Tuesday, May 09, 2006


Food for thought

This post is motivated by Hans-Hermann Hoppe's "Economic Science and the Austrian Method":

For something, anything to be explained by empirical research, i.e. gained empirical knowledge, then the initial proposition much necessarily have to be either fasifiable or provable through observation. Understanding this, economic laws can not be understood through empirical research, otherwise they would not be laws, since they could be falsifiable at any time in the future.

The Austrians, at least some anyways, believe that it is folly to empirically test economic laws, all of which derive from Mises's axiom of action. Hoppe cited a few here:

Whenever two people A and B engage in voluntary exhange, they must both expect to profit from it. And they must have reverse preference orders for the goods and services exchanges so that A values what he receives from B more highly than what he gives to him, and B must evaluate the same things the other way around.

Or, consider this: Whenever an exhange is not voluntary but coerced, one party profits at the expense of the other.

Or the law of marginal utility... Or take the Ricardian law of association...

Or as another example: Whenever minimum wage laws are enforced that require wages to be higher than existing market wages, involuntary unemployment will result.

Or as a final example: Whenever the quantity of money is increased while the demand for money to be held as cash reserve on hand is unchanged, the purchasing power of money will fall.

Hoppe furthers that the only way to know these laws is through rigorous logical formulation. He uses an analogy to make this point:

...it is as if one wanted to establish the theorem of Pythagoras by actually measuring sides and angles of triangles. Just as anyone would have to comment on such an endeavor, mustn't we say that to think economic propositions would have to be empirically tested is a sign of outright intellectual confusion?

Although I am not sure if I fully buy into that, I think he makes a valid point on empirical understandings and their necessary limitations. I think it is fair to empirically test observations in an attempt to find new laws, but without the logical justification and formulation of new theories, they can only survive as theories.

I think the distinction between categorical decisions and incremental ones is helpful here again. Some decisions require incrementally measured data, like how much gas will it take for me to drive to my vacation destination? What cannot be known empirically is categorical, do I prefer to vacation in the mountains or by the ocean? What may lie under this decision may be even less empirical: I like to fish and eat what I catch. I prefer trout to crab. I will vacation in Boone.
But theory is valueable in making decisions, and is, at its root, based upon precedent. For the last six years I have spent two weeks at the beach. This year I might be expected to do the same. But, alas, to Boone I go, and the theory is broken.
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