On Austrian Methodology and Praxeology

Blogger, analyst and economic hot-shot, John Aziz, recently posted at his blog, Azizonomics, a criticism of Mises’ and Rothbard’s methodological approach: “A Critique of the Methodology of Mises & Rothbard

The rather convoluted background here is that shock-jock Max Keiser got under Austrian rising star Tom Woods’ skin by saying on his (Keiser’s) hugely popular show that Mises was not a true Austrian and that Menger was the real Austrian and that Mises should basically be ignored.  I’ll post one link to the spat and then you can follow the trail of venom from there.

Aziz has basically jumped into the middle of this to lend some weight to the Keiser corner (not that Aziz would necessarily like to be labelled a Max Keiser apparatchik!) by criticising Mises’ methodological approach and praising Menger’s.

Aziz is a 25-year old whizz kid from England who has clearly made some waves in the intellectual community, managing at a young age to make it on to the contribution bill at the popular and highly respected economics blog Seeking Alpha.

He seems at first glance like something of an economic eclectic, multi-disciplinary type, with seeming causal-realist, even libertarian, leanings.  His blog lists his rather diverse regular online reads which include  Ambrose Evans-Pritchard, Barry Ritholtz, Circle Bastiat (the Mises Institute blog), FT Alphaville, Joe Weisenthal, Matt Taibbi, Max Keiser, Nassim Nicholas Taleb, Paul Krugman, Philosophical Economics, Robert Wenzel, Scott Sumner, Steve Keen, and Zero Hedge.

Two of his top 10 books include Nassim Taleb‘s Fooled by Randomness and The Black Swan, and his Seeking Alpha profile contains a picture of a black swan.  So it looks like Aziz is a bit of a Taleb disciple, meaning he’s probably got a good maths/stats brain on him.

Wikipedia lists Taleb’s influences as Friedrich Hayek, Karl Popper, Henri Poincaré, Michel de Montaigne, Benoit Mandelbrot, and Frédéric Bastiat, which puts him into a strongly statistical/mathematical and economically free market camp.

Wiki says of Taleb’s views [my emphasis],

“He proposes…”stochastic tinkering” as a method of scientific discovery, by which he means experimentation and fact-collecting instead of top-down directed research.”

Karl Popper, one of Taleb’s listed influences, was a major contributor to theories of Falsifiability in which he strongly attacked Humean inductive empiricism in favour of falsifiability in which single random data points can render previous inductive hypotheses invalid.

From these roots we get Taleb’s ‘Black Swan’ thesis which essentially criticises inductive mathematical models and suggests strategies to protect against inevitable randomness.

On the other end of the scale from Humean inductive empiricism is Austrian deductive praxeology which purports to build theory on the logical deductive basis that humans act and then deduce further axioms or truths that result from this action.  You can see the logic in the alliance between the likes of Taleb/Aziz with Austrians who also strongly criticise the inductive empirical approach, particularly in the social sciences.

In fact Aziz shows his strong partiality (without committing wholesale) to Austrian economics:

“I am to some extent an Austrian, on three counts.

First, I subscribe to the notion that value is subjective; that goods’ and services’ values differ according to different individuals because they serve various uses to various users, and that value is entirely in the eye of the beholder.

Second, I subscribe to the notion that free markets succeed because of the sensitive price feedback mechanism that allocates resources according to the real underlying shape of supply and demand and conversely the successful long-term allocation of labour, capital and resources by a central planner is impossible (or extremely unlikely), because of the lack of a market feedback mechanism.

Third, I subscribe to the notion that human thought is neither linear nor rational, and the sphere of human behaviour is complicated and multi-dimensional, and that attempts to model it using linear, mechanistic methods will in the long run tend to fail.”

Aziz also sees political-economy issues very clearly, and glancing over his blog I can see the guy is super-smart and probably worth sticking on your periodic blog reading list.

However for Aziz, the pure deductive a priorism of the Austrians is problematic.

First he quotes from Rothbard and Mises [original emphasis]:

Rothbard
“Praxeology rests on the fundamental axiom that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals. This concept of action contrasts to purely reflexive, or knee-jerk, behavior, which is not directed toward goals. The praxeological method spins out by verbal deduction the logical implications of that primordial fact. In short, praxeological economics is the structure of logical implications of the fact that individuals act.”

