Market Process

Austrian Economics

Austrian economics is defined largely by its epistemology, that is, what the Austrian economist considers to be valid knowledge and valid methods of gaining knowledge. All the salient characteristics of Austrian economics -- its subjectivism, its individualism, its emphasis on purposeful action, its logical as opposed to mathematical analysis -- follow from its epistemology.

Humans experience two worlds, the external world of natural phenomena, and the internal world of thought, feeling and value. Purposeful human action is the link between these two worlds: action directs means in the external world in response to ends chosen by the mind in the internal world. 'Purposeful human action' includes all action that is chosen. Its opposite is involuntary reaction.

Corresponding to the two worlds are two types of knowledge. Observation, or experimental knowledge, is valid if it accurately describes the external world. The validity of experimentation depends on repeatability of the experiment and ability to observe data in the external world. Logic, or aprioristic knowledge, is valid if its reasoning from assumptions to conclusions is correct and its assumptions are true. Logical knowledge is not dependent on external facts. For example, the Pythagorean theorem of geometry cannot be proved or disproved by measuring triangles in the external world. The theorem is inherently true from its assumptions.

To the Austrian economist, economics is part of a broader science of purposeful human action. In particular, economics is the study of what is universal about human action, of what will happen whenever a given set of assumptions is present. History, by contrast, is the study of what is specific about human action, of what happened at a particular place and time. The methodology of Austrian economics follows from this emphasis.

Because Austrian economics deals with human choice, Austrian economists define economic concepts by the subjective intentions and beliefs of acting individuals. An object has no value except to an acting individual; no object is a means unless considered such by an acting individual. This methodological dualism or subjectivism leads to a skepticism of mathematical approaches to economics, which assume economic quantities can be directly measured in the external world. Collecting economic statistics is, to Austrians, history and not economics:

If a statistician determines that a rise of 10 per cent in the supply of potatoes in Atlantis at a definite time was followed by a fall of 8 per cent in 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. (Mises, pp. 55 - 56)

The Austrian economist also assumes a methodological apriorism, the gaining of knowledge by deductive reasoning from first principles, and not experimental methods. Aprioristic knowledge is true when its assumptions are true, so conclusions of 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" (Hayek, p. 73). In economics, knowledge gained by logic accurately represents reality because the assumption of economic logic -- human choice -- exists in reality.

Austrians reject the gaining of knowledge by experiment. Experimental knowledge assumes repeatability, that is, the same set of initial circumstances will always produce the same results. Economic events, however, are not repeatable. Different people placed in the same situation may behave differently, because each has the capacity to choose. Even the same person placed in the same situation twice may behave differently each time.

Austrians also reject experimental knowledge because experimental knowledge assumes that data are directly observable. Austrians, however, believe that economic concepts cannot be measured, because they are subjectively present in the minds of acting individuals. Further, 'facts' about collective social entities such as markets are not single, observable things but a collection of related events. The events must be related by a pre-existing theory. For instance, what transactions constitute the market for automobiles, what time span is short run, and so forth, are facts that must be related according to prior knowledge of what a market is. Economic theories are not about social facts, but comprise them, and so can never be disproved by another social fact (theory).

Another important component of Austrian methodology is a methodological individualism. All action is taken by individuals, even when the individuals are acting on behalf of a group. Thus Austrians trace economic events back to their source in individual action.

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.