Austrian Economics: An Annotated Bibliography, Part II

Methodology of the Austrian School

One of the distinctive features of the Austrian school of economics is its emphasis on the methodological foundations of the social sciences in general. Equally distinctive is the particular approach most members of the school have taken in their investigations. The two pillars of their approach have been methodological individualism and methodological subjectivism. Methodological individualism emphasizes that the essential building-blocks of economic and social analysis are the activities of the respective social and market participants, whose interactions generate the aggregate market and social outcomes. Methodological subjectivism draws attention to the fact that meaning and significance can be attached to those activities only in terms of an understanding and interpretation of the knowledge, intentions, and expectations of the actors themselves.

An implication of subjectivism is what Carl Menger and F. A. Hayek in particular saw as the pervasive presence of the unintended consequences of human action. The undertaking of many individual plans in a complex social order, in which each actor’s knowledge and horizon is limited, sets the stage for inevitable consequences that may be the result of human action but not of human design. One of the tasks of social and economic method and theory is to explain the emergence, formation, and evolution of the spontaneously generated social and market institutions that often coordinate economic and social activities independent of any single human plan.

The Austrian economists have also had significant diversity within their common viewpoint. This diversity concerns the source of knowledge in economic science. Ludwig von Mises considered economics to have its origin in a set of “a priori” axioms derived from logical reflection on the “essence of action.” For Hayek the field of knowledge requires “empirical elements” concerning the processes of human learning once we turn to problems of interpersonal activity. Fritz Machlup has argued for viewing economics as built on postulates selected as useful for the questions requiring solution through the construction of various “ideal types.” Israel M. Kirzner has seen it as sufficient to emphasis the purposefulness of all human endeavor without having to delve further into any epistemological foundations. Murray N. Rothbard, on the other hand, has attempted to give Austrian economics an Aristotelian grounding. And most recently Mario Rizzo and Gerald P. O’Driscoll have attempted to use Henri Bergson’s phenomenology of time and being as a basis for Austrian subjectivism.

But within this diversity has run and continues to run a common thread of emphasis on man as an intentional, creative being, an actor rather than a mere passive responder to given constraints and circumstances. The Austrian tradition has, therefore, always extended subjectivism beyond tastes and preferences to perspective, perception, and purposes, which are the ultimate engines of all social activity and processes.

Carl Menger

Practically every Austrian development in the past hundred years has its beginning in the writings of Carl Menger, methodology is no exception. In the introduction to his Principles of Economics [1871] (New York: New York University Press, 1981) we find a fervent argument for methodological individualism as a basis for economic theory and a strong attack against reducing social analysis to the methods of the natural sciences. And though never articulated expicitly, the exposition of the theory of value and price formation is grounded in a view of man as an active agent who plans, directs, and effects change on a basis of imperfect perceptions in an uncertain world.

In his Problems of Economics and Sociology [1883] (Urbana: University of Illinois Press, 1963) the question of the methods and aims of economics is taken up directly, Menger had two goals: to defend the applicability and universality of theory in all economic analysis against the relativist, antitheoretical claims of some German Historicists and to demonstrate how economic and social theory could explain the emergence of “institutions which serve the common welfare [that] came into being without a common will directed toward establishing them” (p. 146).

Wieser, besides defending the “deductive method,” also strongly argued in defense of the “introspective” source of economic knowledge.

Menger’s book was quickly criticized by one of the leaders of the German Historical School, Gustav von Schmoller, who vehemently defended the “Historical” method as the method for economic analysis. See Gustav von Schmoller, “Political Economy and Its Method,” [1894] in Introduction to Contemporary Civilization in the West, prepared by the Contemporary Civilization Staff of Columbia College, Columbia University, vol. II (New York: Columbia University Press, 1946), pp. 514-524. Menger replied forcefully in a pamphlet on “The Errors of Historicism in German Economics.” This set the stage for the long and bitter Methodenstreit of the last decades of the 19th Century. Menger’s views on the categories and organization of economic science can be found in his essay “Toward a Systematic Classification of the Economic Sciences” [1889] in Essays in European Economic Thought, ed. by Louise Sommer (Princeton: D. Van Nostrand, Co., Inc., 1960), pp. 1-38.

