Objective Ruminations

Realism, Abstraction and Counterfactual Laws in Economic Analysis

In Uncategorized on July 7, 2011 at 12:23 am

In this paper I will put forward a critique of the neoclassical method as presented by Milton Friedman from an Austrian perspective and point towards some of the major differences resulting from this methodological distinction. Specifically I will focus on the differing conception of the nature of abstractions and economic laws arguing that while implicit in Friedman’s positivist theory is a Platonic view of universals, it is the Aristotelian tradition which sets the framework for the Austrian approach[1].  In particular I contend that the Platonic view is flawed and leads to the acceptance of unrealistic modeling in economics and should be superseded by the Aristotelian approach of the Austrian school which relies on verbal logic, qualitative analysis and intransigent conceptual realism.

The standard Austrian critique of neo-classical economics is that it is unrealistic and makes assumptions which are not merely oversimplifications but outright falsehoods.  The reliance on mathematical constructs and modeling, according to these critics, is fundamentally wrong headed and ends in a cul de sack of irrelevancy and the danger of policy recommendations on the basis of theories which are far removed from reality. Consequently the limitations inherent in the neo-classical approach encompass the lack of  “subjective assessment, institutional context, social embeddedness, knowledge (as opposed to information), judgment, entrepreneurship, creativity, process, history”. Indispensable to the Austrian approach of explaining competition and the market process, in particular, are the concepts of rivalry and entrepreneurship, imperfect information and the passage of time.

In his widely influential essay ‘A Theory of Positive Economics’ Milton Friedman offered a rebuttal of such criticisms by pointing out that a good explanatory model must be abstract, i.e. must select from a plethora of different characteristics the most relevant one’s and disregard the others. Abstractions, according to Friedman, are by their very nature unrealistic, because the act of abstraction necessarily entails making an inaccurate representation of reality. On this view if realism, i.e. correspondence to reality, was the standard according to which a theory had to be judged the whole point of a theory, to ‘explain much by little’, would be defeated.  In essence this amounts to the view that abstractions necessarily falsify reality. Friedman writes:

“Truly important and significant hypotheses will be found to have “assumptions” that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions (in this sense).The reason is simple. A hypothesis is important if it “explains” much by little, that is, if it abstracts the common and crucial elements from the mass of complex and detailed circumstances surrounding the phenomena to be explained and permits valid predictions on the basis of them alone. To be important, therefore, a hypothesis must be descriptively false in its assumptions.”


Austrians point out that this method leads to an exclusion of precisely those things which make the market process intelligible, such as imperfect information and the resulting coordinating role of the entrepreneur which is simply assumed away in the neoclassical theory. However, Friedman would most likely argue that depending on which assumptions the Austrians make, which aspects they regard as crucial “from the mass of complex and detailed circumstances”, their hypothesis is but one of several competing one’s, but that the realism of the assumption adds nothing to its merit. In Friedman’s words


“ the relevant question to ask about the “assumptions” of a theory is not whether they are descriptively “realistic,” for they never are, but whether they are sufficiently good approximations for the purpose in hand. And this question can be answered only by seeing whether the theory works, which means whether it yields sufficiently accurate predictions.


The Austrians and Friedman obviously mean two different things when they refer to an explanation to Friedman explanatory power refers to the ability of a hypothesis to predict empirical data, to the Austrians an explanation is an account of cause and effect relationships according to the nature of the entities involved in the real world. The Austrians do not accept the idea of ‘descriptively false’ assumptions in economic analysis at all. In their view the existence of imperfect information or the role of the entrepreneur would not constitute optional assumptions among equally valid competing hypothesis but realistic accounts of the world the denial of which would render any theory false from the outset.

The key to understanding this difference and the reason why Friedman’s defense of unrealistic models is defective lies in Friedman’s erroneous conception of the nature of abstractions. In the following an Aristotelian conceptions of abstraction as developed by Ayn Rand will be presented in order to vindicate the Austrian’s critique of Friedman’s methodology. Furthermore I will show how the Austrian method is premised, albeit unwittingly, on the Aristotelian/Objectivist theory of abstractions.

