On Methodology of the Austrian Economics
Leslie
Webb and Tsutomu Hashimoto (translated by Leslie Webb)
This article is a translation of the Japanese paper, which appears in Hiroyuki Okon and Tsutomu Hashimoto eds., Austrian Economics, Nihon Keizai Hyoron-sha, 2003.
0. Introduction
The Austrian school has made especially notable contributions to methodology. Of course, in the fields of theory and application there are excellent contributions. However, in regard to methodology, Austrian economics is extremely radical, and it shows a militant content that challenges members of other schools. From Menger, the founder of the Austrian school to various scholars, the Austrian school members have criticized the methodology of other schools, and by means of criticizing even the ideological content, they have come to bear one part, extreme of an ideological war. In the present chapter I would like to take up the methodology which has been the core of the Austrian school.
What we call methodology here is not a methodology such as ‘What should we do to further well our research. Rather, it indicates a research totality that considers ‘How should or should not economics as a research discipline be constituted?’ (?).This chapter will include problems such as ‘What procedures should economics use to become a science?’ and ‘What kind of limits are there to current economic theory?
Again, what is here called methodology, has a close relation to problems such as ‘What are the social sciences?’ and especially to ‘What is science?’ Again, the methodology of the social sciences has an important task in observing the relationship between the social sciences and thought (ideology).
In regard to this kind of research, when we do academic study, we ask, “Why does this study have significance?’ and it is because it will give a meaning appropriate in terms of culture, thought, and academic study. Below, in regard to Austrian methodology, we would like to focus on the major theorists. Specifically, we will discuss the methodology of Menger, Mises, Hayek, and Machlup. Finally, we will summarize the features of Austrian methodology and evaluate its current significance
1. Menger
In the Untersuchungen Menger distinguished clearly between historical and theoretical research. Historical research is concerned with specific and concrete aspects of a phenomenon. In contrast, theoretical research is concerned with the universal, abstract aspects of a phenomenon. For example, historical research is concerned with the features of a particular market. In contrast, theoretical research is concerned with common, general features of markets, such as the mechanism whereby prices are determined. In a kind of classificational economic phenomenon, in the sense of being able to find it wherever we look, we can recognize universal economic relationships.
Menger especially emphasized that historicists presuppose theoretical research. In order to recognize historical phenomena, we must use some kind of classificatory cognitive method. From infinity of phenomena, for example, in order to recognize something such as mutual exchange, we must be able to classify something as mutual and something as exchange. This act of classification already includes a kind of category in it, and that category includes inclusive pattern recognition of a type that constitutes social phenomena.
When we use various methods of classification consistently in historical research, we are already presupposing a theoretical cognition from a conceptual point of view. Historical research, in regard to the point of classificatory cognition, needs theoretical research.
However, there is often a great difference between the research methods that economists think they are carrying out and the methods that they actually use. Historians think their research does not need universal theory. In regard to this theoretical researchers think that what is most appropriate theoretically is most appropriate when applied to current economic society. However, it is not the case that we can get theories through induction procedure from collecting various historical phenomena. For example, in chemistry, when we study the pure structure of elements such as oxygen and hydrogen, the individual concrete instances of these elements are in an impure condition, and we cannot observe them theoretically. Again, in mathematics, in regard to observing elements such as a ‘point’ or ‘line’ we are not referring to concrete points or lines that are written on paper. For example, we look at them as having the pure qualities of having the unreal characteristic of not occupying any area. The same is true when we look at economic phenomena. For example, the action of the economic man (homo economicus) does not express the empirical action from actual complexities, but expresses action which is based on a pure economic, selfish concern. In regard to this point, the concepts which economics uses abstract from the real, concrete qualities.
[Exact science]
Menger called the method of abstract conceptual analysis by means of these types exact science, in contrast to empirical science. Exact science uses abstract, unempirical methods. In other words, phenomena that are formed by means of its concepts, all have a homogeneous quality. For example, phenomena expressed by the concept economic man, in any time or place, are from the point of view of definition all the same. Again, exact science which uses these methods is not empirical, however, by means of exact methods it is an area in which scientific research can be done. Exact science, by means of a genetic method which is theoretically exact, can arrive at exact knowledge. In regard to experiential methods, one cannot build up principled thought from them.
