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 Rand’s realist approach is superior to both Mises’ rationalism and Friedman’s empiricism.
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.
Mises’ 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 Mises’ theorems of economics is rooted in the concept of human action. Mises’ 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 person’s 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 person’s specific knowledge of those features of the external world that are relevant to the person’s goals or to the methods used in his pursuit of these goals. Praxeology’s 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 praxeology’s propositions can be derived.
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 facts.
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. Mises’ 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.
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Friedman’s Predictive Approach
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Milton Friedman dismisses Mises’ apriorism and aprioristic reasoning as a subjective method of considering the introspections of a person’s 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, “The Methodology of Positive Economics,” 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.
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“Mises’ 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.”
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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 theory’s predictions will falsify the theory. His idea of the role of testing thus involves induction via elimination or rejection. Friedman’s 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 theory’s assumptions. In fact, he extols the virtues of descriptively false assumptions. According to Friedman, “Truly 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.” Friedman explains that a person cannot say that a theory’s 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(1).
It is difficult to reconcile Friedman’s practice with his methodological principles. In practice, he frequently argues on the basis of the plausibility or realism of a model’s 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 Rand’s theory of concept formation transcends both Mises’ apriorism and Friedman’s 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 man’s 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 man’s 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 one’s 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 Mises’ 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. All the essential principles and laws of economics could then be deduced from the action axiom.
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, “Check your premises.” 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 Friedman’s 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 Friedman’s view, the theory does not have to be descriptively false(2).
Ayn Rand’s 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.
- See Roderick T. Long, “Realism and Abstraction in Economics: Aristotle and Mises versus Friedman.” Austrian Scholars Conference 10 (Ludwig von Mises Institute, March 2004).
- Ibid.