Sunday, September 15, 2013

Austrian School Methodology

I want to thank Luke Westman from The Analytical Economist blog for devoting the time to have this friendly, serious, & meaningful discussion on the subject of how best to study economics from a methodological perspective. I will be presenting the case for the Austrian methodology while Luke will be presenting the methodology used by the Chicago School and others in the Neoclassical tradition.

While it is no surprise that the Chicago and Austrian Schools of Economics share many things in common with regards to a free market analysis and conclusions, I do think it is critically important to highlight the difference in methodology and how best to “do economics.”

Scientific Laws of Physical Sciences

It is no surprise a dichotomy exists between certain sciences. On the one side are the natural/physical sciences (Physics, Chemistry, Biology, etc.). On the other hand are the social sciences (Economics, Law, Anthropology, History, Sociology, etc.). The physical sciences study the natural world of matter (atoms, elements, compounds, etc.) and how different objects react to each other under certain conditions of motion or stimuli. This discipline aims to discover certain causal laws of nature. The substances under investigation in the natural world cannot choose how they react to stimuli, but through observation and understanding we can come to know these objects and categorize them by their properties and their behavior. As Rothbard states,

“Stones, molecules, planets cannot choose their courses; their behavior is strictly and mechanically determined for them.” (Rothbard, 2011, p. 3)

In the physical sciences, the scientific method is the technique used to derive knowledge, conclusions, and scientific laws using empirical hypothesis testing. This is the best approach to deriving so-called laws of nature since this realm is unintelligible.  To arrive at these casual laws of nature we employ the best means available to investigate this seemingly unintelligible world of phenomenon, a realm in which the subjects under investigation cannot communicate with us.

The procedure of the empirical scientific method goes something like this: 1) forming a hypothesis/conjecture, 2) gathering data relevant to hypothesis, 3) testing the data against the hypothesis and 4) stating a conclusion of whether the hypothesis failed or did not fail.

The presuppositions of the scientific method are important to our current discussion. The first presupposition is that events must be reproducible or repeatable. If we’re interested in examining the law of gravity, the events demonstrating this law should be reproducible by other independent scholars for confirmation/falsification. Second, the effects that are being hypothesized about are quantitatively definite. This is to say that a quantitative mathematical formulation/equation can be given to represent the hypothesis and demonstrate a precise quantitative aspect of the relationship. Third, effects are invariant across time and place operating universally. That is to say that in the realm of the physical sciences, the nature of things remains the same. The implication of the scientific method is that we can do scientific prediction given the universality of the hypothesis. For example, based on the law of gravity, we recognize its universality that two objects will behave the same regardless of whether they are dropped from the Eiffel Tower in the 19th Century or from the Sears Tower in Chicago tomorrow.

Scientific Laws of Human Action

In the social sciences, the realm of investigation deals with studying man. What is the proper way to study man? Can we import the same methodology as used in the physical sciences? What can we say about economics? And, should the methodology of economic science closer resemble Physics or that of Applied Logic?

Mises and others before him argued the study of man differed from the study of the physical sciences and thus required a distinctly different approach.

Mortal man does not know how the universe and all that it contains may appear to a superhuman intelligence. Perhaps such an exalted mind is in a position to elaborate a coherent and comprehensive monistic interpretation of all phenomena. Man--up to now, at least--has always gone lamentably amiss in his attempts to bridge the gulf that he sees yawning between mind and matter, between the rider and the horse, between the mason and the stone. It would be preposterous to view this failure as a sufficient demonstration of the soundness of a. dualistic philosophy. All that we can infer from it is that science-at least for the time being-must adopt a dualistic approach, less as a philosophical explanation than as a methodological device.