Aristotle’s theory of universals was put forward as a response to the prevailing Platonic view of abstractions. Plato contended that universals must be knowable, and that if they must be knowable they must actually exist, they must be real, for Parmenides, before him made it sufficiently clear that ‘thou canst not know what is not’, but universals cannot be found in the world of particulars, hence there must be a second world of universals. One of his arguments is that universals and particulars have radically different characteristics and hence must be radically different things, particulars for example are ever changing in every respect and every instant, but universals are unchanging, immutable. Real triangles for instances are never perfectly triangular, what is more there are triangles in different sizes and colors and even materials since every real triangle is of physical extension, the universal concept of triangle, however, is perfect and immutable and of no physical extension.  So since concepts on the one hand are supposed to apply to all particulars of an instance, but on the other hand could not do so if they had as content any determinate characteristic of any one particular, concepts cannot apply to any actual triangle without falsifying reality. If the universal of triangle was to refer to all triangles it could not contain any particular material, but then the concept triangle would have to have as its referents triangles of no particular material, since it cannot strictly apply to any actual triangle made of some determinate material. Plato’s way out was to postulate and immaterial world of forms where this-worldly particular triangles would be mere reflections of the eternal and immutable form.

Aristotle’s major objection was that Plato committed the fallacy of reification (lit. thing making); the theory of forms, according to Aristotle, is self-contradictory by its very statement. The universal is made into a concrete individual particular thing, which obliterates the whole distinction between universal and particular, but by definition a universal is what is common to a number of particulars, it can only exist in other things. To say it is a thing is to make the universal a non-universal; a particular. Hence Plato confuses abstraction with concretes. Aristotle went on to lay out his own theory of abstraction; the way we arrive at universals starting from concretes is through a mental process of selective awareness of a group of concretes and to isolate what is common to them (the universal) while ignoring the changes and differences. In the case of a triangle we focus on the geometric shape while abstracting away, i.e. while ignoring, the different materials, colors or imperfections of any one particular.

In the 20th century Ayn Rand gave a complete account of this process. According to Ayn Rand we form concepts by grasping similarities and differences among existents. Similarity of course does not mean identity. Ayn Rand recognized that the existents united by a valid concept can differ in every respect but that the nature of those differences is quantitative, i.e. they are differences in the measurement of the characteristics. So in forming a concept our mental process consists in retaining the characteristics but omitting their differing measurement. In the case of the triangle we retain the essential characteristic (its geometric shape) while omitting the measurements that differentiate one triangle from another. The differences in size, color or material are omitted when forming the concept. However, since concepts refer to actual existents, and to be is to be something specific (law of identity), we do not deny the existence of measurements when we omit them, only if we specified these measurements no to exist would our abstraction falsify reality, but then again, as Aristotle pointed out it would not be an abstraction to begin with.

Rather we recognize that the relevant measurements must exist in some quantity, but may exist in any. By not specifying the measurements we can integrate all triangles into a single mental entity and treat them as interchangeable member of a class.[2] “A concept” in Ayn Rand’s definition “is a mental integration of two or more units possessing the same distinguishing characteristic(s) with their particular measurements omitted.”

The mistake of Plato, and as we will see also Friedman, is then to misunderstand measure omission as being an act of denying the existence of those measurement, as we have seen on the contrary measurement omission means dropping, i.e. not specifying the measurements which must non-the-less exist . Therefore the concept as mental unit includes and applies to all its particular existents.

Roderick T. Long eloquently capsulated this by pointing out that the difference lies in the fact that we may consider a triangle as not having a determinate color, or else we may consider the triangle not as having a determinate color. In the former case we specify the non-existence of the measurement and hence falsify reality, i.e. contradict the concretes on which it is based, whereas in the latter we merely refrain from specification and thus include all instances of ‘triangularity’. [3]

After this excursion into epistemology let us now return to Friedman’s defense of unrealistic models on the basis that abstractions are by their descriptive falsification of reality. This as we have seen is exactly the Platonic mistake of treating all abstractions as a form of idealization. This confusion is well demonstrated by the following passage from his above mentioned essay:

