Praxeology and Understanding: An Analysis of the Controversy in Austrian Economics

Praxeology and Understanding:
An Analysis of the Controversy in Austrian Economics

George A. Selgin

The law of sufficient reason states the minimum amount of connection and order in the world which is necessary if we are to have a chance to understand and control it…. Thus [the law asserts] there is not unlimited possibility present in our world…. Whatever occurs, a battle, a change in the government or in the economic system, or the like, it is not true that everything or anything else could have happened…

The principle of sufficient reason obviously cannot be proved objectively; that is, we cannot prove that it was impossible for everything which has happened to have been different, and we certainly cannot prove that the present constitution of the world is such that only certain things will happen and that nothing else can possibly occur. It is rather a postulate of science to satisfy the demand for understanding.... By assuming, therefore, that everything has certain determinate relations to certain definite other elements we have a reason for seeking to find them, and the success of science or its progress encourages us to believe that further relations can be discovered if we persist in our search.

—Morris Cohen

The Meaning of Human History, pp. 97, 100

We live in a world full of contradiction and paradox, a fact of which perhaps the most fundamental illustration is this: that the existence of a problem of knowledge depends on the future being different from the past, while the possibility of the solution of the problem depends on the future being like the past.

—Frank Knight

Risk, Uncertainty and Profit, p. 313

Austrian economics emerged in rebellion against skepticism. The predominant economic doctrine in continental Europe at the time of its founding, that championed by the German historical school under Gustav Schmoller, rejected the idea of an economic science devoted to the explanation of market phenomena in terms of exact and universal laws. It proposed, instead, historical description and interpretation of social events devoid of any reference to universal or “exact” laws and to “pure” economic theories based on them.

Today, Austrian economics is challenged by skepticism once again. The new threat is not historicism per se, but the unorthodox views of G. L. S. Shackle and his Austrian followers.1 According to Shackle, the future is unknowable and “kaleidic” (that is, dominated by patternless change). Action in the marketplace, to be rational, requires that actors in the marketplace be able to anticipate the behavior of their fellows. Theory cannot explain why such anticipations should, except by mere chance, be correct. Thus the idea that action is “purposeful,” which lies at the heart of the conventional Austrian approach to economic theory, is questioned, and new doubt is cast upon the meaningfulness of economic science. This has led to a controversy within the Austrian school that is the subject of the present analysis.

Before examining this controversy, it will be necessary to review the methodological tenets of Austrian economics. In particular, it will be useful to examine the method of praxeology, which forms the basis for the Austrian defense of the possibility and validity of “pure” (i.e., universal) economic theory. The investigation will then proceed to analyze the ideas of F. A. Hayek, G. L. S. Shackle, and Ludwig M. Lachmann insofar as they have cast suspicion upon the praxeological approach as it was originally conceived by Ludwig von Mises. Finally, the analysis will turn to the issues of equilibration, coordination, and determinism that occupy center stage in current Austrian debate. It attempts to resolve the conflicts concerning these issues by offering new arguments based on the application of radical subjectivism consistent with the praxeological framework. The article concludes with a critical assessment of proposed changes in the Austrian “research program.”

 

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2For evidence of Shackle’s influence, see Method, Process, and Austrian Economics, Israel M. Kirzner, ed. (Lexington, Mass.: Lexington Books, 1982).

• 1For evidence of Shackle’s influence, see Method, Process, and Austrian Economics, Israel M. Kirzner, ed. (Lexington, Mass.: Lexington Books, 1982).
• 2Today, Austrian economics is challenged by skepticism once again. The new threat is not historicism per se, but the unorthodox views of G. L. S. Shackle and his Austrian followers. According to Shackle, the future is unknowable and “kaleidic” (that is, dominated by patternless change). Action in the marketplace, to be rational, requires that actors in the marketplace be able to anticipate the behavior of their fellows. Theory cannot explain why such anticipations should, except by mere chance, be correct. Thus the idea that action is “purposeful,” which lies at the heart of the conventional Austrian approach to economic theory, is questioned, and new doubt is cast upon the meaningfulness of economic science. This has led to a controversy within the Austrian school that is the subject of the present analysis.