For day 13 in the 30 Day Reading List, Murray Rothbard lays out the system of thought used by Austrian economists in “Praxeology: The Methodology of Austrian Economics.” It’s basically a summary of the first few chapters of his Man, Economy & State (which I’m reading now) but with some added thoughts on the differences between his method and that of Ludwig von Mises.
He begins by explaining that “Praxeology rests on the fundamental axiom that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals.” One could deny the action axiom, and attempt to prove it to be false, but that would involve using purposeful behavior toward a chosen goal, therefore proving the axiom. For an excellent introduction to this subject, see Praxgirl’s YouTube channel, where she outlines the basics of praxeology and human action. Here’s a short video on methodology:
So what we see is that because humans are not homogenous units, their action is not a constant that can be plotted like inanimate objects, the traditionally scientific method cannot be applied to economic behavior. Like Praxgirl says, “To try and box humans into the type of predictable data and statistics that work in sciences like biology, astronomy, or geology is not only completely inappropriate, but is essential a denial of the action axiom, a contradiction.”
Rothbard then points out why using mathematics to explain economic theory is inappropriate, for it violates Occam’s razor. His point is that if one were to formulate a theory, express it in mathematical logic, and then convert it back into verbal logic, he’d make unnecessary work for himself and needlessly complicate matters. To demonstrate his point he presents two statements, each in different form, but expressing the same truth:
To a higher price of a good, there corresponds a lower (or at any rate not a higher) demand.
If p denotes the price of, and q the demand for, a good, then
q = f(p) and dq/dp = f’ (p) ≤ 0
He then quotes political scientist Bruno Leoni and mathematician Eugenio Frola, who wrote in part: “We might suspect that translation into mathematical language by itself implies a suggested transformation of human economic operators into virtual robots.” This of course we know to be false from the action axiom.
Moving on to the type of reasoning used, Rothbard describes Mises as a Kantian who subscribed to an a priori method of epistemology. He simply took axioms, such as the action axiom, and produced theory from deductive reasoning. But Rothbard was a self-described Aristotelian, who saw these economic laws as coming “from the experience of reality and are therefore in the broadest sense empirical.”
F.A. Hayek too was also more of an empiricist, and Rothbard quotes from his essay “The Nature and History of the Problem:”
The essential difference is that in the natural sciences the process of deduction has to start from some hypothesis which is the result of inductive generalizations, while in the social sciences it starts directly from known empirical elements and uses them to find the regularities in the complex phenomena which direct observations cannot establish. They are, so to speak, empirically deductive sciences, proceeding from the known elements to the regularities in the complex phenomena which cannot be directly established.
Rothbard next moves to distinguish praxeology from other social sciences, such as psychology or history, by explaining that it is founded on “the universal formal fact that people act, that they employ means to try to attain chosen ends.” This is wholly different from the other social sciences in that it “deals not with the content of men’s values, goals, and actions — not with what they have done or how they have acted or how they should act — but purely with the fact that they do have goals and act to attain them.”
Another distinction in praxeology is that it’s based on methodological individualism, or “the fact that only individuals feel, value, think, and act.” Rothbard notes that many criticize this approach, believing it means that each individual must be “sealed off” from everyone else. In fact, the opposite is true. Because people are not separated they continuously influence one another and learn new things in return.
As for the notion that history is a valuable tool in formulating theory, Rothbard refers once again to Mises, who argued that economic theory doesn’t need to be tested historically, and in fact can’t be so. This is true because historical events are not simple or reproducible like laboratory experiments. In Rothbard’s words “each event is a complex resultant of a shifting variety of multiple causes, none of which ever remains in constant relationships with the others.”
So rather than use history to explain the laws of economics, Rothbard argues that “economic law is neither confirmed nor tested by historical facts; instead, the law, where relevant is applied to help explain the facts.”