|Three of the most respected and influential
free-market thinkers of the 20th century are Ludwig von Mises
(1881-1973), Milton Friedman (1912- ), and Ayn Rand (1905-1982).
The purpose of this essay is to compare and evaluate the respective
methodological approaches of each of these theorists who have
influenced the course of history with their ideas. We will see how and
why Randís realist approach is superior to both Misesí rationalism and
Mises argued that concepts can never be found in reality, wanted to
construct a purely deductive system, and was searching for a
foundation upon which to build it. He was seeking a theoretical
foundation that could not be questioned or doubted. He wanted to find
knowledge of logical necessity and desired to escape the
concrete-based empiricism of historicism. His mission became to look
inward in order to deduce a system that was logically unobjectionable.
Mises aspired to find laws that could only be verified or refuted by
means of discursive reasoning.
Misesí action axiom, the universal introspectively-known fact that men
act, was the foundation upon which Mises built his deductive system.
Action, for Mises, is the real thing. Mises said that action was a
category of the mind, in a Kantian sense, that was required in order
to experience phenomenal reality (i.e., reality as it appears to us).
The unity found in Misesí theorems of economics is rooted in the
concept of human action. Misesí economic science is deductive and
based on laws of human action that he contends are as real as the laws
of nature. His praxeological laws have no spatial, temporal, or
cultural constraints. They are universal and pertain to people
everywhere, at every time, and in all cultures.
Human actions are engaged in to achieve goals that are part of the
external world. However, a personís understanding of the logical
consequences of human action does not stem from the specific details
of these goals or the means employed. Comprehension of these laws does
not depend on a personís specific knowledge of those features of the
external world that are relevant to the personís goals or to the
methods used in his pursuit of these goals. Praxeologyís cognition is
totally general and formal without reference to the material content
and particular features of an actual case. Praxeological theorems are
prior to empirical testing because they are logically deduced from the
central axiom of action. By understanding the logic of the reasoning
process, a person can comprehend the essentials of human actions.
Mises states that the entirety of praxeology can be built on the basis
of premises involving one single non-logical concept -- the concept of
human action. From this concept all of praxeologyís propositions can
Mises contends that the axiom of action is known by introspection to
be true. In the tradition of Kant, Mises argues that the category of
action is part of the structure of the human mind. It follows that the
laws of action can be studied introspectively because of aprioristic
intersubjectivity of human beings. Not derived from experience, the
propositions of praxeology are not subject to falsification or
verification on the basis of experience. Rather, these propositions
are temporally and logically prior to any understanding of historical
For Mises, economic behavior is simply a special case of human action.
He contends that it is through the analysis of the idea of action that
the principles of economics can be deduced. Economic theorems are seen
as connected to the foundation of real human purposes. Economics is
based on true and evident axioms, arrived at by introspection, into
the essence of human action. From these axioms, Mises derives logical
implications or the truths of economics. Misesí methodology thus does
not require controlled experiments because he treats economics as a
science of human action. By their nature, economic acts are social
acts. Economics is a formal science whose theorems and propositions do
not derive their validity from empirical observations. Economics is
the branch of praxeology that studies market exchange and alternative
systems of market exchange.
Friedmanís Predictive Approach
Milton Friedman dismisses Misesí apriorism and aprioristic reasoning
as a subjective method of considering the introspections of a personís
own mind. Seeking objectivity and verifiability, Friedman prefers the
empirical method which uses publicly and socially available data. As
an empiricist, he considers a theory to be useful if the theory
permits individuals to predict occurrences of the phenomenon. This is
in opposition to Mises and many other Austrian thinkers who regard the
explanation of economic phenomena as making the world understandable
in terms of human action in the pursuit of values and goals.
In his 1953 article, ďThe Methodology of Positive Economics,Ē Friedman
maintained that the realism or unrealism of the assumptions of
economic theory is no guide to its usefulness. He rejected both
introspection and the plausibility or realism of assumptions as a way
of evaluating a theory. He asserted that these had no bearing on the
predictive power of a theory or hypothesis with respect to its further
applications. What matters to Friedman is whether or not the
predictions of a theory correspond to empirical evidence. For
Friedman, an instrumentalist, hypotheses are tentatively chosen
because they have been successful in yielding true predictions.
Friedman contends that an hypothesis can be tested only by the
conformity of its predictions or implications with observable
phenomena and not by comparing its assumptions with reality. He
applied the ideas developed by Karl Popper for use in the natural
sciences in the realm of economics. Friedman argues that, as in the
natural sciences, theories should be accepted provisionally or
rejected only on the basis of the degree of correspondence of the
predictions of a theory with the factual evidence obtained. Friedman
asserted that a single empirical counterexample to a theoryís
predictions will falsify the theory. His idea of the role of testing
thus involves induction via elimination or rejection. Friedmanís
approach is similar to the pragmatism of John Dewey.
For Friedman, the significance of a theory is not considered to be a
direct result of the descriptive realism of the theoryís assumptions.
In fact, he extols the virtues of descriptively false assumptions.
According to Friedman, ďTruly important and significant hypotheses
have assumptions that are wildly inaccurate descriptive
representations of reality, and in general the more significant the
theory, the more unrealistic the assumptions.Ē Friedman explains that
a person cannot say that a theoryís assumptions are true because any
of its conclusions are true but that a person could say that there
must be at least one assumption that is false whenever some specific
conclusion is false.
