Austrian Economics

Economics
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Hey all, I’m new here and have much enjoyed all the very stimulating reading the last couple weeks. However I need some help because I think I’m going through my first crisis as an Objectivist.

I took my first college course on economics last Fall and it really was my first exposure to the subject in any real depth. I came away I think more enlightened but confused as well, I don’t think it was too liberal or marxist. Having been a student of Objectivism since I was 17 and first read Rand’s books, I never really mastered the nuts and bolts of how the economics part of Objectivism would work. It seems the only economists doing any real work that would support an Objectivist’s view of how a society should be set up was the Austrian School of Economics. Doing some internet research on economics, I came across a lot of criticism of Austrian Economics. It seems these economists don’t get taken seriously in the mainstream, which I admit does worry me as I begin to tackle the subject. One criticism I read said:

One criticism of the Austrian school is its rejection of the scientific method and empirical testing in favor of supposedly self-evident axioms and logical reasoning.

Is this true? Rejection of the scientific method and empirical testing? My understanding so far is that Austrian economics is the backbone of the Objectivist political philosophy, the justification for a rights respecting world, what makes it theoretically feasible. But I do get a bit nervous when I think that the fundamentals of an Objectivist political worldview are entrusted to a school of economics that can’t get accepted into the realm of serious economic discourse. I can’t even find what the supposedly “top” economists think about Austrian economics, so that I can find out where their reasoning is flawed, because there is hardly any mainstream reference to it. I also read that the only reason it continues to exist is because it is financed by wealthy business donors on the far right. What the hell is going on here? I’m sincerely hoping someone here has some answers, because I’m confused.

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My understanding so far is that Austrian economics is the backbone of the Objectivist political philosophy, the justification for a rights respecting world, what makes it theoretically feasible. But I do get a bit nervous when I think that the fundamentals of an Objectivist political worldview are entrusted to a school of economics that can’t get accepted into the realm of serious economic discourse.

The purpose of philosophy is to tell us the basic nature of the universe and our place within it. The areas within philosophy (metaphysics, epistemology, ethics, politics, aesthetics) use universally-available evidence to derive their conclusions. In politics, the Objectivist philosophy is an application of ethics to the problem of social existence.

The special sciences on the other hand, take philosophical conclusions as premises and look and particular aspects of the universe. For example, biology looks at the basic nature and processes of living things. Economics looks at the nature of commerce and trade. Unlike philosophy, the special sciences require specialized study of particular aspects of existence (animal life; commerce.) We use philosophy to validate the conclusions we make in the special sciences. For example, philosophy tells us that scientific theories must be logical, non-contradictory, causal, etc. Conclusions from the special sciences (economics included) cannot overturn philosophical principles, since they derive from philosophical methods and principles. Economics tells us the social consequences of violating man’s rights – it cannot tell us what man’s rights are, or whether it is wrong to infringe upon them.

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Austrian economics was developed by a number of thinkers with different philosophies. All of those thinkers had various philosophical errors, and some of those errors are reflected in their economic theories. Ludwig von Mises in particular was very good on economic theory, but over-ambitious in trying to apply it to areas outside the realm of economics. While his economic theory is very good, he had major differences with Objectivism in the fields of epistemology, ethics, and politics. (For example, he was a utilitarian, and supported taxation and the draft.) Hayek, the best-known Austrian economist, was basically a welfare statist.

Is this true? Rejection of the scientific method and empirical testing?

This is a very common and very wrong characterization. Most Austrian economists do make some legitimate philosophical errors, and it can be difficult to detangle their mistakes from stawman attacks such as the above. You should familiarize yourself with Austrian theory before making any conclusions. Here is a place to get started: http://www.mises.org/about/3224

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It’s not just the Austrian School that aligns with Objectivist politics; parts of the British Classical School do as well. There are good and bad theories and ideas everywhere in the feild. Economics isn’t a subject set in stone, but it’s not devoid of principles either.

One problem with contempary economics is, for example, there heavy use on formulas and graphs to explain things. They don’t take into account the geometric limitations of such things. Like supply and demand curves are great for showing the basic principle, but when anaylizing relationships they are limited to only examing two or three variables at a time. And real-world economics don’t work that way. The change in demand in one area effects demand in thousands of other areas.

One economist to study is George Reisman. He is an Objectivist and was a personal student of both Ayn Rand and Ludwig von Mises. You can read the first chapter of his book here.