Methodological dualism refrains from any proposition concerning essences and metaphysical constructs. It merely takes into account the fact that we do not know how external events -- physical, chemical, and physiological -- affect human thoughts, ideas, and judgments of value. This ignorance splits the realm of knowledge into two separate fields, the realm of external events, commonly called nature, and the realm of human thought and action. (Mises, 1985, p. 1)

Mises argues there are two distinct realms of knowledge and this is fundamental to the way the scientist approaches his particular field of inquiry.

Rothbard also recognizes the dualist approach:

In the behavior of physical objects, science begins by empirical observation of constant relations, and then frames tentative hypotheses of explanatory laws, these hypotheses being always subject to testing and revision by referring their deduced consequents to controlled experiments, where all but the relevant, isolated factors are held constant. This is the “scientific method” of physics. But in the study of human action, as Mises shows, the reverse is true; here, we begin by knowing the causal laws: by knowing the fact of human consciousness, of free will, of motivated, purposeful action of human beings in using given means for the attainment of desired ends. (Rothbard, 2011, p. 26)

History of the Dualist Approach in Economics

Mises was not the first to recognize this methodological approach. He simply systematized that which other before him had always recognized and acknowledged. Other famous thinkers of political economy in the Classical tradition had long recognized this dualism. John Cairnes, Nassau Senor, J.B. Say, and most notably Lionel Robbins all held this dualist position. Lionel Robbins’ work, Essay on the Nature and Significance of Economic Science was held as the benchmark for economic methodology for nearly 30 years in the English speaking community which heavily cited Mises.

Rothbard traces how the dualist approach in the social sciences and especially economics was abandoned in favor of the “monist” methodology championed by Milton Friedman.

In the economics profession, of course, the practitioners down in the trenches only loosely reflect, or indeed have scarcely any interest in, the small number of methodological reflections in the upper stories of the ivory tower. But these seemingly remote philosophical musings do have an important long-run influence on the guiding theories and directions of the discipline. For approximately two decades, Lionel Robbins’s justly famous The Nature and Significance of Economic Science was the guiding methodological work of the profession, presenting a watered-down version of the praxeological method of Ludwig von Mises. Robbins had studied at Mises’s famous Privatseminar at Vienna, and his first edition (1932) stressed economics as a deductive discipline based on the logical implications of the universal facts of human action (for example, that human beings try to achieve goals by using necessarily scarce means). In Robbins’s more widely known second edition (1935), the Misesian influence was watered down a bit further, coupled with intimations no bigger than a man’s hand of the neo-classical formalism that would hit the profession about the time of World War II. After the war, the older economics was inundated by an emerging formalistic and mathematical neoclassical synthesis, of Walrasian equations covering microeconomics and Keynesian geometry taking care of macro.

Aiding and abetting the conquest of economics by the new neoclassical synthesis was the celebrated article by Milton Friedman in 1953, “The Methodology of Positive Economics,” which quickly swept the board, sending Robbins’s Nature and Significance unceremoniously into the dustbin of history. For three decades, secure and unchallenged, the Friedman article remained virtually the only written portrayal of official methodology for modern economics. (Rothbard, 2011, pp. 130-131)

Constancy & Human Action

An important distinction exists between the science of material bodies in the physical sciences and the science of human action involves the nature of the ends, goals, desires, tastes, preferences, and other factors. These factors constantly change the nature of things for each individual actor. Additionally, the means to achieve certain ends are never fixed, constant, or invariant.

One can assume constancy and an invariant nature of reality in the study of material bodies in the physical sciences to derive casual laws of nature. Mises points to this significant distinction in Human Action when he states:

