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Is Objectivism Compatible with Austrian Economics?

There have been a number of papers comparing Objectivism to Austrian Economics.  The motivation appears to be Rand’s relationship with Ludwig Von Mises, since both are known for advocating Laissez Faire Economics.  Most of these papers have focused on ethics, particularly whether the subjective theory of value in Austrian Economics (AE) is consistent with Objectivist ethics.  The majority of these papers have argued that AE (at least the Menger-Mises side) and Rand are actually very similar and compatible, but not all including Rand herself.  In order to arrive at these conclusions, the authors have often provided nuanced explanations of what the Austrians or Rand said.  For instance, Richard Johnsson argues:

It seems to be a well-established fact that there are similarities between Rand and Menger, despite the objectivist/subjectivist issue.  Once we concede that something can be intrinsic value, in Moore’s sense, I believe the differences between Austrian subjectivism and Rand’s Objectivism vanish.[i]

Roderick Long concludes in his paper, Praxeology: Who Needs It:

I have argued that the features of Misesian praxeology that Rand found most objectionable—its aprioristic methodology, its value subjectivism, and its claims about motivational psychology—can be reinterpreted in ways that make them congenial to Rand’s philosophical principles while still preserving the essential points that Mises was seeking to make. Hence there is no reason for those of a Randian philosophical bent to deprive themselves of the powerful methodological instrument developed by Mises and his fellow Austrians: praxeology, the a priori science of human action.[ii]

And Ed Younkins argues:

Objectivism’s Aristotelian perspective on the nature of man and the world and on the need to exercise one’s virtues can be viewed as complementary with the praxeology of Austrian economics.[iii]

Objectivists are generally more critical of the Hayek branch of AE.  For instance, David Kelley writes “if a defense of freedom depends on individualism, and individualism presupposes individuals capable of genuine self-direction, Hayek cannot successfully defend freedom.”[iv]  Ed Younkins says this about Hayek, “Hayek is primarily concerned with the nature, scope, limits, use, and abuse of reason in human life. For Hayek, a man’s knowledge of the world and himself is at best limited, incomplete, and uncertain.”[v]

This paper will focus primarily on the similarities and differences of the epistemology of various Austrian Economists (Menger, Mises, Hayek) and Rand.  Rand and the economists will be taken at their word.  Unlike many previous researchers, this paper will argue that the epistemological theories of Austrian Economists are incompatible with Objectivism and inconsistent with the science project of the Enlightenment.

 

Menger

Menger lays out his epistemology in his book Investigations into the Method of Social Sciences.[vi]  Lawrence H. White in the introduction to the book, explains.

Fortunately, Menger draws and even emphasizes a suitable distinction between the “realist-empirical orientation of theoretical research” and the “exact” orientation (p. 59). The search for so-called ,”exact laws” alone is more appropriately considered the task of purely theoretical research in economics. We can make sense of “exact laws” as theoretical propositions which (necessarily) take an “if-then” form: if conditions A and B hold, then condition C must also obtain. Menger rightly insists (pp. 70, 215) that realist-empirical generalizations (e.g., A and B are usually accompanied by C) can by their nature never attain the strictness that necessarily characterizes logical implications. The two sorts of “laws” are on different epistemological planes. So without too much dissent from Menger’s thought we may divide economic theory from economic history where he divided strict theory from what he considered an empirical sort of theory. What is empirical is really historical, and this accounts for its different status from what is deductive.[vii]

Lawrence H. White goes on to explain:

But this is not because, like some economists, he (Menger) sees empiricism or positivism or falsificationism as the only proper method for both social science and natural science. Instead he argues (p. 59 n. 18) that both the search for empirical regularities and the formulation of non-empirical, non-falsifiable (“exact”) theories are methods common to both economics and such natural science fields as chemistry. In viewing theoretical research in every field as having a non-empirical proposition at its core, Menger’s position bears some resemblance to that of modern philosophers of science. [viii]

As a person who has a masters’ degree in physics and a BS in Electrical Engineering and has worked with scientists and engineers his whole life, I am unaware of any so-called theoretical side of chemistry or other natural science that is ‘non-empirical, non-falsifiable (“exact”)’ nor have I ever heard such an idea proposed by others.

Ed Younkins describes Menger’s epistemology as:

Menger distinguishes between the empirical-realistic orientation to theory and the exact orientation to theory (36–44). Whereas the empirical-realistic branch of economics studies the regularities in the succession and coexistence of real phenomena, the exact orientation studies the laws governing ideal economic phenomena. He explains that empirical-realistic theory is concerned with regularities in the coexistence and succession of phenomena discovered by observing actual types and typical relationships of phenomena. Empirical realistic theory is subject to exceptions and to change over time. Theoretical economics in its realistic orientation derives empirical laws that are valid only for the spatial and temporal relationships from which they were observed. Empirical laws can only be alleged to be true within a particular spatiotemporal domain. The realistic orientation can only lead to real types and to the particular. The study of individual or concrete phenomena in time and space is the realm of the historical sciences.[ix]

Younkins and White both seem to agree that according to Menger there is theoretical side of economics that is exact and cannot be tested empirically.  Menger argues there is also an empirical side of economics, which is not exact and subject to change over time.

Menger’s epistemology should be familiar as it is a restatement of the analytic-synthetic distinction.  “Analytic propositions are true by virtue of their meaning, while synthetic propositions are true by how their meaning relates to the world.”[x]  Not surprisingly the origin of this distinction can be found in Kant and comes from his metaphysics, in which he argues there is a noumenal and phenomenal realm.[xi]  The noumenal realm is a realm of pure ideas and phenomenal world is a realm where our senses are engaged.  This logically gives rise to an epistemological analytic-synthetic distinction.

