 I'm traveling this weekend so our show is a great pre-recorded lecture from our friend and colleague Dr. Bob Murphy given at our inaugural Mises Boot Camp event earlier this summer. Now Bob gave an introductory talk entitled Human Action where he really sets the framework and lays out how we should go about understanding economics. So it's a great refresher for those of you who are more familiar with the Austrian School but it's also a great introductory talk to share with your friends who are not as familiar. We hope you enjoy it and have a great weekend. Let me first give a big picture in terms of this odd term action and praxeology and why does Mises title his famous treat as human action. Let me try to give you a little background about that. So what the, there was a revolution in economics and it formally occurred during the 1870s of course it had been germinating earlier than that. It was the founder of the Austrian School Carl Manger who was as widely recognized as one of the three pioneers that it was called the marginal revolution where the old classical approach people like Adam Smith and David Ricardo the way they would explain market prices they would look at the cost of production and then this new so-called marginal revolution instead explained prices in terms of the consumer and the subject evaluation. So I think in the next few lectures you're going to get more of that. I don't want to take too much time there but what I want to explain is Mises says in human action that once that revolution occurred the economics per se was no longer a self-contained discipline. It wasn't that all the things we want to talk about in economics could just be contained there that the new methods and tools that were unleashed or unraveled if you will during the so-called subjective revolution that really occurred in the 1870s that once that happened it was no longer just applying those tools to narrowly economic things like the price of wheat or wage rates or the business cycle that Mises said this opened up a whole new field of the study of action per se. Okay so again that's one of the reasons that Mises's book his famous book is called human action not you know principles of economics or something like that that you might have otherwise expected because he was realizing economics is just a subset of this broader field of praxeology is the term Mises used. So where that term comes from what that means praxeology it's a sort of intimidating term but just means like this the study of action or the logic of action per se all right so it's it's economics is just a subset a part of the broader praxeology. If you want to get an idea to remind yourself of where's that term come from I was just curious to see what it would say I went and just googled you know Greek word praxis definition to see and it's it'll pop up and it'll say it's practice is distinguished from theory okay so that word praxis you know when the the roots there one of the possible English translations of what that means is practice is distinguished from theory right so in conventional everyday usage people often say oh yeah that's true in theory but what about in practice all right so I really like that because it underscores what the Austrians in the tradition of Louis van Mises are doing just so let me just be clear about this we are not building hypothetical models where things happen and then we hope that that shed some light on the real world what starting with Carl Manger and continuing with you know his his followers in the tradition of the what we call the Austrian school what they're trying to do is explain how do people in the real world act and so in particular if we want to know where do market prices come from what causes the business cycle where why is there a long-term institutional unemployment all of these things about the real world we want to know really what's happening okay whereas in other schools of thought they build hypothetical little models and make a bunch of assumptions and they draw conclusions and study that little simulated reality and then they hope maybe that's close enough for that will shed some insight into the real world but that's not what the Austrians do so I want to be clear about that another distinguishing feature another way to clarify what it is the Austrians are doing is that we are not studying you might have heard the term homo economicus or economic man and that was something that was developed again in the classical period and then even to this day many economists and other schools use this framework where they're saying well let's assume people are really selfish or let's assume people really just care about money and study that aspect of their behavior and that's what economics does but then there's all kinds of other stuff like philanthropy and things over here like a mother caring for her child and that's outside the scope of that is not at all what the Austrians do Mises is saying we are in praxeology we study action per se and then yes if somebody happens to be very selfish and cares about money then that falls under the umbrella of what we're studying but mother Teresa also falls under the umbrella of what we're studying so what do I mean when I keep using this term action it means purposeful behavior all right so it means people who are choosing action or who are behaving in a certain way in order to achieve a goal that the people have okay and that's really what action means so it's distinguished from reflexive behavior and don't be intimidated by this this is very straightforward so we do it all the time in everyday life and you do it so automatically you don't even realize it but just let me just give you an example to make sure you see the distinction if uh if I take a rock and throw it up in the air