Champio Rafe The Austrian School of Economics as a Popperian Research

8/7/2019 Champio Rafe The Austrian School of Economics as a Popperian Research

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he Austrian School of Economics as a Popperian Research paper . Rafe Champion

ttp://www.the-rathouse.com/RC_PopperPaper.html (1 of 7) [04/04/2011 22:19:11]

In this paper I will argue that Popper supported the Austrian school of economics in three ways. First, his theory of

metaphysical research programs shows that the Austrian program cannot be dismissed as "unscientific" quite as easily

as many critics suppose. Some of the so-called a prioriprinciples of Austrian economics can be regarded as working

assumptions, either methodological or metaphysical postulates, of the kind that occur in all sciences. These need to

stand up to criticism but they do not have to be testable or falsifiable.

Second, the method of situational analysis and the rationality principle which Popper advocated for the explanation of

events in the social sciences is practically identical to the Austrian approach which is labelled "praxeololgy" (the logic of

action).

Third, in addition to supporting in principle the use of a metaphysical framework for analysis, Popper championed some

particular metaphysical assumptions that provide a congenial framework for the Austrian approach. In other words,

Popper and the Austrians are metaphysical fellow travellers.

Part I provides a brief introduction to the Austrian school of economics. Part 2 sketches Popper's views on the function

of methodological conventions and metaphysics in shaping and directing research programs. It also indicates some

elements of the program that flows from his own work. Part 3 describes how Popper's ideas provide support to the

Austrians. An addendum shows how Larry Boland anticipated some of these ideas.

The Aust r ian Schoo l o f Econom ics

The leading features of the Austrian tradition include methodological individualism, the origin of social institutions as the

unintended consequences of human action, the salience of dynamic competition and entrepreneurial innovation in the

marketplace, the subjective theory of value, recognition of the time factor in social and economic processes, and the

uncertainty of human knowledge. Vaughn (1990) identif ied three recurring themes in Menger's major text (1) knowledge

and plan, (2) the primacy of process, and (3) spontaneous order and the progress of civilization. The most distinctive

feature and the one that has created the most problems for them in gaining acceptance in the mainstream of modern

economics is the concept of praxeology, of which more in a moment.

The founding fathers of the school were by Carl Menger (1840-1921), Friedrich von Wieser (1851-1926) and Eugen von

Bohm-Bawerk (1851-1914). Their busts are displayed on three consecutive pillars in the quadrangle of the old Vienna

University and people who attended the Popper Centenary Conference may recall them, near the book displays.

Menger is usually named with Walras and Jevons as a leader of the Marginalist Revolution although his approach was

very different from theirs.

Major contributors to the Austrian tradition were Knut Wicksell (1851-1926), Ludwig von Mises (1880-1973, Lionel

Robbins (1898-1984),Friedrich A. Hayek (1898-1994) and Murray Rothbard (1926-1995). Contemporaries include

Ludwig Lachmann and Israel Kirzner The Austrian tradition appeared to be firmly placed in the mainstream of the

economics profession until Keynes captured the field in the 1930s and the Austrians became practically invisible until

the movement staged a revival in the 1970s. Vaughn (1990) provides an excellent timetable and summary of the

reasons for the fall and rise of the school. The leading stronghold of Austrian thought at present is the Mises Institute

and other centres with a significant Austrian presence include the Institute of Humane Studies, the George Mason

University and the Cato Institute [Note 1].

Several factors contributed to the eclipse of the Austrian tradition. First, economics fell under the spell of mathematical

analysis, as described by Ingrao and Israel (1987, 1990), and this distracted attention from real market processes where

Cen ten a ry Con feren ce

002 Popper Cen ten ar y Con ference 200 2opper Cen tena ry Conference 20 02

The Austrian School of Economics as a Popperian Research Programme

A paper prepared for the Popper Centenary Conference, 2002 . Rafe Champion

opp er Cen ten a ry Con feren ce2002Popper


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the Austrians focus their attention [Note 2]. Second, the subjectivism and methodological individualism of the school

were widely misrepresented as either a psychological approach or as an indefensible form of ontological individualism, a

claim that only atomistic individuals existed, independent of social contexts and historical influences. Third, many of the

leading Austrians, especially Mises, taught that the undesirable consequences of state intervention in markets far

outweigh the intended effects and this put them at odds with all progressive social movements up to the present time.

