The Methodology of the Austrian School Economists

The relationship of the Weberian verstehende Methode (interpretive or empathetic method) endorsed by Lachmann to the praxeological method propounded by Mises has been analyzed at length by the contemporary Austrian economist Israel M. Kirzner. While the concept of Verstehen emphasizes the teleological or economizing character of human action, praxeology is grounded in the broader notion of purposiveness.108  The Austrian approach, Kirzner explains, views the individual decision-maker as actively alert and searching, rather than only as passively allocating means to ends according to given constraints.109

Kirzner identifies alertness as the entrepreneurial element in action. In his Competition and Entrepreneurship, a work that has contributed importantly to the recent resurgence of Austrian economics, he draws out the implications of this element for price theory. He builds upon the conception of entrepreneurship set forth by his teacher, Mises, and stresses, as Hayek has, that competition must be viewed as an ongoing process rather than as a timeless situation.110

In a more recent collection of essays, Perception, Opportunity, and Profit, Kirzner extends in many directions a subjectivist analysis based on his theory of entrepreneurship. The essay “Hayek, Knowledge, and the Market Process” makes a powerful case for amending the Hayekian position (in “Economics and Knowledge”) that the a priori part of economic theory must be supplemented by empirical assumptions regarding knowledge-acquisition in order to explain the market process toward equilibrium. Kirzner argues that praxeological theory can make use of non-empirical insight into knowledge-acquisition or what we might call the “pure logic of discovery” in addition to the “pure logic of choice.” The Misesian notion of human action already gives us “the recognition that people possess a propensity to discover what is useful to them.” This propensity plays a vital role in the context of disequilibrium. Because price dispersion offers arbitrage profit opportunities, and because surpluses or shortages create opportunities to gain by adjusting asking prices downward or bid prices upward, we can be sure that “a process is set in motion by disequilibrium conditions as these opportunities are gradually noticed and exploited.” In this way, though it alone cannot tell us the specific course of events in an actual market, “our insight into the general propensity of people to be alert to opportunities nonetheless provides us with an understanding of the overall tendencies governing these sequences of market events.” By this argument Kirzner aims to repair the epistemological division Hayek had made between the Pure logic of choice and the theory of equilibrating market forces.111

Another student of Mises, Murray N. Rothbard, has also elaborated the methodological tenets of praxeology, explaining its epistemology and defending its “extreme a priorism” in economic journals early in his career.112 Where Mises in neo-Kantian fashion held the axiom of human action (i.e., that men do act to attain goals) to be a truth a priori to human experience, Rothbard returns to the Aristotelian epistemology of Menger to find the axiom based in empirical reality yet just as certainly true.113

Rothbard has also been a chief expositor of the Austrian theory of the business cycle. Building upon the Misesian theory of money, Hayek offered a methodological discussion of the problems of business cycle theory in Monetary Theory and the Trade Cycle (1929). Hayek there argued that a theoretical investigation of this phenomenon must be integrated into a broader corpus of economic theory, and that theoretical deduction must precede consideration of statistical evidence.114  Rothbard follows this methodological prescription in his study America’s Great Depression. The central problem which a theory of the business cycle must explain, he points out is the cluster of entrepreneurial error which is revealed by the “crash.”115  In the historical application of the Austrian theory of the business cycle the School’s many theoretical insights built up through subjectivist methods—insights into capital, interest, entrepreneurship, and expectations—join together in the explanation of complex real world phenomena.

The current revival (however modest it may be) of professional interest in Austrian economics, which has been centered in the United States, may be dated from 1974. In that year a conference was held featuring lectures, many of them on methodology, by Lachmann, Kirzner, and Rothbard. These lectures have since been published as a book.116  Several subsequent conferences have produced volumes featuring the theoretical and methodological writings of younger Austrian economists, many of whom attended the 1974 conference.117  A complete survey of these and other recent contributions would go beyond our task here. The list of professionally active members of the younger generation of Austrians, almost all of whom have written some on methodological topics, at this date includes at least the following names: D. T. Armentano, Walter Block, Stephan Boehm, Richard M. Ebeling, John B. Egger, Roger W. Garrison, Richard Fink, Jack High, Richard N. Langlois, Don C. Lavoie, S. C. Littlechild, Gerald P. O’Driscoll, Jr., Mario J. Rizzo, Joseph T. Salerno, Sudha R. Shenoy, Karen L. Vaughn, and Lawrence H. White. Though all presumably share a subjectivist perspective on the nature of economic discourse, we can expect the future development of Austrian views on the proper methods of economics to be marked by disagreements both between generations and within the younger generation on the finer points involved. Such controversy is merely a healthy sign of intellectual progress. It is also, as we have seen with respect to the earlier generations, very much a part of the Austrian tradition.

• 108Kirzner, The Economic Point of View, p. 161 et seq.
• 109Kirzner, “Methodological Individualism, Market Equilibrium, and Market Process,” pp. 791-792.
• 110Kirzner, Competition and Entrepreneurship (Chicago; University of Chicago Press, 1973).
• 111Kirzner, “Hayek, Knowledge, and the Market Process,” pp. 29, 30, 31, 34.
• 112See Murray N. Rothbard, “In Defense of ‘Extreme A Priorism,’” Southern Economic Journal 23 (Jan. 1957): 314-320 and for an outline of the branches of praxeology, see Murray N. Rothbard, “Praxeology: Reply to Mr. Schuller,” American Economic Review 41 (Dec. 1951): 943-946.
• 113Rothbard, “In Defense of ‘Extreme A Priorism,’” p. 318. See also his recent ,and valuable expository essay “Praxeology as the Method of Economics,” in Maurice Natanson, ed., Phenomenology and the Social Sciences, vol. 2 (Evanston, IL: Northwestern University Press, 1973). Here Rothbard discusses the writings of phenomenologist Alfred Schutz, which have also been cited by Lachmann.
• 114Hayek, Monetary Theory and the Trade Cycle (Clifton, NJ: Augustus M. Kelley, 1975), reprint of the 1933 translation by N. Kaldor and H. M. Croome from the 1929 German edition, pp. 27-32.
• 115Rothbard, America’s Great Depression (Kansas City: Sheed and Ward, 1975), pp. 16-17. See also Rothbard, Man, Economy and State, p. 746 and pp. 846 et seq., and Hayek’s essay “Price Expectations, Monetary Disturbances and Malinvestment” (1933), Profits, Interest, and Investment (Clifton, NJ: Augustus M. Kelley, 1975), p. 141.
• 116Edwin 0. Dolan, ed., The Foundations of Modern Austrian Economics (Kansas City: Sheed and Ward, 1976).
• 117Spadaro, ed., New Directions in Austrian Economics (1978); Mario J. Rizzo, ed., Time, Uncertainty, and Disequilibrium: Exploration of Austrian Themes (Lexington, MA: Lexington Books, 1979); Kirzner, ed., Method, Process, and Austrian Economics (1982). An essay by Mario J. Rizzo in this last-named volume, “Mises and Lakatos: A Reformulatior of Austrian Methodology,” is particularly noteworthy.