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In this post guest contributor, Jakub Bozydar Wisniewski, who blogs here, replies to Eric’s critique of the Austrian method.

As Eric clearly understands the difference between establishing that a theory is logically true and establishing that it is empirically relevant, he should also understand that his critique does not apply to economic theory and its methodology as conceived by the Austrians. The Austrians never tire of stressing that economic theory is a tool to interpret the empirical reality and make it intelligible in terms of the categories of human action, not a “replacement” for the investigation of its empirical contingencies. This point is made forcefully and explicitly in, say, “Theory and History” and “In Defense of Extreme Aprorism”. Economic theory can provide a set of non-trivial, necessarily true statements regarding the logical structure of human action – nothing more and nothing less. It cannot and does not attempt to prove its relevance to any particular case rooted in the contingencies of the empirical world. The business of establishing such relevance belongs to other analytical tools, mental faculties, and areas of knowledge. An entrepreneur is in the business of making forward-looking judgments of relevance. A historian is in the business of making backward-looking judgments of relevance. But they both have to accept the logical (a priori) correctness of economic theory (or, for that matter, mathematical theory) if their judgments of relevance are not to be arbitrary leaps in the dark.

Having made the above general point, let me make a few further points relating to specific claims made by Eric in his two posts.

The fact that “we can certainly conceive of a world where humans are nothing more than mere animals, reacting on the basis of instinct alone” does not demonstrate that the action axiom is empirical. Eric is confusing two dimensions here – the metaphysical one (necessary vs contingent) and the epistemological one (a priori vs a posteriori). While he is right in saying that the applicability of the action axiom is not necessary (i.e., true in all possible worlds), he is wrong in suggesting that its truth is known a posteriori, unless he wants to define introspection as empirical in some broader sense which includes internal experiences (which is what Rothbard did). If we are to remain faithful to the Kantian/Misesian terminology, however, the action axiom must be thought of as a contingent a priori truth, similar to, say, the Cartesian cogito.

Also, the broad observational statements about the nature of economic agents and their condition in our world, such as the existence of scarcity, hetereogeneity of resources and skills, the existence of as yet unsatisfied preferences, etc., while certainly empirical in nature, are nonetheless not testable/falsifiable in the positivistic sense, since their truth is established by the mere perceptual contact with the empirical reality of our world, rather than by the experimental search for evidence of the previously formulated hypotheses (in fact, the formulation of any testable hypothesis presupposes the truth of these general observational statements). Hence, the fact that the Austrian economic theory relies on them to establish its relevance to empirical reality does not in any sense and in any degree commit it to the positivist programme of hypotheses testing.

Finally, towards the end of his second post Eric makes quite a very strong, but rather unsubstantiated point that seems to be independent of his previous critical remarks. He says the following: “Simply because actors prefer what satisfies them more over what satisfies them less, does not mean that each unit of a good that they use will give them less satisfaction than the previous one. It is all the more outrageous to believe that such things as the time-preference theory of interest or Austrian business cycle theory follow logically from simply the principle of human action”. If what he says here is that the above implications and derivations need not hold in view of various potentially intervening thymological contingencies associated with the lack of preference constancy over time, the role of expectations coordination, etc., then he does not mount any logical argument against the Austrian economic theory and its methodology. If, on the other hand, his suggestion is that these implications and derivations need not hold even assuming the relevant thymological ceteris paribus conditions, then I think his claim is clearly wrong, but since it is not supported by any identifiable logical justification, it is difficult to determine what deductive mistake or misunderstanding led to it.

Action implies the preference for sooner over later (since the opposite preference would lead to permanent inaction), and the preference for sooner over later implies that sacrificing the consumption of a certain quantity of present goods can be meaningfully engaged in only in exchange for receiving a larger quantity of future goods (even if the latter are to be goods of a purely immaterial nature, such as the psychological satisfaction of offering one’s friend a gift of interest). Hence, the action axiom implies the time-preference theory of interest.

