When we refer to the Austrian School of Economics,
we do not mean an institution located in a building in Vienna, nor we mean the Austrian
economy. Instead, we mean a group of persons who adhere
to a common school of economic thought, founded by and developed mainly by Austrians. Nowadays, when we talk about economists – regardless
of their origin – who apply the methodology and theories of the Austrian School in their
research, then we call them Austrian economists. Let us start by noting that the Austrian School
of Economics is not an ideology, but a way of scientific thinking. The Austrian theorists never thought in terms
of an ideological assumption that “the free market is the best, so we have to build a
theory around it to integrate this ideology with the general body of science”. Quite the contrary. Carl Menger, considered to be the founder
of Austrian School, experienced the real market first hand by talking with entrepreneurs and
stock investors, and this inspired him to develop his theory in a way that best suited
reality. Thanks to the studies of the Austrian economists
we now know that free prices, private ownership of the means of production, and free trade
allow for the most effective allocation of scarce resources. The reason Austrian School may be accused
of being ideological is probably that it is often associated with libertarianism. These two, however, are separate things. The fact is evident by the existence of libertarian
economists who are not Austrians, and Austrian economists who are not libertarians. Libertarianism is a political philosophy. Philosophy answers a different kind of questions
than economics. Economics, as Ludwig von Mises wrote, does
not ask which ends should people desire, but what means they should employ to achieve their
desired ends. According to Mises and the other Austrians,
economics stems from praxeology. To put it simply, praxeology is the science
of human action, or the general theory of human action. Why do the Austrians use praxeology to study
economics? Because they consider economics a social science. They maintain that social sciences should
not rely on methods of natural sciences – such as physics, chemistry, or biology – because
natural sciences deal with utterly different subjects of research. We call this position methodological dualism. You can find the entire argument in an essay
by Mises entitled Social Science and Natural Science, to which we provide a link on our
website. Praxeology is an a priori / deductive study. This means that in contrast to the natural
sciences, its basic method of analysis is not an experiment, but a verbal deduction
from evident, observed, or previously deduced assumptions. If we are sure of our assumptions, then we
can call them axioms, that is statements considered obvious. The foundation of praxeology is the axiom
of human action, meaning the contention that people act purposefully to achieve their goals. Of this Mises writes:
“Human action is purposeful behavior. Or we may say: Action is will put into operation
and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful
response to stimuli and to the conditions of its environment, is a person’s conscious
adjustment to the state of the universe that determines his life.” Mises regarded this statement an a priori
fact that is antecedent to any experience. According to Murray N. Rothbard, however,
the axiom of human action is learned empirically through one’s own experience of reality. I leave it to your judgment to decide which
of them is right. This dispute over the so-called epistemological
status of the axiom of human action does not change the axiom itself. Both Mises and Rothbard deem the axiom evident. Why should we take the axiom for a fact? This is because we can reflect on our own
experience as human beings. Each of us aims at some ends and chooses the
appropriate means to implement these ends. The exceptions are newborns, who will start
to act later in their lives, or people who are ill, perhaps in a vegetative state, which
prevents them from acting. Even refraining from action is an action. To quote Mises: “Action is not only doing
but no less omitting to do what possibly could be done”. For example, a person who can choose to work
can instead choose unemployment. We also consider this an action, because the
person making this decision has to have some reasons, and as such applies appropriate means
to attain this end. The desired end may be to have a lot of free
time. Moreover, one trying to refute the axiom of
human action would only confirm its validity. Imagine a man trying to do this. The refutation of the axiom itself becomes
his end, and he must choose appropriate means to attain it, such as writing an article or
giving a lecture about it. By choosing to act on this, he only confirms
the validity of the axiom. Now, it is worth saying what human action
IS NOT. Unconditioned reflex, for instance, does not
qualify to be human action. When a doctor acts and hits you in the knee
with a tiny rubber hammer, you yourself do not act in the praxeological sense when your
leg reacts with a kick, because it is not a purposeful behavior on your part. The reflex is beyond your control. The workings of your internal organs are also
not actions. You have no sway over them. We can put it this way: the unconscious behavior
does not involve choice, while deliberate action has to. Action should not be confused with work nor
effort as well. Some actions require effort, others do not. When a military commander issues a verbal
command, he acts, even though it takes little effort. Refraining from talking can also be an action,
for example when you aim to show someone that you disprove of his actions. Praxeology also does not deal with psychology
of human behaviors. Our ends are simply treated as given, and
