The Problem and Limitations of Praxeology

Introduction

Let me commence by stating that the purpose of this essay is not to criticize the Austrian School of Economics as an economic school of thought. Indeed, praxeology is the method of inquiry used by the Austrian School of Economics but not all Austrian economists necessarily rely on it to conduct their analysis. I believe that the Austrian School has, in fact, brought important contributions to the field of economics such as the concept of opportunity cost, time preference, economic calculation, and the knowledge problem. So, this essay was not written to object to the ideas of the Austrian School but to rather object to a particular method of inquiry called a “science” which is clearly not a science.

Furthermore, let me reiterate that not all Austrian economists adhere to the praxeological method of economic inquiry. Joseph A. Schumpeter and Friedrich von Hayek were Austrian economists who did not use praxeology systematically in their works of economic analysis. In his book Business Cycle: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, Schumpeter engaged in the empirical analysis of the process of economic development using historical and statistical material based on his theoretical framework he developed in his early writings. Hayek’s early economics works such as Price and Production were more empirical than his later works (e.g., Law, Legislation, and Liberty). Even Murray Rothbard, one of the foremost advocates of praxeology who considered himself a strict praxeologist, in his book America’s Great Depression, used historical evidence and empirical data to prove his theories—he mainly used the historical data from 1920 to 1933 to support the Austrian explanation of the Great Depression whereas praxeology systematically rejects the use of empirical data in economic analysis.[1]

The objective of this essay is to elucidate why praxeology is not the correct method of inquiry for conducting economic analysis due to some of its limitations. In this essay, I developed three arguments among many to support my statement. Before developing these arguments, let me first explain what praxeology is.

I – Praxeology: Definition & Concept

Praxeology is the theory of human action, based on the notion that humans engage in purposeful behavior, as opposed to reflexive behavior and other unintentional behavior. This theory was developed by Ludwig von Mises in his magnum opus Human Action, published in 1949. Mises defined praxeology as human action, and he described human action as purposeful behavior. He outlined purposeful behavior as the following:

“Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful response to stimuli and to the conditions of its environment, is a person’s conscious adjustment to the state of the universe that determines his life.”[2]

The particular characteristic of praxeology is that it is a method of inquiry that is entirely based on a priori rationalism. Some Austrians call it even a “science”; to be precise, they call it “the science of human action.” The inquiry process of praxeology is fairly simple. It uses the logical deduction approach to arrive at its conclusions by starting from the action axiom, which is considered apodictic because it cannot be proved, disproved, or falsified by empirical data. Praxeology holds that if the axiom from first principle is true, therefore, the conclusion must also hold true. It means that the axiom reflects an economic law and economic laws, according to Mises, cannot be falsified. Praxeology constructed its inquiry from a set of axioms such as “the market is freedom,” “human action is purposeful,” or “government intervention hampers the market.”

In Human Action, Mises argued that the statements and propositions of the praxeological method are not derived from experience—that they are like mathematics or logic because they are a priori. He furthered his argument by stating that praxeological axioms are both logically and temporally antecedent to any comprehension of historical facts.

Mises was convinced that the correct and appropriate method of economic analysis was praxeology. Indeed, he claimed in Human Action that the only pure economic science is radical apriorism—using deductive reasoning without the help of experience to establish first principles.[3] Under the influence of Immanuel Kant, who was convinced that reason alone, contra empiricism and historicism, could give universal knowledge, and Mises built his entire system on logic and self-evident assumptions, similar to geometry. [4] Mises vehemently rejected all forms of inductive aposteriorism, or the use of empirical studies or history to prove or disprove a theory.[5] It is fair to say that this approach to economic inquiry is quite unrealistic. Shall we take at face value that a given theory is true just because it is based on a priori approach?