Mises
“Our statements and propositions are not derived from experience. They are not subject to verification or falsification on the ground of experience and facts.”

Aziz then states,

“This is completely wrongheaded. All human thought and action is derived from experience; Mises’ ideas were filtered from his life, filtered from his experience. That is an empirical fact for Mises lived, Mises breathed, Mises experienced, Mises thought. Nothing Mises or his fellow praxeologists have written can be independent of that — it was all ultimately derived from human experience. And considering the Austrian focus on subjectivity it is bizarre that Mises and his followers’ economic paradigm is wrapped around the elimination of experience and subjectivity from economic thought.”

My immediate reaction to Aziz’s post is that he is conflating base economic theory and economic forecasting, and that he is misunderstanding Mises’, and especially Rothbard’s, methodological approaches.  As an Austrian economic forecaster myself I can strongly identify with Aziz’s appeal to an approach that uses a ”mixture of deductionism and data.”  However we should not conflate Mises’ or Rothbard’s theoretical approach (most emphatically demonstrated in Human Action and Man, Economy and State respectively) with the task of economic forecasting.  As Rothbard and Mises (and others) have shown, deductive reasoning from the fundamental basis of human action can produce economic tomes that stand the test of time.  These texts provide a bedrock upon which one can begin to assess and understand broader economic cause and effect.

No one of any great credibility claims that analysing economic history or forecasting economic events is not an exercise in at least some empirical work, but the basic deductive foundations of an economic theory PROVIDE THE LENS through which that history must be interpreted.  Get the wrong lens and the data can be a liability!

This is why I believe Mises, Rothbard et al believe that deductively discovered axioms (independent of data per se – more on the nuances of this below) must precede an appeal to an empirical record since this immediately introduces circularity when applying theory to the data.

In other words it’s one thing making good theory and quite another making good forecasts.

That’s my first point.  My second point is that even in the realm of interpreting economic history and making economic forecasts, there has come to be an over-reliance on data.  The trick with data is not just that you can look at it through many different lenses, but that data through time and place is never directly comparable since the underlying drivers of economic data is individual subjective context, which is always different.

For example, a 2% US Treasury yield in 1812 is VERY different from a 2% Treasury in 2012.  Empiricists tend to use long range data and induce analysis based on quantitative aspects of data without having good understanding of qualitative aspects.

This kind of approach, especially when a practitioner is interchanging it with their theory formulation, can lead, as Aziz asserts about the praxeological approach, “down a dead end.”

Aziz seems to be flirting with these murky water in his own approach [my emphasis]:

“If I make a deductive prediction about the future, it is essential that I refer to data to determine whether or not my prediction has been correct.”

Exposing a hypothesis to the light of evidence augments its strong parts and washes away its weaker ones. When the evidence changes, I change my opinion irrespective of what my deductions led me to believe or what axioms those deductions were based upon. Why reach the conclusion that central planning can induce civilisational failure through pure logic when the historical examples of Mao’s China and Stalin’s Russia and Diocletian’s Rome illustrate this in gory detail?

Aziz is revealing somewhat his eclecticism, but going deeper than that, he’s saying essentially that data, or what he calls “evidence”, ultimately trumps deduction.  Or stated another way, he’s saying that deduction is servant to data.  But he immediately follows this up with an odd rhetorical question about how to analyse central planning.  His question could easily be rephrased: why spend hours and days pouring over data and history books when one can deduce logically that central planning can induce civilisational failure?  Moreover, Aziz is assuming that the data we’re working with is good enough to draw conclusions from or that even the right data is available at all.  What if all the examples he cites were the result of some other, unrecorded random failures and NOT central planning?  If this was discovered the person using Aziz’s approach (which, to reiterate, I believe excessively exalts data over logical deduction) could conceivably and erroneously change their view of central planning, or at least become agnostic.  The deductive logician faces no such dilemma which is why Austrians tend to hold far more consistent views over time than other economists.

This is elementary stuff. Deduction is important — indeed, it is a critical part of forming a hypothesis — but deductions are confirmed and denied not by logic, but by the shape of the evidence.

