The close followers of the work of Ludwig von Mises (1881–1973), one of the leading thinkers of the Austrian School of Economics, maintain that economics is an a priori science, “a science whose propositions can be given a rigorous logical justification, which distinguishes Austrians, or more precisely Misesians, from all other current economic schools.”[1]
Indeed, such a view stands in very sharp contrast to today’s state-of-the-art mainstream economics, which has fallen victim to the spell of positivism: in an attempt to investigate the truth of hypotheses in the field of social sciences, the positivists declare that measuring peoples’ actions and their continual empirical testing (according to “if-then” statements) would be required, thereby allowing for scientific progress.[2]
However, the positivist-empiricist approach does not, and cannot, deliver on its promise. It promotes false economic doctrines, as it misconceives the logical status of the science of economics. Positivism-empiricism encourages, intellectually speaking, a drift away from the free-market order, paving the way towards collectivism, socialism, and even totalitarianism.
Positivism-empiricism encourages social relativism: it denies any a priori truth of the social reality of human action, adhering to the view that “anything goes.” As such, social relativism plays into the hands of the enemies of the free societal order: there is nothing that could, as a rule, prevent recommendations derived from the positivist-empiricist doctrine from violating individuals’ property rights.
In 1945, Friedrich August von Hayek (1899–1992) formulated the consequences of a social philosophy that ignores principles:
[T]he aversion to general principles, and the preference for proceeding from particular instance to particular instance, is the product of the movement which with the “inevitability of gradualness” leads us back from a social order resting on the general recognition of certain principles to a system in which order is created by direct command.[3]
In virtually all developed countries, government activity — as measured, for instance, in terms of state spending as a percentage of total income and the scope of authoritative regulation — has been expanding at the expense of individual freedom and the free-market order, acquiesced to — or even publicly advocated — by mainstream economists.
This is why Mises’s work on the logical status of the science of economics needs to be brought back to public attention: his work actually forms the intellectual bulwark against the degeneration of the free societal order. So in what follows, the methodological foundations of Austrian economics will be reviewed briefly.[4] Our starting point is, and necessarily so, the field of epistemology.
Epistemology as a Starting Point
Epistemology is the branch of philosophy concerned with the origin, possibility, scope and general basis of human knowledge. One of the key epistemological questions is, where does our knowledge come from?
Rationalism holds the view that our knowledge is based on reason. Knowledge does not come to us through experience (sensory perception). It derives solely from principles that the human mind possesses prior to it.
Empiricism maintains that our knowledge rests on experience. It has its root in the idea that all we can know about the world is what the world cares to tell us, and we must observe it carefully.
Rationalism would not maintain that we cannot gain any knowledge from experience. However, whenever one begins to be scientific, whenever rules and laws are to be identified that apply universally, a rationalist would argue that experience does not have the same validity as deductive reasoning.
That said, one may confirm rules and laws by experience, but they are acquired by logical deduction from higher — overarching — laws, which are already contained in reason. It is here we need to take a brief look at the great philosopher Immanuel Kant (1724–1804) and his revolutionary The Critique of Pure Reason.
Kant’s Synthetic A Priori Propositions
Kant tried to solve the epistemological problem by showing that human beings’ knowledge of objects, or natural reality in general, does not depend on the objectives themselves. He maintained that empirical objects depend — somewhat paradoxically — on our knowledge of them.
Kant maintained that human beings’ mental constitution itself would yield knowledge. Such knowledge does not come to us through experience and observation of reality. In fact, it is derived from overarching principles, which the minds of human beings possess prior to any experience.
Kant made a distinction between a priori and a posteriori. The former refers to a judgment that expresses knowledge acquired prior to any observation, while the latter refers to knowledge that is acquired on the basis of experience.
What is more, Kant drew a distinction between synthetic and analytical judgments. An analytic judgment is restricted to the information already contained in the definition of a concept, while a synthetic judgment means that a judgment about objects provides information about the subject under review.
His distinctions allow the following four combinations:
Analytic a posteriori judgments cannot arise, since there is never a need to take recourse to experience in support of a purely explicative assertion.