there is no need to explain their origin. This separates praxeology from psychology. Praxeology focuses only on action as such. So for praxeology the axiom of human action
is the starting point. Mises explains the further deductive process:
“All the concepts and theorems of praxeology are implied in the category of human action. The first task is to extract and to deduce
them, to expound their implications and to define the universal conditions of acting
as such. Having shown what conditions are required
by any action, one must go further and define – of course, in a categorial and formal
sense – the less general conditions required for special modes of acting. It would be possible to deal with this second
task by delineating all thinkable conditions and deducing from them all inferences logically
permissible.” According to Mises there are three general
requisite conditions to human action: First, in order for a human to begin to act,
they must first feel some uneasiness; second, they must imagine a more satisfactory state
than the present one; third, they must expect that their purposeful behavior can reduce
their uneasiness. On the other hand, when it comes to “all
thinkable conditions,” Mises adds that because science aims at allowing us a grasp of reality,
praxeology mainly examines the conditions that occur in reality. Even when Austrian economists conduct peculiar
thought experiments, they always stress that the purpose is to isolate in their analysis
a factor that is obscured in the real world by a multitude of other factors. They add additional realistic empirical statements
such as the fact that people differ from each other and are changeable in time, that they
treat free time as a valuable good, and that every action is a process that takes place
in time. There are, however, two instances in which
Mises allows for the use of praxeology while assuming conditions that do not exist and
do not match present reality. The first instance is an analysis of conditions
that may arise in the future. For example, praxeology may explain the operation
of a completely unregulated, that is fully free, market. In the second instance Mises allows for the
analysis of unreal conditions that could not ever exist in the future, provided that such
an analysis can help understand reality. Suppose that we want to show the validity
of the contention that goods are scarce. To do that, we can assume that this contention
is false and confront the result with reality, delineating differences between these two
worlds. All in all, praxeology is an aprioristic science,
not unlike mathematics and logic. At the same time, its contentions are empirical. In spite of claiming, in contrast with Rothbard,
that the axiom of human action is a priori, Mises acknowledged that other assumptions
of praxeology are empirical, and that they help to shape and define its proper subject
of analysis. Experience thus helps economists to focus
on the subject of their investigations, but does not define their mode of operation. And the mode of operation, the method of analysis,
is a priori. Rothbard explains the process of verbal deduction
clearly: “Furthermore, since praxeology begins with a true axiom, A, all the propositions
that can be deduced from this axiom must also be true. For if A implies B, and A is true, then B
must also be true.” Then he provides examples of such deduction,
well worth quoting here: ”Action implies that the individual's behavior
is purposive, in short, that it is directed toward goals. Furthermore, the fact of his action implies
that he has consciously chosen certain means to reach his goals. Since he wishes to attain these goals, they
must be valuable to him; accordingly he must have values that govern his choices.” And the second example:
“The fact that people act necessarily implies that the means employed are scarce in relation
to the desired ends; for, if all means were not scarce but superabundant, the ends would
already have been attained, and there would be no need for action. Stated another way, resources that are superabundant
no longer function as means, because they are no longer objects of action.” Why do the Austrians stress verbal deduction
that uses words, instead of mathematical deduction that uses symbols? Murray Rothbard and Polish economist Jakub
Bożydar Wiśniewski explain this extensively in articles that we link to on our website. We can say here that there are several reasons
for the use of verbal deduction. Subjective value judgments cannot be represented
meaningfully by use of simple, numerical functions or symbols. Moreover, economic values are incommensurable
and tend to change with the passage of time. And lastly, the mathematical representation
of logical deduction would only result in oversimplification and would impoverish its
content. More on this in the aforementioned articles. Why do the Austrians think that economics
as science cannot be experimental? Mainly because in economics there are no fixed
numerical relations between values. It is also impossible to isolate specific
market factor that we may wish to examine while other things remain unchanged. There is no way to put society in laboratory
conditions in order to thoroughly recreate an experiment. As Mises writes: “If a statistician determines
that a rise of 10 percent in the supply of potatoes in Atlantis at a definite time was
followed by a fall of 8 percent in the price, he does not establish anything about what
happened or may happen with a change in the supply of potatoes in another country or at
another time. He has not ‘measured’ the ‘elasticity
of demand’ of potatoes. He has established a unique and individual
historical fact.” Another recently celebrated example is the
introduction of minimum wage in Germany. According to theory, when the price of a good
