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-Sanchez: Welcome to the Mises Academy podcast. I'm Danny Sanchez, director of online learning
at the Music Institute.
I recently appeared on the Tom Woods show to discuss economic methodology,
and I thought you'd like to hear it. A great resource for high schoolers on this
topic is
"An Introduction to Economic Reasoning" by David Gordon.
You can get a free copy of this book by enrolling yourself,
or your high schooler in the online course, Basics of Economics:
Introduction to the Free Market by Robert P Murphy, which starts in January
at Academy.Mises.org. The book,
along with the course will be a great Christmas gift to the young economist in
your family.
-Woods: We're gonna turn to our friend Danny Sanchez because we're going to talk today about
how the Austrian economists, members of the Austrian School of economics,
do economics. Because you sometimes hear, 'oh the Austrians, they're not scientific,
they don't use statistics or whatever.' Well, they do use statistics, the question
is what do you use them for?
So, we're going to talk today to Danny Sanchez who is the director of the Mises
Academy, You all know Mises is spelled M-I-S-E-S.
The Mises Academy is the online learning platform of the Mises Institute
and of course you can find the Mises Institute at Mises.org
and the Mises Academy at academy.mises.org,
and he's also the author of many important
articles including the one we're going to be talking about today. Mises on Mind and Method,
which is a paper explaining the economic method of Ludwig von Mises.
We're going to have a link to that article in the show notes for this episode. So Danny
Sanchez
thanks for taking some time with us today to talk about a
sort of complicated, but nevertheless important topic.
-Sanchez: Thank you for having me, I love your show, I listen to every single episode, so i'm so glad to be on.
-Woods: Well thanks, thanks,I appreciate that.Now
let's- I wanna talk today as I said in the introduction here,
about this whole question of Austrian Economics ad
is it unscientific and what is what is Mises' method of
doing economics and is this some kinda odd ball method that only a weirdo
would use. These are sorts of things that come up
on the internet quite a bit and you get the sense that a lot of people talking
about a probably haven't read Mises epistemological works.
You get the sense they've learned it from three sentences they saw quoted
by some guy once. So, I wanted to get
you on here because you've written about this so effectively
and I want to explain first of all, let's I guess start from the
beginning here.
Let's explain what is the nature of the
dispute in general. What is this argument all about
when it comes down to what Mises believed the economy or how
Mises believed the economist should pursue his craft. What's difference
between Mises and what the sort of man on the street might
think is the way an economy should operate? well you mention scientific and
-Sanchez: Well, you mention scientific and that reminds me of
a funny thing that happened a couple of years ago. Tom DiLorenzo
went to testify to the House Subcommittee on
Domestic Monetary Policy, and congressman
William Lacy Clay accused
Austrian economics of lacking what he called scientific rigor
And the reason for that was because he said it uses
deductive reasoning. So, I think it's so funny
this mccarthyite type situation where he saying, is it true sir, that you are
part is a group of people who use- dun, dun dun, logic?
-Woods:You're right, can't have that.
So in other words, it's a question
of deductive verses inductive reasoning and a question of
which type of reasoning is appropriate to a given discipline,
and the question that Mises is trying to answer is,
well I'm interested in economics, which approach
makes more sense? The approach we would use in geometry or in a legal theory,
for example,
or is it better to try to gather data in the scientific method sort of
way
and go into economics sort of
agnostic, and then see if we can derive general principles from observing
empirical data. Is that more less it?
-Sanchez: Yes, you mentioned geometry and
that's a really important comparison because
the thing is that, people often will say well,
if you are not subjecting your propositions to
empirical tests, then basically that's a dogma.
And so basically, that's a religion. Which,
I wonder if they would accuse geometry of being a
religion. I mean geometry
also doesn't put its propositions
to the test of experience in general.
Geometry is what is called
aprioristic,
and that's kind of a strange word,
but basically that means that the series of
geometry logically deduced,
is prior to
any kind of experience. So, any kind of experience with
measurements of objects in reality
that Euclid elements,
the system of geometry logically deduced,
doesn't depend on the measurements that we take
of real-world objects, and
they can't be invalidated by such measurements.
And that is not a controversial idea.
