When we refer to the Austrian School of Economics,
we do not mean an institution located in a building in Vienna, nor we mean the Austrian
economy. Instead, we mean a group of persons who adhere
to a common school of economic thought, founded by and developed mainly by Austrians. Nowadays, when we talk about economists – regardless
of their origin – who apply the methodology and theories of the Austrian School in their
research, then we call them Austrian economists. Let us start by noting that the Austrian School
of Economics is not an ideology, but a way of scientific thinking. The Austrian theorists never thought in terms
of an ideological assumption that “the free market is the best, so we have to build a
theory around it to integrate this ideology with the general body of science”. Quite the contrary. Carl Menger, considered to be the founder
of Austrian School, experienced the real market first hand by talking with entrepreneurs and
stock investors, and this inspired him to develop his theory in a way that best suited
reality. Thanks to the studies of the Austrian economists
we now know that free prices, private ownership of the means of production, and free trade
allow for the most effective allocation of scarce resources. The reason Austrian School may be accused
of being ideological is probably that it is often associated with libertarianism. These two, however, are separate things. The fact is evident by the existence of libertarian
economists who are not Austrians, and Austrian economists who are not libertarians. Libertarianism is a political philosophy. Philosophy answers a different kind of questions
than economics. Economics, as Ludwig von Mises wrote, does
not ask which ends should people desire, but what means they should employ to achieve their
desired ends. According to Mises and the other Austrians,
economics stems from praxeology. To put it simply, praxeology is the science
of human action, or the general theory of human action. Why do the Austrians use praxeology to study
economics? Because they consider economics a social science. They maintain that social sciences should
not rely on methods of natural sciences – such as physics, chemistry, or biology – because
natural sciences deal with utterly different subjects of research. We call this position methodological dualism. You can find the entire argument in an essay
by Mises entitled Social Science and Natural Science, to which we provide a link on our
website. Praxeology is an a priori / deductive study. This means that in contrast to the natural
sciences, its basic method of analysis is not an experiment, but a verbal deduction
from evident, observed, or previously deduced assumptions. If we are sure of our assumptions, then we
can call them axioms, that is statements considered obvious. The foundation of praxeology is the axiom
of human action, meaning the contention that people act purposefully to achieve their goals. Of this Mises writes:
“Human action is purposeful behavior. Or we may say: Action is will put into operation
and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful
response to stimuli and to the conditions of its environment, is a person’s conscious
adjustment to the state of the universe that determines his life.” Mises regarded this statement an a priori
fact that is antecedent to any experience. According to Murray N. Rothbard, however,
the axiom of human action is learned empirically through one’s own experience of reality. I leave it to your judgment to decide which
of them is right. This dispute over the so-called epistemological
status of the axiom of human action does not change the axiom itself. Both Mises and Rothbard deem the axiom evident. Why should we take the axiom for a fact? This is because we can reflect on our own
experience as human beings. Each of us aims at some ends and chooses the
appropriate means to implement these ends. The exceptions are newborns, who will start
to act later in their lives, or people who are ill, perhaps in a vegetative state, which
prevents them from acting. Even refraining from action is an action. To quote Mises: “Action is not only doing
but no less omitting to do what possibly could be done”. For example, a person who can choose to work
can instead choose unemployment. We also consider this an action, because the
person making this decision has to have some reasons, and as such applies appropriate means
to attain this end. The desired end may be to have a lot of free
time. Moreover, one trying to refute the axiom of
human action would only confirm its validity. Imagine a man trying to do this. The refutation of the axiom itself becomes
his end, and he must choose appropriate means to attain it, such as writing an article or
giving a lecture about it. By choosing to act on this, he only confirms
the validity of the axiom. Now, it is worth saying what human action
IS NOT. Unconditioned reflex, for instance, does not
qualify to be human action. When a doctor acts and hits you in the knee
with a tiny rubber hammer, you yourself do not act in the praxeological sense when your
leg reacts with a kick, because it is not a purposeful behavior on your part. The reflex is beyond your control. The workings of your internal organs are also
not actions. You have no sway over them. We can put it this way: the unconscious behavior
does not involve choice, while deliberate action has to. Action should not be confused with work nor
effort as well. Some actions require effort, others do not. When a military commander issues a verbal
command, he acts, even though it takes little effort. Refraining from talking can also be an action,
for example when you aim to show someone that you disprove of his actions. Praxeology also does not deal with psychology
