In a consideration of economic thought, the Austrian method, as advanced by Carl Menger, provides a distinct contrast from other schools. Any good method will produce economic laws that are inherently true due to the nature of the principles from which they are deducted. Austrian economics takes a position of absolute consistency that can be applied universally. The historical, empirical, and mathematical schools, however, fail to contribute a method by which to deduct real world, universal laws from human action.

Austrian economics takes a realist approach to establishing laws. It starts with the simplest unit in the economy, the individual person, and from fundamental truths of human nature derives economic law. Such laws are proven true simply because they originate in truths of human behavior. By grounding economics in human action a firm science is created. Simple observation of human action would indicate that people buy less at higher prices. Thus, it can be deducted that price and demand relate inversely. The Austrian method is empirical in the sense that it starts with simple facts and from there establishes law. The principles upon which economic law is based, however, are unseen and cannot be empirically falsified or verified. For example, the fact that people have preference is based upon the idea that individuals make choices. Preference can’t be seen or verified, yet, it exists and its results translate into economic law. This method is one of causal realism. Within this approach is the recognition that there are universal causal principles that can be seen in the real world. Causal relationships are absolute and contain effects that will occur in every circumstance where the cause is present. In the case of increased price, for example, all other things equal, demand will decrease. Though an Austrian economist would never try to quantify how much this change is, he can be assured that it will occur. For Carl Menger, and his work which gave rise to the Austrian school, economics was a matter of establishing a causal link between subjective values and objective market prices.
The Austrian view can be contrasted with other schools of thought. The Historical school holds that there are no universal laws of economics or human action. Causal connections, according to this school, are contingent. The circumstances in which an event took place could change the result that would occur. Historicists would hold that while a change in price might have had a certain affect on price, if the time and place were different, the same change in price might have an entirely different result. The order German Historical School, lead by Karl Knies, held that there is operating laws of economics but they operate differently in each case. The laws that exist are more like norms or trends in economic activity that may or may not apply at any given point. The younger Historical School, under Gustav von Schmoller, denied the existence of law altogether. He saw economics purely as a study of history. Economic trends in the past may give light to present or future activity but would not be expected to provide any consistent principles that could be applied. In both the older and younger historical views, economics is nothing more than gathering evidence and telling a contingent story to explain facts. It is not about discovering laws but finding how economic activity has work throughout history. This sort of method provides no means by which to establish economic law that can be applied in different times and places. This renders economic analysis virtually useless in decision making and policy assessment.

The Empirical School differs from the Historical School in that it grants that there are economic laws. Yet, laws are discovered by observation and hypotheses. The Empirical method is an attempt to apply the theory of the natural sciences to realm of the social sciences. The empiricist sees economics as a process of gathering data and forming hypotheses from that data. If new data disproves the hypotheses, it will be revised. A view may be held that voluntary exchange is mutually beneficial. Yet, the empiricist is ever looking for a case which denies this law. Were that exception to be found, he would, like a student of the natural sciences, amend his law to fit the new data. This makes economics merely a trial and error approach of finding truth. At any given point a long held economic law could be overturned by one new example that disproves the held hypotheses. Thus, one can never be certain that the economic law he is using is correct, all he knows is that it has yet to be disproven.

The Mathematical School takes an entirely different approach. It views economic theory as a simplified mathematical model of the economy. From this perspective, economic truth is discovered by fashioning an abstraction and then finding how this model applies to the real world. The abstraction would contain a system of equations based on the general equilibrium. The general equilibrium theory, as advanced by Walras, assumes that all factor prices in the economy can be determined and calculated to create an equilibrium price. Mathematical theory produces an absolute result in that the equations will always give the same result. Yet, it fails in two important areas. First, in order for this model to be used, it must be assumed that value is a measureable substance which can be arranged cardinally. The only way mathematics can be used is if a numeric value could be assigned to each good and every consumer and producer preference ranking. Ordinal rankings would not fit into a mathematical equation. Yet, as Menger discusses in his critique of classical theory, ordinal ranking is the only way to determine preference. Additionally, if the numeric value could be determined, one would have to attain this value for all goods within the economy, an impossible task. The second problem that arises is one of application. The Mathematical school concerns itself so much with the economy on paper that it is unable to apply the laws it creates to the real world. Ideally, recourses would be allocated as directed by the mathematic model. Yet, how does one go about taking equations and applying them to a world where buyer’s and seller’s only quantification of value comes at the point of exchange. In order for a mathematical model to provide advice to economic planners it must be usable prior to the point of exchange. The mathematical model fails to provide a method capable of discovering law that can be used in economic consideration.

