The Online Library of Liberty

A project of Liberty Fund, Inc.

• Editor’s Preface
• Ludwig M. Lachmann, an Austrian Stocktaking: Unsettled Questions and Tentative Answers
• John B. Egger, the Austrian Method
• Mario J. Rizzo, Praxeology and Econometrics: a Critique of Positivist Economics
• Israel M. Kirzner, Economics and Error
• S. C. Littlechild, the Problem of Social Cost
• D. T. Armentano, a Critique of Neoclassical and Austrian Monopoly Theory
• Gerald P. O’driscoll, Jr., Spontaneous Order and the Coordination of Economic Activities∗
• Murray N. Rothbard, Austrian Definitions of the Supply of Money
• Laurence S. Moss, the Emergence of Interest In a Pure Exchange Economy: Notes On a Theorem Attributed to Ludwig Von Mises
• Roger W. Garrison, Austrian Macroeconomics: a Diagrammatical Exposition
• Louis M. Spadaro, Toward a Program of Research and Development For Austrian Economics

The Austrian Method

John B. Egger

• Goucher College

There has been a renewal of interest in the Austrian School of economics in recent years. Good public relations deserve part of the credit: the 1974 Nobel award to F. A. Hayek and the series of seminars sponsored by the Institute for Humane Studies have had some effect. But beneath these lies the substance: economists are learning that information has a great deal to do with human behavior—and they are learning that the Austrian School long has focused on the broad and narrow behavioral implications of fragmented information.

Recognizing that the Austrian School is different or novel or even better is easier than recognizing exactly what makes it different. Sometimes the span between the recognition and the identification of the difference is long and difficult. Making it shorter and easier is the goal of this paper. It does not particularly advance the frontiers of Austrian methodology, but aims at presenting the basic differences between the Austrian School and the neoclassical orthodoxy1 in terms likely to be clear to students of the latter. The paper’s target reader is perhaps the graduate student who studies to the point of memorizing statements like “The Austrian School studies purposive human action” and yet is still unable to see how this relates to what he finds in his microtheory course.2

DOES A PRIORISM DIFFERENTIATE AUSTRIANISM?

Murray Rothbard and Ludwig von Mises, two of the great Austrian School economists, strongly defend the proposition that economics is a priori.3 The primary question for my thesis is: does this position differentiate the Austrian writers from other economists? While arguing that the laws of economics are independent of the specifics of human experience, Mises stood opposed to historical and institutional approaches which held even the very theory of economics valid only in particular historical or institutional settings. Of course a theory whose most basic principles change over time is no theory at all; Mises was thus defending the very possibility of a science of economics.

But it was never his intent, in his statements of a priorism, to differentiate his and his followers’ method from that of the neoclassical economists. Their “constrained maximization” technique is every bit as independent of historical circumstance as is the technique of spinning out implications from the “action axiom.”4 Because a priorism does not differentiate the Austrian School, it is not a defining characteristic of the School.

EQUILIBRIA, STATIC AND DYNAMIC

One of the avenues by which the nature of the “Austrian differentia” can be approached is an examination of two meanings of “equilibrium.”5

In the conventional sense (which I term “static”), “equilibrium” refers simply to a state in which prices of the various goods result in zero excess demand for each of them. The term “static” is often taken to mean “timeless” and is indicated by the absence of time parameters in the supply and demand functions, but the essentially static nature of this conception of equilibrium is not violated even if some of the goods among which the individuals choose are “future goods.”

Consider as a typical example the interactions among three individuals, each with an endowment of goods and a specific utility function. Under certain reasonable assumptions about the forms of these utility functions, some set of relative prices among these goods will be consistent with the preferences and initial endowments of the three individuals. The market’s, and each individual’s, excess demand for each good will be zero at this set of relative prices. The nature of this equilibrium is not at all changed if some of the goods are promises of future delivery of others—based upon knowledge, let us say, of a regular Sunday night manna delivery. Each individual independently considers his present and future preferences, and the individuals’ interaction determines a mutually consistent (present and future) price vector.