His definition of economics reads –

I define economics as the science that studies the production of wealth under a system of division of labor, that is, under a system in which the individual lives by producing, or helping to produce, just one thing or at most a very few things, and is supplied by the labor of others for the far greater part of his needs.

Hope this helps.

Edit: The Austrian school has also been hijacked by anarchists and other assorted nutjobs, which makes it easier for the “mainstream” to right them off.

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This is a very common and very wrong characterization. Most Austrian economists do make some legitimate philosophical errors, and it can be difficult to detangle their mistakes from stawman attacks such as the above. You should familiarize yourself with Austrian theory before making any conclusions. Here is a place to get started: http://www.mises.org/about/3224

I would highly recommend NOT starting with anything from Mises.org, which pretends to be Austrian but is actually an anarchist institution with little understanding of Austrian economics.

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My understanding so far is that Austrian economics is the backbone of the Objectivist political philosophy, the justification for a rights respecting world

Your understanding is 100% wrong. Where in the world did you get that from? Objectivist politics is based on Objectivist ethics, which in turn is based on epistemology and metaphysics. Economics is not a part of philosophy and is derived from ethics and politics.

What you call the justification for a rights-respecting world lies in the primacy of existence and the nature of man. Specifically, in the fact that men, if they want to survive qua man, ought to deal with each other by reason rather than by force. You don’t need to be a student of economics in order to realize this; quite on the contrary, you need to grasp this first if you want to arrive at a true theory of economics.

But I do get a bit nervous when I think that the fundamentals of an Objectivist political worldview are entrusted to a school of economics that can’t get accepted into the realm of serious economic discourse.

None of Objectivism was accepted in the realm of what they called “serious philosophic discourse” during the lifetime of Ayn Rand, and its acceptance is still very limited today. This does not make Objectivism any less true. In fact, if contemporary mainstream intellectuals uniformly castigate and ridicule an idea, it is a good indication that it may have merit to it.

I also read that the only reason it continues to exist is because it is financed by wealthy business donors on the far right.

Oh, NOW you got me interested! Could you name some of those wealthy business donors on the far right please? Objectivism could certainly use some of them.

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All of those thinkers had various philosophical errors, and some of those errors are reflected in their economic theories.

This is very relevant. Personally, I find Carl Menger (arguably the founder of the school) to be excellent. His Epistemology is spot on, his statement and derivation of basic economic concepts true (and revolutionary, for the time). The Epistemology of subsequent austrians takes a dive, bottoming out in the complete rationalism (thought unconnected to reality) of von Mises.

Interestingly there is an economist who’s Epistemology is even better (or better stated) than Menger: Jean Baptiste Say. Reading the introduction of his “Treatise on Political Economy” there are several passages one could think came straight from Objectivist canon (except, of course, for the fact that he was a little over a century too early for that).

All human knowledge is connected. Accordingly, it is necessary to ascertain the points of contact, or the articulations by which the different branches are united; by this means, a more exact knowledge will be obtained of whatever is peculiar to each, and where they run into one another.

The manner in with things exist and take place, constitutes what is called the nature of things; and a careful observation of the nature of things is the sole foundation of all truth.

But a knowledge of facts, without a knowledge of their mutual relations, without being able to show why the one is a cause, and the other a consequence, is really [not useful]

Nothing can be more idle than the opposition of theory to practice! What is theory, if it be not a knowledge of the laws

which connect effects with their causes, or facts with facts? And who can be better acquainted with facts than the theorist

who surveys them under all their aspects, and comprehends their relation to each other? And what is practice without theory, but the employment of means without knowing how or why they act?

In economics itself, I found Say’s treatise somewhat poorer than the Austrians’ (excepting his masterful identification of what has become know as “Say’s law” - that production is demand). But that Introduction was a joy to read.

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[Describing Austrian Economists as dismissing of the scientific method] is a very common and very wrong characterization. Most Austrian economists do make some legitimate philosophical errors, and it can be difficult to detangle their mistakes from strawman attacks such as the above.

Although my reading of essays directly written by Von Mises and his intellectual descendents is limited (I have read a few though), my understanding that most Austrian Economists today are essentially Rationalists. This has been corroborated by discussions of Von Mises in Mark Skousen’s The Big Three in Economics, descriptions of the post-Mises Austrian school in Mark Skousen’s Vienna or Chicago: Friends or Foes? and personal communication with Andrew Bernstein. Do you believe that this is an accurate characterization?