For example, in regard to our knowledge that ‘if demand falls, prices will fall’, empirically even though we can suppose ‘such will probably be the case in the future,’ we are not able to reach exact knowledge of the law of prices as a fundamental principle. Again, exact science investigates the most simple elements, and from them it explains complex reality. It is similar to science that tries to explain the structure of matter as coming from combination of simplest elements. Exact science in economics begins by supposing simple concepts such as economic man, utility, money, and demand. From these concepts, by means of the genetic-compositive method, it tries to explain complex economic phenomena. For example, in regard to money, it makes clear what kind of abstract features money has, and it tries to explain how causal relationships arise using all other simple elements. This kind of method is different from empirical scientific methods which measure regressive generalities from observed data. Empirical science can explain make mutual relationships between facts, however, it is unable to make clear principled causal relationships.
In regard to Menger’s method of investigating universal economic principles, there may be the following kind of objection from historical and empirical scholars. In other words, for something to truly be a science it must an empirical science with its roots in the social phenomena of reality. For example, people act to maximize their own self-interest, the theory that money is something that is used as a universal means of exchange, is a theory separate from actual history and experience, this theory is unrealistically false, and is meaningless metaphysics. In regard to this kind of objection, Menger says that operations which abstract from reality bring out one aspect of reality, and that reflects an aspect of social existence. Therefore, exact science even though it abstracts from reality, that does not mean it is an unrealistic fiction, but is a logic that has its roots in (actual existence) reality.
2. Mises
When the historicists criticized Menger, one of their intentions was the ethical assertion that economic science must not be a technical knowledge for the purpose of pursuing economic self-interest. Menger did not think men were only self-interested economic persons, however, generally the view of man presupposed in economic theory is that of a self-interested individual, and it provides no opportunities for the individual’s ethical character building. From such things, in regard to the view of man in economic theory, there were many criticisms such as ‘People are not like that’ and ‘If that is the way people are, it is impossible to create a society on such a basis”.
Praxeology: In regard to this criticism, Mises says that even altruistic people exist in economics. According to Mises, simple theory in regard to choice and preference crosses the boundaries of problems that were discussed in the classical economists such as J.S. Mill, Hume, Smith, and Cantillon, and it clearly has a wide application. This theory is related not only to the material happiness of the work of human beings, but is related to all kinds of actions. For the actor, what has value has already appeared together with list of other choices.
What purpose should he choose? Again, what ideals should he hold? This problem is a problem of human choice which has been thrust on human beings, and since it is a problem of choice, it is within the area of inquiry of economics. According to Mises, all not only economic phenomena, but all problems that relate to choice of action by human beings, must be included in the general theory of human action. Mises called this inclusive theory praxeology. In praxeology, human action is defined as behavior that has a purpose. Purposeless action is of no significance. It is simply behavior and is not to be called action. On the one hand, action springs from a motive of discomfort or dissatisfaction. On the other hand, it springs from the motive that by means of it, a better condition will be arrived at. We can understand this point from the following example. Suppose I am reading, get bored, and think of watching television. The incentive for me to turn on the television is to remove a feeling of discomfort and try to achieve a better condition. In order to achieve a definite purpose, it is necessary to use some kind of means. However, in regard to means, not just any means will do. In order to achieve a purpose, we must “economize”, in other words, the principle of economics is achieving a purpose at the least cost. That is, “economics” means economizing and the achievement of efficiency. In regard to the economizing of means, time is not excluded. As expressed in the phrase, ‘Time is money’, in order to achieve a purpose, economizing time costs is rational.
[A priori axioms]
The fixing of a purpose for action and the economizing of means to achieve this purpose depend on each person. However, any person, no matter who he is or when he acts, must combine his purpose and the means he uses to achieve it rationally. Praxeology starts from the indubitable proposition that ‘Man acts’. In the natural sciences, in order to understand natural phenomena, we begin by setting up uncertain hypotheses. In regard to this, the starting point of praxeology is not something as unsettled as this. The basic proposition of praxeology is an axiom that is truea priori, and it can offer a basis for certainty in our inquiry. Praxeology is like logic and mathematics in that it starts from a proposition that is true a priori. So we can think of it a field of inquiry that has a firm foundation.
In regard to this point, neoclassical scholars, in looking at the logical characteristics of the basic propositions of economics, would object in the following way. They would say that the basic propositions of economics, which show general tendencies of supply and demand, are reflected in empirical data, and are something whose truth has to be verified.
However, according to Mises, one cannot carry out exact, isolated experiments in regard to social phenomena. One cannot test the truth of propositions through experimental methods. One can only offer extremely imperfect verification in regard to experimental data. In complex social phenomena in which various causal relationships are entwined, regular causal factors do not exist, and we cannot test the theory at all. Therefore, the propositions of economics have no foundation in empirical data.