This is certainly an equilibrium. In the context of the particular moment’s valuations and expectations, any further changes in any of the prices would cause some net excess demands to become nonzero. But it is a static equilibrium in this sense: it does not differentiate between future expectations which are consistent among the individuals and those which are inconsistent.6 Even though a unique price vector of “future goods” is determined, we have no assurance that the plans on which the individuals based their future valuations are consistent. In the simplest case—that of divergent expectations about physical data—an equilibrium relative price between beach umbrellas and rain umbrellas may be determined under circumstances in which one individual thinks it will rain tomorrow while the other two believe it will be a pleasant day for swimming. But even if expectations about physical data coincide, expectations about each other’s action plans may be contradictory: each individual may base his demand for, say, “tomorrow’s automobile services” on the expectation that he alone plans to drive on a certain narrow, dusty mountain road. In either of these cases, a unique static equilibrium price vector may be determined, but the passage of time will reveal the inconsistency of the individuals’ expectations and hence require the determination of a new price vector. This equilibrium is static because it is built upon inconsistencies of which the individuals will learn in attempting to follow their plans. Only a dynamic equilibrium incorporates consistent future plans, and hence is not disturbed “endogenously”—by the very act of following one’s plans.

The Hayekian dynamic equilibrium,7 in short, consists of a market-clearing price vector based upon interpersonally consistent expectations; the static equilibrium discussed above consists of a vector of market-clearing prices based upon plans which the individuals may or may not be able to carry out.

Two quite different perspectives on the economic problem are implied by these two viewpoints on the nature of “equilibrium.” I claimed at the start of this section that these perspectives will illuminate the distinction between the Austrian School and the neoclassical microapproach. There is just a bit more groundwork.

The analysis characterized above as static concentrates upon the existence of a price vector consistent with the momentary relative valuations of the individuals. The conditions of the world expected by these individuals—which include the actions of other individuals—remain in the shadows; the only relevant issue is the subjective rate of substitution among the commodities, and there is no way to judge whether or not the subjective rates of substitution determined by the different individuals are based upon contradictory future expectations. Static analysis begins at a point at which expectations and marginal utilities (or preference orderings) have already been formed and allows us to determine the existence and uniqueness of a price vector (which may include future goods) consistent with these preferences. Whether the preferences themselves are based upon consistent expectations is simply beyond the pale of this approach. I have thus come to believe that it is not quite accurate to argue that the (static) analysis of equilibrium conditions “assumes away” the problem of inconsistent expectations:8 it simply has nothing to say on that issue.

Such an approach may be considered “timeless,” in a sense, whether or not there are “future goods” in the commodity bundles. For the passage of time would reveal whether the individuals’expectations were interpersonally consistent or not, and this would transform the problem into something quite different from that with which static analysis deals. It would, to be specific, shift us into the realm of the dynamic equilibrium or disequilibrium nature of the static conditions we have derived.

The difference between a market-clearing price vector corresponding to a static and one relating to a dynamic equilibrium is that the latter necessarily incorporates interpersonally consistent expectations. The process of deriving, by logical deduction, the distribution of goods and relative prices under this sort of equilibrium presupposes that the premises on which the deduction is based—the preferences and plans of the individuals—are, themselves, logically consistent. Thus the application of our static tools to dynamic questions requires a great deal more in the way of assumption: that each individual foresee exactly those actions which the others plan to take.9 This interpersonal consistency of expectations must be presupposed before the specific pattern of prices and distribution can be logically deduced.

THE “AUSTRIAN DIFFERENTIA”

In his seminal “Economics and Knowledge” Hayek made a statement which for some time I found puzzling:

. . .since equilibrium is a relationship between actions, and since the actions of one person must necessarily take place successively in time, it is obvious that the passage of time is essential to give the concept of equilibrium any meaning. This deserves mention, since many economists appear to have been unable to find a place for time in equilibrium analysis and consequently have suggested that equilibrium must be conceived as timeless. This seems to me to be a meaningless statement.10

Why could not this great economist understand what I knew: that all we had to do was leave t out of our equations?

The answer is provided in the above section. Whether or not there are “future goods” (or t’s in the demand functions),11 the search for a logically consistent set of preferences (i.e., a market-clearing price vector) does not necessarily present us with a logically consistent set of plans.12 Although the price vector determination completes the job of the auctioneer, the matter of interest to the individuals participating in the mar- ketplace is whether or not their actions will achieve the expected results—which most assuredly will not be the case if their expectations are logically inconsistent.

Questions concerning the existence, uniqueness, and stability of a price vector which is mutually consistent with the preferences of many different individuals are, in short, of an entirely different character from the questions and problems which arise when one investigates the existence, uniqueness, and stability of the set of expectations or plans which is interpersonally consistent.