of human behaviors. Our ends are simply treated as given, and
there is no need to explain their origin. This separates praxeology from psychology. Praxeology focuses only on action as such. So for praxeology the axiom of human action
is the starting point. Mises explains the further deductive process:
“All the concepts and theorems of praxeology are implied in the category of human action. The first task is to extract and to deduce
them, to expound their implications and to define the universal conditions of acting
as such. Having shown what conditions are required
by any action, one must go further and define – of course, in a categorial and formal
sense – the less general conditions required for special modes of acting. It would be possible to deal with this second
task by delineating all thinkable conditions and deducing from them all inferences logically
permissible.” According to Mises there are three general
requisite conditions to human action: First, in order for a human to begin to act,
they must first feel some uneasiness; second, they must imagine a more satisfactory state
than the present one; third, they must expect that their purposeful behavior can reduce
their uneasiness. On the other hand, when it comes to “all
thinkable conditions,” Mises adds that because science aims at allowing us a grasp of reality,
praxeology mainly examines the conditions that occur in reality. Even when Austrian economists conduct peculiar
thought experiments, they always stress that the purpose is to isolate in their analysis
a factor that is obscured in the real world by a multitude of other factors. They add additional realistic empirical statements
such as the fact that people differ from each other and are changeable in time, that they
treat free time as a valuable good, and that every action is a process that takes place
in time. There are, however, two instances in which
Mises allows for the use of praxeology while assuming conditions that do not exist and
do not match present reality. The first instance is an analysis of conditions
that may arise in the future. For example, praxeology may explain the operation
of a completely unregulated, that is fully free, market. In the second instance Mises allows for the
analysis of unreal conditions that could not ever exist in the future, provided that such
an analysis can help understand reality. Suppose that we want to show the validity
of the contention that goods are scarce. To do that, we can assume that this contention
is false and confront the result with reality, delineating differences between these two
worlds. All in all, praxeology is an aprioristic science,
not unlike mathematics and logic. At the same time, its contentions are empirical. In spite of claiming, in contrast with Rothbard,
that the axiom of human action is a priori, Mises acknowledged that other assumptions
of praxeology are empirical, and that they help to shape and define its proper subject
of analysis. Experience thus helps economists to focus
on the subject of their investigations, but does not define their mode of operation. And the mode of operation, the method of analysis,
is a priori. Rothbard explains the process of verbal deduction
clearly: “Furthermore, since praxeology begins with a true axiom, A, all the propositions
that can be deduced from this axiom must also be true. For if A implies B, and A is true, then B
must also be true.” Then he provides examples of such deduction,
well worth quoting here: ”Action implies that the individual’s behavior
is purposive, in short, that it is directed toward goals. Furthermore, the fact of his action implies
that he has consciously chosen certain means to reach his goals. Since he wishes to attain these goals, they
must be valuable to him; accordingly he must have values that govern his choices.” And the second example:
“The fact that people act necessarily implies that the means employed are scarce in relation
to the desired ends; for, if all means were not scarce but superabundant, the ends would
already have been attained, and there would be no need for action. Stated another way, resources that are superabundant
no longer function as means, because they are no longer objects of action.” Why do the Austrians stress verbal deduction
that uses words, instead of mathematical deduction that uses symbols? Murray Rothbard and Polish economist Jakub
Bożydar Wiśniewski explain this extensively in articles that we link to on our website. We can say here that there are several reasons
for the use of verbal deduction. Subjective value judgments cannot be represented
meaningfully by use of simple, numerical functions or symbols. Moreover, economic values are incommensurable
and tend to change with the passage of time. And lastly, the mathematical representation
of logical deduction would only result in oversimplification and would impoverish its
content. More on this in the aforementioned articles. Why do the Austrians think that economics
as science cannot be experimental? Mainly because in economics there are no fixed
numerical relations between values. It is also impossible to isolate specific
market factor that we may wish to examine while other things remain unchanged. There is no way to put society in laboratory
conditions in order to thoroughly recreate an experiment. As Mises writes: “If a statistician determines
that a rise of 10 percent in the supply of potatoes in Atlantis at a definite time was
followed by a fall of 8 percent in the 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.” Another recently celebrated example is the
introduction of minimum wage in Germany. According to theory, when the price of a good
rises, other things being equal, the demand for the good falls. In this case the wage is the price, so its
