The Philosophical Origins of Austrian Economics

Another Aristotelian theme exercised great influence on the Austrians; and this one, fortunately, is easier to document. The characteristic method of Austrian economics, carried to its culmination in Mises, is deduction. One starts with a self-evident axiom (”man acts”) and with the aid of a few subsidiary postulates, deduces the entire science of human action.

Where does this notion of science originate? Although, as earlier mentioned, it is very difficult in intellectual history to demonstrate direct influence, I think it is no accident that the idea of a deductive science is found in Aristotle’s Posterior Analytics. Aristotle argues that a complete science must start with a self-evident axiom and, by the use of deduction, exfoliate the entire discipline. Often conditions force the use of mere empirical hypotheses, but this is a mere expedient. 10

Empirical science exists as a placeholder for true science, which must work through deduction. When Brentano and others revived the study of Aristotle, this view of method became available for study in Austrian universities.

Aristotle also discusses the necessity of self-evident principles in the Nicomachean Ethics. He notes that to justify a proposition, one would normally proceed by citing another proposition. But if matters are left at this, the task is not finished. What in turn justifies the proposition advanced in support of one’s original claim? Obviously, one can cite yet another proposition, but this procedure cannot continue forever.

One needs to start with one or more self-evident axioms from which justification proceeds. Unless this is done, reasons advanced in support of one’s claims will hang in air. One will either pile up justifications indefinitely or argue in a circle. Once more the parallel with the Austrian procedure is precise. Praxeology stems from the axiom of action, which itself requires nothing further in its support.

A common mistake needs to be noted here. It does not follow from the regress argument about justification that one must always trace arguments to one axiom alone. All that the argument shows is that at least one self-evident principle is required to begin a chain of justification. But nothing in the argument limits the number of these principles.

If one were to argue that to avoid an infinite regress of justification, one must arrive at a single axiom, the argument would be fallacious. The argument, in brief, would be that since every proposition that is not self-evident requires justification, there must be some basic proposition which is the source from which all others are justified. This is equivalent to the “argument” that since everyone has a father, someone is everyone’s father. Obviously, this is wrong.

When a proposition is claimed to be self-evident, this does not mean that one is appealing to a psychological experience of certainty in support of the proposition. To do so would precisely be not to claim that the proposition was self-evident, since its evidence here depends on something else — the psychological experience. Whether one has an “Aha” experience in the style of Gestalt psychology on coming to realize the self-evidence of a proposition is irrelevant.

The point is important because contemporary hermeneuticists sometimes maintain that the self-evident axioms of praxeology are really principles accepted by a particular community. This approach is just a variant of the psychological fallacy we have already considered. Whether a particular group accepts a proposition as an axiom differs from the question of whether the axiom is self-evident.

I have so far claimed that the deductive method of Austrian economics stems from Aristotle. But an obvious objection comes to mind. When one turns to the third great figure of the Austrian School, Ludwig von Mises, Aristotle seems absent from the scene. Instead, Mises resorts to a distinctively neo-Kantian terminology: in particular, he regards the propositions of Austrian economics as synthetic a priori truths. The action axiom assumes free choice, but this to Mises is but a postulate. Mises does not presume to legislate for the noumenal world. One cannot, he thinks, rule out the possibility that science will one day demonstrate that hard determinism is true. (Oddly, Mises here reverses Kant, who thought we were phenomenally determined but noumenally free.)

Having raised this objection, I shall not spend much time on it. Although Mises does indeed resort to Kantian language, nothing in his argument depends on Kant’s system. As Mises employs the phrase “synthetic a priori proposition,” for example, it simply designates a proposition that is necessarily true and not a tautology. Those who prefer an Aristotelian approach can easily translate Mises’s terms into their own preferred usage.

Mises’s chief importance for our purposes does not lie in his Kantian veneer. Rather, a group of philosophers, the logical positivists, who arose in the 1920s developed doctrines that threatened to undermine the Austrian system. Their views, to the extent they impinged on Mises’s system, did not challenge his economics; it was instead his deductive method that roused the positivists to protest. For Mises, then, our focus is not on the philosophers who influenced him, but on those who attacked him. In his response to these attacks, Mises further developed and clarified the Austrian position.

The logical positivists or Vienna Circle met under the leadership of Moritz Schlick, a professor of philosophy at the University of Vienna. Although Schlick led the group, his own views were not in all respects characteristic of the Circle. As an example, he believed that ethics was a science, while most logical positivists regarded ethical assertions as empirically meaningless. 11

Probably the most philosophically important member of the group was Rudolf Carnap, a German by birth but resident in Vienna. Ironically, Ludwig von Mises’s brother, Richard von Mises, belonged to the Circle, as did Karl Menger, the son of the Austrian School’s founder. Another member, Felix Kaufmann, was also a participant in Ludwig von Mises’s seminar. Nevertheless, like all the members of the Circle, he strongly opposed Mises’s deductive approach to economic method.