If the above is true, I think it helps explain why Milton Friedman’s pro-capitalism views seemingly drew significantly more mainstream attention than those of Von Mises. Milton Friedman would always supplement his claims with a plethora of real-world examples.

I do not think that this criticism extends to Carl Menger and Eugene Bohm-Bawerk though, who essentially founded the school.

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The reason Austrian economics receives less attention is epistemic and can be summed in one phrase: philosophy of science. Austrian economics differs from all mainstream economics (and indeed, mainstream science) in one critical area, methodology.

The central tenet of the Austrian school is praxeology, which is a modeling of human action in an attempt to uncover the conceptual root of economics. Mises expanded on Menger’s line of though to create this methodology. Mises treatise on economics was appropriately titled ‘Human Action.’ Praxeology is founded on the axiom: Man must act. From here Mises concludes that a man’s actions are taken to improve his own ‘satisfaction.’ The study of economics can be seen as the study of interactions between individuals in a society exchanging goods in attempts to increase their own satisfaction, with each individual exchanging something of relatively low regard for something of higher regard, i.e. When I trade a goat for a cow, it is because I value the cow higher than I value the goat, and I am acting to improve my own satisfaction.

DarkWaters is correct. Mises derives praxeology - and therefore the study of Austrian economics - from a rationalistic a priori basis. Friedman was a positivist essentially. He wrote a paper titled Essay in Positive Economics, that essentially lays out the Chicago school’s foundation. Friedman talked about a pool table with an expert pool player lining up a shot. He then asked: How can you predict the final state of the pool table after the player strikes his shot? He said that the physicist would point to Newtonian mechanics, and maybe use some equations relating force, mass, acceleration, momentum, etc. Now, Friedman would concede that it is not realistic to assume that the pool player is solving equations in his head before he strikes the shot, nor to assume that there is no element of human error involved. However, this does not stop Friedman from concluding that, nevertheless, Newtonian mechanics provides an approximation of the final state of the table through its predictions, and insomuch as the the predictions predict with relative accuracy the final state, the physicist can assume the theory is true. Of course, when a new abstract theory is conceived such as Einstein’s relativity, then Friedman would say that it would replace Newtonian mechanics as truth, because it more accurately predicts observed phenomena.

But Friedman wasn’t really saying anything groundbreaking in my estimation. His methodology is simply an extension of the historical methodology of economics, if not all of science. Most theoritical physicists would agree with Friedman. Stephen Hawking sure did in one of his books (maybe A Brief History of Time?). I remember him stating something like, “It may not sound like reality to accept that the theory ________. But if the theory describes what we observe and document, and predicts future occurences accurately, then the scientist must accept it as valid knowledge, for his job is not to search for absolute truth.” In other words: If I can dream of a string theory which posits 11 or 12 dimensions to the world, and this theory describes observed phenomena with more accuracy than any other existing theory, then it must be valid. If I say a cat is alive and dead in a box simultanously, and the equations describing it have some manifestation in observed reality, then it must be a valid truth that the cat is indeed dead and alive.

So, Friedman and the majority of economists would accept the scientific method. It is true that the Austrian school would not. Either way, Objectivism is not based on Austrian economics.

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Either way, Objectivism is not based on Austrian economics.

But no one should make the mistake of dismissing the Austrian school. It’s still essential to explaining capitalism and economics. Anyone who says von Mises wasn’t pro-capitalist is a fool.

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Mises expanded on Menger’s line of though to create this methodology.

“Expanded” is not the word I would use. “Perverted” is.

Menger derives concepts from observation, principles from concepts.

Mises proposes concepts based mental gymnastics, derives principles from them and then tries to explain what he observes. Luck and an implicit Epistemology much better than his explicit one explains why Mises gets so much right.

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Menger derives concepts from observation, principles from concepts.

Mises proposes concepts based mental gymnastics, derives principles from them and then tries to explain what he observes. Luck and an implicit Epistemology much better than his explicit one explains why Mises gets so much right.

Could you elaborate a bit more on this?

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my understanding that most Austrian Economists today are essentially Rationalists. This has been corroborated by discussions of Von Mises in Mark Skousen’s The Big Three in Economics, descriptions of the post-Mises Austrian school in Mark Skousen’s Vienna or Chicago: Friends or Foes? and personal communication with Andrew Bernstein. Do you believe that this is an accurate characterization?

