 Okay, our final lecture this morning is going to be given by Professor Hans Hermann Hoppe, and the title of this lecture is Praxeology, The Method of Economics. Hans? I forgot my fur coat. I'm sure all the greens among you would have loved to see me in the fur coat, but you will have to do without it this time, I guess. My lecture is, in a way, a recapitulation and the continuation of last night's lecture. The question that I want to address is, what is the status of economic propositions? Is economics some axiomatic deductive science, or is it what is nowadays called an empirical science, or to formulate it somewhat differently, are economic propositions logically derived from some firmly established starting point, and hence provided that no flaw occurs in the course of logical deductions, statements that are absolutely true, or as Mises said, apodictically true, or are economic propositions hypothetical statements that require some sort of empirical testing? And I want to show that, contrary to widespread beliefs, these types of methodological questions are of utmost importance and have fundamental implications depending on what the answer to this riddle is. If we look at the present situation, then we can say that all economists, except those who belong to the Austrian school, believe that economics is an empirical science, in the same sense as physics and chemistry is an empirical science. Now, this does not mean that all economists actually practice what they preach. In fact, we can say that the better economists among the mainstream economists are people who don't really practice what they preach. That is, they frequently act as if economic propositions are not testable propositions, but when you ask them are they hypothetical propositions that need to be tested, then they say, yes, of course, they need to be tested. Now, the Austrians, while they are complete outsiders nowadays, were not outsiders some 50, 60, 70 years ago. The view that the Austrians hold that economics is more akin to logic or mathematics in the sense that their propositions do not require to be tested, this view represented until maybe about the 1950s or so the mainstream position. Until the 1950s, the most famous book dealing with the methodology of economics was a book by Lionel Robbins, The Nature and Significance of Economic Science. You can get that here in the bookstore, a very, very good book. And Lionel Robbins had been heavily influenced by Ludwig von Mises. He frequently went to Vienna and if you look in his book, Ludwig von Mises is more frequently cited in this Nature and Significance of Economic Science book than anybody else. And this view that economics is more like logic was also the position held by many famous 19th century economists such as Jean-Baptiste Sey and Nassau Senior and John Kearns and so forth. The adoption of the new view held nowadays by almost everyone except for the Austrians that economics is an empirical science that formulates hypothesis that require continuous testing. This view was adopted mainly because of the influence of modern positivism. Modern positivism is the modern air of the empiricism in particular as espoused by David Yew. The most influential group of people promoting the positivist view, the empiricist view, is the so-called Vienna School or more precisely the so-called Schlickkreis. They existed in Vienna at the time various groups of intellectuals. They existed in Mises Kreis for instance where he assembled his students and there existed also Schlickkreis where the logical positivists came together. Ludwig von Mises' brother Richard von Mises, a famous mathematician, was also a leading member of this Schlickkreis because of that the two brothers had a somewhat complicated, not always friendly relationship. If I give you some famous names of logical positivists, many of them are nowadays forgotten but once upon a time they were very influential, Moritz Schlick, Rudolf Karnab, Hans Reichenbach, Gustav Hempel, Otto Neuerath and also Karl Popper who did not refer to himself as a logic positivist. He used a different term called himself a critical rationalist but that was some sort of a misnomer, very much like liberals nowadays in the United States are about the opposite of liberals were in the old days and still are considered to be in Europe. So he was not really a rationalist but he was a logical positivist too. He just adopted a different type of name. This school was not very influential in Europe at the time but became influential in the United States because most of them happened to be Jewish and emigrated to the United States and acquired quite prestigious positions at some leading universities in the United States. Now I want to give to you their basic views and use Karl Popper as the main representative of this group. So his view and by implication the view of most of these people is the following. There exist two types of scientific propositions. The first one we call empirical propositions. Empirical propositions say something about the real world. And empirical propositions must be either verifiable, that is we must be able to find out that they are true, or they must be falsifiable, that is a particular Popperian view, falsifiable by experience. We must be able by referring to experience whether they are false or what makes them false. Statements that are not falsifiable are not scientific statements. Nothing can be known about reality with certainty. Anything that we know about reality is hypothetical, must be testable. And on the other hand we have statements that are called analytical statements. And analytical statements are statements that are true by definition, such as bachelor means unmarried men. They do not say anything about reality, they just say something about how we use certain words, how words are defined. And their view was that logic and mathematics, for instance, are analytical statements. They do not say anything about real things, they just say something about how we use certain symbols. Anything about reality at all, that is a very unusual view. Most people before saw that logic and mathematics does have something to do with reality. And of course, as I mentioned also last night, normative propositions about what is good and what is bad are not cognitive propositions at all. They are just expressions