The group at its inception was not very influential. Eric Voegelin, who was in Vienna during the 1920s and 1930s, once told me in conversation that the logical positivists were usually regarded as eccentric and deranged. Voegelin’s own negative view of the group perhaps colored his memory, but his testimony is nevertheless significant. The Circle became much more influential after the rise of Adolf Hitler to power in 1933. The European political situation, culminating in the German annexation of Austria in March, 1938, forced most of the logical positivists into exile. Many of them wound up in the United States and secured posts at major universities. It is largely owing to the logical positivist influence on American philosophy that most American economists reject praxeology. They regard Mises’s method as old fashioned and scholastic, allegedly not in keeping with the dictates of scientific philosophy.

The essence of logical positivism can for our purposes be quite simply stated. All empirical statements, i.e., statements about the world, must be testable. If a statement cannot be tested, then it has no empirical meaning. By “testable” or “verifiable” the positivists meant “capable of being perceived by the senses.” This is the famous verifiability criterion of meaning, the Vienna Circle’s most noted principle.

One can immediately see that the structure of Austrian economics is in deep trouble if the verifiability criterion is accepted. According to Mises, the propositions of economics are necessarily true. But necessary truths cannot provide information about the world, in the logical positivist view. Only propositions that can be both true and false, depending on circumstances, convey information. Propositions that either must always be true or must always be false do not. The conclusion then seems inescapable: Austrian economics conveys no information about the world.

The logical positivists did not deny that some propositions must be true. But, as suggested above, this lends no help to Austrian economics. Logically necessary truths are just tautologies, i.e., statements that convey no new information about the world. 12  A prime example of tautology is a definition. In the classically trite example, the statement “a bachelor is a never-married male above a certain age” conveys no information about the world. It merely offers a definition. A definition tells us that two expressions can be substituted for each other in a sentence while preserving the truth value of the sentence. In like fashion, a necessarily false proposition is the negation of a tautology. If I were to claim that some bachelors are married, I would not be making a false assertion about reality. I would be misusing the expression “bachelor.”

Has Austrian economics been dealt a crippling blow by these considerations? Mises certainly did not think so. In The Ultimate Foundation of Economic Science, he addressed the claim of Karl Popper that scientific propositions must be falsifiable. Although Popper was not a positivist, he intended his falsification criterion to separate scientific from non-scientific statements.

Mises’s comment was dismissive: “if one accepts the terminology of logical positivism … a theory or hypothesis is unscientific if it cannot be refuted by experience. Consequently, all a priori theories, including mathematics and praxeology are unscientific’. This is merely a verbal quibble.” 13

It is easy to see that Mises’s reaction to the verifiability criterion would be the same. Praxeology arrives at truth by deduction. If someone wishes to define “meaning” so that the conclusions of praxeology are empirically meaningless, why should he care? To this an obvious rejoinder suggests itself. The logical positivists did not view their criterion of meaning as an arbitrary proposal, to be dismissed by anyone not sharing the Circle’s affinities. On the contrary, they claimed that their position was well supported. Are they correct?

I do not think so. In point of fact, the criterion is worthless, since every statement comes out verifiable under it. Suppose that “p“ is a non-controversially verifiable statement, e.g., “there is a chair in this room.” Let us take “q“ to be a statement logical positivists reject as meaningless. A good example is one that Rudolf Carnap held up to ridicule when he called for an end to metaphysics. He cited the following from Martin Heidegger’s Being and Time (1927): “The not nothings itself.” I shall not attempt to explain this: one can see why Carnap presented it as a paradigm instance of a meaningless statement.

Does the verification principle eliminate it? Surprisingly, it does not. From p, we deduce p or q. (This step is non-controversial.) Assuming that a logical consequence of a verifiable proposition is itself verifiable, (p or q) is verifiable. Further, if p is verifiable, then the negation of p is verifiable; this principle seems difficult to question. Now, consider this argument:

p or q not-p

q

This argument is valid, and each of its premises is verifiable. Then, q is a logical consequence of verifiable propositions, and it, too, is verifiable. Clearly, if the verification criterion cannot eliminate “the not nothings itself,” it is not worth very much.

A falsification criterion fairs no better. If p is falsifiable, then (p and q) is falsifiable. Once more, not-p should be falsifiable if p is, though Karl Popper has implausibly denied this. By an argument parallel with that for verification, we conclude that q is falsifiable.