Leonard Peikoff states, “The theory of the analytic-synthetic dichotomy presents men with the following choice: If your statement is proved, it says nothing about that which exists; if it is about existents, it cannot be proved.”  Menger seems to disagree with at least the analytic (theoretical) side.  Menger seems to argue that theoretical laws of economics can be derived by just thinking about them.  Somehow these theoretical laws can tell us something empirical about economics.  Whether that is true or not, it is not consistent with Objectivist epistemology and it is not science.  The philosophy of science is a complex topic especially now days when Karl Popper is supposed to be the foremost philosopher of science and the Copenhagen Interpretation of Quantum Mechanics appears to undermine objectivity and even the law of identity.   However, even these deviations in the philosophy of science do not suggest that science can be divorced from empirical evidence.

 

Mises

Mises’ epistemology is described in his praxeology, which is supposed to be the study of human action.  The Action Axiom is the fundamental starting point of praxeology and it states “that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals.”[xii]  According to Mises the principles (axioms) “are, like those of logic and mathematics, a priori. They are not subject to verification or falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts.”[xiii]  Mises continues, “A fashionable tendency in contemporary philosophy is to deny the existence of any a priori knowledge. All human knowledge, it is contended, is derived from experience.”[xiv]

According to Long, Rand objected to this idea of a priori knowledge in her marginalia of her copy of Human Action.  “There is no ‘a priori’ knowledge,” Rand insisted in the margins; “[t]here is no knowledge not derived from experience” (Rand 1995a, 113–14).”[xv]

Long argues that Rand’s definition of axioms is the same as Mises’ a priori.  Long admits that Rand ultimately bases her axioms on reality while Mises does not, but relies on Rand’s explanation of an axiom as “a proposition that defeats its opponents by the fact that they have to accept it and use it in the process of any attempt to deny it.”[xvi]

According to praxeology the attempt to deny the action axiom necessarily means that you are acting towards a purpose.  While it might be true that the person arguing against the action axiom is taking action toward a goal, it is not true that a person having a seizure is taking ‘conscious actions toward chosen goals’.  A person in an abusive relationship suffering from ‘battered person syndrome’ is not engage din conscious actions toward chosen goals.  Advocates of praxeology might argue that the abused person feels responsible for the abuse they are suffering and therefore they are working toward the goal of relieving their guilt.  Any impartial observer would say that the abused person’s actions are not working toward relieving their guilt or getting out the abusive relationship.  In economics it is at least an open question whether the idea of unintended consequences fits the action axiom.  In that case the result obtained was not those the person(s) was striving for.

Note, Rand says that an axiom requires a person accept it in any attempt to deny it.  Arguing that person having a seizure is not engaged in conscious actions toward chosen goals, does not mean that they have accepted the action axiom.

Another part of Mises’ action axiom is, human action is necessarily always rational.  According to Mises, “the term ‘rational action’ is therefore pleonastic and must be rejected as such.  When applied to the ultimate ends of action, the terms rational and irrational are inappropriate and meaningless.”[xvii]  Mises further states, “however one twists things, one will never succeed in formulating the notion of ‘irrational’ action whose ‘irrationality’ is not founded upon an arbitrary judgment of value.”[xviii]

This is a clear contradiction between Rand and Mises on an epistemological and ethical level.  This is not a minor disagreement, but goes to the very fundamentals of Mises’ praxeology and Objectivism.  Long however argues that this is not the case.  “Mises of course did not mean that people always pursue the most rationally defensible ends (for Mises there are no such things) or even that, given their ends, people always choose the most rationally defensible means to their ends. In part, what he meant was simply that human action is purposeful.” [xix]  According to Long, when Mises says people always act rational, he means “in a manner appropriate to their situation in the way of actually seeing it that is constitutive of their action. And this is a claim that Rand has no reason to reject”[xx]

Rand defines reason as, “reason integrates man’s perceptions by means of forming abstractions or conceptions, thus raising man’s knowledge from the perceptual level, which he shares with animals, to the conceptual level, which he alone can reach.  The method which reason employs in this process is logic—and logic is the art of non-contradictory identification.”[xxi]  Thus for Rand to act rationally is to act in accordance with reason.  This does not include all purposeful actions.  Hitler acted purposively to kill off the Jews, but this action cannot be considered rational according to Rand.

All the massaging of what Rand and Mises meant cannot reconcile these two radically different positions.  While English was Mises’ second language, his ideas about praxeology were fundamental and Mises never retracted his statements or reinterpreted them and neither did Rand.  An informal review of video lectures by Austrian Economists shows that they take Mises at his word.  It is very dangerous to reinterpret what people are saying.

Mises is clear that praxeology is a type of philosophical rationalism.

“[Praxeology’s] cognition is purely formal and general without reference to the material content and particular features of the actual case. Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori.”  Mises, Human Action, p. 32

“All theorems of economics are necessarily valid in every instance in which all the assumptions presupposed are given.” Mises, Human Action, p. 66

“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. Historical fact enters into these conclusions only by determining which branch of the theory is applicable in any particular case.”  Murray N. Rothbard https://mises.org/library/praxeology-methodology-austrian-economics.

Philosophical rationalism is defined as “the doctrine that reason alone is a source of knowledge and is independent of experience.”[xxii]  Philosophical rationalism is commonly associated with Descartes and Spinoza.  Here is what Rand said about rationalism.

[Philosophers came to be divided] into two camps: those who claimed that man obtains his knowledge of the world by deducing it exclusively from concepts, which come from inside his head and are not derived from the perception of physical facts (the Rationalists)—and those who claimed that man obtains his knowledge from experience, which was held to mean: by direct perception of immediate facts, with no recourse to concepts (the Empiricists).[xxiii]

Mises’ epistemology is not science.  At a minimum science always requires that concepts (hypothesis) are checked against reality and reality is ultimate determiner of what is true.  William Thomas, Director of Programs at The Atlas Society, argues that Mises was not a philosophical rationalist and shows that some of the concepts Mises uses, such as money, can only be derived from experience.  This is another attempt to massage the words of Mises.  What this shows is that Mises’ praxeology and his ideas about money result in a logical contradiction.  Rand’s response from Atlas Shrugged might be “contradictions do not exist. Whenever you think that you are facing a contradiction, check your premises. You will find that one of them is wrong.”

