Contemporary political discourse is dominated by economic terminology. Candidates run on platforms that emphasize “jobs, jobs, jobs,” and sitting representatives (and presidents) justify their policies through references to GDP growth. There is simply no way to approach politics without grappling with this stuff. Yet even as it takes on an outsized role in the formulation of public policy, economics is calcifying into a technocratic pursuit wrapped in impenetrable jargon and complex statistics, a phenomenon fittingly termed “the Econocracy.”[1]
It is those statistics that end up making their way into debates about taxation, spending, and welfare. Unfortunately, when neo-cons and progressives point to their favored studies, few stop and ask what validity there is in justifying economic policy by pointing to past successes. Can statistical proofs or historical circumstances demonstrate the viability of any particular economic policy? The answer is clearly no—correlation is not causation. Yet if economics is a science, shouldn’t it reveal causal relationships between “economic” phenomena?
Few economists have grappled with the epistemological problems of economics as extensively, or as successfully, as Ludwig von Mises. While he is credited with formulating the influential Austrian business cycle theory, his contribution to the methodology of economics is equally illuminating. In many ways, Mises’s approach can be seen as a further development of the ideas of Immanuel Kant, who sought to establish the possibility of an a priori science. According to Mises, a priori reasoning is not only informative within economics, it is necessary. His arguments stem from some simple observations about the status of positivistic approaches within the social sciences.
The method of the natural sciences is well known: it consists of observation, hypothesis, and experimentation. In the experiment, conditions are controlled to isolate the variables under examination. With repetition, this method promises a high degree of certainty as to the validity of the hypothesis. In other words, regularity in nature reveals itself a posteriori, in the world of experience.
Yet experience reveals no such regularity in the constantly changing world that is the proper subject matter of economics. As Mises observes, “here we lack the possibility not only of performing a controlled experiment in order to observe the individual determinants of a change, but also of discovering numerical constants.” Without this information, it is impossible to “show how given situations influence action quantitatively and qualitatively.”
While the experiment is the primary tool of the scientist, logic is the economist’s guiding light.
Because the world is constantly changing, economists can’t isolate variables to perform tests. Thus, the methods of the natural sciences are ill-suited to uncovering economic law. One can never tell, at least not with certainty, whether a nation’s well-being has improved because of low taxes, unusually bountiful harvests, or the shifting sands of geopolitics. There are simply no causal relations to be found through the study of such historical data. Yet in Mises’ view, the whole business of science is to uncover causal laws.
Thus, the task of elucidating economic laws is left to a priori reasoning. While the experiment is the primary tool of the scientist, logic is the economist’s guiding light. This, of course, does not mean that economics is an abstract pursuit. Rather, the method described by Mises integrates real-world conditions into the analytical process. History and the natural sciences have an important role to play: they tell us what these conditions are.
On Mises’s account, economic law is discovered through the analysis of choices made by individuals under given conditions. The analysis proceeds a priori, without any reference to past performance or anticipated results. Yet for all that, it is highly informative. Mises explains,
We are unable to grasp the concept of economic action and of economy without implying in our thought the concept of economic quantity relations and the concept of an economic good. Only experience can teach us whether or not these concepts are applicable to anything in the conditions under which our life must actually be lived. Only experience tells us that not all things in the external world are free goods. However, it is not experience, but reason, which is prior to experience, that tells us what is a free and what is an economic good.[2]
In other words, only a priori analysis can reveal the nature of various economic phenomena. Once the nature of phenomena such as free and scarce goods, interest rates, and money has been articulated, economic laws follow. One brief example of such a method in action can be found in Ricardo’s discussion of comparative cost, summarized by Mises in Human Action:
If A is in such a way more efficient than B that he needs for the production of r unit of the commodity p 3 hours compared with B’s 5, and for the production of 1 unit of q 2 hours compared with B’s 4, then both will gain if A confines himself to producing q and leaves B to produce p. If each of them gives 60 hours to producing p and 60 hours to producing q, the result of A’s labor is 20p + 30q; of B’s, 12p + 15q; and for both together, 32p + 45q. If, however, A confines himself to producing q alone, he produces 60q in 120 hours, while B, if he confines himself to producing p, produces in the same time 24p. The result of their activities is then 24p + 60q, which, as p has for A a substitution ratio of 3q and for B one of q, signifies a larger output than 32 p + 45 q. Therefore it is manifest that the division of labor brings advantages to all who take part in it. Collaboration of the more talented, more able, and more industrious with the less talented, less able, and less industrious results in benefit for both.[3]
It is important to note that the outcome of this process results in laws valid only so long as all the conditions of the investigation are met. Just as a physicist might qualify the enumeration of constants (such as the speed with which gravity accelerates objects towards the ground) with the caveat “on Earth,” an economist, according to Mises, must qualify their conclusions with the caveat, “so long as all relevant conditions hold constant.” It is entirely possible to conduct an investigation that reveals economic laws for a system that has never existed, such as a purely socialist system. Whether this proves useful depends on the facts provided a posteriori.
It would be impossible to arrive at economic laws if we relied exclusively on mathematics.
