In this paper I will argue that Popper supported the Austrian school of economics in three ways. First, his theory of metaphysical research programs shows that the Austrian program cannot be dismissed as "unscientific" quite as easily as many critics suppose. Some of the so-called a priori principles of Austrian economics can be regarded as working assumptions, either methodological or metaphysical postulates, of the kind that occur in all sciences. These need to stand up to criticism but they do not have to be testable or falsifiable.
Second, the method of situational analysis and the rationality principle which Popper advocated for the explanation of events in the social sciences is practically identical to the Austrian approach which is labelled "praxeololgy" (the logic of action).
Third, in addition to supporting in principle the use of a metaphysical framework for analysis, Popper championed some particular metaphysical assumptions that provide a congenial framework for the Austrian approach. In other words, Popper and the Austrians are metaphysical fellow travellers.
Part I provides a brief introduction to the Austrian school of economics. Part 2 sketches Popper's views on the function of methodological conventions and metaphysics in shaping and directing research programs. It also indicates some elements of the program that flows from his own work. Part 3 describes how Popper's ideas provide support to the Austrians. An addendum shows how Larry Boland anticipated some of these ideas.
The Austrian School of Economics
The leading features of the Austrian tradition include methodological individualism, the origin of social institutions as the unintended consequences of human action, the salience of dynamic competition and entrepreneurial innovation in the marketplace, the subjective theory of value, recognition of the time factor in social and economic processes, and the uncertainty of human knowledge. Vaughn (1990) identified three recurring themes in Menger's major text (1) knowledge and plan, (2) the primacy of process, and (3) spontaneous order and the progress of civilization. The most distinctive feature and the one that has created the most problems for them in gaining acceptance in the mainstream of modern economics is the concept of praxeology, of which more in a moment.
The founding fathers of the school were by Carl Menger (1840-1921), Friedrich von Wieser (1851-1926) and Eugen von Bohm-Bawerk (1851-1914). Their busts are displayed on three consecutive pillars in the quadrangle of the old Vienna University and people who attended the Popper Centenary Conference may recall them, near the book displays. Menger is usually named with Walras and Jevons as a leader of the Marginalist Revolution although his approach was very different from theirs.
Major contributors to the Austrian tradition were Knut Wicksell (1851-1926), Ludwig von Mises (1880-1973, Lionel Robbins (1898-1984),Friedrich A. Hayek (1898-1994) and Murray Rothbard (1926-1995). Contemporaries include Ludwig Lachmann and Israel Kirzner The Austrian tradition appeared to be firmly placed in the mainstream of the economics profession until Keynes captured the field in the 1930s and the Austrians became practically invisible until the movement staged a revival in the 1970s. Vaughn (1990) provides an excellent timetable and summary of the reasons for the fall and rise of the school. The leading stronghold of Austrian thought at present is the Mises Institute and other centres with a significant Austrian presence include the Institute of Humane Studies, the George Mason University and the Cato Institute [Note 1].
Several factors contributed to the eclipse of the Austrian tradition. First, economics fell under the spell of mathematical analysis, as described by Ingrao and Israel (1987, 1990), and this distracted attention from real market processes where the Austrians focus their attention [Note 2]. Second, the subjectivism and methodological individualism of the school were widely misrepresented as either a psychological approach or as an indefensible form of ontological individualism, a claim that only atomistic individuals existed, independent of social contexts and historical influences. Third, many of the leading Austrians, especially Mises, taught that the undesirable consequences of state intervention in markets far outweigh the intended effects and this put them at odds with all progressive social movements up to the present time. Finally, both positivism and falsificationism in the philosophy of science seemed to rule out some of the basic principles of the Austrian approach, most especially the doctrine of praxeology.
As described by Rothbard (1976):
Praxeology is the distinctive methodology of the Austrian school. The term was first applied to the Austrian method by Ludwig von Mises, who was not only the major architect and elaborator of this methodology but also the economist who most fully and successfully applied it to the construction of economic theory.
