The methodology of economics: How you're doing it all wrong.

Man acts

Praxeology is the scientific study of human action, which is purposeful behaviour. A human acts whenever they use means to achieve an end that they subjectively value. Human action is thus teleological or intentional; a person acts for a reason. Not all human behaviour is action in the praxeological sense: purely reflexive or unconscious bodily movements (such as coughing when exposed to tear gas) are not examples of actions.

 

Methodology

Praxeology stems from the undeniable axiom that human beings exist and act, and logically deduces implications of this fact. These deduced propositions are true a priori; there is no need to test them in the way that a physicist might test a proposed "law of nature.”So,as long as a praxeological statement has been derived correctly, it must necessarily contain as much truth as the original axioms.

This is similar to mathematics, where you start with the fundamental axioms of arithmetic and engage in logical deduction to reach certain conclusions (for instance, (a+b) = a2+b2+ 2ab) that need no further empirical testing and will be universally true as long as the deduction process has been performed correctly.

 

Economics and Praxeology

Economics is a subset of Praxeology. It deals with the study of human action under scarcity, specifically,  the process of exchange of goods as a means for each individual to produce satisfactions for his desires. These goods may be tangible commodities, or they may be intangible personal services.

 

But how?

One might question the  possibility of deducing the entirety of economic theory from the single axiom of human action. Accordingly, I urge the reader to refer to ‘Man, Economy and State,’ by Murray N. Rothbard, a principles textbook in economics that does the same extremely elegantly. To explain further, we can illustrate the deduction of one of the key concepts of economics - Marginal Utility; Consider this: when individuals act, they necessarily employ some means towards the satisfaction of a preferred end. A limited supply of means can only satisfy a limited number of ends. Since a homogeneous stock of means may be dedicated to a variety of ends, an individual will use a stock of means to satisfy the most important or desired ends, and leave the less important ends unsatisfied. Therefore, additional units of this homogeneous stock of means would be employed by the individual to satisfy lower-ranked ends, because the most highly preferred ends that could be satisfied by the means would be attained first. Thus, giving us the law of ‘diminishing marginal utility’.

 

Historical Acceptance

The above-described methodology was generally accepted by majority of economists in the mid- 20th century.

Lionel Robbin's book “The Nature and Significance of Economic Science,” which was first published in 1932, and is praxeology in all but name, was heralded as the gold standard of economic methodology for almost twenty years. (1)

 

Positivism

The prevailing methodology in economic theory has since largely deviated from a purely deductive framework and has now adopted the logical positivist doctrine, postulating that economic theory must be built up by the experimental method, as  applied in Newtonian physics. Every statement of economic theory must be open to verification by facts and that there are no economic laws, only tested hypotheses that have not yet been falsified, and thus, canbe accepted as true for the time being. (2)

 

Ceteris Paribus

A fundamental error in attempting to discover and comprehend economic theory lies in the fact that unlike natural sciences- such as physics and chemistry- economics does not enjoy the benefit of being able to conduct experiments performed under laboratory conditions. Every historical event in a society is heterogeneous, id est, each event is a complex resultant of a shifting of multiple causes, none of which ever remains in a constant relationship with the others. Thus, historical events cannot be used to either test or  construct laws of economics, quantitative or otherwise. We can place every atom of copper into a homogeneous class of copper atoms; but we cannot do so with the events of human history.

 

The "Alternative"

It should thus be clear that economic theory, due to the lack of ceteris paribus and a lack of constant measures of human valuations, cannot be tested or constructed on the basis of historical events. In addition to this, it must be reiterated that there is also no need to test praxeological economic theory due to it being firmly grounded in an undeniable axiom andrules of logic.If we conceive of a world wherein the problems we face in conducting an economic empirical experiment did not exist, "testing" praxeological economic theory will consistently result in its affirmation, similar to mathematics. simply due to the fact that it is true a priori and can now be illustrated in this perfect world.

 

Economic Theory and History

The proper relationship then, between economic theory and economic history, or history in general, is that history must be interpreted  through the lens of praxeological economic theory, which as has been demonstrated, is a priori true, along with  relevant theories from the various disciplines that impinge on any given problem. Thus, the historian must be prepared to use not only praxeological economic theory but also insights from physics, psychology, technology, and military strategy, along with an interpretive understanding of the motives and goals of individuals. He must employ these tools to understand  the goals of the various actions of history and the consequences of such actions.

References

(1) B.A. Corry, "Robbins, Lionel Charles," The New Palgrave: A Dictionary of Economics, v.4, pp.206-208.

(2) Richard Lipsey, An Introduction to Positive Economics

 

For Further Reading

1.    Murray N. Rothbard, Praxeology, The Methodology of Austrian Economics

2.    Ludwig Von Mises, Social Science and Natural Science

3.    Lionel Robbins, An Essay on the Nature and Significance of Economic Science