “Austrian” economics can say nothing about reality – is joined at the hip with this final objection that we shall consider here, that “Austrian” economists do not make predictions. One of the more sophisticated guises of this objection runs something like this: if “Austrian” economics says absolutely and necessarily true things about reality, how is it possible, when it comes to applying them to a real world situation, their validity, or emergence, becomes contingent? How is it that these can be undeniably true laws about the world yet we do not know when they are going to make their appearance and cannot be used to make predictions?

The answer to this is that “Austrian” economics can be used to make predictions – it is just that the formal laws of human action are not sufficient to make those predictions about human behaviour. Such a limitation does not invalidate the necessary truth of those laws. The fundamental categories of action are necessarily true because we cannot conceive of a mode of action in which they would be untrue. We cannot, for example, ever imagine an action that is not the result of a choice to use ends towards means. Thus, the laws that are deduced from these fundamental categories must also be absolutely true.

Looking for a moment to the natural sciences, all scientific propositions are conditional statements of the “if-then” variety, the appearance of which in the real world is contingent upon the actual conditions they require being present. A chemist may be able to tell you that, provided that two atoms of hydrogen and one atom of oxygen are present under certain conditions then they will join to form a molecule of water. Undoubtedly this law will be very useful in making predictions as we now know what will happen when certain conditions are present. But to make a prediction of future events we also need to know whether such conditions will be satisfied at X point in the future – and this is an entirely separate question. The law by itself, therefore, is not enough to make a prediction. To make predictions, we first need to study the outcome that will result when a certain configuration of variables is present; and then we need to determine whether that precise configuration will occur at some point in time. The fact that we need to carry out both tasks has no bearing on the truth or validity of the law. Carrying out the second task – attempting to determine whether certain conditions will be present – may be more straightforward for a natural scientist to do, given that unconscious matter has no will of its own. But outside of controlled laboratory conditions, even predictions of this nature have proved immensely difficult. We cannot predict the weather accurately more than about a week in advance, nor earthquakes in time to evacuate affected populations. It has previously been predicted by scientists that a rocket would never be able to leave the Earth’s atmosphere; that rail travel at high speed would not be possible because passengers would die of asphyxia; and even Einstein once predicted that Nuclear energy would be unobtainable. All of this is before we even consider the science behind the whole climate change saga and the truly abysmal scientific predictions made in fields where human action has been a variable, such as “peak oil” and other resource depletion. None of these predictions has anything to do with what happens when certain conditions are present – rather, they are predictions about whether the required conditions will be present for a particular outcome.

Natural scientists may give the appearance that both elements of prediction are a unified whole as they can predict both elements in their role as scientists by following the same method of empirical observation. When we turn to human action, however, the formal, qualitative laws of praxeology will bind human action within a certain framework. We can say that if X conditions are present then Y result will occur. These laws can be used to predict outcomes. But a whole and complete prediction of human action requires also a prediction of the substance of human choices and of the conditions in which humans will find themselves – about which, praxeology has nothing to say. Thus the praxeologist in his role as a praxeologist, does not, unlike the natural scientist, make predictions. Given the difficulty, as we just outlined, of making predictions about unconscious matter, how much more difficult must it be to make predictions of human behaviour where quantitative and substantive predictions concerning human action cannot be made with scientific certainty? The difficulty in predicting human behaviour, caused by the volition of human choice, does not, though, have any bearing upon the necessary truth of the laws of praxeology – and if anything, those laws are the mainstays in making such predictions. The fact also that the laws cannot be expressed quantitatively is also no bearing on their necessary truth – human action proceeds in whole, discrete steps and any change in conditions must be sufficient to make a change in a human’s rank of values. Whether and what point such a change will be made also cannot be reduced to scientific certainty but must, rather, be based firmly on our empathetic understanding of our fellow human beings and their response to the conditions in which they find themselves, which much also be predicted. If this was not true then profit would not exist in the world. For if every human desire and the consequent action was predictable with scientific certainty then every resource would be bid up exactly to the level of its cost. It is precisely the task of the entrepreneur to estimate future human desires and choices and to direct resources accordingly. Where he correctly estimates the conditions his application of the appropriate praxeological law will render his prediction correct.

Neither also is “Austrian” economics, however much its theorems may be necessarily true, not weaker because it lacks substantive prediction and quantitative measurement. The boundaries of science are that which can be known in the universe and “Austrian” economics restricts itself to formal, qualitative laws of action precisely because that is all that can be known with scientific certainty. To acknowledge the limits of scientific endeavour is simply intellectual honesty and not a weakness. It remains incumbent upon the mainstream to explain why they think that “science” is about making known that which is simply unknowable.

We can conclude this piece by stating that “Austrians” themselves sometimes, at the very least, give the appearance of making predictions in their capacity as “Austrian” economists. The forecasts of wild inflation and five figure gold prices that have not come to pass since the 2008 crash should remind “Austrian” economists who are desperate to display the truthfulness of their insights that these are entrepreneurial judgments and not scientific facts.

View the video version of this post.

1See, for example, Petr Beckmann, Einstein Plus Two

2Murray N Rothbard, An Austrian Perspective on the History of Economic Thought, Vol. I, Economic Thought Before Adam Smith, Ch. 16.

3Henry Hazlitt, The Failure of the New Economics – An Analysis of the Keynesian Fallacies, pp. 4-9.

4Murray N Rothbard, An Austrian Perspective on the History of Economic Thought, Vol. II, Classical Economics, p. 317.

5Eugen von Böhm-Bawerk, Karl Marx and the Close of his System, p. 77-78. In this passage, Böhm-Bawerk states that the belief of Marx, and of the classical economists, in the labour theory of value was a “cherished philosophical principle” that was not routed in strict, scientific analysis.

 

Advertisements