As I’ll move on to later, this is only true in the sense that the most fundamental axioms of human action are derived from basic conscious experience.  This is something Rothbard called a hyper-empirical view of the praxeological approach, something which Aziz does not recognise in his critique.

In rejecting modelling — which has produced fallacious work like DSGE and RBCT, but also some relatively successful models like those of Minsky and Keen — praxeologists have made the mistake of rejecting empiricism entirely. This has confined their methods to a grainier simulation; that of their own verbal logic.”

I belive Aziz has a point here about Austrian practitioners who engage in forecasting, but that leaves me a little confused as to who he’s gunning after here.  Surely not Mises and Rothbard who were theorising not forecasting? And surely not the many Austrian practitioners around today who do use models/data?

That’s my second point.  My third and final point is the most important, and it is that I think Aziz is misunderstanding Rothbard’s and Mises’ views on the praxeological approach.  Rothbard actually rejected Mises’ Kantian a priorism and instead adopted a far more realist approach to deduction.  Yet Rothbard does this without disregarding at all the basic notion of a prioristic reasoning and the validity of the deductive praxeological approach, and points out that Mises himself admitted that “a prioristic cognition” could also be called “inner experience”, something which we can all recognise as being a deep, almost innate empiricism.  This is contrary to the notion implied in Aziz’z Mises quote.

Rothbard essentially distinguishes between the human conscious experience and observation of the “laws of reality” on the one hand, and inductive data empiricism that occurs outside of natural human experience on the other. Rothbard lays his thoughts out as only Rothbard can in his “Praxeology: The Methodology of Austrian Economics“.  I’ll let him do the talking [my emphasis]:

Turning from the deduction process to the axioms themselves, what is their epistemological status? Here the problems are obscured by a difference of opinion within the praxeological camp, particularly on the nature of the fundamental axiom of action. Ludwig von Mises, as an adherent of Kantian epistemology, asserted that the concept of action is a priori to all experience, because it is, lik e the law of cause and effect, part of “the essential and necessary character of the logical structure of the human mind.”

Without delving too deeply into the murky waters of epistemology, I would deny, as an Aristotelian and neo-Thomist, any such alleged “laws of logical structure” that the human mind necessarily imposes on the chaotic structure of reality. Instead, I would call all such laws “laws of reality, ” which the mind apprehends from investigating and collating the facts of the real world. My view is that the fundamental axiom and subsidiary axioms are derived from the experience of reality and are therefore in the broadest sense empirical. I would agree with the Aristotelian realist view that its doctrine is radically empirical, far more so than the post-Humean empiricism which is dominant in modern philosophy…

Furthermore, one of the pervasive data of all human experience is existence; another is consciousness, or awareness….

That in thus penetrating the data of sense, conception also synthesizes these data is evident. But the synthesis here involved, unlike the synthesis of Kant, is not a prior condition of perception, an anterior process of constituting both perception and its object, but rather a cognitive synthesis in apprehension, that is, a uniting or “comprehending” which is one with the apprehending itself. In other words, perception and experience are not the results or end products of a synthetic process a priori, but are themselves synthetic or comprehensive apprehension whose structured unity is prescribed solely by the nature of the real, that is, by the intended objects in their togetherness and not by consciousness itself whose (cognitive) nature is to apprehend the real—as it is.

If, in the broad sense, the axioms of praxeology are radically empirical, they are far from the post-Humean empiricism that pervades the modern methodology of social science. In addition to the foregoing considerations, (1) they are so broadly based in common human experience that once enunciated they become self-evident and hence do not meet the fashionable criterion of “falsifiability”; (2) they rest, particularly the action axiom, on universal inner experience, as well as on external experience, that is, the evidence is reflective rather than purely physical; and (3) they are therefore a priori to the complex historical events to which modern empiricism confines the concept of “experience.”

