An introduction to praxeology and Austrian school economics

A couple of weeks ago, I presented a paper about health and medical care at the 2016 Austrian Economics Research Conference, which was held at the Mises Institute.  I will be sharing the content of the talk in the next few posts, but given that I use some terms and concepts borrowed from that school of thought (e.g., “praxeology”), I thought that I would first take the opportunity to give a brief introduction to Austrian economics for those unfamiliar with it.

Brief history

Austrian school economics refers to a school of economic thought whose adherents generally share similar views on methodology.  The originators of that school were mid-to-late nineteenth century Austrian scholars whose economic ideas were in opposition to the ones dominant in Germany at that time.   The term “Austrian school,” given in disparagement by members of the German Historical School, stuck.  The German school has disappeared, but the Austrian school remains vibrant today.

In the early part of the twentieth century, economic theory in the Austrian tradition exerted important academic influence in the English speaking world.  By the mid-1930s, however, it was largely eclipsed by the rise of Keynesian economic theory during and after the great depression.  There has been a renewed interest in Austrian economics beginning in the early 1970s.  By then, the two most prominent Austrian economists, Ludwig von Mises and Friedrich Hayek, had emigrated to the United States and had re-tooled the theory to address some perceived shortcomings.

Von Mises taught American economists, such as Murray Rothbard and Israel Kirzner , and they, in turn, taught and influenced a great number of other scholars.  Hayek received the Nobel prize in economics in 1974 for his work on business cycle theory. The revival of Austrian school economics has been particularly vigorous in the last 20 years, and especially so after the 2008 recession.  Today, there are adepts of Austrian economics all over the world.

Basic ideas

Austrian economics is known for its emphasis on deductive reasoning, as opposed to empirical induction.  Austrians emphasize deductive reasoning because when they consider how economic exchanges take place, they generally take the view that a preference for one good or service over another is a choice made intentionally, an act of preference.  As philosopher David Gordon put it, you can diagram the mental event as an arrow going from the person choosing to the object of choice.

An alternative view is to emphasize the psychological effect that the good or service is anticipated to produce on the person’s mind, and the so-called utility derived from it.  In that case, the emphasis is on the arrow going from the object to the subject.  If one holds this view, one might be tempted to think that the economic exchange will be determined by the intensity of the pleasure or displeasure that the good or service (the object) might produce in the person.

And if one thinks about utility as related to psychic intensity (of pain or pleasure), one might be tempted to think of it as a quantifiable measure, and to build economic theory using quantitative, mathematical models.  In many important ways, the foundations of mainstream economic theory were articulated on the basis of that empiricist emphasis.¹

[Related post: Taking stock of our existence: Gawande versus Frankl on the meaningful life]

Methodological dualism

When Ludwig von Mises began to establish a systematic theory of economics, he insisted on what he called the principle of methodological dualism: the scientific methods of the hard sciences are great to study rocks, stars, atoms, and molecules, but they should not be applied to the study of human beings.  In stating this principle, he was voicing opposition to the introduction into economics of concepts such as “market equilibrium,” which were largely inspired by the physical sciences, and were perhaps motivated by a desire on the part of some economists to establish their field as a science on par with physics.

Mises remarked that human beings distinguish themselves from other natural things by making intentional (and usually rational) choices when they act, which is not the case for stones falling to the ground or animals acting on instinct.  The sciences of human affairs therefore deserve their own methods and should not be tempted to apply the tools of the physical sciences willy-nilly.  In that respect, Mises agreed with Aristotle’s famous dictum that ” It is the mark of an educated man to look for precision in each class of things just so far as the nature of the subject admits.”

Praxeology

Mises used the term praxeology to name the deductive science that begins with the premise that human beings act intentionally.  This premise is often called the “axiom” of praxeology.  It is an axiom because, in order to disprove it, you have to engage in what the proposition affirms, i.e., you have to act intentionally to argue against the proposition.  An intentional action identifies an end, or purpose, to the action, as well as certain means selected to achieve that end.

From that premise, and from a few other empirical and essentially self-evident propositions (e.g., that there is a diversity of ends that human beings choose for themselves, that there is a diversity of means in nature,  and other basic notions such as these), Austrian economists develop an economic theory and identify “economic laws” that include the laws of utility and laws of returns.  They then go on to develop an elaborate theory of money, of interest, and of the business cycle.

Note that Austrian theory does not care and makes no claim about the psychological state of mind of the actor, and whether the action is rational or not. This is also in contrast to mainstream neoclassical economics which rely on a “rational agent under constraint” assumption for the economic actor, an assumption which is increasingly being recognized as seriously flawed or limited.

