Jeffrey M. Herbener, ed.
The Meaning of Ludwig von Mises:
Contributions is Economics, Sociology, Epistemology,
and Political Philosophy
Boston: Kluwer Academic Publishers, 1993, pp. 102117
Mises and His Methods
Roger W. Garrison*
Over the past several years, I have participated in a number of short
courses on Austrian economics, and for some I was involved in the planning
stages. The one aspect of such planning that stands out in my memory has
to do with the issue of methodology. How should we present the methodological
precepts that underlie Austrian theory? There seemed to be three possibilities:
We could deal headon with the methodological issues in the first lecture,
in which case we would spend the remainder of the course trying to put
methodology behind us in order to deal with the substantive issues; we
could postpone discussion of methodology to the very end, in which case
we would spend most of the course anticipating the arguments to be presented
in that last lecture; or we could simply exclude methodology from our schedule
of lectures, in which case every lecture that we did schedule would quickly
transform itself into a discussion of the methodological underpinnings.
I have some concern that
my present discussion of Mises and his methods may propel me into the "black
hole of methodology." Economists who allow themselves to become totally
immersed in methodological issues rarely escape to do substantive work.
In an attempt to keep one foot outside of the black hole, I propose to
steer clear of the loftier issues of metaphysics, epistemology, and philosophy
of science. I will deal instead with the workaday methods used by Mises
and by those who have followed his lead. How did Mises go about doing economics?
How do his methods compare with those of the modern mainstream?
The issues have become standard:
the appropriateness of mathematical formulations, the relationship between
theory and statistical data, and the role of assumptions in economic theorizing.
Recent developments in econometric methods and in mathematical modeling
techniques allow the contrast between Mises and the more modern practitioners
to be sharpened.
I. Mathematical Economics and the Eclipse of Causality
Appearing two years before the initial publication of Mises's Human
Action (1949) was Paul Samuelson's Foundations of Economic Analysis
(1947), the title page adorned with a pronouncement by J. Willard Gibbs:
"Mathematics is a Language." Samuelson mastered that language in the course
of his training at the University of Chicago and then at Harvard. According
to Fischer [1987, p. 234], "Samuelson more than anyone else brought economics
from its pre1930s verbal and diagrammatic mode of analysis to the quantitative
mathematical style and methods of reasoning that have dominated for the
last three decades." The techniques of the physical sciences are so dominant
today that an economist who prefers not to use mathematics in his economic
theorizing is held in the same regard as a sculptor who prefers not to
use a chisel or a welder who prefers not to use a torch.
Economists who choose to
work within the tradition begun by Menger and firmly established by Mises
may be tempted to take issue directly with Willard Gibbs. But there is
no justification for insisting upon a narrow conception of language. Mathematics
is
a language. We can respond to Samuelson in a more telling way with the
claim that so too is music. There is no reason for economists to observe
a categorical prohibition against either mathematical formulation or musical
expression. The relevant question is: What sort of language—music, mathematics,
or, say, English—allows economists best to communicate their ideas? Which
language serves the economist without imposing constraints of its own upon
his subject matter?
The answer to the question
just posed depends, of course, upon what the economist takes his subject
matter to be. And in particular the answer turns—both for Mises and for
modern mathematical economists—on whether or not causality in economics
is a worthy concern. For Mises causality was the central concern. His methodological
individualism has as its goal the establishment of a causal linking of
individual actions to observed economic phenomena. The very title of Mises's
magnum opus identifies his starting point. Human action is the root
cause of all economic phenomena. The task of the economist, in Mises's
view, is to draw out the historically relevant implications of the fact
that individuals act—that they employ means to achieve ends. Alternatively
stated, the economist's task is to devise a logic of action—a praxeology,
to use the Misesian term.^{(1)}
For Mises and the Austrians,
cause and effect in economic theory manifest themselves as human action
and its consequences. By human action Mises simply meant purposeful behavior;
by consequences he included both the intended consequences and the unintended
consequences but maintained a sharp distinction between the two categories.
