The Methodology of the Austrian School Economists

The member of the Austrian School who has produced the most subtle and detailed critique of the notion that the social sciences should ape the methods of the physical sciences—an idea he calls “scientism”—is F.A. Hayek. The data of the social sciences are of necessity subjective, he writes, for they deal “not with the relations between things, but with the relations between men and things or the relations between man and man.”75  Hayek has developed the insight of Menger into a comprehensive indictment of the objectivism, collectivism, and historicism which stem from the scientistic approach to social phenomena in his lengthy essay “Scientism and the Study of Society,” reprinted in The Counter-Revolution of Science.

Hayek has also continued Menger’s concentration on the role of information and knowledge in the process of economic decision-making.76  Menger, despite the “exact” nature of economic laws, suggests the impossibility of a “strict regularity of economic phenomena, what we would call equilibrium, due to the fact that economic men are so often “in error about their economic interest, or in ignorance of economic conditions.”77  Menger’s concept of “error about their economic interest” stems from his consideration of needs as an objective factor. But by pointing out the implications of incomplete information for equilibrium analysis, he clearly inspired Hayek’s analysis, in the 1936 address “Economics and Knowledge, of limited knowledge and divergent expectations.

Menger continues his last-quoted statement: “The presupposition of a strict regularity in economic phenomena, and with this of a theoretical economics in the full sense of the word, includes not only the dogma of ever-constant self-interest, but also the dogma of the ‘infallibility’ and ‘omniscience’ of men in economic matters.”78  The formalism of Mises supplies the “dogma” of ever-constant self-interest by interpreting self-interest in a subjectivist way.79  But Hayek is sharply critical of the assumption of perfect information, which he recognizes as “just another way of saying that equilibrium exists but does not get us any nearer an explanation of when and how such a state will come about. It is clear that, if we want to make the assertion that, under certain conditions, people will approach that state, we must explain by what process they will acquire the necessary knowledge.”80

The market economy for Hayek is an information-gathering process, and this concept springs directly from his subjectivist outlook. In the task of using “available” resources to satisfy “existing” needs, “neither the ‘available’ resources nor the ‘existing’ needs are objective facts.” Resources and needs “exist for practical purposes only through somebody knowing about them.” The fact that each individual’s knowledge is limited and specialized means that “a successful solution . . . must be based on a method of utilizing the knowledge dispersed among all members of society. . . . This is precisely the function which the various ‘markets’ perform.”81  This analysis forms the basis for the Mises-Hayek argument concerning the impossibility of efficient socialism.

To assume perfect information is thus to assume away the very phenomenon supposedly under study, the market process. For the market process, Hayek points out, is a process of discovery unfolding through time.82

The subjectivism of Austrian theory, writes Lachmann, “needs the dimension of time, since all human action is only possible in time. The Lausanne theory of equilibrium not only does not require time; it requires time’s exclusion.”83  Time as an important factor was an innovation in economic theory by the Austrian theorists. Neither the classicists nor the Marxists had given it an important role. Menger views economic activity as planning for the future and discusses the range and scope of human forethought.84  In Böhm-Bawerk’s capital theory, time is of central importance. Hayek finds the passage of time impossible to exclude from a meaningful equilibrium theory, “since equilibrium is a relationship between actions, and since the actions of one person must necessarily take place successively in time.”85

Hayek spins out yet another important strand of Menger’s thought in his explanation of social institutions as the “results of human action but not of human design.”86  In this explanation he adopts the “compositive method” of “methodological individualism” that both he and Menger advance in their distinction between the natural and the social sciences. This distinction for Hayek springs directly from the subjective approach:

While in (the social sciences) it is the attitudes of individuals which are the familiar elements and by combination of which we try to reproduce the complex phenomena, the result of individual actions, which are much less known—a procedure which often leads to the discovery of principles of structural coherence of the complex phenomena which had not (and perhaps could not) be established by direct observation—the physical sciences necessarily begin with the complex phenomena and work backwards to infer the elements from which they are composed.... While the method of the natural sciences is in this sense analytic, the method of the social sciences is better described as compositive or synthetic. It is the so-called wholes, the groups of elements which are structurally connected, which we learn to single out from the totality of observed phenomena only as a result of our systematic fitting together of the elements with familiar properties, and which we build up or reconstruct from the known properties of the elements.87

 

The familiarity of these elements, being subjective in nature, is the result of that procedure common to Austrian economists, introspection. Hayek emphasizes that, unless we adopt a purely behavioristic stance, such a procedure is unavoidable. The nature of social phenomena is such that they “are accessible to us only because we can understand what other people tell us and can be understood only by interpreting other people’s intentions and plans. They are not physical facts, but the elements from which we reproduce them are always familiar categories of our own mind.”88

