Tag: Economics

The Epistemological Foundation of Economic Science

The Epistemological Foundation of Economic Science

“A fool believes that the society of the future will transcend the laws of economics. A person of reason hopes that it will finally learn to respect them.” – Jakub Bożydar Wiśniewski

The author is a second year law undergraduate and enthusiast of the Austrian School of economics. You can follow him on Twitter @Hazlitt_3.

This article was originally published on austrianpoliticaleconomy.blogspot.com. Read the original article.


One of, if not the most fundamental difference between the Austrian school and the mainstream neoclassical school is the difference of opinion with regard to the essential epistemological character of economic propositions. The Austrian position is that economic propositions constitute a priori knowledge; that is, knowledge derived, not from observational experience, but from a true axiom. Mises has poignantly articulated the Austrian position:

“Its [economics] statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification and 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.”

Contrariwise, the neoclassical school conceives of economic propositions as a posteriori (empirical) statements, which are derived from observational experience. Whereas the Austrians understand economics to be a purely deductive science, the neoclassicals believe economics to be a historical science, akin to physics or chemistry. For the neoclassicals, knowledge of economic theory stems entirely from the experimental method. The Austrians, conversely, hold that economic knowledge arises from theoretical reasoning. Economic phenomena are simply too variable to allow for the fruitful employment of the methods of the natural sciences.

The fundamental reason for this is that economic phenomena such as market prices, interest rates, and the business cycle are the product of the actions of individuals and, unlike the subject matter of the natural sciences, human beings are not perfectly predictable. How people acted yesterday is no absolute assurance of how they will act today or tomorrow or a year from now. There is in the realm of human action no empirical constants. This fact forever precludes the use of the methods of the empirical sciences.

The neoclassicals are unable and unwilling to comprehend this immutable fact. Since the 1940s, the doctrine of empiricism-positivism has dominated the economics discipline. The positivist view is that physics is the preeminent science and that all other sciences must emulate its method, despite fundamental epistemological differences between the various fields. Accordingly, positivism is an ideology marked by a commitment to methodological monism, in contrast to the methodological dualism of the Austrian school.

If empiricism is not appropriate for economics, then what method can be employed to investigate economic phenomena? The answer is logical deduction. However, logic alone is not sufficient. A self-evident and eternally true axiom is also required. The logical deductions that can be made from that axiom are, provided the axiom is legitimate, true knowledge about reality, as opposed to merely analytic knowledge. They are what Kant has called synthetic a priori statements. How are such axioms discovered, if not by observational experience? They emanate from internal, introspectively produced experience. What’s more, these axioms are self-evident because one cannot deny their validity without self-contradiction; that is, in attempting to refute them, one would actually – implicitly – assent to their truth.

The validity of all true economic theorems and statements, then, derives not from empirical experience, but from the axiom of purposeful human action. This axiom fulfils the requirements of a Kantian synthetic a priori proposition. It cannot be rejected that this proposition is true, since the rejection would have to be regarded as a purposive action. Moreover, the axiom is also not derived from observation; it is derived from reflective experience. The various elements of action – means, ends, psychic profit, value, and so forth – exist only in the minds of acting men. It is impossible to observe, for instance, subjective value; this impossibility is inherent in the nature and meaning of subjectivity.

All these various categories of action are implied in the axiom of action. As Hoppe has said, the fact that one is able to interpret observations in terms of these categories means that one already knows what it means to act. In other words, the categories of action are logically antecedent to purposeful action.

In sum, Mises and the Austrians correctly understand that the epistemological foundation of economic science is rooted in the Kantian concept of the synthetic a priori. Economics – or to use the Misesian term: Praxeology – says that’s all true economic propositions must be demonstrated to be logically deducible from the incontrovertible axiom of purposeful human action. Those that are, are true a priori; that is, they cannot be falsified by observational experience. Therein lies the fundamental epistemological difference between the Austrian school and the neoclassical school.

H


The Twenty-Four Year Hangover

The Twenty-Four Year Hangover

“Where all is but dream, reasoning and arguments are of no use, truth and knowledge nothing.” – John Locke

Daniel Lahoud is an economist, PhD in history, researcher and professor of Finance and History of Economic Thought at Universidad Catolica Andrés Bello (Caracas) and Universidad Central de Venezuela (Caracas). Visit his blog here.
 