Finally, both positivism and falsificationism in the philosophy of science seemed to rule out some of the basic principles

of the Austrian approach, most especially the doctrine of praxeology.

As described by Rothbard (1976):

Praxeology is the distinctive methodology of the Austrian school. The term was first applied to

the Austrian method by Ludwig von Mises, who was not only the major architect and elaborator of

this methodology but also the economist who most fully and successfully applied it to the

construction of economic theory.

Rothbard claimed that this was the basic method of the earlier Austrian school (Menger et al) and of some members of

the earlier classical school including J B Say and N W Senior.

Praxeology rests on the fundamental axiom that individual human beings act, that is, on the

primordial fact that individuals engage in conscious action towards chosen goals [in contrast with

reflex or knee-jerk behaviour], furthermore, since praxeology begins with a true axiom, A, all the

propositions that can be deduced from this axiom must also be true. For if A implies B, and A is

true, then B must also be true(ibid).

Rothbard noted that praxeology does not assume that people are wise and proper in their choice of goals, or that they

necessarily select the technologically appropriate manner of reaching them. He emphasised that all action in the real

world takes time and the future is uncertain, though the actor believes that the action will make a difference for the

better.

Rothbard asserted that these propositions are deducible from the axiom of purposeful action (in a real world of time and

uncertainty).

Apart from the fact that these conclusions cannot be tested by historical or statistical means,

there is no need to test them since their truth has already been established.

Turning to the establishment of the axiom, there was a difference of opinion in the camp.

Ludwig von Mises, as an adherent of Kantian epistemology, asserted that the concept of action is

a priori to all experience, because it is, like the law of cause and effect, part of 'the essential and

necessary character of the logical structure of the human mind'. I would deny, as an Aristotelian

and neo-Thomist, any such alleged laws of logical structure [in] the human mind]. 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(ibid).

In addition to the foregoing considerations, (1) [the axioms] 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 (ibid).

On t he re l a t i onsh ip be tw een p raxeo logy and o the r d i sci p l i nes

In brief, praxeology consists of the logical implications of the universal formal fact that people

act, that they employ means to try to attain chosen ends. Technology deals with the problem of

how to achieve ends by the adoption of means. Psychology deals with the question of why people

adopt various ends and how they go about adopting them. Ethics deals with the question of what

ends, or values, people should adopt. And history deals with ends adopted in the past, what


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means were used to try to achieve them and what the consequences of these actions were(ibid).

He dismissed the criticism that Austrian methodological individualism implies that the person is an isolated and

hedonistic "social atom", instead it merely claims that it is individuals who perform the subjective activities of feeling,

thinking and valuing.

He suggested that it was a mistake of the early Austrians to describe themselves as the psychological school (to

emphasise their subjective theory of value, and the axiom of purposeful action) because it enabled critics to accuse

them of ignoring recent findings in psychology, and it led to misunderstanding of the law of diminishing marginal utility as

a law of psychology rather than a corollary of the theory of value.

At one point, and one point alone, however, praxeology and the related sciences of human

action take a stand in philosophical psychology: on the proposition that the human mind,

consciousness, and subjectivity exist, and therefore action exists. In this it is opposed to the

philosophical base of behaviorism and related doctrines, and joined with all branches of classical

philosophy and with phenomenology(ibid).

The differences are less important than the similarity because the "a priori" nature of the basic Austrian postulate of

human action has been ridiculed by mainstream economists on the grounds that it destroys any claim by the Austrian

theories to scientific status. Blaug wrote on Mises "His later writings on the foundations of economic science are so

idiosyncratic and dogmatically stated that we can only wonder that they have been taken seriously by anyone" (1980, p

81). He went on to quote Samuelson "I tremble for the reputation of my subject" in connection with the exaggeratedclaims that used to be made in economics for the power of deduction and a priori reasoning [Note 3].

To achieve the status of a science, it has been urged that the propositions of economics should be verifiable (according

to the positivists) or falsifiable (according to people who invoke the name of Popper). However in the following section I

will show that this insistence on verifying or testing methodological proposals represents a category error on the part of

the critics of the Austrians.

Popper on M e thodo logy and M e taphys ics

Two aspects of Popper's theory of research programs are (a) the recognition of the importance of conventions in

methodology and (b) his theory of metaphysical research programs.

He advocated the critical method, with five forms of criticism.1. The check on the problem. Does the theory solve the problem?

