“Austrian” methodology — by which most people mean praxeology, which is not inclusive of all Austrians — has commonly been attacked for being anti-empirical. How can we know whether knowledge deduced by means of pure logic actually applies to the real world, which is composed of a vast quantity of data? The latest addition to the tomes of criticisms is Eric Perkerson’s critique at The Social Rationalists. What these analyses miss, though, is the “second half” of Mises’ epistemological view. In Eric’s case, it’s because he misidentifies the purpose of economic science. Taken in its entirety, Mises’ epistemology is ultimately an empiric-centric one, where the task of economic science is merely to better understand the data around us.

I am, by no means, highly knowledgeable about philosophical topics such as epistemology. For a deeper defense of praxeology, my co-blogger Mattheus is much better suited. But, I think I have a good handle of economic science and its purpose, and therefore all I can say about praxeology is that, for the most part, it is the only methodology that I have found that seems the most proper for attaining relevant knowledge.

What is economics? What purpose does it serve? Eric’s essay doesn’t provide us with a comprehensive idea of his views in this regards, but we know that some of it at least revolves around policy and knowing what means are best for what ends. He believes that with economics we can improve human welfare. I think that the economist likes to think this is true; but, unfortunately, this belief has brought the world more ill than good. How can an economist know what means are better suited for given ends? The economist is not an omniscient scientist; this insight, in fact, was the product of an Austrian economist: Friedrich Hayek. The only person suited to know the proper means is the individual who knows her own value scale. As such, a policy recommendation that has a specific end in mind cannot guarantee welfare maximization, because there’s no possibility that the advocate knows what is in each person’s best interest. An economist might be able to argue what policy is definitely not in anybody’s interest, but it hardly follows from this premise that we can supply the right one.

Economics seeks to explain certain phenomena of the real world. The real world, in turn, is analyzed through a science specific to this purpose: history — what I above referred to as the “second half.” Economics supplies history with the ability to interpret data, which otherwise would have no meaning to us. How can we establish causality through empiricism, when we can only see the data ex post? We can’t, which is why we have economics to provide us understanding. This leaves us with a dilemma: how can we establish causality without being able to see causality in action?

Mises’ solution is to take a most basic axiom, which acts as a kernel of sorts. The seed contains everything required to develop it into a full-grown plant. In praxeology, as Eric writes, the axiom is that of rational action: all individuals act, in that they apply scarce means towards the accomplishment of a given end. More literally, Mises thought that human action is the use of means to attain satisfaction. Eric considers this an empirical claim, therefore undermining the deductive purity of praxeology. Actually, some Austrians — praxeologists at that! — wouldn’t disagree: Murray Rothbard thought that the action axiom is, at its base, empirical. Mises took an approach that subtly mirrors Rothbard’s. The mere act of attempting to disprove it reinforces its validity, and so in this sense it is empirical: disproving it requires an empirical test that must always fail.

From the action axiom, Mises purports to deduct the entire body of economic theory: from time preference to business cycle theory. Economic theory, in turn, is a body of knowledge which establishes causality between related events. It doesn’t necessarily describe reality as it exists, but a possible reality. The qualification referred to the title is here. I can’t really defend Mises’ endeavor, because the logical “tree” escapes me. In my studies, I haven’t deducted my economic knowledge from a single axiom. But, neither can I accept a disjointed approach, where individual assumptions are empirically verified and we can deduce from there. To establish causality in more ‘advanced’ or complicated cases, we need prior causal understanding, which in some sense validates Mises’ epistemological beliefs.

What is this knowledge useful for? Here is the empirical side of praxeology (which is actually an umbrella for different forms of knowledge): history. What we do with economics is we take historical episodes and attempt to explain them. Admittedly, many Austrians do this part poorly, in part because they’ve focused so much on the logical part that few of them have trained themselves to be historians. But, without historians economics can’t tell us much about the world. This backwards looking approach is actually in tune with many non-praxeologists, including Ludwig Lachmann and John R. Hicks.

Taken in its whole, we now see how “Austrian” methodology transcends the epistemological differences between two separate categories of knowledge: theory and history (which, by the way, is the title of Mises’ mature exposition of the exact topic discussed here). We also see something which Eric doesn’t think Austrians account for, which is the possibility that different methodologies are useful for different purposes. Eric here too is mistaken, since it is Mises who adopts a “methodological dualist” approach to knowledge. In fact, this is a major building block in his criticism of positivism and the hijacking of economics, and other social sciences, by those who seek to apply the methods of physics. (It might also form part of his criticism of mathematics, which I think is flawed, because mathematics is a deductive, logical language.)

However, contra Eric, this doesn’t mean that different methodologies are suitable for different schools of economics. All schools of economics seek to gain knowledge on the same topic: economic theory that explains the world around them. As such, there are no grounds to believe that the Neoclassical and Keynesian schools can apply, say, positivism and gain adequate results. No less, the idea that Neoclassical theory is better suited to inform a businessman is equally as flawed (in fact, Neoclassical theory is probably the worst school of thought to inform an entrepreneur!). To give an example, remember the debate between Oskar Lange and the Austrians during the second half of the 1930s. Lange argued that by using the Neoclassical production function and equilibrium structures socialist engineers, essentially, could use a derived constellation of prices to efficiently distribute the means of production. In fact, this is what prompted Hayek’s work in the dispersion of knowledge and the role of prices in overcoming this problem. (Also, worth reading are Piero Sraffa’s critique of the Neoclassical theory of production.) In fact, it can be argued that it has been flawed methodology that has resulted in the almost universal inability to accurately predict future events using Neoclassical models (or any model, for that matter — but, economists who know better stay away from claiming ownership of a crystal ball).

Eric misses the task of Mises’, and those who have inherited his ideas, praxeology. Had he better understood the epistemological foundations of Mises’ approach to social science, he would have realized that Misesian economics is not anti-empirical. In fact, the application of economics is an entirely empirical task! Neither does metholodigical dualism give reason to the idea that different methodologies are suitable for different economical inquiries. This would only be true if we were to redefine what economics is! But, where the definitions are the same, the application of an inadequate methodology oftentimes leads to inadequate results — this is exactly what is shown in much of the body of Neoclassical economic theory. This is not to deny that praxeology may have its flaws, but if these exists then they undoubtedly have to be found in the depths of an epistemological debate.