Twenty-four years have passed since Paul Krugman wrote “The Hangover Theory,” ample time for him to have read Friedrich Hayek’s “Prices and Production” or even J. M. Keynes’ “Treatise on Money.” The former provides an understanding of the Austrian School’s Cycle Theory while the latter, a discovery rather than denial of the 1930s diatribe in relation to Keynes’ ineffable Treatise. Suppose there is one thing to be learned in the History of Economic Thought. In that case, it is this: you must first familiarize yourself with an author before presenting a thesis based on imagination. Aligning Hayek and Schumpeter is a terrible starting point.

Mises initiated the Austrian Theory of the Economic Cycle research. Hayek expanded it during his lectures at the London School of Economics in 1930, and in addition, Schumpeter also elaborated on the cycle. But Schumpeter’s position misses that of Mises and Hayek’s; in “Theory of Economic Development,” his only book with an Austrian influence, his explanation of the cycle is associated with the idea of innovation. For Schumpeter, the cycle becomes expansive with the rupture of equilibrium resulting from innovation, and the recession begins with the massification of innovation and the restitution of equilibrium. It has nothing to do with the Austrian Theory of the Economic Cycle.

Astonishingly, Krugman flippantly asserts that the Austrian Cycle Theory speaks of either a shift of workers from investment to consumption during a crisis or the recession is the consequence of expansion. Nowhere is this found in the Austrian tradition. Krugman criticizes without knowing the arguments and his disingenuous assertions represent terrible tactics for a meaningful debate. Mr. Krugman would do himself and his admirers a great service by reading:

In them, Krugman would learn that his summary of the cycle theory is oversimplified and incorrect and that Keynes misunderstood Hayek’s criticisms of Keynes’ “A Treatise on Money.” Through the use of a dense epistolary bibliography, Keynes did manage to improve and raise his arguments again, saying to Hayek, “I no longer think like that, I am writing a book in which I show the way in which I understand the problem” (1935). Had Krugman enquired, he may have abandoned his view: 

“[a] theory that I regard as being about as worthy of serious study as the phlogiston theory of fire.” 

The Keynesian (not Keynes) system is similar to the Ptolemaic system in its belief that it sits squarely in the centre of the universe. Fortunately, the Austrians effectively point out that the Keynesian approach better likens a small satellite circling a planet, believing cycles are products of the businessman’s mood swings. But how would they explain the absence of deflation when businessmen simultaneously raise their demand for money at the onset of a recession? They would likely tell me to revisit the monetary theory.

DL


A Word on Statism

A Word on Statism

“Just because you do not take an interest in politics doesn’t mean politics won’t take an interest in you.” – Pericles


His reply read, “Ok, found the statist.” A grin spread across my face as I chuckled at his response. It was, after all, in jest. My friend was well aware of my hesitant feelings towards the state. But many online are deadly serious while machine-gunning the term “statist” at anyone failing to toe their line. Unable to pinpoint its earliest deviation point, it’s fair to look to the anarchist movement’s recent involvement in redefining the term for its purposes. Much like the struggle to reacquire the term “liberalism,” some are not in the habit of affording groups the right to redefine words to suit their needs.

The term statism first appeared circa the 1600s in reference to church-state matters. The two were nearly inseparable and exercised substantial control over the individual. By the late 19th century, the term represented the “art of government” before eventually signifying the political opposite of individualism by the early 20th century. In his book, “Socialism: An Economic and Sociological Analysis,” Ludwig von Mises referred to it as “etatism” and wrote:

“Marxism relies upon the infallible judgment of a proletariat filled with the revolutionary spirit, Etatism upon the infallibility of the reigning authority. They both agree in belief in a political absolutism which does not admit the possibility of error.”

Mises preferred the term “etatism,” which contains the French word “état,” meaning “state,” over “statism.” This change reinforced that the statist mindset had not originated in the Anglo-Saxon culture. Origins aside, the term has more recently come to be defined as:

“Concentration of economic controls and planning in the hands of a highly centralized government often extending to government ownership of industry.”