Many of his theories, in fact, involved a contrast between the intentions
of market participants or policy makers and actual consequences that flow
from the market process.
Systems of equations can
be suitably employed to describe the consequences of human action,
but such mathematical descriptions are inherently blind to notions of intentionality
and causality. In the words of Mises [1966, p. 356], "[The] equations and
formulas [of mathematical economics] are limited to the description of
states of equilibrium and nonacting." Until recently, mathematical economists
saw the eclipse of causality as one of the virtues of the mathematical
method. Four decades ago, for instance, George Stigler [1946, p. 181] wrote
approvingly that the profession had abandoned the "older concept of cause
and effect" in favor of the "concepts of mutual determination" and accused
those still concerned with causality with "fail[ing] to understand some
of the most essential elements of modern... theory."^{(2)}
Philosophical insight into
the meaning of causality is not at issue here. The point is that some modes
of expression make nonsense out of the question of cause and effect. An
orange—or other spheroid—placed in a large rounded bowl will come to rest
at the very center of the bowl. Gravity, we might be inclined to say, is
the "cause" of this result. But suppose that two oranges are placed
in the bowl. Which one of the oranges causes the other to be displaced
from the center? The question itself is nonsensical. We can describe the
loci of possible resting points of the two oranges, however, by manipulating
the mathematical expressions representing the sizes and shapes of the oranges
and the bowl. The two points of contact, of course, would be mutually determined.
In economics, it is possible
to phrase questions about causality which are equally—but maybe not obviously—nonsensical.
Under a variety of circumstances, real wage rates and real interest rates
are inversely related to one another. But does a low interest rate cause
the wage rate to be high, or does a high wage rate cause the interest rate
to be low? The question simply makes no sense; the two rates are analogous
to the two resting points of the oranges.
This particular example
of the eclipse of causality is not a frivolous one. The inverse relationship
between the wage rate and the interest rate forms the bedrock of Ricardian
distribution theory.^{(3)} For neoRicardians
who adopted the mathematical method, the question of which rate was the
cause and which the effect gave way to the question of which rate is "exogenous"
to the relationship, or predetermined, and which is "endogenous," or determined
by the relationship? Those who believed that the interest rate is predetermined
(by social convention) became Cambridge capital theorists; those who believed
that the wage rate is predetermined (by the requirements for subsistence)
became Marxists. Agnosticism about the true locus of exogeneity was also
a respectable position—one that provided a halfway house for neoRicardians
making a conversion in one direction or the other.
Mathematics can describe
the various combinations of wage and interest rates but cannot answer or
even make sense of questions about which caused which or about which one
is, in reality, determined exogenously. The mathematical economist, however,
is content to remain agnostic on the issue of causality; the two rates
are mutually determined. The praxeologist, by contrast, seeks to identify
the plans and actions of individuals in the marketplace which constitute
the ultimate cause of the pattern of wage and interest rates.
While mathematical economists
may not deny that the ultimate cause is to be found in the actions of market
participants, they proceed untroubled by the fact that mathematics is inherently
silent on the issue of cause and effect. This disadvantage of the mathematical
method was Mises's concern [1966, p. 350] when he remarked that "[i]ts
syllogisms are not only sterile; they divert the mind from the study of
the real problems and distort the relationships between the various phenomena."
The claim is sometimes made
that any relationship, including presumably causal relationships, can be
expressed mathematically. John Egger's attempt to give plausibility to
this claim by offering a farfetched example is noteworthy because the
particular example he chose provides, if only inadvertently, a sound basis
for rejecting the claim. Egger [1978, p. 29] translates the old saw "absence
makes the heart grow fonder" into f'(x)>0. (The first derivative of fondness
with respect to absence is greater than zero.) Tellingly, the word "makes,"
which indicates the direction of causality, is unavoidably lost in the
translation. The exact same mathematical expression would result from a
translation of the converse: "growing fonder makes the heart absent."
