February 27, 2014

What is Unique About Austrian Economics and What is the Christian to Say?

By In Articles, Economics

Warning: this is a long and philosophically technical post.

Full disclosure: In economics I can be considered a Misesian and a Rothbardian.  That is to say, while “Austrian economics” has become more acceptable (not by the academics, just the laypeople) in the world since the rise of the libertarian movement, these “Austrians” are not all Austrians in the Misesian/Rothbardian tradition.  It is important to lay that out front as I think these differences are important and stark.  For the most part, at Mises.org one will find this orthodox tradition.  But there other outlets, George Mason University and Cato Institute among them, in which economists are “Austrians” of a different flavor.  More recently, they don’t even call themselves Austrians anymore (happily so) and they deny the Austrian Business Cycle Theory. I will not be discussing these differences in this post, but there should be no confusion of my position.   For more on this important issue, browse through some of these articles and posts here.

What makes Austrian economics unique (it should go without saying now that by “Austrian” I mean Misesian and Rothbardian not the neo-Austrian schools) is that it broke away from the base philosophy of empiricism in favor of a rationalist method.  The methodology of rationalism  is deductive, rather than inductive.  In the deductive method of economics, an axiom is presupposed and from there its implications are drawn out through reason.  Economics then, for the Austrian, need not and should not require its conclusions to be “tested” as in the scientific method.  Ludwig von Mises states it like this in Human Action, page 32:

“The statements and propositions [of economics] are not derived from experience.  They are, like those of logic and mathematics, a priori.  They are not subject to verification and falsification on the ground of experience and facts.  They are both logical and temporally antecedent to any comprehension of historical facts.  They are a necessary requirement of any intellectual grasp of historical events.

It is precisely this which sets it apart and in this current world where the scientific method is for the masses what Scripture is for the Christian, that is, the basis of knowledge, it is obvious why the Austrian method is so unpopular.  From Adam Smith to the Positivist roots of Milton Friedman to John Keynes, all those not in the Austrian School are empiricists.  Economics for them is about data and mathematics and statistics.  It is about the past, as induction must always be.

Austrian economics though relies on the axiom of “human action.”  That is, the most fundamental axiom for the Austrian economist is this: “Human beings act.”  To clarify, even if one’s most ultimate epistemology is empirical, if he is an Austrian economist he only uses a rationalist method within the boundaries of economic science.  Murray Rothbard is a great example of this.  He was ultimately a Thomist and an empiricist, which means that the senses are the most ultimate test of knowledge.  However, in the realm of economics per se, he, like his mentor Ludwig von Mises, began with the axiom of human action and considered the economic methodology to be deductive.  He states this very clearly (page 6):

Whether we consider the Action Axiom “a priori” or “empirical” depends on our ultimate philosophical position.  Professor Mises, in the neo-Kantian tradition, considers this axiom a law of thought and therefore a categorical truth a priori to all experience.  My own epistemological position rests on Aristotle and St. Thomas rather than Kant, and hence I would interpret the proposition differently.

-[italics are in original –CJE]

So let me clarify: When it comes to economics, the Austrian theory is that an axiom needs to be deduced.  What axiom? “Human beings act.”

What justifies this axiom?  This is the most basic question.  The method of Austrian economics may be perfectly logical and reasoned out, but this does not prove reality.  Let me give you an example:

-Proposition 1: All horses have wings

-Proposition 2: Gary is a horse

-Conclusion: Gary has wings

This example is logically sound.  The reasoning was pure.  But it is not a true conclusion according to reality.  Why?  The premise was wrong.  Thus, in the same way, we must ask ourselves, “is the premise of Austrian economics true?”  Mises had to face that question and so did Rothbard.  Rothbard’s justification was different from Mises’ justification.  I have indicated this above.  Rothbard relied on his empirical Thomism to establish the axiom.  Ludwig von Mises relied on Kant’s defense of the existence of apriori synthetic  propositions (propositions that can be established as true without observation and require more than formal logic).  In other words, for Rothbard, the axiom must be discovered through observation and for Mises, the axiom is discovered through self-reflection the demands of self-consistency.  The (brilliant) philosopher and economist Hans Hermann Hoppe explains (page 18) that, for Mises, such truths can be verified by the fact that “one cannot deny their truth without self-contradiction; that is, in attempting to deny them one would actually, implicitly, admit their truth.”

The deductive nature of Austrian economics is what sets it apart from all other theories and, in my estimation, makes it the most accurate and successful school of economics.  Now, as Christians, what should we say about this?  That famous axiom needs to be justified.  Did either Rothbard or Mises succeed in this area?

Considering that Rothbard relied on inductive reasoning and the Aristotelian epistemology of St. Thomas Aquinas, we have some immediate things to say.  Namely, that induction and observation can never prove anything absolutely true.  It only indicates what was true in the past and, as Christian philosophers like Gordon Clark realized, the discoveries of the past cannot be assumed to be true in the future.  It is a leap to logic to say that something was observed to be true previously, and therefore it is true for all time.  The conclusions of the empirical arguments are not required by the premises.  To rely on empiricism and induction for absolute and eternal truth would require one to be omniscient.  (Perhaps this is why the Fed Chairmen and politicians think they can run the economy and use their empirical data to prove it).  In fact, the entire and general field of epistemology is destroyed by Thomist thinking as even Mises famously noted.  He writes: “The plight of empiricism consists precisely in its failure to explain satisfactory how it is possible to infer from observed facts something concerning facts yet unobserved.”  Also, I’d like to point out the fact that even, especially in economics, if we observe a fact, there is nothing to indicate why this fact is as it is.  In other words, if the unemployment rate goes up after quantitative easing, it is actually faulty logic to say that quantitative easing caused higher unemployment.  This is to say: correlation does not equal cause and effect.  Rothbard’s empirical foundation for the human action axiom, then, should not be used.