Here we are faced with one of the main differences between physics and chemistry on the one hand and the sciences of human action on the other. In the realm of physical and chemical events there exist (or, at least, it is generally assumed that there exist) constant relations between magnitudes, and man is capable of discovering these constants with a reasonable degree of precision by means of laboratory experiments. No such constant relations exist in the field of human action outside of physical and chemical technology and therapeutics. For some time economists believed that they had discovered such a constant relation in the effects of changes in the quantity of money upon commodity prices. It was asserted that a rise or fall in the quantity of money in circulation must result in proportional changes of commodity prices. Modern economics has clearly and irrefutably exposed the fallaciousness of this statement. Those economists who want to substitute "quantitative economics" for what they call "qualitative economics" are utterly mistaken. There are, in the field of economics, no constant relations, and consequently no measurement is possible. If a statistician determines that a rise of 10 per cent in the supply of potatoes in Atlantis at a definite time was followed by a fall of 8 per cent in the price, he does not establish anything about what happened or may happen with a change in the supply of potatoes in another country or at another time. He has not "measured" the "elasticity of demand" of potatoes. He has established a unique and individual historical fact. No intelligent man can doubt that the behavior of men with regard to potatoes, and every other commodity is variable. Different individuals value the same things in a different way, and valuations change with the same individuals with changing conditions. (Mises, Human Action, 1996)

The aim of economic theory is to develop economic propositions which are necessarily true independent of experience, historical events, or statistical data. If we do conclude a distinction does exist between the nature of material bodies and nature of human action, it would only logically follow a different methodology would be required to engage in scientific study of man.

From the argument Mises raises above, we can foresee problems with the presuppositions of scientific method as it relates to applying it to human action given no constant relations or quantifiable measurement is possible. For a case study, let’s take the economic law of demand which says given a falling price of a homogenous good, an individual will buy the same or more of a said good. If we consider this an empirical proposition to be tested for some quantitatively definite magnitude of this effect, then it would seem the replication of events would be problematic. Every event at a different point in time or by a different person or by the same person at a different place under a different set of circumstances cannot be replicated. Nor can the effects of measured as a mathematical equation to be definite or precise. If today the price of a gallon of milk drops by 50%, an individual will the buy the same amount or more milk than they would at the previous price. However, it is impossible and fruitless to quantifiably model, predict, or know exactly how much more milk they will buy a represented by a mathematical equation. All that can be known as a reflective and qualitative fact of human action is that given such a price drop in milk, the same amount or more will be purchased all other things being equal.

Axiom of Action, Praxeology, & Economic Theory

Mises’ presupposition of methodological dualism rests on the action axiom. That is, human beings are conscious agents who make choices, adopt values, and “act” purposefully to attain certain goals, ends, or results. The action axiom is self-evident. Any attempt to refute this claim is contradictory based on the reality that such an attempt to do so would therefore be an action aimed at goal using a particular means to achieve an end.

The axiom of action is a simple yet profoundly important statement of reality. Mises stated it as such:

Human action is purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful response to stimuli and to the conditions of its environment, is a person’s conscious adjustment to the state of the universe that determines his life. Such paraphrases may clarify the definition given and prevent possible misinterpretations. But the definition itself is adequate and does not need complement of commentary. (Mises, 1996, p. 11)

Mises defines this scientific realm of inquiry as Praxeology which can be better understood as the logic or science of human action. This realm can best be categorized as teleological.  That is, it is purpose-directed meaningful behavior as opposed to that of the physical sciences which is categorized causally.

Rothbard summarized the praxeological methodology and deductive method as follows:

Praxeology rests on the fundamental axiom that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals. This concept of action contrasts to purely reflexive, or knee-jerk, behavior, which is not directed toward goals. The praxeological method spins out by verbal deduction the logical implications of that primordial fact. In short, praxeological economics is the structure of logical implications of the fact that individuals act. This structure is built on the fundamental axiom of action, and has a few subsidiary axioms, such as that [sic] individuals vary and that human beings regard leisure as a valuable good. Any skeptic about deducing from such a simple base an entire system of economics, I refer to Mises’s Human Action. Furthermore, since praxeology begins with a true axiom, A, all the propositions that can be deduced from this axiom must also be true. For if A implies B, and A is true, then B must also be true. (Rothbard, 2011, p. 60)

Given the logical incontestability of the action axiom, an entire edifice of necessarily true economic statements can be implied or derived from it. The method employed to derive these ancillary conclusions is through logical deductive reasoning just as the same method employed in formal logic, mathematics, and geometry. These logical propositions inferred through this deductive method are held to be true so long as no logical mistakes, flaws, or errors occur in this process of reasoning. Therefore, these statements do not require confirmation or falsification via experience. The deductive process follows step by step using verbal logic since each statement is meaningful, important, and significant.