Add to this that when looking up the term “statist,” many dictionaries merely describe it as an advocate of statism. Therefore, classically defined, a statist argues for and pursues a high degree of government centralization and control, which stems from their belief in the superior nature of central planning over free-market actions. 

Statism implies a preferred or desired state of affairs – not someone’s acceptance of unavoidable compromise. Many individualists dream of a world where voluntary interactions and mutual respect for private property abound; perhaps an impossibility if we are to believe the 17th-century English philosopher Thomas Hobbes’ view of the state of nature. Arguably, without the rule of law, the unprotected fundamental securities of life would lead to continual wealth destruction and de-civilization. Christianity also addresses this precept when pointing to the depraved state of humanity, a consequence of sin entering into the world.

Recognition and mindfulness of such foundational beliefs are essential to the discussion at hand. There is no contradiction in acknowledging the government’s inevitable existence and coercive nature and then seeking to restrict its power as the end goal. Political activism towards reducing government does not positively represent government endorsement. It merely represents a pragmatic rather than idealistic approach to remedying a problem: large-scale co-existence and civilization-building in light of the human tendency towards plunder and violence. 

Etatism or statism is altogether different; the deep-seated belief in a benevolent and far more efficient central authority flies in the face of free markets and personal responsibility. The statist and utilitarian are united in their view that government planning, decision-making, and emphasizing collective happiness are morally superior to individualism and its relationship with private property.

By definition, statism propagates activities that validate increasing government control over our lives. Voting for political parties who endeavour to reduce government size and promote free-market friendly policies is disharmonious with the statist worldview and does not follow its classical definition.

Social media platforms are ripe with pseudo-intellectualism and hurlers of insult. A better strategy would be to pursue sober-mindedness and become better acquainted with one’s arcs of fire. Indeed, there is nothing wrong with idealism, for without it, to what would humanity aspire? But to discount pragmatism, which confronts the world as we know it, would be disastrous and short-sighted. 

The tornados of life don’t whirl about the inside of vacuums. We often experience the tug of wars between principle and pragmatism and the difficult decisions that go along with them. Human tribalism and the need to organize aren’t going anywhere, and so it seems degrees of governance aren’t going anywhere either. While the individualist works to curtail this reality, the statist will always devote his efforts to its expansion. 

Towards liberty,

OA


Economics: What It Is and Is Not

Economics: What It Is and Is Not

“Economics is not about things and tangible material objects; it is about men, their meanings, and actions. Goods, commodities, and wealth and all other notions of conduct are not elements of nature; they are elements of human meaning and conduct. He who wants to deal with them must not look at the external world; he must search for them in the meaning of acting men.”
– Ludwig von Mises
 

The author is a first year law undergraduate and enthusiast of the Austrian School of economics. You can follow him on Twitter @Hazlitt_3.

This article was originally published on austrianschooleconomics.blogspot.com. Read the original article.


In his seminal treatise, Human Action, Ludwig von Mises put forward a definition of economics as the scientific study of human action. Mises conceived of economics as a branch of what he called praxeology, his term for the general, formal science of human action. For Mises, it was of paramount importance that economic reasoning and analysis be predicated on human action and not material commodities and their physical properties. While this may seem trite, I hope this essay will convince you otherwise.

Human Action 

When we observe phenomena in the world and try to make sense of their underlying causation, we invariably discern between purposeful action and unmotivated behaviour. We can either explain phenomena in terms of the purposive actions of human beings, or we can attribute them to natural laws. In the economic realm, we explain phenomena by reference to purposeful actions on the part of human beings. Mises’ student and intellectual successor, Murray Rothbard, explained purposeful human action as,

“purposeful behaviour toward the attainment of ends in some future period which will involve the fulfilment of wants otherwise remaining unsatisfied.”

When a human acts, he employs means in an endeavour to achieve an end or a goal that he subjectively values. Moreover, since action is intentional we can say it is teleological. It is clear, then, that not all human behaviour constitutes action in the praxeological sense of the word: unconscious or reflexive behaviour — for example, coughing when exposed to tear gas — are evidently not forms of purposeful action. 