2. The check of logic. Is the theory internally consistent?

3. The check of consistency with other well-tested theories.

4. The check of evidence, falsifiability (if this is appropriate).

5. The check on the metaphysics.

Jarvie has recently explicated the core of Popper's classical work as a set of conventions regarding the use of evidence

(check 4, above), a kind of constitution for science that starts with the supreme principle of maximising the exposure of

theories to empirical tests, then spells out a number of subsidiary principles to support that objective (Jarvie, 2001). The

point is that the conventions themselves are not empirically testable because they live on the "ought" side of the is/ought

divide, they are tested by their capacity to support the search for truth and the improvement of descriptive and

explanatory theories.

Moving on to Popper's theory of metaphysical research programs which appeared in a reasonably well developed form

in the Metaphysical Epilogue to Quantum Theory and the Schism in Physics (1982), the third volume ofThe Postscript

to the Logic of Scientific Discovery.

In almost every phase of the development of science we are under the sway of metaphysical -

that is, untestable - ideas; ideas which not only determine what problems of explanation we shall

choose to attack, but also what kinds of answers we shall consider as fitting or satisfactory or

acceptable, and as improvements of, or advances on, earlier answers. These programmes

[clusters of metaphysical theories] are only occasionally discussed as such: more often, they are

implicit in the theories and in the attitudes and judgements of the scientists(p 161).


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The term "program" implies that these metaphysical ideas tend to cluster together and support each other in various

ways. They also provide historical continuity despite changes in the status of testable theories. A striking example used

by Popper is Plato's geometrical cosmology, designed to overcome a crisis in Greek mathematics when it was found

that arithmetic could not satisfactorily treat irrational numbers. Popper traced this theme into modern times as a "behind

the scenes" influence in cosmology and physics. [Note 4]

Popper's major work on metaphysics occurs in Quantum Theory and the Schism in Physics where he explored the

problems that he attributed to the influence of defective metaphysical theories in the orthodox interpretation of quantum

theory. The theories which he subjected to criticism were subjectivism, instrumentalism and determinism. From this

analysis and other works by Popper it is possible to discern a coherent program of epistemology, methodology andmetaphysics that challenges the dominant assumptions of most schools of thought in the natural and human sciences.

Popper Program Trad i t iona l Program

Fallibilism or non-justificationism Dogmatism or justificationism

Objectivism Subjectivism

Realism Instrumentalism

Non-determinism Determinism

Non-reductionism (emergence) Reductionism

Non-essentialism Essentialism

(definitions are not fundamental) (conceptual analysis)

Situational analysis and Holism and collectivism

methodological individualism

Inevitably, discussion of MRPs tends to be somewhat abstract, and is constantly likely to deteriorate under the influence

conceptual analysis. Practical concerns, such as the discipline of experimentation or technological application should

help to keep discussion focussed.

H ow P opper suppor t s t he A us t r i ans

Popper supports the Austrian school of economics in three ways. First, his theory of metaphysical research programs

legitimates the use of untestable principles to provide the framework for a research program. The basic principles of

Austrian economics can be regarded as working assumptions, either methodological or metaphysical postulates, of the

kind that occur in all sciences. These need to stand up to criticism but they do not have to be testable or falsifiable.

The term "metaphysical" may antagonize people who have taken on board the strong positivist prejudice against

metaphysics, however in this context it simply means that many basic principles and methodological conventions cannot

(and need not) be subjected to empirical tests as the positivists would demand. The most obvious example for the

Austrian program is so-called axiom of purposeful action. This is usually (unhelpfully) described as "self-evidently true"

but it is more usefully depicted as a methodological assumption. It does not need to be directly testable, it is tested by

the capacity of the program to produce robust explanations for the phenomena under investigation, such as money, the

Great Depression, unemployment, inflation and trade cycles. This may resolve the clash between Popper and Mises on

the matter of falsifiability. Mises totally rejected the idea that the principles of praxeology should be falsifiable but he was

as interested in the facts as anyone else. In his tract Epistemological Problems of Economics under the heading 'The

Logical Character of the Universally Valid Science of Human Action' he wrote "only experience makes it possible for us

to know the particular conditions of action. Only experience can teach us that there are lions and microbes. And if we

pursue definite plans, only experience can teach us how we must act vis a vis the external world in concrete situations".