The debate between Menger and Schmoller has been summarized in some detail, with extensive quotation, by Albion Small in “Later Phases of the Conflict Between the Historical and Austrian Schools,” Origins of Sociology [1924] (New York: Russell & Russell, 1967), pp. 204-233. A good discussion can also be found in Samuel Bostaph, “The Methodological Debate Between Carl Menger and the German Historicists,” Atlantic Economic Journal (Sep. 1978), pp. 3-16, which emphasizes the philosophical roots of the two schools.

Böhm-Bawerk and Wieser

Menger found loyal defenders among his followers. Eugen von Böhm-Bawerk insisted on the primacy of theory in tracing out economic causations and the categorizing of the facts of economic phenomena. See Böhm-Bawerk, “The Historical vs. the Deductive Method in Political Economy,” in Annals of the American Academy of Political and Social Science, vol. I (1891), pp. 244-271.

Friedrich von Wieser, besides defending the “deductive method,” also strongly argued in defense of the “introspective” source of economic knowledge, believing that it gave economics a stronger foundation than those found in the natural sciences. See Friedrich von Wieser, Social Economics [1914] (New York: Augustus M. Kelley, 1967), pp. 4 & 8-9.

Ludwig von Mises

But it is in the writings of Ludwig von Mises that we find the most methodical exposition and defense of Austrian subjectivism after Menger’s death in 1921. The thrust of Mises’s writings on methodology can be seen as an attempt to establish an autonomous plane for economics that escapes the hazards of both Historicism and Positivism. His early essay on “Sociology and History” [1929] in Epistemological Problems of Economics [1933] (New York: New York University Press, 1981), pp. 68-129, is a criticism of Max Weber, in which Mises wishes to gleen the insights that a subjectivist “action” framework offers without the excess weight of historical relativism. His 1930 essay on “Conception and Understanding,” ibid., pp. 130-145, tries to distinguish between conceptualization of the universal logic and categories of choice, distinct from time and place, and the understanding or interpretation of concrete manifestations of historical human actions. His essay “On the Development of the Subjective Theory of Value,” [1931] ibid., pp. 146-166, attempts to demonstrate the “subjective” quality underlying the concepts and categories of all economic phenomena. And his essay “The Task and Scope of the Science of Human Action” [1933] ibid., pp. 1-67, tries to unify economic theory more rigorously on the basis of a concept of human action that incorporates all conscious, purposeful human behavior.

Mises’s monumental work, Human Action, most systematically defends what he calls “praxeology,” the general science of human action.

Mises’s monumental work Human Action: A Treatise on Economics [1949] (Chicago: Henry Regnery, 3rd revised ed., 1966), pp. 1-142, however, most systematically defends what he calls “praxeology,” the general science of human action. Besides restating his criticisms of Historicism, he defends economics against Positivism, arguing that the laws of economics are logical relationships, not empirical ones. The indeterminateness of human choice, depending as it does on volition, precludes the discovery of quantitative regularities along the lines of the natural sciences. Economics must instead construct its theorems from the inside out, through reflection on the formal logic of action and choice under alternative assumptions, which then serve as the schemas for intelligible organization and explanation of the historical sequences of human conduct.

Mises’s later work Theory and History: An Interpretation of Social and Economic Evaluation [1957] (New Rochelle: Arlington House, 1969) applies and extends his methodological outlook through critiques of determinism, materialism, scienticism, and historicism. It delineates more clearly the relationship between theory and historical analysis in his framework. The Ultimate Foundation of Economic Science: An Essay on Method [1962] (Kansas City: Sheed, Andrews and McMeel, Inc., 1978) restates the “a priori” basis of praxeological reasoning, discusses the problem of human volition for social science and the nature of uncertainty in the real world, and criticizes several Positivist applications in economics.

F. A. Hayek

Hayek’s earliest writings on methods of economics can be found in the opening chapter of his Monetary Theory and the Trade Cycle [1929] (New York: Augustus M. Kelley, 1966), pp. 27-48, in which he discusses the relationship between economic theory and the use and application of statistical methods. In the essay opening the collection he edited under the title Collectivist Economic Planning (London: George Routledge & Sons, Ltd., 1935), pp. 8-12, Hayek followed Wieser and Mises in distinguishing between the natural and social sciences on the basis of their sources of knowledge. He developed this theme in greater detail in The CounterRevolution of Science [1952] (Indianapolis: Liberty Press, 1979). He emphasized that social theory relies primarily on the “composite method” by which it explains the emergence of complex, composite phenomena from their elementary components: the activities of individual agents.

