Real Economics is the Study of Human Action
But Mises, more so than most any other economist, wanted to be clear; This is the foundation of what we're doing. Let's be clear on what economics is before we just jump right into the interesting stuff, because if you don't have a good foundation, the whole thing can crumble." - Robert Murphy
The question that I want to address is, what is the status of economic propositions? Is economics some axiomatic deductive science, or is it what is now a days called an empirical science, or to formulate it somewhat differently, are economic propositions logically derived from some firmly established starting point and hence, provided that no flaw occurs in the course of logical deductions, statements are absolutely true, or as Mises said, apodictically true? Or are economic propositions hypothetical statements that require some sort of empirical testing? And I want to show that contrary to widespread beliefs, these types of methodological questions are of utmost importance and have fundamental implications, depending on what the answer to this riddle is." - Hans-Hermann Hoppe
Mainstream Economics
Real economics is not only, not even primarily, the calculation of statistics, the working of formulas, the tweaking of interest rates, or fancy graphs of national output. Over time, economics, as we have come to know it from the mainstream sources (schools, media & government), has become this pseudo-scientific calculation and statistic based field. When most people think of economics, they think of how they learned it in school and what they see on TV; formulas, variables, calculations, national outputs, averages, and graphs predicting future growth using complicated models. But, does this sort of economics make any sense? Does their methodology produce good results? And are their results accurate or helpful for understanding what is going on in the world?
It might seem like they're making sense, but their methods are flawed, their premises are faulty, and their results are usually flat out wrong. But, it's okay to be wrong, if everyone sees this as the only way to think about economics. So, when mainstream economists come up with terrible prescriptions for the economy, or when they fail to predict coming collapses, or when they hand out head-scratching advice to governments and individuals alike, we give them a big collective pass. Everyone just says, "Well, economics isn't perfect", "Who would have seen that coming?", or they'll just assume the methods were correct, but next time we need to tweak some government control one way or another, then we'll get the magical results the economists have predicted.
The Austrians
The truth is, there are people who often see things coming and who are dishing out very rational and helpful economic advice; the thing is, no one is listening. Even though these people are correct more often than standard economists, they are dismissed as being "unscientific." They are written off as radical and not worth listening to. (As an aside, we can see the same phenomenon in other areas of study and more easily understand this way that acceptable, mainstream views are promulgated, and alternative views are kept in the dark. I'm thinking here of "alternative" (real) medicine, alternative views on history, climate change, terrorism, etc. There is always the comfortable, state-approved, official way of looking at things, and anything else gets names thrown at it. They'll marginalize the idea, call it racist, call it unscientific, call it anti-social, undemocratic, unpatriotic, and so on. A general rule I go by, the harder the mainstream slanders a particular viewpoint, the more of a chance there is some truth there waiting to be uncovered and understood.) So who are these people, and why are their economic recommendations and conclusions so different from the mainstream; from what we think economics is all about?
Generally, these people are economists and philosophers of the "Austrian School" of economics. For anyone not familiar with the term; they are not all from some school in Austria. It refers to a "school of thought," or tradition of thought, which originated in Austria in the mid to late 1800s. Their founder is a man named Carl Menger; but the most well-known representatives of Austrian thinking are Ludwig von Mises, Friedrich A. Hayek, and Murray N. Rothbard. Today the tradition is continued on by many others, including Hans-Hermann Hoppe and Robert Murphy, who were both quoted at the beginning of this article.
Why Mainstream Economics Is What It Is
You might ask, why would these people be so often dismissed if their economics makes more sense than the mainstream. Well, the answer is pretty simple. Mainstream economic's purpose is not to practice good economics. Its purpose is to legitimize what governments wanted to do anyway. Their purpose is to create excuses for politicians and cronies; to give some sort of scientific backing to the actions of governments, central banks, the IMF, the World Bank, and crony corporations. A "good" economist will parrot the government line. They'll tell us the latest Fed or congressional decision was a good move. Or they'll recommend that a certain action be taken to "improve" the economy, then shortly thereafter that action is put into practice by the government. For example, in the early 2000s, the top court economist, Paul Krugman, was recommending that the Fed inflate a housing bubble. (Yeah, sorry people, that whole 2008 thing; not caused by the "free market.")