In response to this neoclassical scholars may emphasize the existence of statistical laws in society. However, statistical data do not provide us any universal laws. Since this statistical data confines itself to indicating a particular trend, we can use it to predict the future in only a limited way. Again, even if we put together many such statistical predictions of the future, they do not lead us to a universal and logical understanding of economic society. The future is uncertain. Experience cannot verify or falsify theory.
[Methodological dualism]
As described above, Mises laid the foundations for praxeology in axioms similar to those of mathematics and logic. However, in saying that the methodology of praxeology is different from that of the natural sciences, Mises he takes a position of methodological dualism. Methodological dualism is the view that, on the one hand, we have the method of the natural sciences represented by physics, and, on the other, we have a different method related to human action, and the latter cannot be reduced to the former. Human beings do not all respond in the same way to the same stimulus, so we cannot explain human action as something that reduces to physical phenomena. No matter how much we study causal theory relations between matter and behavior, these relations cannot make clear the structure of human action as it relates to purpose and chosen action. Again, in the area of human action, the procedures of the natural sciences, by which we quantify knowledge, and in accordance with experiments verify or falsify (hypotheses) such a procedure will not yield fruitful results.
The area of human action is different from that of the natural sciences, and one cannot obtain justification of a proposition by means of empirical data. One must use a methodology different from that of the natural sciences.
Mises’ methodological dualism has significance in the point in which it criticizes the position of Marxism, especially methodological monism. Marxists asserted that from the view of historical materialism, all human action is determined by historical and social structures. In other words, there can be no choice of action based on human free will. All human action is determined in accordance with the laws of the basic structure of history and society. Thus, to explain human action, the Marxists maintained that that we must pay attention to something different from the will. We must look at the material level, which is the structure of production. However, according to Mises, it is not the case that the external world of material phenomena and the spiritual inner world of thought, feeling and purposeful action are in a one to one correspondence. For example, even if I think I want to eat an apple, that desire is not completely determined by physiological, life historical and economic conditions.
Human beings have ’free will’ and will maintains freedom which is not decided according to the material world. If the action of human beings were decided in accordance with material causes, we would not be able to recognize respect for the rationality of human beings (free will). For example, if everything a person did were decided by the external world, we would not have to do anything, whatever we did would be to no avail, and we would be fatalists. According to Mises, everything is not pre-decided, for human action. Rather, by using knowledge and reason, we can achieve autonomy, which is to act freely. The emphasis on the independence of human action, from the standpoint of methodological dualism, recognizes free will in human action, and this recognition is important for getting people to become autonomous.
[Methodological apriorism] A priorism is the position that a proposition is correct (a priori), prior to experience. For example, mathematics and logic do not reflect or match experiential facts, but they possess axioms that are logical true in and of themselves. In mathematics there is the formula 1+1 = 2. In logic, it is the tautology, ‘when A is B, A cannot at the same time be something that is not B’. Such propositions are not true from of experience, but must be regarded as true a priori. Mises says, also for the science of human action, its propositions are such that they a priori true. That is, ‘man acts’. Its propositions must be understood as correct and true even though they are not to be confirmed or falsified actually by individual experiences. The reason why is even if in our heads just thinking about this proposition, it is something whose truth we cannot doubt.
Let us suppose the opposite to be true. We try to trying to refute this by saying the ‘human beings do not act’ or ‘we think human beings act, but actually they don’t’. But this criticism is not fatal. For such criticism cannot deny our consciousness that human beings act. However, even though we say something is true a priori, it does not mean it is completely prior to experience. We must understand that the axiom ‘Man acts’ is true, first from reflecting on common human experience. In other words, Mises’ methodological a priorism, is something that is first built up from the presupposition of a general, intersubjective experience that people share. Correctly speaking, methodological a priorism does not mean something prior to all experience. Rather, it means something prior to individually observed experiential data.
[Methodological subjectivism]
Mises’ methodological
individualism is opposed to the two characteristics of methodological
collectivism—that is ‘immanence’ and ‘the
supposition of anthropomorphism.’
Human is an argument that that sees upon the group as the actor. For example, in regard to the issues, ‘What
is capital’ or ‘What is the purpose of society,’ the
collectives capital and society are seen as actors. This position is called
methodological collectivism. In
response to this, anthropomorphism is the methodology that sees human beings as
being capable of the same kind of omnipotence and omniscience as God. For
example, the argument that sees economic man as having perfect knowledge, thus
making markets efficient, is an argument for a planned economy. It believes the
central authorities can approach omniscience in gathering information.