This has been the general theme for almost all of Hayek’s writings on both methodology and social theory. The “composite method” has led him to emphasize that many social phenomena are “the results of human action but not of human design.” See Studies in Philosophy, Politics and Economics (Chicago: The University of Chicago Press, 1967), pp. 96-105. The unintentional, complex quality of such phenomena also led Hayek to point out that the social scientist must be more modest in making his predictions. The most he can hope for is qualitative predictions of patterns and institutional forms, rather than precise quantitative determination of market outcomes. See his essays “Degrees of Explanation,” “The Theory of Complex Phenomena,” and “Rules, Perception and Intelligibility,” in ibid., pp. 3-65. This analysis has also been his basis for continued criticism of what he calls social “constructivists.” See his essays “The Errors of Constructivism,” “The Pretence of Knowledge,” and “The Primacy of the Abstract” in New Studies in Philosophy, Politics, Economics and the History of Ideas (Chicago: The University of Chicago Press, 1978), pp. 3-49.

Oskar Morgenstern

In his 1928 volume, Wirtschaftsprognose: eine Untersuchung ihrer Voraussetzungen und Moglichkeiten (Wien: Julius Springer Verlag, 1928) Oskar Morgenstern expressed skepticism about quantitative prediction in economics on three grounds: • the heterogeneity of the data and the smallness of “samples” make the application of probability theory extremely difficult, if not impossible, with, at the most, probability theory only enabling a prediction of “class” outcomes not the individual events; • economic statistics hide both the behaviorial qualities that underlie and generate the quantitative data and the interdependency of economic phenomena with social, cultural, and political events, and • the possible influence of public forecasts on the decisions of the agents whose actions are being forecast leads to an infinite regress.

In his later work On the Accuracy of Ecomonic Observations (Princeton: Princeton University Press, 1963) Morgenstern reinforced his argument with an analysis of the ambiguities, crudeness, and frequent lack of compatibility of much “economic data” relative to the logical categories of economic theory.

An excellent “Austrian”-style analysis of the limits of quanititative economics can also be found in Leland B. Yeager, “Measurement as Scientific Method in Economics,” American Journal of Economics and Sociology (July 1957), pp. 337-346.

Fritz Machlup and Alfred Schutz

After Mises, Fritz Machlup is probably the Austrian who devoted the most care and time to methodological questions. In a series of essays concerned with the status and nature of the social sciences, Machlup, while not denying similarities in all scientific endeavors, drew special attention to the intentionalist quality of social phenomena in which the actor’s subjective meanings were crucial elements to successful social analysis. See “On Comparisons Between Natural and Social Sciences,” part five, in his collection Methodology of Economics and Other Social Sciences (New York: Academic Press, 1978), pp. 305-367.

The tool that Machlup considered particularly useful for such analysis was that of the “ideal type,” a mental construct of human conduct under the constraints of certain specified circumstances, motivations, and states of knowledge, selected as appropriate for deriving implications of human action in alternative institutional and economic environments. See the essays in “On Ideal Types and the Interpretation of Reality” in ibid., part 4, pp. 207-301. In his selection of methods Machlup was greatly influenced by his close friend Alfred Schutz who had tried to synthesize Husserl’s phenomenology with Max Weber’s “ideal type” construction and Austrian subjectivist economics. See Alfred Schutz, The Phenomenology of the Social World [1932] (Evanston: Northwestern University Press, 1967) and his Collected Papers, vol. I, “The Problem of Social Reality” (The Hague: Martinus Nijhoff, 1962), pp. 3-96.

Ludwig M. Lachmann

Ludwig M. Lachmann has, following the lead of Max Weber, also emphasized the significance of “understanding” (Verstehen) and “interpretation” of the subjectively meaningful act for social science. His slender volume The Legacy of Max Weber tries to reformulate the Weberian contribution along more Austrian lines in terms of the “planful” or “purposeful” act. He also attempts to blend Weber’s and Menger’s analyses of the function and evolution of social institutions as “nodal points” for interpersonal coordination. Lachmann has particularly emphasized the subjectivist quality of knowledge and expectations and their implications for economic theory and methods. See the essays in part II of his collection Capital, Expectations and the Market Process, ed. by Walter E. Grinder (Kansas City: Sheed, Andrews and McMeel, 1977) pp. 45-129, and “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,” Journal of Economic Literature (March 1976), pp. 54-62.