Concentration upon this latter set of issues constitutes the Austrian differentia. The distinction cannot be appreciated from a simple statement removed from the context of the above remarks, but it appears correct to argue that: whereas most contemporary microtheory focuses upon the abstract logic of preferences, the Austrian School focuses upon action.13

MAN, THE ENTREPRENEUR

The above comments may help to clarify some of the claims made by the Austrian School writers:14 although the “abstract logic of preferences” can employ the technique of mutual determination via the solution of sets of simultaneous equations, an analysis of the plans underlying these preferences and how plans are modified must incorporate the concepts of purpose and learning. “Purpose” in this sense cannot refer simply to the a prioristic universal goal of “utility maximization”; it refers to some specific goal the individual wishes to achieve and consequently to how his actions and plans are likely to be modified when he learns that the economic environment is going to be different from that which he anticipated when he developed his initial plans. Simultaneous determination may govern the logical analysis of preferences, but the “older concept of cause-and-effect”15 is the only technique appropriate to the study of learning and the modification of inconsistent plans. The “cause,” of course, is the individual’s subjective perception of an opportunity to improve his situation, and the “effect” is a change in his way of acting, or in his plans.

This process of the revision of inconsistent plans requires that the individual be able to recognize those features of his original plans which caused the inconsistency and that he recognize also the changes in his plans which tend to eliminate that inconsistency. Such abilities constitute at least part of what economists call “entrepreneurship.” (The popular notion of “creating a new product or service” is simply a special case in which a businessman thinks he perceives the desirability of a change in his own plans and hopes that the resulting plan inconsistency [he plans to get rich but potential customers have yet to learn of his new product, so they don’t plan to buy any] will be resolved by a subsequent revision of his potential customers’ plans rather than of his own.) It is precisely the relation among entrepreneurship, plan revision, and action which explains the irrelevance of entrepreneurship to neoclassical microeconomic theory which takes preferences as axiomatic and does not concern itself with the possibility of carrying out their underlying plans.

Professor Kirzner’s important work refers to the “alertness to information” as entrepreneurship.16 But the importance of the Austrian viewpoint is more clear if we realize that this ability is precisely what differentiates man from other living beings, that “entrepreneurship” in general is indistinguishable from use of the rational faculty, from the ability to conceptualize, from thinking.17

Concept formation requires differentiation and integration: differentiation among the infinite variety of attributes of certain items or situations, isolation of a specific attribute common to the items, and integration of the different items or situations into a concept according to whether or not they possess the chosen common attribute. The process is one of grouping into classes, or classification, and is common to all thought. A decision is a classification, and decision is the goal of all thought.

How is this process of classification related to action? An individual’s action hinges upon the comparison: “What will things be like if I don’t act,” versus “What will they be like if I do?” To make such a decision the individual must construct hypothetical states of the future, one conditional on the individual’s act and the other on its absence. Once the concretes of the situation are perceived, the process of conceptualization consists of the isolation of certain characteristics common to this and to other situations. These other situations may be historical instances the individual remembers or an imaginary case in which he envisions himself in the role of another person and considers how he would behave in that role. In either case the function of the isolation of certain features is to eliminate unessential clutter: specific details of the scene which are not thought to be “important.” It is the ability to isolate correctly the relevant—causal—aspects of a situation or an ongoing process, and hence to accurately predict its future in both the absence and presence of one’s own action, which constitutes successful entrepreneurship. And it is the attempt to do so which constitutes entrepreneurship, successful or not.

But all thought is exactly of this form. Whether one is trying to think through the causal forces behind the Industrial Revolution or to analyze a Frost poem, the technique is to hypothesize alternatives and to isolate particular causal elements, characteristics which appear to make the crucial difference between what is and what might have been. The only difference between such contemplative thought and the popular view of entrepreneurship is that the historian or poet has at his command the data needed to test his hypothesis, while the fledgling businessman must wait and see whether customers come. But during the interval of time between the development of the counterfactual hypothesis and its test (e.g., “perhaps X caused the Industrial Revolution ... but that would imply a certain pattern of relative prices which did not, in fact, occur,” or “why didn’t Frost write ‘The woods are owned by Mayor Jones, whose wife sells pickled cabbage at the fair’ instead of ‘whose woods these are I think I know’?... but that would eliminate the degree of generality Frost is trying to convey in the rest of the poem....”), the test lies as much in the future as that facing the businessman.