Action also implies the preference for higher ranked wants over lower ranked wants. Thus, the utilization of the second unit of a supply of equally serviceable means has to be associated with the satisfaction of a want that is ranked lower than the one for whose satisfaction the first unit of the supply in question was utilized. Given a sufficient degree of preference constancy over time, suggesting anything else would not make logical sense (it would imply either that satisfying lower ranked wants gives the agent as much utility as satisfying higher ranked wants, or, even more absurdly, that satisfying lower ranked wants gives the agent more utility than satisfying higher ranked wants ). Hence, the action axiom implies the law of diminishing marginal utility.

The reason why the logic of the above chains of deduction does not convince Eric is nowhere to be found in his two posts.

Guttenberg’s response to my critique of Austrian methodology displays a large degree of carelessness and misunderstanding of the nature of logic. Guttenberg fails to respond to my thesis; he states it, claims it is “demonstrably untrue,” and then never mentions it again. Claiming an argument is “demonstrably untrue” requires you to demonstrate that it is untrue. Nowhere in his response does he say anything about whether knowledge we gain from the use of pure deduction can be an appropriate means towards our goals. It is telling that Guttenberg portrays my discussion of knowledge-as-means as opposed to knowledge-as-end as simply “some interesting thoughts” as if this is unrelated to my thesis.

My argument is that pure deduction by itself cannot give us appropriate knowledge-as-means, or knowledge that we value because it enables us to better serve our goals. Without any empirical knowledge there is no way we can apply the conditional knowledge gained by logical deduction. What we use as knowledge-as-means is ultimately empirical knowledge because we act in the real world, on the basis of knowledge about the real world. By itself, conditional knowledge tells us nothing about the world that we could use. The only way in which conditional knowledge can ultimately be knowledge-as-means is by expanding our knowledge of the real world given some knowledge of the real world. With conditional knowledge, we can take a few empirical facts and deduce from them many empirical facts that must also be true. But without any means for attaining empirical knowledge, logical deduction is useless. It can only be valued as knowledge-as-end.

But no one to my knowledge sees economics as knowledge-as-end. Economics is valued because it can inform our decisions by giving us knowledge about the real world. The Austrian economists are no exception to this rule. Any time the Austrian theory of the business cycle is applied to a real-world business cycle, every time an Austrian economist comments on economic policy, and whenever Austrian economics is used to try to predict the outcomes of given real-world events, Austrian economics is being treated as knowledge-as-means. One of the more prominent Austrian economists, Guido Hülsmann, has in fact said “The necessary assumption of any research activity [is] that research will make a difference. Whoever sets out to develop a model of human behavior necessarily assumes that his findings will have some impact on either his own action or the actions of other persons (otherwise this research would be senseless).”*

There is of course no discussion of anything like this in Guttenberg’s response, rather, he takes issue not with my thesis but with much more fundamental claims about logic and deductive reasoning. Guttenberg’s naïve understanding of logic, and of its most well drawn-out application, mathematics, is present at every stage of his response to my critique, as I will show.

The first claim I make that he takes issue with is my thesis:

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.

However, after asserting it is “demonstrably untrue,” he never mentions it again. Somehow, in a mere half page of writing, he completely forgets about this. Indeed, in his next paragraph he has so forgotten about it that he claims:

$A = A$ is a tautology, just as all deduction is. Whether Eric thinks logical tautology can give us usable or meaningful knowledge is another thing.

No. It is not “another thing,” it is central to my thesis.

The second claim I make that he takes issue with is this:

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.

Now, the fact that he takes issue with this is rather disturbing. He says in response to this that:

Pure deduction, as a matter of fact, can yield quite a bit of certain knowledge. The understanding of mathematics and geometry are based on pure deduction from an incontestable axiom: the law of identity.

Here, Guttenberg takes issue with my claim without even being able to figure out the negation of my statement. If someone disagrees with this claim, they are claiming that without any foundational assumptions at all, they can deduce something. He claims that “mathematics and geometry,” as if geometry is not part of mathematics, is an example of deduction not from any foundational assumption, immediately before stating the foundational assumption on which he believes they are based. “Axiom” in fact means “foundational assumption.”

