Methodology
for Introduction to Austrian Economics
By Paul F. Cwik, Ph. D.
Mount Olive College &
The Foundation for Economic
Education
Most Economists Don’t Care
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Most economists are not concerned with the methodology
of economics. Their response is indifference.
Austrian economists tend to be much more interested in
methodology. There is a disparity.
Unfortunately, when Austrians confront mainstream
economists on methodological issues, we are not scoring
many points. Many just don’t care. “Let me teach my class.”
Even if the Austrians completely beat every opponent’s
methodological argument, I wouldn’t expect to see a
wave of converts to the Austrian approach.
Nevertheless, there is merit for doing the science
correctly.
Menger vs. the German Historical
School (GHS)

Menger’s economics had two major elements:
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Methodological Individualism
Methodological Subjectivism
There was a strong negative reaction by German professors to
his idea that these elements are universal.
The GHS rejected Menger’s ideas and, instead, were in favor
of the “doctrine of internal relations.”
This doctrine says that everything influences everything else.
However if all things are connected, then in order to gain full
knowledge of anything, we need the knowledge of everything.
For the GHS, looking at anything separately or in isolation
(e.g., using ceteris paribus) is completely illegitimate.
The Doctrine of Internal Relations
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This doctrine states that before we can know or understand
anything, we need to see the total picture.
The total picture is necessary because everything influences
everything else. Looking at a topic in isolation is to ignore
these greater relationships.
Economics is not separate from history, political science,
ethics, and so forth.
The best approach is that we pick topics like: prices, wages,
production, banking, inflation, the business cycle and describe
as much as we can observe.
The more information that we gather, the better understanding
we will eventually have.
The flaw of this approach is that it is unsystematic and does
not follow deductive reasoning.
Methödenstreit
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Menger published his Investigations Into the Method of the Social Sciences
in 1883, and Gustav von Schmoller wrote a review of Menger’s book.
As you can guess, Schmoller did not have a favorable review.
In 1884, Menger responded with a (never translated into English) pamphlet:
“The Errors of the German Historical School.”
The German Historical School (GHS), although
divided, shared a common belief that: There were no
universal laws of economics applicable for all men, at
all times, in every country.
The GHS called the Classical Economic Theories,
“English Political Economy.”
They argued that each historical period has its own
laws of economic relationships and that these “laws”
of economic relationships are relative to the historical
epoch of that moment.
These laws change as the historical period changes.
Methödenstreit continued
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For the GHS, the German nation and people had their own history, their
own historical stages of development and therefore, their own “laws of
economics.”
England could argue that it was good for them at that time to follow a path
of free trade, but Germany, in its own historical stage and “economic laws”
required protectionism and governmental intervention.
For the GHS, what was the purpose of theory and policy on the basis of
that theory?
The answer is to serve the interests of one’s nation, to make it strong and
progressive.
The GHS accepted the socialist argument that class tensions existed and
also accepted the mercantilist argument that the interests of the individual
might not be harmonious with the national interest.
Hence, the State has to intervene in economic and social affairs to
minimize class tensions and to regulate individuals in their economic
activity to make their actions consistent with the “national interest.”
Methödenstreit continued
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The GHS and Schmoller argued that the laws of economics were
historically determined. Each stage of a nation’s history dictated
and required different economic relationships and institutional rules
(for contracts, for property rights, etc.).
Schmoller parted ways (from the GHS) and argued that there were
no historically dictated stages of predetermined evolution. There
was just the process of history. All one could do was sift through the
historical artifacts of previous stages of a nation’s history and “the
facts” (institutional, legal, technological, cultural) of one’s own
time, and out of this “discover” the theory – the “law of economics”
that seems to be prevailing for this time.
As a result, Schmoller called for “just relationships” (that’s just as in
Justice) as defined by himself. He advocated the state cartelization
of industry, the establishment for welfare programs for the lower
classes, and, in general, the state must act as a paternalistic agent for
everyone in the nation.
This is what Menger was up against when he waged essentially a
one man battle.
Menger Argues in Favor of Social
Organic Structures
How
it be that
institutions
which

Forcan
Menger,
social
institutions
and serve
socialthe
common
welfare
are extremely
significant
phenomena
are and
the result
of individuals
acting
forand
its are
development
come
being without
a
not the result
of into
a collectivist
design.
common
will
directed toward

