 Welcome to the Mises Academy podcast. I'm Danny Sanchez director of online learning at the Mises Institute I recently appeared on the Tom Woods show to discuss economic methodology, and I thought you'd like to hear it a Great resource for high schoolers on this topic is an introduction to economic reasoning by David Gordon You can get a free copy of this book by enrolling yourself or your high schooler in the online course Basics of economics introduction to the free market by Robert P. Murphy which starts in January at Academy dot Mises dot org the book along with the course would be a great Christmas gift for the young economist in your family We're gonna turn to our friend Danny Sanchez because we're gonna talk today about How the Austrian economists members of the Austrian school of economics do economics? Because you're sometimes here. Oh the Austrian. They're not scientific. They don't use statistics or whatever Well, they do use statistics. So the question is what do you use them for? So we're gonna talk today to Danny Sanchez who is the director of the Mises Academy? You all know Mises is spelled M-I-S-E-S The Mises Academy is the online learning platform of the Mises Institute And of course you can find the Mises Institute at Mises dot org and the Mises Academy at academy dot Mises dot org And he's also the author of many important articles Including the one we're gonna be talking about today Mises on mind and method Which is a paper explaining the economic method of Ludwig von Mises We're gonna have a link to that article in the show notes for this episode. So Danny Sanchez Thanks for taking some time with us today to talk about a sort of complicated, but nevertheless important topic Thank you for having me. I love your show. I've listened to every single episode and so I'm glad to be on it Well, thanks. Thanks. I appreciate that now Let's I want to talk today as I said in the introduction here about this whole question of Austrian economics and is it Unscientific and what is what is Mises method of doing economics? And is this some kind of oddball method that only a weirdo would use and These are sorts of things that come up on the internet quite a bit And you get the sense that a lot of people talking about it probably haven't read Mises epistemological works You get these you get the sense. They've learned it from three sentences. They saw quoted by some guy once So I wanted to get you on here because you've written about this so effectively and I I want to explain first of all Let's let's I guess start from the beginning here Let's explain. What is the nature of the the dispute in general? Like what is this argument all about when it comes down to what Mises believed the economy or how Mises believe the Economist should pursue his craft. What's different between Mises and what the sort of man on the street might think Is the way an economist should operate? Well, you mentioned scientific and that reminds me of a funny thing that happened a couple years ago Tom De Lorenzo went to testify to the House subcommittee on domestic monetary policy and Congressman William Lacey clay accused Austrian economics Lacking what he called scientific rigor and the reason for that was because he said it uses deductive reasoning so I think it's so funny this McCarthyite type situation Where he's saying is it true sir that you are part of this group of people who use dun dun dun logic Can't have that so in other words, it's a it's a question of Deductive versus inductive reasoning and a question of which type of reasoning is appropriate to a given discipline and and the the question That Mises is trying to answer is well I'm interested in economics which approach makes more sense the approach we would use in geometry or in Illegal theory for example, or is it better to try to gather data? you know in the scientific method sort of way and and and go into economics sort of agnostic and then see if we can Derive general principles from observing empirical data. Is that more or less it? Yes, you mentioned geometry and that's a really important comparison because The thing is that people often will say well if you are not subjecting your propositions to Empirical tests then basically that's a dogma and so basically that's a religion Which I wonder if they would accuse geometry of being a religion I mean Geometry also doesn't put its propositions to the test of experiment In of experience in general Geometry is what is called? An a-prioristic discipline and that's kind of a strange word, but basically that means that the theory of geometry Logically deduced is prior to any kind of experience so any kind of experience with measurements of objects in reality that the Euclid elements the all the the system of geometry Logically deduced doesn't depend on the measurements that we take of real-world objects and it big They can't be Validated by such measurements and that is not a controversial Idea it's not just Austrian Surveyors and Austrian engineers who treat geometry as prior to their to their Their use of prior to dealing with real-world objects So it's not To be just laughed out of court just because it's It's considered prior to it's experiment so in other words nobody would say hey you dogmatic Geometer you you're telling me you believe that the sum of the two sides of a the sum of the squares the two sides of a Right triangle equals the square of the hypotenuse and you haven't measured a single triangle to verify this like what's the matter with you? But nobody would ask act that way right nobody would be Frankly stupid enough to act that way So the question becomes then is it appropriate like what is most appropriate? What kind of approach we all see that an empirical approach to geometry? Makes no sense and is ridiculous and fails to understand the nature of geometry But why what would make us think that the nature of economics is such that the method would be similar Right there really isn't any Good reason to think that because the Contrast to geometry is the method applied to the natural sciences and the natural sciences The phenomena that that they're describing are characterized by regularity And but human action is not characterized by strict regularity Where we're just because you see a phenomena happen in certain conditions in the past it necessarily must happen in the future and so Mises showed How the character of economics is more akin to geometry? especially because just like with geometry There are certain implications that are bundled up in the Basic concepts that everyone introduces into their reasoning All right Yeah, let me let me jump in here because this this is a good starting point for the whole analysis here So Mises uses the term a priori or synthetic a priori that we can have a statement That's meaningful and yet that we can know prior to all experience And so the action axiom is an example of the synthetic a priori So can you explain that first of all? What's