[UPDATE below, then UPDATE #2.]
In a recent post, David Friedman writes:
Yesterday I spoke at a Students for Liberty Conference. Before the talk I had a conversation with several students who identified themselves as supporters of the Austrian school of economics. I asked them if they could explain what that meant by identifying a proposition in economics that almost all Austrian economists and almost no non-Austrian economists would agree with.
One response was along the lines of “Austrians believe that one can derive economic conclusions from convincing axioms without adding any empirical facts.” So I asked them to give me an example of such a conclusion, of a statement that one could test, observe the truth or falsity of in reality, that could be derived in that way.
I now put the same two questions to any readers of this blog who consider themselves believers in Austrian economics. Can you state such a proposition? For the particular proposition that was proposed, can you give an example, a prediction about the real world that can be made with certainty from economic theory alone with no input of real world information?
I have to agree with Vijay in the comments, who wrote:
I’m a little surprised you ask this, Professor Friedman. You have been debating so-called Austrians for many years, and it seems to me you do not have basic exposure to the literature. Have you attempted to read Human Action by Mises? These questions, which are epistemological in nature, are answered in great depth in that book, among others.
This was, after all, the whole focus of our debate at Porcfest over the summer. I’m not expecting Friedman to agree with the Misesian/Rothbardian take (I’m not calling it “the Austrian take” since not all self-described Austrians buy into the a priori stuff), but his question entirely misconstrues what we’re saying. The whole point is that economic principles are not “testable” in the way he means.
So here are two statements that economists know about the “real world” with certainty:
==> People respond to incentives.
==> Choices always carry tradeoffs.
Those are the types of statements we can deduce just by thinking through the logic of rational behavior, or what Mises called “human action.” Notice that they aren’t mere definitions; I’m not saying, “Bachelors are unmarried.” Also notice that they are definitely useful in understanding the world. But, as I said, you can’t test them; there is nothing, even in principle, that would make an economist suddenly doubt either of the above. They are ways of interpreting reality.
Further, Mises wasn’t saying, “This is how we Austrians do economics; everyone else is an idiot.” On the contrary, Mises was codifying what economic science was. It was descriptive, not prescriptive, although as the 20th century progressed, the divergence between “Austrian economics” and “the mainstream” got wider and wider so it turned into the present situation, where Austrians come off wagging their fingers at everybody else.
But if you want to see how historically, the great economists adhered to this method, look at the opening section of Hoppe’s essay. He quotes from Say, Cairnes, and Lionel Robbins to show that Mises was not offering some idiosyncratic view in his methodological writings early on.
Last point: Friedman’s demand to hear something that almost all Austrians believe, but almost all non-Austrians don’t believe, is a loaded question. You could do that with anybody who claims to belong to a school of thought, in any discipline. Then when the person gives the answer, you can:
(A) Point out that no, actually most scholars in that field do believe the proposition, so there’s nothing special with his or her “school,”
(B) Point out that nobody else in his right mind believes such nonsense, so why the heck would he or she associate with such a “school”?
In closing, let me say that the tone of my present post here might sound very hostile. Just remember I’m the same guy who did this.
UPDATE: I should probably clarify that the two propositions I listed above are not “Austrian” propositions, but in fact are standard fare in micro textbooks, usually offered in the first section on “HOW TO THINK LIKE AN ECONOMIST.” Another example would be, “There’s no such thing as a free lunch.” Another would be, “Both parties benefit in a voluntary exchange.” I’m purposely picking mainstream stuff to get these guys and gals to realize that Mises is describing good economics. As I pointed out to David Friedman during our debate, nobody passionately believes in free trade because of a regression, but rather because of “thinking about it” in light of an essay by Bastiat or David Friedman, for that matter.
It is nothing but pure physics envy to think that to be “scientific” an economist needs to subject his or her propositions to empirical verification. There are statements in economic history–such as “What caused the US housing bubble?”–that rely on empirical content. But there is a core body of economic theory that you deduce just by “thinking things through.” I can teach a whole introductory class on economics without once having to resort to the authority of previous experiments or statistical tests.
UPDATE #2: In the comments, David says (correctly) that I didn’t offer anything to his first query. OK, here’s are two examples:
“Most Austrian economists think that it is a basic confusion to say that interest is equal to the marginal product of capital, in the way that wages are equal to the marginal product of labor.”
“Most Austrians think that to understand the business cycle, it is important to keep in mind that the capital structure is composed of heterogeneous physical goods, rather than a homogeneous ‘capital stock.’”