Every once in a while, there is a local eruption of discussion on the a priori method, with specific reference to Mises’ praxeology. Jason Brennan, at Bleeding Heart Libertarians, discusses a recent run-in with a young Austrian and their conversation on behavioral economics and Austrian economics. Brennan makes the point that if an a priori economics cannot account for the various realities of human behavior, then its usefulness is put into doubt. I sympathize with Brennan, but I think the point can be put in another way that makes the implications a bit clearer.

My background makes me very sympathetic towards the praxeological method. At one point, I thought it was the end all, be all. I have defended Mises’ method from its critics before. But, I have also been influenced by the anti-rationalism of Hayek, and my beliefs have moved towards a position that acknowledges the positive attributes of an a prioristic method, but also the positive (and necessary) characteristics of an empirical method. One problem is that young scholars want to take an either/or position, but this doesn’t have to be the case. Both methods, at the extreme, have their shortcomings; it only makes sense to apply them both. This makes me something of what Bruce Caldwell calls a “critical pluralist.” There is no one perfect method, so we have to do what helps reduce human error the most, and this may change on a case-by-case basis.

Coming back to Brennan’s invocation of behavioral economics, I want to mention a Hayek-influenced argument that puts the shortcomings of a purely a priori method into perspective. It took me a while to get this point, and I should thank Greg Ransom for hammering it into me.

There is a good reason why an Austrian would say that there is a “difference” between behavior and action. Behavioral economics deals with how humans actually respond to different incentives, situations, and environments. This speaks to “neoclassical” economics, because these sets of models usually try to get an idea of how an agent behaves (or maximizes its function) given various constraints (call them incentives). Praxeologists, on the other hand, don’t try to model human behavior, but rather purport to show the outcomes of different actions. Then, depending on how real world humans behave, the economist can apply the set of theory that is relevant to that action.

The question that arises is how praxeology can offer insight on complex human phenomena. These are events that form over a sequence of actions, by some number of individuals. That is, they are events where one agent is responding to another. To make sense of these events, we have to have some idea of how humans respond to … constraints, incentives, and their environment. One method is to build a priori, analytical models that help us to get an idea of how a human would behave in these cases — this is what “neoclassicals” do. But, since these models are just analytical devices — simplified, abstracted, et cetera —, there is an empirical element that they can’t capture.

This is Hayek’s point in “Economics and Knowledge,”

I have long felt that the concept of equilibrium itself and the methods which we employ in pure analysis have a clear meaning only when confined to the analysis of the action of a single person and that we are really passing into a different sphere and silently introducing a new element of altogether different character when we apply it to the explanation of the interactions of a number of different individuals…

When I first read Brennan’s post and I thought about the issue, what came to mind are institutions. Institutions, the formal and informal rules that constrain human activity, are crucial to understanding real world exchange. They determine how these exchanges take place and their outcomes. Their importance is almost universally recognized by economists of all stripes. But, institutions have an empirical element that is difficult to analyze in a purely logical model. It’s difficult to talk about institutions unless we also talk about the environment they exist in, which ultimately helps decide what these rules will look like (this is what economists have in mind when they discuss something like efficient, but constrained institutions). What are the technological constraints? What kind of behavior are the institutions meant to regulate? These are ultimately empirical questions.

The business cycle is another example. The business cycle is a complex phenomenon; it occurs as a result of the interaction of millions of agents. There are common factors that we can pinpoint, such as informational biases due to non-randomly distorted prices. But, even these common factors ultimately tell us very little about what an industrial fluctuation will actually look like. To be able to paint an accurate picture, we need to know the expectations of the various human agents and how they will respond to interactions caused by other agents. We could build a purely logical theory, but if the set of possible human responses (behaviors) is very large and we have to consider a very large set of agents, the range of alternative models is going to approach infinity. Thus, to be able to understand and explain real world business cycles, we have to embrace some element of empiricism.

This doesn’t mean that we should abandon praxeology (or “the pure logic of choice”). Hayek, throughout his life, would grapple with what each method has to offer. Later on, he would go on to doubt some of the benefits of empirical economics in the study of complex phenomena. Specifically, he postured that falsification becomes increasingly more difficult as the event becomes more complex. (This shouldn’t be surprising; it seems to be related to the fact that very reason we opt for analytical models is because it’s too difficult — sometimes impossible — to make sense of complex observations.) But, this seems to support the contention that, ultimately, what we want is to balance the merits of empirical and logical approaches to understanding the world. This balance is context dependent; it’s, ironically, an empirical problem.