At best, Egger's equation
can describe the equilibrium relationship between "absence" and the "growth
rate of fondness." More likely, however, such a wanton use of mathematics
would invite attempts to quantify inherently unquantifiable concepts. And
worse, the very fact that the expression involves a derivative suggests
the appropriateness of the calculus operators. Egger could hardly argue
against those who might want to integrate the equation in order to determine
the absolute level of fondness that corresponds to an absence of
a given duration. The real lesson in his curious exercise is not that any
idea can be expressed mathematically but rather that mathematical economists
have tortured economics in the same way that Egger has tortured a piece
of romantic prose.
II. "Causality" in Modern Empirical Economics
Considerations of technique prevent the modern economist from addressing
the full range of economic questions. As mathematician, he can shed no
light on issues of causality, but as economist, he is continually confronted
with such issues. The melding of classical statistics with formal mathematical
modeling, which establishes a link between theoretical abstractions and
historical experience, does not close the gap between issues and answers.
All respectable texts on statistics and econometrics acknowledge that statistical
inference can never identify cause and effect; they warn against interpreting
correlation as causation.
In recent years it has become
acceptable within the economics profession to ignore all such acknowledgments
and warnings and to make claims about cause and effect on the basis of
empirical tests. For a hypothetical example, the claim that a rising interest
rate causes the wage rate to fall may be supported by timeseries analysis
in which an inverse relationship between wage rates and lagged interest
rates is demonstrated. The longrespected strictures against reading causality
into statistical patterns are flouted. Empirical causality tests are increasingly
common in the professional literature.
Only in the early phase
of this empirical innovation was it made clear that such tests are based
upon a newly stipulated definition of the word "cause." Stripped of all
its subtle and difficult philosophical content and of its etymological
link with reason, the word "cause" is used to describe observed temporal
patterns in timeseries data. In the judgment of Clive Granger and Paul
Newbold [1977. p. 225], "A better term might be temporally related,
but since cause is such a simple term we shall continue to use it." It
is interesting to note that, though this usage is defended on the basis
of simplicity of expression, economists who employ empirical techniques
developed by Granger use the decidedly unsimple and unaesthetic term "Grangercause,"
as in: Falling interest rates Grangercause wage rates to rise.
Christopher Sims, most widely
known for his development and use of techniques suggested by Granger, is
explicit about the nature of his enterprise. "The method of identifying
causal direction employed here does rest on a sophisticated version of
the post hoc ergo propter hoc principle" [1972, p. 543]. "After
this, therefore because of this," of course, is not a principle at all,
but a fallacy. And sophistication cannot convert fallacy into principle.
The linguistic technique
introduced by Granger is nothing short of a scandal. (A better term might
be career enhancing innovation, but since scandal is such a simple
term I shall continue to use it.) Publishers and editors are not likely
to be interested in research that yields limp conclusions about the temporal
relationships in the movements of economic variables; they are interested
in research that demonstrates that one thing causes another.
Grangerinspired research
is often reported guardedly in the section on the testing procedure and
then unguardedly in the summary section. Gerald P. Dwyer, Jr. [1982], for
instance, conducts Grangercausality tests to determine whether or not
federal budget deficits Grangercause inflation. Failing to find any statistically
significant posthoc relationship, he tentatively reports in his
summary that "...there is no reason to predict that a reduction of deficits
has a causal role in any policy to reduce inflation."
The economist's audience
is interested in the issue of causality; his mathematical and econometric
techniques are not up to the task. The result—for those who confine themselves
to mathematical and statistical methods—is a scandalous abuse of the English
language. For Mises the notion of cause and effect as used by economists
is presupposed by the notion of means and ends, where both cause and means
are to be understood in terms of the purposes and plans of acting individuals.
None of these notions are adequately illuminated by the methods of mathematical
economists or econometricians.