Since human beings are finite and temporal, praxeology pays attention to the time dimension of human action. From that attention to time, praxeology quickly hones in on the idea of future uncertainty.  Uncertainty means that the future is “somewhat predictable,” i.e., it is neither completely determined nor completely random.

Future uncertainty is conclusively deduced from the axiom of intentional human action.  If future outcomes were completely known with certainty, no ends would be chosen, as we would simply wait for those outcomes to occur.  Conversely, if we thought the future were completely random, no means would be selected, since we would not think that means could help achieve ends.²

The emphasis on time considerations and on future uncertainty is one of the main reasons Austrian economists typically reject basic neoclassical economic market models that invoke idealizations like “perfect knowledge” or “perfect competition.”  Such models imply instantaneous adjustments to prices, which cannot conceivably occur in real human action.  Austrian economists believe these models are flawed and must be rejected.³

Personal action and methodological individualism

Praxeology also emphasizes that human action is personal action.  In other word, every economic and social behavior must be ultimately traced back to the actions of individuals.  There is no “collective mind” or collective entity that takes action independently of the actions of the individual members comprising the collectivity.  When we say that Germany invaded Poland, or when we say that the government established a social security program, or that Apple is launching a new iPad, these expressions are all shorthand to describe the actions of individual persons within those organizations.  That emphasis on personal action is often called methodological individualism.

This concept may seem obvious but, in the mid-nineteenth century, it was common to believe in collective spirits embodied in “the nation” or,  under Hegelian and Marxist influence, in other collectivities such as “the bourgeoisie” or “the proletariat.”

Although we may recognize the fallacy of imputing action to a collectivity, we should be aware that the idea still lurks beneath the surface today: as mentioned above, mainstream economic theory tends to rely on mathematical models for representation of market processes.  Such representation tempts one to make statements about human behavior in the aggregate.  So we frequently hear about general “demand” or “supply” as if these were somewhat divorced from the specific actions of individual citizens.

Implications for medicine and health care

Perhaps you already see some parallels between an Austrian critique of mainstream economics, and a critique one could raise against modern medical science.  In mainstream medical science, like in mainstream economics, there is a great deal of emphasis on aggregate measures (derived from clinical trials or epidemiological studies), and an increasing insistence on the use of statistics and mathematical calculations to aid in clinical decision-making.  Are these tools proper to the care of human persons?

[Related post: Population medicine: The other “dismal science”]

[Related post: Is medicine a scientific enterprise?]

[Related post: The physician as entrepreneur]

In the next few weeks,  I will sketch a proposal for how we might alter our conceptual framework regarding health and medical care in a way that can allow us to avoid inappropriate mathematization of clinical care.   The posts will follow the outline of the paper I presented at the Mises Institute.

I will start by first reviewing why and how the “machine model” of the human body became embedded in medical education and medical practice, and the consequences that this has had on healthcare.  I will then briefly discuss the main alternative view of health, proposed  by the World Health Organization (WHO) to counter the machine model.  The WHO definition of health is also deficient, and also rooted in an empiricist interpretation of the human person.   Lastly, I will begin to sketch a proposal for a new interpretation of health that is rooted in the premise that human beings act intentionally.

More info about Austrian economics can be found on my resource page.  I strongly anyone interested in this to sign-up for economist Jeffrey Herbener’s online course at Liberty Classroom.

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Note:

1. The origin of the mathematization of economics is traced back to Swiss mathematical genius Daniel Bernoulli, who precisely conceived of utility in terms of the intensity of psychic effect.  Murray Rothbard elaborated on the foundation of mathematical economics here, but it is worth noting that two hundred and fifty years after his death, Bernoulli’s probabilistic insights are also getting criticized by Nobel prize winner Daniel Kahneman (see Part 4 of Thinking: Fast and Slow).

2. One may remark here that uncertainty may simply be a mind phenomenon and not a feature of reality, that reality is in fact completely determined, or that science may eventually allow us to understand the determination of all events.  Mises had no problem with that possibility and, in fact, may have been a determinist himself.  By insisting on methodological dualism, however, he was simply pointing out that at present time, empirical science does not shed light on the topic on way or another and, for human scientists studying human behavior, the intentionality of human action seems to be a valid and constructive premise on which to build a social science.

3. Incidentally, it is on the basis of these flawed market models that mainstream economists and policy analysts come up with the equally flawed definition of “market failures,” which are identified as empirical deviations of what the perfect competition model would predict—deviations that then justify government intervention in the market.

Israel Kirzner recently gave a great lecture on the how the differences between Austrian economics and mainstream economics crystallized in the mid-twentieth century.  If you have some familiarity with basic mainstream economic theory, I think you will find the lecture very enlightening.