Rothbard claimed that this was the basic method of the earlier Austrian school (Menger et al) and of some members of the earlier classical school including J B Say and N W Senior.
Praxeology rests on the fundamental axiom that individual human beings act, that is, on the primordial fact that individuals engage in conscious action towards chosen goals [in contrast with reflex or knee-jerk behaviour], furthermore, since praxeology begins with a true axiom, A, all the propositions that can be deduced from this axiom must also be true. For if A implies B, and A is true, then B must also be true (ibid).
Rothbard noted that praxeology does not assume that people are wise and proper in their choice of goals, or that they necessarily select the technologically appropriate manner of reaching them. He emphasised that all action in the real world takes time and the future is uncertain, though the actor believes that the action will make a difference for the better.
Rothbard asserted that these propositions are deducible from the axiom of purposeful action (in a real world of time and uncertainty).
Apart from the fact that these conclusions cannot be tested by historical or statistical means, there is no need to test them since their truth has already been established.
Turning to the establishment of the axiom, there was a difference of opinion in the camp.
Ludwig von Mises, as an adherent of Kantian epistemology, asserted that the concept of action is a priori to all experience, because it is, like the law of cause and effect, part of 'the essential and necessary character of the logical structure of the human mind'. I would deny, as an Aristotelian and neo-Thomist, any such alleged laws of logical structure [in] the human mind]. Instead, I would call all such laws 'laws of reality' which the mind apprehends from investigating and collating the facts of the real world. My view is that the fundamental axiom and subsidiary axioms are derived from the experience of reality and are therefore in the broadest sense empirical (ibid).
In addition to the foregoing considerations, (1) [the axioms] are so broadly based in common human experience that once enunciated they become self-evident and hence do not meet the fashionable criterion of falsifiability; (2) they rest, particularly the action axiom, on universal inner experience, as well as on external experience, that is, the evidence is reflective rather than purely physical; and (3) they are therefore a priori to the complex historical events to which modern empiricism confines the concept of experience (ibid).
On the relationship between praxeology and other disciplines
In brief, praxeology consists of the logical implications of the universal formal fact that people act, that they employ means to try to attain chosen ends. Technology deals with the problem of how to achieve ends by the adoption of means. Psychology deals with the question of why people adopt various ends and how they go about adopting them. Ethics deals with the question of what ends, or values, people should adopt. And history deals with ends adopted in the past, what means were used to try to achieve them and what the consequences of these actions were (ibid).
He dismissed the criticism that Austrian methodological individualism implies that the person is an isolated and hedonistic "social atom", instead it merely claims that it is individuals who perform the subjective activities of feeling, thinking and valuing.
He suggested that it was a mistake of the early Austrians to describe themselves as the psychological school (to emphasise their subjective theory of value, and the axiom of purposeful action) because it enabled critics to accuse them of ignoring recent findings in psychology, and it led to misunderstanding of the law of diminishing marginal utility as a law of psychology rather than a corollary of the theory of value.
At one point, and one point alone, however, praxeology and the related sciences of human action take a stand in philosophical psychology: on the proposition that the human mind, consciousness, and subjectivity exist, and therefore action exists. In this it is opposed to the philosophical base of behaviorism and related doctrines, and joined with all branches of classical philosophy and with phenomenology (ibid).
The differences are less important than the similarity because the "a priori" nature of the basic Austrian postulate of human action has been ridiculed by mainstream economists on the grounds that it destroys any claim by the Austrian theories to scientific status. Blaug wrote on Mises "His later writings on the foundations of economic science are so idiosyncratic and dogmatically stated that we can only wonder that they have been taken seriously by anyone" (1980, p 81). He went on to quote Samuelson "I tremble for the reputation of my subject" in connection with the exaggerated claims that used to be made in economics for the power of deduction and a priori reasoning [Note 3].
