The Long FAQ on Liberalism
A Critique of the Austrian School of Economics:


How, then, do Austrians understand anything that goes on in the economy? Through an approach called methodological subjectivism. Kirzner defines this as the recognition "that the actions of individuals are to be understood only by reference to the knowledge, beliefs, perception and expectations of these individuals." (1)

Austrians claim that attempting to understand individual actions through statistics or other group generalizations is mistaken, for all the reasons outlined in the previous section. By comparison, mainstream economists find it useful to know that unemployment has risen from 6 to 12 percent, because that means more workers will be competing for fewer jobs, and they will be reducing their wage demands to get them. It doesn't matter what the individual wants, plans or believes -- his decision to accept a lower wage is being determined by a market force larger than himself. And one can accept the mainstream view while acknowledging there may be exceptions to the generalization.

The undeniable existence of market forces is something that subjectivists have had to grapple with. Gunning explains the history of their effort: A good way to see this viewpoint is to return to the unemployment example given above. If unemployment rises from 6 to 12 percent, that's because countless individuals acting on their own knowledge made it happen. If market forces exist, it's not for impersonal reasons, but because subjective individuals interact on the market.

The realization that humans act on their knowledge gave rise to what Gunning calls the "new subjectivism." He continues: Mises classified the idea that "humans act" as a priori knowledge, since it is something that humans instinctively know and accept. (Its opposite would be "humans involuntary react.") Mises held this idea to be as true as any mathematical form of a priori knowledge, such as "two plus two equals four." And just as math helps scientists understand physical behavior, the knowledge that "humans act" helps economists understand economic behavior. All economic logic flows from this axiom. Mises used it to build his own logical theory of human economic action, called praxeology. (Hayek did not subscribe to praxeology, hence the current rift in the Austrian School.)

There are several problems with subjectivism, both new and old. Even granting the premise that humans are endowed with free will, there is no denying that even impersonal forces affect human actions to a very large degree. Both mainstream and Austrian economists agree that economics is "primarily concerned with the efficient allocation of scarce resources among competing uses." (4) But resources are often discovered by accident -- for example, the well-driller who strikes oil, the sailor who discovers an island, or the coal miner who finds gold. Technology is also often discovered or invented by accident as well, as in the invention of plastics. These accidents of history ripple through the economy, sometimes radically altering its supply and demand, and creating the market forces to which people must respond.

Even natural disasters throw entire economies into new directions. For example, the steam engine was considered equal to or even superior than the gasoline engine from 1890 to 1914. But then a national epidemic of hoof-and-mouth disease led to the withdrawal of horse troughs, which is where steam cars refilled with water. The disappearance of a market for steam engines brought their thriving research and development to a halt, whereas gasoline engines profited from another 80 years of research and development. (5) Thus, an accident of history is responsible for the big oil companies of today, and the direction of an entire global economy (not to mention the attendant pollution problems). Is this economic activity primarily traceable to the beliefs, plans or expectations of subjective individuals? Of course not.

An Austrian might argue that individuals are nonetheless responsible for searching out resources and inventions. But even eliminating the luck involved with finding them, the fact remains that entire market forces are unleashed by the discoveries of a relatively few people. The subjective effect that Austrians evoke is actually slight; the vast majority of people are not subjectively interacting with each other on the market, but are responding to market trends created by a small group of discoverers. Even if it were possible for everyone on the market to contribute a discovery, theirs would be only a tiny fraction of the total; they would still be inundated by the market forces unleashed by everyone else's.

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1. Israel M. Kirzner, The Meaning of Market Process (New York: Routledge, 1992).

2. J. Patrick Gunning, The New Subjectivist Revolution (Savage, Md.: Rowman & Littlefield Publishers, 1991), p. 19.

3. Ibid., pp. 20.

4. Stephen Casler, Introduction to Economics (New York: HarperCollins, 1992), p.3. Compare to Rockwell's statement: "Austrians view economics as a tool for understanding how people both cooperate and compete in the process of meeting needs, allocating resources, and discovering ways of building a prosperous social order."

5. W. Brian Arthur, "Competing Technologies and Economic Prediction," Options, International Institute for Applied Systems Analysis, Laxenburg, Austria (April, 1984), pp. 10-13.