(Don’t get me wrong, I do believe that QE causes unemployment.  But I do not believe it on the basis that statistics may say so.)

And what about Mises’ Kantian foundation?  This nut is much harder to crack.  Historically, the problem that Kant faced was that on one hand the epistemology of pure rationalism failed to show that whatever logic went on in the mind was applicable in the real and observable world.  There was a gap between logic and the senses.  On the other hand, the problems of empiricism (some of which were mentioned above) were devastatingly revealed by the work of David Hume.  Thus, Kant needed a “midway” for lack of a better word.  His solution was that man had in his mind a set of “tools” which interpreted the data that was gathered by the senses.  Whereas the empiricists believed that the mind was a “blank slate,” Kant realized (through Hume) that this led to skepticism.  The mind had tools, or structures could categorize the data and fill the gap, allowing for knowledge.  These structures included the laws of logic such as the law of non-contradiction.  Hence, when we use these tools to discover the axiom, we can trust that the axiom has been justified.

But this only pushes the problem away one step.  For how are we to be sure that these logical structures and tools that the mind has accurately describe reality?  For Kant and Mises, knowledge itself is a combination of the logical tool and the experience.  Our senses and our mind together make things comprehensible.  To use Mises’ own words:

“We see reality, not as it is and may appear to a perfect being, but only as the quality of our mind and of our senses enables us to see it. […] We must never forget that our representation of the reality of the universe is conditioned by the structure of our mind as well as of our senses.”

Therefore, we cannot really and truly be assured that our understanding of reality is, in fact, reality.  So when they say such things as: “to deny the premise ‘all men act’ is to prove it because it takes action to deny it,” we have a question for them: “how do you know that your understanding of that statement is true in the real world?  Perhaps your representation of reality is flawed.”  And lastly, under what assumption can we say that every person, because they are separated by time and space, thinks the same thoughts?  Perhaps Mises’ “self-reflection” convinced him of human action.  But why is this true of everybody for all time?

Thus, Austrian economics is a brilliant school of thought, which has at its axiom a proposition that has yet to be justified.  But if Rothbard and Mises can both be called Austrian Economists because they based an entire economic theory on the same axiom, even though they justified (or attempted to) that axiom differently, can we as Christians also be called Austrian Economists on the bases that we use the same axiom?  Surely so!  And do we have a justification for the famous “axiom?”  Indeed.  The Christian epistemology is based on this: “The Bible Alone is the Word of God.”  This is known as Christian Presuppositionalism. (All epistemologies, whether their advocates admit it or not, have presuppositions.  Even the scientist assumes before he starts that observation is adequate to describe what is real).   The Christian epistemology is, by its nature, deductive just like Austrian economics.  We learn absolute truth from Scripture and this truth, as the Westminster Confession notes, “is either expressly set down in Scripture, or by good and necessary consequence may be deduced from Scripture.”

What may be known about God and man are contained in the Bible.  God thinks and his thoughts are truth.  The Scriptures are his thoughts.  The Scriptures say that man is the image of God. (1 Cor 11:7).  God create our minds that we may know Him.  We have the same mental structure, the same tools of thought and logic, as God does.  We, like our Creator, are rational beings.  God acts with purpose and purpose presupposes this rationality.  In the same way then, man acts with purpose.  All men.  Because all men are made in the image of God.  Furthermore, God not only created our minds, but also the physical world around us.  We can trust our senses because God created them to coincide.  However, propositions are not proven true or developed out of sensory observation.  Only propositional revelation, and that which is deduced from that revelation, can establish absolutes.

We have attempted to justify the human action axiom from a Christian worldview.  The Christian, with Mises and Rothbard, should be a proponent of Austrian economics.  Mises and Rothbard’s economic system was, I am convinced, one of the best ever presented.  It would seem though that only the Christian can say with certainty that “human beings act.”  And perhaps we can also mention that other aspects of Austrian economics, such as the subjective theory of value, are justified by the Scripture.  Does not God impute goodness into his creation after he created it in the first book of the Old Testament? And, despite all our objections to the contrary, does not God alone determine who he favors and who he does not as the basis of salvation?  Man is made in the image of God and value is subjective to the valuer.

Written by C.Jay Engel

Editor and creator of The Reformed Libertarian. Living in Northern California with his wife, he writes on everything from politics to theology and from culture to economic theory. You can send an email to reformedlibertarian@gmail.com
  • Doug Douma

    Great article. You’ve said what I’ve been thinking for some time. However, and this is tangential to your main argument, I’m not sure about the “Alone” in the axiom “The Bible Alone is the Word of God.” The Bible is God’s Word, but there is more. It’s just perhaps the only Word that has been revealed. Another thing to consider: if the Bible says internally that it “alone” is the Word of God, then the axiom “The Bible Is the Word of God” would be sufficient; and “The Bible Alone is the Word of God” would be derivative.

    • cjayengel

      I agree with you. I have just always used that phrase because it was Clark’s:) You are certainly right though. The main reason that Clark stuck the alone in there was because his critics (including the Roman Catholics and liberal Christians) were claiming that tradition was God’s Word (as they define it) and also that new revelation in the charismatic movement was also God’s Word. So that is the reasoning:)

  • Fred Zorch

    Jay, you wrote: “… an axiom needs to be deduced.”

    How can an axiom be deduced since it is the beginning of the deduction?

    • C.Jay Engel

      Yeah I wrote that poorly. What I meant was that there was an axiom from which other economic principles needed to be deduced. Thanks for pointing that out.