of emotions. More particularly, they saw that the task of science is to give explanations and explanations have the same structure as predictions. They are always of the kind, if, a, then, b. If then statements are, so to speak, the characteristic of science and these if-then statements need to be testable statements, they must in principle be falsifiable by experience. These if-then statements are statements that have universal terms, that is if a refers to all sorts of things that fall under the category of a, then b, b is also a term that refers to all things that fall into the class of b objects. Now if we find that a hypothesis is confirmed, that is our hypothesis if a, then b, if we observe an a and a b indeed follows, then we would say the statement is confirmed. But a confirmation of a hypothesis is not a verification, that is we do not know that this statement is really true because the hypothesis refers, of course, to an infinite number of examples. All that a confirmation does is so far the hypothesis has not been falsified. So far we have to, we can accept it but we do not know whether it is true. It might be that in the future we find instances where a was the case but b did not follow. And on the other hand if we observe a and b does not follow, then we would say the hypothesis has been falsified. But a falsification also does not mean that a and b are not related at all. All it means is they are not related as the initial hypothesis stated, that is it might well be that a is the cause of b, except we might have to control some other variables as well. So if c and d are also fulfilled, then we can observe that a is indeed the cause of b. So a falsification does not mean a and b have nothing to do with each other. The hypothesis just has to be rephrased. We can always find excuses, so to speak, why a was in particular cases not followed by b. And the view of the positivist was then about the progress of science is we formulate hypothesis, then we try to falsify them. And if we falsify them, then we reformulate the hypothesis, formulate a new hypothesis and thereby we gradually approach the truth and scientific progress results. They also had a specific view on definitions. According to them there exist two types of definitions. These are ostensive definitions, that is by pointing to something, this is green or this is a tree. Or they were stipulative definitions, that is such and such is defined as such and such, bachelor is defined as unmarried men. Those are the two types of definitions that they allowed. Now before I come to a refutation of this empiricist logical positivist research program, so to speak, I want to make you aware of the relativistic implications that this research program involves. To make you aware of this is not the same as refuting it, but it might be good to make you somewhat skeptical about it. And I want to show you what the relativistic implications are. The first one is obvious, that is simply we can say nothing about what is right and what is wrong. Ethical statements are not scientific statements at all according to their view. But there are more important relativistic implications as well. The implication of these empiricist views is that we in the social sciences in particular have to engage in some sort of piecemeal social engineering in order to find out what is right and is wrong. What is wrong? That is, they imply that we just act as if we were social engineers. Now to make this clear what I have in mind with this, I want to give you first a number of examples where we would clearly say these are hypothetical statements. What are these hypotheses? And I agree that these are hypotheses. Children prefer McDonald's over Burger King. Worldwide beef consumption to pork consumption is 2 to 1. Germans prefer Spain over Greece as vacation destinations. Consumer education leads to higher wage rates. Consumer spending before Christmas is higher than after Christmas. Catholics vote predominantly democratic parties. Japanese save a quarter of their disposable income. Germans drink more beer than Frenchmen. US produces more computers than other countries. American inhabitants in the United States are white and of European descent. Now if you hear these statements you'll realize that we can in each case also just formulate the opposite. We could say for instance that children prefer Burger King over McDonald's or worldwide beef consumption to pork consumption is 1 to 2. Your longer education leads to lower wage rates. Consumer spending before Christmas is lower than after Christmas. If we would negate these statements we are obviously not saying nonsense. Which one of these, the original one or the negation of the original one is right and which one is wrong we can only find out by making observations, looking at data and then we find out it is true that children prefer McDonald's over Burger King or it is not true that children prefer McDonald's over Burger King. These are clearly hypothesis and what we must do is we must collect data so to speak to determine is this right or is that right. Now consider however some economic propositions. Consider this for instance, human action is an actor's purposeful pursuit of valued ends with scarce means or no one can purposefully not act or every action is aimed at an improvement over what otherwise would have occurred or a larger quantity of the good is preferred over a smaller quantity or what is consumed now cannot be consumed again later or if the price is lowered either the same quantity or more is bought or prices fixed below market clearing prices lead to shortages or without private property in production factors there can be no prices and without prices cost accounting is impossible or interpersonal conflict is possible only if things are scarce or no thing or part of a thing can be owned exclusively by more than one person at a time or property and property titles are distinct entities and an increase of property titles without a corresponding increase in real property does not raise social wealth but leads to a redistribution of existing wealths or if the minimum wage is increased let's say to one thousand dollars per hour then massive unemployment will result or every voluntary exchange benefits both exchange partners otherwise it would not occur or every coercive