An interesting point is that Mises’ subjective theory of value is fundamental to his ideas on praxeology.  “Let us note that praxeology does not assume that a person’s choice of values or goals is wise or proper . . . “[xxiv]  “However one twists things, one will never succeed in formulating the notion of ‘irrational’ action whose ‘irrationality’ is not founded upon an arbitrary judgment of value.”[xxv]  As a result, it is impossible to separate the subjective theory of value from Mises praxeology.

George Reisman makes some important point about Mises’ contention that economics (science) should be value-free.

The notion that science and value should be divorced is utterly contradictory. It itself expresses a value judgment in its very utterance. And it is not only self-contradictory, but contradictory of the most cherished principles of science as well. Science itself is built on a foundation of values that all scientists are logically obliged to defend: values such as reason, observation, truth, honesty, integrity, and the freedom of inquiry. In the absence of such values, there could be no science. The leading historical illustration of the truth of these propositions is the case of Galileo and the moral outrage which all lovers of science and truth must feel against those who sought to silence him. [xxvi]

 

Hayek

F.A. Hayek’s epistemological ideas are contained in his ideas on “cultural evolution”.  Hayek was proud of his ideas on cultural evolution and considered them central to his ideas on economics.  “The theory (cultural evolution), of which Hayek himself was proud, is on all accounts central to his economic, social, and political project”[xxvii]

Cultural evolution is the idea that social institutions, such ethics, law, and economic systems are created by a non-rational evolutionary process.  “According to this theory, rules, norms and practices evolve in a process of natural selection operating at the level of the group. Thus, groups that happen to have more efficient rules and practices tend to grow, multiply, and ultimately displace other groups.”[xxviii]

Bruce Caldwell describes cultural evolution as:

The term “cultural evolution” refers to the evolution of a tradition of learnt rules, norms, ethical precepts, and practices, “especially those dealing with several property, honesty, contract, exchange, trade, competition, gain, and privacy” (Hayek 1988:12). This cultural heritage emerged through “a process of winnowing and sifting, directed by the differential advantages gained by groups from practices adopted for some unknown and perhaps purely accidental reasons” (Hayek 1979:155). The traditions and institutions that resulted allowed the development of a vast extended order, one capable of sustaining huge increases in population, an order that would have been considered fantastical to earlier humans existing under more primitive conditions.[xxix]

According to Hayek, no individual is capable of using reason to determine which social institution will end up with the best result beforehand or why a particular set of social norms does work well.  Linda C. Raeder in Humantis makes this point and also points out that David Hume’s ideas entered the mainstream libertarian movement through Hayek.

“The picture of man as a being who, thanks to his reason, can rise above the values of civilization, in order to judge it from the outside . . . is an illusion.”  For Hayek, morals, values, and reason are entirely natural phenomena, evolutionary adaptations which have enabled man to survive and flourish in his particular kind of world.

Perhaps no other area of Burke’s and Hayek’s thought is as congruent as their understanding of the role of reason in human affairs; their views are so close as to suggest that Hayek’s thought on this issue is merely an elaboration, although quite an extensive one, of Burke’s theme. Hayek developed several of Burke’s most crucial insights: 1) the priority of social experience (or “tradition”) over reason; 2) the notion that inherited social institutions embody a “superindividual wisdom”  which transcends that available to the conscious reasoning mind; and 3) the impotence of reason to ‘design’ a viable social order.[xxx]

David Kelley elaborates on this point:

Hayek, by contrast, is a critic of what he calls ―constructive rationalism. His concept of rationalism is somewhat idiosyncratic, and is not equivalent to Rand‘s conception of reason. Nevertheless, it leads him to claim that ―no universally valid system of ethics can ever be known to us, which is obviously not consistent with her view. For Hayek, moral rules have a status lying ―between instinct and reason.

Is Hayek anti-reason?  It’s hard to say, however arguing that reason is fundamentally limited (as opposed to making a mistake) in understanding reality without any real evidence is an attack on reason itself.  Like Hume, Hayek cannot say reason is completely impotent, because what would be the point of writing.  Writing presumes some ability to reason.

Hayek’s case for freedom is based on the limits of reason.  In order for Hayek’s cultural evolution to work, you cannot substitute the decisions of a single leader (or small group) for those of the masses.  To do so undermines the evolutionary process.  As David Kelley explains:

This case for market freedom is essentially negative. Hayek seems to think that if socialist planning were possible, socialism might be the morally ideal system. But the inescapable ignorance of would-be planners excludes that possibility: ―If there were omniscient men, if we could know not only all that affects the attainment of our present wishes but also our future wants and desires, there would be little case for liberty.

Hayek does not think that reason can tell you how or why social institutions, including the law and ethics work.  This is totally inconsistent Rand’s ideas and undermines the very idea of science.

Interestingly, Hayek’s position on ‘the subjective theory or value’ is a fundamental part of his epistemology, just like Mises’.  His cultural evolution requires that we cannot formulate a rational ethics because that would undermine the evolutionary process.  As a result, every ethical system is subjective and therefore so is every law.  The most we can do is put our faith in the process and blindly hope our ethical and legal systems are better than they were in the past because of the evolutionary process of cultural evolution.

 

Economics vs. Philosophy

It is clear that Austrian Economics’ epistemological positions are incompatible with Objectivism and science more generally.  However it is entirely possible that despite this, Austrian Economics has achieved great things in economics.  For instance, David Kelley has shown that John Locke made a number of epistemological errors with respect to perception, in his book The Evidence of the Senses, and yet Locke’s ideas on Natural Rights are still profound and fundamentally sound.

In this case however, when Objectivists and Austrians are talking they are not even speaking the same language.  For instance, when Rand says she is for capitalism, she means “a social system based on the recognition of individual rights, including property rights”[xxxi]  By individual rights, Rand means a moral claim based on man’s nature and discovered using reason.  Austrians do not think that a rational ethics is possible.  As a result to Austrians, capitalism is an economic system that has low levels of governmental interference, based on some utilitarian criteria.  (You cannot live without an ethical system, so most Austrians default to utilitarianism)

When Objectivists talk about property rights, they mean an ethical claim to take action with respect to something, such as land.  This ethical claim is based on a rational, natural rights system.  When Austrians talk about “property rights”, they do not really mean a “right” in any way except a purely arbitrary legal claim.  Austrians argument for “property rights” is a purely utilitarian or historical argument (Hayek) that can be fudged to meet the utilitarian goal or historical precedence.