To be able to speak of “entrepreneurship” and “thought” as different concepts is useful, to be sure. But this analysis suggests that the entrepreneur is anyone acting in accordance with his specifically human nature. A school of economics which, because of its focus and method, can accord a central role to the entrepreneur is simply respecting the nature of man. Surely this is an important aspect of the Austrian differentia.

METHOD: MATHEMATICS AS AN ANALYTICAL TOOL IN ECONOMICS

If we are to analyze the function of mathematical terminology in economics, we must analyze it at its best. The difficulties associated with the use of differential and integral calculus are well-known (e.g., the requirements that products and factors be infinitely divisible, that individuals consider infinitesimal changes relevant, that all preference orderings be representable by a total utility function and production relations by a total product function), so analyses using differentiable and integrable objective functions are no longer at the frontiers of mathematical economics, except perhaps in the study of uncertainty. The more general approach of set theory has been developed largely since Debreu (1959),18 and it is a real and significant improvement over differential calculus in economics. Those who wish to criticize mathematical economics must take on its best.

Bertrand Russell contends that “pure mathematics is the class of all propositions of the form ‘p implies q...”19 The claim of equivalence between pure logic and pure mathematics is sometimes attributed to Russell and Whitehead’s Principia Mathematica (1910–13), but the same idea is presented forcefully in the first few pages of Russell’s 1903 work. Russell was led to this conclusion by the discovery that numbers are sets,20 that ordinary algebra is therefore an application of set theory, and that any statement of implication can be rewritten in set-theoretic terms: e.g., “p implies q” is identical to “q is a subset of p.” Venn diagrams even give us pictures.21

Jevons felt that economics was by nature mathematical because it deals with numbers.22 Modern mathematicians prefer to identify the roots of their subject with the theory of sets. A set is a collection of undefined “elements,” which may represent any property we wish to attribute to them, and the theory of sets consists of the logical relations among them. Because of the completely general nature of these sets and elements, we can embrace a much wider view of the nature of mathematics than can those who restrict themselves to, say, functional notation; James R. Newman’s cursory sampling of a few modern mathematicians’ views of their own subject indeed suggests that the boundary between logic and mathematics is becoming increasingly blurred.23

Furthermore, either logical relations or mathematics—whatever the distinction may be—is capable of expression in either verbal or abstract symbolic terms. Jevons was correct in this regard: one cannot identify the basically mathematical or nonmathematical nature of a discipline according to whether or not it is expressed verbally.24

From this viewpoint it appears as if Austrian School writers’ criticisms of mathematics in general—rather than of crude mathematics, or of symbolic mathematics—are, in essence, criticisms of pure logic, which is not always (sometimes, perhaps, but not always) what they intend. The real issue is: are there advantages to be gained from the substitution of symbols for words in economics?25

The advantages claimed for this substitution include economy, precision, and rigor.26 The economy arises simply from the fact that a symbol (e.g., x) is more brief than the set of words it denotes (e.g., “the number of oranges he buys per week”). The precision and rigor follow from the abstract nature of symbols: once a set of symbols is appropriately defined (i.e., related verbally to the problem of interest) the entire corpus of the formal theory of relations among these symbols becomes applicable to one’s problem. The ability to draw on the pure, abstract theory of logic (or mathematics) provides the rigor, and the exactness required in the definition of symbols forces the precision.

It is clear enough that representation with symbols is always possible: by defining ƒ() and x appropriately we can represent “absence makes the heart grow fonder” by “ƒ¹(x)>0.”27 The question is, why bother? What advantages might such symbolism offer? There will be advantages—economy, precision, rigor—only if the symbols will be used repeatedly in the course of some logical analysis.

The economy is achieved by omitting repeated verbal identification of the symbols. The form in which this generally occurs is: verbal definition of symbols, a (perhaps long) process of deduction from the initial postulates with a symbolic conclusion, and a statement in words of the meaning of the conclusion (obtained by reference to the symbols’ initial definitions). Mathematical symbolism is indeed economical in this case, if only the final deduced proposition is held to be important. If the problem were analyzed in verbal terms, much unnecessary and redundant restatement of the symbols’ definitions would occur. Many academic journal articles are precisely of this form: a few words at the beginning and end, pages of symbolic mathematics in the middle.

