This is Part 3 of my ongoing series of posts summarizing Bob Murphy’s excellent book Choice: Cooperation, Enterprise, and Human Action — which itself is a summary of Ludwig von Mises’s classic treatise “Human Action.” The idea of this series of posts is to popularize and spread the word about Austrian economics and educate the public. Part 1 is here. Part 2 is here. Feel free to read them first if you’re just getting started. They’re actually very simple posts, making very simple points — as we are still in foundational mode.
Also, I have created a category for all these posts, called “Human Action and Choice,” so that all these posts can be read (in reverse order) with a single click. Also, let me be clear: any errors in these summaries are mine and not Murphy’s. I am restating his points in my language, and that opens up the possibility of inaccuracy. Should that happen, blame me, not him.
One of the things that the Paul Krugmans of the world mock about Austrian economics is that they claim it is too abstract and has no relationship to the real world. After all, as I explained in previous posts, Mises sees economics as a discipline that derives universal truths from deductive reasoning that has nothing to do with experimentation. Mises tells us that everything we need to know about economics is within us. All we need to do is think about these principles and understand what logically follows from our conclusions. How can that teach us anything about the real world (the Krugman types ask)?!?!
Here, Murphy makes the analogy to geometry. We do not derive the Pythagorean theorem by building 500 right triangles and measuring the angles and the sides. The proof of the theorem does not depend on experimentation. The proof is within us — it is simply a logical chain of thoughts that we need to reflect on.
How can economics be compared to that?? Isn’t economics a discipline depending on endlessly random and changing variables that can never be predicted?
Mises says that’s wrong. According to Mises, there are certain laws of human action that we can derive logically — just as we logically derived yesterday that human action requires a mind, preferences that are ordinal and not cardinal, and a desire to affect the future.
Economics is not physics. Economics does not set up a hypothesis about what will happen in reality if one conducts a controlled experiment in which x does specified action y to object z. In economics, as conceived by Mises, there is nothing to “test.” It is an a priori discipline. Mises did not reject the study of data. But he did reject the notion that principles of economics depend upon on the outcome of data from controlled experiments.
Murphy, in his book, offers a compelling defense of this approach, by challenging the hypothetical classical economist to come up with precepts that demonstrate what it means to “think like an economist.” Murphy quite rationally guesses that even a classical economist would say things like this:
- “There’s no such thing as a free lunch.”
- “People make decisions on the margin.” [Editor’s note: we’ll get into what this means in a future post. The simplest way to illustrate the concept for now is with this observation: the hundredth bite of steak may not be as appealing as the first bite.]
- “Trade is a positive-sum game.” [Editor’s note: socialists and Democrats forget this one all. the. time.]
Pretty much every honest economist would agree with these concepts. But why? Because 100,000 controlled experiments have been run to demonstrate whether free lunches exist? No. These are not observations we think are true because we conduct experiments. They are simply inherent in the process of “thinking like an economist.” These are truths that we know, from being a human being and reflecting on the nature of humans and how they act.
Also important is to distinguish economics — an analysis of human action — from economic history, which is a very different discipline. Again: Mises did not reject the concept of collecting economic data per se. Murphy notes that Mises and his student Friedrich Hayek founded the Austrian Institute for Business Cycle Research in 1927. (Mises predicted that the monetary expansion of the 1920s was going to result in a giant crash, just as followers of Austrian economics like Ron Paul predicted, in the early 2000s, a huge crash from the Fed’s cutting of interest rates — while folks like Paul Krugman were explicitly calling for a housing bubble; no joke!). So: no, Mises did not reject the study of economic data. He just refused to call it “economics.” He just believed that study fell under the category of “economic history.”
So if you think geometry is irrelevant to the “real world” because its truths do not depend on empirical observations or experimental verification, feel free to reject Austrian economics on the same basis. Otherwise, you are compelled to grapple with each grippingly inescapable conclusion on its own . . . even as it follows inexorably from the previous one.
Murphy rounds out the chapter with this observation:
“Subjective Value Theory” Is an Objective Theorem in Misesian Economics
Other than learning the building blocks of Austrian economics, one of the main concepts you might learn from this post (if you are unfamiliar with the concept, which many people are) is the concept of “subjective value theory.” The idea here is that the market price of any good, or service (or stock, or bond) does not depend upon anything objective. The price simply reflects the subjective perspective of consumers in the market. This is not a uniquely Austrian insight, as far as I know; I believe it is universally accepted by all honest economists these days.
And I think the insight is very valuable. I once had someone say to me: “I heard the stock market lost hundreds of millions of dollars in value yesterday. My question is: where did it go?” Before I learned “subjective value theory” I was utterly at a loss. Where had it gone? I had no idea.
Now I know: it didn’t go anywhere. Yesterday, all the people forming the consumers in the stock market collectively thought these stocks were worth x. Today, they think it’s worth x . . . minus a few hundred million dollars. It’s completely subjective.
Again (and I could be wrong here), but while this is a core Austrian concept — and was discovered by the earliest known major Austrian economist, Carl Menger — it was also discovered by others at about the same time . . . and is now (I believe) fairly well universally recognized by all economists, both Austrian and classical.
The point made by Murphy is not to explicate the concept (which is, I submit, an important concept), but rather to note that, within Mises’s framework, this “theory” is not really a “theory” in the way we typically use the term. It’s more like an objective theorem, the way the Pythagorean theorem is a truism and not a “theory.”
Again: economic truths like these just are. They can’t be proven right or wrong by experimentation. They are just there: truths to be discovered through reflection.
Enough for today. Tomorrow we’ll define some more concepts and get into the concepts of diminishing marginal utility (a core economic concept) as well as the central role that time plays in the Austrian vision.
I hope you’re enjoying this. Real economics is one of the most important disciplines you can learn.