that goes up and then comes down and someone says hey explain the observations that you just you know witness what what just happened there what is that reality nowadays if people said oh well the rock in the beginning wanted to get away from the earth and then it changed its mind and wanted to get closer to the ground and that's why that happened that would appear to us to be very primitive and unscientific right that would just they would be crazy you know the rock's not a conscious entity with desires that that language just sounds silly don't even you shouldn't even talk like that but yet if you see a plane start to go up and then storm clouds form and then the plane comes back down and you say explain what you just saw it would be perfectly sensible to say well originally that they wanted to get to Toledo but then the pilot saw the clouds and maybe you know the air traffic control told them actually no there's clouds ahead come back down because it's too dangerous and they you know they didn't want to take that risk that is perfectly scientific you know scientific there's nothing wrong with that and that's how we talk in everyday language and that's perfectly justified all right and so you see there's this divide there among the other differences between those two scenarios one of the important ones is that to say the pilot has subjective desires or intentions okay so that notion of intentionality is key to what we're doing in praxeology and so what Mises was arguing is that we can carve out this whole new field of scientific inquiry that we as people studying human behavior and let's call it praxeology and what we're studying is just the logic of that fact that people have desires and then they use their mind to to try to pick means to achieve those goals okay and so as we go on you'll see this fleshed out more in terms of relationship to things you normally think of as economics like prices and business cycle that's where we're going with this whole boot camp we're building up to so you understand the Austrian theory of the business cycle by the time this is done but Mises more so than most any other economists wanted to be clear about this is the foundation of what we're doing let's be clear on what economics is before we just jump right into the interesting stuff because if you don't have a good foundation the whole thing can crumble okay let me give one more clarification on what Mises means by this this idea of action which you might you might call purposeful behavior it has to do with this word rational all right and so again i'm trying to make sure you don't get confused with what other economists are doing compared to the Austrians that some economists say oh well economics it's kind of assumes people are rational let's see how far that gets us in terms of predicting human behavior and then you know in the real world people aren't totally rational but that's a good benchmark you know to sort of give us a frame of reference again that's not what Mises means purposeful behavior means when people have a goal in mind and they choose a means to try to achieve that whether or not their means is a good one is successful okay so if you see people doing a rain dance and we with our you know view perspective think that off those people don't understand meteorology dancing around like that and chance during things that's not going to make it rain nonetheless that is action okay because you can say why are they doing that it's not just because of the laws of physics or chemistry or biology we can say oh because it hasn't been raining they're concerned that they're going to lose the crop and so that's why they're doing this ritual because they believe perhaps we would say erroneously that doing that will cause it to rain right so they have goals in mind that they're trying to achieve and they're using their minds their reason to try to achieve them even if we happen to think that the means they're picking are not really going to be successful in this particular example okay and that's it's important to make that distinction because otherwise you lose the you lose that ability to distinguish purposeful behavior from just natural reflexes if we look back in human history lots of humans were doing things that from our vantage point we think were unsuccessful attempts to achieve their goals but nonetheless they were clearly engaged in purposeful behavior you know if you looked at what doctors were doing 200 years ago a lot of that we would now say that wasn't a good idea or that they they were go barking up the wrong tree but clearly if we're trying to understand what was going on we need to know they had goals in mind and so you'll see if you're just wondering well what does this have to do with conventional economic topics it goes back to this revolution i said in the 1870s to explain market prices to know you know why do cigarettes and tobacco have such a certain price you need to know that people enjoy smoking right if you didn't know that that this would just be a bewildering array of statistics but once you know oh there are some people they enjoy smoking cigarettes or pipes or what have you then it all falls into place you understand why they pay money for those things and then why ultimately it makes sense for farmers to be growing tobacco and selling that for money and that's the causal chain of explanation and so the point is it doesn't matter whether you as an analyst think smoking is good or bad for the person the point is you need to be able to explain market prices and why does tobacco have a certain price you need to know that there are some people who enjoy that the you know the buzz they get from smoking a cigarette and so they think that okay if i want to satisfy that a good means of doing that is going and