In order to formulate these logical propositions, Praxeologists uses imaginary constructs or thought experiments derived from action starting with simple constructs and adding layers of complexity along the way, which is also known as successive approximation. In the process of forming these deductions, the term “ceteris paribus” or “all things being equal” is used as a tool to hold certain variables as constant while one factor is changed.

Praxeology contains several categories or branches. Often, Praxeologists will use term “catallactics” interchangeably with the term “economics.” What is meant here is simply the branch or which deals specifically with interpersonal exchange. Other branches of Praxeology include the theory of isolated individual (Robinson Crusoe), theory of war, theory of law/ethics, theory of games, and others fields. (Rothbard, 2011, p. 117)

Status of Economics Propositions

The economic propositions as understood by Austrians in the praxeological tradition obviously differ in their epistemological status from those in the logical empiricist or the modern positivist camp. While I will not go into great detail about this debate, I would like to pay a little attention to it and make a few points.

As illustrated above, the implications derived from the logically incontestable axiom that humans act purposefully follows that these economic propositions are therefore necessarily true as opposed to being a non-necessary or contingent true. Some characterize these as a priori statements or a priori propositions. While there does exist a debate in certain circles on the perspective of how exactly these a priori propositions or laws of action are distinguished, all praxeologists share the common agreement that economics propositions are necessarily true.

Professor Barry Smith has written about this topic and frames the two a priori approaches as “impositionist” versus “reflective”. He writes:

All defenders of apriorism share the assumption that we are capable of acquiring knowledge of a special sort, called "a priori knowledge" via non-inductive means. They differ, however, in their accounts of where such knowledge comes from. Two broad families of apriorist views can be distinguished in this regard.

On the one hand are what might be called impositionist views, which hold that a priori knowledge is possible as a result of the fact that the content of such knowledge reflects merely certain forms or structures that have been imposed or inscribed upon the world by the knowing subject. Knowledge, on such views, is never directly of reality itself; rather, it reflects the "logical structures of the mind," and penetrates to reality only as formed, shaped or modeled by a mind or theory.

On the other hand are reflectionist views, which hold that we can have a priori knowledge of what exists, independently of all impositions or inscriptions of the mind, as a result of the fact that certain structures in the world enjoy some degree of intelligibility in their own right. The knowing subject and the objects of knowledge are for the reflectionist in some sense and to some degree pre-tuned to each other. And directly a priori knowledge of reality itself is therefore possible, at least at some level of generality, much along the lines in which we recognize the validity of a proof in logic or geometry. (Smith, 1990)

Rothbards also acknowledges the different epistemological perspectives.

There is considerable controversy over the empirical status of the praxeological axiom. Professor Mises, working within a Kantian philosophical framework, maintained that like the “laws of thought,” the axiom is a priori to human experience and hence apodictically certain. This analysis has given rise to the designation of praxeology as “extreme apriorism.” Most praxeologists, however, hold that the axiom is based squarely in empirical reality, which makes it no less certain than it is in Mises’s formulation. If the axiom is empirically true, then the logical consequences built upon it must be empirically true as well. But this is not the sort of empiricism welcomed by the positivists, for it is based on universal reflective or inner experience, as well as on external physical experience. Thus, the knowledge that human beings have goals and act purposively to attain them rests, not simply on observing that human beings exist, but also on the introspective knowledge of what it means to be human possessed by each man, who then assents to this knowledge. While this sort of empiricism rests on broad knowledge of human action, it is also prior to the complex historical events that economists attempt to explain. (Rothbard, 2011, pp. 33-34)