They are
unintended
results.establishing them?
– Menger (1883)
 Menger labeled them as “organic social
structures.”
 Menger asks…
Law, language, the state, money, markets, all these
social structures in their various empirical forms and in
their constant change are to no small extent the
unintended result of social development. … Also,
understanding of them cannot be “pragmatic” in the
cases considered here. It must be analogous to the
understanding of unintentionally created social
institutions. The solution of the most important
problems of the theoretical social sciences in general
and of theoretical economics in particular is thus closely
connected with the question of the understanding the
origin and change of “organically” created social
structures. – Menger (1883)
Organic Social Structures include…
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Language,
Laws,
Morals,
Markets,
Money, and
Towns.
Most importantly, Menger demonstrates that you should start
with individuals and their interests.
It is from an analysis of individuals’ incentives that we can build
up the story of the origin of and the importance of these organic
social structures.
I think that Menger eventually wins this battle, but it might not
be because he out argued his opponents and everyone agreed
with Menger.
I will hold off on answering “why,” but I think Wieser was right.
Modern Positivism / Empiricism
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This approach is followed by the mainstream.
It starts by dividing economics into positive
economics and normative economics. (You’ll see this
in Chapter 1 of most textbooks.)
Positive Economics is independent of any particular
ethical position.
 “What
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Normative Economics does consider the ethical side.
 “What

is?”
ought to be?”
Any normative or policy position needs to be founded
on Positive Economics, or what they call “theory.”
Modern Economic “Theory”
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In 1953, Milton Friedman wrote on methodology and
for the mainstream it all starts and ends there.
The goal of positive economics is to create a theory
that “yields valid and meaningful predictions.”
– Friedman (1953)
“[T]heory has no substantive content; it is a set of
tautologies. Its function is to serve as a filing system
for organizing empirical material and facilitating our
understanding of it.”
– Friedman (1953)
Theory needs to be connected to the real world by
empirical observations to gain any meaning.
Modern Economic Methodology
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Doesthe
Scientific
Method is
Scientific Method:
Austrian
Economics
work fordifferent.
the Social
WeSciences?
use
Observe data/event
 Axiomatic
Recognize correlations
The Austrians
say, Deductivism:
“No.” We are
going toAxiom
examine what each side
Speculate Causation
says andLaws
then you can decide
(Construct a Theory)
which
side you agree (or at least
Create a Hypothesis
 Theorems
disagree) with.
(Yes/No)
 Models
Test—Controlled Remember: WeThought
need to Experiments
use
Experiment
the ceteris
Theseparibus
thoughtcondition.
experiments allow us
Revise Theory
to hold everything else constant.
Empiricism needs Testing
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Prediction is necessary to distinguish causes.
We know what has occurred, but to distinguish the validity of
one theory over another, the applicability to future events
becomes paramount.
“Viewed as a body of substantive hypotheses, theory is to be
judged by its predictive power for the class of phenomena
which it is intended to ‘explain.’ Only factual evidence can
show whether it is ‘right’ or ‘wrong’ or, better, tentatively
‘accepted’ as valid or ‘rejected.’ … Factual evidence can never
‘prove’ a hypothesis; it can only fail to disprove it, which is
what we generally mean when we say, somewhat inexactly,
that the hypothesis has been ‘confirmed’ by experience.”
– Friedman (1953)
Results from Testing
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Friedman correctly points out that testing never
proves or disproves an economic relation.
What happens is that we are reducing the probability
that something is false.
As an aside, it should also be noted that probabilities
are not truth.
Furthermore, the assumptions need not be realistic.
All that matters is the predictive power of the
hypothesis.
Criticisms of Empiricism
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What should we measure?
 How
do we know if we have a collaborative or
falsifying result?
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How do we measure?
 There
are no constants in economics, unlike the
speed of light in physics.
 How do we measure utility?

(What’s a util, anyway?)
 Empiricists
only observe; they do not engage in
introspection.
Empiricism is Self-Contradictory
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Empiricism starts with, “A statement must be verifiable with
empirical evidence, otherwise it is merely definitional and tells
us nothing about the real world.”
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(Recall that Friedman said, “[T]heory has no substantive content; it is a
set of tautologies.”)
However, this beginning statement is not something that can
be empirically verifiable.
Nevertheless, the statement is attempting to tell us about the
structure of reality.
It is contradicting itself.
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Either the statement that all knowledge must be verifiable is an empty
tautology and “has no substantive content,”
or it, too, must be subject to falsification. So why should we adopt the
verification principle?
Mises’ Response
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If Empiricism is defined this way, then Mises was right to say,
“[I]f one accepts the terminology of logical positivism … a
theory or hypothesis is unscientific if it cannot be refuted by
experience. Consequently, all a priori theories, including
mathematics and praxeology are ‘unscientific.’ This is merely
a verbal quibble.” – Mises The Ultimate Foundation of
Economic Science
If someone wants to define “meaning” so that the conclusions
of praxeology are meaningless, why should he (and other
praxeologists) care?
For Mises, praxeology is built upon a foundation of truth and
from that foundation can be deduced meaningful economic
statements.
Introspection is the Key
The Natural Sciences observe and attempt to
infer reality from their observations.
 They never ask the pen why it falls.
 The Social Sciences have an advantage over
the Natural Sciences.
 We don’t have to merely observe the world
around us.
 We can ask, “Why did we (you) do that?”
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The Use of Deduction
Deduction allows us to start with a Truth and
obtain other true statements.
 A Valid Argument is a correct conclusion
derived from premises.
 An invalid conclusion means that at least one
of your premises were not true.
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The Use of Inference
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An inference is a part of the reasoning process.
We can start with a statement like this:
 “All
 And
socialists are subversives.” (Thanks to David Gordon for this example.)
change it to “All fatheaded socialists are fatheaded
subversives.”
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Math does the same thing:
 If
x = 5, then
 2x = 10.
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In mathematics, once you know the rule you can
always apply it.
The Use of Inference
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However, inference does not have a hard rule in the social
sciences like it does in mathematics.
For example:
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“All socialists are subversives.”
“Therefore, all Russian socialists are Russian subversives.”
This conclusion is not true. The Russian Socialists might be
Ukrainian subversives.
There is no mechanical rule that tells us which immediate
inferences work and which do not.
Therefore, the use of mathematics needs extreme care.