We cannot, contrary to Guttenberg’s proclamation, derive mathematics from the “law of identity.” There are many axioms on which mathematics is based, and some of them are very intensely contested, such as the famous axiom of choice. The “law of identity” is something that is true by assumption: we essentially define it to be true. The identity relation is something which we define as a binary relation such that for a set X, { (x,x) | x element of X}, and the symbol “=” simply denotes this binary relation. That A = A is a simple result that is “derived” from this definition. It follows trivially from it. With a different definition, the statement could easily be false, viz., in some conceivable world the statement is false. To the extent that it is “derived,” it is derived from the definition, and is thus conditional on that definition.

None of this implies that the statement “A = A” is an empirical hypothesis, subject to continual testing or experimentation, or anything of the sort. Guttenberg simply does not understand that “conditional knowledge” is not the same as “empirical knowledge.” Conditional knowledge is knowledge of a conditional statement, an if-then proposition. If I am “given” something that satisfies the condition, then I also know something else. If I am given a right triangle, then I know how to relate their side lengths as the Pythagorean theorem describes. It is a conditional statement, and it is conditional knowledge because we know it to be true, but nothing about it is empirical. This confusion is Guttenberg’s.

The third claim I make he takes issue with is:

Conditional knowledge becomes proper knowledge when the conditions it is base 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.

Now, the simple example of the Pythagorean theorem was used to demonstrate how logically true and certain conditional knowledge can come to be used as knowledge-as-means, or useful knowledge. Since Guttenberg has ignored the whole problem my critique raises about useful knowledge, he says that:

What empirical testing and experimentation can do is to verify whether certain theorems fit into a specific case, not whether certain theorems are true or false.

This is of course, exactly what I had just said, and yet Guttenberg says of the paragraph in which I talk about this that it “is untrue in all of its parts.” Guttenberg has clearly contradicted himself. The remainder of his paragraph attempts to portray my work as claiming that the truth of logically deduced claims is somehow dependent on reality. Once again, Guttenberg’s confusion between “conditional knowledge” and “empirical knowledge” leads him to falsely characterize my critique.

The remainder of Guttenberg’s response to my critique is largely repetition, and is similarly poor in its interpretations and arguments. There are, however, several more erroneous notions of which Guttenberg needs to disabused. First, merely because something is true, does not make it useful. For example, if I am given that P is false, then the statement P implies Q is true vacuously. Yet this statement is obviously not useful because P is false. Another example pertains to an apocryphal story told in my math department: supposedly, some poor MIT student’s Ph.D. thesis was on functions satisfying an inequality of the type |f(x) – f(y)| <= |x-y|^k where k > 1. Allegedly, more than 100 pages were written on the properties of such functions. And at his oral defense he was asked for a non-constant example of such a function. (There aren’t any). You can guess at the outcome of his defense. However true his claims, they are nonetheless useless. The same can be said of praxeology without some justification for why it can be applied.

The second is the “proof” that Hoppe gives for the principle of diminishing marginal utility. A basic understanding of the logic of a proof demonstrates that Hoppe’s argument does not constitute a proof even though Guttenberg thinks otherwise. The principle of diminishing marginal utility does not follow from the principle of human action; there has been, in this instance, a “flaw in the process of deduction.” Simply because actors prefer what satisfies them more over what satisfies them less, does not mean that each unit of a good that they use will give them less satisfaction than the previous one. It is all the more outrageous to believe that such things as the time-preference theory of interest or Austrian business cycle theory follow logically from simply the principle of human action.

Now, as well practiced as Guttenberg seems to be at calling statements “wrong,” “unqualified,” “demonstrably untrue,” etc., he is completely ignorant of what “conditional knowledge” and “axiom” mean, among other things. This is hardly acceptable for anyone, but much less someone who feels the need to share their views on logic and epistemology and to critique others’ views on these subjects. Guttenberg would be wise to study these matters more carefully.