One might think that this is a mere trick, readily avoidable through slight modification of the principle. There have been many attempts to formulate a criterion that comes up with the “right” results, but so far all have failed to withstand criticism.

Nevertheless, some people will persist in thinking that the principle is basically sound. To them, we can advance a deeper, if duller objection than the foregoing: why should one accept the verifiability criterion? Surely proponents of it owe us some argument that the statements they wish to eliminate as meaningless really are meaningless. They in fact do not provide any. Perhaps the best account of the criterion from a sympathetic point of view is found in Carl Hempel’s Aspects of Scientific Explanation (1965). Hempel elaborately describes the modifications and complications of the criterion in the decades it has been discussed. But he offers no argument in its favor. Mises was entirely right. The verification principle is an arbitrary formulation that has no claim on our support.

Before leaving the verification principle, I should like to mention another criticism advanced against it. Many opponents of logical positivism contend that the criterion is self-refuting. It itself is neither analytic nor verifiable: Therefore, by application to itself, it is meaningless. The Polish phenomenologist Roman Ingarden was probably the first to advance this criticism, and it has been set forward very effectively by Hans Hoppe. I shall not discuss this objection in detail here: suffice it to say that if carefully handled the criticism strikes home. 14

To my mind, the foregoing considerations dispose of logical positivism, at least for our purposes. Because of Karl Popper’s great influence on contemporary economic methodology, however, I think it advisable to make a few remarks about his variant of positivism.

Popper has had some effect on Austrian economics, in large part owing to the fact that Friedrich Hayek, his close friend, has to some extent abandoned praxeology and adopted falsificationism. In doing so, Hayek reemphasized a positivist strain in his thought that has been present since his university days. He has been deeply impressed by the physicist and philosopher Ernst Mach, whose views in many respects resembled logical positivism. Mach rejected concepts in physics that could not be derived from the senses. For example, he refused to accept Newton’s doctrine of absolute motion because in his opinion it lacked empirical reference. He also rejected atomism: atoms did not really exist but were a mere hypothesis.

Hayek’s Machian tendencies emerge in full force in The Sensory Order, his study of perception. Popper cannot be blamed or credited with Hayek’s positivism. What he did was to help bring about Hayek’s extension of positivism to economics.

But this has been a digression. To return to Popper, his basic doctrine modifies the verifiability criterion. Rather than say that a meaningful statement about the world must be empirically verifiable, Popper asserts that a scientific statement must be falsifiable. Popper utterly disclaims association with the positivists: he stresses that his falsification criterion is a test for scientific statements, not a criterion of meaning. At least in his earlier years, though, he set little store by non-scientific statements; and although he has in recent times grown increasingly willing to countenance “metaphysical” statements, he does not consider them true or false. Small wonder that Carnap and Herbert Feigl classed Popper as an ally.

To say that a proposition must be “falsifiable” instead of “verifiable” at first seems trivial. If a proposition is verified, its negation is falsified; if a proposition is falsified, its negation is verified. Consider, e.g., “The demand curve slopes downward and to the right.” Whenever this is verified, its negation, “the demand curve fails to slope downward and to the right” is falsified.

Further, since any proposition is verifiable (as shown above), the negation of any proposition is falsifiable. But a proposition’s negation is of course also a proposition. Its negation is then falsifiable. Since this negation is identical with the proposition from which we started, we conclude that any proposition is both verifiable and falsifiable.

What then is all the fuss about? Popper’s falsification criterion is in fact much more than a triviality. He maintains that confirming a proposition does not add to the probability that it is true, since he rejects induction. No matter how many times a demand curve has been found to slope downwards and to the right, the chances that this statement is true have not gone up. Mises displayed characteristic good sense in having nothing to do with Popper’s skepticism.

At every stage in the development of Austrian economics, philosophy has been an accompanying though not dominating presence. Action, that leitmotif of praxeology, has in the Austrian tradition received a distinctly Aristotelian analysis. Austrian economics and a realistic philosophy seem made for each other.

• 10Aristotle believed that through induction, one can arrive at true first principles. These form the basis of science. This is discussed in Terence Irwin, Aristotle’s First Principles (Oxford: Oxford University Press, 1988), p. 35.
• 11This position is the notorious “emotive theory of ethics.”
• 12J. Albert Coffa, The Semantic Tradition From Kant to Carnap: To the Vienna Station (Cambridge: Cambridge University Press, 1991) gives a comprehensive account of the logical positivists’ philosophy.
• 13Ludwig von Mises, The Ultimate Foundation of Economic Science. (Kansas City: Sheed Andrews and McMeel, 1977), p. 70.
• 14The criticism presupposes that the first argument given above can be escaped. Otherwise, the criterion is verifiable, since all statements are verifiable. The positivist will not find this “defense” to his liking.