The Popperian or "critical rationalist" rejoinder to positivists, nave falsificationists and instrumentalists who lampoon the

Austrian approach is to explain that it is not a departure from acceptable scientific practice to make use of untestable

propositions for some purposes. The critical rationalist does not insist that all the premises and presuppositions in


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scientific discourse should be verified, merely that they stand up to criticism. Empirical tests are a particular kind of

criticism, but they are not appropriate for all assumption, especially those of methodology and metaphysics, which have

to prove themselves at one step removed - by the power of the testable explanatory theories that they generate.

The second way that Popper supported the Austrians was in his advocacy of situational analysis and the rationality

principle for the explanation of events in the social sciences. This is practically identical to the Austrian approach, by

way of praxiology, the logic of human action, with the basic principle that human beings act purposefully. Popper

followed the Austrians in other ways, in methodological individualism, in the theory that most institutions arise as the

unintended consequences of actions, in the uncertainty of knowledge.

Thirdly, in addition to supporting the use of a metaphysical framework for analysis, and following the Austrianmethodology for the human sciences, Popper propagated a particular set of metaphysical theories which happen to

provide a congenial framework for the Austrian approach. These theories are realism, especially the reality of "the arrow

of time", non-determinism, and non-reductionism (the emergence of novelties in evolving systems). Popper's objectivism

may appear to conflict with the Austrian subjective theory of value, however Popper's three-world theory contains a

world 2 of subjective mental states. This provides a space, indeed a whole "world" for the Austrian subjective theory of

value, for mental acts of judgement about the possible uses ofvarious goods and factors of production.

As described by Ingrao and Israel (1987, 1990) the overwhelming dominance of mathematics and general equilibrium

theory in economics is due to the mystique of science and mathematics that the economics inherited from physics.

Morover it was a particular program, the program of mathematical instrumentalism which they claim was introduced into

both physics and economics by John von Neumann [Note 5]. This was the program that Popper subjected to criticism in

Quantum Physics and the Schism in Physics. Thus Popper has both revitalised the language for critical discussion of

metaphysics (with his theory of metaphysical research programs) and he has also articulated a particular research

program that may be equally appropriate for physics and the human sciences.

Conclusion

The continuing revival of the unfashionable but potentially fruitful Austrian program depends on recruiting people from

the dominant orthodoxies where they tend to be locked in by three influences. First by the guild mentality (professional

brand loyalty); second, by ideological commitments (another form of brand loyalty); and finally, by unexamined

metaphysical or philosophical theories. The third is probably the most insidious influence because it traps people who

might otherwise be prepared to resist brand loyalties. The "Popper program" offers hope for real progress in throwing off

the fetters of counter-productive metaphysics because it helps to expose the roots of deep structural assumptions so

they can be subjected to criticism. The revival of the Austrian program also requires that the Austrians themselves haveanother look at Popper instead of following the example of Mises and dismissing his ideas as irrelevant to their

concerns.

NOTES

1. The list should also include (at least) Hillsdale, Grove City, Loyola (New Orleans)

San Jose State and New York University. The Austrian Economics newsletter was important during the early stage of

the revival, as were two collections of papers (Dolan, 1976 and Spadaro, 1978).

2. In the language of paradigm theory they described the capture of economics by a mathematical and instrumental

program lifted from physics. This program provided continuity from Walras (circa 1880) to Nobel Prizewinners in recent

times such as Samuelson, Arrow and Debrau.

As will be shown throughout this book, the highly different and even divergent programs (or

paradigms) that succeed one another in the history of the [general equilibrium] theory retain an

almost intact core that can be identified with the aim to demonstrate the existence, the

uniqueness, and the global stability of the equilibrium. This core will be called the invariant

paradigmatic nucleus [author's italics]. Indeed, we shall see that the theory axiomatised by Gerard

Debrau, although completely different in its form and content from Walras's theory, not only retains

this nucleus intact but also represents an early attempt to demonstrate at least the property of the

existence of equilibrium and to analyze the conditions in which uniqueness occurs.(page 3)

3.. We might tremble for the reputation of the profession where Samuelson himself won a Nobel Prize. Practically up to


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the time of the Fall of the Wall he wrote in his best-selling textbook that the Soviet economy was performing strongly

and rapidly catching up with the US.

