The Methodology of the Austrian School Economists

The considered rejection of the mathematical method as sterile, i.e., as incapable of shedding light on the vital questions of economic processes, has been one of the continuing themes of the Austrian School. Böhm-Bawerk, in his monumental work on Capital and Interest, steers clear of any suggestion of functional interdependence between the elements of his theoretical system.28  He maintains a strictly cause-and-effect analysis. Wieser, like Menger, was particularly critical of the Walrasian system.29

Wieser raised the objection to the use of calculus in economic theory that economic phenomena are necessarily discontinuous and discrete. The Austrians, with their focus on the way in which agents perceive and act in the real world, have always been careful to formulate their marginalism in terms of discrete units and discontinuous points rather than infinitesimal units and smooth curves. Menger emphasized discontinuities at many places in the Grundsätze.30  Wieser was especially explicit about the discreteness of changes in marginal utility scales, and in developing the theory of imputation assumed a discontinuity among inputs. Böhm-Bawerk analyzed supply and demand in terms of discontinuous schedule, and used for illustration a market for a particularly indivisible commodity, horses.31  The discreteness of changes in marginal utility scales in Wieser and Böhm-Bawerk is directly due to their subjectivist concern only with changes that could actually be felt by the valuing individual, Schumpeter thus missed the intent of the Austrian theorists again when he suggested that differential calculus is necessary in order to “formulate their reasoning correctly.”32

Schumpeter’s remark that the Austrians “saw in marginal utility the essence of their innovation”33  indicates that he was likely misled by statements Böhm-Bawerk made to that effect while propagandizing on behalf of the School.34  Wieser also made similar statements. Such remarks must today be regarded in the context in which they were made. At the time they were made the theoretical work of the Austrian School had just begun. Since then the School has extended its investigations into many areas other than value theory. More to the point, the remarks had only limited accuracy at the time. Marginalism per se, as Streissler has stressed, is clearly not the keystone of Menger’s Grundsätze.35  The concept of marginal utility is not introduced until the third chapter.

It is important to remember that, of the three early Austrians, Menger paid the greatest attention to methodological matters. Wieser, according to Hayek, “did not attach much value to scientific methodology as a special discipline.”36  Schumpeter not unfairly notes that Böhm-Bawerk “was no methodological connoisseur.”37

Neither Wieser nor Böhm-Bawerk found much value in methodological studies or controversies, both feeling that the proper method would emerge through theoretical practice. There were, consequently, some disagreements between Menger and his followers, notably over Böhm-Bawerk’s capital and interest theory.38

Böhm-Bawerk generally followed Menger in the epistemology of the “exact” method, which he preferred to call “isolating.” Wieser, on the other hand, chose to justify theoretical knowledge in his own way. He held that we discover the meaning of economics by listening to our own “inner experience.” Though Menger found the essence of economics in the relationship of the economizing human agent to the external world, Wieser, reports Emil Kauder, discovered the “necessary series of action in the mind itself.”39  Wieser called this approach “psychological,” and this term was endorsed by Böhm-Bawerk.40  The psychological orientation of Wieser began a methodologically separate branch of Austrian economists, but in his doctrine of “natural value” (an objective standard value a good would have under hypothetical circumstances) and his insistence on the interpersonal comparability of utility, Wieser developed in directions that were later abandoned.41

In his earliest work, Usprung und Hauptgesetz des wirtschaftlichen Wertes in 1884, Wieser paid great tribute to psychology. He referred to subjective value theory, in fact, as “applied psychology.” In a later work he expressed misgivings about the phrase, explaining that economic theory acknowledges no dependence on professional or scientific psychology; value theory analyzes psychological material in its own way.42  Private introspection or inner experience is the source of the material with which the economist works, shaping it by use of “idealizing assumption” in the form of ideal types. Wieser postulated an economic man who takes careful stock of his interests and the means at his disposal and with single-minded purpose maximizes his utility. Gone were the independent needs of Menger’s economic agents.

In Natural Value (1889), Wieser made extensive use of the method of isolating and idealizing assumption. Deducing the fact of subjective valuation, he proceeds to production and distribution, developing the concepts of opportunity cost (as sacrificed utility is now known) and imputation, the latter a term he introduced. As consumers can value only final goods, he explains, the value of producer goods must be imputed from their marginal contributions to the expected value of their outputs. The costs of production stem from the fact that inputs must be diverted from other (subjectively) valuable uses.

