Most critics of Austrian economics have little or no clue about the theory or what it explains. But it happens, albeit not often, that critics have at least cursory knowledge of the Austrian corpus. Such critics, far and wide between, tend to target Mises’s praxeology rather than the economic theory per se. They obviously consider the logic of action a low-hanging fruit. The problem is that they pick it from the wrong tree.
I will explain their error by way of a simple analogy. My hope is that this will save future critics from embarrassment and at the same time fuel a real and substantial debate on these important matters.
For analogy we will look to the discipline physics, or at least a simplified version of how physics research is often understood. Mainstream economics has long suffered from “physics envy” and attempted to become the physics of the social sciences, so the analogy is not entirely untethered from reality.
Physics is a powerful and accurate (if not “real”) predictive science whose success rests on the adoption of Popperian falsification at the core. It is an empirical science that follows what is commonly referred to as the Scientific Method™. As such, physics research, at least as commonly understood, follows the well-known sequence of scientism: formulating hypotheses, collecting data, and then “testing” those hypotheses against data.
If praxeology is construed as a method for predictive science much like physics, then the obvious critique would be its lack of falsifiability. After all, economic theory developed using praxeology is not “tested” against data. So, critics ask, how can we know that it is true? Leaving aside the fact that falsificationism cannot generate truth but only leaves unfalsified hypotheses (at some point rhetorically elevated to “theory”), praxeologically-derived economic laws may, at first glance, appear unsubstantiated. But this conclusion is a mistake.
Many critics of Austrian economics appear to be misled by how mainstream economists often appear to “test” economic theory using data. These economists make quantified predictions about the real world much in the same sense as physics makes predictions about atoms or black holes. It is therefore easy to jump to the conclusion that Austrian economics also fits this same mold. But it does not. And the physics analogy illuminates how praxeology is different.
While rarely mentioned, physics is not only or purely an empirical science. I do not mean that there is theoretical physics too, but that physics in toto relies (heavily) on mathematics. Without mathematics physics would be impotent. But mathematics is not subject to falsification—it is accepted at face value and assumed true. We thus have several different parts of physics: the body of physics theory specifically, which seeks to explain correlations in historical (already recorded) phenomena and predict future outcomes, and the assumed flawless framework of mathematics.
How does this apply to Austrian economics? Our economic theory does not pretend to be predictive in the sense that the natural sciences are, but is descriptive. It uncovers causalities (not mere correlations) in the social world but cannot predict outcomes with quantifiable precision.
For example, economic theory uncovers the fact that the more of a good of equal usability a person has, the lower his marginal valuation of this good (aka, diminishing marginal utility). This is formally a predictive statement because we know that, all else equal, the value of a good to some person (all persons) will fall with increased quantity and vice versa. And that therefore means they are also willing to give up less to acquire it (the law of demand)—always. But we do not know by how much they will reduce their valuation, so we cannot predict exactly how prices therefore will change.
Obviously, this means that it is a fundamental mistake to assess economic theory based on the quantitative predictions that it does not (and cannot) make. And the predictions that it does make, such as in the case of diminishing marginal utility, cannot be falsified because they are (1) necessarily true and (2) not a matter of predicting quantities.
Critics have a hard time grasping that economic theory to Austrians is not like the mass of unfalsified hypotheses that physicists and other natural scientists prefer to call theory. Economic theory—economic law—is much more akin to the unassailable math that physics and physicists depend on. And just as physics applies math to produce hypotheses, economics applies economic theory to generate specific pronouncements about the world. Those pronouncements, which depend on making accurate interpretations of the particular data and circumstances, can then be “tested.”
Austrian economists, as opposed to mainstream economists, never suffered from physics envy and therefore never attempted to become a quantitatively predictive “science.” In fact, this muddying of the waters by mainstream economists is a constant Austrian critique of what today is called economics. Because the subject matter—the economic phenomena that arise from people’s behavior directed by their subjective valuations—cannot be studied inductively or leaning heavily on empiricism. In fact, as its use of mathematics shows, even physics cannot!
The sooner critics of Austrian economics in general, and praxeology in particular, realize what it is for and how it is used, the sooner they will be able to engage us in a constructive conversation about the nature and promise of social science.