A theory or its “assumptions” cannot possibly be thoroughly “realistic” in the immediate descriptive sense so often assigned, to this term. A completely “realistic” theory of the wheat market. Would have to include not only the conditions directly underlying the supply and demand for wheat but also the kind of coins or credit instruments used to make exchanges; the personal characteristics of wheat-traders such as the color of each trader’s hair and eyes, his antecedents and education, the number of members of his family, their characteristics, antecedents, and education, etc.; the kind of soil on which the wheat was grown, its physical and chemical characteristics, the weather prevailing during the growing season; the personal characteristics of the farmers growing the wheat and of the consumers who will ultimately use it; and so on indefinitely. Any attempt to move very far in achieving this kind of “‘realism” is certain to render a theory utterly useless.”


Friedman assumes here that the extreme of realism would be to specify ‘color of each trader’s hair and eyes, his antecedents and education’. Ayn Rand’s ‘Introduction to Objectivist Epistemology’ contains a passage that provides a direct answer to Friedman:


“ “When can we claim that we know what a concept stands for?” they [modern philosophers] clamor – and offer, as an example of man’s predicament, the fact that one may believe all swans to be white, then discover the existence of a black swan and thus find one’s concept invalidated. This view describes the unadmitted presupposition that concepts  are not a cognitive device of man’s consciousness, but a repository of closed out of context omniscience – and that concepts refer not to the external world but to the frozen, arrested state of knowledge inside any given consciousness at any moment.”


Concepts are cognitive tools whose purpose it is to condense the mass of complex details and differences Friedman describes. The concept of ‘man’ or the ‘wheat market’ is the same regardless of the context of knowledge of the person holding it. The cognitive tool has to be kept apart from its particular contents which is determined by a person’s context of knowledge, the fact that we are able to learn is a demonstration of the ‘open ended nature’ of concepts, new discoveries about the ‘wheat market’ do not invalidate the prior concept  but are subsumed under it. The requirement of realism does not demand that every detail and aspect be specified, merely that their non-existence be not specified either. Friedman was in part responding to the attempts to make models more realistic by adding additional assumption to the models, but the issue of the lack of realism is not remedied by seeking idealized representations of reality that specifies less aspects of reality to be non-existent thus offering a better approximation, but rather to seek abstractions that do not specify the non-existence of any such aspect at all. [4]


This is why, in the earlier example, the Austrians would not have been contended if their theories had been delegated the status of approximate hypotheses. The Austrians are aware of the need to deal with real world complexity by means of abstraction and generalization, that is why they leave aside irrelevant details, rather than specifying their absence, this is why the Austrians can claim realism; their abstractions (and hence their generalizations) are not descriptively false. The perfect competition model for example, does not merely fail to specify the existence of entrepreneurial error which would merely mean that it would be unable to explain essential aspects of the market process, but it would not be descriptively false. But rather by postulating complete knowledge, on the premise that this idealization constitutes an abstraction, the model explicitly specifies the non-existence of entrepreneurial error. It is this falsification against which Austrians protest.


Friedman’s view of abstractions which allowed him to make unrealistic assumptions has an obvious appeal; it allows the social scientist to assume the same constancy of physical objects  in human action, and thus reduce the human agent to a determined automaton which can be set in a constant, quantitative relationship to certain determining factors and conditions.  This has allowed economists to emulate the alleged queen of science; physics by appropriating its language; mathematics. Philip Mirowski has pointed out “that neoclassical economics developed as a copy of nineteenth-century mechanical physics: using the same formal method, yet replacing the concept of energy with that of utility and applying the same principles of conservation, maximization of the result and minimization of waste.”[5] It is the nature of the object which a science studies that dictates the proper ‘language’ of a science. Physics seeks to establish laws of material nature, i.e. causal relationship between physical objects existing in time and space. It is the fact that these physical objects are fully determined by the essential relationships in which they stand with other physical objects, which makes it possible that these relationships can be expressed by means of establishing relationships between numerical measurements.[6]The essence of scientific explanation is to give an inductive generalization that accounts for facts in terms of other facts. A thing X is scientifically explained if we can demonstrate that there is a constant causal relationship between X and another thing Y. The nature of neo classical assumptions allows its adherents to look for exactly the same relationship as do their colleagues in the physics department.

