Monday, September 3, 2007


Hello and welcome to my blog. Here I will attempt to explain Austrian Economics in the tradition of Mises and Rothbard. Although both Mises and Rothbard make, what would appear to some, as quite extraordinary claims -– especially in the realm of monetary and capital theory -- they are actually not that for off the beaten path of Nobel laureates Friedman and Hayek, or the great economists of previous centuries, such as Riccardo, Smith, Say, and Cantillon. However, the truly fundamental difference between Austrian and mainstream economics (here I clump Friedman but not Hayek with the mainstream) is the Austrian commitment to an epistemically sound foundation for the field of economics. Specifically, while the mainstream approaches economics (and by extension the rest of the social sciences) with a positivist lens, Austrians recognize that positivism is an incomplete epistemology, especially when dealing with human actors, and thus reject its validity in the social sciences. In this introductory article, I would like to explore this notion briefly and also share some thoughts on the nature of economic inquiry.

The first thing to stress is that, despite the inherent contradictions in positivism (described later in this article), it should not be confused as having failed humanity. Positivism in the natural sciences (physics, chemistry, biology, etc) has been fabulously successful at explaining the world around us. In fact, it has been so successful that it has been mistakenly confused as the scientific method, while the true scientific method has fallen into obscurity and has only really been kept alive by the Austrians. The reason for this is because what is known as the synthetic a priori can only advance so far in the natural sciences that in order to gather any knowledge of the world around us, we must rely on the synthetic a posteriori. Thus, having observed the success of the latter and the apparent failure of the former in the natural sciences, those without a good appreciation of epistemology have mistakenly confused the latter as science and the former as crank science; whereas, in reality, they are two sides of the same coin.

Contrasting the social sciences with the natural sciences, a very curious phenomenon occurs, which is that the deductive based synthetic a priori now becomes far more important than its inductive based cousin, because, while one can build controlled experiments with atoms and molecules, one can do no such thing with human beings. Atoms and molecules obey laws of causality that can be isolated in a laboratory and thus induced from specific observations and controlled experiments. In the social sciences, no such corollary exists. All knowledge, is, and should be, deductive. The reason for this is two fold. First, different people will react differently faced with the same situation since each has his own unique subjective value system. And second, there is a temporal element that the natural sciences do not face. Atoms and molecules will behave identically regardless of when the experiment is performed. The same cannot be said for humans. Thus we cannot understand the science of human action unless we first understand that humans act. No such understanding is necessary in the natural sciences.

At this point I realize that I have used terms somewhat casually assuming familiarity on the part of the reader, so let me attempt to formalize the discussion. Wikipedia describes positivism as
the philosophy that the only authentic knowledge is knowledge that is based on actual sense experience. Such knowledge can come only from affirmation of theories through strict scientific method.
Interestingly, I do not disagree with the first statement. The only valid epistemic position is sense perception. What I disagree with is the latter assertion that such knowledge can only be achieved through the scientific method of observation, experimentation, and hypothesis testing. This latter statement is, at best, incomplete, and at worst, patently false. Consider for a moment its implication on itself; for, if all authentic knowledge must be derived through the scientific method of experimentation and hypothesis testing, then the truth value of that statement too, in order to be considered authentic knowledge, must be derived through the scientific method of experimentation and hypothesis testing, thus rendering it a mere hypothesis that may be falsified at any time and not an absolute truth forming the basis of the positivist philosophy. The contradiction should be apparent. In their zeal to place all knowledge within the a posteriori, the positivist have shot themselves in the foot by making the scientific method -- and thus, by extension, sense perception -- optional. However, the validity of sense perception is not optional. The problem is the positivists naive understanding of epistemology which allows him no room to maneuver out of this dilemma short of special pleading.

And further, at what point has the positivist either proposed or performed an experiment to actually demonstrate his claim? Until he does so, should we not reject its authenticity, per his own urgings?

The argument I have put forward above is detrimental to positivism, but not sense perception. Sense perception has two aspects, the deductive a priori, and the inductive a posteriori. The former is apodictic while the latter is empirical. Placing the validity of sense perception in the former allows us to ascertain, with apodictic certainty, that sense perception is the only valid epistemic framework. In fact, all disciplines, even the natural sciences, will collapse if one fails to recognize the various a priori premises that one implicitly assumes. For example, the physicist is lost if he does not implicitly assume the regularity of nature or the inviolability of logic. Neither of these are determined via hypothesis testing or experimentation. In fact, they are logically prior to any such action; hence the term a priori.

At this point the reader should have noticed that I am using the terms a priori and a posteriori slightly differently than their accepted meaning in scientific circles today. This is not sloppiness; I have very good reasons for doing so. I believe the reason the positivist is so quick to dismiss the a priori is because they are unclear about its correct interpretation. They consider it knowledge prior to experience. However, it is more correctly understood as knowledge post experience, but prior to experimental verification. It is deduced from axioms that are only known because they are observed via the senses. A simple example will illustrate: consider the axiom of consciousness: that i am conscious. I doubt the reader will dispute its status as authentic knowledge of reality. However, it does not need to be experimentally verified because it is self evidently true: it is axiomatic. To see why, try disproving it. Any attempt to do so fails because one must use their conscious faculties to disprove the statement, thus implicitly proving the statement. The act of disproving it results in a performatory contradiction. Further, it is derived from sense perception because I ascertain that I am conscious only having first observed that I am, in fact, conscious. And it is not a posteriori since it does not need to be experimentally verified once observed and determined. In fact, it is impossible to falsify, thus making it "unscientific" according to the positivists, which is clearly absurd since it is very clearly authentic knowledge.

I realize this "introduction" to my blog has, in fact, been quite dense. I promise that the rest of my blog is not, as it is written for the layman with no background in economics or philosophy. This article is a necessary introduction because the biggest problem with economics today is simply the lack of understanding of basic epistemology amongst its practitioners. If the reader has followed the argument outlined here, they are well on their way to understanding why Austrian economics is the correct approach to economics and the mainstream are the pseudo scientists, despite their vehement arguments to the contrary.

For more details, please see here.

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