2012-09-12

Austrian Identity Crisis

This month's Cato Unbound is all about Austrian School economics, what it is, what it is not, and who thinks so. Cato Unbound is always interesting, and this month is no exception.

It is particularly interesting to me, in light of my oddball Austrianism. I have previously argued that Rothbard was not just wrong, but incredibly wrong to reject mathematical reasoning in economics. The thrust of my argument is that deductive logic itself is nothing other than a different language used in the application of verbal logic. Mathematics is a condensed language that enables us to express quantitative and logical ideas more concisely than verbal logic. Changing the symbols doesn't invalidate the logic, far from it. And, as my previous post on the topic points out, Mises himself didn't feel the same way Rothbard did about it.

Fortunately for me (considering my limited readership), George Selgin makes my broader point for me in his recent contribution to Cato Unbound. He writes (emphases his):
For Mises and Rothbard, and for many other Austrian economists, the term “economics” means what is elsewhere referred to as theoretical economics, at least when they use it in the course of a methodological pronunciamiento. That is, it means (as Mises indicates in one of the passages quoted above) the set of extant economic theorems. Understood this way, the claim that “economics” is a purely deductive undertaking ought not to strike even the most mainstream of economists, or anyone who has worked through a standard graduate microeconomics text, as particularly controversial, let alone absurd.
Then, the coup de grace: Selgin states, "But for most of us, Steve included, 'economics' doesn’t just mean pure economic theory or analytical economics. It also means applied economics, which includes everything from economic history to economic policy appraisal to econometrics."

This is the key point. Mises didn't reject applied economics. He conducted applied economics for the Vienna Chamber of Commerce, for heaven's sake! Rather, when Mises wrote essays and books on theoretical economics, he made clear that "praxeology" is economic theory.

In those works, he often referred to applied economics as "accounting." Take, for example, the following excerpt from Human Action, which for my money (no pun intended) is the best showpiece of Mises' advocacy of applied economics, including math:
Monetary calculation reaches its full perfection in capital accounting. It establishes the money prices of the available means and confronts this total with the changes brought about by action and by the operation of other factors. This confrontation shows what changes occurred in the state of the acting men's affairs and the magnitude of those changes; it makes success and failure, profit and loss ascertainable.
Here Mises isn't just lauding the profession of accounting and its ability to estimate costs, he's describing comparative statics, i.e. the bread-and-butter of microeconomic analysis. These are not words uttered by a man who rejected mathematics or applied economics.

Instead, these are the words of a man who used a specific term - praxeology - for economic theory (as Selgin rightly argues), and another specific term - accounting - for applied economics.

On this point, we can concede that Danny Sanchez is technically correct with respect to Mises' views when he (Sanchez) writes (emphasis his):
Mises wrote, "There are two main branches of the sciences of human action: praxeology and history." For Mises, praxeology is one of the sciences of human action, and history is another science of human action.  Praxeology does not include “all” of the sciences of human action.
Yes, Mises' terminology specifically differentiates between praxeology, economic history, and accounting.

Where Sanchez goes astray, however (and I mean, besides his tremendously uncharitable language regarding Steve Horwitz), is when he fails to realize that this is not the question posed by Cato Unbound at all. The question is not, "What, according to Mises' terminology, is the exact definition of praxeology." No, the question is, as the folks at Cato themselves put it:
In his lead essay [Horwitz] argues that logical deduction has a strictly limited role to play in economics, and that Austrian economists are indeed making important empirical contributions to the field. Further, he argues that the Austrian school stands to teach mainstream economics a good deal about how to conduct empirical observations and interpret them properly.
In fact, the title of this edition of Cato Unbound is Theory and Practice in the Austrian School. Mr. Sanchez would do us all a favor if he took time to understand that the purpose of this series is not to quibble over what can be properly understood as "praxeology," but rather in the Austrian School of economic thought, what is "theory" and what is "practice?"

For my money, Horwitz does an admirable job of pointing out both the importance of praxeology and its unique method for elucidating economic theory and the importance of embracing quantitative analysis in applied economics of the Austrian variety, which - if we are to use Mises' terminology - includes both "economic history" and "accounting."

A broader issue here might be whether there is any benefit to be gained by quixotically clinging to Misesian terminology to the point that one can no longer have a productive conversation with non-Austrian School economists. I would argue no. I would argue that such dogmatism is precisely what keeps Austrian School theories out of the mainstream, and furthermore puts many people off of the Ludwig von Mises Institute in general.