The A Priori Nature of Economic Theory

Mises’ definition of economics as the science of human action may not appear very controversial. In fact, it might seem like he is simply stating the obvious. But Mises says of economic theory,

“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 and 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.”

The assertion that economics is an a priori science distinguishes Misesian-Austrians from all other modern schools of thought. Besides the Austrians, all other schools regard economics as an empirical (a posteriori) science and its theorems as a collection of testable hypotheses. 

Mises did not see praxeology as a novel invention. Rather, he saw himself as merely recapitulating and systematizing economics as it had been conceived of by virtually every economist since the genesis of the discipline in the 18th century. While they did not use the term a priori, the view that economics constitutes a deductive science was held by the classical economists. This was also the view of Mises’ predecessors in the Austrian school (Menger, Bohm-Bawerk, and von Weisser).  However, at the same time Mises was formulating his theory of praxeology, a new trend was emerging in the economics profession.

Since the 1930s, an idea has prevailed that physics is the preeminent science and that all other sciences, including the social sciences, and economics in particular, must emulate its methods in order to be truly scientific. In the 1940s, the same decade Mises’ Human Action was published, Paul Samuelson’s highly successful textbook Principles of Economics was adopted by the mainstream pedagogy, and since then the neo-classical mainstream, the Chicago school, and all other non-Austrian schools have all strictly adhered to empiricist-positivism and conceived of economics as a quantitative and mathematical discipline. Only the Austrians remain true to the original and legitimate vision of economics as a deductive science. 

According to Austrian economist Hans-Hermann Hoppe, all true economic theorems can be “deduced by means of formal logic from this incontestably true material knowledge regarding the meaning of action.”  Hoppe rests his defence of Misesian praxeology on Kantian epistemology. The main characteristic of Kantian epistemology is the submission that synthetic a priori propositions exist. These are propositions whose truth is not derived from observational experience but by means of formal logic from a self-evident material axiom. Such axioms are self-evident because it is impossible to reject their validity without self-contradiction; the mere attempt to deny the axiom would result in implicitly assenting to its truth. What is the source of synthetic a priori axioms? They derive not from observational experience, but from internal, reflective introspection and experience.

Thus, the so-called action axiom satisfies the requirements of a synthetic a priori statement. First, any attempt at denial would by logical necessity have to be interpreted as a purposeful action. Secondly, the axiom is not derived from observation, but purely from reflective consideration. Therefore, all the implications that can be logically deduced from the action axiom must contain as much truth as the original axiom itself. It is these implications that constitute the grand edifice of economic theory. 

Conclusion 

So, what is economics? The answer should now be clear: it is the a priori science of human action. And, contrary to the empiricist-positivist trend of the last eighty years, it is emphatically not an empirical science. The damage inflicted by empiricism upon economics cannot be understated. As Hoppe points out, even if there is agreement on a particular theory, this agreement is superficial. For the positivist-empiricists believe such theories to be empirically tested propositions when they are actually true synthetic a priori propositions. Only the Austrians understand the true epistemological nature of economic science.

H


Bibliography 

Mises. 1949. Human Action 
Rothbard. 1962. Man, Economy, and State.
Hoppe. 1995. Economic Science and the Austrian Method.


The War on Reason

The War on Reason

“The curious task of economics is to demonstrate to men how little they know about what they imagine they can design.” – Friedrich August von Hayek

Jon McDonald is an energy economist in Texas focusing on the international trade of natural gas and natural gas derivatives. He has a master’s degree in energy economics from Rice University. Follow him on Twitter @jonnymack1010.


It is true that history gave us some philosophers who believed, through the power and process of human reason, they could predict the future of mankind as if it were as simple as watching the hands on a clock or the sun rise and fall. They claimed they were granted this power by a higher authority. Through their own arrogance they sought to produce absolute eternal truth. These utopian philosophers prepared schemes for paradise on earth but neglected the fact that what they believed to be eternal truth was just their own hubristic creation. The belief in this divinely awarded position led them to promptly establish absolute moral codes binding on all men. To free themselves from criticism, they raised themselves above fallibility and incorporated the intolerance and violent oppression of those who would dare disagree with their philosophy. Only these philosophers knew what was best for mankind so they sought dictatorship for themselves or for those who would put their ideas into practice. Only their ideas could end suffering. 