These differences result in real differences in economic policy.  Menger, for instance, advocated 1) public works constructed by the state such as roads, railways and canals, 2) government established agricultural and vocational training institutions, 3) state intervention to stop clearing of forests on private property in the mountains of Austria when this clearing had serious and bad effects on agriculture, and 4) government intervention to stop child labour.[xxxii]           Hayek was in favor social security, some sort of government provided health care, emergency government assistance for natural disasters, and suggested that manipulating the money supply might be used to alleviate recessions/depressions.[xxxiii]

Even Ludwig Von Mises waffles on economic policies that are inconsistent with capitalism as an Objectivist would define it.

There are certainly cases in which people may consider definite restrictive measures as justified. Regulations concerning fire prevention are restrictive and raise the cost of production. But the curtailment of total output they bring about is the price to be paid for avoidance of greater disaster. The decision about each restrictive measure is to be made on the ground of a meticulous weighing of the costs to be incurred and the prize to be obtained. No reasonable man could possibly question this rule.[xxxiv]

Note that Mises justification for fire regulations is based on utilitarianism, which Rand condemns as “’the greatest good for the greatest number’ is one of the most vicious slogans ever foisted on humanity.”[xxxv]

The Austrians sound a lot more like modern conservatives than capitalists.  When it is a government policy that Austrians are in favor of, they are quite happy to override peoples’ individual rights.  They just want these programs to be run more efficiently.  Austrians make a number of errors in their analysis of the economy also, however there is not time in this paper to take on these issues.

 

Conclusion

Austrians often argue that if you do not support the Austrian school of economics then which school (economists) do your support then, as if this was an election or a smorgasbord with a limited number of choice.  Science is a creative endeavor and we are not limited only the existing choices.

New Growth Economics’ central point is that wealth is created by the human mind.  This should be exciting to Objectivists, because that sounds very much like Ayn Rand.  It also points to an objective basis for economics.  Every human needs to acquire and consume a minimum number of calories or they die.[xxxvi]  This provides an objective standard that is very similar to Rand’s standard for her ethics.  It also ties economics to biology, particularly human biology, just like Rand tied her ethics to biology.

Inventions are the result of applying man’s reasoning power to the objective problems of life.  The way we become wealthier is by increasing our level of technology.  I explain this in more detail in my book, Source of Economic Growth; in my Savvy Street article, entitled ‘Inventing at the Intersection of Biology and Economics’; and in my 2015 & 2016 talks at Atlas Summit.

All species are biologically designed to spend most of their existence on the edge of starvation.  The fact that human beings, starting around 1800, were the first species to permanently escape this condition, needs a profound answer based on man’s unique nature, his ability to reason.

[i] Richard C.B. Johnsson, The Journal of Ayn Rand Studies Vol.6 no. 2 Spring 2005 pages 317-335.

Subjectivism, Intricism, and Apriorism,:Rand Among the Austrians, Penn State University Press, http://www.jstor.org/stable/pdf/41560286.pdf.

[ii] Roderick D. Long, “Praxeology: Who Needs It JARS, http://praxeology.net/praxwho-x.pdf

[iii] Edward W. Younkins, The Journal of Ayn Rand Studies Vol.6 no. 2 Spring 2005 pages 337-374, Menger, Mises, Rand, and Beyond, Centenary Symposium, Part II Ayn Rand Among the Austrians, http://quebecoislibre.org/younkins28.pdf

[iv] David Kelley, Rand versus Hayek on Abstraction,  Symposium: Rand and Hayek on Cognition and Trade, Reason Papers Vol. 33, https://reasonpapers.com/pdf/33/rp_33_1.pdf.

[v] Edward W. Younkins, The Road to Objective Economics: Hayek Takes a Wrong Turnhttp://rebirthofreason.com/Articles/Younkins/The_Road_to_Objective_Economics_Hayek_Takes_a_Wrong_Turn.shtml

[vi]https://mises.org/sites/default/files/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf ,  INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES WITH SPECIAL REFERENCE TO ECONOMICS

[vii]https://mises.org/sites/default/files/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf ,  INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES WITH SPECIAL REFERENCE TO ECONOMICS, Introduction, p. xi.

[viii]https://mises.org/sites/default/files/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf ,  INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES WITH SPECIAL REFERENCE TO ECONOMICS, Introduction, p. xiii, Lawrence H. White.

[ix] Edward W. Younkins, The Journal of Ayn Rand Studies Vol.6 no. 2 Spring 2005 pages 337-374, Menger, Mises, Rand, and Beyond, Centenary Symposium, Part II Ayn Rand Among the Austrians, http://quebecoislibre.org/younkins28.pdf

[x] Wikipedia, Analytic–Synthetic Distinction, Accessed  October 21, 2016, https://en.wikipedia.org/wiki/Analytic%E2%80%93synthetic_distinction.

[xi] Kant’s noumenal/phenomenal distinction is restatement of Plato, in which there is a realm of forms (ideas) and the imperfect world we live in.

[xii] Murray N. Rothbard, “Praxeology: The Methodology of Austrian Economics”, https://mises.org/library/praxeology-methodology-austrian-economics

[xiii] Ludwig Von Mises, Human Action, p. 32, https://mises.org/sites/default/files/Human%20Action_3.pdf

[xiv] Ludwig Von Mises, Human Action, p. 32, https://mises.org/sites/default/files/Human%20Action_3.pdf

[xv] Roderick D. Long, “Praxeology: Who Needs It JARS, p. 300, http://praxeology.net/praxwho-x.pdf

[xvi] Galt’s Speech,, For the New Intellectual, 155, http://aynrandlexicon.com/lexicon/axioms.html

[xvii] Ludwig Von Mises, Human Action, 1.I.32, http://www.econlib.org/library/Mises/HmA/msHmA1.html

[xviii] Ludwig Von Mises, Human Action, The Scholar’s Edition, p. 104.& https://mises.org/library/what-do-austrians-mean-rational ,  What Do Austrians Mean by “Rational”?, MISES DAILY ARTICLES, Accessed 6/9/16.

