Harrington: Forget Data, this is Economics

Correct economics makes you look like a stubborn, ideologue whose opinions are independent of reality and objective observation.  It makes you sound like a dogmatist and, at times, act like one.

In this article, my first in a long time, I hope to explain something Greg Lenz and I debated the other day.  It’s going to be a little dry – economic theory, epistemology, a priori synthetic knowledge – you know, the stuff that makes libertarians look like nerds.

My goal is to explain a couple things:

  1. The Austrian economic method is correct and no amount of observable evidence can circumvent this truth (I know, I know…that statement alone makes this sound like a religion.  Trust me, it is entirely grounded in philosophical concepts that have been understood as legitimate since, at least, Immanuel Kant, but essentially since the Ancient Greeks. In other words, point one is not dependent upon blind faith).
  2. How, in economics at least, using strict empiricism is a breaking of Occam’s Razor.

Now, I’m not really going to address these independently, as they are all interrelated, but hopefully I cover these well enough for everyone who actually takes the time to read this whole post can understand them.

First, let me explain the controversy surrounding the Austrian method.

In modern science, whatever evidence is attained through observation delineates the explanation of certain phenomena. This is just a fancy way of saying that in order to explain a certain event (say, the motions of the Earth around the Sun), we first hypothesize and then we test this hypothesis against the observations of the phenomena in question.  In this case, we may hypothesize that the Earth moves around the Sun due to the forces of gravity.  We then observe the motions of the Earth around the Sun and see if what actually happens is what our hypothesis would predict should happen.

Based upon this observation, we either affirm the hypothesis or the hypothesis is wrong and we must rework it in light of what we have observed.

This should sound familiar to most people as it is the traditional scientific method. Identify, research, hypothesize, test, conclude, hypothesize again, etc.

Now, all of this is good in as far as it goes, but the Austrians, being the damned rebels that they are, have a pretty radical proposition.  They say that, in the realm of economics, observable evidence is irrelevant; that the scientific method is unnecessary to understanding economics. This is the subject of the article, so read on if you’re intrigued.

It is important to note that they only apply the logic I’m about to lay out to economics. They do believe that the scientific method is appropriate and that observable evidence is vital to an understanding of the natural sciences.

The Austrian Method

So lets get into the nitty griddy.  What is the Austrian method?

The Austrian economic method begins from one single premise: humans act. By action, they mean purposeful behavior. This is to be distinguished from purposeless behavior such as the motions of, say, leaves blowing in the wind, or, in regards to humans, reflexive behaviors where nuero-transmitters literally skip the brain entirely to cause bodily movement.

Now, the concept of human action is an axiom. The concept of action is undeniable. In an effort to deny human action, you yourself act. The process of denying action requires action, or it presupposes action. When you deny action, you are committing an action.

Now, since this starting point is fundamentally true and undeniably so, the laws of logic would require that any justifiably deducted propositions from this starting point must be equally valid and undeniably so.

So how is this relevant?  Well take a standard economic proposition like the law of marginal utility.  The law of marginal utility says that if you have any given number of units of a homogeneous good, then as you add a unit of said good to your stock, each additional unit is valued less than the previously attained unit.  As you lose good from your stock, each additional unit given up is valued more than the last unit you gave up.

Now, to explain this, non-Austrians have looked at the law of marginal utility as generally observable (despite the fact that you cannot measure subjective value). Sometimes they try to explain it as a “satiation of wants” (sort of like you can only have so many McDonalds cheeseburgers before you’re just sick of McDonalds cheeseburgers or how many times do you listen to that new hit song before you just hate it).

However, this goes much deeper than that.  Marginal utility is true because is is logically deduced from the action axiom.  Indeed, a number of fundamental economic doctrines emerge from the action axiom.  For example, the concepts of subjective value, costs, profits, loss, time preference, and choice.

Explaining this in depth is a long article, so for the sake of brevity I’ll just show how action implies the law of marginal utility, but for a good summation of what it does directly imply, see Economic Science and the Austrian Method

Now, how does action imply marginal utility?

Goods are not valued in and of themselves, they are valued because they provide a service. Food provides the service of satisfying hunger, tasting good, etc.  So, this means that their value is going to be dependent on the service they are providing.

