Wednesday, August 1, 2012

Austrian Methodology: Neither Empiricist nor Anti-Empirical

My learned friend Eric wrote a sympathetic critique of the methodology of the Austrian School. Below is my attempt to address his points.

As Eric clearly understands the difference between establishing that a theory is logically true and establishing that it is empirically relevant, he should also understand that his critique does not apply to economic theory and its methodology as conceived by the Austrians. The Austrians never tire of stressing that economic theory is a tool to interpret the empirical reality and make it intelligible in terms of the categories of human action, not a replacement for the investigation of its empirical contingencies. This point is made forcefully and explicitly in, say, “Theory and History” and in “In Defense of Extreme Apriorism”.

Economic theory can provide a set of non-trivial, necessarily true statements regarding the logical structure of human action – nothing more and nothing less. It cannot and does not attempt to prove its relevance to any particular case rooted in the contingencies of the empirical world. The business of establishing such relevance belongs to other analytical tools, mental faculties, and areas of knowledge. An entrepreneur is in the business of making forward-looking judgments of relevance. A historian is in the business of making backward-looking judgments of relevance. But they both have to accept the logical (a priori) correctness of economic theory (or, for that matter, mathematical theory) if their judgments of relevance are not to be arbitrary leaps in the dark.

Having made the above general point, let me make a few further points relating to specific claims made by Eric in his two posts.

The fact that “we can certainly conceive of a world where humans are nothing more than mere animals, reacting on the basis of instinct alone” does not demonstrate that the action axiom is empirical. Eric is confusing two dimensions here – the metaphysical one (necessary vs contingent) and the epistemological one (a priori vs a posteriori). While he is right in saying that the applicability of the action axiom is not necessary (i.e., true in all possible worlds), he is wrong in suggesting that its truth is known a posteriori, unless he wants to define introspection as empirical in some broader sense which includes internal experiences (which is what Rothbard did). If we are to remain faithful to the Kantian/Misesian terminology, however, the action axiom must be thought of as a contingent a priori truth, similar to, say, the Cartesian cogito.

Also, the broad observational statements about the nature of economic agents and their condition in our world, such as the existence of scarcity, hetereogeneity of resources and skills, the existence of as yet unsatisfied preferences, etc., while certainly empirical in nature, are nonetheless not testable/falsifiable in the positivistic sense, since their truth is established by the mere perceptual contact with the empirical reality of our world, rather than by the experimental search for evidence for the previously formulated hypotheses (in fact, the formulation of any testable hypothesis presupposes the truth of these general observational statements). Hence, the fact that the Austrian economic theory relies on them to establish its relevance to empirical reality does not in any sense and in any degree commit it to the positivist programme of hypotheses testing.

Finally, towards the end of his second post Eric makes quite a strong, but rather unsubstantiated point that seems to be independent of his previous critical remarks. He says the following: “Simply because actors prefer what satisfies them more over what satisfies them less, does not mean that each unit of a good that they use will give them less satisfaction than the previous one. It is all the more outrageous to believe that such things as the time-preference theory of interest or Austrian business cycle theory follow logically from simply the principle of human action”. If what he says here is that the above implications and derivations need not hold in view of various potentially intervening thymological contingencies associated with the lack of preference constancy over time, the role of expectations coordination, etc., then he does not mount any logical argument against the Austrian economic theory and its methodology. If, on the other hand, his suggestion is that these implications and derivations need not hold even assuming the relevant thymological ceteris paribus conditions, then I think his claim is clearly wrong, but since it is not supported by any identifiable logical justification, it is difficult to determine what deductive mistake or misunderstanding led to it.

Action implies the preference for sooner over later (since the opposite preference would lead to permanent inaction), and the preference for sooner over later implies that sacrificing the consumption of a certain quantity of present goods can be meaningfully engaged in only in exchange for receiving a larger quantity of future goods (even if the latter are to be goods of a purely immaterial nature, such as the psychological satisfaction of offering one’s friend a gift of interest). Hence, the action axiom implies the time-preference theory of interest.

Action also implies the preference for higher ranked wants over lower ranked wants. Thus, the utilization of the second unit of a supply of equally serviceable means has to be associated with the satisfaction of a want that is ranked lower than the one for whose satisfaction the first unit of the supply in question was utilized. Given a sufficient degree of preference constancy over time, suggesting anything else would not make logical sense (it would imply either that satisfying lower ranked wants gives the agent as much utility as satisfying higher ranked wants, or, even more absurdly, that satisfying lower ranked wants gives the agent more utility than satisfying higher ranked wants). Hence, the action axiom implies the law of diminishing marginal utility.

The reason why the logic of the above chains of deduction does not convince Eric is nowhere to be found in his two posts.

[Reprinted from The Social Rationalist]

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