It's not just Austrian surveyors and Austrian engineers
who treat geometry as prior to
their use
prior to dealing with the real world objects.
So it's not to be
just laughed out of court just because it's considered prior to experiment.
-Woods: So, in other words nobody would say, 'Hey you dogmatic geometer,
you're telling me that you believe that the sum
of the squares of two sides of a right
triangle
equals the square of the hypotenuse and you haven't measured a single triangle
to verify this? Like, what's the matter with you?
But, nobody would have to act that way. Nobody would be,
frankly, stupid enough to act that way. So the question becomes then,
what is most appropriate, what kind of approach-
We all see that an empirical approach to geometry
makes no sense. It is ridiculous and fails to understand the nature of
geometry, but
why- what would make us think that the nature of economics is such that the
method would be similar?
-Sanchez: Right, there there really isn't any good reason
to think that because the
contrast to geometry is the method applied to the natural sciences,
and the natural sciences- the phenomenon that
they're describing are characterized
by regularity.
But human action is not characterized by
strict regularly. Where just because
you see phenomena happen in certain conditions
in the past, it necessarily must happen
in the future. And so, Mises showed
how the characters of economics is more
akin to geometry especially because
just like with geometry, there are certain
implications that are bundled up
in the basic concerts
that everyone introduces into their reasoning.
-Woods: Let me jump in here because this is a good starting
point for the whole analysis here.
So, Mises uses the term a priori or synthetic a priori. That we can have a
statement that's meaningful,
and yet that we can know prior to to all experience
and so the action axiom is an example of the synthetic a priori. So can you explain
that, first of all, what's the action axiom and
what do we mean that it's an example of a synthetic a priori statement,
and by the way, to people listening today, you had no idea how awesome this
podcast gonna be, did you? Now you're
hearing about synthetic a priori statements? The people just gonna love you now.
-Sanchez: Okay well,
an a priori statement is something that is
prior to experience, and the
synthetic a priori statement basically is getting
towards the fact that it applies to something
in the real world. And that is something that is characteristic to
Austrian economics, that it's very
realistic, that it does apply directly
to the real world, as opposed to certain other schools
of economics. Now, the action axiom basically
is that human action exists,
or that man acts. And actually, a funny thing that
not a lot of people are aware of, is that Mises himself never used to
the term action axiom.
He never posited it as a proposition
that man acts. He called it a category action
so she focused on just the the concept itself of
action and what can be
logically deduced from
even thinking in terms of action, in any case.
And so what can be unpacked from
the concept of action. And so
the thing is, is that every thinker
of social sciences, of all schools, not just the Austrian
school, that they've introduced
concepts, especially action
that have certain implications that necessarily follow
from it. So, a lot of people get caught up
in phrasing it in terms of the action axiom, and they challenge
critics of Austrian economics and critics of the free-market
by- first starting off by saying, 'okay, well if you think
man acts-' and then what happens is that the conversation
get sidetracked in all these orders meta philosophical
objections and ruminations on
on the rationality of man, but really you don't even have to put that proposition
to that.
You can just point out that your opponent
in his own discussions of human society
is himself positing action.
And if he's positing action, then he has to accept
the logical implications that necessarily come
from action. So, for example,
there are certain things that without which,
the idea of action would be incoherent,
for example, time. Try to think of
an action that didn't involve time. The human mind can even fathom
such a concept, and so time is an implication of-
the logical implication of actions.
Also, the notion of
the perfect conditions in light of
actors judgment. That
if a person didn't think that
conditions would be imperfect
without his intervention, that he wouldn't act.
The very notion of a person expecting
perfect conditions with or without his action
actually acting, you can't even imagine why such a person
would act. So, these are some basic
logical and necessary implications of action,
and any social science thinker
who even discusses in terms of action
to be even logically coherent has to accept these occasions.
-Woods:All right, now maybe to make this a little bit more concrete for
people
other implications of the action axiom,
which says that man acts, or that, in other words, that man
uses means to pursue his goals. That people have goals. That's basically
what
is being said here. There are very clear
economic implications of this, that everybody can understand. For example,
that cost exists because in every time that I act, I'm implicitly
setting aside other things that I might have done. So, if I sit here and eat a ham
sandwich,
I am setting aside flying a plane at the same time.