The theory of anthropomorphism, , when it is applied to the knowledge of the central authorities is related to the thought that collectivism equals collective production. In regard to ‘holism’ and ‘anthropomorphism’, Mises’ methodological individualism replies in the following way. First of all, whenever anything is desired or has a purpose, it is always in the end an individual, not a group. Something such as the ‘purpose of society’ does not exist at all. All that exists are the purposes of each individual.
Secondly, we cannot imagine all-powerful, all-knowing authorities, we can only imagine human beings who lack perfect knowledge are easily exposed and beate-down by changes. A perfect designed order cannot in principle come out of a society composed of human beings such as they are. Mises argues that men are weak, imperfect beings. Yet Mises’ methodological individualism is different from the instinct theory that sees humans as egotistical animals. Methodological individualism sees human nature as something that changes with the social.
3. Hayek
As we have seen, Menger and Mises strictly determined the field of science as one of exact inquiry, and they have criticized other kinds of economics as unscientific and showed how they are as un-theoretical and historical rather than exact. In regard to this, Hayek does not put as much value on this kind of exact, narrowly defined science. Rather, he is skeptical about the significance of science. Especially in regard to highly systematized neoclassical economics, he takes a fundamentally critical stance. Hayek interprets science in a broad meaning. He thought that the moral sciences which deal with problems of philosophy were an especially important area of inquiry.
[The significance of the moral sciences]
For example, let us consider the question ‘Is a socialist system desirable?’. There will be various answers depending on people’s ways of thinking. When we think about whether a socialist society should be brought about, there is the problem ultimately of each person’s subjective beliefs. However, according to Hayek, if we make a little effort to come up with a solution to this problem, we can investigate it logically. In other words, if we set up the problem, ‘Can socialism actually be carried out?’, we can investigate this scientifically.
It is not necessary to go back to the problem of each person’s subjective tastes, in regard to whether socialism is desirable. By correcting and establishing well the problem in regard to each persons point of view, the moral sciences can open the way to investigating this problem logically. Hayek sets up the social sciences as a broadly defined inquiry including this kind of moral science.
If one is a scholar who in response to this would like to stop at a narrow definition of science, then he will probably try to avoid as much as possible problems of thought and morality. In the academic world one is not supposed to deal with the problem of value, in regard to bringing out the underlying assumptions of one’s axioms. However, according to Hayek, this is nothing more than academic cowardice. With such an attitude we cannot rationally grasp the various options that are open to us. If we become unable to consider rationally the problem of value, hiding in the concealed values of our axioms, then we end up concealing the possibility of social choice. In this way Hayek criticizes the attitude of scientists who would stop at a strict definition of science. , and he urges the importance of the moral sciences and social sciences which treat the problem of value.
[Criticism of scientism]
However, on the other hand, Hayek, in regard to arrogant scientism which tries to solve the problem of value in the name of science, by means of applying uncritically to the social sciences the thought habits of the physical sciences, in the same way that the physical scientist is able to control the physical sciences, (the scientist) thinks that he can consciously control human society in this way, and by means of this method solve the problem of value, this position is called (‘scientism’). However, according to Hayek, worshipping the results of the physical sciences as the highest form of human knowledge and applying its methods uncritically to social problems is an abuse of reason. A true scientific attitude is not this kind of scientific attitude. A true scientific attitude adjusts its methods of inquiry to the object of investigation and is something that must be accompanied by appropriate judgment. The various scientific methods have limits to the range of their applicability. Distinguishing between these limits is what is appropriate to the scientific attitude. For this reason the requirement of scientism that all sciences must be modeled on the physical sciences is the arrogance of reason, and is mistaken as the methodological attitude of the social sciences.
So what is the best way for the social sciences to investigate the phenomenon of society? According to Hayek the social sciences must be based on the limits scientific knowledge. Of course, modern science, by means of technology has conquered nature and has come to expand relentlessly the extent to which it controls society. However, on the other hand, in this control there are large flaws and limits. Modern society must make clear the limits and significance of technical knowledge as a tool of control. Especially, the social sciences, must make clear the way in which a social system is spontaneously formed in spite of the limits of knowledge of each person, In regard to human reason, it is not equipped with the ability to survey all of society and control everything. Again the human reason develops is not directed toward acquiring such omniscience and omnipotence. Our civilization has succeeded in developing society in a different direction, getting by without putting an excess burden on reason what the social sciences should make clear is that civilization has advanced in a different direction from that of control (knowledge).