Unfortunately, I am not familiar with the publications you mention. I think it’s true to a degree - but not in the way that mainstream economists think. In fact, mainstream economics is far more rationalistic and anti-scientific than Austrian economics, even though (and precisely because) it attempts to eradicate theory. In their attempt to practice philosophical empiricism (to reject theory as such), mainstream economists rely on implicit rationalistic value-judgments. For example, in econometrics, economists build statistical models which are both so complex and so specific that they are useless as framework for understanding economic behavior. In Keynesean and neoclassical economics, the “perfect market” theories are so detached from reality that they are equally useless. The enforcement of antitrust is a perfect example. It relies on rationalistic statistical theories which do not reflect reality, and thus their attempts at “empiricism” are actually arbitrary power-mongering in the guise of “scientific” utilitarianism.

To put it another way, if you tried to study philosophy with statistics, you would have to resort to pragmatism. You could describe the concrete details of individual scenarios, but you could reach no fundamental conclusions. Any “theories” you discovered would be based on implicit ideas you already held. Likewise, the economical behavior of human beings cannot be studied as if human interactions were chemical reaction. It requires a theoretical analysis of human action in conjunction with empirical study. (Which Austrians are not opposed to, by the way. In fact, the most insightful analyses of economic events such as the Great Depression, the dot-com boom/best, and the current recession were written by Austrians.)

This says more about what Austrianism is not than what it is. Unfortunately, I am not well-read in economics, since most of my knowledge comes solely from lectures and conversation with various Austrian economists. The Mises Institute is the best free online resource I am aware of, so I suggest their online content.

If the above is true, I think it helps explain why Milton Friedman’s pro-capitalism views seemingly drew significantly more mainstream attention than those of Von Mises. Milton Friedman would always supplement his claims with a plethora of real-world examples.

I think that Friedman’s and Hayek’s success has a lot more to do with the fact that they advocated more interventionism. Incidentally, it is interesting that Hayek was an important Austrian despite the fact that he was a welfare statist. It demonstrates that Austrian economics primarily an epistemological method and not a policy prescription. It is a positive science, and makes no judgment about what should be, but only about what is.

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Your understanding is 100% wrong. Where in the world did you get that from? Objectivist politics is based on Objectivist ethics, which in turn is based on epistemology and metaphysics. Economics is not a part of philosophy and is derived from ethics and politics.

I know this, my fault for making my post unclear. The rejection of the use of force and respecting each other’s rights absolutely should be the touchstone of all human societies, in my view, and the basis for this is in philosophy. What I was trying to say is that so many times in debates with non-Objectivists I see theories from Austrian economics used to support the practicality of a free rights respecting society.

Oh, NOW you got me interested! Could you name some of those wealthy business donors on the far right please? Objectivism could certainly use some of them.

I have no idea who they are, but if I run into one I’ll see if they can cut the ARI a check :slight_smile:

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The purpose of philosophy is to tell us the basic nature of the universe and our place within it. The areas within philosophy (metaphysics, epistemology, ethics, politics, aesthetics) use universally-available evidence to derive their conclusions. In politics, the Objectivist philosophy is an application of ethics to the problem of social existence.

The special sciences on the other hand, take philosophical conclusions as premises and look and particular aspects of the universe. For example, biology looks at the basic nature and processes of living things. Economics looks at the nature of commerce and trade. Unlike philosophy, the special sciences require specialized study of particular aspects of existence (animal life; commerce.)

We use philosophy to validate the conclusions we make in the special sciences. For example, philosophy tells us that scientific theories must be logical, non-contradictory, causal, etc. Conclusions from the special sciences (economics included) cannot overturn philosophical principles, since they derive from philosophical methods and principles. Economics tells us the social consequences of violating man’s rights – it cannot tell us what man’s rights are, or whether it is wrong to infringe upon them.

I don’t think I’m understanding. I thought all science, economics included, was supposed to be guided by the scientific method and using empirical data only. I didn’t think philosophy could overrule the conclusions reached via the scientific method. I have never heard that in science there is any “philosophical premise”, as you say, other than the scientific method.

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Either way, Objectivism is not based on Austrian economics.

