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Methodological Individualism – continued

Deductive Economics

What is this thing? It is quite simple, really. It means that if you look at what a group is doing, you can’t really know why a group is doing it or if it will do it again. A group is composed of too many people doing too many things for too many reasons. In other words, a mess.

It is impossible to figure out the motivations for a group to do something.

To solve this problem, Mises and Rothbard decided to distill the issue down to the basics. And a single person is as basic as you can get. If you could figure out why a person is doing something, you could figure out why a group of people will do something.

Therefore, they devised “thought experiments”. These experiments are not real-life experiments but hypothetical ones, where a person or two are placed in a situation and we deduce how will they react. Because these situations are very, very basic, their reactions are not that difficult to predict. From these reactions, we can then build up and add a third, a fourth person and so on, until we get a group. From this group, we can then extract general rules of behavior, particularly for economics.

For example, if two people are in an island and one is good at fishing and the other is good at growing, eventually, they will exchange their surplus of fish and vegetables simply because people want a varied diet. We can see from this simple example how a market is born. We can go on and determine rules of supply and demand and pricing and many other rules. We don’t need a statistical sample of a real market to understand this. Two people suffice.

We can go further, we can study what will happen when conditions fluctuate, a bad harvest or an excellent fishing season and so on.

The advantage of these experiments is that we control all the conditions and we can change them at will, and come up with even more valuable information.

The most basic axioms of such a method cannot be proved or disproved, just like with any other science. We have explained this phenomenon in the lesson What Is Science And How It Works.

This is not as farfetched as it seems. There is a long and proud tradition of “thought experiments” in science. As an example, consider this: during the early days of particle physics (about 1930’s) a great deal of “thought experiments” took place involving Albert Einstein.  If you are interested in this topic, you could learn more in Wikipedia Though Experiment.

Furthermore, discoveries in the field of economics were derived using this methodology. Discoveries that were later on adopted by “classic economic” theories! So, this method cannot be all that bad!

This is not to say that all Austrian economists follow this deductive process. However, most do to one or another degree. Remember what we said in our lesson  Political Experimentation Is Good , we fully agree that Austrian Economics is not a fully mature science, however, it is quite powerful as it is. Experimentation is indeed good!


Critique to Deductive Economics

Of course and as expected, “classic economists” attacked this method.

One such objection is that conclusions reached by this method are limited and weak, yet, they gave rise to many improvements that were later on adopted by classic economic theories…. how strange…

Then there is the concept that Deductive Economics has been dismissed by mainstream economics. Which is true, it has been mostly dismissed. The question that springs to mind is, of course, so what? Mainstream economics works on a different set of methods and assumptions. If it wants to be consistent with itself, it must reject Deductive Economics. Rejection happens not because Deductive Economics is flawed, but because mainstream economics cannot adopt it without losing its identity! This so-called argument is nonsense.

Some classic economists are more honest, and they do acknowledge that the outcomes of Deductive Economics, particularly the power to show gross defects in their theories, has been of use to them. And so, a method that shows large defects in other theories, cannot be that weak or easily dismissed.

Over time, other Austrian economists have added models and mathematics to Deductive Economics and have showed that Austrian economics is close to Macroeconomics in classical terms. Furthermore, they have shown that Austrian Macroeconomics can be deduced from Microeconomics… which was yet another criticism.

Yet another criticism is based on the fact that Deductive Economics rejects statistical data and mathematical models, relying on principles instead. The problem with this critique is that it is not a critique at all! They are saying that because Austrian Economics does not use the same tools as classic economic theories, it is therefore false! This is, of course, ridiculous!. Consider this: cars are good to move people from point A to point B. If I take the train, I must be mistaken! Yes, this argument is that silly.

Then we have the notion that Austrian Economics rejects the scientific method. The issue is again one of definitions. Austrian Economics does not reject the scientific method, it only states that the one that classic economic theories are using is unsuitable to test Austrian theories! It is simple. Critics need to produce a method that Austrian economists can use, and they will use it. There really is no point in trying to disprove a theory using flawed tools.

We also have the criticism that since useful economic information has been extracted from market models which are based on statistics. Therefore, if a method opposed to the Austrian is generating useful results, the Austrian one must be erroneous. Again, this is nonsense. Nobody said that Austrian Economics is perfect or complete. Nobody said that classic economic theories cannot produce valuable information. They can and they will. The question is which theory is the best, not which one produces “some” results.

And then, we have those who are upset because of Austrian methods. They find them somehow personally insulting and irritating. They misread and use words to attack. However, when all the verbal fireworks are over, there is very little substance to contradict Austrian methods. In other words, as somebody in the street would say, these economists should put-up or shut-up.

Austrian economists do acknowledge that Austrian Economics is not perfect nor finished, but for all intents and purposes, it is quite powerful and much more honest that classic economics, particularly Keynesianism.

This is indeed something worth keeping.

Note: please see the Glossary if you are unfamiliar with certain words.

Continue to Austrian Economics In Theory - Part 4


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