[xix] Roderick D. Long, “Praxeology: Who Needs It JARS, p. 309, http://praxeology.net/praxwho-x.pdf

[xx] Roderick D. Long, “Praxeology: Who Needs It JARS, p. 310, http://praxeology.net/praxwho-x.pdf

[xxi] “Faith and Force: The Destroyers of the Modern World,” Philosophy: Who Needs It, 62, http://aynrandlexicon.com/lexicon/reason.html.

[xxii] Dictionary.com, http://www.dictionary.com/browse/rationalism, accessed October 22, 2016.

[xxiii] “For the New Intellectual,” For the New Intellectual, 30, http://aynrandlexicon.com/lexicon/rationalism_vs_empiricism.html.

[xxiv] Murray N. Rothbard, “Praxeology: The Methodology of Austrian Economics”, https://mises.org/library/praxeology-methodology-austrian-economics

[xxv] Ludwig Von Mises, Human Action, The Scholar’s Edition, p. 104.& https://mises.org/library/what-do-austrians-mean-rational ,  What Do Austrians Mean by “Rational”?, MISES DAILY ARTICLES, Accessed 6/9/16.

[xxvi] George Reisman, Capitalism: A Treatise on Economics, p. 36, http://www.capitalism.net/Capitalism/CAPITALISM_Internet.pdf.

[xxvii] Erik Angner, The History of Hayek’s Theory of Cultural Evolution, p. 3, http://institutoamagi.org/download/Angner-Erik-The-history-of-Hayeks-Theory-of-cultural-Evolution.pdf.

[xxviii] Erik Angner, The History of Hayek’s Theory of Cultural Evolution, p. 3, http://institutoamagi.org/download/Angner-Erik-The-history-of-Hayeks-Theory-of-cultural-Evolution.pdf.

[xxix] Bruce Caldwell , The Emergence of Hayek’s Ideas on Cultural Evolution, p. 6, http://www.gmu.edu/depts/rae/archives/VOL13_1_2000/caldwell.pdf.

[xxx] Linda C. Raeder, The Liberalism/Conservatism Of Edmund Burke and F. A. Hayek: A Critical Comparison, HUMANITAS, Volume X, No. 1, 1997. National Humanities Institute,  http://www.nhinet.org/raeder.htm.

[xxxi] What Is Capitalism?” Capitalism: The Unknown Ideal, 19, http://aynrandlexicon.com/lexicon/capitalism.html.

[xxxii] Social Democracy For The 21st Century: A Realist Alternative To The Modern Left, http://socialdemocracy21stcentury.blogspot.mx/2012/08/rescuing-menger-from-austrians.html, accessed October 23, 2016.

[xxxiii] Nicholas  Wapshott,  Hayek on health care, social safety nets and public housing (quoting from Road to Serfdom) https://sites.google.com/site/wapshottkeyneshayek/hayek-on-health-care-social-safety-nets-and-public-housing  accessed October 23, 2016.

[xxxiv] Ludwig Von Mises, Human Action, The Scholar’s Edition, p. 741, https://mises.org/sites/default/files/Human%20Action_3.pdf.

[xxxv] Textbook of Americanism,” The Ayn Rand Column, 90, http://aynrandlexicon.com/lexicon/utilitarianism.html.

[xxxvi] Calories make a convenient catch all for all human requirements including air, water, micronutrients etc.

May 10, 2017 Posted by | -Economics, philosophy, bioeconomics | , , , , , , | Leave a comment

Austrian Economics and Aristotle

Austrian Economics is always claiming a strong connection to the Philosophy of Aristotle.  The Austrians main connection to Aristotle is the idea of apriorism.  In philosophy apriorism is defined as the philosophical doctrine that there may be genuine knowledge independent of experience.  This apriorism shows up particularly in Menger and Mises.  In Mises case it is clearly related to his ideas on praxeology.  In Menger’s case this comes from his epistemology in which he states there is an exact theoretical side of science and an inexact empirical side of science.  The question is whether the Austrians’ claim to following Aristotle’s ideas or being neo-Aristotelian has any validity.

One of the most defining points of Aristotle’s philosophy was his disagreement with Plato’s “Theory of Forms.”  Plato argued that we cannot trust our senses and the world they perceive is at best a vague, shadowy version of the real world.  For more see Plato’s Allegory of the Cave.  According to Plato if you see a red ball there is a perfect version of red and a perfect version of a ball in the “real world” and we are seeing some sort of distorted versions of these.  Plato’s real world is often represented as being up in the sky, sort of a heaven.  Since we cannot trust our senses, Plato’s answer is that we must just think about what has to be true and that will lead us to the truth.  This is known as rationalism.

Aristotle rejected Plato’s ideas and said we could trust our senses.  In order to verify (and integrate) that our conclusions from our senses are valid Aristotle created rules of thought or logic.  It is important to remember that to Aristotle these conclusions were always based on (tested against) the real world evidence.  In other words, logic was useful in reasoning about the world, but the ultimate proof was reality.  This makes him diametrically opposed to Plato’s rationalism.

There is a famous painting entitled The School of Athens by Raphael in which Plato is pointing to the sky and Aristotle has his hand out pointing to the world before us that illustrates the differences between Aristotle and Plato.  Aristotle’s epistemology is based in this world, where Plato thinks that the real world is somewhere else.