Now considering the nature of abstractions and the mistake committed by Friedman the descriptively false assumption upon which mathematical modeling in economics relies is no longer tenable. What emerges as central fact in all social sciences, formerly assumed away, is the fact that human beings have free will[7]. The fundamental fact that human beings do choose and that the capacity to make choices is a defining characteristic of human nature forms the starting point of the Austrian approach[8], which I am going to outline in due course. Let us first turn to Friedman’s treatment of free will. Friedmand explicitly operates on the assumption that if we could conduct controlled experiments we could determine the impact of certain condition on human behavior and formulate scientific laws:


“Unfortunately, we can seldom test particular predictions in the social sciences by experiments explicitly designed to eliminate what are judged to be the most important disturbing influences. Generally, we must rely on evidence cast up by the “experiments” that happen to occur.“


But the fact that human beings have free will means that even in an experimental setting constant laws of cause and effect, i.e. sufficient causal condition, for human behaviors could never be established, because human action is determined by choice, self –determination, self causation. This insight has a wider implication. Because of the existence of human choice it is impossible to give explanations of behavior in terms of a causal chain linking it to antecedent events. Hence any attempt to emulate the physical sciences in the social sciences is bound to fail.[9]

Now if the current discussion and the Austrian position ended on that note, the Austrians would find themselves in the somewhat self-refuting position of being a school of economic thought that postulated the impossibility of economic laws.  At first glance, however, this would seem to be the only logical conclusion from the fact that no antecedent causes can give a causally sufficient account of human action. And indeed this position was held by the German Historical school the foremost rival of the Austrian approach to economics in the latter half of the 19th and early 20th century. Among its most prominent representatives are Gustav Schmoller, Karl Knies and Werner Sombart.  Their views differed not only from the Austrian school but also from classical economics. The members of the group rejected laws of economics, altogether, even such basic principles as the law of supply and demand. They regarded economics as a historical and practical discipline. It was to be the science of the state, akin to its historical origin describing the efficient management of the Greek household, but merely extended beyond the confines of the home to encompass all of the state. Economics should be studied in connection to history, political science, ethics and if the subject had been known at the time psychology and anthropology. In short economics was seen as the mere outgrowth of a myriad of different factors in which economic behavior is embedded and which influence human action. These influencing factors, however, would merely present certain habits or tendencies because ultimately, so the German Historical school postulated, there can be no laws of economics and no laws of human action as such.

This follows because there are no determinants of human action or constant relationships that could predict them in a lawful fashion for any explanation has to make reference to people’s beliefs and desires. The members of the group thought the way to understand people’s action is not through empirical regularities but through Verstehen, the empathy of beliefs and desire in order to explain human action. And since these belief and desires are determined by human choice there can be universal laws of people’s beliefs and desires. [10]

The Austrian scholars at the time most vigorously opposed this view and a bulk of literature dealing with the distinctly Austrian method; praxeology has been written every since.[11] The Austrian school is arguably the most method-conscious school of thought in academia today and I do not intend to explore the depth and different facets of the disparate, competing views prevailing in the Austrian schools today[12]. Rather I will give what I regard as the most convincing and accessible account of praxeology; “the science of human action”[13] as developed by Jörg Guido Hülsmann[14] and employed by economists such as Frederic Bastiat [15]and Henry Hazlitt.

At this point in the paper we established the impossibility of modeling human action upon physics with mathematically formalism and the methodological fallacy which hitherto allowed the neoclassical mainstream to do so.  Furthermore the opposite extreme ensuing from the realization that human action is ultimately determined by human choices has been surveyed as represented by the German Historical School. The difficulty posed by the fact of human choice that the Austrian method tries to overcome is how to establish universally valid laws of economics without falling prey to the idealized non-realistic modeling of neoclassical economics which contradict the existence of human choice. Put differently how can the Austrian combine their Aristotelian conception of abstractions with the requirements of an exact science?