III. Mathematical Economics in Perspective
To recognize that the notion of causality cannot be expressed mathematically
or testedfor empirically is to suggest that, for the economist, the language
of mathematics and econometrics is too confining. Systems of equations
can be used to describe abstract states of general equilibrium, and econometrics
can provide some quantification of actual economic magnitudes. There should
be no objection to this.^{(4)} In fact, the
appropriateness of mathematics for describing an economy in general equilibrium
or for describing the evenly rotating economy, to use Mises's own construction,
derives precisely from the fact that there is no human action in such states.
The Austrian economist, however, is interested primarily in the give and
take of market processes. This is where the action is. But his task of
making those processes intelligible by identifying the plans and actions
that give rise to them is not facilitated by the mathematical method.
There is no justification
for insisting that mathematical formulations be expunged from economics
in some wholesale fashion. The appropriate imperative is much milder in
both substance and tone: Do not allow the applicability of mathematical
and statistical methods to define the scope of economics. Most economists
if confronted explicitly with this recommendation would, I suspect, accept
it, many believing that it simply goes without saying. Implicitly, however,
the recommendation is systematically rejected—as judged by the extent to
which the applicability of these methods have in fact been allowed to dictate
subject matter.
It is convenient to describe
the current state of economics with the aid of a simple Venn diagram consisting
of two overlapping circles (see Figure 1). Let one circle M represent
mathematics; let the other E represent economics. The overlap ME
represents mathematical economics and includes all those aspects of economics
that actually are—even in the Austrian view—susceptible to a mathematical
treatment. Descriptions of equilibrium states, for instance, fall in this
overlap. Mises's only complaint about such exercises [1966, p. 355] is
that they have unduly dominated the attention of economists: "A superficial
analogy [i.e. the imaginary construction of the final state of rest translated
into algebraic symbols] is spun out too long...."
Figure 1: Venn Diagram 
The very construction
of the Venn diagram suggests that economists who use the mathematical method
should take precautions of two sorts. First, they should guard against
allowing mathematical exercises to take them across the border separating
M from ME, where the equations cease to express relationships
having any relevance to economics. Second, they should strive continuously
to maintain free passage across the other border, which separates ME
from E. They should willingly make excursions into any area of economics—even
if they have to abandon the vehicle of mathematics at the border. Anyone
familiar with today's economics profession will quickly realize that the
border guards are misdeployed. Dissatisfaction with the state of the profession
stems largely, I think, from the work of economists who are oblivious to
the border that should not be crossed but who instinctively retreat from
the border that should be ignored.
The professional journals
are filled with technically sophisticated articles in which mathematical
formulations and manipulations have no clear relevance to economic reality.
The problem is not abstractness per se. The most fundamental and
broadly applicable propositions of economics are inherently abstract. Nor
is the realism of assumptions directly at issue here.^{(5)}
The problem is the failure to maintain a distinction between mathematical
economics and mathematical gymnastics.
Charles L. Schultze [as
quoted by Herron, 1987] recognized the problem of the unguarded border
in his assessment of modern technical economics. The profession tends to
engage itself in what Schultze calls "finger exercises—you can't tell where
the mathematics ends and the economics begins." More typically, the crossing
of the unguarded border occurs in the opposite direction (i.e., from ME
into M) from that suggested by Schultze's lament. Mathematical economists
begin by associating their symbols with economic magnitudes: k is
capital; l is labor; q is output, etc. They proceed, then,
to manipulate mathematical equations without concern about the economic
meaningfulness—or the possible meaninglessness—of the resulting relationships.
One of the clearest examples
of this mathematical procedure is the infamous Cambridge Controversy over
capital and the production function. Polynomials that purportedly described
multiperiod production processes yielded pro forma solutions suggesting
the possible existence of multiple pure rates of interest, technique reswitching,
and capital reversing. Without question these oddsounding phrases were
descriptive of the mathematical results obtained by Cambridge capital theorists;
but they are not meaningful in the context of any known economic process.