exchange involves a loser and a winner one who gains in utility in another one who loses in utility or if we increase the amount of money without increasing the quantity of non-money goods social wealths will not be higher but only prices will rise now ask yourself are these second the second second set of examples that I gave the same type of statements as the first set of examples that I gave that is would we accept the position these letter examples that I gave are also hypothetical this that we have to go out and test them to find out whether they are true or false in the same way as we would have to go out and test whether people indeed prefer McDonald's over Burger King or the other way around now the astonishing thing is that the logical positivists say claim that there is essentially no difference between the first set of examples that I gave and the second set of examples that I gave that is the second set of examples such as minimum wages of 100 of $1000 in our causes unemployment is also a hypothesis that is if it is a hypothesis then we would be able to negate these sentences and they might also be true we do not know so if I say for instance a minimum wage of $1000 per hour if enforced to the hilt might increase employment a coercive exchange benefits both exchange partners a voluntary exchange benefits one at the expense of another increasing the amount of money without increasing the quantity of real goods increases the general standard of living now I trust that you immediately recognize that there is something fundamentally wrong to think that these statements might be true that is that it might be true that a coercive exchange benefits both exchange partners that the voluntary exchange might just benefit one at the expense of harming someone else I trust that you realize that the negation of the second set of examples that I gave strikes you as absurd how can we possibly test a statement like this but according to the positivist they are hypothesis they must be tested if they are not hypothesis then according to them these statements do not say anything about anything real at all so now back to what I said what are the relativistic implications of this so if we say these are hypothesis then in order to find out whether a minimum wage of $1000 per hour increases employment or decreases employment what is the only way that we can find out which one is true we would have to try it out first because we don't know the answer a priori we do not know in advance what the answer will be socialism mesus' argument you will hear more about that in the course of this week I'm sure economic calculation under socialism is impossible because if there is no private property in factors of production then there exists no prices for factors of production if there exists no prices of factors of production then not then we cannot compare the input prices and the output prices and cannot determine whether we produced efficiently or inefficiently whether we make profits or losses if this is a hypothesis then what need what do we need to do in order to find out whether this is true or not is we have to introduce socialism first and then we find out whether it is true or not and if we find out that it is not true that standards of living let's say go down then we have remember falsification does not mean that we have proved that there is no connection between the variables that we try to associate with each other it only means the hypothesis is not quite right the way we have currently formulated we can just say oh that might be different if we also control the weather or if Stalin puts on a hat which he did not put on the year before or if we murder a few more Ukrainians then it might work out perfectly all right so there is an endless way of finding excuses whenever things do not turn out the way that we initially predicted based on our hypothesis what would what would come what would come through um take take an example that this currently of importance doing monetary easing printing ever more money in order to allegedly create ever more wealths in society obviously all economists except the Austrians are of this opinion that you if you print additional pieces of paper social wealths will somehow increase now what if it doesn't increase then you might just say oh the quantity of money that we have added to the existing quantity of money was not increased drastically enough but if you increase it even more drastically then of course you will see that the result will come out will come out right if you have an endless line of excuses whenever things do not go the way that you want them to go now i want to come to a more rigorous refutation of this claim of the positivist i'm i'm almost convinced that you realize by now that there is something fishy about this this whole idea now Mises proceeded in the following way he's just said look if this distinction that the positivists make about there are either empirical statements that must be testable or there are analytical statements that do not say anything about reality what what is the status of this distinction between empirical statements and analytical statements obviously if we apply the argument to itself then this distinction between there are only empirical statements and there are analytical statements must be either an empirical statement that is it is empiric is a hypothesis there are empirical statements and the analytical statements and nothing else but if it is a hypothesis it might be just wrong so why should we accept this distinction if it just the hypothesis itself or that's the second alternative is or it is an analytical statement and if it is an analytical statement then we know it doesn't say anything about the reality at all so again why should i then accept this type of proposition either it's a hypothesis and i can just formulate the opposite or it is an analytical statement it says nothing at all or and that is of course the third alternative but the alternative that the positivists cannot admit that this distinction between there are only analytical statements and their empirical statements is itself a statement that is none hypothetically true but that is something that they do not admit as possible um the same we can apply to their view that all of science is consists of explanations and explanations