[…]

Whether we consider the Axiom "a priori" or "empirical" depends on our ultimate philosophical position. Professor Mises, in the neo-Kantian tradition, considers this axiom a law of thought and therefore a categorical truth a priori to all experience. My own epistemological position rests on Aristotle and St. Thomas rather than Kant, and hence I would interpret the proposition differently. I would consider the axiom a law of reality rather than a law of thought, and hence "empirical" rather than "a priori." But it should be obvious that this type of "empiricism" is so out of step with modern empiricism that I may just as well continue to call it a priori for present purposes. For (1) it is a law of reality that is not conceivably falsifiable, and yet is empirically meaningful and true; (2) it rests on universal inner experience, and not simply on external experience, that is, its evidence is reflective rather than physical; and (3) it is clearly a priori to complex historical events. (Rothbard, 2011, pp. 108-109)

Professor Jeffrey Herbener in his Austrian economics course produced by LibertyClassroom.com also agrees with Rothbard that economic laws of human action are “reflective facts” that we come to know through introspection of the reality or world around us through abstraction.

Falsifiable Propositions vs. Necessarily True Propositions

Building upon the last section regarding the status of economic propositions, let’s look at two groups of statements.

Group A - Propositions

  • Children prefer McDonalds over Burger King
  • Germans drink 5 times more beer than Frenchmen
  • Higher education leads to higher wage rates
  • Consumer spending before Christmas is higher than after Christmas

Group B – Propositions

  • Whenever the supply of a good increases by one additional unit, provided each unit is regarded as of equal serviceability by a person, the value attached to this unit must decrease. For this additional unit can only be employed as a means for the attainment of a goal that is considered less valuable than the least valued goal satisfied by a unit of such good if the supply were one unit shorter.
  • Whenever minimum wage laws are enforced that require wages to be higher than existing market wages, involuntary unemployment will result
  • Whenever the quantity of money is increased while the demand for money to be held as cash reserve on hand is unchanged, the purchasing power of money will fall
  • Of two producers, if A is more productive in the production of two types of goods than is B, they can still engage in a mutually beneficial division of labor. This is because overall physical productivity is higher if A specializes in producing one good which he can produce most efficiently, rather than both A and B producing both goods separately and autonomously.

Do these two groups of statements differ in anyway or are they of the same epistemological type or status? Austrians would reply to this query by saying unequivocally, YES – these two groups are different. All of the propositions in Group A are hypothetical statements which require confirmation or falsification in order to say whether the statements are true or false. All schools of thought, including Austrians hold the propositions in Group A can be categorized as a posteriori. Both Austrians and non-Austrians would both agree that these types of statements can never be true absolutely across time and space. Most importantly, Austrians would say that these statements would not necessarily have any predictive power of necessarily explaining future human action since the opposite or the negation of each of these statements could be the case.

What about the second group of statements, Group B? Austrians would classify these statements as true economic statements as opposed to hypothetical or contingent statements. However, all other schools of thought, including those in the Chicago school, would say that the propositions in Group B are also contingent or hypothetical and require confirmation or falsification.  Austrians would disagree and argue Group B does not require confirmation or falsification since these statements all can be known independent of historical investigation or experience. One does not need to test whether these propositions hold water in London, Paris, or Bangladesh to know their status. These are a priori propositions. Moreover, the negation of any of these statements (proposing the opposite) would be absurd.  This is a fundamental disagreement between the schools of thought. 

Thymology & Verstehen

The realm of knowledge which can be categorized teleological is obviously essential, useful, and of “utmost importance” as Hans Hoppe frequently states. While Praxeology encompasses the logic of human action and the consequences (cause & effect) inferred from the action axiom, there exists a separate branch of inquiry which is non-theoretical, but does utilize the application of praxeology & economic theory.