To achieve the status of a science, it has been urged that the propositions of economics should be verifiable (according to the positivists) or falsifiable (according to people who invoke the name of Popper). However in the following section I will show that this insistence on verifying or testing methodological proposals represents a category error on the part of the critics of the Austrians.
Popper on Methodology and Metaphysics
Two aspects of Popper's theory of research programs are (a) the recognition of the importance of conventions in methodology and (b) his theory of metaphysical research programs.
He advocated the critical method, with five forms of criticism.
1. The check on the problem. Does the theory solve the problem?
2. The check of logic. Is the theory internally consistent?
3. The check of consistency with other well-tested theories.
4. The check of evidence, falsifiability (if this is appropriate).
5. The check on the metaphysics.
Jarvie has recently explicated the core of Popper's classical work as a set of conventions regarding the use of evidence (check 4, above), a kind of constitution for science that starts with the supreme principle of maximising the exposure of theories to empirical tests, then spells out a number of subsidiary principles to support that objective (Jarvie, 2001). The point is that the conventions themselves are not empirically testable because they live on the "ought" side of the is/ought divide, they are tested by their capacity to support the search for truth and the improvement of descriptive and explanatory theories.
Moving on to Popper's theory of metaphysical research programs which appeared in a reasonably well developed form in the Metaphysical Epilogue to Quantum Theory and the Schism in Physics (1982), the third volume of The Postscript to the Logic of Scientific Discovery.
In almost every phase of the development of science we are under the sway of metaphysical - that is, untestable - ideas; ideas which not only determine what problems of explanation we shall choose to attack, but also what kinds of answers we shall consider as fitting or satisfactory or acceptable, and as improvements of, or advances on, earlier answers. These programmes [clusters of metaphysical theories] are only occasionally discussed as such: more often, they are implicit in the theories and in the attitudes and judgements of the scientists (p 161).
The term "program" implies that these metaphysical ideas tend to cluster together and support each other in various ways. They also provide historical continuity despite changes in the status of testable theories. A striking example used by Popper is Plato's geometrical cosmology, designed to overcome a crisis in Greek mathematics when it was found that arithmetic could not satisfactorily treat irrational numbers. Popper traced this theme into modern times as a "behind the scenes" influence in cosmology and physics. [Note 4]
Popper's major work on metaphysics occurs in Quantum Theory and the Schism in Physics where he explored the problems that he attributed to the influence of defective metaphysical theories in the orthodox interpretation of quantum theory. The theories which he subjected to criticism were subjectivism, instrumentalism and determinism. From this analysis and other works by Popper it is possible to discern a coherent program of epistemology, methodology and metaphysics that challenges the dominant assumptions of most schools of thought in the natural and human sciences.
Popper Program Traditional Program
Fallibilism or non-justificationism Dogmatism or justificationism
Non-determinism Determinism Non-reductionism (emergence) Reductionism Non-essentialism Essentialism
(definitions are not fundamental) (conceptual analysis)
Situational analysis and Holism and collectivism
Inevitably, discussion of MRPs tends to be somewhat abstract, and is constantly likely to deteriorate under the influence conceptual analysis. Practical concerns, such as the discipline of experimentation or technological application should help to keep discussion focussed.
How Popper supports the Austrians
Popper supports the Austrian school of economics in three ways. First, his theory of metaphysical research programs legitimates the use of untestable principles to provide the framework for a research program. The basic principles of Austrian economics can be regarded as working assumptions, either methodological or metaphysical postulates, of the kind that occur in all sciences. These need to stand up to criticism but they do not have to be testable or falsifiable.