the action axiom and what do we mean that it's an example of a synthetic a priori statement and by the way to people listening today You had no idea how awesome this podcast is gonna be did you not know you're you're learning about synthetic a priori statements I mean people are just gonna love you now Well, okay, so well an a priori statement is something that is prior to experience and The falling it a synthetic a priori statement basically is getting to towards the fact that it applies to something in the real world And that is something that is characteristic of Austrian economics is that it's very realistic that it does apply Directly to the real world as opposed to certain other schools of economics now the action axiom basically is that Human action exists or that man acts and actually it's a funny thing that not a lot of people are aware of is that Muses himself never used the phrase Act of the term action axiom. He never posited it as a proposition that man acts he called it the category of action so he focused on just the the concept itself of action and What can be? Logically deduced from even thinking in terms of action in any case and and so what can be? unpacked from the concept of action and so the thing is is that every thinker and social sciences of all schools not just the Austrian school that they Introduce concepts especially action that have Certain implications that necessarily follow from it so a lot of people get caught up in phrasing it in terms of the action axiom and they challenge Critics of Austrian economics and critics of the free market by first starting off by saying Okay, well, do you think a man acts and then what happens is that the conversation can get sidetracked in all these sort of Meta philosophical objections and Ruminations on on the rationality of man, but really you don't even have to put that proposition to them You can just point out that your your opponent in his own discussions of Human society is himself positing action And if he is positing action then he has to accept the logical implications that necessarily come from action so for example There are certain things that Without which the idea of action would be incoherent for example time Try to think of an action that didn't involve time The human mind can't even fathom such a concept and so time is an implication Logical implication of action Also the the notion of Imperfect conditions in light of the actors judgment that if a person didn't think that conditions Would be imperfect Without his intervention, but he wouldn't act the very notion of a person expecting perfect conditions with or without his action Actually acting you can't even imagine why such a person would act so these are some basic Logical and necessary implications of action and any social thinker social science thinker Who even discusses in terms of action to be even logically coherent has to accept these implications? All right now Maybe to make this a little bit more concrete for people the other implications of the act of the action axiom Which says that man acts or that in other words that man pursues Uses means to pursue his goals, but people have goals. That's basically what is being said here There are very clear Economic implications of this that everybody can understand for example that that cost exists because if If in every time that I act I'm implicitly Setting aside other things that I might have done so if I sit here and eat a ham sandwich I am setting aside flying a plane at this at the same time You know, so if I'm spending my afternoon on a park bench eating a sandwich. I can't also be flying an airplane So I I'm I'm choosing and setting aside and then in choosing and setting aside I'm demonstrating that I prefer one thing over another So here we have the idea that there are value scales in my mind And I have a video online where I start with the action axiom and I end up showing people how Supply and demand curves are derived where the law of marginal utility comes from and it all just comes from explaining the implications of the seemingly uninteresting statement that human beings act Exactly me this argued that all means or or you could also say goods are Necessarily scarce and by scarce means that the quantity Available of the good is outstripped by the goals that a person has in mind for it So the very concept of using something that is scarce Necessarily implies the notion of as you said pursuing some ends with it and leaving other ends Unpursued so action with regard to to scarce means Necessarily involves choice pursuing some ends and setting aside other ends and A further implication of that is that when a quantity of a good is lost to the actor Then the actor will sacrifice certain ends certain goals Now the goals that are sacrificed are by definition Valued less than all the goals that he did not sacrifice and from this reasoning a thinker can deduce the law of marginal utility and this law is bound up in the very notions of action and Means and scarcity and you can derive it and I'm like you said you derive it in In your in your lecture and that's what Austrian economists are basically doing Now is this some Freakishly odd thing that only Austrians do or is in fact can we find in the history of economic thought that? Maybe I realize I'm stacking the question But may that this was in fact the completely mainstream approach to doing economics until quite recently Yes, Mises argued that throughout the history of economic thought This is basically the method that economists Largely pursued even though in their writings on methodology where they're talking about methodology They don't necessarily endorse it But in practice when the kind of reasoning that they were doing is theoretical reasoning like we're discussing here And and there are examples of some Economists prior to the Austrian school that actually were pretty much explicit Praxeologists so praxeology is This idea of just theorizing from the basic concept of action and Rothbard Murray Rothbard covers some of these examples in his Austrian perspective on economic thought treatise which is a fascinating read Another thing that you might think that a lot of this is just very vague and very general so okay, so if you just think about just the general concept of action that you come up with Very very general conclusions, but how does that help us in? studying the complex world Where it's not just that you know that people are acting, but that you know that people are acting in certain ways but that's also part of praxeology for Mises because What we need to do is then Think about certain modes of action and so we need to Restrict our notion of action by certain assumptions and and we think of different ways in which people can act so for example people can think of interpersonal exchange and so that's not a Property of all human action that you can imagine sort of a Robinson Crusoe just sitting on this island and he has