Mises coined this field of study, Thymology, which studies causes of human action of the past (economic history) and the future (forecasting & prediction). Mises defines Thymology as

a branch of history or, as Collingwood formulated it, it belongs in 'the sphere of history.' It deals with the mental activities of men that determine their actions. It deals with the mental processes that result in a definite kind of behavior, with the reactions of the mind to the conditions of the individual's environment. It deals with something invisible and intangible that cannot be perceived by the methods of the natural sciences. But the natural sciences must admit that this factor must be considered as real also from their point of view, as it is a link in a chain of events that result in changes in the sphere the description of which they consider as the specific field of their studies. (Mises, 1962, pp. 47-48)

Thymology employs its own method of investigation to explain and make sense of human events known as Verstehen, which is a “specific understanding.” Mises elaborates on what it means to employ, Verstehen, which was first introduced by Max Weber.

In analyzing and demolishing the claims of Comte's positivism, a group of philosophers and historians known as the s├╝dwestdeutsche Schule elaborated the category of understanding (Verstehen) that had already in a less explicit sense been familiar to older authors. This specific understanding of the sciences of human action aims at establishing the facts that men attach a definite meaning to the state of their environment, that they value this state and, motivated by these judgments of value, resort to definite means in order to preserve or to attain a definite state of affairs different from that which would prevail if they abstained from any purposeful reaction. Understanding deals with judgments of value, with the choice of ends and of the means resorted to for the attainment of these ends, and with the valuation of the outcome of actions performed. (Mises, 1962, p. 48)

Austrians are often accused of rejecting history or empirical data. However, this is simply not true and no Austrians are opposed to research of past events (or future events for that matter) or prescribing the likelihood of future events. Austrians simply posit no scientific laws of history exist nor can one scientifically predict future events with any definitive precision. Austrians acknowledge there does exist a difference between the realm of praxeology (theory) and the realm of applying or using theory, which Thymology encompasses.

Thymology & Economic History

First, let us examine the approach to doing economic history. In order to engage in the discipline of economic history or historical explanation, one must have an understanding of economic theory.. Without a grounding in sound theory (praxeology), how can one interpret the infinite amount of historical data recorded over the course of human events?

Rothbard connects the dots between economic history and praxeology.

Far from being opposed to history, the praxeologist, and not the supposed admirers of history, has profound respect for the irreducible and unique facts of human history. Furthermore, it is the praxeologist who acknowledges that individual human beings cannot legitimately be treated by the social scientist as if they were not men who have minds and act upon their values and expectations, but stones or molecules whose course can be scientifically tracked in alleged constants or quantitative laws. Moreover, as the crowning irony, it is the praxeologist who is truly empirical because he recognizes the unique and heterogeneous nature of historical facts; it is the self-proclaimed “empiricist” who grossly violates the facts of history by attempting to reduce them to quantitative laws. (Rothbard, 2011, p. 75)

[..]

What, then, is the proper relationship between economic theory and economic history or, more precisely, history in general? The historian’s function is to try to explain the unique historical facts that are his province; to do so adequately he must employ all the relevant theories from all the various disciplines that impinge on his problem. For historical facts are complex resultants of a myriad of causes stemming from different aspects of the human condition. Thus, the historian must be prepared to use not only praxeological economic theory but also insights from physics, psychology, technology, and military strategy along with an interpretive understanding of the motives and goals of individuals. He must employ these tools in understanding both the goals of the various actions of history and the consequences of such actions. Because understanding diverse individuals and their interactions is involved, as well as the historical context, the historian using the tools of natural and social science is in the last analysis an “artist,” and hence there is no guarantee or even likelihood that any two historians will judge a situation in precisely the same way. While they may agree on an array of factors to explain the genesis and consequences of an event, they are unlikely to agree on the precise weight to be given each causal factor. In employing various scientific theories, they have to make judgments of relevance on which theories applied in any given case; to refer to an example used earlier in this paper, a historian of Robinson Crusoe would hardly employ the theory of money in a historical explanation of his actions on a desert island. To the economic historian, economic law is neither confirmed nor tested by historical facts; instead, the law, where relevant, is applied to help explain the facts. (Rothbard, 2011, pp. 77-78)

Praxeologists are in the unique position to use theory to explain the cause and effect of past human events. Praxeologists armed with this a priori theory are naturally in a position to be good historians to know what data is relevant and what data is irrelevant.