rise must mean a fall in employment. Now, after a time since the introduction of
the minimum wage, some observers voiced their opinions that the economists were wrong, because
besides no fall in employment, there actually was a fall in unemployment. Does such an “empirical” evidence prove
the theory wrong? Of course not. First of all, during the very first day of
the introduction of the minimum wage in Germany the assumption of other things being equal
became false, because some factors indeed have changed. There are numerous diverse factors that affect
employment. It is not too hard to imagine, for example,
that Germany, apart from the introduction of the minimum wage itself, could add to the
mix some favorable conditions for business that attracted new investments or helped create
new sole proprietorships. Over a year, hundreds of things could have
happened that would impact employment in a positive or negative way. The theory remains valid, and while we can
say with certainty that increasing minimum wage reduces employment, we cannot say that
it is the only factor. We can still say that if the minimum wage
had not been introduced, unemployment would fall even lower. As Jakub Bożydar Wiśniewski aptly puts it:
“The method of praxeology does not consist in comparing the state of the world before
a given action occurred with the state of the world after it occurred, but in comparing
the state of the world in which a given action occurred with the state of the world as it
would have been had it not occurred. We call this counterfactual analysis.” But going back to the theory, empirical research
must eventually lead us astray as it is impossible in the real economy to have all things be
equal. It is only through the looking-glass of economic
theory that we can properly judge certain economic phenomena. Let’s move to the next problem. The Austrian School of Economics rests on
the principle of methodological individualism, meaning that it deals only with behaviors
of individuals. This does not mean that the theory neglects
the fact that human beings do not exist in a vacuum. Nobody challenges the fact that people act
among other people. However, any group, whether large or small,
consists of individuals. To be able to properly explain the actions
of a group of people, we should focus on the particular individuals who act within the
group. As Rothbard puts it: “Praxeology, as well
as the sound aspects of the other social sciences, rests on methodological individualism, on
the fact that only individuals feel, value, think, and act.” Mises, in turn, writes: “Those who want
to start the study of human action from the collective units, encounter an insurmountable
obstacle in the fact that an individual at the same time can belong and – with the
exception of the most primitive tribesmen – really belongs to various collective entities. The problems raised by the multiplicity of
coexisting social units and their mutual antagonisms can be solved only by methodological individualism.” Austrians also apply the principle of methodological
singularism, meaning that they focus on concrete single actions. According to Mises, by analyzing the world
only by use of wholes and universals, that is, when we consider only the whole of mankind,
the nation, or entire categories of needs and goods, we arrive at paradoxical conclusions. For instance, it is impossible to resolve
the diamond-water paradox by use of an overgeneralized analysis. Let us see: how is it that gold and diamonds
are more expensive than iron and water? Water and iron are a lot more useful, so they
should be more valuable. Mises explains that a particular person never
chooses between gold and iron in general, but sifts only through concrete amounts of
gold and iron. For a detailed discussion of the diamond-water
paradox look up our “The Value of Things” video. The last thing we will mention here is methodological
subjectivism. Praxeology, and therefore economics, does
not judge human goals. Praxeology does not offer value judgments
about whether one’s aim is good or bad. It does not set objectively good ends for
us to realize. Praxeology regards subjective ends as given. It only deals with the determination of whether
human beings use proper means to achieve their own individual ends. In other words: Austrians realize that people
are diverse creatures and their goals can be and are diverse. Consequently, ends should be interpreted from
the point of view of one desiring them, that is subjectively. According to the Austrians, not only are the
ends subjective, but the costs, profits, or values are as well. Only the individual who makes a choice knows
the value he assigns to his ends, and what he is willing to give up to achieve these
ends. Only the one who participates in an exchange
can possibly judge how much it will satisfy his needs. This cannot be objectively measured. Methodological subjectivism can be summed
up with a quote from a book “The Meaning of the Market Process” by Israel Kirzner:
“[Methodological subjectivism is a recognition] that the actions of individuals are to be
understood only by reference to the knowledge, beliefs, perception and expectations of these
individuals.” We invite you to visit our website econclips.com
that provides further sources expounding the topic. We would like to thank the economists from
the Polish Mises Institute who devoted their time and verified the correctness of the script
to this video. And especially thank you, the viewer, for
any contributions that allow us to make our videos. If you want to support this project, you can
do it with Paypal, Bitcoin, or by becoming our patron on patreon.com. You will find the links in the video description.

