Mises’s Contribution to Economic Methodology

As the 2021 Nobel Prize in Economics suggests, it is generally believed that in order to properly study economic phenomena, one needs an empirical method: formulating hypotheses and then falsifying or verifying them through experiments or statistics. This method is the so-called “scientific method” most fundamentally accepted in the natural sciences, and the view that the social sciences, including economics, must also adopt the research methods of the natural sciences in order to become truly scientific is highly dominant.

However, Ludwig von Mises explicitly opposed introducing the methods of the natural sciences into economics (and many areas of the social sciences). Put simply, he rejected the most widely accepted form of the scientific method. Of course, there are clearly fields of study in which the scientific method is difficult to apply appropriately. For example, the formal sciences, such as mathematics and logic, deal with abstract rules generated by human thought, so it would be absurd to think that new mathematical or logical laws could be discovered through observation or statistics. Yet the subject matter of economics—economic phenomena and human action—is clearly something that can be observed and experienced. In this respect, the idea that economic phenomena should be studied through the scientific method seems entirely natural, and Mises’s opposition to it appears to defend pseudoscience. Indeed, if the possibility of empirical verification or falsification is taken as the criterion for a science that studies the real world, Mises’s Austrian School economics cannot pass that test.

The fundamental reason Mises opposed the adoption of the scientific method, even though economics plainly deals with the world we experience in reality, is this: the disciplines that deal with the natural world and those that deal with human beings—especially human action—are categorically different, and therefore their methods must also differ. Physics, chemistry, and biology belong to the so-called empirical sciences, which study particular empirical facts through positivist methods, whereas economics, like geometry, mathematics, and logic, is a so-called formal science that studies abstract laws. In the terminology of Mises and the Austrian School, the former are a posteriori sciences and the latter are a priori sciences. In other words, just as arithmetic or the Pythagorean theorem cannot be verified or refuted on the basis of experience and facts, and are logically and temporally prior to all historical and empirical calculations or triangles in the real world, so too the laws of economics are not objects of empirical verification or falsification but are prior to all economic phenomena. The law that the introduction of a minimum wage set above the existing market wage, as deduced from the law of demand, always causes involuntary unemployment is always valid.

Then on what grounds does Mises claim that the statements and propositions of economics are not hypotheses to be empirically verified or falsified, but stand on the same footing as the laws of mathematics and logic? His argument cannot be examined closely here. To point out just one important issue, the procedure by which economics determines the truth or falsity of a given proposition differs from that of the a posteriori sciences, while being fundamentally the same as that of the a priori sciences. Even physics, which among the a posteriori sciences possesses the greatest mathematical and logical rigor, still requires continual empirical experimentation and the development of hypotheses. But in economics, it is foolish to posit as a hypothesis and then verify or test a theory explaining the effects of a minimum wage law or an increase in the money supply. The proposition that the introduction of a minimum wage set above the market wage generates involuntary unemployment cannot be refuted by any empirical evidence, while at the same time containing an accurate statement about reality. If A’s wage is set at 7,000 won in the market, then when the minimum wage is set at 8,000 won, A is placed in a state of permanent unemployment. This is as logically necessary a truth as the statements “A person cannot be in two different places at the same time” or “An object that is red cannot simultaneously be blue.”

All attempts to infer laws through empirical research while denying this necessity implicitly presuppose the assumptions of empiricism. That is, all valid knowledge about economic reality must be empirical knowledge that is verifiable or at least falsifiable by observational experience, and because such empirical knowledge is contingent, no one can predict it before actually observing it, while the propositions of economics are always merely hypothetical and never certainly true, and therefore depend on future observational experience.

Empiricism may be appropriate for dealing with the natural sciences, but it is not at all appropriate for economics. This is because economic propositions are not derived from observational evidence; rather, such propositions are logically and temporally prior to observation. Unless one already knows the concepts of action and the concepts implied in action—value, ends, means, choice, preference, cost, profit, and loss—it is impossible to understand economic phenomena as causal and meaningful relationships. If one does not know the meaning of acting, all that can actually be observed is bodily movement, and one cannot grasp that such movement is conscious activity aimed at reaching an end by using means with intention. In short, economic reasoning can proceed only on the basis of a priori knowledge of the meaning of action.

To properly understand real economic phenomena and history, one must first understand this theoretical foundation. For example, although the only effect of a minimum wage is always involuntary unemployment, a region where a minimum wage is introduced may nonetheless experience a temporary or permanent rise in employment. In such a case, however, there has simultaneously been a sufficient increase in labor demand or the like to offset the effect of the minimum wage system, so this cannot be regarded as a refutation of the economic effect of the minimum wage.

Mises can be seen as having made an enormous contribution not only as one of the most important economists of the 20th century, but also to the philosophy of science and epistemology, in that he greatly expanded the field of epistemology and applied it to the study of the real world. He pointed out the problems of empiricism and positivism as self-contradictory doctrines, showed the clear distinction between a priori science and a posteriori science, and explained from what aspect of the nature of human knowledge this distinction arises, and why the unique discipline of economics can deal with meaningful statements about reality while requiring no observation. It is hardly an exaggeration to say that economics as a discipline was able to build its foundations thanks to the giant that was Mises.

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Original title: 경제학 방법론에 대한 미제스의 기여

Author: Kyeong-hun Kim

Date: 2022-02-25

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=9&idx=24560