History gave us Georg Hegel and Auguste Comte. Hegel from Germany and Comte of French descent. Hegel knew everything in the universe that could be known. His doctrine held that to fully know anything required the knowledge of everything. He said the “truth” was revealed to him by Geist, or “The Absolute Spirit”. Though a brilliant thinker, nobody could interpret his work. Some took it as a reason for the autocratic dictatorship of the Prussian Church while others interpreted it as the reason for atheism and revolution. Comte said he could predict the future and he thought this entitled him to the position of supreme lawmaker. Comte worked to establish a new religion to replace Christianity and picked out a woman to supplant Mary. Comte was insane.1

The war on reason was borne out this line of thinking. It was not the result of careful self-examination, modesty, caution, or humility on behalf of the utopian philosophers nor was it caused by the failures of the natural sciences. The economic freedom which emerged as a by-product of the political freedom obtained in the late 17th and 18th centuries gave rise to the freedom to maximize knowledge towards the application of human needs. The result was the marvelous growth of science which ultimately changed the face of the world. It would be pointless to attack the technological improvements of the human race over the course of history as they speak an undeniable language of great progress and human ingenuity. Those who would wage the war on reason took aim at another target – Economics.2

The war took shape out of the conditions which existed in the 19th century. The classical economists – Say, Smith, Ricardo, and Bastiat among others – had laid socialism in its grave. They were yet to find the solutions to the classical system as drawn by Jevons and Menger, but they had done enough to expose the delusions of the socialist utopians. The communists were finished. There was only one way left open that could resurrect the collectivists ideas. They could attack reason and replace it with magical intuition.

History would choose Karl Marx to propose this solution.

Based on the omniscience granted to Hegel by Geist and the mysticism of Comte, Karl Marx gave himself the ability to predict the future for all of humanity. Karl, being the supreme knower of all things, was better informed than Hegel and Comte on the plans of Geist. In Marx’s vision of the future, the final outcome of humanity’s evolution must be the establishment of the socialist utopia. Socialism will inevitably arrive as time progresses as if it were natural law, he declared. Since every stage of human history improves upon the previous, the ultimate result of mankind’s evolution will be socialism and it will be perfect. Socialism is the highest form of civilization that man could ever achieve. Time is all that is necessary to bring about our socialist destiny and time will arrange everything for the best. There is no reason to listen to the advice of mere mortals. 

Marx still had one more hurdle in his path. The critique of the economists stood in his way, but he had a solution in mind. Human reason, he claimed, was insufficient to find truth. Universal logic and truth do not exist. Marx, replacing Hegel and Comte as the chief exhorter of “truth”, asserted that the different classes of society formulate logic in fundamentally different ways simply because the different classes have different incomes. Proletarian logic is different than bourgeois logic, he claimed. The bourgeois mind cannot produce anything other than an apology for their capitalistic exploitation of the proletariat. Therefore, bourgeois logic is irrelevant, and the proletariat class will soon abolish all classes to convert the earth into a socialist heaven. Marx stated that whatever the mind produces is ideology which can only demonstrate the selfish interests of the theorists own social class. To Marx, universal truth and reason were not available to the human mind. Yet, according to the supposedly higher mind of Marx it was universally true that socialism was mankind’s destiny.

Fittingly, some members of the bourgeois were granted the ability to logic like the proletariat. By the work of some unspecified miracle, Marx was endowed with this special ability. Karl Marx, the son of a wealthy lawyer and married to a Prussian noble, was a member of bourgeoisie awarded the knowledge of the logic of all class’s past, present and future. His collaborator Frederick Engels, a wealthy textile manufacturer, was also granted this special privilege – an obvious coincidence. That Marx and Engels both attained a wealthy status by what they called “capitalistic exploitation” by other members of society was irrelevant. They had the approval to determine absolute truth by Geist and were therefore exempt from their own theory. 