Are there many Objectivist economists? Who are they and what kind of research do they do? I had thought that the Austrian school was the basis for concluding that the philosophy of Objectivism could have real world application. I am committed to the idea of living in a land where human rights are sacred, but the empiricist in me would like to be able to demonstrate with data, derived by the scientific method, that this is the best way to organize human societies. From the discussion here it seems Objectivists differ on whether Austrian economics is congruent with Objectivism, though.

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I thought all science, economics included, was supposed to be guided by the scientific method and using empirical data only. I didn’t think philosophy could overrule the conclusions reached via the scientific method. I have never heard that in science there is any “philosophical premise”, as you say, other than the scientific method.

I believe the idea is that you cannot define a scientific method without first having a theory of the universe, a theory of knowledge and a theory of induction. In other words, having bad philosophical premises in metaphysics and epistemology makes it very difficult to be practice science soundly. For example, a bad theory of the universe might lead to philosophically questionable scientific conclusions, such as the Copenhagen Interpretation of the double-slit experiment.

Are there many Objectivist economists? Who are they and what kind of research do they do?

There are a few. There is Brian Simpson who is a professor at National University and the author of Markets Don’t Fail! and is currently writing a book on money, banking and the business cycle. I highly recommend Dr. Simpson’ s book! There is also the distinguished economist George Reisman who is the author of Capitalism: A Treatise on Economics and The Government Against the Economy. Dr. Reisman used to be very active in the Ayn Rand Institute but he parted ways maybe a good 15 - 20 years ago at the very least due to a personal dispute and possibly also for a philosophical dispute.

Finally, there are also a few active forum members on here who might be economists by training. One of whom I think is a professor of economics.

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Are there many Objectivist economists? Who are they and what kind of research do they do? I had thought that the Austrian school was the basis for concluding that the philosophy of Objectivism could have real world application. I am committed to the idea of living in a land where human rights are sacred, but the empiricist in me would like to be able to demonstrate with data, derived by the scientific method, that this is the best way to organize human societies. From the discussion here it seems Objectivists differ on whether Austrian economics is congruent with Objectivism, though.

The three main Objectivist economists I know of are George Reisman, Brian Smith and Richard Salsman. Reisman was a student of both Rand and von Mises, and unfortunately shares the Austrian vice of treating economics as an exercise in deduction from abstract principles and thought experiments. His major work is Capitalism: A Treatise on Economics, which is a thorough and comprehensive exposition of his views on economics. (It’s almost a thousand pages long, IIRC!) In spite of his somewhat rationalist methodology, there’s a lot of value to be found there.

Brian Smith seems to be influenced pretty strongly by Reisman. He’s a professor at National University. He’s got one book out, called Markets Don’t Fail!, which is an analysis and attempted refutation of a number of criticisms of the free market. I have a copy but haven’t read it.

Richard Salsman is an economist in private practice, engaged in forecasting for various clients. He’s written a couple of small books, Breaking the Banks on the history of free banking and Gold and Freedom on the gold standard. Both of these are published by the American Enterprise Institute. He also has an article in the recent collection The Abolition of Antitrust, edited by Gary Hull. Salsman tries to apply a more inductive methodology in his economics, but is nowhere near as systematic as Reisman or Smith.

There are some other Objectivist intellectuals with training in cognate fields. Yaron Brook, the director of the Ayn Rand Institute, was formerly a professor of finance at Santa Clara University, which means he has some formal training in economics. There is also a book by Jerry Kirkpatrick, In Defense of Advertising, which tries to do what the title says on the basis of Objectivist philosophy and broadly Austrian economic premises.

I think there are also some lectures on economic topics at the Ayn Rand Bookstore, but the above hits what I know of as the high points on written material on economics by Objectivists with formal economic training.

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But no one should make the mistake of dismissing the Austrian school.

Nobody should also make the mistake of accepting all of philosophical premises produced by the Austrian School of Economics in its entirety either. While they certainly have produced a lot of powerful and useful economic ideas, post-Mises Austrian Economists exhibit a staunchly Rationalist approach to economic philosophy. Their works should be read with caution.

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I am committed to the idea of living in a land where human rights are sacred, but the empiricist in me would like to be able to demonstrate with data, derived by the scientific method, that this is the best way to organize human societies. From the discussion here it seems Objectivists differ on whether Austrian economics is congruent with Objectivism, though.

The Austrians are justly skeptical about drawing conclusions about human behavior or society from data collected here and there. As somebody said on another forum, “It is not so much that Austrians say they need no empirical testing, as they say that it will be impossible to design an appropriate experiment to test the theory.”