How did Austrians ever get the idea that apriorism is consistent with Aristotle?  A search of Aristotle on the Internet Encyclopedia of Philosophy of Philosophy and the Stanford Encyclopedia of Philosophy does not show any mentions of apriorism or apriori.  An informal search of academic papers and books finds only a couple of mentions of Aristotle and apriorism, except by Austrians (Austrian/Objectivists).  Both argue that apriorism is inconsistent with Aristotle’s philosophy.  One book says that Aristotle the empiricist exposes the vanity of armchair natural scientists and it is clear that Aristotle lies on the side of empiricism not apriorism.[1]

This idea that apriorism is consistent with Aristotle appears to come from Aristotle’s concept of axioms.  Aristotle had one axiom, the principle of non-contradiction according the Stanford Encyclopedia of Philosophy.  The explanation (justification) of this axiom sounds similar to the Austrians apriorism.

“Before embarking on this study of substance, however, Aristotle goes on in Book Γ to argue that first philosophy, the most general of the sciences, must also address the most fundamental principles—the common axioms—that are used in all reasoning. Thus, first philosophy must also concern itself with the principle of non-contradiction (PNC): the principle that “the same attribute cannot at the same time belong and not belong to the same subject and in the same respect” (1005b19). This, Aristotle says, is the most certain of all principles, and it is not just a hypothesis. It cannot, however, be proved, since it is employed, implicitly, in all proofs, no matter what the subject matter. It is a first principle, and hence is not derived from anything more basic.

What, then, can the science of first philosophy say about the PNC? It cannot offer a proof of the PNC, since the PNC is presupposed by any proof one might offer—any purported proof of the PNC would therefore be circular.”[2]

 

This axiom was expanded to three axioms, the law of identity, the law of the non-contradiction, and the law of the excluded middle.  It seems to me that the other two laws follow from the law of identity.

This sounds similar to how Austrians justify their apriorism, however the Austrians extend the idea to state:

(a) that the fundamental axioms and premises of economics are absolutely true;

(b) that the theorems and conclusions deduced by the laws of logic from these postulates are therefore absolutely true;

(c) that there is consequently no need for empirical “testing,” either of the premises or the conclusions; and

(d) that the deduced theorems could not be tested even if it were desirable.[3]

While this was written by Murray Rothbard it is the logical conclusion of Menger’s “theoretical science.”  These ideas are diametrically opposed to those of Aristotle.  Austrian Economics is not Aristotelian, not science and not consistent with Objectivism.

econgrowth.smallI have pointed to an economic theory that is consistent with Aristotle, science, and Objectivism.  Part of my insight came from  “New Growth Economics”, whose  central point is that wealth is created by the human mind.  This should be exciting to Objectivists, because that sounds very much like Ayn Rand.  It also points to an objective basis for economics.  Every human needs to acquire and consume a minimum number of calories or they die.  This provides an objective standard that is very similar to Rand’s standard for her ethics.  It also ties economics to biology, particularly human biology, just like Rand tied her ethics to biology.

Inventions are the result of applying man’s reasoning power to the objective problems of life.  The way we become wealthier is by increasing our level of technology.  I explain this in more detail in my book, Source of Economic Growth; in my Savvy Street article, entitled ‘Inventing at the Intersection of Biology and Economics’; and in my 2015 & 2016 talks at Atlas Summit.

All species are biologically designed to spend most of their existence on the edge of starvation.  The fact that human beings, starting around 1800, were the first species to permanently escape this condition, needs a profound answer based on man’s unique nature, his ability to reason.

 

[1] Walter E. Wehrle, The Myth of Aristotle’s Development and the Betrayal of Metaphysics

[2] Aristotle’s Metaphysics http://plato.stanford.edu/entries/aristotle-metaphysics/#FundPrinAxio

[3] Murray N. Rothbard,” In Defense of “Extreme Apriorism”, https://bastiat.mises.org/sites/default/files/Defense%20of%20Extreme%20Apriorism,%20In_6.pdf, accessed November 25, 2016.

November 26, 2016 Posted by | -Economics, bioeconomics, Blog, philosophy | , , , , , | 1 Comment

Carl Menger: Austrian Economics vs. Objectivism

I am giving a talk with Will Thomas at Atlas Summit 2016 on Austrian Economics.  I have been assigned to discuss the Austrian economists Carl Menger and F A. Hayek.  I will have about eight minutes for each Menger and Hayek.  This post presents the basic ideas I will present on Carl Menger.

Carl Menger is commonly considered the founder of Austrian economics.  Menger wrote his first book Principles of Economics in 1871.  It is very difficult to nail down Menger’s position on a number of issues.  For instance, he is known for developing the subjective theory of value in Austrian economics, which was in response to the labor theory of value of classical economics.  The labor theory of value is that value of an item is equal to the value of all the labor that went into making the item.  This is an intrinsic theory of value and rejected by almost all economists today.  However, many people including some Objectivists argue that Menger really was advocating an objective theory of value instead of a subjective theory of value.

For instance, consider these two quotes by Menger from Principles of Economics:

Value is thus the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs. p. 115  (objective?)

The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts. What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another. P. 146  (subjective?)

MengerModern Austrians and most economists today have accepted the subjective theory of values.  The logical result of accepting the subjective theory of values is that no rational theory of ethics is possible, which is exactly what Mises, Hayek, modern Austrians and modern economists, such as Milton Friedman, have concluded.  This means that Natural Rights and Rand’s ethics are inconsistent with the subjective theory of values.  This has important implications particularly for property rights, but in fact makes all of law subjective.

Despite the contradictory statements by Menger I think it is fair to say that he was advocating a subjective theory of values.  Menger was most influenced by philosopher Franz Brentano who also was highly influential of Freud.  Franz Brentano maintained that our senses were invalid and could not tell us anything about the world.[1]  In addition, the Austrians who follow and praised Menger have adopted the subjective theory of value.

Another question that arises is whether Menger’s epistemology was reason or consistent with science and Objectivism.  Again you can find contradictory interpretations, even among Objectivist.  However, in his book Principles of Economics he is clear that the techniques of the physical sciences at the time were not the ones he was applying in his study of economics.  Menger described his epistemology in more detail in his book Investigations into the Method of Social Sciences, where he suggests that all science has a theoretical, non-empirical side and an empirical side.[2]  The theoretical side creates universal truths that cannot be subject to empirical proof or disproof.  That is not science.  It appears to me that Mises’ praxeology follows Menger’s theoretical side, which is philosophical rationalism.  While Hayek follows the empirical side of Menger, which rejects the efficacy of reason.