In the Marxian universe, everything revolves around the income of someone else as if it were the gravity that holds that world together. The Marxist doctrine is a false prophecy that attempts to teach the world how to properly covet, envy and despise the position of another. Marx asserted that the logical structure of the mind is dependent on class, or, essentially, income and status. Thus, the Marxists reject the economic concept of scarcity as outlined by Lionel Robbins. They reject it not only because the socialist order cannot account for this reality in its operation, but because Robbins rose from the humble life as the son of a farmer to the ranks of a prestigious professor at the London School of Economics. To a Marxist, an economic theory developed by a member of the bourgeois is spurious. The Aryans reject the theories from economists like Ricardo, Rothbard and Mises because they were Jewish. The logic of a racist differs only from Marxian logic in that it ascribes to each race a different logical structure of the mind and holds that all members of certain races, regardless of class, are endowed with this logical composition. 

Now, it is irrelevant for economics to critique the concepts of class and race as prescribed by the Marxists. It is not the purpose of economics to ask a Marxist when and how the logical structure of the mind changes when a member of the proletariat succeeds in joining the ranks of the bourgeois. It is not necessary to ask a racist to explain the logic of people who are not of a single race.

Economics has more important arguments to put forward. 

The belief that simply discussing the background of an author will suffice in the attempt to illuminate the fallacies of a theory is entirely asinine. What is necessary is to construct a system of logic to counter the contested theory to show why the theory contains invalid logic. Neither the Aryans nor the Marxists have ever been able to design such a system. Nor have they been able to demonstrate precisely in what logic the proletarian logic differs from that of the bourgeoisie or the logic of the Aryans from the non-Aryans. If such a system of counter-logic cannot be constructed, a Marxist or an Aryan would have to consistently maintain that certain ideas are false because the author is not a member of the proper class, nation, or race. However, consistency is not their strength. The Marxists and the Aryans will approve any thinker whose doctrines fit their own ideology. Anybody else is their enemy guilty of treason.

In a free market system where individuals with the natural right to choose the pursuits to which they will direct their labor, either for necessity or desire and unobstructed by the arbitrary powers of another, every change in the market setting will affect the short-run interests of several different groups of people. This dynamic makes it easy to expose every single change in the existing conditions as a change which benefitted the “selfish interests of greedy people.” Many authors today fall victim to this low-hanging fruit and Marx did not discover this procedure. It was known long before his time. It never occurred to the supporters of such dogma that where there are selfish interests in favor of certain changes there must always be selfish interests against such changes. It is completely unsatisfactory to explain any event as an affair that favored a special class. The question that is necessary to answer is why the rest of the populace whose pursuits were injured by such an action failed in challenging the efforts of those who were favored by it.3

Every firm in every sector of a free and competitive economy is interested in a higher quantity of sales for its products or services. In the long run, however, there exists a prevailing tendency towards the equalization of profits in the various sectors of production through the process of competition. If the demand for the products or services of a certain branch of industry increases, prices will rise until sufficient productive capacity can be built to meet the rise in demand. The rise in price signals a shortage and an arbitrage opportunity to a profit maximizing agent. Investors rush into the sector attempting to capture a return on capital. In consequence, more capital flows into the sector increasing the productive capacities of competing firms. The dynamics of new entrants and higher production results in lower prices and the competition of new enterprises brings the height of net returns down to a more equal level.

Those at the helm of the already high profitable firms have little interest in the preservation of free competition. They are, however, opposed to new entrants expropriating their profits and would rather keep competition at a minimum to ensure higher prices. On the other hand, they are in favor of government measures which prevent new business from challenging their position in the market. Those who fight for free enterprise and free competition do not defend the interests of the rich. They want the opportunity left open to the unknown entrepreneurs and innovators of tomorrow whose ingenuity will make the life of coming generations more agreeable. They want the way left open to further economic improvements. They are the watchtowers of human progress.


*Special attention was given to the work of Ludwig von Mises in the writing of this essay. The majority of what is written here can be found in Human Action – ‘Economics and the Revolt Against Reason’. My hope was to bring this work back into discussion in a condensed version.

[1] Ludwig von Mises, “Human Action”, 1949. Hereafter abbreviated LVM.

[2] LVM

[3] LVM