Synthetic a posteriori judgments are the relatively uncontroversial matters of fact we come to know by means of our sensory experience.
Analytic a priori judgments include all the logical truths and straightforward matters of definition; they are necessarily true.
Synthetic a priori judgments are the crucial case, since only they could provide new information that is necessarily true.
A priori synthetic judgments neither repeat the information content of definitions nor provide new information about the subject matter on the basis of experience. They refer to features the human mind possesses prior to experience and shape empirically derived knowledge, telling about the nature of the world, based on reason investigating itself.
The key question then is, how can we identify the truth of such synthetic a priori propositions, given that formal logic is not sufficient and observations are unnecessary? According to Kant, the truth of synthetic a priori propositions can be definitely established by self-evident material axioms. A proposition is self-evident because we cannot deny its truth without running into self-contradiction; an attempt to deny the truth of a synthetic a priori proposition would equate to admitting its truth.
Mises’s Axiom of Human Action
Mises’s “axiom of action” — the proposition that humans act — is a true synthetic a priori proposition. The proposition that humans act cannot be refuted, since such a denial would itself qualify as an action; the truth of the statement cannot be undone.
All categories with which economics concerns itself — value, ends, means, choice, costs, etc. — are implied in Mises’s axiom of action. They can be interpreted only if we assume that human beings act. They are a priori true, logically deduced from the axiom of action.
To Mises, the science of economics follows the discipline of applied logic, and he therefore applied the term praxeology — the science of the logic of human action — for characterizing the theory of logic of human action.[5]
Mises concluded about the science of economics,
Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification or falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts. They are a necessary requirement of any intellectual grasp of historical events.[6]
Hans-Hermann Hoppe put Mises’s great insight succinctly:
Mises’s great insight was that economic reasoning has its foundation in just this understanding of action; and that the status of economics as a sort of applied logic derives from the status of the action-axiom as an a priori-true synthetic proposition.[7]
Some Examples of A Priori Judgments in Economics
Let us consider some implications that can be logically derived from Mises’s axiom of human action. We know that humans act; it is a true a priori proposition, as one cannot logically think that humans do not act.[8]
Human action logically implies exchange, as action as such is exchanging one state of affairs for another state of affairs.
Human action takes place in time. The human mindset cannot think of anything different. If man could attain his desired ends instantaneously in the present, there wouldn’t be any reason for him to act — but, as we know, acting is necessary to man’s nature; one cannot think of man not acting.
Time is scarce, as man is mortal. And as man must make use of time for achieving his ends, time is a means for attaining a desired end.
With time being a scarce means, the necessity for making a choice among alternative ends arises: scarcity means that one end can only be achieved by giving up other ends.
Having to make choices, human action is actually purposeful behavior: it is aiming at attaining certain ends.
When deciding to pursue certain ends, the actor must assign ranks of value to ends, representing a process of valuation.
Acting man must have an idea of how to achieve his desired ends. If man thinks he cannot attain his ends, he cannot take action. But, as shown above, there is no such thing as man not acting.
What is more, causality — that is the link between cause and effect — is a category of human action. If there is no causal relation, man cannot act — which is impossible.
Man’s future is uncertain. If man knew his future, his action could not change it, and therefore human action testifies that the future is uncertain to the actor.
Another truth related to Mises’s axiom of human action is that only individuals act. Concepts such as “government,” “groups” and “collectives” do not have an existence of their own. They do not have any reality; they just rest on the actions of individuals.