have the same structure as predictions that is they consist of if then statements now what is the status of this explanation of an explanation is this explanation of what explanations are an empirical statement is a hypothesis and then again we could say so what we can just formulate the opposite just as well or it is an analytical statement then we have no reason to believe it that is simply a verbal convention that we made we could just as well make some other conventions the same also applies to definitions definitions are either stipulative definitions one word is defined by another or they are ostensive definitions were a point to something but what is the definition what is the status of the definition of definitions is it again just a hypothesis about what definitions are or is it simply a verbal convention that we accepted we define definition in this way or is it something else and again all students will say yes there is something else that is what we call real definitions definitions that accord to the nature of things now i want to proceed further and show that whatever we might think about this research program it certainly can't apply to human actions let me for this go high tech and explain again how according to positivists the process of science works so we begin with a hypothesis and we test the hypothesis and we can either falsify the hypothesis or we can confirm the hypothesis because confirmation does not mean it's true it means just so far it has not been shown to be false so we have to continuously retry a new test again that can test can falsify or it can confirm if it falsifies you revise the hypothesis and then the revised hypothesis is again tested and it can be either falsified or it can be confirmed and so forth and so forth now ask yourself this when we have a hypothesis and the hypothesis is tested and we said it is confirmed we must make an assumption and the assumption is why don't we for instance just say first i found this result and then i tested it and i found the same result again just a repetition why would we say this confirms it or i have a hypothesis then i falsified why can we say that it is falsified why can't we just say first i found out this and the next time i found out something else now the assumption that we must make in order to say the second observation second set of observation is a confirmation or the second set of observation is a falsification of what we had observed before the assumption that we must make is that the nature of things did not change that is that the nature of things is constant otherwise if things sometimes work out this way and sometimes things work out that way we would could not could not say this is a confirmation this confirms what i thought before otherwise would be just a repetition if we think that things work out sometimes this way and sometimes that way we would not say it is a falsification we would just say okay first we observe that and then we observe that but that doesn't mean that any consequences follow from that that any consequences follow from it that is that we say this confirms this makes us believe the same thing will happen again in the future or this falsifies this makes us believe that the next time we have to revise our hypothesis requires that we assume the nature of things did not change nature of things is constant now the question is can we make this constancy assumption when it comes to human action and the answer is no the hypothesis now refers to some hypothesis about human actions not the hypothesis about whatever the behavior of material objects but hypothesis refers to people did such and such or do such and such if these and these conditions exist before now but can we make this constancy assumption when the hypothesis refers to human action the answer is as i said is no for the following reason is obviously the person that engages in this research process is part of the realm of of the objects about which the hypothesis has been made but what what happens to the scientist or the person who does regression analysis in order to test certain hypothesis what happens to the person depending on the outcome of his tests obviously if we falsify our hypothesis the person knows something that he did not know before he is in a way a different person than he was before he did not know the outcome of the test before he actually conducted the test the same as to if the hypothesis is confirmed after all that is the purpose of the entire enterprise we learned something that we did not learn did not know before so the process of engaging in this scientific endeavor is precisely a process that leads to a result of the kind that i'm different now after the test than i was before the test the purpose of the test was precisely to inform us about something that we did not know before so what we realize here is that it is impossible to predict so to speak what the outcome of the research process will be that's why we engage in research so people are different after each test after each test they know something that they did not know before and since all of our knowledge influences how we act what we do we reach the conclusion that it is impossible to predict our own future states of knowledge until we actually have it and since we cannot predict our own future states of knowledge and our states of knowledge influence how we act we also cannot predict in any scientific way how we will act in the future in various circumstances so predicting human action is not a science predicting human action is what entrepreneurs do this is an art but nothing for which we can formulate so to speak formulas that allow us to make correct predictions formulas that other people could apply in the same way as we as we applied we applied them but there is also an implicit admission of something else so while it is impossible to predict human actions in the same way as we predict whatever the behavior of material bodies because we learn after all and the learn our learning influences how we will act in the future and we cannot predict what our future states of knowledge are until we actually have them we have also gained an insight that is true about every one of our actions about all human actions namely that there are no constants no empirical constants allowing us to predict what what