Austrian Methodology 101
by Jason B. Romano
A recent article by Joe Dunsmore criticizing the methodology employed by Austrian economists has created a great stir. In the original article, as well as the follow-up discussions on the forum boards, there has been some misunderstanding of exactly what the Austrian method is, and why it is pertinent to economics. This article is intended to give a basic introduction to the Austrian method, and explain why empirical verification is not applicable to Austrian theory.
According to the Austrian School, economics is a purely deductive science of human action. What this means is that economic theory is considered prior knowledge of human action, and therefore empirical studies on actual human behavior cannot verify or refute the theory. Indeed, it is clear that even attempting to interpret economic events is impossible without the prior knowledge provided by economic theory, as without such knowledge of what prices, interest rates, and exchanges are, the real world is simply a mass of unconnected data.
The heart of Austrian methodology is the basic set of axioms about human action. These axioms are irrefutable, which is not to be confused with non-falsifiable. A non-falsifiable statement would be one along the lines of asserting that the Great Pumpkin from Charlie Brown is the ultimate cause of all economic phenomena. Clearly there is no way to prove this wrong through any form of independent verification or logical reasoning, thus making the statement non-falsifiable.
An irrefutable axiom, however, is completely different from a non-falsifiable statement. This is because an irrefutable axiom is one that not only cannot be falsified, it cannot be denied without implicitly accepting its truth. An example would be the action axiom, which lies at the heart of Austrian economic theory. This axiom states simply that humans act. This is irrefutable because a simple attempt to refute it would in fact be a human action, thus implicitly accepting the statement as true and nullifying the argument. Thus, the action axiom is an example of what is referred to as a synthetic a priori statement, which is beyond empirical verification or refutation. The Great Pumpkin, on the other hand, can be denied without implicitly accepting its existence.
Given that the axioms of Austrian economics are irrefutable and constitute prior knowledge of human action, it follows that any conclusions reached through proper logical reasoning based upon these axioms must also be true, and beyond the scope of empirical verification. The only way that economic theory can be refuted, as Mises pointed out, was through rational argument. It is analogous to the laws of mathematics, which also constitute prior knowledge of the world around us. One cannot empirically refute that 1 + 1 = 2, for any empirical circumstance that appeared to show a sum which is not 2 would in fact be a case of improper observation of the data. Similarly, any empirical situation that showed the law of demand to be false must logically also be a case of improper observation, and rejected as such. As stated earlier, without the prior knowledge that economics provides, it is impossible to even interpret economic phenomena as anything more than random data.
There is another problem with attempting to verify economic predictions based upon theory, which illustrates a misunderstanding of the nature of such predictions. When an economist states the law of demand, and says that people will demand more of a good at a lower price than at a higher price, it is necessarily an "all other things being equal" prediction. Unfortunately, in economics, "all other things" can never be equal. This is because humans exhibit free will and are non-deterministic in their behavior, which makes it impossible to set up controlled experiments to test predictions of economic theory.
Finally, this leaves the question of whether there is any place for statistics in economics, to which it should be stated that yes, there is. It is not, however, in the verification or falsification of theory proper, but in the application of theory to the real world. Given the prior knowledge of economics, statistics can be used as a tool to determine what is happening in the economic sphere, and thus be a guide as to which economic theories are applicable to current events. For example, statistics cannot refute that an increase in the money supply will, all things being equal, raise the general level of prices. It can, however, help us to decide whether such an increase in the money supply is in fact occurring at this moment, and whether such an increase in the general level of prices is probable in the future.
Hopefully this short article has helped to explain in an understandable manner the methodology of the Austrian School of economics, and created an interest in studying the theories of the school in more depth. It should be clear that a solid understanding of economics is essential to any market anarchist, and the Austrian School is highly recommended towards that end.
http://www.anti-state.com/article.php?article_id=382