The usual example is a horse.  Say a farmer acquires a horse. Now, what service will he commit this horse to? Obviously the service he values the highest, say, driving a plow. If he gets another (identical) horse, then it cannot be directed towards the service of driving a plow, which is the highest-valued service the horse can provide, but must instead be directed towards a lower-valued service.

We know that driving the plow is the highest valued service because it is the first service he chooses to satisfy. The next satisfied service upon the acquisition of another horse will, by the actors own action, be shown to be the highest valued presently unsatisfied service.

So, logically, as another unit of the good is acquired, it must be directed towards the highest presently unsatisfied end. Each end, therefore, will be valued less than the previous end that was satisfied, and so on.

This works in reverse as well, where if the farmer is faced with giving up a horse, then he’ll start with the horse satisfying the least valued service.

Remember, as economists, we can only say these things based upon the fact that the farmer committed the action. We aren’t saying, “well the farmer values riding the horse more than driving the plow, but he put the first horse he acquired towards driving a plow, so he must have messed up.”  No, this is all dependent on the demonstrated preference that the farmer has shown us through his action.

Now, obviously this is a thought experiment. We are describing these propositions in our minds.  However, they are true, in the real world, because they were deduced from the action axiom.

Action is true regardless of evidence, as is its logically deduced propositions

This is where things get controversial.

If some economist said, “Behold! I have done a study and it says that action does not exist! I have observed the world and come to the conclusion that the data explains action as non-existent!”

We, of course, would say, “No, you’re wrong.  Your evidence is faulty, your logic is flawed, your apprehension of the data is wrong. You have messed up along the way because action is unfalsifiable.  By even beginning to commit your study, you have proven action to be true.”

This doesn’t really seem too radical. It sounds like common sense.  However, this logic applies just as firmly for the propositions implied in action such as the law of marginal utility and, since the law of marginal utility is how we come to price formation (which I will not go into here), it also applies to the logic that supply and demand cause prices.

This is radical.  We are saying that the “facts” surrounding the formation of prices in any given moment are irrelevant.  We do not need to consult evidence to prove supply and demand because we deduced these concepts from the action axiom. It is true a priori. No amount of evidence can deny this.

Well, what is a price? Wages maybe? Is it not common economic doctrine that a binding price floor will lead to shortages? So a binding minimum wage will lead to unemployment.

This truth – that the minimum wage will, holding everything else equal, reduce the level of employment below the level it could have been without the minimum wage – is true a priori.

This is very radical as it says that we shouldn’t care whether or not the “facts” fall in line with this statement in any given case.  We know this statement to be true because it can be logically deduced from the action axiom.  So, when people throw some study at you that says the minimum wage does not correlate with unemployment, and therefore the standard economic theory in regards to the minimum wage is therefore wrong, we can respond that the facts are irrelevant, the standard theory is right, regardless of the facts.

I know.  This sounds like stubborn dogma. It is not though, it is merely logic.

Empiricism in economics breaks Occam’s Razor

Now, what is the point of testing and experimenting in the first place? Is it not to find patterns, consistencies, and correlations between variables within the data?  The goal is to find the cause of something.

In, say, physics, we start not with the cause of motions, but the observations of the effects of whatever the unknown cause is.  We must induct up to the cause.

This is important. The only reason we even use experimentation in the natural sciences is because we don’t know causes.

However, in economics, we already know the ultimate cause. Human action is the ultimate cause. We can experiment in economics all we want, but we just don’t need to.  Occam’s Razor is a guideline in science that says that, everything else equal, the simplest answer is probably the right one. We don’t need to go through finding data, deciphering relevant data, blah blah blah, its wasted effort. We already know what is causing economic effects. Why do all of this work? We know the answer already.

Conclusion:

I know, this isn’t very in depth, but hopefully it allows you to look at economics a little differently. If you would like a far more rigorous treatment, then please look into Economic Science and the Austrian Method by Hans-Hermann Hoppe.

 

Creighton Harrington is 26-year-old libertarian who writes for WAL occasionally and yells on podcasts uncontrollably.