we will do in the future so we also have what we can say is a priori knowledge about action namely that this type of prediction that most mainstream economists think they are doing and they should do that this thing is not possible so we have also a priori knowledge of action it might not be telling us a lot of things but it does tell us something of utmost importance applying to each and every one of our actions and to each and every actor now let me explain this by using one example let's take the law of marginal utility that is in a way the most important of all economic laws the law states that if the supply of a homogeneous good increases by a unit then the marginal utility decreases or if the supply of a homogeneous good decreases we have less of a good the marginal utility the marginal utility increases now how do we come up with this with this law what we realize is the first unit of a good will always be employed in order to satisfy the most highly ranking of all desires that can be satisfied with this good that is a logically true statement the first unit of any good by any actor by every actor will be used in order to satisfy what this person considers to be the most important use that can be made of this good if i have a second unit of the same good then again by definition the second unit will be used in order to satisfy the second most highly ranking goal that can be satisfied with the help of this particular good if i have three units then the third unit will be used in order to satisfy the third most highly ranking good goal if one unit is taken away from our supply it doesn't matter which unit is taken away because they are homogeneous we regard each good as equally serviceable as every other but we have to do without one set with one satisfaction less which satisfaction will we give up and the answers of course we will give up the least important of the previously satisfied satisfactions in giving up one unit now you realize that this statement is an a priori statement there is no way that we can ever think of how could this statement possibly be falsified on the other hand what it does not do it does not tell us of course anything about what is my most highly ranking desire so again use an example so i have an orange i can apodictically say the first unit of the first orange will be used in order to satisfy my most highly ranking desire of all desires that can be satisfied with an orange but i cannot predict what that desire will be will it be eating the orange squeezing the orange using the orange as a baseball or throwing the orange away giving it to somebody as a present none of that we can predict that depends on on knowledge that we have on changing ideas that we might have what can be done about an orange let's say i find out that oranges are are no good for anything then i might throw it away the next day i find out oranges are really good because they have lots of vitamin c then i might ingest them well i find out that that oranges can be used for this purpose as this purpose as well it can be squeezed i didn't know that they could be squeezed before and and now i think my most important use of an orange is to squeeze them none of that i know um the second unit will be used in order to satisfy my second most highly ranking desire that can be satisfied by means of an orange but i do not know which my second one will be or what your second most important use of an orange will be it might also be that that changes today you saw the first most important use of an orange is to do such and such which the orange and tomorrow you might think that it is far more important to use the first the first orange for an entirely different purpose none of those things all the things that can be influenced by changing knowledge by changing values all those things cannot be predicted in a scientific way i'm not saying that they cannot be predicted in a non scientific way in an entrepreneurial way yes of course entrepreneurs make constant predictions in terms of people will use this for such and such people will use it for such and such people would value this more than they value this and so forth but this is not nothing scientific because if it would be scientific it could be just imitated everyone would be just equally good as an entrepreneur and we all know that that is obviously not the case but what we do know is that whatever our various uses our various rankings of goals are the first unit will always be employed in order to satisfy the most highly ranking desire the second one will be used to satisfy the second most highly ranking desire and the third one will be used in order to satisfy the third most highly ranking desire it isn't the same as what i indicated last night logic does not tell us much about reality but what it does tell us about reality is of utmost fundamental importance economics might not tell us much about what humans will do here and there in in this situation in that situation but what this what economics tells us is of utmost of utmost importance so if we want to compare the austrians again to mainstream economists we can say the austrians are in some ways more dogmatic let me say certain things we know apodictically it cannot be different than this way and we do not need to test this at all and to test it is a sign of intellectual confusion it is as if somebody thinks that he has to test the law of pisagoras let's say by measuring triangles and then if he finds out such and such results i have gained in the united states that he has to travel to australia and to find out whether the same laws of pisagoras hold in australia as well we would just say that is absolutely stupid why do you do something like this on the other hand we are far more humble than the mainstream economists because mainstream economists think they can predict what my most highly ranking goal of using an orange will be and what my second most highly ranking goal of using an orange will be there the austrians would say no that's that sort of enterprise is a silly enterprise this is something that entrepreneurs have to do and if you are so smart you economists why aren't you as rich as the entrepreneurs are are so austrians are dogmatic in a small area and they are very humble in most other areas and mainstream economists are all around confused thank you