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28 thoughts on “🇦🇹 The Methodology of the Austrian School of Economics”

  1. Cool. It's extremely unfortunate that neoclassical economics dominates introductory courses to economics in schools and universities. It's less an economics course than a course in basic calculus. Students don't get to learn how real markets work, but how some totally unrealistic market of perfect competition could work. But then, of course, they are told how markets in the real world are never perfect and so we need the government to fix the market failures.

  2. Interesting, enthralling, yet complex. Thanks for the video. Started my adventure into the only real school of economics some days ago. Awesome channel you guys have!

  3. Maybe I'm too late for someone to pay attention to this comment, but it seems to me that, at least as presented on this video, austrian economics are mere philosophical musings without real consequence, ie:

    – What is the difference, in economic policy not something that goes on in their heads, between a libertarian and a austrian economist?
    – How is methodological subjectivism different from the old libertarian speech that "they don't know what is best for anyone else, hence freedom is the best arrangement for society so individuals can decide for themselves"?
    – How do austrian economist know if their theory is correct? when they can not compare it with the real world using experiments, nor make rigorous deductions from their axioms using symbolic manipulations. In other words, they have renounced both evidence and consistency.
    – How is the "axiom of human action" different from the well established and mainstream notion of rationality? (ie game theory)
    – How does their notion of "economic value" differ from simple utility?

    In short: how does all of this differ from mainstream economics? other than at philosophical level.

  4. Seperation from science starts from stating initial assumptions are correct. Science only moves forward with the destruction of previous assumptions. It is a very conservative, dogmatic start. Saying Austian economics is a science is at best a lie. We have a saying for such, garbage in = garbage out.

  5. Excuse me, WTF?! Jakub says its not same at 13:03.
    Lets see.

    Smt happens, we observed before it happened and after -> he says its not praxeology.
    Observe world where something happened compared to it never happening-> this is praxeology.
    These are the same things!
    A world where "action never happened" is the same world as "action didn't happen yet" and the world where "something occurred" is same world as in "after the action happened".
    He just rephrased the same thing. WTF!
    The "something never happening" is the continual of the state of BEFORE. And world of something occurring is the world AFTER action was done. Really? I would dismantle rest of Mises with simple psychology but it is unnecessary as psychology superseded the one Mises had in his time, rendering praxeology obsolete.

  6. Diamond are more expensive because it is a scam, but your praxeological approach limits your ability to analyze it. But if you want to know why some less valuable things are more expensive it is because they are a scam. Value and price are not same. Mind you.

  7. 1:55 "Why did the Austrians use praxeology to study economics? Because they consider economics a social science."

    Neither is this an explanation nor does it make sense. Marx is considered a social scientist too and he applied apriorism and logical deduction as well.

    Apriorism and their aversion against empiricism just harmed the Austrian economics. Hayek realized this and wrote: "[W]hen he [Mises] asserted that the market theory was a priori, he was wrong; that what was a priori was only the logic of individual action, but the moment that you passed from this to the interaction of many people, you entered into the empirical field" (1994, p. 72). "To economics as an empirical science we must now turn" (1949, p.4).

    As Antony Davis put it: "I don’t want to have to choose between one side and the other (praxeology versus empiricism) because neither is complete. [..] In shunning empirical arguments, Austrians miss the opportunity to push non-Austrians to the wall in the opposition’s own vernacular. [..] I do know that the quantitative analysis of mainstream economics and the logic of Austrian economics are both tools that can reveal truth."

  8. If your "science" doesn't produce provable results, is not falsifiable or empirically testable, its simply NOT SCIENCE.
    Real economics relies on empirical real world data and produces results which can be tested. Praxeology is a pseudoscience and there's a good reason why it has never been taken seriously or utilized even by capitalist free-market economies.

  9. Good work on describing the Austrian method.

    I notice a very interesting affinity between Jordan Peterson’s theory of psychology and Mises’ epistemology for his axioms.

    I believe JP has arrived at the axiom of action independent of Mises and could lend support to the body of epistemology for it.

  10. A person who would rather have free time than be employed is not "unemployed" by any common definition of the word.

  11. It really shows you how Kaynesians and Central Planners think about the world, they pay no heed to individual autonomy or the attainment of desired ends, they simply engineer human behavior until it is "Correct" and in line with the moral calculus of a political elite. There's no way that a system like that could ever evolve into anything other than authoritarianism.

  12. 1:00 but it doesn't. Six empty homes for every homeless person. Enough food to end hunger. It does allocate it to those wishing to expand their capital but it does not necessarily " effectively' allocate the 'scarce' resources." Capitalism is great for industrialization. But it has problems.

  13. In a simplistic modal, can the complexity not just be broken down – building the model back up from simple building blocks.
    I understand this is hard… but to dissuade (due to lack of understanding) means not enough effort (in terms of work/effort to understand) – this seems to be a limitation or cop out.
    However I do like the priori thought model.
    Thanks for posting.