The answer emerges if we examine an example of an economic generalization presented by Milton Friedman in the essay discussed above.  Friedman cites the example of minimum-wage laws to demonstrate the importance of positive economics, i.e. of empirically testable hypotheses for normative economics:


“Opponents [of minimum-wage laws] believe (predict) that legal minimum wages increase poverty by increasing the number of people who are unemployed or employed less advantageously and that this more than offsets any favorable effect on the wages of those who remain employed.”


An Austrian would put this statement slightly differently and say that minimum wages cause poverty (or better unemployment) to increase. But what does it mean to say that minimum wage laws cause an increase in unemployment? As compared to what does the unemployment rise? On the one hand as we have seen the establishment of minimum wage laws cannot be an efficient cause of the human action leading to higher unemployment; however the law is also more than just the statement of and empirical regularity or pattern of data since it seeks to provide a causal account of observed facts. But even after minimum wage laws have been enacted unemployment could start to fall due to other countervailing factors which intervene simultaneously. If then economic laws are not relationships between observable events, what are they? Hülsmann ventures to give and answer:


“The true social scientist must be content to describe the transformation of the world without any pretension to know its laws. However, this view is unwarranted since there are laws of choice, and therefore of human action. These laws make various causal and noncausal explanations of human action possible. The key to our argument lies in the fact that human action contains both realised and unrealized parts. Human action is realised in the actual movement of the body and in the actual activity of the mind. But it also contains two types of unrealised parts: the ends sought after and the foregone alternatives.”


In other words economic laws are not causal relations between earlier and later events but rather between actualized events and counterfactual ones. They are the study of the laws of choice. Unrealized parts of human actions subsume the purpose/end of an action and the activity forgone for it. The fact of human choice also entails the undeniable fact that one could have done otherwise and that there exist then in a certain sense a conceivable alternative to actualized human action. This insight Hülsmann writes elsewhere “puts Austrian economists in a position to explain the realized manifestation of human action (behavior and thoughts) as a corollary of the non-realized part. [… ] By contrast, neoclassical economists seek to explain observable phenomena [… ] in terms of other observable phenomena [….]”. To return to the minimum-wage law example; an Austrian economist would describe the law of cause and effect governing the relationship between the minimum wage law and unemployment by invoking the forgone counterfactual alternative. Accordingly a minimum wage law raises unemployment by more than it would otherwise have been. It is in this fashion that the Austrians were the first to dismantle what has become known as broken window fallacy. In his treatise ‘What is Seen and What is Not Seen’ Frederic Bastiat eloquently explains why it is wrong to belief that the destruction of a glass pane is a net benefit by providing labor for the community employing counterfactual analysis. He points out that the broken pane constitutes a loss because other goods would otherwise have been consumed but had to be forgone in order to pay for the pane.:


Have you ever been witness to the fury of that solid citizen, James Goodfellow, when his incorrigible son has happened to break a pane of glass? If you have been present at this spectacle, certainly you must also have observed that theonlookers, even if there are as many as thirty of them, seem with one accord to offer the unfortunate owner the selfsame consolation: “It’s an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glazier if nobody broke a window?” Now, this formula of condolence contains a whole theory

that it is a good idea for us to expose, flagrante delicto, in this very simple case, since it is exactly the same as that which, unfortunately, underlies most of our economic institutions. Suppose that it will cost six francs to repair the damage. If you mean that the accident gives six francs worth of encouragement to the aforesaid industry, I agree. I do not contest it any way; your reasoning is correct. The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen. But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen. It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.[16]


What is seen is the actualized fact, what is not seen is the counterfactual forgone alternative, the relation between the two is the essence of economic laws and the key to accommodating human choice in exact scientific laws. Now we can tie this in to the discussion of abstraction at the beginning of the paper. The reader should note that in formulating counterfactual laws no reference is made to other operating factors; but instead of trying to hold them constant or specify them to be non-existent, they are simply not specified. This is a form of measurement omission which makes the economic law thus formulated a realistic, universally applicable law, for it holds regardless of what other factors might intervene. Just like a concept it subsumes all instances uniting them by a distinguishing characteristic while omitting the particular measurements in a given situation such as economic growth, prevailing work ethics etc. Measurement omission is inherent in the approach, since counterfactual laws relates an actual fact to a counterfactual alternative what differs across the two scenarios is by definition merely the fact under consideration (such as minimum wage laws ), this difference holds true for any conceivable, concrete situation.