For example, M ∙ V ≡ P ∙ Q does not equal 2M ∙ V ≡ 2P ∙ Q.
Should We Use So Much Math?
It is a great fault of symbolic pseudo-mathematical methods of
 If youalook
Austrian
journal
and
formalising
systematofan
economic
analysis
… thatarticle
they expressly
assume
strict independence
between the factors
involved
and lose
compare
it to a mainstream
article,
you would
all their cogency and authority if this hypothesis is disallowed….
not
think
that
they
are
in
the
same
field.
Too large a proportion of recent “mathematical” economics are
mere
concoctions,
as imprecise
as the initial
assumptions they rest
 The
mainstream
approach
is highly
on, which allow the author to lose sight of the complexities and
mathematical,
while
the
Austrian
is
interdependencies of the real world in a maze of pretentious and
significantly
less
so. Keynes The General Theory, (1936) p. 297-8.
unhelpful
symbols. John
Maynard

Who said the following?
Jean-Baptiste Say’s Approach

Jean-Baptiste Say, A Treatise on Political Economy
(1834):
“The study of statistics may gratify curiosity, but it can
never be productive of advantage when it does not indicate
the origin and consequences of the facts it has collected;
and by indicating their origin and consequences, it at once
becomes the science of political economy.”
 “A perfect knowledge of the principles of political
economy may be obtained, inasmuch as all the general
facts which compose this science may be discovered. In
statistics this can never be the case….”
 “Political economy [is] … whenever the principles which
constitute its basis are the rigorous deductions of
undeniable general facts, rest[ing] upon an immovable
foundation.”
 “Political economy…is composed of a few fundamental
principles, and of a great number of corollaries or
conclusions, drawn from these principles.”

Nassau Senior’s Approach
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Nassau Senior, An Outline of the Science of
Political Economy (1836)
“[P]remises consist of a few general propositions,
the result of observations or consciousness, and
scarcely requiring proof, or even formal
statement, which almost every man, as soon as he
hears them, admits as familiar to his thoughts, or
at least as included in his previous knowledge;
and his inferences are nearly general, and, if he
has reasoned correctly, as certain as his
premises.”
 Also, economists should be “aware that the
Science depends more on reasoning than on
observation, and that its principle difficulty
consists not in the ascertainment of its facts, but
in the use of its terms.”

John E. Cairnes’ Approach
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John E. Cairnes, The Character and Logical
Method of Political Economy (1857)
“[While] mankind have no direct knowledge of
ultimate physical principles…the economist starts
with a knowledge of ultimate causes.”
 “The economist may thus be considered at the outset
of his researches as already in possession of those
ultimate principles governing the phenomena which
form the subject of his study, the discovery of which
in the case of physical investigation constitutes for
the inquirer his most arduous task. … Conjecture [in
economics] would manifestly be out of place,
inasmuch as we possess in our consciousness and in
testimony of our senses…direct and easy proof of
that which we desire to know. In Political Economy,
accordingly, hypothesis is never used as a help
toward the discovery of ultimate causes and laws.”