To evaluate the process of symbolic analysis outlined above, we must consider the epistemological significance of language. Words are concrete audiovisual representations of the abstractions called concepts, in which form all knowledge is retained.28 As a consequence, any mathematically derived symbolic propositions which are to be meaningful must be translated into words. (If they are merely translatable then they are merely potentially meaningful.) Thus, the long sequence of intermediate steps in a logical derivation must be expressed verbally if it is to be related to human experience. But without subsidiary hypotheses about how people learn, these intermediate steps are not meaningful as guides to the comprehension of behavior and cannot be related directly to human experience. Only the conclusion can, in the sense that it describes an “equilibrium” state toward which actions are headed. Equilibrium theorists who make extensive use of mathematical symbolism are, in fact, saving a great deal of paper and time. The fact that causality is lost is irrelevant to one concerned only with descriptions of equilibria.

Those who perceive economic theory as a set of propositions which are logically implied by initially hypothesized preference sets and production possibilities understandably find symbolic logic and mathematics a powerful tool: economical, precise, rigorous. But the analysis of the conditions specific to an equilibrium presupposes that the conditions necessary for equilibrium exist. This is hardly much to ask if one restricts his viewpoint to static conditions, in the sense discussed earlier in this paper—that is, to search for a price vector logically consistent with the individuals’ preferences at a specific moment. If one sees the central purpose of economics as the analysis of action, however, the relevant equilibrium is the dynamic one, and its preconditions—interpersonally consistent future plans or expectations—cannot be merely hypothesized. One must attempt to examine the ways in which this interpersonal consistency of expectations can be brought about. This requires the introduction into one’s analysis of empirical (nondeduced) statements about what reactions individuals are likely to have when confronted with unexpected developments.29 If these reactions were implicit in the initial propositions and therefore could be logically derived from them using their symbolism, they would not be reactions to unexpected developments at all: they would simply be preprogrammed behavioral changes in accordance with perfectly foreseen changes in data and would be empty of learning.

The introduction amidstream of unexpected developments thus requires the use of words. Symbolism is economical only when one can draw on it for a long time. Process analysis, however, by requiring the continual specification of non-deduced empirical hypotheses about learning and expectation revision, and hence about causality, can make little use of this economy.

Of course, if one looks upon the process of plan revision and movement toward a dynamic equilibrium as a series of discrete jumps, one can associate a static equilibrium price vector with each discrete set of preferences as they emerge throughout the process. This would seem to enhance the role of pure logical deduction and symbolic technique, rather than to minimize it. But the meaning of these sets of price vectors is not clear. They are still unrelated to the consistency of the expectations on which the preferences supporting them are based.

Those who are firmly wedded to the symbolic analysis characteristic of so much of modern economics may prefer to contend that their work alone is theory, that the introduction of non-deduced hypotheses about reactions to unexpected changes converts one’s study into applied work. But I should point out that logic is common to all fields of study, and it is only the introduction of specific empirical characteristics that makes an engineer’s analysis of a nonlinear control system at all different from an economist’s study of business cycles. The logic used by physicists is the same as that used by biologists and by economists. What differentiates physics from biology from economics is the nature of the empirical links between the objects studied and the abstract logical rules the analyst employs.

UNCERTAINTY AND MATHEMATICS IN ECONOMIC ANALYSIS

I cannot undertake here a systematic examination of recent trends in “the economics of uncertainty.” It deserves mention, however, because it may seem to reconcile the “imperfect information” of the dynamic disequilibrium and the use of mathematical symbolism. In what sense does “uncertainty economics” incorporate imperfect information and learning?

The relative-frequency concept of probability30 is not applicable to human action with its unique events.31 For discussion I will simply assume here something which I am by no means convinced is legitimate: that there is an appropriate subjective probability concept according to which future states can be ordered by cardinal degrees of belief.

Modern analyses using this approach are, like their deterministic counterparts, inevitably static. Even the most sophisticated of the techniques, that of “stochastic dominance,” which permits the entire subjective distribution (rather than only its mean and variance) to be considered,32 necessarily involves the reduction of an alternative to a “certainty equivalent,” an ordinal which can be value ranked against other alternatives. Essentially, a hypothetical and certain alternative is manufactured—one which has the same value as the uncertain state—and preferences are constructed on the basis of this hypothetical alternative. For example, a man may be indifferent to the choice between $40 and a 50–50 chance at $100 or nothing. In determining preferences he will act as if $40 were actually the alternative; market prices of lottery tickets, for example, will be determined in this manner.