Hülsmann goes on to distinguish between exact counterfactual laws such as “increased savings diminishes present consumption below the level it would otherwise have reached’ which are true by metaphysical necessity and not open to choice and between “case probable” counterfactual laws which describe mere tendencies in human action such as “an increased demand for a good involves a higher market price for the good than would have obtained without this increase”[17]. Although these differences are important, I shall refer the reader to the original article since the point does not add to the argument in question.

The important point of the above discussion is that counterfactual laws are realistic in that they omit the measurements of other confounding factors without assuming them away, hence just as a concept it is universally applicable and refers to all instances in which it obtains. For this reason Austrian economists employ verbal logical to describe and explain economic phenomena. Keeping in mind the fact that such conceptual treatment are the only way to deal realistically with laws of human actions critics lamenting the loss of the exaction of mathematical formalism can be countered by pointing out that whereas mathematical models are syntactically impeccable they are semantically wrong. Peter Boettke furthermore makes the point that verbal logic, while being the only guarantee of semantic correctness does not have to compromise the syntactical value of economic laws.[18]

To once again put the discussion into a historical context, during the Methodenstreit with the German Historical School Ludwig van Mises put forward his method of praxeology as a defense of economics and economic reasoning as such. He did not try to define a distinct Austrian position, in fact there was not yet such thing as the Austrian school, but rather explicate and vindicate what he perceived to be the general method of economic reasoning of the mainstream of his profession.[19] The formulation of economic laws which Hülsmann describes as counterfactual is the outcome of the standard deductionist method as formalized by John Stuart Mill. Mill realized that due to the manifold causal factors influencing given economic phenomena inductive generalization employing the experiment based method of physics[20]. The solution is to establish ‘basic psychological or technical laws’ such as the law of diminishing marginal utility and then to deduce the implication for a set of problems. The law of diminishing marginal utility for instance has important implication for determination of prices. In an attempt to strengthen the methodological make-up of economics, Mises postulated his fundamental premises to be that human action occurs in a means ends framework and is hence purposeful and lawful, by adding only little more assumptions he claimed to be able to deduce all of economics. It is this claim that must seem alienating to mainstream economists, but in so far as Mises was inconsistent with his proclaimed method he approximated Mill’s approach of deducing from the most basic observation such as ‘all things being equal people seek to advance their material well being’. In order to discover economic laws then only the fact that men employ means in order to achieve certain ends taking into account uncertainty, the possibility of human error and limited context of knowledge, have to be assumed based on the rough ethical, psychological and philosophical make up of the population under investigation[21]. Murray Rothbard describes this study of human action as starting from the primary axioms that men are causal agents, i.e. that the ideas they adopt by free will govern their actions. He contends that economists hence “begin by fully knowing the abstract axioms” upon which they build by “logical deduction, introducing a few subsidiary axioms to limit the range of the study to the concrete applications we care about”.

It is my contention that this is the general method by which economists reach insights about lawful operations. Even if Friedman propounds positivism and the testing of hypothesis based on direct empirical rather than causal confirmation he has to have reached these hypotheses somehow, by more than lucky hunches or the passive observation of certain ‘empirical regularities’. In fact anyone who has seen one of Friedman’s public appearances can testify to his rigorous causal analysis and refutation of fallacies by disclosing the logical contradiction of his opponents. In the above quoted statement on minimum wage laws Friedman provides a causal explanation of economic law that Austrians would call ‘a priori’ all one needed to add to the above statement to make it counterfactual is’… than otherwise would have happened’[22]. If data were collected which showed Friedman’s hypothesis to be wrong, i.e. falsified its prediction, would it follow that the law Friedman stated was wrong? No, because a multitude of other factors could have contravening effects. If Friedman had stated his law as an open ended counterfactual law it would have had universal validity.  The Austrian economist Walter Block once remarked that if you ‘scratch’ a neoclassical you will always find a praxeologist, he cited an anecdote in which his PhD supervisor rejected the result of an econometric survey based on logical impossibility of the outcome. Friedman’s inadvertent use of praxeology drives the point home as well.