Analysis of economic method reveals that only a theory deducted from individual action can produce economic laws applicable to the real world. The method of the empirical, historical, and mathematical schools fail to provide the necessary foundation for economic law.

I'm not really sure if anyone read this blog to begin with but I'm sure my recent lack of posting has reduced my readership to zero. My extra time which at one point could be spent reading and writing about economics for fun is now filled with reading and writing about economics as a homework assignment. (Actually, I do still read econ for fun. The Mises blog is always good reading in Civ class and I'm slowly making progress in Bastiat's Economic Harmonies)

Nonetheless, I found a great article I wanted to reference. In my shift in the way I'm learning economics (i.e. going to college) I have the privilege of learning under some of the best econ professors an Austrian could want.

This article was written by one of them.
Enjoy: http://www.lewrockwell.com/orig8/ritenour1.html

Hiroshima

"Today is the anniversary of the atomic bombing of Hiroshima, one of
President Harry Truman's two acts of butchery against Japan. This isn't much to
be said that hasn't been said many times before. The U.S. government has needed
atomic bombs commit mass murder. It's "conventional" weapons are potent enough.
But considering how the policymakers saw The Bomb, the two uses of it against
Japan stand out as especially heinous. The U.S. government may not have used
atomic weapons since 1945, but it has not yet abstained from mass murder."
-Sheldon Richman

"...let's say a few words about the bloodthirsty Republicans, who think of
war not as something to regret, but rather the very moral life of the nation.
For them, justice equals Guantánamo Bay, and public policy means a new war every
month, and vast subsidies to the military-industrial complex and such other
Republican-friendly firms as the big pharmaceuticals. "
-Lew Rockwell

62 years later, it seems, little has changed. War remains a political tool where US soldiers and foreign lives become pawns in the hands of the political elite. The enemy has changed, the rhetoric has changed, the means has changed, but the flawed ideas which motivate remain the same.

Pulled this from Lew Rockwell's blog:

Fred Thompson and BlowbackPosted by Lew Rockwell at July 16, 2007 09:21
PM

Writes Mike Martin: "I was watching 'Law and Order' tonight (I always
root for the accused against that smug creep Jack) and the characters were
discussing the unintended consequences of U.S. policies in the Middle East. The
show ended with Fred Thompson's character proclaiming 'It's called blowback.'
Ironic, huh?"

"the opposite of liberty"

"As regards the social apparatus of repression and coercion, the government, there cannot be any question of freedom. Government is essentially the negation of liberty. It is the recourse to violence or threat of violence in order to make all people obey the orders of the government, whether they like it or not. As far as the government's jurisdiction extends, there is coercion, not freedom. Government is a necessary institution, the means to make the social system of cooperation work smoothly without being disturbed by violent acts on the part of gangsters whether of domestic or of foreign origin.

Government is not, as some people like to say, a necessary evil; it is not an
evil, but a means, the only means available to make peaceful human coexistence
possible. But it is the opposite of liberty. It is beating, imprisoning, hanging. Whatever a government does it is ultimately supported by the actions of armed constables. If the government operates a school or a hospital, the funds required are collected by taxes, i.e., by payments exacted from the citizens.

If we take into account the fact that, as human nature is, there can neither be civilization nor peace without the functioning of the government apparatus of violent action, we may call government the most beneficial human institution. But the fact remains that government is repression not freedom. Freedom is to be found only in the sphere in which government does not interfere. Liberty is always freedom from the government."