The term "metaphysical" may antagonize people who have taken on board the strong positivist prejudice against metaphysics, however in this context it simply means that many basic principles and methodological conventions cannot (and need not) be subjected to empirical tests as the positivists would demand. The most obvious example for the Austrian program is so-called axiom of purposeful action. This is usually (unhelpfully) described as "self-evidently true" but it is more usefully depicted as a methodological assumption. It does not need to be directly testable, it is tested by the capacity of the program to produce robust explanations for the phenomena under investigation, such as money, the Great Depression, unemployment, inflation and trade cycles. This may resolve the clash between Popper and Mises on the matter of falsifiability. Mises totally rejected the idea that the principles of praxeology should be falsifiable but he was as interested in the facts as anyone else. In his tract Epistemological Problems of Economics under the heading 'The Logical Character of the Universally Valid Science of Human Action' he wrote "only experience makes it possible for us to know the particular conditions of action. Only experience can teach us that there are lions and microbes. And if we pursue definite plans, only experience can teach us how we must act vis a vis the external world in concrete situations".
The Popperian or "critical rationalist" rejoinder to positivists, naïve falsificationists and instrumentalists who lampoon the Austrian approach is to explain that it is not a departure from acceptable scientific practice to make use of untestable propositions for some purposes. The critical rationalist does not insist that all the premises and presuppositions in scientific discourse should be verified, merely that they stand up to criticism. Empirical tests are a particular kind of criticism, but they are not appropriate for all assumption, especially those of methodology and metaphysics, which have to prove themselves at one step removed - by the power of the testable explanatory theories that they generate.
The second way that Popper supported the Austrians was in his advocacy of situational analysis and the rationality principle for the explanation of events in the social sciences. This is practically identical to the Austrian approach, by way of praxiology, the logic of human action, with the basic principle that human beings act purposefully. Popper followed the Austrians in other ways, in methodological individualism, in the theory that most institutions arise as the unintended consequences of actions, in the uncertainty of knowledge.
Thirdly, in addition to supporting the use of a metaphysical framework for analysis, and following the Austrian methodology for the human sciences, Popper propagated a particular set of metaphysical theories which happen to provide a congenial framework for the Austrian approach. These theories are realism, especially the reality of "the arrow of time", non-determinism, and non-reductionism (the emergence of novelties in evolving systems). Popper's objectivism may appear to conflict with the Austrian subjective theory of value, however Popper's three-world theory contains a world 2 of subjective mental states. This provides a space, indeed a whole "world" for the Austrian subjective theory of value, for mental acts of judgement about the possible uses of various goods and factors of production.
As described by Ingrao and Israel (1987, 1990) the overwhelming dominance of mathematics and general equilibrium theory in economics is due to the mystique of science and mathematics that the economics inherited from physics. Morover it was a particular program, the program of mathematical instrumentalism which they claim was introduced into both physics and economics by John von Neumann [Note 5]. This was the program that Popper subjected to criticism in Quantum Physics and the Schism in Physics. Thus Popper has both revitalised the language for critical discussion of metaphysics (with his theory of metaphysical research programs) and he has also articulated a particular research program that may be equally appropriate for physics and the human sciences.
The continuing revival of the unfashionable but potentially fruitful Austrian program depends on recruiting people from the dominant orthodoxies where they tend to be locked in by three influences. First by the guild mentality (professional brand loyalty); second, by ideological commitments (another form of brand loyalty); and finally, by unexamined metaphysical or philosophical theories. The third is probably the most insidious influence because it traps people who might otherwise be prepared to resist brand loyalties. The "Popper program" offers hope for real progress in throwing off the fetters of counter-productive metaphysics because it helps to expose the roots of deep structural assumptions so they can be subjected to criticism. The revival of the Austrian program also requires that the Austrians themselves have another look at Popper instead of following the example of Mises and dismissing his ideas as irrelevant to their concerns.
1. The list should also include (at least) Hillsdale, Grove City, Loyola (New Orleans)
San Jose State and New York University. The Austrian Economics newsletter was important during the early stage of the revival, as were two collections of papers (Dolan, 1976 and Spadaro, 1978).
2. In the language of paradigm theory they described the capture of economics by a mathematical and instrumental program lifted from physics. This program provided continuity from Walras (circa 1880) to Nobel Prizewinners in recent times such as Samuelson, Arrow and Debrau.