When we consider the individual’s plans, rather than his preferences, we see at once that the state of winning $40 with certainty cannot have been expected and planned for. It is simply not one of the possible outcomes. As a consequence, the uncertainty models are by their nature static: perfectly sufficient for the analysis of market-clearing prices, but no more capable of incorporating learning and the removal of plan inconsistency than the deterministic static analyses. When the individual discovers that he has—or has not—won the $100, he no longer acts and plans as if he were certain to receive $40. Static uncertainty analysis has contributed to our understanding of price determination under uncertainty, but it does not permit us to analyze a process of action and learning.

THE AUSTRIAN METHOD

What implications do the foregoing comments have for methodology? How are propositions about economics to be developed? The formal study of patterns of consistent preferences—which I have called the “abstract logic of preference” —may employ the techniques of formal logic and mathematics, particularly set theory. The study of consistent plans, and how inconsistencies in interpersonal expectations are eliminated through learning, requires a technique (if it may be so called) different from the abstract symbolism of mathematics. It requires that specific nondeduced hypotheses be advanced about how an individual’s plans and preferences change when he is confronted with unexpected events. The fact that these propositions about learning cannot be logically derived from other accepted statements may make the analysis appear unscientific, because of course it renders the conclusions dependent upon the accuracy of the empirical hypotheses. But if one accepts Popper’s terminology,33 the possibility of falsification is precisely that which makes a proposition scientific rather than unscientific.

In fact, it may not be the empirical elements themselves which give Austrian work an “unscientific” appearance, but instead the way in which they are introduced. Rather than being simply empirical assertions presented as part of the statement of a problem from which logical implications are then deduced (e.g., “such-and-such an elasticity is greater than one”), these propositions about learning must be introduced in the middle of the analytical process. One is not allowed to follow through with his logic: the smooth workings of the logical derivation are interrupted by the discovery and revision of inconsistent plans.

But this introduction of nondeduced hypotheses does not imply that “anything goes”; the nature of these hypotheses is governed by the introspective and experiential evidence that people learn from experience; that when confronted with plan inconsistencies they tend to revise their plans in the direction of consistency.34 The development of an “Austrian process analysis” consists largely of an examination of how individuals are likely to interpret market or nonmarket changes as evidence that their own expectations must be revised. If different inconsistencies are brought to light when they proceed to act on these revised expectations, some further changes in plans (perhaps, this time, the plans of the other people) will be required. It is always possible to advance some reasonable hypothesis about the nature of the plan changes.

The role of symbolic mathematical analysis consists of the determination of the specific conditions which would exist under plan consistency. Whether there “really are” such consistent plans implicit in current expectations but somehow unrecognized, deep below the level of awareness,35 or whether (as is far more likely) current expectations are fundamentally inconsistent so that some hypothesis must be invented about what plans would be like if they were consistent, this state of plan consistency is the benchmark, the goal providing a general direction to entrepreneurial activity. But the process by which it is approached must be analyzed with unfailing sensitivity to what the acting individual finds in the course of his actions and how he is likely to revise his expectations when he learns these things.

As an example of what difference all this makes, we could consider literally any process in time, especially a process we could consider evolutionary. The monetary theory of Menger and Mises36 provides an excellent example because Mises’ conclusion—the regression theorem—provides the solution to the so-called monetary-value theory dichotomy still challenging today’s monetary theorists.

Starting with a set of preferences based upon use values alone (although of course it is irrelevant to the mathematics what they are based upon), we can logically derive a consistent static set of relative prices. Now suppose one individual learns or guesses that he can use a certain good as a trading medium and thereby acquire goods he could not otherwise have obtained. His preference for this “trading good” rises above its pure use value. Once again we can logically derive a new static price vector, based this time on his higher valuation (the cause of which, once again, is irrelevant). Now we can hypothesize that others observe this intermediate trading, or get the same idea independently, or observe that our initial individual is now more willing to accept the trade good than before, so their valuations of it rise for this reason. Once again, we can derive a new static price vector, this one revealing again the higher relative price of the traded good. As the learning process proceeds, the good becomes money. Its relative price (“the price level”) is tied by the gradual process of learning to the barter relative price of the good from which it developed.

The whole approach, which provides such fruitful insight into monetary evolution, is rooted in the question: why do individuals pay more for a good than its use value? The answer is: they have learned, through observation and experience, of its acceptability in trade. However rigorous symbolic logical deduction may be, it can tell us very little about such everyday evolutionary processes.