To make this point clear, Hayek criticizes the objectivism of scientific methodology and argues for subjectivism. Objectivism means that the material world and the mental world are in 1-1 correspondence. It is the position that the phenomena of the mental world or consciousness can all be explained from the laws of the material world (social causes). For example, the materialist position that human consciousness and action are determined by the forces of production and the structure of production is for Hayek a representative methodology of objectivism.
The mistakes of objectivism are in the following. First objectivism looks at subjective phenomena as objective, physical facts of the material world order. For example, suppose I am thirsty and want to drink a Coca Cola. According to the objectivist point of view, the conscious development of my subjective human desire is something caused by things such as the advertisements of the company that makes Coca Cola and objective qualities of Coca Cola. This means my desire is not something I choose; rather the Coca Cola Company has forced me to choose as I did.
Materialism in particular holds that the Coca Cola Company is a form of production form that appears inevitably in capitalist production. Consequently people’s desires are pre-determined by the capitalist system. The error of this kind of objectivist thought is overlooking the point that the reclassification of linkage (relationships) in the mental order continually grasps and interprets the material order. Consciousness as mental order continually reinterprets the social order as a material order. The actual content of is not determined one-sidedly by the material order. Rather, the relationship between the mental and material order is one of mutual interaction. Objectivism overlooks this point.
The second error of objectivism is to think that all sciences can be unified by methods of the physical sciences. In other words, all scientific theory thinks that its truth value is confirmed, based on “physical facts (data)”. In regard to this point, Hayek thinks that the facts of the social sciences have qualities that cannot be reduced to physical facts. The point of departure for investigation in the social sciences cannot be physical facts which we try to determine. There can be no other point of departure for the social sciences than the vague structures of meaning which our everyday language has. Hayek, in positively recognizing such vagueness, takes a subjectivist position.
[Methodological individualism]
Subjectivism in taking its departure from vague, everyday language is intimately connected with methodological individualism. However, Hayek’s methodological individualism has often been misunderstood and criticized. Below, while arranging the various meanings which methodological individualism has, we will understand what Hayek is asserting.
In regard to methodological individualism there are roughly five
levels. First, one can think of
methodological individualism as a interpretatively constructed
tool, at the level of the theory ofknowledge. Objects
in social sciences are already constructed through interpretation by means of
people’s everyday cognitive activities.
Again these (phenomena) can be regarded not as things which express
something essential, but as abstract rather than actual things. This kind of position is called conventionalism.
In regard to this, the positions that are called methodological essentialism and objectivism can be thought of as treating collective concepts as concrete things. For example, it says that a collective concept such as an army or social class is a concrete thing. Behind these concepts there are constant essences, and one can think of the concept as embodying those essences.
Secondly, let us consider methodological individualism at the level of the discovery method of social theory. At this level methodological individualism tries to build its theoretical model from the motives, expectations, and relations of individuals. In contrast, methodological collectivism builds its theory by starting from the study of collective concepts.
Thirdly, let us consider methodological individualism, in regard to its object of research. Methodological individualism is concerned with how social structures and customs change through the actions of individuals. In contrast, methodological collectivism or macro-theory analyzes how social structures and customs change through macro variations.
Fourthly, let us consider methodological individualism in terms of how we justify its research findings. Methodological individualism starts from the analysis of individuals’ motives and expectations. Even so, methodological individualism does not base its foundations on the psychological assumptions of individuals. What we here call motives and expectations have formal content only. They are not the particular psychological facts of certain individuals. All psychological assumptions are products of a system, and they change according to the system. Methodological individualism differs from psychologism in this respect. Psychologism tries to explain systems from psychology. It starts from analyzing and understanding a system’s particular psychological assumptions.
Fifthly, let us consider methodological individualism at the level of action. Methodological individualism says that only individuals act. In contrast, holism sees collective concepts embodied in concrete actions when we consider questions such ‘What is the purpose of society?’ or ‘What does capital want? Holism sees a collective concept such as society as having a purpose above and beyond that of the individuals that compose it. Society’s purpose restricts an individual’s purposes and actions. Methodological individualists say that only other individuals can restrict individual’s purposes and actions.
The above are the five levels of methodological individualism. Let us consider methodological individualism and holism at the level of existence theory. At this level, holism and methodological individualism conflict in the following way. Holism maintains that because society exists individuals can exist. For example, because the ecology of the forest exists, individual trees can exist. In contrast, methodological individualism maintains that because individuals exist, society can exist. People who understand methodological individualism in terms of this existence theory often criticize it. However, methodological individualism can be consistent with holism from the view of existence theory. At least in Hayek’s case, the two are consistent.