Menger’s Principles of Economics provides almost no empirical evidence for his positions.  In addition, he shows no interest in the most interesting economic phenomena in history, the Industrial Revolution.  This is inconsistent with a scientific approach to economics.

Menger shows only a passing interest in what causes economic growth, particularly per capita increases in wealth.  He argues that economic growth is the result of creating more second or high order goods.  His explanation appears to be the basis of the Austrian Business Cycle Theory.  This is just a long winded way of saying increasing capital goods causes economic growth, which had already been said by many other economists.  Not only has this already been said by other economists, but it is wrong.

In conclusion, Menger seems to commonly make contradictory statements, which makes him difficult to pin down, however it appears clear to me that Menger is not consistent with Objectvism on metaphysic, epistemology, or ethics.  Menger’s support for “free markets” or capitalism is coincidental with Objectivism, not fundamental.

[1] https://en.wikipedia.org/wiki/Franz_Brentano, accessed November 11, 2015, Wikipedia, Franz Brentano

[2] p. xi https://mises.org/sites/default/files/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf,  INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES WITH SPECIAL REFERENCE TO ECONOMICS

 

March 21, 2016 Posted by | -Economics, philosophy | , , | 5 Comments

Carl Menger: Principles of Economics

This is a review of Carl Menger’s book Principles of Economics published in 1871[1].  I will be judging this book on three criteria: 1) Is it adhering to the philosophy of science? 2) Does it address the question of what is the cause of real per capita increases in wealth? and 3) Does it address the Mengerquestion of what was the cause of the industrial revolution?  These last two questions are the most important in all of economics and it is impossible to write something that is profound if it does not address a profound question.  I will also be analyzing Menger’s “subjective” theory of value and prices.

 

Philosophy of Science

Menger addresses this issue in the Preface.  He discusses the remarkable advances of the hard sciences and the high regard in which they are held.  He also laments that economics is held in very low regard.

This method of research, attaining universal acceptance in the natural sciences, led to very great results, and on this account came mistakenly to be called the natural-scientific method. It is, in reality, a method common to all fields of empirical knowledge, and should properly be called the empirical method. The distinction is important because every method of investigation acquires its own specific character from the nature of the field of knowledge to which it is applied. It would be improper, accordingly, to attempt a natural-scientific orientation of our science.  (P.47)

Menger however never states why it would be improper to use the philosophy of natural sciences.  He implies that he is using the “empirical method” however he never explains what he means by that.  The rest of the book has almost no empirical evidence in support of Menger’s positions.  Menger’s lack of clarity on this point is consistent with much of the rest of the book.  This means that it is often possible to argue that Menger held two contrary positions and find support for both in this book.  This in and of itself is support that Menger did not follow the philosophy of science, however it is a useful rhetorical tool.  In addition, his major protégé, Ludwig Von Mises, explicitly rejects the philosophy of science, in favor of philosophical rationalism.

Menger’s major intellectual influence was Franz Brentano, an Austrian philosopher best known for his works related to psychology.[2]  Brentano wrote a book entitled Perception is Misception, in which he claims that perception is erroneous.  “In fact he maintained that external, sensory perception could not tell us anything about the de facto existence of the perceived world, which could simply be illusion.”[3]  Since Menger considered Brentano a friend and intellectual influence and Menger did not refute this position, it is reasonable to assume that Menger was sympathetic to Brentano’s anti-perception idea.  This anti-perception point of view is very reminiscent of Plato.  Plato’s ideas are not consistent with science.

The overwhelming evidence is that Menger did not follow the philosophy of science.  This means that none of the major Austrian economists, Menger, Von Mises, or Hayek based economics on the philosophy science.  Austrian economics is not a science.

 

Source of Economic Growth

This section, The Causes of Progress in Human Welfare p. 71, is the part of Menger’s book I consider most important.  It also appears to be the payoff for pages of description of first, second, third, etc. order goods.  Even Menger admits that his definition of these is a bit vague, however first order goods appear to be consumables or consumer goods.  Menger argues that economic growth is the result of creating more second or high order goods.  This is just a long winded way of saying increasing capital goods causes economic growth, which had already been said by many other economists.  Not only has this already been said by other economists, but it is wrong.  He also has one throw-away line about human knowledge.

“Nothing is more certain than that the degree of economic progress of mankind will still, in future epochs, be commensurate with the degree of progress of human knowledge.”

He never builds on this, he does not explore how human knowledge is created, how it results in increases in economic wealth, or what knowledge is important to economic growth.  His followers, such as Mises also do not build on this, they all focus on increases in savings and capital as the cause of growth in the economy.

In a technologically stagnant economy adding more capital at best can lead to some sort of optimum output, but can never exceed this level.  (I describe and provide evidence for this in much more detail in my book Source of Economic Growth).  As a simple example, imagine Robinson Crusoe fishing with a spear.  The spear is a second order good or higher under Menger’s approach.  Now if Crusoe creates more spears will he have more fish?  No, since he can only use one spear at a time.  At best having more spears will allow him to replace his spear more quickly if he breaks or loses a spear.  Another example is that if every farmer that can use a tractor has one, then giving them more tractors will not increase the production of first order goods.  This has been shown empirically and Robert Solow’s paper (Solow, Robert M, Technical Change and the Aggregate Production Function, The Review of Economics and Statistics, Vol. 39, No. 3 (Aug., 1957), pp. 312-320) is just one of many that prove this.

Menger fails to answer the question of what causes real per capita increases in wealth.

 

Industrial Revolution

Menger never mentions the industrial revolution in this book.  The Industrial Revolution is the first time that people escape subsistence living (the Malthusian Trap) in large numbers.  It is the most significant event in the economic history of the world and Menger shows no interest in it.  By the time Menger wrote Principle of Economics the Industrial Revolution was at least seventy years old and had exploded in the United States.  This shows a profound disinterest in the empirical side of economics.  It would be like an astronomer ignoring and eschewing the telescope or biologist who refuses to do or even explore the results of dissections.

