Tuesday, December 9, 2008

Some Thoughts on the Limits of Austrian Analysis

I posted this on the LvMI forum, and figured it might be relevant to some of y'all, so I'm reposting it here. This is in response to a fellow going by nazgulnarsil suggesting that critiques of Austrian methodology stem from disputes about the purposefulness of human action. It also ties in to a conversation that I had with Peter Leeson over the summer and meant to develop on this blog, so I'm glad I'm finally getting to say something about it. Without further ado:


The way I see it, it's sort of like this: It's not that action isn't purposeful; if we define an "action" as involving deliberation, choice, and execution, then it's true that action is purposeful. This is true because of the way we've defined "action;" it's an analytical truth. But some people (myself included) would point out that not everything we do involves deliberation, choice, and execution. The most obvious examples are reflexive or conditioned behaviours: when you strike my knee, my leg shoots up; when I sneeze, my hand automatically darts to cover my mouth; when someone asks me how I am, I rarely think before responding, "I'm doing alright." If I don't deliberatively choose to do these things, then the Austrian logic falls apart; it's no longer true a priori that I purposefully did them, or that I believed that doing what I did was for the best. One may be able to argue that I didn't actively restrain myself from doing those things, but the Austrian claims don't apply to unintentional ommissions, they apply to actions.

The same sort of problem presents itself in other areas: Austrian analyses are correct, but they sometimes don't apply. For another example, if a business actively chooses to not hire an additional employee, it can be presumed that they didn't believe that doing so would be profitable; in their eyes, the marginal cost of the employee would be larger than her marginal product. But if the business never considers hiring a new employee, we can't say anything.

Austrians could argue (and often have to me) that economics can't be concerned with anything besides actions; we simply can't say anything useful about non-purposeful behavior. And that may be true. But it does limit our ability to look at the real world and arrive at any conclusions: concepts like "demonstrated preference," for example, can be seen to be troublesome when we don't understand exactly what was deliberately chosen (or what people thought they were deliberately choosing), and the all-too-typical Austrian tendency to look at market processes with satisfaction can be seen to be wanting for the kind of entrepreneurial perspective that the Austrians themselves pioneered. To be clear, I don't mean to suggest that Austrians don't possess the tools to think properly about these things; they clearly do. Mises, Hayek, and Kirzner were the ones who introduced me to these problems, and the more perceptive Austrians are well aware of them. But as I noted in a previous blog post, these factors inherently limit the capacity of Austrian theories to be applied to real-world events. We often simply cannot know that the phenomena we observe warrant the descriptive terms used by Austrian analyses, and if we can't correctly apply those descriptors, the cogent a priori analysis flatly does not follow.


Jordan Amdahl said...

For a great look at economics that does not assume perfect deductive rationality, look at Eric D Beinhocker's "The Origin of Wealth". I'm working my way though it right now, and it does a great job of showing how markets can emerge without from evolving individuals using inductive rules. The first casualty of this process? Equilibrium. I would definitely recommend it.

Danny Shahar said...

Thanks for the recommendation, Jordan! From the brief description on Beinhocker's Wikipedia page, it sounds like he's basically reintroducing us to Hayek and Kirzner (or alternatively, building on Schumpeter). Are you familiar with their work? Is Beinhocker's paradigm substantially distinct?

RJ Moore II said...

Unless I miss something in your analysis, wouldn't all of these non purposive behaviors simply be under 'reactions'. Properly speaking they are conditions of the actor and may be as different as any material, empirical circumstance does. The fact that one automatically flinches from pain is no more contrary to Austrian economics than the flammability of kerosene. These material facts are only datum for the actor. One's body is ultimately nothing but a means toward satisfaction.

Danny Shahar said...

Well but I didn't say anything about refuting Austrian economics. My point was that if "reactions" are very common, then our ability to use Austrian analyses to understand observed phenomena may be limited.

Anonymous said...

but praxeology is only one aspect of doing economics: it is in the application, seeing when, where and how the pure theory applies, and then supplementing it with empirical information, that AE gets its true beef

Anonymous said...

but yeah, if there ain't no action then AE don't apply, and it is not clear cut when we can interpret something as an action or as e.g. a reflex. Still, that leaves an awful lot of stuff for AE to be applied to

Danny Shahar said...

Hi there; thanks for checking out my site! I'm not sure if both anonymous comments were left by the same person, but I'll assume that they were in responding.

I agree that Austrian economics need not be confined to use in praxeological reasoning, but I'd suggest that in applying praxeological ideas to the real world, we move into what Mises categorized as "history." That is, we develop a priori conceptual tools to help us to think about historical events. But my point here was just that for all the talk about analytical a priori reasoning, the jump from theory to history will necessarily introduce a lot of uncertainty as non-actions are introduced to the mix and as we are confronted by difficulties in identifying exactly what choices people made in particular instances. None of that is meant to suggest that Austrian economics is useless or false; I only hoped to show why it might be more limited in explanatory power than some people seem to think.

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