buying cigarettes okay so that's the idea where here you just need to be able to understand when people have goals in mind and then set out to achieve them you study that process and one of the offshoots of that discovery or that that study is oh now you can explain market prices the modern way that we've realized is a much better approach than what they used to do under adam smith and so on okay so now i'm going to move on to roman numeral number two in your outline on method so if i've explained to you what praxeology is and how economics is just the best developed component of this broader study of human action what is the is the exact method in praxeology that we use to to advance our knowledge so here mises argued that and this is where a lot of people criticized him i'm going to come back at the end of these remarks to address some of these criticisms but let's first make sure we understand what mises is saying he was saying that we start with this idea that that humans act that people have purposeful behavior they have intentions desires and they use their minds their reason to try to achieve their goals and then we can as an analyst just step by step deduce certain implications from that and that is what we're actually doing in economics and we might supplement it with certain other things like to to talk about the availability of labor versus land and so on and later lectures people will get more specific but mises wants to be clear that is what we're doing and notice this is totally different from what they do in the natural sciences right in physics or chemistry or biology we don't have any internal knowledge of what it's like to be a hydrogen atom right we don't have any knowledge well at least i don't maybe you guys do but the point is that's we can't just sit there and run the thought experiment and say well gee if i were hydrogen added you know what i want to bond with oxygen or i'm not sure you know that you can't you can't think like that right and so all that's available to you is to make testable at least in principle hypotheses or your guesses about well if the initial conditions were such and such you know it would maybe would end up looking like this or if this theory is correct this is what we would see in the laboratory or if we're doing astronomy we'd say you know these are predictions the sky would look like this on this date and then you can point the telescopes when that data occurs and look up at the sky and see where we right and if we were then you say okay that's you know that's good evidence in favor of this particular theory the theory might still be wrong but okay so far looks pretty good whereas you can point the telescope and the stars are totally not where you thought they were going to be you know okay i don't have a good model of how the heavens work or how the how the universe works in terms of stars in their motion okay so that's what they do in the hard sciences or what we call the hard sciences the natural sciences you might call them the empirical sciences mises is quite clear that in economics that's not what we're doing and it's a mistake to think that we should copy those methods to try to gain the prestige of the physicists you know because the general public really thinks the physicists are smart and that that's the model of how science ought to behave and mises is quite clear that no that's that's a dead end you're going to run into problems with that that what we're doing in economics which again is a subset of praxeology is we are starting from the idea that in certain things of life it makes great sense to interpret what's happening by saying there is another mind at work there and to see the implications of that and then let's just study that fact let's follow those the deduction of that to its logical conclusion all right so there's this term that floats around i struggle with whether even to bring us up what you might hear if you read more so i just want you to know what is the term is a priori and all that means is you can have this type of knowledge without going out and looking at the outside world for empirical verification it's stuff you can know just by thinking it through okay so i'm obviously not getting too philosophically savvy here i just want you to be familiar with the the big picture of what these terms mean so that's one way that people describe what mises is saying is going on in economics okay so let me give you just some examples of what i mean by this so you can understand uh there's this principle in economics called diminishing marginal utility all right and so let me just walk you through how using this deductive method you could derive this insight this you gain knowledge about how does economics work or you gain a principle in economics right so this idea of it's called diminishing marginal utility again in the next lecture you're going to learn more about these concepts but up here i'm focusing on how would we come to this new principle how would we know it's true is an economist how would you get it across so what what it means marginal utility is saying if i get one more unit of a good you know right now i have five apples what if i get a sixth apple you know how much satisfaction does that give me how much happiness does it give me and the idea of diminishing marginal utility is that as you get more and more units on the margin you know the utility from additional units is smaller okay that's the idea and so how would you go about proving that well if you were steeped in the in the logic and the methodology of chemistry and physics you might say oh well let's let's conduct a bunch of experiments let's get a thousand test subjects we'll put them into you know a control group and it's in a a treatment group and you know maybe we'll do a double