What is the purpose of economics, or generally, of any of the various branches of the quest for knowledge? Some people value the pursuit of knowledge for its own sake. For these people, knowledge is valued as an end. As far as we accept the idea that value is subjective, we cannot question any further into why this is so. Logic games can be entertaining. However, I would hazard to say that most people value knowledge for the sake of its applications.* That is to say, knowledge is generally valued as a means to other ends. Whereas it is difficult to question the worth of knowledge-as-end, we can carefully scrutinize knowledge-as-means. After all, in an objective sense, certain means can be vastly inappropriate for the ends that they are intended to reach.
Economics, as knowledge-as-means, is knowledge that we apply in our actions. We use economics to improve human welfare just as we use the physical sciences to improve human welfare. Biochemistry can tell us about the appropriate means for designing pharmaceuticals aimed at curing certain diseases. Economics can tell us about the appropriate monetary policy for fostering international trade. Both, in their applications, are knowledge-as-means.
Methodologies are important because they are the tools we can use to yield bodies of knowledge. We can think of the ends aimed at by knowledge-as-means as an nth order good, knowledge-as-means as an (n + 1)th order good, and the methodology used to attain the knowledge-as-means as an (n + 2)th order good. Value is imputed backwards from ultimate ends to the ends sought by the knowledge-as-means, backwards further still to the methodology.
The process of pure deduction, as a methodology, should not be valued in this regard. As we will show, it cannot be applied because it cannot yield appropriate knowledge-as-means.
Pure deduction can only yield conditional knowledge. Only with foundational assumptions, or with things that are “given,” can logical deduction yield any results at all. Logic in a vacuum yields nothing. Nothing in, nothing out.
For conditional knowledge to be elevated to the status of proper knowledge, we have to somehow verify that the conditions or assumptions on which the conditional knowledge is contingent actually hold true in some respect out in the external world. The conditional knowledge of the pythagorean theorem is based on the condition that one has a right triangle. Actual knowledge based on the pythagorean theorem has to come from knowledge that one is dealing with something which satisfies the definition of a right triangle. Conditional knowledge becomes proper knowledge when the conditions it is based on are known to be satisfied. How this knowledge comes to be known is a problem that is outside of the realm of pure deduction: it is necessarily empirical. This is the interesting epistemological problem.
To further use the example of the pythagorean theorem, what is important about empirical measurement is not that we test the conditional theory “the side lengths of a right triangle are related to one another by the equation a^2 + b^2 = c^2 where a and b represent the side lengths of the sides adjacent to the right angle and c the side length of the side opposite the right angle” by appealing to empirical measurement, but that when presented with a triangle, we measure the angles to first determine whether or not we are actually dealing with a right triangle, and can thus apply the pythagorean theorem.
Conditional knowledge, without knowledge about whether or not the foundational assumptions hold, cannot be knowledge-as-means because there is then no way of connecting the real world with the abstract world in which the assumptions we have based our conditional knowledge on hold. We have shown that the process of deduction by itself, as a methodology, is useless in attaining knowledge-as-means, because it gives no way of solving this problem.
But of course, the process of deduction that is made use of as part of the methodology of Austrian economics does not begin with nothing. It all begins with the action axiom.
But while we have good reasons for believing this axiom to be true, it is by no means true on the basis of pure deduction alone. Fundamentally, this is an empirical claim. We can certainly conceive of a world where humans are nothing more than mere animals, reacting on the basis of instinct alone. We also know that there are human beings in our world who do not act, who have fallen into persistent vegetative states. But if one tries to solve this problem by appealing to definition, by claiming that human beings are defined by their ability to act, then one is at once at a loss to explain how they can know that the beings around them who look similar and with whom they seem to communicate are in fact human beings in the sense that they act.
Nevertheless, for empirical reasons, most people tend to accept that human beings do in fact act purposefully.
Far from being the end of the matter, the action axiom is but the first of many assumptions needed to fuel the engine of deduction that produces the claims embodying Austrian economics. Very little, and possibly nothing which could be classified as “useful” economic knowledge-as-means can be derived from simply the action axiom alone. “Useful” knowledge, for people acting in the real world, must be knowledge about the real world. Further assumptions are drawn upon in the course of developing Austrian economics. But for Austrian economics to be considered relevant to our world, to be knowledge-as-means, these assumptions need to be justified. And this is precisely what the stated methodology of the Austrian school cannot do.
Indeed, what is certainly one of the most important parts of the Austrian research agenda today is a rigorous, logical formalization of Austrian economics which presents the deductive element of Austrian economics in the form of a logical proof while making every single assumption it is taking into account explicit. Logical formalization would prevent any criticism of Austrian economics on account of logical error, while enumerating the assumptions used would allow those assumptions to be subjected to empirical testing. Empirical claims, after all, demand empirical evidence.
Moreover, in criticizing alternate methodologies, it is easy to forget that methodologies can achieve different objectives. Each methodology has a body of knowledge that its employment can conceivably attain, but different methodologies can attain entirely different bodies of knowledge. The methodology of physics can attain very little in the way of historical knowledge, and vice versa, but it would be quite foolish for chiding the historians for not employing the method of physics in their investigations into historical problems. The methodology of physics can yield one body of knowledge, and that of history can yield a different body of knowledge.
Such is the case with Austrian economics and neoclassical economics. For example, nothing can be deduced in the Austrian method about quantitative prediction. But for an entrepreneur trying to estimate the effect on sales of a change in price of his product, knowledge of quantitative prediction is very valuable, and he would be better served by turning to the methods of neoclassical economics rather than Austrian economics for an answer to his question.
To the extent that different methodologies apply to differing bodies of knowledge, one cannot be said to be superior to another.
In the final analysis, the methodology of Austrian-economics-as-practiced, as opposed to the stated methodology of Austrian economics, is a synthesis of casual empiricism, in that the assumptions necessary for the reasoning are simply taken for granted, and logical deduction. The main difference in methodologies between Austrian and neoclassical economics is essentially that neoclassical economics recognizes the need to test assumptions and results against reality, particularly since neoclassical economics often resorts to an absurd level of abstraction from reality. Nevertheless, Austrian economists need to make sure that they are not equally as removed from reality.
*Austrian economists today, I think, would maintain that their pronouncements on matters of policy are not the product of simple logic games, but do in fact have a basis in reality that provides useful knowledge for understanding the role and effects of policy.