* Hülsmann, “Economic Science and Neoclassicism” Quarterly Journal of Austrian Economics vol. 2, no. 4 (Winter 1999): 3-20, p. 13.

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.

I recommend reading this interesting post over at Practical Ethics concerning what the relationship between neuroscience research and the law should be. The author mentions that there are instances where a criminal’s anti-social behavior can be traced back to neurological damage or pathologies. In light of such findings he goes on to question how that should influence the way cases are tried and the kind of research neuroscientists pursue.

One issue that is also worth considering is whether juries are capable of processing complicated and nuanced scientific claims and if they are not what does that suggest about the inherent limits of employing scientific research in the courtroom or better still about the need to move away from the jury system itself.

Either way, my initial thinking on the matter is that hopefully our court system can become more compassionate if in certain instances it can be demonstrated that a person’s behavior is a product of forces wholly out of their control that might even be treatable. Ideally bringing neuroscience research to bear on legal decision-making might also influence neuroscientists to develop methods for treating the kind of neurological damage that incline afflicted individuals to commit crimes. Its also worth considering whether courts, by employing neuroscience research, can become more effective and objective agents of justice.

I believe Professor Cohen’s challenge hits the mark and must be taken seriously. The project of reclaiming modernity begins with imagining institutional structures that can harness and harmonize the productivity of market-capitalism and the spirituality of intentional communities. Thinking beyond the nation-state is essential to this project, for reasons that I hope to expand on in future posts. But the first step for libertarians is to come to grips with the facts about the ugly side of capitalism, as laid out by Professor Cohen, among others.

We cannot succeed in conceiving a new institutional structure in which to embed market institutions if we do not know what is wrong with capitalism as it currently exists. Part of the task here is to recognize capitalism’s deleterious features in abstraction from the one’s that arise from its relationship to the nation-state system. Only in this way can libertarians liberate themselves from their immature and vulgar faith in market fundamentalism.

Ross Kenyon wrote on C4SS this interesting piece called “The “Market” Doesn’t Disicpline, Ron Paul. We Do.” Because of the importance of his thesis, I would recommend everyone read it for themselves. It’s not long, so you have no excuse. For the following blog article, I will assume you have read it.

Let us consider the following argument put forth by Kenyon:

“We are “the state.” We are all “state forces.” We are the ones Obama is proposing to have more power to discipline wrongdoers via torts, lobbying, voting and petition. Libertals do not believe in delegating this authority away from ourselves as that act of concession will lead to regulatory capture and the centralization of power and economy. Democracy is absolutely not an external process we can afford to just sit back and watch transpire before us.”

Let me clarify that nothing what Ross says is untrue; it is true that ‘we’ are the market. That ‘us’ is important; if ‘we’ want to discipline big companies, we will need to do stuff – change our consumer purchases, pursue legal measures, etc. This is all true. However, as the paragraph above illustrates; something very similar can be said about democracy as well. It is ‘us’; ‘we’ need to take an active part in it, etc. The problem with emphasizing our collective responsibility for these respective social institutions is that it doesn’t make the most relevant point of all: the market is a specific set of rules and institutions that allows for the most beneficial kinds of (social) action in disciplining others – through market oriented mechanisms. Tort law is one of these (if you don’t want to call that ‘a market mechanism’, then call it something like ‘an institution tasked with securing the principles of liberty or whatever, you get the point). If we simply stop caring, then the market will provide garbage and deceive us – but it will probably still be better than the government, which also requires social action to work better – and even more.

Consider this interesting insight from De Jasay: because of the ‘free rider/public goods’ excuses for government, we create a bigger free rider/public goods problem: the problem of controlling government by outside forces is one big public good – and very undersupplied for that matter.

Ron Paul is correct in saying that ‘the market disciplines’ (better than government). The market makes it easier and allows for less destructive behavior, even if nobody cares. It’s important that we emphasize the process – called the market – not the actors; because the actors are important in both processes. The real difference are the rules, not the actors that play by the rules.

That is why libertarians have a robust political philosophy and the respective statist camps do not.