blind study we won't tell them which one we'll give some of them five apples some of them six apples and so on and one of them will give them a survey i guess and ask them how much did you like that that sixth apple you know so you you're running the difficulties but the point is a lot of people would think that's the way you learn new knowledge about the world right because that's that's just the scientific method isn't it and the point is with this no that's not at all what we do what we do in economics is we just think through the logic of the situation and say okay if people really value apples of apples are a good and then just that term you know to for it to be a good means that it's something that you benefit from that you enjoy and say okay suppose you had gave someone the first apple and they had all sorts of possible uses of the apple they could just eat it directly to satisfy their their hunger they could use use it maybe in an apple pie they could you know if they see some guy teaching economics on a sary morning he's really boring they could just throw the apple at him right there's all sorts to hopefully that's pretty low on your list of priorities right so there's all kinds of things you could do with units of apples and the point is in principle you know we as the outside analysts don't know how you rank them you know some are more important to the person some are less important there's various things you could do technologically in your mind you could think of things i could do with apples and the point is if i give you the first one and you have a hundred different things you could conceivably do with one apple which use are you going to devote that one apple to the first apple too though your most important and the least important the one in the middle and so if you think through the logic of that if you only had one apple clearly you would devote it to satisfying the most important thing to you that you could achieve with one apple right and you can see if you just think through the logic of what i'm saying there once it clicks with you what do i mean by those words it's obvious that has to be true right because if instead you you know if you if you use it to be planted in your back or you gave it to your the squirrels or something just threw out there so i want to feed the animals it wouldn't make sense to say oh that person really was was starving to death and his most important use for that apple was satisfying his direct hunger but he chose instead to renounce that and to give it to the squirrels because even though feeding the animals was much less important to him for some reason he acted irrationally if you start talking like that the point is as a praxeologist we know that doesn't make any sense by his action he is demonstrating that for this particular person at that moment in time when he made that choice feeding the animals was the the most important end to him or goal to him that he's satisfied with one apple it has to be because that's what he chose to do okay so you see how that logic works and so then if i gave the person a second apple what end is he gonna devote it to the second most important that could be satisfied with apples and so on and so forth and so you see the more apples we give the person's gonna then devote them to successfully less important ends and so that's the sense in which you can build up this law or principle of diminishing marginal utility and so you can see how on the margin when you give the person a thousandth apple that's not a big deal the person or the person had to give up the thousandth apple damn no big deal because you've already satisfied the first 999 uses that you can make with apples okay and so that's again notice you you wouldn't go test that that wouldn't even make sense once you understand what we mean by those terms then the result pops out you just have to think it through but at the same time notice that's probably not something that would have occurred to you if i didn't go down that path right or unless you've heard it before right the average person going through life would not all of a sudden say well yeah diminishing marginal utility obviously and then move on you know that's not something that would just pop into your head so i'm giving you real knowledge about reality or the world and how things work and get i'm equipping you so you can better navigate through your life now that you have that principle under your belt but the point is how did i get that knowledge into your head i did not show you a bunch of statistics i didn't say well we ran this controlled experiment and actually 72 of the time that people did such and such with that seventh apple that's that would be missing the point you would that would be confusing you as to what the type of knowledge was that i was giving you okay so that's just one example the kind of thing we do let me give you another example we could and again in subsequent lectures they might give you more specifics here but we could derive step by step a proposition saying if uh the federal reserve pumps more dollars into the economy prices will be higher than they otherwise would have been or i could say the dollar will be weaker than it otherwise would have been if the federal reserve pumps more dollars into the economy okay and so there there's no way to falsify that statement right if suppose that the prices are certain you know however you want to measure them are a certain level you have a consumer price index basket or what have you the federal reserve pumps in a bunch of dollars then you wait a month and measure prices again a month later and you look and what if prices went down so it looks like the dollar strengthened you say oh that proposition was wrong then huh you say no we said other things equal