Wieser insisted that subjective value theory is concerned strictly with empirical fact, though it appears deductive. It is empirical, he explains in Social Economics (1914), in that it deals with typical phenomena in the guise of ideal types.43  The issue of apriorism—how an a priori (deductive) theory can have empirical content—has confronted Austrians from the outset, and Wieser, like the rest, was compelled to explain the applicability of his abstract theory to the real world. He conceded that his statements of theory, as all empirical statements must, do admit of possible exception, and are formulated with empirical testing in mind. Menger, with his essentialist orientation, had held his “exact” laws to be unfalsifiable and without exceptions. They are laws, he explained, “which are not only without exceptions, but according to our laws of thinking simply cannot be thought of in any other way but as without exceptions.” Empirical “testing” of exact laws would be methodological absurdity, analogous to testing the principles of geometry by measuring real objects.44

Böhm-Bawerk, like Wieser, was unprepared to follow Menger on the issue. In an article responding to the attack by the Historical School on the fanciful apriorism and disregard for empirical realities they thought demonstrated by the Austrians, Böhm-Bawerk, while defending the possibility and worth of theory, concedes that it must be firmly based on empirical observation. He denies that the Austrians’ “so-called abstract-deductive method” is unempirical, “spinning abstract conclusions without concern as to their empirical reality,” claiming instead that it is “in its very essence a genuinely empirical method.” He denies that it confines itself to inferences and deductions from a priori axioms, claiming instead that it starts “with observation of actual conditions and endeavors from this empirical material to derive general laws.” But, he adds, it also recognizes the usefulness of tracing causal connections from general to special, in order to discover “links in the chain of causes” of events which would have remained hidden from a purely inductive method.45

• 28Böhm-Bawerk, Capital and Interest, V. 1, P. 354, states it as his goal “to trace the phenomenon of interest back to beginnings which are among the simplest natural and psychological fundamentals of our economic system.” But for a mathematical-functional restatement of his theory see Robert E. Kuenne, Eugen von Böhm-Bawerk (New York: Columbia University Press, 1971), pp. 51-63.
• 29See Howey, The Rise of the Marginal Utility School, p. 148.
• 30Menger, Principles of Economics, pp. 117-118, 140, 145, 162. Also see Howey, The Rise of the Marginal Utility School, p. 45.
• 31Böhm-Bawerk, Capital and Interest, v. 2, p. 217.
• 32Schumpeter, History of Economic Analysis, p. 18n.
• 33Schumpeter, History of Economic Analysis, p. 918.
• 34See, for example, Eugen von Böhm-Bawerk, “The Austrian Economists,” Annals of the American Academy of Political and Social Sciences 1 (Jan. 1891): 365.
• 35Streissler, “To What Extent Was the Austrian School Marginalist?” p. 427. Also see Erich Streissler, “Structural Economic Thought: On the Significance of the Austrian School Today,” Zeitschrift für Nationalökonomie und Statistik 29 (Aug.-Dec. 1969): 248.
• 36Hayek, “Friedrich von Wieser,” Jahrbucher fur Nationalökonomie und Statistik (1926), translated and abridged in Henry William Spiegel, The Development of Economic Thought: Great Economists in Perspective (New York: John Wiley & Sons, 1952), p. 560.
• 37Schumpeter, “Eugen von Böhm-Bawerk,” Neue Oesterreichische Biographie (Vienna: Amalthea Verlag, 1925), translated and abridged in Spiegel, op. cit., p. 578. See also Schumpeter, Ten Great Economists, pp. 157–161.
• 38Schumpeter reports, in History of Economic Analysis (p. 847, n. 8), that Menger considered Böhm-Bawerk’s capital and interest theory “one of the greatest errors ever committed.” It is Lachmann’s view that Menger found Böhm- Bawerk too eager to simplify and objectify in order to achieve results. See Lachmann, Capital, Expectations, and the Market Process, pp. 27, 264. This view is shared by Steissler, “To What Extent was the Austrian School Marginalist?,” p. 435.
• 39Kauder, “Intellectual and Political Roots,” pp. 415–416.
• 40See Böhm-Bawerk, “The Historical vs. the Deductive Method in Political Economy.”
• 41Hayek, “Economic Thought: The Austrian School,” p. 460.
• 42Wieser, Social Economics, p. 3.
• 43Social Economics.
• 44Menger, Problems of Economics and Sociology, pp. 61, 69.
• 45Böhm-Bawerk, “The Historical vs. the Deductive Method in Political Economy.” p. 263.