The Ultimate Foundation of Economic Science, New Directions in Austrian Economics

The Ultimate Foundation of Economic Science, by Ludwig von Mises, introduction by Israel Kirzner. Kansas City: Sheed Andrews and McMeel. 1978. 148 pp. $4.95 paper.

New Directions in Austrian Economics, edited by Louis Spadaro. Kansas City: Sheed Andrews and McMeel. 1978. 239 pp. $4.95 paper.

Neo-Austrians these days are quick to observe "an expanding influence of Austrian thought in economic debate." Sometimes cited as evidence of the expanding influence is a new series of books entitled Studies in Economic Theory, two of the more recent of which are a reprint of Ludwig von Mises's The Ultimate Foundations of Economic Science and a collection edited by Louis Spadaro and entitled New Directions in Austrian Economics.

But the publication of the books seems to reflect, not so much the increased influence of neo-Austrian economics among intellectuals, as it does the increased generosity of those who underwrite such Austrian work. Whatever the reason for publication, the books make readily available some evidence that should be useful to the libertarian trying to make an informed choice between the neo-Austrian and the Chicago approaches.

To decide between the two schools, one must first ask what economics is to be: a handmaiden to libertarian political philosophy or a value-free instrument of explanation? Libertarians are often attracted to neo-Austrian economics because it seems to offer a closed and certain framework for proving that the free market always delivers the goods. Chicago economics, on the other hand, avows that whether the free market delivers the goods is a question subject to empirical investigation.

In fact, on occasion a Chicago economist finds evidence that the government is more effective at delivering the goods than is the market. Should this bother the libertarian purist? The answer depends in part on what foundation the purist gives for his libertarianism. If, with Nozick or Rand, he follows Kant in giving an ethically a priori account of what sorts of interactions among men are moral, then his libertarianism would remain intact even if the free market were not superior in delivering the goods. Only if his standard is the greatest good for the greatest number, need discovery of "market failures" undermine his libertarianism.

It is not clear, however, that even the utilitarian libertarian should prefer handmaiden economics to value-free economics. Freedom and truth are both high ideals, but is not truth the higher? According to Kirzner's foreword to the von Mises reprint, the master himself would have answered: "Yes, truth is the higher ideal." In Kirzner's words: "It is necessary for the scientist to acknowledge findings that seem to run counter to his own intellectual interests with the same candor and openness with which he announces conclusions that he views as more congenial to his own values." It follows that an economic school should be judged on the explanatory power of its theories, not on its presumed compatibility with libertarianism.

The books under review here provide grounds for judging the explanatory power of the neo-Austrian school—the von Mises book because it is the most detailed and articulate defense of neo-Austrian method; the Spadaro book because it is billed by the neo-Austrians as presenting some of the best of the fruits of that method.

Two major claims separate von Mises's neo-Austrian method from the method of the rest of the profession. They are that all of economics can be deduced from the axiom that "man acts" and that empiricism in economics is worthless.

That all of economics can be derived from the axiom "man acts" sounds no less miraculous than the claim that Jesus fed a large crowd with a couple of fish and a loaf of bread. The question is whether in economics there can be a theoretical free lunch. Put more precisely: How can an admittedly tautological (p. 17) proposition yield other propositions that have explanatory power?

Von Mises gives no direct explanation. Instead, he issues a warning that is frequently repeated: Do not confuse economics with other disciplines. In this particular instance, von Mises claims that those who criticize the tautological character of the action axiom are confusing economics with geometry. It is as if Jesus, when asked how he had multiplied the loaves, had responded: "Beware not to confuse loaves with rocks!" One might heed the warning, yet still remain puzzled.

A scholar named Claudio Gutierrez was puzzled enough to pursue the action axiom beyond the vague yet grand claims made for it in essays on methodology. He examined in detail (see Theory and Decision, 1971) the early portions of a book by one of von Mises's disciples. What he found was that significant results are derived from the action axiom only by the frequent, unacknowledged redefinition of terms at crucial points in the argument. If Gutierrez had been given to overdrawn metaphor, he might well have concluded that the Austrian cookbook contains no recipe for a theoretical free lunch.