4. Popper wrote at length about this in a massive note 9 to Chapter 6 ofThe Open Society (1950 edition) and he

explicitly referred to the programmatic element of the geometrical world view in Addendum I of the 1957 edition. Arthur

Koestler's book The Sleepwalkers is a veritable textbook of examples of scientists in the grip of metaphysical

preoccupations stumbling over and around the ideas that were required to solve their problems, inspired, blinded and

distracted in turn by dreams and speculations of a metaphysical or religious nature. The exploration of metaphysical

ideas in connection with science is not unique to Popper, far from it, many hands have been involved in this work, Burtt,

Koyre, Lovejoy, and in the Popper school Agassi and Watkins. However metaphysics was banned from the philosophy

of science in the empiricist tradition that ran from Hume to the Logical Positivists

5. The authors quote a commentator on von Neuman's naive and optimistic faith in mathematical machinery. Under his

leadership the old reductionism [in economic theory] was replaced by a sort of neoreductionism, whose key idea was

the centrality of mathematics, understood as a purely logicodeductive schema. Some years earlier von Neuman had

carried out a similar operation in the field of physics in order to exorcise the problems raised by quantum mechanics(pp

185-86). For an alternative view on von Neuman's contribution see Popper's critical comments in Quantum Physics and

the Schism in Physics. Von Neuman was the co-author with Oscar Morganstern of a book on game theory which

Popper took on the boat to England in 1945. Earlier Popper heard a paper from Morgenstern in the Karl Menger

mathematical symposium which impressed him so much that he wrote in The Poverty of Historicism that mathematical

economics might have passed through its Newtonian stage (page 60).

REFERENCES

Blaug, M (1980), The Methodology of Economics . CUP.

Boland, L A (1982), "The Foundations of Economic Method", Allen and Unwin.

Dolan, E G editor (1976), The Foundations of Modern Austrian Economics . Sheed and Ward.

Ingrao, B and Israel, G (1990), The Invisible Hand: Economic Equilibrium in the History of Sciencetranslated by Ian

McGilvray, the MIT Press.

Jarvie, I (2001), "The Republic of Science: The Emergence of Popper's Social View of Science 1935-1945". Ripodi.

Popper, K R (1982), Quantum Theory and the Schism in Physics

Rothbard M N (1976), Praxeology: The Methodology of Austrian Economicsin The Foundations of Modern Austrian

Economics, ed Edwin G Dolan, Sheed & Ward.

Spadaro L M editor (1978) , New Directions on Austrian Economics Sheed Andrews and McMeel.

Vaughn K (1990), The Mengerian Roots of the Austrian Revival in Karl Menger and His Legacy in Economics ed Bruce

J Caldwell, Duke University Press.

Addendum

In 1982 Lawrence Boland produced a major internal criticism of neoclassical economics, focussed on the difficulties thateconomists encounter due to problems with induction and (consequently) with methodological individualism (Boland

1982, 2003). Boland did not mention of metaphysical programs but the Popper-Hayek agenda that he proposed

includes some of the elements described above as Popper's methodological/metaphysical program.

The elements of the program are:

(1) Anti-justificationism

(2) Anti-psychologism

(3) Rational decision-making (according to the logic of the situation, with

reference to Hayek 1937/48 and Hicks)

(4) Situational dynamics. Behavior can change as a result of learning as


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well as from changes in the situation.

Boland noted that Hayek's point about the importance of learning has been taken but has been blunted by persisting

elements of inductivism, as though we just need more information (of a different kind) to get the kind of rationality that

the traditional agenda demands. Based on the four principles Boland sketched "A Neoclassical Program for a Real-time

Short Run" to explain decision-making by economic actors in real time (as opposed to the instantaneous processes that

achieve equilibrium in a large set of simultaneous equations). The program is based on a dynamic concept of

knowledge, which is endogenous (part of the system that has to be explained). It involves learning, and learning takes

times so the arrow of time has real meaning in this system. So does the notion of error, and learning from mistakes. The

program aims to cater for disequilibrium in a way that the mainstream of neoclassical economics cannot.

Boland's book offers a detailed internal or "immanent" critique of the neoclassical research agenda and apart from

advocating the Popper/Hayek program there is hardly any reference to the Austrians because his aim was to

demonstrate that the neoclassical program contains too many contradictions and errors to be sustainable without major

reforms along Popperian or "critical rationalist" lines.

the rathouse

on Popper

full index

Popper Centenary Conference

Further reading in the Rathouse

On Popper's theory of metaphysical research programs

On the Austrian school and economic rationalism

On Popper's "three world" theory

A review of Larry Boland's book (first edition)
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Champio Rafe The Austrian School of Economics as a Popperian Research