Friedman states that for a theory to be useful it must be an
oversimplification of reality and therefore a false picture of
reality. He goes on to say that, depending upon the theory and its
uses, some of these false pictures, along with their assumptions, may
be more appropriate (i.e., more predictively accurate) than others.
For Friedman, abstraction involves a theory in which many actual
characteristics of reality are designated as absent from the theory.
Given this perspective, every advance in knowledge, new discovery, or
inclusion of additional attributes would defeat, invalidate, and
falsify the previous theory. Friedman views any theory as deficient
and descriptively false when it fails to specify all of the
characteristics of reality including all extraneous, non-explanatory,
and irrelevant characteristics. It follows that, for Friedman, all
models or theories are imperfect or incomplete because they do not
take into account all aspects of the economy. It is no wonder that he
turned his attention to prediction rather than to explanation.[i]
It is difficult to reconcile Friedmanís practice with his
methodological principles. In practice, he frequently argues on the
basis of the plausibility or realism of a modelís assumptions. After
comparing predictions with outcomes he revises hypotheses and
assumptions with the intention of making them more realistic. In the
light of test results, economists (including Friedman) modify their
hypotheses and assumptions in an ongoing and iterative process of
observation and theory. Of course, Friedman should be concerned with
the realism of assumptions. How else would he know what to attempt
next when his predictions fail to square with the facts? If an
economist does not assess the realism of his assumptions, the process
of theory modification would be inefficient, futile, and based on
speculative guesswork. It is apparent that Friedman is not a great
theoretical system builder and is even inconsistent with respect to
conforming his theory with his practice.
Ayn Randís theory of concept formation transcends both Misesí
apriorism and Friedmanís empiricism. Rand explains that the
acquisition of knowledge requires both induction and deduction. What
is known is distinct from, and independent of, the knower. Knowledge
is therefore gained via various processes of differentiation and
integration from perceptual data. Empirical knowledge is acquired
through observational experience of external reality. For example,
people observe goal-directed actions from the outside and attain an
understanding of causality and other categories of action by observing
the actions of others to reach goals. Individuals also learn about
causality by means of their own acting and their observation of the
outcomes. Introspection is a reliable but ancillary source of evidence
and knowledge with respect to what it means to be rational,
purposeful, volitional, and acting human being.
For Rand, the essential characteristics of a concept are
epistemological rather than metaphysical. Concepts are
epistemologically objective in that they are produced by a manís
consciousness in accordance with the facts of reality. Concepts are
mental integrations of factual data. Rand explains that concept
formation involves the process of measurement omission. A concept is a
mental integration of units possessing the same differentiating
characteristics with their particular measurements omitted.
Mises explained that a manís introspective knowledge that he is
conscious and acts is a fact of reality and is independent of external
experience. Mises deduced the principles of economics and the complete
structure of economic theory entirely through the analysis of the
introspectively-derived a priori idea of human action. While it is
certainly important to understand and acknowledge the useful role of
introspection in oneís life, it is also necessary to realize that its
role is limited, secondary, and adjunct to the empirical observation
and logical analysis of empirical reality. It would have been better
if Mises had said that external observation and introspection combine
to reveal that people act and employ means to achieve ends.
Introspection aids or supplements external observation and induction
in disclosing to a man the fundamental purposefulness of human action.
Randian epistemology recognizes that Misesí action axiom could be
inductively derived from perceptual data. Human actions would then be
viewed as performed by entities who act in accord with their natural
attributes of rationality and free will.
The Randian or Objectivist view is that the best way for judging a
model or a theory is to examine the plausibility of its assumptions.
As Ayn Rand herself would put it, ďCheck your premises.Ē Things which
the assumptions abstract from should pertain importantly to the
problem under examination. An hypothesis, complete with its
assumptions, is both explanatory and predictive if it abstracts the
crucial and common elements from the mass of detailed and complex
conditions surrounding the phenomenon to be explained and furthers
valid predictions of that phenomenon. The Objectivist view is that
economic and other theories need to omit a lot of details. Randian
realism does not require that all nonexplanatory extraneous
particulars be specified.
The Randian conception of abstraction is to attend to some aspects or
attributes of a phenomenon and to exclude others. From this
perspective, certain actual characteristics are simply absent from
specification or measurement. This is far different from and superior
to Friedmanís view that some actual characteristics are specified as
nonexistent or lacking. From a Randian perspective, new knowledge may
expand or refine a theory, concept, or model but it does not
necessarily contradict or invalidate it. In other words and contrary
to Friedmanís view, the theory does not have to be descriptively
Ayn Randís methodological approach overcomes the false alternatives of
rationalism and empiricism by explaining how abstract knowledge of
reality can be soundly derived from valid perceptual experience. Her
method for overcoming these dichotomies includes a number of processes
such as differentiation, induction, integration, deduction, reduction,
measurement omission, and so on.
Roderick T. Long, ďRealism and Abstraction in Economics: Aristotle and
Mises versus Friedman.Ē Austrian Scholars Conference 10
(Ludwig von Mises Institute, March 2004).
Dr. Edward W. Younkins is Professor of Accountancy at Wheeling
Jesuit University. He is the author of Capitalism and Commerce:
Conceptual Foundations of Free Enterprise [Lexington Books,
2002]. Many of Dr. Younkins' essays can be found on line at his
personal web page at
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