Kirzner contrasts the narrowness of Robbins’s economizing point of view with the Misesian conception of human action and clarifies several of the ambiguities sometimes seen in Mises’s own writings.

Israel M. Kirzner and Murray N. Rothbard

The Misesian formulation of Austrian methodology has been rigorously defended and expounded by two of Mises’s students, Israel M. Kirzner and Murray N. Rothbard. In The Economic Point of View, originally a dissertation written under Mises, Kirzner elaborates on the changing meanings of the subject matter of economics. In the last two chapters Kirzner discusses the emergence of economics as a science of economizing behavior, as influenced by Lionel Robbins’s Essay on the Nature and Significance of Economic Science (itself influenced by the Austrian writings of the 1920s). Kirzner, however, contrasts the narrowness of the economizing point of view with the Misesian conception of human action and clarifies several of the ambiguities sometimes seen in Mises’s own writings. He defends the praxeological perspective in “Rational Action and Economic Theory,” Journal of Political Economy (Aug. 1962), pp. 380-385, and “What Economists Do,” Southern Economic Journal (Jan. 1965), pp. 257-261. And in his “On the Method of Austrian Economics” in The Foundations of Modern Austrian Economics, ed. by Edwin G. Dolan (Kansas City: Sheed & Ward, Inc., 1976), pp. 40-51, he analyzes the implications of Austrian methodology with particular emphasis on human purposefulness and the indeterminacy in human decision-making.

In 1951 Rothbard defended the praxeological perspective against the criticisms of G. J. Schuller. See “Mises’ ‘Human Action’ Comment,” American Economic Review (March 1951), pp. 181-185, and “Praxeology: Reply to Mr. Schuller,” American Economic Review, (Dec. 1951), pp. 943-946. He restated the premises of the Misesian system in “In Defense of ‘Extreme A Priorism,’” Southern Economic Journal (Jan. 1957), pp. 314-320. Rothbard’s essays “The Mantle of Science” and “Praxeology as the Method of the Social Sciences,” in Individualism and the Philosophy of the Social Sciences (San Francisco: Cato Institute, 1979) summarize several Austrian arguments against “empirical” social sciences and explain the logic of praxeology. His contribution to the Foundations of Modern Austrian Economics, ibid., pp. 19-39, titled “Praxeology: The Methodology of Austrian Economics,” briefly discusses the intellectual tradition of praxeology and contrasts the Neo-Kantian and Aristotelian approaches for grounding its axioms.

The praxeological perspective has also recently received a particularly fair exposition and critique by a non-Austrian, Bruce J. Caldwell, in “Praxeology and Its Critics: An Appraisal,” History of Political Economy (Fall 1984), pp. 363-379.

New Directions in Austrian Methodology

Recently members of the “younger generation” of Austrians have attempted to extend the bounds of subjectivist methodology. In The Economics of Time and Ignorance Gerald P. O’Driscoll and Mario J. Rizzo contrast static (or given-preference) subjectivism with dynamic (or changing knowledge and expectations) subjectivism. The latter draws its premise from the phenomenological writings of the French philosopher Henri Bergson. Their proposed tool of analysis for the study of acting man in an uncertain world is that of Schutzian ideal types.

A dynamic subjectivism that sees the inherent limits and tentativeness of knowledge and the problems this raises for understanding the process of social coordination seems to open new vistas for developments in Austrian methodology.

Introductory Readings

Lawrence H. White, Methodology of the Austrian School (Auburn: The Mises Institute, 1984).

Murray N. Rothbard, Individualism and the Philosophy of the Social Sciences (Washington, D.C.: The Cato Institute, 1979).

F. A. Hayek, “The Facts of the Social Sciences,” in Individualism and Economic Order (Chicago: University of Chicago Press, 1948) pp. 57-76.

Ludwig von Mises, “Natural Science and Social Science,” in Journal of Social Philosophy & Jurisprudence (April 1942) pp. 240-253.

Israel M. Kirzner, The Economic Point of View (Kansas City: Sheed & Ward, Inc., 1976) pp. 146-185.

Richard M. Ebeling is assistant professor of economics at the University of Dallas.