Thymology & Economic Forecasting

Now that we’ve looked at the approach of examining human events of the past, how can Thymologists use economic theory and Verstehen to look forward to forecast the likelihood of future human events? Again, the knowledge derived from economic theory can be useful to assist Thymologists in looking forward, but it cannot ensure with exact certainty what will happen absolutely. The a priori knowledge of economic theory does provide us with a framework to foresee the trends or patterns by constraining the possible outcomes that might occur if certain conditions are met. But, this knowledge still provides an incomplete picture. Here we must turn to using Verstehen to determine the likelihood of particular event or set of events to occur, which is more an art than a science.

Lionel Robbins discussed the use of theory and predicting patterns.

Economic laws describe inevitable implications. If the data they postulate are given, then the consequences they predict necessarily follow. In this sense they are on the same footing as other scientific laws, and as little capable of "suspension". If, in a given situation, the facts are of a certain order, we are warranted in deducing with complete certainty that other facts which it enables us to describe are also present. To those who have grasped the implications of the propositions set forth in the last chapter the reason is not far to seek. If the "given situation" conforms to a certain pattern, certain other features must also be present, for their presence is "deducible" from the pattern originally postulated. The analytic method is simply a way of discovering the necessary consequences of complex collocations of facts—consequences whose counterpart in reality is not so immediately discernible as the counterpart of the original postulates. It is an instrument for "shaking out" all the implications of given suppositions. Granted the correspondence of its original assumptions and the facts, its conclusions are inevitable and inescapable. All this becomes particularly clear if we consider the procedure of diagrammatic analysis. Suppose, for example, we wish to exhibit the effects on price of the imposition of a small tax. We make certain suppositions as regards the elasticity of demand, certain suppositions as regards the cost functions, embody these in the usual diagram, and we can at once read off, as it were, the effects on the price. They are implied in the original suppositions. The diagram has simply made explicit the concealed implications. It is this inevitability of economic analysis which gives it its very considerable prognostic value. It has been emphasized sufficiently already that Economic Science knows no way of predicting out of the blue the configuration of the data at any particular point of time. It cannot predict changes of valuations. But, given the data in a particular situation, it can draw inevitable conclusions as to their implications. And if the data remain unchanged, these implications will certainly be realised. They must be, for they are implied in the presence of the original data. (Robbins, 1946, pp. 121-122)

Mises explains the role of prediction here.

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. Quantitative problems are in the field of human action open to no other elucidation than that by understanding.

We can predict, as will be shown later, that--other things being equal--a fall in the demand for a will result in a drop in the price of a. But we cannot predict the extent of this drop. This question can be answered only by understanding.

The fundamental deficiency implied in every quantitative approach to economic problems consists in the neglect of the fact that there are no constant relations between what are called economic dimensions. There is neither constancy nor continuity in the valuations and in the formation of exchange ratios between various commodities. Every new datum brings about a reshuffling of the whole price structure. Understanding, by trying to grasp what is going on in the minds of the men concerned, can approach the problem of forecasting future conditions. We may call its methods unsatisfactory and the positivists may arrogantly scorn it. But such arbitrary judgments must not and cannot obscure the fact that understanding is the only appropriate method of dealing with the uncertainty of future conditions. (Mises, 1996, pp. 117-118)

Rothbard explains his thoughts on economic forecasting.