Hoppe provides insightful examples of Mises’s a priori economic propositions:
Human action is an actor’s purposeful pursuit of valued ends with scarce means. No one can purposefully not act. Every action is aimed at improving the actor’s subjective well-being above what it otherwise would have been. A larger quantity of a good is valued more highly than a smaller quantity of the same good. Satisfaction earlier is preferred over satisfaction later. Production must precede consumption. What is consumed now cannot be consumed again in the future. If the price of a good is lowered, either the same quantity or more will be bought than otherwise. Prices fixed below market clearing prices will lead to lasting shortages. Without private property in factors of production there can be no factor prices, and without factor prices cost-accounting is impossible. Taxes are an imposition on producers and/or wealth owners and reduce production and/or wealth below what it otherwise would have been. Interpersonal conflict is possible only if and insofar as things are scarce. No thing or part of a thing can be owned exclusively by more than one person at a time. Democracy (majority rule) is incompatible with private property (individual ownership and rule). No form of taxation can be uniform (equal), but every taxation involves the creation of two distinct and unequal classes of taxpayers versus tax receiver-consumers. Property and property titles are distinct entities, and an increase of the latter without a corresponding increase of the former does not raise social wealth but leads to a redistribution of existing wealth.[9]
Mises’s Methodological Dualism
In his book Theory and History, Mises, right at the start, addresses the issue of methodological dualism: the insight that actions of human beings cannot be analyzed according to the methods applied by natural sciences, in which positivism-empiricism has become the dominant approach.
Murray N. Rothbard noted that the objects of natural sciences (stones, planets, atoms, etc.) would differ radically from human beings, as “it is the essence of human beings that they have goals and purposes, and that they try to achieve those goals. Stones, atoms, planets, have no goals or preferences; hence, they do not choose among alternative courses of action.”[10]
And further,
atoms and stones can be investigated, their course charted, and their paths plotted and predicted, at least in principle, to the minutest quantitative detail. People cannot; every day, people learn, adopt new values and goals, and change their minds; people cannot be slotted and predicted as can objects without minds or without the capacity to learn and choose.[11]
The methodological approach taken by today’s mainstream economics — following those applied in the field of natural sciences — is empiricism. Mises rejected this approach on the grounds of the incompatibility of the subject-matters of the two disciplines.[12]
Natural sciences rest on laboratory experiments: the effect of changes of an individual element on other elements can be observed in isolation. The researcher makes a hypothesis, and observations are required to find out whether it is right or wrong.
The empirical approach amounts to engaging in a never-ending trial-and-error procedure. Such an approach would reject the notion of a once-and-for-all established truth of propositions, today perhaps best illustrated by the (quasi-nihilistic) reasoning of Sir Karl Raimund Popper (1902–1994).
Popper suggested that a hypothesis cannot be verified (that is criticized by observation) once and for all, since no finite amount of observation could ever demonstrate its correctness. A theory may be provisionally retained until it is finally falsified; in that sense, true knowledge is provisional.
However, this approach is incompatible with economics, as “no laboratory experiment can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged.”[13]
First, empirical tests are based on historical data, which must form the basis of the empirical approach to social science. These data are contingent, as they are always the result of complex phenomena.
Second — and this is categorically different from natural laws — people can and do learn from experience and tend to change their value scales and preferences. As a result, one cannot assume time-invariant relations between causes and effects, as can be observed in the natural sciences.
If economics is a logically deductive a priori science, as Mises laid out, what then is the role of empirical testing, a procedure that has attained central status in the current economic sciences? Any effort of empirical testing of logically deduced truths would be illustrative of intellectual confusion.
Take a synthetic a priori proposition such as the Pythagorean theorem: a² + b² = c². Would empirical testing of this logically derived theorem yield any additional knowledge? No, any such efforts would be in vain and signal a state of intellectual disorientation. The same holds true for efforts aimed at testing logically derived economic propositions.
Take, for example, the law of diminishing marginal utility. It holds that if the supply of a good increases by one unit, the value attached to this additional unit must necessarily decrease — because this additional unit can only be employed as a means for realizing a goal that is less valuable than the least valued goal satisfied by a unit of such a good if the supply were one unit shorter.
The Empiricist-Positivist Doctrine Leads to Social Relativism
To base economics on the doctrine of empiricism is, in fact, an erroneous undertaking leading to fallacious results as empiricism suffers from serious logical deficiencies. Empiricism holds that nothing can be known before empirical testing. But how can we arrive at such a conclusion?