If I'm spending my afternoon on a park bench
eating a sandwich, I cant also be flying an airplane.
So, I'm choosing and setting aside, and then in choosing and setting aside and
demonstrating that I prefer one thing over another.
So here we have the idea that there are value scales in my mind,
and I have a video online where I start with the action axiom
and I end up showing people how supply-and-demand curves are derived,
where the law marginal utility comes from, and it all
just comes from explaining the implications of the
seemingly uninteresting statement that human beings act.
-Sanchez: Exactly. Mises argued that all means,
or you could also say goods are necessarily scarce,
and by scarce he means that the quantity
available for the good is outstripped
by the goal that a person has in mind for it.
So the very concept of using something
that is scarce, necessarily implies
the notion of, as he said, pursuing some and with it
and leaving other ends on pursuit.
So, action with regard to scarce means
necessarily involves choice. Pursuing some
and setting aside other ends. And a further implication of that
is that when a quantity of a good
is lost to the actor, then the actor
will sacrificed certain ends,
certain goals. Now, the goals that are sacrificed
are, by definition valued less
than all the goals that he did not sacrifice,
and from this reasoning a thinker can deduce
the law of marginal utility.
And this law is bound up in the very
notions of action and means
and scarcity. And you can derive it and like you said you to derive it
in your lecture and that's what Austrian economists are basically doing.
-Woods: Now, is this some
freakishly odd thing that only Austrians do,
or is in fact can we find in the history of economic thought, that
maybe I realize I'm stacking the question, but me that this was in fact
the completely mainstream approach to doing economics until quite recently?
-Sanchez: Yes, Mises argued that throughout the history
of economic thought, this is basically the message
that economist largely pursue,
even though in their writings on methodology,
where they're talking about methodology, they don't necessarily
endorse it, but in practice when the kind of reasoning that they were doing
is theoretical reasoning like we're discussing here.
And there are examples some
some economist prior to the Austrian School
that actually we're pretty much explicit praxeologists.
So, praxeology is this idea of just
theorizing from the basic concept of action and Rothbard-
Murray Rothbard covers some of these examples in his
Austrian Perspective on Economics treatise which is a
fascinating read. Another thing
that- you might think that a lot of this
is just very vague, very general.
Okay, so if you just think about just
the general concept of action then you can come up with
very very general conclusions,
but how does that help us in
studying the complex world, where it's not just
that you know that people are acting, but that you know that people are acting in
certain ways.
But that's also part of praxeology for Mises
because what we need to do
is then think about certain modes
of action. So we need to
restrict our notion of action
by certain assumptions and we think of
different ways in which people
can act. So for example, people can think of
interpersonal exchange
and so that's not property of
all human action. You can imagine a sort of Robinson Crusoe just sitting on
this island and has no one to exchange with.
But you can
posits certain assumptions about
what you're theorizing about and you can say, okay let's say that there's another
person. Let's say that Friday is on the island
with him and they can interpersonally exchange.
Now, there are some logical implications
to where even just thinking about
that restricted kind of action,
necessarily has certain logical implications.
So for example, one logical implication is that
both Crusoe and Friday
mutually benefit or expect to mutually benefit
from the exchange because if they didn't expect
to benefit, why would they do the exchange anyway?
But, by definition, they expect to benefit. So, that's one thing that you can know, that
from the very concept of exchange necessarily
must be true. And then like you said you do in your lecture,
that you could take the concept of exchange,
apply the law of marginal utility to that and other concepts,
and then, for example, derive the law a
demand. And you can use that kind of reasoning
to construct price theory, and then use
the reasoning of price theory
to construct a profit and loss series.
And so, this is the way the Austrian economist operates.
-Woods: Now, what about the objection that
people will say, 'yeah, yeah, yeah, this sounds fine and everything but the
real problem with you Austrians is that you're so dogmatic in your beliefs
because of your, so called,
praxeology and your deductive reasoning and all this fancy stuff,
that you won't even admit statistics into your analysis. I mean really,
what kinda thinker doesn't even use statistics?' Now, is it true that Austrians
just
belligerently refuse to use statistics? Like, what exactly is the relationship
between Austrians and statistics?