The divergence of outcomes arises from the fact that might be adequate to describe a certain hypothesis might entirely fail to model other aspects. So that researchers employing the deductionist method to formulate certain hypothesis can draw up models that are only apt to represent a very limited range of phenomena so that further applications or reasoning from it are invalid. The perfect competition model for instance might aptly illustrate the competitive forces operative in the wheat market but entirely fail to describe competition in normal industries which is only be open to a qualitative description of a rivalrous process, let alone serve as ideal. The above charge and demand for realism hence still stands, models might serve as an aid to grasp an abstract causal process but can never be employed as authoritative representations of the real world.

[2] Application to the problem of induction can be found in Harriman the logical leap

[3] For further discussion of this distinction see Roderick T. Long, “The  Benefits and Hazards of Dialectical


[4] Essentially the same critique with reference to philosophers in the Aristotelian tradition such as Thomas Aquinas, Pierre  Abélard and the Spanish scholastics is given in “Realism and Abstraction in Economics:

Aristotle and Mises versus Friedman” and “The  Benefits and Hazards of Dialectical  Libertarianism” by Roderick T. Long

[5] P. Mirowski, More Heat than Light: Economics as Social Physics, Physics as Nature’s Economics, Cambridge: Cambridge University Press, 1989. Mirowski later (Machine Dreams, Cambridge: Cambridge University Press, 2002) refined even further his critical analysis of the mechanicism of the Neoclassical School, which he refers to as ‘the Cyborg incursion into economics’. (in Huerta de Soto)

[6] For a full discussion of the relationship between physics and  mathematics see David Harriman’s chapter ‘the role of mathematics and philosophy’ in the logical leap.

[7] For a complete validation of the fact of free will and its implication for the social sciences see “The Mantle of Science” by Murray N. Rothbard

[8] For a recent discussion of the causal insufficiency ‘ gap’, i.e. absence of necessary causes determining human action see Searle John (Freedom and Neurobiology)

[9] An exhaustive account of this conclusion is given in Hoppe ‘Kritik der kausalwissenschaftliche Sozialforschung’

[11] For a summary see Rothbard ‘Praxeology; The Austrian Method’, for an indepth discussion see van Mises ‘Human Action’ and Hoppe ‘Economic Science and the Austrian Method’

[12] Leading Austrian theorist on methodology is Hans Hoppe whose views conflict to some extent with those of Murray Rothbard and David Gordon.

[13] First definition by von Mises in ‘Human Action’

[14] Jörg Guido Hülsmann ‘Facts and Counterfactuals in Economic Law’

[15] Frederic Bastiat ‘What Is Seen and What Is Not Seen’

[16] Open domain, quoted in Huelsmann ‘Facts and Counterfactuals’

[17] The fact that such laws operate in the form of tendencies was first indentified by John Stuart Mill: It is evident, in the first place, that Sociology, considered as a system of deductions a priori, cannot be a science of positive predictions, but only of tendencies. We may be able to conclude, from the laws of human nature applied to the circumstances of a given state of society, that a particular cause will operate in a certain manner unless counteracted; but we can never be assured to what extent or amount it will so operate, or affirm with certainty that it will not be

counteracted; because we can seldom know, even approximately, all the agencies which may co-exist with it, and still less calculate the “collective result” of so many combined elements. (http://www.gutenberg.org/files/27942/27942-h/27942-h.html) p. 621


[18] Peter Boettke ‘What is wrong with neoclassical economics (and what is still wrong with Austrian Economics)

[19] See Roger Backhouse ‘Austrian Economics and the Mainstream: View from The Mainstream’ The graph in the appendix illustrates the fact that the use of models only rose to prominence in the late 30s

[20] Daniel M. Hausman ‘Economic Methodology in a Nutshell’

[21] It cannot be taken for granted that all people across time and place seek to advance their material well being, e.g. the law of supply and demand might not hold for primitive people who have not even grasped the law of identity or causality including their own causal efficiency.



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