Mises, "Liberty and Property"

It came to my attention tonight that one’s worldview depends in a very large part on with what they surround themselves. I had just finished listening to a lecture for my economic course, by Walter Block, an economics professor and senior fellow at the Mises institute. His lecture provide a brilliant defense of anarcho-capitalism and libertarian thought, probably the best defense I had heard. In this lecture the Iraq war came up. He provided a defense of a non-interventionist foreign policy. His justifications ranged from the founders views, the benefit to US security (i.e. why were we attacked on 9/11?), empirical examples (look to Switzerland), and just common logic (what does it look like to someone just observing earth, that one nation has their troops in almost every other nation? It would look like an empire). If this is sounding familiar, yeah, it’s Ron Paul’s stance too. After hearing this lecture I had the feeling of "everyone agrees with me." (Even though that is far from the truth.) It becomes easy to feel that way when you surround yourself with people of similar viewpoints.

I can turn on my computer in the morning, read my favorite libertarian blogs, do my economics (which comes from an Austrian perspective), watch a video of Ron Paul, read the latest book I’ve picked up, have a discussion with a friend, and have all of those interactions be consistent with my views.

It is by no means illogical, it makes since to surround oneself with like minded people. But what if those people are wrong? That surrounding like-mindedness, then, will only serve to cement the incorrect ideas into the individual’s mind. Suddenly the ideas are no longer just his, but other’s as well, which bring validity. The ideas are discussed, assumed, and acted upon widely with in this circle of commonalty. As this circle develops so does the individual’s trust for others in the circle, as well as those who are viewed in high regard by others in the circle. Thus, the commonalty serves as a strong influence on the original individual.

Let’s say hypothetically, our individual, who we will call Winston, in his circle of influence, hears from a good friend about a presidential candidate. Winston, trusting his friend’s opinion, votes for the candidate, without ever looking into him himself. Clearly Winston has allowed his influences to stop him from utilizing personal responsibility.

Another possibility, let’s say it’s a few months before the election and another friend of Winston’s comes to him with more election advice. (This would be a friend that he agrees with on some things, but not all). Winston dismisses the advice, saying he can’t vote for the candidate, claiming that his views are too radical, too out there. What is he essentially saying? Simply that the candidate’s views are too far away from his circle of influence. Were Winston to actually think though the candidate’s stance, he might realize that it is logical and he should support it. But instead, he has let his framework and worldview be built by those around him, rather than his own reasoning. When this happens it is much harder for that friend on the outside to persuade him. His views are now, not just his, but also the views of those around him and thus, far more cemented in his mind. It will take a great deal of work to change them. In fact, the only way to change his views is the same way he came by them. Little by little, the people around him must educate him in a different view. After hearing this new idea from enough sources he might begin to accept it, or at least be more open to it.


Changing the views of the people within this nation, requites, first that they think things though for themselves and secondly that those with the correct views use every chance they have to plant a seed, to educate in truth. Few, if any, will accept a message upon hearing it once, but every time they hear it, they become a little more receptive and willing to receive that message.

My goal in this post was not to propagate a particular view but to show something about how people come to hold the views they do and what it takes to change that view.

of note

The news media seemed too preoccupied with Paris Hilton’s detention to
notice, but a U.S. appeals court last week struck a major blow for liberty.
A three-judge panel of the U.S. Fourth Circuit Court of Appeals ruled that
the Bush administration may not declare a U.S. resident, whether a citizen
or not, an “enemy combatant,” throw him in a military prison, and hold him
without charge indefinitely — all without judicial review. Try him in the civilian courts or let him go, the judges said.

And justice wins out, at least for now.

I would love to write more in depth on this issue but at the moment I'm deeply infatuated with Valuation and Appeasement and how they relate in the Austrian Method. I'm sure you'll see a post from me on enemy combatants and the war on terror before too long. Just thought this was interesting enough to share now.

The rest of Sheldon Richman's article can be found here