The praise of deduction in von Mises's methodology is surpassed in passion only by the disdain for empiricism. In substance, his critique is that since man has free will, it is impossible to derive empirical laws useful in predicting what he will do (p. 58). While this criticism may have philosophical appeal, it rules out too much for his purpose.

The problem is that a priori laws provide just as much a constraint on free will as would empirical laws. To the extent that free will is unconstrained, it limits the explanatory power of all laws, whether a priori or empirical. As a result, von Mises's emphasis on free will provides no grounds for preferring Austrian economics to Chicago economics. In fact the von Mises position, when carried to extremes (as in Lachmann and Shackle), results in a scientific nihilism that denies that economics can ever have any explanatory power.

The Chicago school, in contrast, generally maintains an agnostic silence on matters of free will and the human psyche. For Chicagoans, the power of economics lies not in fathoming the psyche but in making conditional predictions about how behavior will change with changes in objectively observable constraints. Thus, the Chicagoan predicts that when the price of shoes goes up, fewer shoes will be consumed. Of course an "other things being equal" clause is always added. But this clause is less significant than it appears, because a law is only judged useful if other things usually are close to being equal.

Chicagoans are agnostic on more than free will; few of them would bother to criticize von Mises's method abstractly. Following Stigler rather than Friedman, they are doubtful that abstract arguments can provide the decisive grounds for preferring one method to another. The most telling test for them is the fruitfulness of the method when practiced. New Directions in Austrian Economics provides the evidence for such a test because it was intended to include some of the best and the latest of the work of the neo-Austrians.

Several of the programmatic suggestions in the essays indicate a move in the direction of good sense, and these are to be applauded. Thus Rizzo suggests that the neo-Austrian should consider how statistics may be soundly applied to historical work; Moss points out the weakness in a purely subjectivist account of interest rates; Garrison by example indicates that graphs may be useful; and Spadaro suggests that the use of advanced mathematics should not be ruled out out of hand.

But in spite of a few signs of good sense, there is little evidence of the alleged explanatory power of neo-Austrian economics. Consider if you will a too-brief-to-be-fair but too-long-to-be-stylish summary of the contents of the volume: Ludwig Lachmann attacks the use of macroaggregates and endorses the scientifically nihilistic radical subjectivism of G.L.S. Shackle; John Egger argues that Austrian economics differs from other approaches because it focuses on plans rather than preferences; Mario Rizzo identifies economic statistical work with logical positivism and then proceeds to repeat the standard criticisms of that philosophy; Israel Kirzner uses a debate between Leibenstein and Stigler as an occasion to reaffirm his program in Competition and Entrepreneurship; S.C. Littlechild complains that cost-benefit analysis is not subjective enough and is likely to be used to promote socialism; D.T. Armentano summarizes the differences between neoclassical and various Austrian theories of monopoly; Gerald O'Driscoll abstractly repeats the spontaneous coordination theme of his recently published dissertation; Murray Rothbard denounces Chicago and reveals the a priori definition of money; Lawrence Moss, in the tradition of Böhm-Bawerk, offers brief but cogent criticism of the neo-Austrian subjectivist account of interest rates; Roger Garrison expresses the Austrian macroeconomic position graphically so as to clarify its differences from the position of Don Patinkin; and, finally, the editor, Louis Spadaro, presents a program for future research. All of the essays, with a couple of partial exceptions, are either method, program, history of thought, or a repetition of old arguments. What is painfully absent is evidence of expanding explanatory power.

Research programs are easy to advise but difficult to fulfill. With exasperation Eliza Doolittle sang to Freddy: "Don't talk of love—show me!" If Eliza were a modern economist she would sing a similar song to the neo-Austrians: "Don't talk of method, history, and program—show me!" So far, she would still be waiting to be shown.

Arthur Diamond has a Ph.D. in philosophy and is now pursuing graduate studies in economics at the University of Chicago.