Friedrich A. Hayek trenchantly described the praxeological method in contrast to the methodology of the physical sciences and also underlined the broadly empirical nature of the praxeological axioms:

“The position of man…brings it about that the essential basic facts which we need for the explanation of social phenomena are part of common experience, part of the stuff of our thinking. In the social sciences it is the elements of the complex phenomena which are known beyond the possibility of dispute. In the natural sciences they can only be at best surmised. The existence of these elements is so much more certain than any regularities in the complex phenomena to which they give rise, that it is they which constitute the truly empirical factor in the social sciences. There can be little doubt that it is this different position of the empirical factor in the process of reasoning in the two groups of disciplines which is at the root of much of the confusion with regard to their logical character. The essential difference is that in the natural sciences the process of deduction has to start from some hypothesis which is the result of inductive generalizations, while in the social sciences it starts directly from known empirical elements and uses them to find the regularities in the complex phenomena which direct observations cannot establish. They are, so to speak, empirically deductive sciences, proceeding from the known elements to the regularities in the complex phenomena which cannot be directly established.”

Similarly, J.E. Cairnes wrote:

“The economist starts with a knowledge of ultimate causes. He is already, at the outset of his enterprise in the position which the physicist only attains after ages of laborious research…. For the discovery of such premises no elaborate process of induction is needed… for this reason, that we have, or may have if we choose to turn our attention to the subject, direct knowledge of these causes in our consciousness of what passes in our own minds, and in the information which our senses convey…to us of external facts.

Nassau W. Senior phrased it thus:

“The physical sciences, being only secondarily conversant with mind, draw their premises almost exclusively from observation or hypothesis…. On the other hand, the mental sciences and the mental arts draw their premises principally from consciousness. The subjects with which they are chiefly conversant are the workings of the human mind. [These premises are] a very few general propositions, which are the result of observation, or consciousness, and which almost every man, as soon as he hears them, admits, as familiar to his thought, or at least, included in his previous knowledge.”

Commenting on his complete agreement with this passage, Mises wrote “that these “immediately evident propositions” are “of aprioristic derivation…unless one wishes to call aprioristic cognition inner experience.”

It should be noted that for Mises it is only the fundamental axiom of action that is a priori; he conceded that the subsidiary axioms of the diversity of mankind and nature, and of leisure as a consumers’ good, are broadly empirical.

Modern post-Kantian philosophy has had a great deal of trouble encompassing self-evident propositions, which are marked precisely by their strong and evident truth rather than by being testable hypotheses, that are, in the current fashion, considered to be “falsifiable.” Sometimes it seems that the empiricists use the fashionable analytic—synthetic dichotomy, as the philosopher Hao Wang charged, to dispose of theories they find difficult to refute by dismissing them as necessarily either disguised definitions or debatable and uncertain hypotheses.

I’m going to butt in here because the section immediately below is really, really important so take note!

But what if we subject the vaunted “evidence” of modern positivists and empiricists to analysis? What is it? We find that there are two types of such evidence to either confirm or refute a proposition: (1) if it violates the laws of logic, for example, implies that A = -A; or (2) if it is confirmed by empirical facts (as in a laboratory) that can be checked by many persons. But what is the nature of such “evidence” but the bringing, by various means, of propositions hitherto cloudy and obscure into clear and evident view, that is, evident to the scientific observers?In short, logical or laboratory processes serve to make it evident to the”selves” of the various observers that the propositions are either confirmed or refuted, or, to use unfashionable terminology, either true or false. But in that case propositions that are immediately evident to the selves of the observers have at least as good scientific status as the other and currently more acceptable forms of evidence.

This last sentence above, to me, is Rothbard’s most powerful.

Or, as the Thomist philosopher John J. Toohey put it,

“Proving means making evident something which is not evident. If a truth or proposition is self-evident, it is useless to attempt to prove it; to attempt to prove it would be to attempt to make evident something which is already evident.”

The action axiom, in particular, should be, according to Aristotelian philosophy, unchallengeable and self-evident since the critic who attempts to refute it finds that he must use it in the process of alleged refutation. Thus, the axiom of the existence of human consciousness is demonstrated as being self-evident by the fact that the very act of denying the existence of consciousness must itself be performed by a conscious being.

…A similar self-contradiction faces the man who attempts to refute the axiom of human action. For in doing so, he is ipso facto a person making a conscious choice of means in attempting to arrive at an adopted end: in this case the end, or goal, of trying to refute the axiom of action. He employs action in trying to refute the notion of action.