It cannot be derived from making observations of reality — empiricism’s alleged only source of knowledge. If we assume that empiricism’s premise is categorically true — that means that we can say something which is a priori true about how certain events are related — it belies empiricism’s thesis, namely that all knowledge is hypothetical in nature. Empiricism cannot provide a priori knowledge, as it (implicitly) professes to do.
What is more, empiricism makes the claim of being able to observe and measure human action. However, these concepts cannot be derived from observation itself, as empiricism claims. In fact, they require an understanding of peoples’ observing and measuring. Again, empiricism must admit that it takes recourse to knowledge which rests on understanding rather than on observation.
In fact, empiricism carries a destructive seed: rejecting the possibility of any a priori truth, empiricism encourages putting into practice all kinds of hypotheses, however ill-conceived they might be. To the positivist, there is no reason to reject any hypothesis from the outset; he subscribes to the motto “anything goes,” and he wants to let experience decide the matter. In that sense, the empiricist-positivist doctrine leads to harmful social relativism.
Whereas the empiricist approach might be relatively harmless in the field of natural sciences, its consequences in social sciences are a completely different matter. For instance, if a hypothesis predicts effects that are widely said to be desirable, the supporters of empiricism in the field of economics have a justification to try it out and see what happens.
If, however, the outcome is not as hypothesized, empiricism does not allow rejecting the hypothesis as wrong. In fact, empiricism immunizes the hypothesis by saying that the falsified experiment was accidental, suggesting that ongoing experimenting would prove its truth. Or, alternatively, the positivist would hold that the hypothesis’s failure was due to uncontrolled (omitted) factors, thereby mustering support for continuing rather than stopping with social experimenting.
The supporters of the empiricist-positivistic doctrine can be expected to come predominantly from the camp of the social engineers: the group of people — that is the government and all its intellectual supporters — that wants to increase their power over other members of society.
Social Engineering the Money Supply — A Case in Point
Take, for instance, the a priori truth that any increase in the money supply reduces the exchange value of money, as derived from the axiom of action, and that a government policy aiming at stabilizing the value of money is an impossible undertaking with disastrous consequences.
To start with, money is a good, and like any other good, money is subject to the law of diminishing marginal utility. The latter holds that the marginal utility of a money unit in the hands of a market agent declines if and when his money holdings increase (other things equal).[14]
As a result, under a money-supply regime that allows for an increase in the money supply over time — be it free-market money or government-controlled money — the exchange value of money cannot remain stable.
Humans act. Acting implies change in peoples’ preferences and valuations of goods and services. Money is no exception. In fact, even if the stock of money remains unchanged, we must expect that its value vis-à-vis other goods and services changes over time, due to the undeniable fact that humans act.
Mises, building on the work of Carl Menger (1840–1921), showed logically with his regression theorem that money can only originate out of free-market barter, that money has a historical component to it. Therefore, money can be traced back to human action. It cannot be established by government’s coercive action.[15]
This insight has important consequences for the monetary order.
Mises was aware that all that is needed for economic calculation — for which money is an indispensable tool — is to avoid great and abrupt fluctuations in the money supply. He provided a logical foundation that the market can provide for such a medium of exchange, without any need for government interventionism.
The positivist-empiricist doctrine, however, supported the concept of replacing the free-market money order by a government money-supply monopoly: it made popular the illusionary notion that stable money would be a desirable and indispensable requisite for economic calculation, and that only the government, and not the free market, could provide such money.
However, stable money is, without any logical doubt, incompatible with the axiom of human action:
The idea of rendering purchasing power stable did not originate from endeavors to make economic calculations more correct. Its source is the wish to create a sphere withdrawn from the ceaseless flux of human affairs, a realm which the historical process does not affect.[16]
As implied in the axiom of action, there cannot be stable money. The government control over the stock of money not only fails to deliver on its promise; it also becomes the very source of economic crises, paving the way toward ever greater doses of government interference with the free-market order — as outlined in the Austrian Monetary Theory of the Trade Cycle.