While sharing the subjectivist and methodological dualist positions of Menger and Mises, Hayek diverges from them on matters of epistemology. In particular, Hayek has distanced himself from Mises’ apriorism by accepting the philosopher of science Karl Popper’s principle that the hallmark of any scientific theory is its openness to empirical falsification.89  In “Economics and Knowledge” Hayek defers to Mises on the a priori validity of the “Pure Logic of Choice” (praxeology) applied to individual plans, but argues that praxeology cannot explain interactive social processes without empirical or “ideal type” assumptions concerning the way in which individuals acquire knowledge, form expectations, and learn from their social experiences. Such empirical assumptions are to Hayek’s view particularly necessary for an economist who wishes to assert that market equilibrium will tend to come about. It is only by asserting the existence of a tendency toward equilibrium “that economics ceases to be an exercise in pure logic and becomes an empirical science.”90

Hayek’s divergence from the praxeological viewpoint has not been so complete or so sudden that “Economics and Knowledge” may accurately be said to mark the emergence of a “Hayek II” who has rejected the bulk of the Misesian ideas on method that had influenced “Hayek I.”91  Yet Hayek’s methodological writings since the 1930s have undeniably shifted toward Popper and away from Mises.

• 75F.A. Hayek, The Counter-Revolution of Science (Glencoe, IL: The Free Press, 1952), p. 25. Hayek continues the attack on scientism in his Nobel lecture, “The Pretence of Knowledge”, in New Studies in Philosophy, Politics, Economics, and the History of Ideas (Chicago: University of Chicago Press, 1978), pp. 23-34.
• 76See E. Streissler and W. Weber, “The Menger Tradition,” in Hicks and Weber, eds., Carl Menger and the Austrian School of Economics, p. 231.
• 77Menger, Problems of Economics and Sociology, p. 84.
• 78Problems of Economics and Sociology, p. 84.
• 79Mises, Epistemological Problems of Economics, ch. 4.
• 80Hayek, “Economics and Knowledge,” in Individualism and Economic Order (Chicago: Henry Regnery, 1972), p. 46
• 81Hayek, The Counter-Revolution of Science, p. 99. Also see Hayek, “The Use of Knowledge in Society,” in Individualism and Economic Order.
• 82Hayek, “Competition as a Discovery Procedure,” in New Studies, pp. 179-190; “The Meaning of Competition,” in Individualism and Economic Order, pp. 92-106. See also Israel Kirzner, “Methodological Individualism, Market Equilibrium, and Market Process,” Il Politico 32 (Dec. 1967).
• 83Lachmann, “The Significance of the Austrian School,” p. 54.
• 84See Hayek, “Carl Menger,” p. 18.
• 85Hayek, “Economics and Knowledge,” pp. 36-37.
• 86Hayek, “The Results of Human Action but Not of Human Design,” in Studies, pp. 96-105.
• 87Hayek, The Counter-Revolution of Science, pp. 38-39.
• 88Hayek, “The Facts of the Social Sciences,” in Individualism and Economic Order, p. 75.
• 89See, for example, “The Theory of Complex Phenomena,” in Studies, p. 41, where Hayek identifies “scientific” with “theoretical and falsifiable” and cites Popper. See also his praise of the Popperian demarcation principle in “The Pretence of Knowledge,” p. 31. Mises, in The Ultimate Foundation of Economic Science, pp. 69-70, argues that the falsifiability criterion is not relevant to the theoretical sciences of human action, where there are no experimentally established facts. He adds that if its a priorism makes praxeology “unscientific,” the same may be said of mathematics. This is another instance of Mises’ strict separation of theory from history.
• 90Hayek, “Economics and Knowledge,” p. 44; see also pp. 33-36, 46-47. For an illuminating discussion see Israel M. Kirzner, “Hayek, Knowledge, and Market Processes,” in Perception, Opportunitv, and Profit (Chicago: University of Chicago Press, 1979), pp. 13-33. If we are right in attributing to Mises the position that hypotheses concerning agents’ perceptions are among those empirical auxiliary assumptions whose applicability must be verified in any historical (or “empirical”) work using the praxeological laws based on them, then Mises and Hayek are perhaps not so far apart on this issue.
• 91This suggestion is made by T. W. Hutchison, The Philosophy and Politics of Economics: Keynesians, Marxists, and Austrians (New York: New York University Press, 1981), p. 215 et seq. Hutchison neglects, the fact that Hayek has continued even since 1937 to uphold subjectivism, methodological dualism (though less categorically), and methodological individualism, particularly in “The Facts of the Social Sciences” and The Counter-Revolution of Science.