Of course, we only need to “look at the historical evidence” to see that Mises’ most fundamental axiom, human action, has not been logically or empirically refuted in nearly 100 years, and since it would take human action to do so, I suspect the axiom is safe.

As for Aziz, he looks like a very sharp analyst, and I’m certainly going to be reading a lot more of his work in future.

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About Russell Lamberti

Russell Lamberti is a regular contributor to Mises SA. He is Chief Strategist at ETM Analytics, an Austrian-influenced economic research firm based in Johannesburg. Although he wrties about many topics, you'll most often find him slaying patent and copyright law and exposing the biggest bubble in history: fractional reserve banking.
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  • http://azizonomics.wordpress.com Aziz

    Very sharp analysis from you too.

    Mises’ fundamental point is not something I want to dispute, because I think it’s basically correct:

    Praxeology rests on the fundamental axiom that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals. This concept of action contrasts to purely reflexive, or knee-jerk, behavior, which is not directed toward goals. The praxeological method spins out by verbal deduction the logical implications of that primordial fact.

    However the way I get to this point, and where I go from it is methodologically very different.

    The key similarity though is advocacy of free markets and individual liberty. Because I believe that successful economic planning is (for similar reasons to Mises) extremely problematic (if not impossible), I believe experimental free markets to be the only arena where humans can engage in true economic empiricism — experimenting to see which systems, which businesses and which ideas produce desired results.

  • Piet le Roux

    Great post, Russell. It is very rewarding to delve into this issue. It feels like a dive, starting out in extremely murky water, but as one presses on the water becomes clearer and clearer the most wonderful world of colour, shape, and systematic relation presents itself.

    On whether Mises’ a priorism was Kantian or Aristotelian, I found the 20-minute Austrian Scholar’s Lecture linked to below most interesting. The speaker, Warren Orbaugh, makes the case for Mises’ a priorism actually leaning more towards Aristotle. I’ll have to do more reading on this before I can pass judgement on the issue, though.

    http://mises.org/media/5959/Whether-Misess-Use-of-a-priori-Is-Kantian-or-Aristotelian

  • Helgard

    This is a rather complex debate that doesn’t really deserve quick blog replies.

    Any way…

    Just 2 thoughts:

    (1) Hayek did not buy Mises’ apriorism and methodological approach.

    Hayek’s epistemological skepticism is at the heart of his economics and political philosophy. Hayek drew much of his methodological inspiration from earlier Austrian like Menger – especially his work on the social sciences. He did of course change his views, especially as his own research changed and he became more interested in the theoretical psychology. He is methodologically different from Mises (but not that far in some readings of Mises) and commonly associated closer to Popper (also not as close as many readings suggest).

    The point being – Austrian – can mean Hayekian and in that sense there is a large part of the Austrian tradition that doesn’t draw from Mises / Rothbard’s a-priori approach and a lot of work currently being done in that tradition. (I agree with Aziz that this is not such a big deal when it comes to fundamental conclusions).

    *For a good overview of Hayek intellectual development economically I would recommend Bruce Caldwell’s “Hayek’s Challenge” and if you want to understand his political economy / philosophy Chandran Kukathas’ “Hayek and Modern Liberalism”.

    (2) A-priorism and Kantian philosophy has it fair share of critics in philosophy and political theory. I cannot speak specifically about theoretical economics – not my field. In fact there is a pretty strong movement in political theory (Geuss, Galston, Williams, Gray etc) against Kantian ethics first approaches to political theory (my field – at least in terms of my current Phd). This would include against people like Rawls and Nozick. Again, the only point being, that there is considerable philosophical and theoretical difference out there among libertarians – but that leads to many of the same conclusions. (I think Roderick Long makes a good defense of a-priori reasoning in pure philosophical terms)

    So, in this sense I think it is important to make the point that the Austrian tradition and libertarian political philosophy is diverse and doesn’t just revolve around Rothbard.

    This debate about a who is a true Austrian is silly and not very constructive. Along Aziz’s lines, there is an awful amount of good work being done in the tradition of Austrian economics – I would like to see “Austrians” embrace this rather than getting into fights about historical “purity”. I think this is a point Pete Boettke often makes and writes about in his latest book. (That said, there is nothing wrong in debating these issues in a civil manner)

  • Helgard