or than they otherwise would have been okay so the point is had the federal reserve not pumped in dollars prices would have fallen even further okay and so what you're these these principles or if you want to say laws of economics are giving us a technical term would be counterfactual propositions they're showing us this is what would have happened and now this is what's going to happen instead so it's compared to some future possible reality it's not compared to the present so properly derived economic principles or propositions they don't let us actually predict the future per se we don't know what prices are going to be like next week because there's all sorts of things that could change how can we predict that some humans they have free will we don't know what they're going to do but the point is what we can say with certainty is whatever they're doing if there's more dollars in the economy then the purchasing power power of dollars is lower than it otherwise would have been okay so that's the kind of knowledge we get and again it's important to realize that there's a two prong thing on the one hand don't be misled and think that you're going to have the kind of knowledge that lets you make predictions the way that physicists can say if we accelerate you know electrons around this thing or such and such we predict these things will pop out of our observations you know they can make those kind of or astronomers can say if we point our telescope at this date at the sky assuming there aren't clouds in the way we're going to see the stars in this alignment they can be pretty confident of those predictions that's not what we're doing in economics but at the same time don't then think okay economics is just primitive and waste waste of time no there's lots of good information we can get from the study of economics in the proper messessian method but again you get you can't it's you're not going to get the kind of knowledge that some people think it ought to be spitting out you're going to get a different type of knowledge so we can know that oh jeez that the federal reserve pumps in a bunch of money that's going to weaken the purchasing power of the dollar so people who are relying on pensions and whatnot are going to be hurt by that or if it's their dollar denominated retirement plans we can know that sort of thing but again we can't predict this is exactly what's going to happen with cpi and so forth okay so now i'm going to move on to roman numeral three if you're following along this idea of methodological individualism so that got big words but it's a very straightforward concept what that's saying is the austrians their approach the method they use stresses individualism but to be clear in this context we don't mean in a in a political sense we don't we don't mean that all of the individual is more important than than the collective and the rights of man and so forth i mean there is a lot of overlap between people who happen to be austrian economists and have those views about the dignity of the individual and so forth but here we mean strictly speaking as a scientific discipline in economics how are we going to proceed in austrian economics for sure what we do is try to explain market aggregate events if you will always tracing it back to the actions of individuals okay so this is again it's consistent with this idea of of say economics is a subset of the study of human action well humans are individuals it's individuals who act all right and so uh just to give you an idea of a way to think about this people a lot of times in everyday language will say things like you know oh uh in in 1941 this country bombed that country okay and that's that's actually sloppy talk right a country doesn't do anything right there's individuals that make decisions it's more appropriate to say the political leaders in this group decided that they would like the ramifications from pursuing this type of foreign policy they decided to speak commands or you know write out instructions to their subordinates and then those military officers thought about the the pros and cons and decided they wanted they would achieve their goals by obeying those orders and so they flew the planes they decided to press the button to drop bombs and so on right so that's actually the more correct analytically way of describing what it was that happened right so in everyday language it's not a big deal if you say you know off the bills blew that game they missed the field goal you know fair they do that a lot by the way but that's that's not a big a big deal it's no harm there but strictly speaking as social scientists we need to be clear that everything is ultimately grounded in individual action groups per se don't act now to be clear you're not throwing out the insights of sociology and other disciplines so it's certainly true that uh you know a mob mentality could take over right somebody there's a horrible crime was committed a group comes together and grabs somebody says this guy did it you know jim saw him do with his own eyes and so maybe the crowd gets worked up and they go ahead and do vigil any justice and whereas no individual would have done that in an isolated context that's you know things like that can happen and as praxeologists we're not we're able to rely on that sort of insight but again the way you would describe that is say the individuals in the crowd decided to go along and say yes go ahead let's do this in that context whereas perhaps in a different context they would have chosen differently but again it's not that the crowd per se does something it's always individuals making decisions and so this you know when you realize that if you're if you're familiar with other economic schools of thought you can see just this huge gulf between the