So, how are we to classify Hayek’s methodological individualism? In the five classifications above, Hayek’s methodological individualism belongs to the first and second positions. These two positions have in common the point that they recognize that collective concepts such as society have a structure which can be changed.
Concepts and theoretical models of society exist in the subjective conceptual structure faculties of each individual. These concepts and models change according to each individual’s point of view. So we do not have accepted uncritically so-called ‘objective’ scientific theory. On this point, methodological collectivism holds that social groups can be cognized objectively or directly. For example, collective bodies such as a nation or a class are in fact existing things composed from the behavior of many people; however, if we take this in fact true, it means that we will take as certain the existence of laws of society for things such as ‘national monopoly’ or the ‘unending class struggle’. Such a view is conspicuous in the method of Comte, who was one of the early socialists. But Hayek says that with this view Comte commits the fallacy of conceptual realism. Comte mistakenly takes as real s a model that is nothing more than something people form in their consciousness. This kind of fallacy originates in presupposing that we can externally observe the conscious phenomena of human beings from afar, just as we can observe a heavenly body from afar. However, we cannot obtain this kind of observation point. But we cannot take this kind of transcendent, external view. Our observations must always start from inside human consciousness. From this standpoint we must continually form and revise theoretical concepts. This is the critical connotation which Hayek’s methodological individualism has.
[Criticism of historicism]
Hayek distinguishes the school of classical history represented by Adam Smith and Edmund Burke from historicism. He criticizes the methodological position of historicism. What is called historicism here is the position represented by Hegel, Marx, Sombart, Spengler, and so on. This position is that by means of studying historical phenomena we can understand the laws by which societies develop. In other words, historicism holds that it can explain according to laws how human consciousness changes in historical stages. This view, for example classically appears in communist thought that says that there will be an inevitable historical transition from capitalism to socialism. Human consciousness will change from egoism to altruism; people will not have feelings of hostility to others and will be able to live without making a fetish of money.
However, according to Hayek there are limits to our grasping laws of such historical changes. The reason is that what we can cognize is limited to that which is similar to our own consciousness. In our cognition we can only recognize things which work in ways similar to those as our own thought. So, we cannot predict ahead of time how human consciousness will change. In other words, Hayek thinks that our consciousness is controlled by the meaning structures of our everyday world.
Historicism holds that we can predict how our knowledge will how our knowledge will grow, but this view is absurd. If we understood in what way our current knowledge is limited, then it would no longer be our current knowledge. It is like asserting that we already know more than we know. In other words, we cannot predict our future consciousness and knowledge, because these things are more than what we know at present.
Furthermore, the position that tries to grasp the laws of history is based on a set of ontogenetic concepts. Ontogeny deals with the development of the individual from something that is previously decided. In biology an organism’s characteristics develop from the innate mechanisms that are in the genes of its reproductive cells. However, according to Hayek history does not have this kind of potential for being predicted. Rather we can say it evolves through genealogical developments. The theory of genealogical development is related the evolution of species, and in regard to the evolution of future species, we cannot say anything in advance.
In contrast to the historicists, classical historians tried only to understand genetically what was called history by synthesizing influences effective over the long term. Furthermore, they opposed the constructivist social view that consciously tries to change society as a whole. Historical research, describes regularities in various individual causal relationships. It is not something done to predict the future. As Hayek sees it the significance of historical research is in trying to understand how our society has developed and produced unintended results (and, how it will develop from now on).
[Criticism of predictive science]
Hayek thus opposes predictions from historical research. Since social phenomena are complex, none of the procedures of predictive science based on hypothetical deduction are appropriate. Social scientists who think of the physical sciences as the paragon have mistaken the significance of models (hypotheses) in the social sciences. They judge whether a model is good or bad from how much it can predict. In other words, they think that a good theory is a model that can predict clearly future events by means of making clear certain variables. However, there are cases in which a model, even though it does not specify variables and so cannot predict future events has value in itself. According to Hayek, in cases when a model is a comprehensive theory, the recognition of the theory itself is practically useful, and there are cases in which verifying or falsifying the model are almost meaningless.