Praxeology is considered a science because it engages in predictive analysis. But how can one predict an economic event or behavior solely on a priori rationalism? How is it possible to determine the potential outcome of an economic event or to predict how people may behave regarding an economic situation without resorting to quantitative tools of analysis? Mises repeatedly insisted that economic theory gives only qualitative, not quantitative laws.[6] If so, then how could he possibly know by economic theory alone that the negative effect of the lack of economic calculation would be severe enough to make socialism infeasible?[7] Mises was certainly right in arguing that socialist systems were indeed terrible economic systems, however, there is no natural experiment of a socialist economy that suffered solely from its lack of economic calculation.[8]

I will never deny that Mises has done very important work in economics, and his contributions shall neither be ignored nor dismissed, but I believe that his method of analysis, which is the praxeological approach, is not the correct method of economic analysis, and my belief is based on three fundamental reasons.

II – The Problems and Limitations of Praxeology

1) Praxeology is Not A science

The advocates of praxeology asseverate that praxeology is the science of human action. I do not agree with that statement because a field of study or a method of inquiry is considered a science if, and only if (1) the hypotheses or assumptions theorized are testable, and (2) if the results of the hypotheses tested are reproducible.

Praxeology is inherently opposed to the scientific method because it presupposes that the axioms on which the analysis is built are de facto true, therefore, do not need to be empirically tested to demonstrate their validity. This is the complete antithesis of the scientific method. The very nature of the scientific method is to test a given assumption to verify its validity. As I argued in my essay The Nature of Economics, economics is a positive and mathematical science where hypotheses are rigorously tested, and the results of these tests are reproducible. For example, the Keynesian theory of the consumption function was taken by most economists as gospel until Milton Friedman was able to propose the Permanent Income Hypothesis which disproved the Keynesian theory of the consumption function by using empirical data and statistical models. How praxeology would have falsified this theory, especially knowing that it was believed to be true without any empirical test in the first place? How praxeology would have demonstrated that the theory of Permanent Income Hypothesis of Milton Friedman was indeed valid without resorting to any empirical test?

Praxeology cannot be a science because it does not have an objective methodological approach to economics. Its approach is rooted in subjectivism. It means that what may seem obvious and logical to one may not be necessarily logical and obvious to someone else. And the reason is that what seems purposeful to us is based on our subjective view of the world. For example, anarcho-capitalists argue that society will be better-off if government was abolished, and economic and social activities would be run through market agencies. The axiom of this statement is that “the market is freedom.” Since it starts from the assumption that the market is freedom, we should therefore conclude that it would benefit everyone. But how can we be so sure that everyone single person would be better-off in such a system without any empirical evidence to support such a belief? What about those who do not agree with that view? Are they in the wrong? One way to objectively demonstrate that people would be better-off without the existence of government would be to measure, for example, how the absence of government will increase the property rights index of people living under an anarcho-capitalist society. Another measurement that could be done would be to test how the absence of government would increase the sustentation of the rule of law. This measurement could even be conducted through a randomized controlled trial experiment to see how people would actually behave if there was no government. There are plenty of empirical data available online to conduct these measurements. People would be more convinced of the plausibility of such a theory if it was tested through the scientific method rather than being stated apodictically.

2) Praxeology Rejects the Use of Mathematics, Econometrics, and Empirical Data

The principal reason why praxeology is not used as the main method of economic analysis is because it does not engage in measurement. Measurements necessary rely on the use of analytical techniques, and measurements deliver objective results. It is impossible to objectively measure a theory without using quantitative methods to obtain valid results. A theory is considered valid or invalid once it has been confronted with empirical data and been rigorously tested using statistical and mathematical methods. For example, the advocates of praxeology argue that empirically testing the assumption that the minimum wage will increase unemployment is not necessary because it is an economic law. But economic theory alone tells us nothing about the magnitude of the increase.[9] The only way to determine objectively how the minimum wage could impact unemployment is by confronting the theory with the data and then measure it to have a clear assessment of the potential repercussions.