austrians and these other schools if you read somebody like paul krugman i don't know why you would do that but let's say you did you lost a better something you read him all the time how does he explain recessions it's oh aggregate demand is too low right they just focus on these big aggregate statistics there's not enough spending and so therefore such and such needs to happen right and so again that's just the furthest thing from the austrian approach which ultimately grounds everything back in individual action now don't don't misunderstand the austrian certainly do have the ability to explain big macro events indeed that's why i think it's so crucial in these times for people to know about the austrian school because it's their theory of the business cycle that is so necessary right now people need to know that because if it's right that means what central banks have been doing since 2008 are setting us up for another crisis okay so it's really important that people are familiar with the teachings of the austrian school but my point is where they start the ground floor and their explanations is not looking at what's the total money supply and what's the velocity of circulation and all these big aggregate statistics that a lot of other economists look at no the austrians always start with individual action and what are the incentives facing individuals and then what makes them choose what they do to achieve their own subjective goals okay let me uh just give you one last thing here now for roman numeral four and then i'll have time for a few questions the critics of praxeology let me just pick one great example so in light of what i've been saying so far one obvious objection that the people will bring up is they'll say this is completely unscientific you guys are very dogmatic you're telling me this a priori approach this deductive method that you can just be sure you're right no matter what happens you know doesn't that make you think that you're therefore immune to correction and that if you're walking around the wrong theory in your head then how we how will you ever learn the truth you know should we we empirical economists are much more scientific and humble we make predictions and if they're wrong then we we correct our theory and move on whereas you guys are just stuck in your own little world with no connection to reality all right so i'm exaggerating trying to be flamboyant here just to make sure you get the nature of that type of critique all right so very quickly the way i would handle something like that is to say okay number one we have an example where all of us can see this method of starting with axioms and then logically deducing implications from them is clearly the appropriate method and it clearly gives us information about the real world it's not we're just spinning our wheels in transforming definitions that are mere tautologies okay and that example would be geometry you know if you've studied that in school the things like the Pythagorean theorem and so on your teacher can define what a triangle is what we mean by a straight line at an angle and so on and then give a proposition and say oh here's the Pythagorean theorem right if these if you have a right triangle such and such then it's a squared plus b squared equals c squared and then go through and actually prove that to you so once you understand how that works you now have that knowledge forever you worry if the if the proof really clicked with you when you understood the steps in the proof you know that's true now you don't have to go out and measure a thousand triangles that satisfy the you know the initial conditions and see and test is this thing really true even if it turned out that you measured a triangle and it looked like it wasn't true you would know you you screwed up the measurement because you have that a priori knowledge you know no the Pythagorean theorem is true i saw the proof of it all right and so that would just misconstrue what geometry was doing if you thought you had to go out and test stuff to see is the geometry right or not right the the proof is correct all right so that's just again one example and at the same time though it's not that we're just spinning our wheels it's not that we're just saying hey a bachelor is an unmarried male and therefore now you know things about the world whereas there you can see well that's kind of just a linguistic convention that's not really telling me anything about reality you're just telling me this is how we've decided to use these terms okay whereas a Pythagorean theorem when you when that clicks with you or anything in geometry you really feel like there's something deep going on there and that even you know aliens if they had minds that could understand the terminology we could teach to them and they might you know appreciate it okay so that's whereas telling them a bachelor is an unmarried male at best that would be giving them trivia about the way we use language you see that whereas the Pythagorean theorem you get the idea that that's something very deep and mysterious about logic or something okay so that's the kind of thing that mises thinks economics is that you don't learn it by going out and measuring observable things you think through the logical implications of certain starting points but yet the knowledge that pops out of that process is real relevant knowledge you know something about the universe that you didn't know before that's why we still teach geometry right that if you're gonna have someone who builds a bridge that person you you hope has previously studied geometry in addition to several other things right and so that's it does help us navigate the world even though geometry per se and the proofs in that do not flow from testable empirical observations