If Mises’s epistemological framework is valid, much of what today passes for economics is better understood as a type of history. Quantitative analyses of past conditions do not reveal economic laws, but they are valuable as mathematical articulations of historically unique phenomena. It would be impossible to practice useful economics without this information. Yet it would be impossible to arrive at economic laws if we relied exclusively on mathematics. That’s because mathematical analysis of past events does not provide information about causal relationships.
The implication is that when a politician says that the economy is improving because of their policies and offers the unemployment rate as proof, they only provide evidence for the first part of their statement. A falling unemployment rate does not prove the existence of a causal relationship. It is a historical fact. How it is that economic history grew to dominate our understanding of the discipline is anybody’s guess.
[1] Joe Earle, Cahal Moran, and Zach Ward-Perkins, The Econocracy (London: Penguin Books, 2017).
[2] Mises, Ludwig von, Epistemological Problems of Economics (Indianapolis: Liberty Fund, 2013) PDF.
[3] Mises, Ludwig von. Human Action: A Treatise on Economics (Auburn: Ludwig von Mises Inst, 2010) PDF.
Adam De Gree is a freelance writer and homeschool history teacher based in Prague. He studied Philosophy at UC Santa Barbara and can be reached by email here.
Image of Ludwig von Mises source: Mises Institute.
Well first off, it’s 4 in the morning and I can’t sleep, so what follows may be gibberish.
The problem I see with this methodology seems to been brought up in the earlier Methodenstreit debates in Germany which in my understanding touched on the validity of abstract vs historical methodologies in economics (https://en.wikipedia.org/wiki/Methodenstreit). If I got that wrong, let me know as I’m not familiar with Mises work.
The main critique against the abstract, a priori reasoning is that it is ‘necessarily, logically correct’ and yet also ‘necessarily, empirically falsified’. Put more simply, the “conditions” which are needed for the logical proof are never met in reality. You end up with an economics methodology that only works with two introverts, trading on an island populated only with coconuts and fish, And even then, not really!
The further problem is the causal relation that is won out of the a priori method is really brought in by slight of hand. This made sense to me on rereading Mises explanation of Ricardo’s comparative advatage, which struck me as incredibly and unnecessarily convoluted (I advise readers who are confused by it to check out Paul Krugman’s explanation or, even Ricardo’s original where i believe he talks about Wine and Textiles instead of “q” at “r”). His mix of a priori reasoning with a posteriori explanation shows that the causal relationship is simply assumed out of thin air, but very slyly so you won’t notice.
A proper a priori proof would require him to separate the logical statements which could easily be done using our commonly understood logical syntax. (I won’t fill the page with it, but I’m refering to setting up A and B’s production function etc etc). Then the step is taken to say that the various logical symbols, which present ‘valid’ proofs, represent things in the world and POOF! we have causality. Maybe I misread this and we start at the a posteriori conditions that “inspire” our a priori proofs – I’m not sure it makes a difference due to my earlier stated problem (how does the a priori proof, inspired by a posteriori conditions that don’t exist, “prove” anything or show “causality” about the real world?)
It seems Mises is working under a D-N model of science (correct me if I’m wrong here) where certain predicates matches with a universal law give us our conclusion. But the series of predicates that we have to insert to match our a priori law to real world conditions seems just as problematic as acertaining economics through historical data. Again, I’m not sure how much more scientific or rigorous the saying
“the logical proof demostrated matches the state of the world. Conclusion: trade is good” (excuse the million missing connecting predicates)
is to
“statistical and historical analysis of trade between two people making two commodities on an isolated island show increased gains for both parties”
Your right, the second makes no pretensions towards causality, but is the first all that convincing? You rightly complain that the second only refers to the past but miss that the first refers to nothing and, in principle, cannot refer to anything in the real world. So why let it inform real world decisions?
My (albeit weak) understanding of economics as it is practiced is mechanistic and model based. No one wants to know if we should trade with other countries. Trade has existed between nations long before economics (or nations, for that matter) has existed and continues to exist between all nations today. Sadly, even the oft cited crazy ol’ autarky (state of self-sufficiency) of North Korea isn’t truly so and still trades. We want to know answers to questions such as if cutting the taxes of those making over 200k in a country with 350 million people will do certain things like raise GDP, increase wealth inequality etc. I can’t even begin to imagine the series of assumptions and generalization that would be required to transform this into an a priori proof (if it’s simple and I’m missing something, please let me know)
Maybe the benefit of Mises’ method is that the proof is clean, and the law and predicates used to reach a conclusion can be easily interrogated? This seems to be a problem with model based economics which the general population can’t undestand and only gets the crumbs thrown to them – by which I mean the various contradictory headlines that say something like “X lowered Y by Z% shows new study!”. I think this does represent a problem and economists don’t seem to do a good job of explaining the assumptions that they make in order to make their models AND why these are reasonable for the questions that they are trying to answer (this is not a dig at ‘economic assumptions’ in the broad sense).
Thanks for the article and the extreme loss of sleep!
Hi Cezary, thanks for posting! I want to make sure I respond to each of your points, and am currently hosting family, so it may be some time, but I will respond asap. Til then, cheers!
The topic I’m REALLY interested in is the philosophical status, worth, or value (if any) of praxeology, of which economics was an example of among others for Mises. In any case, this was a terrific essay.