As with politics, we are also fed a safe spectrum of economic ideas. We're given two candidates, and even though their underlying philosophies are pretty similar and their governing would look basically the same, we would be told they are drastically different and (as always) the election is to be "the most important of our lifetime." Same with economics; we'll be given various economic plans, ideas and proposals put forth by groups that are supposedly polar opposites. But are these economic ideas fundamentally any different from one another? Not really. One might be the liberal sort of plan; the other the conservative, Reagan sort of plan. But there won't be any fundamental difference. One might propose to raise taxes by 5% and increase government spending by 10%. NPR will tell us it is a quite reasonable, moderate plan. Fox News will tell us it is a radical, socialist plan. Then a proposal will be forth by another group. They'll say the government should raise taxes by 3% and government spending should increase by 7%. NPR will tell us this is trickle-down economics that never works, and the reduction to the increase in spending amounts to austerity! Meanwhile, Fox News will tell us this is a good, conservative plan. Or take, for example, possible proposals from the Fed. They could raise interest rates, lower them, keep them the same, or even make them negative (yes that's being debated now).
The point is, the way economics is portrayed to us, we get no fundamentally alternative viewpoints. It's pro-state or more pro-state. For example, regarding the Fed, if you were to say, lets completely abolish the Fed because we shouldn't have a crony super-bank artificially manipulating interest rates; that would not be an acceptable viewpoint in mainstream economic discourse. It's only acceptable to wait with bated breath how the overlords will change interest rates, and how much money they'll slosh out to the biggest mega-banks. (Yes, the real "trickle-down" is the very system most statists support; cheering on the Fed as an indispensable curator of the economy, as they create massive amounts of "money" out of thin air, to "loan" out to the biggest crony banks at virtually 0% interest.)
Mainstream economics, like many other professions, works in a way to over complicate the subject matter, put up barriers to entry, and generally make it out like you must be one of them to understand economics at all. Real economics is actually a very comprehensible subject, but we're given the message that you must have a certain degree from certain acceptable schools, and hold certain specific views about things; otherwise, you'd better leave the important matters to your wise overlords at the White House, the Commerce Department, the Federal Reserve and the New York Times.
The reason then, that the Austrian economists, their methods, and most importantly their recommendations aren't taken seriously by the mainstream, is that they do not parrot the government line. They do not express only the acceptable opinions. They don't get asked to give recommendations because the powers-that-be who try to micromanage the economy don't want to be told everything they're doing is wrong, and that their newest proposed law is only going to make things worse. They want a profession of court economists to rubber stamp what they're doing. The more "sciency" the economic wizards can sound, the more they can lend credibility to what politicians want to do. The same goes for many other industries. It's sort of the same concept as regulatory capture, with a revolving door of government that wants economists to back them up, and economists who want to be in the favor of government, media, and academia. It becomes a self-perpetuating cycle.
Conclusion
Austrian economics, guided by examining the purposeful action of individuals, does not fall into that cycle. This study of human action is called Praxeology and this is what sets Austrians apart from other economic schools of thought. Austrians look at everyone as individuals, trying to logically take into account all the subjective preferences, desires, goals, ambitions and skills of every person within an economy. It all starts with this understanding; just simply recognizing individuals, and that they act purposefully. Mainstream economists don't do this, though. They look at everyone as one big collective. Everyone, and everything they do, gets turned into statistics, averages, and one size fits all solutions. The logical result of a praxeological framework is to leave people alone, let them be free to pursue their own interests, and that no centralized economic "planning" is necessary. The mainstream econometricians, on the other hand, seek to convince us that they are what makes an economy function; that without their lever pulling, manipulating, averaging of everyone, and passing of new bills, nothing would function, and no one would know what to do with themselves.
For further reading, you'll find several links and excerpts below to learn more about this unique methodology. As Hoppe pointed out in one of our opening quotes, it is important to consider differences in how we approach and think about economics. Economics, practiced correctly, can teach us a great deal about people and society. When practiced as the mainstream does, the results can be disastrous. When it comes down to it, everything is economics. Economics is not merely some decision from some government bureaucrat. Economics is the everyday decisions of millions of individuals. And it's a fascinating prospect to consider it in this way. It brings it back down to earth, back to a comprehensible, logical way of looking at the world.
To learn more about economics from this point of view visit Mises.org. For some good specific resources, continue on below.