no one to exchange with but You can deposit certain assumptions about what you theorizing about and you can say okay Let's say that there's another person. Let's say that Friday is on the island with him and they can Interpersonally exchange Now there are some logical implications To where even just thinking about that Restricted kind of action Necessarily has certain logical implications. So for example one logical implication is that both Crusoe and Friday Um mutually benefit or or expect to mutually benefit from the exchange Because if they didn't expect to me to benefit, why would they do the exchange anyway? But by definition they expect to benefit So that's one thing that you can know just from the very concept of exchange necessarily must be true and then like you said you do in your lecture that you could take The concept of exchange Apply the law of marginal utility to that and other concepts and then for example derive the law of demand and You can use that kind of reasoning to construct price theory and then use the reasoning of Price theory to construct a profit and loss theory and so this is the way Austrian economists operate now What about the objection that people will say yeah, yeah, yeah, this sounds fine and everything But the real problem with you Austrians is that you're so dogmatic in your beliefs because of your so-called Praxeology and your deductive reasoning and all this fancy stuff that you won't even admit statistics into your analysis I mean really what kind of thinker doesn't even use statistics now Is it true that Austrians just Allegedly refused to use statistics like what exactly is the relationship between Austrians and statistics? Well, they do use statistics for economic history They don't use statistics to support their theory But they use theory in combination with statistics to understand what actually happened in the past and so this gets at the comparison between Geometry and and economics, so let's say that a geometry teacher Assigns you to derive the measurements of an archaeological ruin and this part of this ruined building happens to have the The characteristics of a right triangle on one of its faces and now let's say that You only are able to directly measure certain parts of the ruin and the geometry teacher assigns you the task of using the law that the theorems of geometry to derive the other measurements Now let's say that That you do that you and then you find out that the measurements Don't jibe with your understanding of the Pythagorean theorem and You return to the teacher to denounce the orthodoxy and dogma of Pythagoras and to proclaim your heterodox rival Theorem about Right triangles that is based on your measurements of this ruin now that is akin to if an Austrian economics teacher assigned you to gather statistics To to help you in economic history, but then when you gather your statistics You decide that you think that this doesn't jibe with Austrian economic theory And so you go back to your teacher and you say I have Denou I'm denouncing the orthodoxy and dogma of Mises and Rothbard And and then you try to have your own Alternatives theory just based on on your statistics Now as you think about the way that every geometry teacher would respond to that student It gives you an idea of the way that an Austrian economist would respond to a similar student So there are a few possibilities that both Both students are making fundamental errors For the geometry student for example, maybe he doesn't actually know the Pythagorean theorem Maybe he tried to derive it in a certain way and he messed up He didn't reason correctly and so he Decides that he thinks that the Pythagorean theorem is that a squared plus b squared equals c cubed for example and So that's why his measurements Don't jibe with what he thinks of as a Pythagorean theorem because it doesn't actually know the Pythagorean theorem. He he derived it incorrectly and So let's say that he actually measures the artifact and from his measurements He finds out that in that one case a squared plus b squared did equal c squared Well that gets him a clue that his reasoning was faulty But those measurements themselves do not substitute for Correcting the reasoning itself. You can't just say I know now that a squared plus b squared equals c squared Because I did these measurements what you have to do is use that as a hint and then go back to your desk and your your pencil and paper and Then read and then derive the correct Pythagorean theorem using validly reasoned proofs Okay, now the parallel of that is an Austrian economist who Doesn't actually Know that the correct theory that he in in trying to derive his own theory that he he reasoned incorrectly and so so that's the problem is that and that's why That statistics don't jibe with his theory because his theory is wrong and he needs to correct his theory Through re-reasoning it. He can't just rely on the statistics now another possibility Is that it's not a right triangle at all? So maybe the Pythagorean theorem doesn't even apply Maybe it's not even relevant to the situation that he's considering and so that would be equivalent to Applying an irrelevant theory to a certain economic set of statistics So maybe if you for example try to apply the theory of economic calculation To barter a barter society when it doesn't even apply because Economic calculation only applies to a market society for example. So basically what that means is That so every logical proof has premises and a conclusion But the conclusion is only certain if the premises are given and so his problem with The fact that he's not even dealing with a right triangle is that the premises involved in the Pythagorean theorem Aren't even given in the situation So of course the the conclusion of the Pythagorean theorem doesn't apply to this particular situation And finally another possibility of course is that the student just mismeasured. So the student just made had human error in trying to take the measurements of the Artifact and then that's similar to just bad economic statistics Well, Danny Sanchez We're just about out of time. So I appreciate you guiding us through what you know what may seem tricky to the beginner, but if you read Mises's stuff on this is actually not impossibly difficult to manage and on the Tom Woods radio comm site next to this particular program We're going to make sure and link to your Article specifically on Mises on mind and method which will help people to understand these sorts of things and then sort of inoculate themselves Against some of the ill-informed attacks that you might encounter online from time to time. So Danny Thanks so much for being here. Thank you and just to mention that in that article But the idea is that I reference in this interview I I link them to particular quotes in Mises's works where he makes these points Great. Thank you. Thank you so much. Okay. 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