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Theory and Method in Economic Science - Leonard P. Liggio, Literature of Liberty, Winter 1982, vol. 5, No. 4 [1982]

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Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.

Part of: Literature of Liberty: A Review of Contemporary Liberal Thought, 20 vols. 19781-982

About Liberty Fund:

Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


Theory and Method in Economic Science

Prediction vs. ‘Complex Phenomena’

Hayek's conception of knowledge, when taken in conjunction with the idea of a spontaneous social order, has important implications for the proper method for the practice of social science. To begin with, Hayek's affirmation of “the primacy of the abstract” in all human knowledge means that social science is always a theory-laden activity and can never aspire to an exhaustive description of concrete social facts. More, the predictive aspirations of social science must be qualified: not even the most developed of the social sciences, economics, can ever do more than predict the occurrence of general classes of events. Indeed, in his strong emphasis on the primacy of the abstract, Hayek goes so far as to question the adequacy of the nomothetic or nomological model of science (i.e. exact prediction through ‘laws’), including social science. At least in respect of complex phenomena, all science can aim at is an “explanation of the principle,” or the recognition of a pattern—“the explanation not of the individual events but merely of the appearance of certain patterns or orders. Whether we call these mere explanations of the principle or mere pattern predictions or higher level theories does not matter.”51 Such recognitions of orders or pattern predictions are, Hayek observes, fully theoretical claims, testable and falsifiable: but they correspond badly with the usual cause-effect structure of nomothetic or law-governed explanation.

In his most important later statement on these questions, “The Theory of Complex Phenomena,” [bibliography, A-109], Hayek tells us that, because social life is made up of complex phenomena, “economic theory is confined to describing kinds of patterns which will appear if certain general conditions are satisfied, but can rarely if ever derive from this knowledge any predictions of specific phenomena.”52 If we ask why it is that social phenomena are complex phenomena, part of the reason at any rate lies in what Hayek earlier characterized53 as the subjectivity of the data of the social sciences: social objects are not like natural objects whose properties are highly invariant relatively to our beliefs and perceptions; rather, social objects are in large measure actually constituted by our beliefs and judgments. Social phenomena are non-physical, and Hayek has stated that “Non-physical phenomena are more complex because we call physical phenomena what can be described by relatively simple formulae.”54 And, because of the subjectivity of its data, social life always eludes such simple formulae.

Hayek's Opposition to Apriori Science

A number of points may be made briefly about Hayek's conception of method in social and economic theory. First, whereas he follows his great teachers in the Austrian tradition in emphasizing the subjective aspects of social phenomena, Hayek's methodology of social and economic science does not belong to that Austrian tradition in which social theory is conceived as an enterprise yielding apodictic truths. Specifically—contrary to T. W. Hutchinson, who periodizes Hayek's work into an Austrian praxeological and a post-Austrian Popperian period, and also contrary to Norman P. Barry who sees both trends running right through Hayek's writings—Hayek never accepted the Misesian conception of a praxeological science of human action which would take as its point of departure a few axioms about the distinctive features of purposeful behavior over time. In the Introduction to Collectivist Economic Planning [E-5, 1935] and elsewhere in his early writings, Hayek had (as Hutchinson notes) insisted that economics yields “‘general laws,’ that is, ‘inherent necessities determined by the permanent nature of the constituent elements.’”55 As Hutchinson himself acknowledges in passing, however, such laws or necessities function in Hayek's writings as postulates (rather than as axioms), and they continue to do so even in his later writings, in which (as I have already noted) a suspicion of the nomothetic paradigm of social science is expressed. It is clear from the context of the quotations cited by Hutchinson that, in speaking of the general laws or inherent necessities of social and economic life, Hayek meant to controvert the excessive voluntarism of historicism, which insinuates that social life contains no unalterable necessities of any sort, rather than to embrace the view that there can be an apriori science of society or human action. To this extent Barry is right in his observation that, “there is a basic continuity in Hayek's writings on methodology.”56 Certainly there seems little substance in a periodization of Hayek's methodological writings by reference to the supposedly Popperian paper of 1937 on “Economics and Knowledge” (A-34).