Menger does not compare the economies of different countries or the economy of a country at different times, despite the profound differences in the economies of countries around the world.  This is not how a scientist thinks or works.  Instead Menger examines propositions in his own head, like the monks of the middle ages arguing over how many angels can dance on a pin head.  Menger’s style is completely consistent with Mises praxeology – philosophical rationalism.

The cause of real per capita increases in wealth is increasing levels of technology (new inventions) and the cause of the Industrial Revolution is legally enforceable property rights for inventions (patents) as William Rosen, shows in his excellent book The Most Powerful Idea in the World and I show in my book Source of Economic Growth.

Menger does not discuss inventions, technology, knowledge, patents or their importance in economics.  Menger fails to add anything useful to the two most important questions in all of economics.

 

Subjective Value

Menger is generally credited with the idea of subjective value in economics.  This is described as a reaction to the labor theory of value described in classical economics, which is an intrinsic theory of value.  Despite this many people have argued that Menger was not advocating a subjective theory of value.  Note that when modern Austrians use the term subjective value they mean that values are disconnected from reality – they are peoples’ arbitrary decisions.  The interesting thing is that in his Principles of Economics you can find support for both positions.  For instance, if you want to argue that Menger was advocating an objective theory of valuation you can provide the following quotes:

Value is thus the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs. p. 115

Value is therefore nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being, and in consequence carry over to economic goods as the exclusive causes of the satisfaction of our needs. p 116

Menger also makes this distinction between real and imaginary goods.  He appears to be making a point about objective values, however he never does anything with these concepts once he introduces them.

Note that Menger never defines what he means by needs.  Are needs anything someone wants?  Menger never says.  Then he talks about the satisfaction of needs.  Is this a personally, subjective decision?  Menger never says.

On the other hand if you want to say Menger was advocating the modern value subjectivism of Austrians, then you can find these quotes.

It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men. It is, therefore, also quite erroneous to call a good that has value to economizing individuals a “value,” or for economists to speak of “values” as of independent real things, and to objectify value in this way. P. 121

The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts. What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another. P. 146

Hence not only the nature but also the measure of value is subjective. Goods always have value to certain economizing individuals and this value is also determined only by these individuals. P.146

Another factor favoring the subjective theory of values is that Menger is clear that ethics and morality are outside the study of economics.

But it seems to me that the question of the legal or moral character of these facts is beyond the sphere of our science. P. 173

Here he is talking about the morality of charging interest, however it is clear that this statement is a more general statement about economics.  This suggests that Menger’s ethics, like most Austrians, is some version of Utilitarianism, which means he rejects Locke’s and Rand’s Natural Rights.  Another quote that supports this point of view is Menger’s ideas of property.

The entire sum of goods at an economizing individual’s command for the satisfaction of his needs, we call his property. His property is not, however, an arbitrarily combined quantity of goods, but a direct reflection of his needs, an integrated whole, no essential part of which can be diminished or increased without affecting realization of the end it serves. P.76

Property, therefore, like human economy, is not an arbitrary invention but rather the only practically possible solution of the problem that is, in the nature of things, imposed upon us by the disparity between requirements for, and available quantities of, all economic goods.  P. 97

The first quote is really Menger’s definition of property.  Note that this over 200 years after Locke.  It is a clear rejection of Locke and Natural Rights.

The second quote is a forerunner of the inane idea that property “rights” are socially useful tools for allocating scarce resources adhered to by Austrians.

Menger’s position on subjective value is confused.  Note that this is not the work of scientist, which shows once again that Menger’s ideas are not based on the philosophy of science.  Despite this Menger’s rejection Natural Rights, rejection of ethics in economics, and the direction his students took suggests that on balance Menger was an advocate of the radical subjective theory of value.

 

Conclusion

I undertook this task because a number of people I have respect for argued that Menger was not the same as Hayek or Von Mises.  In addition, a number of well-known Objectivists have tried to reconcile Austrian Economics with Objectivism.  I have analyzed in depth the irrational roots of the two main branches of Austrian Economics: 1) Hayek and 2) Von Mises.  I have shown that the positions of Austrians on a number of positions are absolutely flawed including their position on property “rights”, the Austrian Business Cycle, their position on fractional reserve banking, and their position on intellectual property.  Carl Menger has not proven to be the savior of this fall from grace.  This is not to say that other schools of economics are better or that there is nothing useful in Austrian economics.  For instance, Menger’s marginal utility is a useful concept, but hardly profound.

I found Principle of Economics boring, repetitive, and written in the pseudo-scientific style of many pop management books or psychological self-help books.  This is consistent with other books I have read by Austrians.  The best writer among the major Austrians is Hayek.

I did not force myself to read every word of Principle of Economics because it is boring, repetitive, and non-scientific.  I will not apologize for not reading all of a book that is clearly not based on science.  I also will not waste my time reading anymore books by Austrians.  I know more about the underlying tenants of Austrian economics than many of its proponents, just as I know more about the underlying tenants of christianity than many of its proponents.

Objectivism and Austrian economics are incompatible.  I think many Objectivists are fooled into supporting Austrian economics because they talk about free markets.  Austrian economics is not the product of reason, the Enlightenment, and the philosophy of science.  It is best described as a branch of the Scottish “Enlightenment”, which really was a counter enlightenment movement.  If Objectivism wants to make progress in economic science it needs to wall itself off from Austrian economics.

 

[1] https://mises.org/sites/default/files/Principles%20of%20Economics_5.pdf,

[2] https://mises.org/library/philosophical-origins-austrian-economics, The Philosophical Origins of Austrian Economics, Mises Institute, by David Gordon, June 17, 2006.

[3] https://en.wikipedia.org/wiki/Franz_Brentano, accessed November 11, 2015, Wikipedia, Franz Brentano

November 16, 2015 Posted by | -Economics, -Philosophy, Innovation, Patents, philosophy | , , | 1 Comment