-Sanchez: Well, they do use statistics for economic history.
They don't use statistics to support their theory,
but they use theory in
combination with statistics, to understand
what actually happened in the past.
And so this gets at on the comparison between
geometry and economics.
So, let's say that a geometry teacher
assigns you to derive the measurements
of a archaeological ruin, and this
part of this ruined buildings happens to have
the characteristics of a right triangle on one if its faces.
And now, let's say that you only
are able to directly measure certain parts of the ruin,
and the geometry teacher signs you the task
of using the laws- the theorems of geometry
to derive the other measurements.
Now, let's say that
you do that
and then you find out that the measurements
don't jibe with your understanding of the Pythagorean theorem.
And you return to the teacher
to denounce the orthodoxy and dogma of
pythagorean and to proclaim your
heterodox rival
theorem about right triangles that is based on your
measurements of this ruin. Now,
that is akin to
an Austrian economics teacher assigned you to gather statistics
to help you in economic history.
But then, when you gather your statistics
you decide that you think that this doesn't jibe with
Austrian economic theory and so you go back to your teacher
and you say I have-
I'm denouncing the orthodoxy and dogma
of Mises and Rothbard.
And then you try to have your own alternative theory just based
on your statistics. Now if think about
the way that every geometry teacher
would respond to that student, it gives you an idea of the way
that an Austrian economist would respond to a similar student.
So, there are a few possibilities that
both students are making
fundamental errors. For the geometry student for example,
maybe he doesn't actually know the Pythagorean theorem. Maybe he tryed to
derive it in a certain way
and he messed up. He didn't reason
correctly and so he decides that he thinks that the Pythagorean theorem
is that A squared plus B squared equals
C cubed, for example.
And so that's why
his measurements don't jibe with he thinks of as the Pythagorean
theorem
because he doesn't actually know the Pythagorean theorem, he derived it
incorrectly. So,
let's say that he actually measures artifact
and from his measurements he finds out that in that one case
A squared plus B squared did equal C squared,
well that gives him a clue that his
reasoning was faulty,
but those measurements themselves do not
substitute for correcting the reasoning itself.
You can't just say, 'I know now that A squared plus B squared equals C squared
because I did these measurements.' What you have to do is use that as a hint,
and then go back to your desk and your pencil and paper
and then re- and then derive the correct Pythagorean theorem
using validly recent proof.
Now, the parallel of that is
an Austrian economist who doesn't actually
know the correct theory that he- and trying to derive his own theory
that he reasoned incorrectly.
And so, that's the problem is that-
are that's why that statistics don't jibe with his theory because
his theory is wrong, and he needs to correct his theory through
re-reasoning. You can't just rely on the statistic.
Now, another possibility
is that it's not a right triangle at all. So,
maybe the Pythagorean theorem doesn't even apply.
Maybe it's not even relevant to the situation that he's considering,
and so that would be equivalent to
supplying an irrelevant theory to a certain
economic set of statistics. So, maybe
if you, for example, try to apply the theory of economic calculation
to a barter society when it doesn't even apply because
economic calculation only applies to market society, for example.
So, basically what that means is that
so every logical proof has premises and a conclusion,
but the conclusion is only certain if the premises are given.
And so, his problem with
the fact that he's not even dealing with a right triangle is that
the premises involved in the Pythagorean theorem aren't
even given in the situations. So, of course the conclusion of the Pythagorean
theorem
doesn't apply to this particular situation.
And finally, another possibility, of course,
is that the student just mis-measured. So, the student just made-
had human error in trying to take some measurements of
the artifacts and that's similar to just bad economic statistics.
-Woods: Well, Danny Sanchez we're just about out of time. So, I appreciate you
guiding us through what may seem tricky to the beginner, but
if you read missus stuff on this is actually not
impossibly difficult to to manage in on the tom was radio dot com
side next to this particular program we're gonna make sure the link to your
article specifically on meese's on mind and method which will help people to
understand the sort of things and then serve unoccupied themselves
again sum up the ill-informed attacks that you might encounter
online from time to time so Danny thanks so much for being here
take you in just to mention that in that article but for
ideas that I i reference in this interview II link them to
particular quote in missus is works aware he makes these points
great thank you thank you so much okay thanks
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