This is a great talk by Robert Murphy on the basics of human action. The quote at the beginning of the article comes from this talk:
The Hoppe quote at the beginning of the article comes from the talk below called Praxeology: The Method of Economics
- Free Full Download of Human Action by Ludwig von Mises
- Free Abridged Download of Human Action
- The following is possibly the best introduction I've ever read to what economics really is. For that reason, I'm reposting the entirety below. For the original, see here Economics Is About Scarcity, Property, and Relationships
The other day I was having coffee with a new friend, a retired businessman who had customized luxury cars in California. I mentioned I had recently retired from owning an investment firm and had studied economics for many years, especially Austrian economics.
Like so many people, he said, “I really don't understand economics and always have been confused by it.”
To which I surprised him with, “Of course you understand economics; it is the thought process you use every day to deal with three things: scarcity, property, and relationships.”
His eyes got big and he said, “Whoa! Say that again.”
“OK,” I said, “Everything in human life is organized around how we make decisions about three things: scarcity, property, and relationships.
“First let’s talk about scarcity which you’ve known about all of your life — you notice when something is missing or about to be missing; it is how you decide when it’s time go to the grocery store, do your laundry or whether you should drive your car faster so not to be late for an appointment.
“Every human being is an expert in the decision process of scarcity. It is something we all naturally do whenever we act and choose — which, by the way, we are doing all the time, every day, all day long.”
I smiled, “I could go on and on. You want more?”
“Sure,” he smiled back.
“All humans make action and choice decisions that automatically weigh the following factors. Knowledge: what do we know? Risk and uncertainty: what is our estimate of the risk we can foresee? What do we not know? Time and priority: when do I want or need this? And, how important is this to me right now in relation to other options? Value: what am I willing to give up to have this thing right now?
“This is the personal way you understand economics; it’s the decision process that every human being goes through every time they act and choose, even if it is only for me, alone.
“But there is another important way you already understand economics, which is how we interact with others. That is why I mentioned property and relationships because here is where the decision process I outlined above takes into account other people.
“Economics is also about how we decide how we will think about — and therefore organize — our property and our relationships.”
After a long pause my new friend then said, “Wait a minute. You haven’t talked about money. Even I know that economics is the study of money.”
To which I said, “The study of money and monetary exchange is the most applied use of economic theory. And this is to be expected.
“Why? Because of property.
“You probably already know that money is a medium of exchange. But what are we exchanging? We are exchanging property, your property for my property.
“It is most valuable to think that there are two conversations happening during every monetary — or property — exchange.
“The first conversation is the one I am having with myself; when I give $3 for this fancy cup of coffee I am saying, “I value that coffee more than the $3 in my pocket.”
“The second conversation is the one the café owner is having with himself. He is saying, “I value your $3 more than the coffee I have for sale.”
“Money is the handiest form of property so I don’t have to try to exchange a fish or a chicken for a cup of coffee, for example.”
I continued, “the real use of economics is in the conversation of how we organize ourselves in groups. Do we peacefully respect each other’s property? Do we peacefully cooperate with a shared sense of peaceful-values or is it that fearful-values are forced on us by some Single Dictator, as in a single person, or a Group Dictator, which is otherwise called democracy, by the way.”
At this point my new friend was squirming and said, “So, really economics is based on politics.”
I said, “Actually, it’s the other way around. If you like, I can send to you a great little essay written in 1850 that clarifies this. The writer’s name is Bastiat and he explains that economic architectures precede political architectures.
“In other words, if you look at politics as simply an argument of how we should organize ourselves, then it becomes obvious that it really boils down to how we know, or don’t know, what property is and how we should deal with it as we relate to each other in life and living.
“This is what I was referring to when I said that economics is also about relationships. The connection between economics and politics is how we organize our relationships and whether our ‘shared values’ assume we can have (and want to have) a society based more on peaceful cooperation — or not.”
As all conversations go, it became apparent that it was time to wrap this up, so I said, “Well, there you go. I have been studying this for a long time. If you would like to learn more I can direct you to learn about these things in a step-by-step way.”
To my surprise, he said, “No, let’s continue. This is very interesting. But one thing bothers me. Are you also saying that humans don’t need rules and laws and that our so-called ‘self interests’ are enough to keep us humans interacting in a more peaceful way? The news is too full of the horrors of humanity to swallow that one.”
I replied, “Well, it is true that the media is mostly reporting bad news. And there are definitely places and times throughout the world where the balance was and is greater violence of man against man.
“But it is also true that this exists against a backdrop of a pretty darn peaceful world overall. On any average day, you are more likely to end the day peacefully in bed than being the victim of some violent or unfortunate occurrence.