CONCLUSIONS

The differentia of the Austrian School is its focus upon the plans—the action-relevant plans—of the individual rather than upon his preferences. Preferences can be treated in an abstract fashion, as the preponderance of contemporary economic theory demonstrates, and such analyses make correct and beneficial use of mathematical symbolism. But the study of plans and how they are brought into interpersonal consistency requires a much more sensitive reading of the nature of human thought and action. Hypotheses about learning and changes in expectations can be based only upon such introspective philosophizing as the attributing of one’s own thought processes to others and guessing, again based upon one’s own personal experiences and hypothetical behavior in similar circumstances, about the specific purpose of the other’s behavior.37

What of the big issues on which the School seems to offer special insight? It is tempting, at first, to try to “define” the School by simply listing them: time preference, opportunity cost, business-cycle theory, monetary theory, imperfect information, entrepreneurship, capital theory, the role of time, analysis without symbolic mathematics. Time preference and opportunity cost are now part of conventional economics.38 But the others are still special to Austrians, and the particular Austrian outlook arises—in each of these cases—from the approach I have outlined here: emphasis upon action (not preferences), recognition that action takes time and that because plans may be inconsistent the results of actions are uncertain, and willingness to adopt a method appropriate to this outlook.

A price is paid for all of these insights, and that price is the purely deductive method. This technique, the approach of today’s mathematical economists, is superbly suited to analysis of the conditions under which known, given preferences are consistent—my static equilibrium—but only to that. Since Austrians are not willing to restrict their viewpoint to the abstract logic of preferences, they must be willing to admit nondeduced hypotheses about plan revision into their analyses.

So which is better—neoclassical and mathematical economic theory, or Austrianism? It is simply not true that all of the advantages are on one side: mathematical symbolism offers decided advantages when the problem is one of pure and complex logical deduction, but the Austrian approach must be used when the problems are not of this sort. And they never are, in any real application—business cycles, planning, monetary policy, they are all dynamic issues, swept under a rug in contemporary economics by a methodological bias for pure deduction and against any hypotheses having to do with thinking.

Hayek pinpointed the differences in 1942 when he noted that:

...the most marked tendency of the development of scientific thought in modern times ... has been correctly described as one toward the progressive elimination of all “anthropomorphic” explanations from the physical sciences. Does this really mean that we must refrain from treating man “anthropomorphically”—or is it not rather obvious, as soon as we put it in this way, that such an extrapolation of past tendencies is absurd?39

The difference between physical and social sciences is not that the former is “inductive” and the latter “deductive.” It is that the physical sciences can use pure deduction because their objects cannot plan and learn. Neoclassical and mathematical economists use the same method by restricting their analyses to “men” who cannot plan or learn any more than can a frictionless plane, whereas the Austrian School builds its entire system and method around these distinctively human potentials—thinking, planning, learning. Which is better? Each of us must answer. But we must answer first: to what extent is economics a study of man?

NOTES

[1]By “neoclassical orthodoxy,” I refer to the approach taken in C. E. Ferguson, The Neoclassical Theory of Production and Distribution (London: Cambridge University Press, 1969) and dozens of intermediate microeconomic theory textbooks.

[2]Works taken to represent the Austrian School include especially: F. A. Hayek, Individualism and Economic Order (Chicago: Univ. of Chicago Press, 1948); Ludwig von Mises, Human Action (Chicago: Regnery, 1966); Israel M. Kirzner, Competition and Entrepreneurship (Chicago: Univ. of Chicago Press, 1973); Ludwig M. Lachmann, Capital and Its Structure (London: LSE, 1956); Murray N. Rothbard, Man, Economy, and State (Los Angeles: Nash, 1962).

[3]Mises, op. cit., pp. 32–36; Rothbard, op. cit., pp. 63–66; also, Mises, Epistemological Problems of Economics (Princeton: Van Nostrand, 1962), pp. 12–13.

[4]Rothbard, op. cit., pp. 1, 63.

[5]On the many ways in which this word has been used, see Fritz Machlup, “Equilibrium and Disequilibrium: Misplaced Concreteness and Disguised Politics,” in Essays in Economic Semantics (New York: Norton, 1967).

[6]On this issue, see F. A. Hayek, “Economics and Knowledge,” reprinted in Individualism and Economic Order, p. 40, passim.

[7]“The state of equilibrium as here understood is a state of complete compatibility of ex ante plans ...” (F. A. Hayek, The Pure Theory of Capital [Chicago: Univ. of Chicago Press, 1941], p. 23).