The reason why mathematics and econometrics are used extensively in economic analysis is that they allow economists to construct precisely defined models from which exact conclusions can be derived with mathematical logic, which can then be tested using statistical data and used to make quantifiable predictions about future economic activity.[10] In rejecting mathematics and econometrics as the main tools to analyze economic theory, praxeology turns economic theory into a speculative and purely abstract field of study with no real substance. As I argued many times, a theory is neither detached nor independent of its practical implications because the very purpose of developing a theory is to apply it. Hence the value of a theory can only be determined by the practical implications it generates, and these practical implications can only be assessed through measurement and confrontation with real-world data.

3) Praxeology cannot predict Economic Activity with certainty

Praxeologists argue that economic activity is predictable through praxeology because if the axiom is correct, hence everything else holds true. They argue that human beings act. That is the fundamental axiom from which they commence all their analyses to reach their conclusions.

Sure, human beings act. So what? Human beings do act, and they do always act with a purpose, but their goals are unknown. And if their goals are unknown then it is impossible to predict with certainty what the outcome of their action would be. As James M. Buchanan explained in his book Economics: Between Predictive Science and Moral Philosophy, praxeology is nonoperational because all it does is to explain any conceivable course of action that a person might observe to take; the observe is that the theory can explain nothing at all.[11]

Praxeology is essentially descriptive whereas economics is a predictive science. In order to determine how a consumer may choose, or when could the next economic recession occur, it is essential to engage in predictive analysis. However, praxeologists believe that history is not repetitious although historical events do tend to repeat more often than we may think. And it is the repetition of historical events that enables us to predict. Praxeology engages in causality and uncertainty to argue its various points, by claiming that since human action is purposeful, therefore there is a cause and effect, and since human beings change their minds constantly, it is difficult to predict with certainty what people would do next. Nonetheless, it is fair to say that individuals tend to repeat actions that benefit them, and repetition is what enables their behavior to be predicted.

Conclusion

Praxeology is not the science of human action. I am more in agreement with the fact that it is the theory or the philosophy of human action, but it is not a science since we cannot test any hypothesis with such a method. The nature of praxeology is descriptive rather than predictive. It is also speculative, highly abstract, and borderline metaphysical with no concrete substance because valid conclusions cannot be merely drawn through logic alone. Moreover, economics is a positive, mathematical, and predictive science whereby its indicators (income, labor, capital, unemployment, profit, marginal rate of substitution, GDP, inflation, interest rates…etc.) have a quantitative nature. Since praxeology cannot measure economic indicators because it only relies on logic, it is therefore impossible by pure logic to predict the outcome of the next economic activity.

It is also impossible from the praxeological method to formulate policy prescriptions because the formulation of any given policy requires the use of measurement to assess the potential impact it may have on society. No organization, whether it is the World Bank, the International Monetary Fund, the UNESCO, the OECD, or even private institutions such as commercial banks, think tanks, or any other major private company; makes decisions based just on pure logic. Each of these institutions makes informed decisions based on a rigorous statistical analysis process. Hence, none of these organizations use praxeology as their method of analysis to make their decisions. I shall finally conclude by saying that the praxeological method is severely limited because it is only good for describing an assumption in economics, but it cannot go beyond that description since it has no tangible proof to elucidate any prediction.

References

[1] Skousen, Mark. "Chapter 4: Methodenstreit: Should A Theory Be Empirically Tested?” Vienna & Chicago: Friends or Foes? (2005). Regnery Publishing Inc. ISBN: 978-0-89526-029-8. p. 114. [2] Mises, Ludwig von. “1. Acting Man: Purposeful Action and Animal Reaction.” Human Action. (1998). Ludwig von Mises Institute. ISBN: 978-1-610016-145-9. P. 11. [3] Skousen (2005) p. 108. [4] Ibid. p. 108 [5] Ibid. p. 108 [6] Caplan, Bryan. Why I am Not an Austrian Economist [7] Ibid. [8] Ibid. [9] Ibid. [10] Kenton, Will. “Mathematical Economics.” Investopedia. (2021). [11]Buchanan, James. “Domain of Subjective Economics” Economics: Between Predictive Science and Moral Philosophy. (1987). Texas A&M University Press. ISBN: 978-0-89096-350-9. p. 74