The Long FAQ on Liberalism
A Critique of the Austrian School of Economics:
THE SCIENTIFIC METHOD
Perhaps the defining difference between mainstream and Austrian
economists lies in their opposing philosophies towards learning
truth.
Mainstream scientists use a well-developed process called the
scientific method. This method employs both data and theory.
"Data" includes facts, evidence and statistics. "Theory"
is the attempt to describe general laws, principles and causes
and effects found in the data. Both form a cycle, as data goes
into the formulation of theory, whose conclusions then engender
more data collection in an attempt to confirm, refute or develop
yet more theories. The accuracy of this process is verified by
experimentation or prediction. Scientists believe they are on
the right path when both theory and data agree; when they disagree,
they know something is wrong. It could be the theory is wrong,
or the data is badly collected or interpreted.
Austrians accept this method in principle, but argue that it is
more appropriate for hard sciences like physics or chemistry,
not soft sciences like sociology or economics. The problem is
that humans, unlike electrons, have freedom of choice. They are
therefore vastly more unpredictable, even if placed in the same
situation twice. Within economics, Austrians favor a method called
"apriorism." A priori knowledge is logic, or
knowledge that exists in a person's mind prior to, and independent
of, outer world experience. For example, the statement "two
plus two equals four" is true whether or not a person goes
out into his garden and verifies this by counting two pairs of
tomatoes. What this means is that Austrians reject the attempt
to learn economic laws through experiment or real world observation.
The only true economic laws are those based on first principles,
namely, logic.
As Hayek wrote, economic theories can "never be verified
or falsified by reference to facts. All that we can and must verify
is the presence of our assumptions in the particular case."
(1)
So the mainstream approach is inductive, and
the Austrian approach is deductive. The first draws generalizations
from the data, the second applies preconceived generalizations
to the data. A completely deductive approach is pre-scientific,
however, which is why Austrians cannot legitimately claim to use
a scientific method. Deduction does occur in science, but the
generalizations are primarily based on other data, not a priori
assumptions.
This is not to say that Austrians do not refer to real-world events
and data in their writings. They just don't do it in the usual
scientific way. Here is Austrian economist Ken Gaillot, Jr., describing
their use of data:
"The Austrian economist sees his task as deducing the implications
of human choice under conditions observed in the real world. The
assumptions of economic theory are the point at which the theory
is empirically verifiable. This approach allows qualitative prediction
of economic events, explanation of observed patterns, and evaluation
of government policy." (2)
In other words, Austrians get to critique the real world, but
the real world is prevented from informing their theories. Even
their predictions are "qualitative," not "quantitative"
-- meaning they are free to call the government "bad,"
without being held down to the statistics that would verify this
claim.
The Austrian approach to philosophy is a very old one: Rationalism.
You have to go back to the 17th and 18th
centuries to find when it was last considered a serious philosophical
movement. It was widely abandoned after its inadequacies were
laid bare by other schools of philosophy: Empiricism, Positivism,
and most famously by Immanuel Kant's Critique of Pure Reason.
Philosophy has progressed tremendously since Rationalism; the
Austrian approach is a relic of history.
The problem with rationalism is that it makes the search for truth
a game without rules. Rationalists are free to theorize anything
they want, without such irritating constrictions as facts, statistics,
data, history or experimental confirmation. Their only guide is
logic. But this is no different from what religions do when they
assert the logical existence of God (or Buddha or Mohammed or
Gaia). Theories ungrounded in facts and data are easily spun into
any belief a person wants. Starting assumptions and trains of
logic may contain inaccuracies so small as to be undetectable,
yet will yield entirely different conclusions.
In fact, if we accepted all the tenets of the Austrian School,
we would have a second reason why it fails to qualify as science.
To be a science, a school must produce theories that are falsifiable
-- that is, verifiable. If a theory's correctness or falseness
cannot be verified, then it is not science. Perhaps it's religion,
or metaphysics, or an unsupported claim. Austrian economists make
claims about the market (such as markets know better than governments),
but then deny us the tools for verifying those claims (such as
statistics). One might ask: how do they know?
Austrians claim to know these things by logic. But although their
literature frequently evokes "a priori" knowledge, this
term appears to be misused. Humans are not born knowing that "two
plus two equals four." It is something they must learn from
their environment, namely, school. Forging this learned knowledge
into axioms comes later, and then through a process of trial and
error. So in this sense, "a priori" knowledge doesn't
even exist, unless one refers to a very basic level of knowledge
capability, such as the physical construction of the human brain
or animal instincts.
Austrians may be using the term "a priori" to mean logical
proofs or axioms, such as "If A=B, and B=C, then A=C."
But if Austrians were creating economic axioms that were true
by logical force, then the Austrian School would become world
famous overnight, whether mainstream economists liked it or not.
In truth, Austrian journals are not filled with these kinds of
axioms. Their arguments are really no more than theories that
are guided or tested by logical proofs. Again, that's
no different from what religions do. The fact that we have thousands
of different religions in the world is remarkable evidence of
the fallibility of this method.
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Endnotes:
1. Friedrich Hayek, Individualism and Economic Order
(Chicago: Henry Regnery Company, c. 1948), p. 73.
2. Ken Gaillot, Jr., "Market Process Theory,"
http://www.scimitar.com/revolution/by_topic/commerce/economic/process/index.html.