Misesian Praxeology
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I do not claim that this is the only
method for Austrian economics.
However, I think that this approach is
the most correct.
Even if you disagree with it, I think
that there are insights here that will
deepen your understanding of
economics.
Mises proposes that we use the term
“Praxeology” (the logic of action) for
the branch of knowledge that includes
economics.
Axiomatic-Deductivism
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We start with an Axiom, something that is universally
true.
There are many true propositions, but the starting
point is the Human Action Axiom.
Axiom of Human Action—is that people behave
purposefully over economic (scarce) goods. To
satisfy our wants and desires, we act.
However, not all goals or wants can be satisfied at
once. This is due to Scarcity. Scarcity is an
assumption.
Immanuel Kant’s Categories
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Mises was not a Kantian,
however he does use Kant’s
categories.
The first division is
between:
Analytic vs. Synthetic


Analytic means that formal
logic, all by itself, is sufficient
to determine truth.
Statements that are Synthetic
need something else.
Kant’s Second Set of Categories
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The second division of categories is between:
A Posteriori vs. A Priori
A statement that is a posteriori means that
observations are necessary in order to establish or
confirm its truth.
A statement is a priori if observations are not
necessary for establishing or confirming its truth.
 For
example, 1 + 1 = 2 is an a priori statement.
Synthetic A Priori Statements

A synthetic a priori proposition is a statement whose
truth-value can be definitely established and
observations are unnecessary, however only using
formal logic is insufficient.
 (According
to Kant, mathematics and geometry contain
examples of true synthetic a priori statements.)

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So, how do we find a truth where observations are
unnecessary, but logic is insufficient?
Observations reveal things as they happen to be; there
is nothing in them that show why things are as they
are.
 We

need something deeper.
The Human Action Axiom fulfills these requirements.
Human Action, Synthetic A Priori?
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The Human Action Axiom is something that does not
need to be observed. We rely on introspection.
The Law of Self-Contradiction shows that its
negation is false.
 Suppose
that you argue that people do not behave
purposefully.
 What has happened?
 You are purposefully arguing that people do not behave
purposefully.
 You have contradicted yourself.

Supposing that we agree with the a priori part, then
what about the synthetic part? What about the part
where logic is insufficient?
Creating Economic Theory
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In order to fulfill the synthetic requirement, we need more.
We need some assumptions.
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We create an Means/Ends framework.
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For example, we live in a world of scarcity, and
we live in a world that uses money.
Action uses Means to achieve an End.
The Means and the Ends must be achievable.
It should also be noted that not all goals lead to actions.
From this process we can deduce the law of demand and the
law of supply.
The combination of these laws with specific assumptions lets
us conduct Thought Experiments.
Theory vs. History

Understanding the world around us, or comparing one
theoretical world with another, is the province of
theory.
 In
other words, it is through theory that we examine the
world around us.
 We apply theory to the facts. We interpret the facts through
the knowledge of theory.

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Empirical observations do not confirm or deny
theory.
Econometrics is a technique of analyzing the data.
Econometrics looks at history.
 However,
history does not explain theory.
Application of Praxeology

Economics is not able to predict like the Natural
Sciences do.
 E.g.,

Natural Science accurately predicts the tides.
What economic theory allows us to do is limit
possible reactions/outcomes that are possible.
 If
something falls outside of what we predict (suppose the
increasing of the minimum wage is followed by a decrease
in unemployment),
 then we have missed something in the application of our
theory. We missed something in one of the subsidiary
assumptions.
Prediction with Praxeology
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In general, we should expect to see the economist who
uses praxeology to have a better track record at
predicting events than one who doesn’t.
In order to make better predictions, we need more
assumptions and more accurate assumptions.
However, this increase in the amount and extent of the
assumptions diminishes the scope of applicability of the
predictions.
(Furthermore with the addition of corollary assumptions,
our conclusions are no longer apodictically certain.)
It is through this process that Austrians (or more
specifically, praxeologists) “do economics.”
Hayek’s View


Hayek didn’t think that
Mises’ Praxeology was
sufficiently grounded
in the real world.
Hayek claimed:
1.
2.
All statements about
the world are
abstractions.
Action needs to take
place in the real world.
Hayek was influenced by Popper





Karl Popper was a colleague of Hayek’s at
the LSE.
Popper said that in order to be considered
scientific, a statement needed to be open to
“Empirical Falsification.”
Popper’s falsification argument is more
than a trivial difference from positivism.
Popper argued that confirming a position
does not add to the probability that it is
true.
No matter how many times we confirm
through empirical observation that demand
curves slope downward, the chances that
this statement is true has not increased.
Wieser’s View

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During the methödenstreit, Menger was at the
forefront.
Böhm-Bawerk also weighed in this debate and scored
some significant points.
Wieser, on the other hand, chose not to join in.
Wieser thought that the best method would tend to
work itself out as economists got on with the doing of
economics.
Conclusion





I think that, perhaps, Wieser’s stance is also my
stance.
I have attempted to lay out Austrian methodology as I
see it.
However, the bottom line is that most economists do
not care about it.
So even if you win every debating point on
methodology you encounter, I very much doubt that
you will win many converts to Austrian Economics.
But then again, maybe you are the person to change
the world.
Methodology
By Paul F. Cwik, Ph. D.
PCwik@moc.edu