rises, other things being equal, the demand for the good falls. In this case the wage is the price, so its
rise must mean a fall in employment. Now, after a time since the introduction of
the minimum wage, some observers voiced their opinions that the economists were wrong, because
besides no fall in employment, there actually was a fall in unemployment. Does such an “empirical” evidence prove
the theory wrong? Of course not. First of all, during the very first day of
the introduction of the minimum wage in Germany the assumption of other things being equal
became false, because some factors indeed have changed. There are numerous diverse factors that affect
employment. It is not too hard to imagine, for example,
that Germany, apart from the introduction of the minimum wage itself, could add to the
mix some favorable conditions for business that attracted new investments or helped create
new sole proprietorships. Over a year, hundreds of things could have
happened that would impact employment in a positive or negative way. The theory remains valid, and while we can
say with certainty that increasing minimum wage reduces employment, we cannot say that
it is the only factor. We can still say that if the minimum wage
had not been introduced, unemployment would fall even lower. As Jakub Bożydar Wiśniewski aptly puts it:
“The method of praxeology does not consist in comparing the state of the world before
a given action occurred with the state of the world after it occurred, but in comparing
the state of the world in which a given action occurred with the state of the world as it
would have been had it not occurred. We call this counterfactual analysis.” But going back to the theory, empirical research
must eventually lead us astray as it is impossible in the real economy to have all things be
equal. It is only through the looking-glass of economic
theory that we can properly judge certain economic phenomena. Let’s move to the next problem. The Austrian School of Economics rests on
the principle of methodological individualism, meaning that it deals only with behaviors
of individuals. This does not mean that the theory neglects
the fact that human beings do not exist in a vacuum. Nobody challenges the fact that people act
among other people. However, any group, whether large or small,
consists of individuals. To be able to properly explain the actions
of a group of people, we should focus on the particular individuals who act within the
group. As Rothbard puts it: “Praxeology, as well
as the sound aspects of the other social sciences, rests on methodological individualism, on
the fact that only individuals feel, value, think, and act.” Mises, in turn, writes: “Those who want
to start the study of human action from the collective units, encounter an insurmountable
obstacle in the fact that an individual at the same time can belong and – with the
exception of the most primitive tribesmen – really belongs to various collective entities. The problems raised by the multiplicity of
coexisting social units and their mutual antagonisms can be solved only by methodological individualism.” Austrians also apply the principle of methodological
singularism, meaning that they focus on concrete single actions. According to Mises, by analyzing the world
only by use of wholes and universals, that is, when we consider only the whole of mankind,
the nation, or entire categories of needs and goods, we arrive at paradoxical conclusions. For instance, it is impossible to resolve
the diamond-water paradox by use of an overgeneralized analysis. Let us see: how is it that gold and diamonds
are more expensive than iron and water? Water and iron are a lot more useful, so they
should be more valuable. Mises explains that a particular person never
chooses between gold and iron in general, but sifts only through concrete amounts of
gold and iron. For a detailed discussion of the diamond-water
paradox look up our “The Value of Things” video. The last thing we will mention here is methodological
subjectivism. Praxeology, and therefore economics, does
not judge human goals. Praxeology does not offer value judgments
about whether one’s aim is good or bad. It does not set objectively good ends for
us to realize. Praxeology regards subjective ends as given. It only deals with the determination of whether
human beings use proper means to achieve their own individual ends. In other words: Austrians realize that people
are diverse creatures and their goals can be and are diverse. Consequently, ends should be interpreted from
the point of view of one desiring them, that is subjectively. According to the Austrians, not only are the
ends subjective, but the costs, profits, or values are as well. Only the individual who makes a choice knows
the value he assigns to his ends, and what he is willing to give up to achieve these
ends. Only the one who participates in an exchange
can possibly judge how much it will satisfy his needs. This cannot be objectively measured. Methodological subjectivism can be summed
up with a quote from a book “The Meaning of the Market Process” by Israel Kirzner:
“[Methodological subjectivism is a recognition] that the actions of individuals are to be
understood only by reference to the knowledge, beliefs, perception and expectations of these
individuals.” We invite you to visit our website econclips.com
that provides further sources expounding the topic. We would like to thank the economists from
the Polish Mises Institute who devoted their time and verified the correctness of the script
to this video. And especially thank you, the viewer, for
any contributions that allow us to make our videos. If you want to support this project, you can
do it with Paypal, Bitcoin, or by becoming our patron on patreon.com. You will find the links in the video description.
🧐
Just prax it out, brah.
Keynes tho.