For example, since Walras the theory of equilibrium has not actually been able to predict specific phenomena; however, by means of describing a general pattern under specific conditions it is able to impart a comprehensive vision in regard to economic society. In that meaning, one can say that general equilibrium theory has value as a comprehensive theory instead of as a predictive theory or one with law-like postulates. The laws of supply and demand and of diminishing marginal utility cannot make specific predictions. But, in being understood by people, these laws lead people’s actions in the desired direction, and in this way they are able to draw out effectively spontaneous market forces. This is the practical significance that a comprehensive theory’s value has. For this reason, research in economic theory, does not aim at seek objective situation analysis that can be falsified by facts; rather it must develop by seeking a comprehensive value, in which the possibility of falsification inevitably decreases. Hayek calls this type of theory ‘fundamental explanation.’ An example of this type of theory is Hayek’s theory of spontaneous order. This theory has excellent practical significance meaning in giving to each actor an image of complex society as a whole.
We have discussed Hayek’s methodology above. Hayek’s contribution to methodology is in his criticism of how the social sciences try to take the physical sciences as a model. The social sciences deal with complex phenomena. Moreover its phenomena are connected with the various values that people hold. So, while understanding the limits of applying uncritically the methods of the natural sciences, we must also deepen our awareness of moral problems.
In this way Hayek broadens the domain of the social sciences. He places and legitimizes the significance of normative science that treats normative problems. It is not necessary that the social sciences be value neutral. Rather, by means of proactively handling value problems, we can advance our research to better understand society. This is the practical connotation that we can obtain from Hayek’s methodology.
4. Machlup
Now finally let us investigate the methodology of the economist
Machlup who belonged to the Austrian school. Machlup was born in 1928 in
Borsenkredit, Industriekredit und Kapitalbildung
The Economics of Sellers’ Competition
The Production and
Distribution of Knowledge in the
The Political Economy of Monopoly
Maintaining and
Restoring Balance in International Payments ?
Essays in Economic Semantics
Knowledge: Its Creation, Distribution,
and Economic Significance
He has published the above works and has
opened and developed the frontiers of economics in various areas. Many of his
works have been translated in
Machlup had various opportunities to discuss methodology, and most of his writings are collected in Methodology of Economics and Other Social Sciences (1978). In this book he studies various problems in the philosophy of science. The problem he debated most was the problem of verification. So let us try and focus on this problem. According to Machlup, verification in economic science is not a question of showing that a proposition is true. Rather one can say it is no more of a question than saying ‘It is possible that the proposition is not in error.’ In other words, even if we can say that a proposition is scientifically verified, it is not a hypothesis which has been disproved by experiment and demonstration so there is now way to ascertain whether the proposition is really true.
The view that the various propositions of economics cannot be verified completely was something Popper had already formalized in The Logic of Scientific Discovery and The Problem of Induction. Popper emphasized in these works the importance of a methodological attitude of falsificationism or critical rationalism, but, Machlup did not completely agree with these. In regard to economic methodology, while criticizing the following two extreme positions he looked for a middle way. The two positions he criticized were “extreme a priorism” and “extreme empiricism”. Let us look at these two positions.
[Extreme a priorism]
Extreme a priorism is represented classcially by Mises’ position, discussed above. Let us first understand what we mean by transcendentalism. A priorism is the position that we can recognize truth prior to experience. In regard to transcendentalism in economics, classical economics such as Keynes and J.S. Mill, and neo-classicists such as Lionel Robbins and Frank Knight held these views in common and have achieved general support. We can summarize these views as follows. Namely, they are that propositions in economics, even though they cannot tested in light of the individual facts of experience, they can be judged to be true on the basis of the pure rationality of human beings. By this meaning all propositions are completely true propositions. For example, propositions such as, “People act rationally”, “People can order their choices in a definite ranking,” “If other conditions are equal, person will choose what is most beneficial to him” can be thought of as being correct priori. These propositions, even though they cannot be shown to be true by experimental tests, are correct a priori, so they can be adopted as fundamental axioms of economics. According to a priori theorists, the propositions of economics can be taken in the same way as the basic axioms of mathematics, and from them we can understand various phenomena.
If we push the a priori position further, we arrive at radical a priorism. This position is that economic theory can be described completely by means of a system of fundamental axioms and propositions. One can understand Mises’ praxeology in this way. Actually, Murray Rothbard, who was a student of Mises, has advanced praxeological methodology to this extreme position. Namely, he maintains that economics begins from the indubitable proposition ‘Man acts’, and it leads deductively to various propositions, and one can build a complete system from this.