For the praxeologist, forecasting is a task very similar to the work of the historian. The latter attempts to “predict” the events of the past by explaining their antecedent causes; similarly, the forecaster attempts to predict the events of the future on the basis of present and past events already known. He uses all his nomothetic knowledge, economic, political, military, psychological, and technological; but at best his work is an art rather than an exact science. Thus, some forecasters will inevitably be better than others, and the superior forecasters will make the more successful entrepreneurs, speculators, generals, and bettors on elections or football games.

The economic forecaster, as Professor Jewkes pointed out, is only looking at part of a tangled and complex social whole. To return to our original example, when he attempts to forecast the price of butter he must take into consideration the qualitative economic law that price depends directly on demand and inversely on supply; it is then up to him, using knowledge and insight into general economic conditions as well as the specific economic, technological, political, and climatological conditions of the butter market, as well as the values people are likely to place on butter, to try to forecast the movements of the supply and demand of butter, and therefore its price, as accurately as possible. At best, he will have nothing like a perfect score, for he will run aground on the fact of free will altering values and choices, and the consequent impossibility of making exact predictions of the future. (Rothbard, 2011, p. 41)

An important point to mention is that while patterns are predictable through application of theory, the quantitative timing is never something that can be known with any degree of certainty. Again, it cannot be stressed enough that predicting human action is not a science but more akin to an art.

Austrian Business Cycle Theory & Thymology

An example of applying praxeology and economic theory to history and forecasting is the application of the Austrian Theory of the Business Cycle (ABCT), a theory which explains the cause and effect of economic booms and busts in the context of the macro economy. ABCT is probably the best example of economic theory used to explain both historical events pattern prediction of future events. Tom Woods’ book, Meltdown (2009), & Murray Rothbard’s book, America’s Great Depression (1963), are two excellent works of economic history which draw explicitly on the insight and explanatory power of the ABCT to assist their Verstehen and Thymological take on the cause and effect of the boom & bust in both eras of history.

Conversely, in an example using ABCT & Verstehen to forecast future events using pattern prediction, Peter Schiff, an entrepreneur and the President of Euro Pacific Capital, was and still is a frequent guest on the financial news media circuit. Schiff has written numerous books, articles, op-eds on the reason why he was able correctly predict much of the outcome of the 2008 financial collapse. A simple search on Google of the words “Peter Schiff was right” will illustrate what Schiff said during the run up to the financial collapse. Naturally, he did not get everything correct and has also written and spoken on the reason for this. It is important to emphasize here that prediction within the realm of Thymology is never going to provide a quantifiably measurable or definite prescription of what will unfold. Certain things can be known necessarily and absolutely based on our knowledge derived through praxeology, but the timing and magnitude of certain effects or outcomes will always be contingent or hypothetical knowledge.

Conclusion

I’ve attempted to represent the methodology of the Austrian tradition. I do not pretend to be an expert on all that I have written. However, I do think I’ve outlined the positive case for the dualist approach to the methodology of approaching the disparate fields of science. I welcome comments, feedback, and questions. Many eminent scholars have written at length on this subject and I do think methodology is extremely important to the study of economics and social sciences as well. While I recognize the Austrian methodology has been largely abandoned by the economics profession, I hope my examination highlights the benefits and the positive case for Austrian methodology in studying human action and applying the logic of human action to other fields of study within the social sciences.

 


References

Mises, L. v. (1962). The Ultimate Foundation of Economic Science. New Jersey: D. VAN NOSTRAND COMPANY, INC.

Mises, L. v. (1985). Theory and History: An Interpretation of Social and Economic Evolution. Auburn: Ludwig von Mises Institute.

Mises, L. v. (1996). Human Action. San Francisco: Fox & Wilkes.

Robbins, L. (1946). An Essay on the Nature and Significance of Economic Science. London: MacMillan & Company.

Rothbard, M. (2011). Economic Controversies. Auburn: Ludwig von Mises Institute.

Smith, B. (1990, Fall). The Question of Apriorism. Austrian Economics Newsletter, pp. 1-5.