[8]I do not know if this has ever been said of my static conception, but it certainly (and rightly) has been said of the dynamic equilibrium. It is important that we appreciate the distinction.

[9]F. A. Hayek, “Economics and Knowledge,” p. 45; also his “The Use of Knowledge in Society,” in Individualism and Economic Order, p. 91.

[10]“Economics and Knowledge,” pp. 36–7.

[11]“The introduction of time parameters into the equations is no solution” (Mises, Human Action, p. 356).

[12]In a comment on an earlier draft of this paper, Professor Israel M. Kirzner observed that the very clearing of a market implies that the participants’ short-run plans are brought into consistency even while the outcome permits inconsistencies in long-run plans (which I simply call “plans”) to remain. I accept Kirzner’s point, but it does not seem to invalidate what follows.

[13]My phrase “abstract logic of preference” is obviously modelled after Hayek’s “Pure Logic of Choice,” but fits my purpose better.

[14]See especially: Mises, Human Action, pp. 350–57; Rothbard, Man, Economy, and State, pp. 277–80.

[15]George Stigler, Production and Distribution Theories (New York: Macmillan, 1946), p. 181.

[16]Kirzner, Competition and Entrepreneurship, p. 68.

[17]Some of the following is based upon Ayn Rand, “Introduction to Objectivist Epistemology,” which appeared in various issues of The Objectivist between July 1966 and February 1967.

[18]Gerard Debreu, Theory of Value (New York: Wiley, 1959).

[19]Bertrand Russell, Principles of Mathematics (New York: Norton, n.c.d.), p. 3. Originally published in 1903.

[20]Morris R. Cohen, A Preface to Logic (New York: Holt, 1944), pp. 9–11.

[21]I have been informed both by a philosopher and by a mathematician that Russell failed in his lifelong attempt to prove the identity between logic and mathematics.

[22]W. Stanley Jevons, The Theory of Political Economy, 5th ed. (New York: Kelley & Millman, Inc., 1957), p. 3.

[23]James R. Newman, The World of Mathematics, 4 vols. (New York: Simon and Schuster, 1956), III, p. 1830.

[24]Jevons, op. cit., pp. 4–5.

[25]Several critics of this paper have pointed out that words are symbols which represent concepts. Of course I accept this, and urge that my “symbols” in the following be interpreted as “second-order symbols,” standing for words.

[26]One or more of these advantages have been claimed by many economists. For one example, see Josef Hadar, Mathematical Theory of Economic Behavior (Reading, Mass.: Addison-Wesley, 1971), pp. 5–7.

[27]Mr. Roger Garrison points out that the verbal phrase expresses causality while the symbolic expression does not. His observation is absolutely correct, and it strengthens all of my subsequent points about the relative natures of mathematical and verbal analyses.

[28]Rand, op. cit., passim.

[29]Hayek, “Economics and Knowledge,” p. 33, passim.

[30]Richard von Mises, Probability Statistics and Truth (London: George Allen and Unwin Ltd., 1961), first published in 1928.

[31]See Mises, Human Action, op. cit., pp. 105–18; also, G. L. S. Shackle, Expectation in Economics (Cambridge: University Press, 1952), pp. 5, 109–27.

[32]See, for example, J. Hadar and W. R. Russell, “Rules for Ordering Uncertain Prospects,” American Economic Review, LIX, No.1 (1969), pp. 25–34.

[33]Karl Popper, The Logic of Scientific Discovery (New York: Harper and Row, 1968), p. 40.

[34]Hayek, “Economics and Knowledge,” p. 44, passim.

[35]It seems to me as if those who argue that entrepreneurship is always moving toward and never away from an equilibrium must adopt this viewpoint.

[36]Carl Menger, Principles of Economics (Glencoe: The Free Press, 1950), pp. 257–71; Ludwig von Mises, The Theory of Money and Credit (Irvington-on-Hudson, NY: Foundation for Economic Education, 1971), pp. 97–123. See also Philip H. Wicksteed, The Common Sense of Political Economy, 2 vols. (London: Routledge & Kegan Paul, 1967), I, pp. 136–37.

[37]See F. A. Hayek, “The Facts of the Social Sciences,” in Individualism and Economic Order, p. 66.

[38]It has been pointed out to me that although these terms are now in common use, they are often not applied in the consistently subjectivist Austrian manner.

[39]Hayek, “The Facts of the Social Sciences,” pp. 64–65.