[Radical empiricism]
Radical empiricism is in direct opposition to this position. According to Machlup, the theorist who represents this position is the economist Terence Hutchison. Hutchison understood early the significance of Popper’s philosophy of science, and he introduced this in a radical form to economics. According to this, the propositions of economics, at any level of analysis, must as much as possible be testable.
Through testing they must achieve a definite proof, and if they are falsified, they must be replaced by different propositions. Even in regard to the proposition above, ‘People act rationally’, this applies. In other words, all propositions cannot be completely correct axioms, but they must always be maintained as axioms, and if a hypothesis that is superior to them appears, they should be abandoned. For example, according to Hutchison, the proposition ‘Consumers maximize utility’ must be taken as a more appropriate proposition than ‘Choices are prioritized by consumers.’
Radical empiricism in this way following the experimental testing of all propositions, determines their truth value in such a way that it must substitute things that are better for these formulae. Generally, empiricism recognizes the theoretical appropriateness of non-experiential matters such as mathematics and logic, radical empiricism, even for the fundamental axioms, which seem non-experiential, says they should be formulated in a way so that they conform to empirical tests.
[Indirect verificationism]
The above positions, that is, extreme a priorism and radical empiricism, are completely opposed to each other, in regard to the possibility of testing the propositions of economics. In regard to these two positions Machlup advocates a more reasonable view. This is that there are various levels of economic analysis, and at the level of the ultimate axioms we can do nothing more than indirectly test them. However, at the level of concrete experience, it is easy to test all propositions. So in this case Machlup, in regard to propositions which are difficult to test, maintains that it is better to test them indirectly. For example, the proposition, one cannot test through experience the proposition itself, ‘People act rationally’. However, if this proposition is synthesized with a more concrete propositions, such as ‘When the price of a good goes up, demand for it goes down’, it can be tested.
The reason Machlup advocates this indirect test is that in regard to the ultimate axioms of economics we must have a strenuous ability to judge the appropriateness of when, where, and how they are to be used. And all these propositions, they must not be used excessively nor will it do if they are evaluated minimally.
By using them together with testable empirical theory, they will be useful for giving us a better understanding of society. Machlup’s arguments here are called “indirect verificationism”. This position was evaluated highly from the point developed by assimilating the knowledge brought by the philosophy of science at the time (the 1950s). According to knowledge of the time, it was understood that a theory was something that could not be individually tested, and one actually could only perform composite tests of theory and assumptions and experimental devices.
Scientific theory is a system of hypotheses and deductions, and its correctness does not belong to or cannot be reduced to correctness of individual propositions. Machlup, with these ideas, regarded the truth of individual propositions as incapable of being directly judged. In regard to the truth of these propositions, to accumulate a large number of indirect verifications is an important procedure.
One can say that this position offered an appropriate plan for research, at a time when in economics extreme verificationism was thriving. Again, in regard to Mises’ praxeology, one can say that it recognizes the core truth of it, but it revises it in a way that will move it and place it as a research program toward something fruitful. (And, Hutchison, who had argued for extreme verificationism, in his dispute with Machlup, came to revise his position to something reasonable.)
5. The significance of Austrian Methodology
As we have seen, Austrian economists developed their own methodology and challenged the reigning methodological views of their time. However, in this challenge, there have been two consistent methodological characteristics.
First is the point of their opposition to historicism such as that of Marxist economics and the German historicists. Second is their opposition to positivism such as that represented by the Neoclassicists, which excessively demands procedures of falsification and verification. One can say that these two characteristics, that is, of taking a critical stance toward historicism and positivism, are the common methodological characteristics of the Austrian school.
Indeed, the twentieth century has been the age in which historicism and positivism have controlled academic learning. However, the discussion of the exposition of the laws of history no longer has credibility, and the scientific Weltanschauung of positivism, which centers on the possibility of testing, has begun to reach its limits.
In fact, Neoclassical economics and Marxist economics, which have built the reigning paradigm both are relatively declining, and we are coming to an age in which various streams of economics will be jumbled together pluralistically. In conditions of this kind of age, the methodology of the Austrian school will continue to be re-evaluated as something offering a definite view for criticizing current economics.
For example, Bruce Caldwell, in his Beyond
Positivism: 20th Century Economic Methodology, criticizes
the currently popular positivism and favorably evaluates Austrian
economics.
In these conditions what we can learn from the methodology of the Austrian school will confirm the horizon at which 20th century social science methodology will arrive. Above all, where will the limits of historicism and positivism be? To understand this point, we must certainly take as a base the results which Austrian methodology has left us.