  14. Error @11:48, if I am not being too Walrasian.
    Demand, as demand is usually defined, is not reduced by an increase in price.
    Demand is usually defined, in the usual textbooks, as the QUANTITIES (note the plural) of a good or service to be purchased at various price points.
    The QUANTITY demanded is what lessens with an increase in price, if all else remains the same, per standard teachings.
    This sort of demand can be thought of as a function of two variables, price and quantity, and can be drawn as a curve. A price change is a movement along the curve, not a shift of the curve itself, as the matter is usually taught.
    This is not some obscure, abstruse, esoteric, nit-picky point. This is what is taught in INTRODUCTORY microeconomics classes.
    By 'introductory', I mean the very first econ course, about 2 weeks in, IIRC.
    Perhaps Menger and the Austrians define or consider demand very differently than modern textbooks do. Example or explanation would have been helpful here, if so. Otherwise, Menger sounds like Smith, if proceeding from qualitiative considerations is the main distinction, and Ricardo like Keynes, by their reliance on simple quantitative methods.
    I had to downvote this vid. Mouthing some of the words does not give us the tune.

  15. Sorry, but you can't be from the Austrian school of economics and not be a libertarian. Who are Austrian economists and not a libertarian?

  16. No, economocs is not a science.

    Logical deduction does not make it a science. The fact that we cannot run tests on our hypothesis means we cannot "Scientifically prove" anything.

    However, logical deduction is just as powerful to establish facts, given that the premises used are correct. Premises can use logic or science to lead to one's logical argument, but not a scientific one.

  17. At 4:29: "One trying to refute the axiom, will only confirm its validity." Er, that's actually a fallacy. I can write an article which argues that there is no such axiom governing all human behavior, and it is true that, while I am writing that article, I am behaving as the axiom describes. Yet, that does not impose itself absolutely on all human action – there may be other times, where I or others know of no good option, or believe that they have no choice in the matter; that others' reasoning or overwhelming power or even a belief in DESTINY makes any attempt to achieve one's own goals irrelevant. So, the axiom SPECIFICALLY ignores the behavior and outcomes of dis-empowered and oppressed groups… but I'm sure businessmen and politicians see it as self-evident, finding no opposition to their wills? (Or is evidence-shunning logical positivism just doomed to enormous blind spots?) As a mathematician, I take special issue with the theft of logic and axiom – we understand that an axiom is not ACTUALLY true. Rather, we say, "IF these axioms WERE true, THEN these other statements would be true." Rothbart's statement that "…since praxeology begins with a true axiom…", demonstrating a complete misunderstanding of the tools of logic and their epistemological import. A few minutes later, Mises rests on the assumption that verbal deduction is superior to statistics, because the latter can never be accumulated into a distribution, remaining forever "a unique and individual historical fact." Why is such skepticism not applied to the 'true axiom'? And, they discount the usefulness of regression toward the mean – though many other factors are at play, when we have many examples of a thing, those competing factors can cancel out. We can also simulate and perform experiments which search over very high-dimensional spaces rapidly. That's what I worked on for a few years, and neural networks are explicit proof that you can extract useful information from multivariate experiments… k. i'm done.

  18. Austrian methodology is just full of holes. To name just a few

    – why the strong, black/white demarcation between "purposeful" and "unconscious" action? Is buying food "purposeful"? It looks more like a reflex, not unlike the example of a doctor hitting a patient in the knee: a chemical signal in the brain forces someone to do something. At the very least, there is a large grey area between "purposeful" and "unconscious" which seems to be completely ignored by austrians

    – this is related to another problem: treating ends as given. This seems like a highly arbitrary delineation in science (which other science pretends other sciences don't exist or are part of some other universe?) and in fact, an ideological choice. In reality, ends do come from somewhere and any serious investigation of an economy cannot simply ignore this (sidenote: most mainstream economic schools do this too and it's stupid there too). Real world example: a conscious campaign by a pharmaceutical company to convince doctors and patients that pain had been undertreated, led to a spike in sales of opiate painkillers. This company had the power to change ends of others. How on earth is this irrelevant? It's just one example but it comes from an abysmal failure to understand humans' and human societies' actual – as opposed to a priori – functioning.

    – Why choose exactly those axioms? There are plenty of others which are just as "indisputably true", but which are ignored entirely by austrians. For example: "in any given economy, someone has to work" or "any economy is part of broader ecosystem". Austrians' choice of axioms comes, I suspect, from an abysmal failure to understand what mathematics is and how it operates. Mathematicians do not judge whether their axioms are "true" or not, austrians do. This is part of a larger problem with this deductive methodology: how do you know you have all relevant axioms? How can you even assess that?

    So, austrian methodology gets a big F in my book, and is utterly disqualified as a "science"

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