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 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:
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:
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:
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:
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:
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: