Austrian Economics: An Empirical and Experimental Science

by Mario Rizzo

I have been doing research on the ideas of the first-generation Austrian economists (Menger, Wieser and Boehm-Bawerk) as they relate to contemporary developments in behavioral and experimental economics. I have come upon a number of interesting things. I expect to share some of them here as well as in a soon-forthcoming paper. Today I wish to share this quotation from Friedrich von Wieser. These sentences are the opening words of an article commissioned by the Economic Journal to explain the ideas of the Austrian school to English-speaking economists:

“The historical school of political economists in Germany, and the Austrian, or as it is frequently termed, the abstract school are more nearly related than is at first sight apparent. Both follow the spirit of the age in rejecting speculative theory and in seeking their highest laurels in the field of observation. In art, as in science, naturalism must be distinguished from truth to nature, and we Austrians, while we have certainly no wish to be disciples of naturalism, we are wholly set on being experimentalists.”

Friedrich von Wieser, “The Austrian School and the Theory of Value,” Economic Journal (March,1891).

Of course, we must pay careful attention to the meaning of his words (he wrote this in English) at the time. In the first place, he was keen to show that the idea of an “abstract” economics did not preclude concern with reality or with the facts. The abstraction involved was an idealization of everyday experience of purpose-driven behavior. In itself it does not teach us much about the complexities of historical phenomenon but it is a useful method —  involving idealization and isolation of individual factors — to organize our thinking about complex realities. It is a (internal) fact-based framework for more specific theories.

Wieser is also careful to mention that this attitude does not imply “naturalism” by which he meant the application of the methods of natural science to all intellectual areas, including the human sciences. An important difference is that the human sciences start from the knowledge (“from within”) that we all have of purpose-driven behavior. Even the natural scientist must presuppose this in the reporting and discussion of his results!

What does Wieser mean by “being experimentalists”? He cannot possibly mean exactly what, say, Vernon Smith does because the methods and ideas were not invented yet. I think he means that Austrians must be interested in applying their framework, and in supplementing or modifying it, as they look around the world. F.A. Hayek mentions in his appreciation of Wieser* that Wieser was more interested in trying to understand the world than in pure intellectual consistency. So his work does not exhibit the kind of consistency we have learned to expect from Boehm-Bawerk, for example. Wieser was trying to extend a system of thought, rather than close it.

Wieser has long considered somewhat of an outcast by contemporary Austrian economists partly for reasons of economic theory and partly for ideological reasons. However, I do think that we would all benefit from looking at a different Austrian perspective — one that develops the ideas of Carl Menger in a way that sheds different light on their significance —  and on a style of thought that eschews the rigidity that some have imparted to the Austrian School.

* F.A. Hayek, “Friedrich von Wieser (1851-1926),” in The Collected Works of F.A. Hayek, vol. IV: The Fortunes of Liberalism: Essays on Austrian Economics and the Ideal of Freedom. ed. Peter G. Klein (Routledge, 1992), 108-125. This essay was first published in 1926.

21 thoughts on “Austrian Economics: An Empirical and Experimental Science

  1. However, I would add that Wieser calls the Law of Diminishing Marginal Utility “Gossen’s Law.” I think Boehm-Bawerk did as well. The story of the psychological character of the Law is not as easily dismissed as Hulsmann seems to think.

  2. Peter’s “Menger the Empiricist” is worth studying. As he characterizes Menger’s view,

    “…for the social sciences, empirical analysis involves the systematic construction of a causal theory based on observation of basic empirical phenomena such as human wants, stocks of goods, technical knowledge, and so on.”

    As Menger puts it in the preface to his Principles,

    “…I have endeavored to reduce the complex phenomena of human economic activity to the simplest elements that can still be subject to accurate observation…and…to investigate the manner in which the more complex economic phenomena evolve from their elements according to definite principles.”

    Clearly, the empirical element in the theory is carefully circumscribed. It refers to observed fundamental, universal aspects of human nature and existence. Of course, in APPLYING the theory to a given situation or to interpretation of given historical events, we will likely need to incorporate more specific relevant information.

    I think Mises was on target in Human Action when he pointed out that “The law of marginal utility and decreasing marginal value is independent of Gossen’s law of the saturation of wants.” No doubt, one’s desire for ice cream can by saturated with the consumption of sufficient quantities at one sitting. But what matters for economic analysis is that we expect individuals to allocate limited quantities of a good first to satisfying their highest priorities.

  3. But Wieser and Boehm-Bawerk believed that *one* of the bases for a person being able to prioritize the uses of his resources is that certain wants may be “satiated.” I place a second ice cream at a lower level of priority relative to, say, a book because my appetite for ice cream is nearing satiation. Gossen’s Law is in the background.

  4. A footnote in _Hayek’s Challenge_ by Bruce Caldwell reports that according to Hayek, Menger once told Wieser that he got his theory of price formation by keeping track of market conditions as an economic journalist.

  5. I would say that Gossen’s law is forward-looking, whereas the pure praxeological law of decreasing marginal utility is backward-looking.

    The first seeks to identify the (physiological or psychological) motive which influences a man’s value scale, while the second deduces from an given action what were the values of the actor.

    The first studies the cause, and the second, the implication, of an action.

    The first is uncertain but may help us to do predictions, whereas the second is absolutely true but doesn’t permit to predict anything.

    When the actor, faced with the alternatives to take a glass of water or a loaf of bread, has already taken three times the glass of water, the Gossen’s law will (perhaps) predict “it’s likely the next choice will be a loaf of bread” or “the next choice will probably still be the glass of water”, while the praxeological law will only state “so far, the marginal utility of the glass of water is greater than that of the loaf of bread”.

    Both, IMHO, seem to be complementary.

  6. Raoul, I’d say the opposite–praxeology is forward-looking. It says people will choose now to satisfy goals, which may be in the future. Satiation is backward-looking, referring to what happens after a sufficient quantity of a good has been consumed.

  7. If I might add one thing: praxeological analysis may be used either for prediction or interpretation. The former will generally require ex ante assumptions about goals and preferences — assumptions which may of course have been arrived at through observations of previous behavior.

  8. I think we must separate “praxeology” from “action”. Praxeology studies “action”, which necessarily aims at satisfying a goal in the future, but I don’t think “praxeology” itself is forward-looking.

    So, when the economist steps in, and begins to analyse an action, this action, by hypothesis, has already been made, and has already revealed the preferences of the actor. It’s why I said praxeology is backward-looking. The economist’s point of view is ex post. He only tries to formulate the meaning of the action for the actor.

    Now, you tell me that “praxeological analysis may be used […] for prediction”, provided (generally) “we take ex ante assumptions about goals and preferences”. I agree but I would emphasize the truism that these assumptions are of a psychological nature, so that we are giving up the distinction praxeology/psychology we were talking about previously.

    What’s more, I find that interesting, because for a long I was puzzled by the apparently contradictory assertions according to which Austrian economics laws are “causal” and are in the same time “tautological”.

    Now, I think that pure praxeological laws, which study action “per se” and are psychology-free, are “tautological” indeed, while the other economic laws, which study market phenomena and make possible to draw qualitative predictions, are really “causal”, but aren’t “praxeological” nor “tautological” because they necessarily involve, as you say, some “assumptions about goals and preferences”.

    I suppose I was confused.

  9. Raoul, I think the distinction is between the relatively pure theory and the application thereof. Consider Aristotelian logic. If all A’s are B’s, then if this is a B it’s also necessarily an A. You can apply this logic to establish that Socrates is mortal if you know that all men are mortal and that Socrates is a man. Then you get “All men are mortal; Socrates is a man; therefore, Socrates is mortal.” The logic (theory) is pretty air-tight, but in order to apply it you have to know other things or make assumptions about those other things.

    As I understand the Austrian paradigm, it starts with a few essentially undeniable tenets about humans and reality, such as that we make choices in pursuit of our goals, that there is scarcity, that things in the world can serve or be made to serve our purposes. From those basics we can reach some fairly important conclusions; for example, people will direct limited quantities of a particular good first toward meeting their higher priorities and only then toward meeting lower priorities — which gives us the “law of diminishing marginal utility.” As Mario points out, often Gossen’s Law is lurking behind this behavior, because people can become satiated with one thing and therefore shift additional resources toward satisfying different desires. But that’s not always the story. For example, if you are purchasing tools for home maintenance, there’s a limit to how many screwdrivers you will buy before you buy a hammer, not because your desire for screwdrivers is somehow “satiated” but because at some point your ability to do home maintenance will be furthered more by a hammer than by another screwdriver. And on that basis, I can fairly confidently predict that few do-it-yourselfers will use up their budgets entirely on screwdrivers and no hammers. Praxeology, man.

  10. Allan,

    I don’t think the law of DMU is of any use to predict the behavior of do-it-yourselfers regarding the purchase of the needed tools. All that this law tells us is that the more you buy screwdrivers the lower is their marginal utility.

    But this law can’t say whether the do-it-yourselfers will buy 10 or 100 or even 100,000,000 screwdrivers before to stop and to switch to hammers. The law of DMU can’t even say if they will ever switch to hammers. It’s possible—at least, the law of DMU, in itself, doesn’t exclude it— that they spend all their money on screwdrivers.

    Now, I guess your prediction is correct, but I don’t think your base it on the law of diminishing marginal utility. To be sure, you don’t resort to Gossen’s law, because screwdrivers usually aren’t eaten.

    But I suppose you build up your prediction upon your theoretical knowledge of the law of returns and your empirical one that the proper screwdrivers/hammers ratio is closer to 10:1 than to 100,000,000:1.

  11. Mario, I don’t know if this will help, but, when you ask: “What does Wieser mean by “being experimentalists”?”, my guess would be that he was drawing upon/refering to the experimental psychology of WIlhelm Wundt – fashionable at that time. As for Carl Menger, he did not like Wundt’s ideas (there is even a special file entitled “Against Wundt” in his archives). You might also have a look at his paper “On the Systematic Classification of the Economic Sciences”. (These are vague souvenirs.)

  12. “Naturalism” as used by Wieser in his EJ article also seems to be a reference to the “naturalistic psychology” of Wundt.

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