At the same time, there seems little warrant for Barry's claim that throughout his work Hayek tries “to combine two rather different philosophies of social science; the Austrian praxeological school with its subjectivism and rejection of testability in favour of axiomatic reasoning, and the hypothetico-deductive approach of contemporary science with its emphasis on falsifiability and empirical content.”57 For there is no evidence, so far as I know, that Hayek ever endorsed the Misesian conception of an axiomatic or apriori science of human action grounded in apodictic certainties. Again, as we have seen, Hayek's view that the social sciences are throughout deductive in form antedates Popper's influence and is evidenced in the Introduction to Collectivist Economic Planning [E-5, 1935].

Popperian ‘Conjectures & Refutations’

Hayek's real debts to Popper are, I think, different from those attributed to him by Hutchinson and Barry. It is not that Hayek under Popper's influence abandoned an apodictic-deductive method that was endorsed (in different versions, Kantian and Aristotelian) by Mises and Menger, but rather that he came to adopt Popper's proposal that falsifiability be treated as a demarcation criterion of science from non-science.58 Again, Hayek follows Popper in abandoning his earlier Austrian conviction that there is a radical dualism of method as between natural and social science: this conviction, he tells us, depended on an erroneous conception of method in the natural sciences: as a result of what Popper has taught him, Hayek says, “the differences between the two groups of disciplines has thereby been greatly narrowed.”59 Hayek's debts to Popper are, then, in his seeing that it is the falsifiability of an hypothesis rather than its verifiability which makes it testable and empirical, and, secondly, in his acknowledging the unity of method in all the sciences, natural and social, where this method is seen clearly to be hypothetico-deductive.

Even in these Popperian influences, it is to be noted, there are differences of emphasis from Popper himself. Hayek anticipates Lakatos in perceiving that the theoretical sciences may contain a “hard core” of hypotheses, well-confirmed and valuable in promoting understanding of the phenomena under investigation, which are highly resistant to testing and refutation.60 And Hayek explicitly states that in some fields Popper's ideas of maximum empirical content and falsifiability may be inappropriate:

It is undoubtedly a drawback to have to work with theories which can be refuted only by statements of a high degree of complexity, because anything below that degree of complexity is on that ground alone permitted by our theory. Yet it is still possible that in some fields the more generic theories are the more useful ones...Where only the most general patterns can be observed in a considerable number of instances, the endeavour to become more 'scientific’ by further narrowing down our formulae may well be a waste of effort...61

In general, then, it seems fair to hold that Hayek acknowledges that the proper method in social and economic studies, as elsewhere, is the hypothetico-deductive method of conjectures and refutations set out by Popper. On the other hand, he continues to recognize that in respect of complex phenomena such as are found in the social studies, testability may be a somewhat high level and protracted process, and the ideal of high empirical content captured in a nomothetic framework—a demanding and sometimes unattainable ideal.

[51.] Hayek, µB-13Õ, Studies, p. 40.

[52.] Hayek, µB-13Õ, Studies, p. 35.

[53.] See F. A. Hayek, µB-9Õ, The Counter-Revolution of Science, Indianapolis: Liberty Press, 1979, Chapter Three.

[54.] Hayek, Studies, p. 26.

[55.] Quoted by T. W. Hutchinson, The Politics and Philosophy of Economics, Oxford: Basil Blackwell, 1981, p. 214.

[56.] Norman P. Barry, Hayek's Social and Economic Philosophy, London: MacMillan, 1979, p. 41.

[57.] Barry, Hayek, p. 40.

[58.] Hayek, µB-17Õ, New Studies, pp. 51-52.

[59.] Hayek, µB-13Õ, Studies, p. viii.

[60.] Hayek, µB-13Õ, Studies, p. 6: “while this possibility µof falsificationÕ always exists, its liklihood in the case of a well-confirmed hypothesis is so small that we often disregard it in practice.”

[61.] Hayek, µB-13Õ, Studies, p. 16.