As will be shown throughout this book, the highly different and even divergent programs (or paradigms) that succeed one another in the history of the [general equilibrium] theory retain an almost intact core that can be identified with the aim to demonstrate the existence, the uniqueness, and the global stability of the equilibrium. This core will be called the invariant paradigmatic nucleus [author's italics]. Indeed, we shall see that the theory axiomatised by Gerard Debrau, although completely different in its form and content from Walras's theory, not only retains this nucleus intact but also represents an early attempt to demonstrate at least the property of the existence of equilibrium and to analyze the conditions in which uniqueness occurs.(page 3)
3.. We might tremble for the reputation of the profession where Samuelson himself won a Nobel Prize. Practically up to the time of the Fall of the Wall he wrote in his best-selling textbook that the Soviet economy was performing strongly and rapidly catching up with the US.
4. Popper wrote at length about this in a massive note 9 to Chapter 6 of The Open Society (1950 edition) and he explicitly referred to the programmatic element of the geometrical world view in Addendum I of the 1957 edition. Arthur Koestler's book The Sleepwalkers is a veritable textbook of examples of scientists in the grip of metaphysical preoccupations stumbling over and around the ideas that were required to solve their problems, inspired, blinded and distracted in turn by dreams and speculations of a metaphysical or religious nature. The exploration of metaphysical ideas in connection with science is not unique to Popper, far from it, many hands have been involved in this work, Burtt, Koyre, Lovejoy, and in the Popper school Agassi and Watkins. However metaphysics was banned from the philosophy of science in the empiricist tradition that ran from Hume to the Logical Positivists
5. The authors quote a commentator on von Neuman's naive and optimistic faith in mathematical machinery. Under his leadership the old reductionism [in economic theory] was replaced by a sort of neoreductionism, whose key idea was the centrality of mathematics, understood as a purely logicodeductive schema. Some years earlier von Neuman had carried out a similar operation in the field of physics in order to exorcise the problems raised by quantum mechanics(pp 185-86). For an alternative view on von Neuman's contribution see Popper's critical comments in Quantum Physics and the Schism in Physics. Von Neuman was the co-author with Oscar Morganstern of a book on game theory which Popper took on the boat to England in 1945. Earlier Popper heard a paper from Morgenstern in the Karl Menger mathematical symposium which impressed him so much that he wrote in The Poverty of Historicism that mathematical economics might have passed through its Newtonian stage (page 60).
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In 1982 Lawrence Boland produced a major internal criticism of neoclassical economics, focussed on the difficulties that economists encounter due to problems with induction and (consequently) with methodological individualism (Boland 1982, 2003). Boland did not mention of metaphysical programs but the Popper-Hayek agenda that he proposed includes some of the elements described above as Popper's methodological/metaphysical program.
The elements of the program are:
(3) Rational decision-making (according to the logic of the situation, with
reference to Hayek 1937/48 and Hicks)
(4) Situational dynamics. Behavior can change as a result of learning as
well as from changes in the situation.
Boland noted that Hayek's point about the importance of learning has been taken but has been blunted by persisting elements of inductivism, as though we just need more information (of a different kind) to get the kind of rationality that the traditional agenda demands. Based on the four principles Boland sketched "A Neoclassical Program for a Real-time Short Run" to explain decision-making by economic actors in real time (as opposed to the instantaneous processes that achieve equilibrium in a large set of simultaneous equations). The program is based on a dynamic concept of knowledge, which is endogenous (part of the system that has to be explained). It involves learning, and learning takes times so the arrow of time has real meaning in this system. So does the notion of error, and learning from mistakes. The program aims to cater for disequilibrium in a way that the mainstream of neoclassical economics cannot.
Boland's book offers a detailed internal or "immanent" critique of the neoclassical research agenda and apart from advocating the Popper/Hayek program there is hardly any reference to the Austrians because his aim was to demonstrate that the neoclassical program contains too many contradictions and errors to be sustainable without major reforms along Popperian or "critical rationalist" lines.