“There are many, many examples of shared peaceful values that we — the world over — rely on in our daily life, that show this to be true. My favorite is the freeway. Here we move along at speeds that easily can kill us and yet we all — mostly and most of the time — peacefully cooperate.
“But let’s talk next time about whether we need to organize ourselves around an assumption that the only way people will peacefully cooperate is via some agency being given the exclusive use of force or whether there are other ways that we can both have rules, laws, and remedies and — at the same time — a higher order of peace, prosperity, and freedom.
“Because there is a way.”
- Here is Rothbard explaining the basics in Praxeology: The Methodology of Austrian Economics:
"Praxeology rests on the fundamental axiom that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals. This concept of action contrasts to purely reflexive, or knee-jerk, behavior, which is not directed toward goals. The praxeological method spins out by verbal deduction the logical implications of that primordial fact. In short, praxeological economics is the structure of logical implications of the fact that individuals act. This structure is built on the fundamental axiom of action, and has a few subsidiary axioms, such as that individuals vary and that human beings regard leisure as a valuable good. Any[one] skeptic[al] about deducing from such a simple base an entire system of economics, I refer to Mises's Human Action. Furthermore, since praxeology begins with a true axiom, A, all the propositions that can be deduced from this axiom must also be true. For if A implies B, and A is true, then B must also be true.
Let us consider some of the immediate implications of the action axiom. Action implies that the individual's behavior is purposive, in short, that it is directed toward goals. Furthermore, the fact of his action implies that he has consciously chosen certain means to reach his goals. Since he wishes to attain these goals, they must be valuable to him; accordingly he must have values that govern his choices. That he employs means implies that he believes he has the technological knowledge that certain means will achieve his desired ends. Let us note that praxeology does not assume that a person's choice of values or goals is wise or proper or that he has chosen the technologically correct method of reaching them. All that praxeology asserts is that the individual actor adopts goals and believes, whether erroneously or correctly, that he can arrive at them by the employment of certain means....
In brief, praxeology consists of the logical implications of the universal formal fact that people act, that they employ means to try to attain chosen ends. Technology deals with the contentual problem of how to achieve ends by adoption of means. Psychology deals with the question of why people adopt various ends and how they go about adopting them. Ethics deals with the question of what ends, or values, people should adopt. And history deals with ends adopted in the past, what means were used to try to achieve them — and what the consequences of these actions were.
Praxeology, or economic theory in particular, is thus a unique discipline within the social sciences; for, in contrast to the others, it deals not with the content of men's values, goals, and actions — not with what they have done or how they have acted or how they should act — but purely with the fact that they do have goals and act to attain them. The laws of utility, demand, supply, and price apply regardless of the type of goods and services desired or produced."
- Here's Mises from the same Rothbard article:
"There are, in the field of economics, no constant relations, and consequently no measurement is possible. If a statistician determines that a rise of 10 percent in the supply of potatoes in Atlantis at a definite time was followed by a fall of 8 percent in the price, he does not establish anything about what happened or may happen with a change in the supply of potatoes in another country or in another time. He has not "measured" the "elasticity of demand" of potatoes. He has established a unique individual historical fact. No intelligent man can doubt that the behavior of men with regard to potatoes and every other commodity is variable. Different individuals value the same things in a different way, and valuations change with the same individuals with changing conditions."
- Mises again from the Rothbard article, explaining problems with mainstream (econometrician) thinking:
"The quantities we observe in the field of human action … are manifestly variable. Changes occurring in them plainly affect the result of our actions. Every quantity that we can observe is a historical event, a fact which cannot be fully described without specifying the time and geographical point.
The econometrician is unable to disprove this fact, which cuts the ground from under his reasoning. He cannot help admitting that there are no "behavior constants." Nonetheless, he wants to introduce some numbers, arbitrarily chosen on the basis of historical fact, as "unknown behavior constants." The sole excuse he advances is that his hypotheses are "saying only that these unknown numbers remain reasonably constant through a period of years."34 Now whether such a period of supposed constancy of a definite number is still lasting or whether a change in the number has already occurred can only be established later on. In retrospect it may be possible, although in rare cases only, to declare that over a (probably rather short) period an approximately stable ratio which the econometrician chooses to call a "reasonably" constant ratio prevailed between the numerical values of two factors. But this is something fundamentally different from the constants of physics. It is the assertion of a historical fact, not of a constant that can be resorted to in attempts to predict future events.35 The highly praised equations are, insofar as they apply to the future, merely equations in which all quantities are unknown.36"