If money must arise from commodity money, government’s control over the money supply cannot be established logically without a violation of property rights and only at the expense of economic efficiencies:
[A] government’s plan concerning the determination of the quantity of money can never be impartial and fair to all members of society. Whatever a government does in the pursuit of aims to influence the height of purchasing power depends necessarily upon the rulers’ personal judgment. It always furthers the interests of some groups of people at the expense of other groups. It never serves what is called the commonweal or the public welfare.[17]
Mises was well aware of the consequences of government-created economic inequalities and crises — both direct results of theories ignoring apriorism in the science of economics: that is, people becoming disenchanted with capitalism. They would see government interventionism — greatly helped by peoples’ anti-free market sentiment — as a solution to crises, rather than their very cause, inviting ever greater doses of government control over the individual.
The Need for Returning to Mises’s Apriorism
The positivist-empiricist doctrine, which forms the core of today’s mainstream economics, is not only an intellectual failure; it also encourages — actually provokes — social relativism, thereby opening the door to anti-free-market policies, which, once set into motion, are difficult to reign in. In that sense, positivism is, if put into practice, an anti-capitalist doctrine.
A return to Mises’s great intellectual insight — namely, that economics can be given a rigorous logical foundation, as epitomized by his praxeology — appears to be required for preventing further damage to the ideal of the free society.
Notes
[1] Hoppe, H.-H. (2007), Economic Science and the Austrian Method, Ludwig von Mises Institute, Auburn, p. 8.
[2] The term positive economics can be ascribed to Friedman, M. (1953), Essays in Positive Economics, University of Chicago Press, Chicago, through which he actually set the epistemological course for today’s mainstream economics.
[3] Hayek, F. A. v. (1980), “Individualism: True and False,” Individualism and Economic Order, University of Chicago, p. 1.
[4] See, for instance, Hoppe, H.-H. (2006), “On Praxeology and the Praxeological Foundation of Epistemology,” The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy, 2nd edition, Ludwig von Mises Institute, Auburn, pp. 265–294; idem, Economic Science and the Austrian Method, Ludwig von Mises Institute, Auburn. Also Leeson, P., and P. Boettke (2006), “Was Mises Right?” Review of Social Economy, Taylor and Francis Journals, Vol. 64, June, pp. 247–265.
[5] See in this context Rothbard, M. N. (1997), “Praxeology: The Methodology of Austrian Economics,” The Logic of Action One: Method, Money, and the Austrian School, by Murray N. Rothbard, Cheltenham, UK: Edward Elgar, pp. 58-77.
[6] Mises, L. v. (1996), Human Action, 4th edition, Fox & Wilkes, San Francisco, p. 32.
[7] Hoppe, H.-H. (2007), p. 25.
[8] For an explanation, see Rothbard, M. N. (2004), Man, Economy, and State, with Power and Market, Ludwig von Mises Institute, Chapter 1.
[9] Hoppe, H.-H. (2001), Democracy: The God That Failed, New Brunswick, N. J., Transaction Publishers, pp. xvii.
[10] Murray N. Rothbard, Preface to Mises, L. v. (2007), Theory and History, Ludwig von Mises Institute, Auburn, p. xiii.
[11] Ibid.
[12] See Mises, L. v. (1978), The Ultimate Foundation of Economic Science, Sheed, Andrews & McMeel, Kansas City, pp. 6-7.
[13] Mises, L. v. (1996), p. 31.
[14] It is often argued that money’s exchange value would remain unchanged if the increase in the supply of money is accompanied by an unchanged demand for money. While such a conclusion is indisputable, it does not rest on a partial analysis. According to the latter, the analyst would vary one factor while holding constant all other factors. By doing so, one can say that an increase in the money supply must ceteris paribus lead to a decline in the exchange value of money.
[15] Rothbard showed that a government money supply monopoly can only be established by an act of expropriation. See Rothbard, M. N. (1990), What Has Government Done to Our Money?, Ludwig von Mises Institute, Auburn, Alabama, chapter III “Government Meddling with Money.”
[16] Mises, L. v. (1996), p. 224.
[17] Ibid, p. 422.