Demonstrations that the results have economic significance are nonexistent,
and even the recognition of this lacking is less than sincere. The final
sentence of an article on capital reswitching appearing in the profession's
most prestigious journal reads: "What now remains is to establish the economic
significance of the constraints imposed to allow us to get these results"
[Galloway and Shukla, 1974, p. 358]. But more than a decade later, that
task, which should have been preliminary to the publication of the mathematical
results, still remains. The results themselves have become and continue
to be the subject matter of further study.^{(6)}
The problem of the unguarded
border is compounded by a problem of the opposite sort on the other side
of the overlap. It has become standard practice in the profession today
to make assumptionssometimes bizarre assumptions—in order to render an
economic issue mathematically tractable, i.e., to avoid crossing from ME
into E. An analysis of the giveandtake of the market process is
often precluded or trivialized by some assumption that focuses attention
on the end result of that process. Examples of assumptions that guard against
plunging headlong into nonmathematical economics are easy to find. The
Walrasian auctioneer has come to serve as one such border guard. Invoking
this piece of fiction allows the mathematical economist to pass over the
question of how the economy actually gropes towards an equilibrium and
to neglect the consequences of transactions involving disequilibrium prices.
A single auctioneer substitutes for competing entrepreneurs, making it
unnecessary for market participants to engage in monetary calculation in
any nontrivial way or to formulate and implement economic plans. All the
issues that captured the attention of Mises and the Austrians are held
at bay while the mathematical economists describe the pattern of prices
and the allocation of resources associated with a general equilibrium.
The Friedmanian helicopter
does for monetary theory what the Walrasian auctioneer does for value theory.
Mathematical tractability is preserved if it can be assumed that monetary
injections are accomplished by helicopter drops of newly created money.
It is often further assumed in the Monetarist literature that individuals
gather up the new money in direct proportion to the amount that they already
possess. Propositions about the neutrality of money follow trivially: production
functions are homogeneous of degree zero with respect to the medium of
exchange. Again, the issues of interest to the Austrians—injection effects,
monetary distortions of the production process, monetary calculation during
periods of inflation—are all swept aside by assumptions that make the remaining
issues mathematically tractable.
In the writings of the New
Classicists, the analytical technique introduced by Walras and extended
by Friedman has been pushed to the limits. The goal of a "fully articulated
artificial economy" and the insistence on the complete absence of socalled
"free parameters" is easily interpreted in terms of our Venn diagram: The
border separating mathematically tractable issues from all other economic
issues should be sealed once and for all.^{(7)}
Modeling techniques introduced
by Edmund Phelps [1970] and developed by Robert Barro [1981] require that
the border guards stand elbow to elbow. The world about which they theorize
consists of a number of island economies. No trade occurs between islands.
There is only one commodity being supplied and demanded. The commodity
is nondurable in the extreme—a service, actually, indistinguishable from
the labor that renders it. Demanders possess the same information as suppliers.
Technical considerations require that the service is such that one individual
must render it to another. (This feature is needed to prevent the model
from collapsing into a model of complete autarchy.) The full specification
of such models taxes the imagination, but Barro [1981, p. 83] achieves
a degree of concreteness by suggesting that we think in terms of "backscratching"
services.
NewClassical models of
this type allow for no substitutability or complementarity among goods
or among factors of production; no capital and hence no heterogeneity of
capital; no information flows, entrepreneurial activities, production plans,
or market processes except in the most trivial senses. Yet the purpose
of such models is to facilitate the analysis of monetary shocks or of alternative
monetary policy regimes. (The substantive conclusions derive from a stipulated
difference in the cost of acquiring global as opposed to local information
about price changes.) But what significance could the implications of such
models possibly have for realworld economies?
Thomas Sargent [1987, p.
7] is aware that the techniques of New Classicism have questionable validity:
"[I]n order to make general equilibrium models tractable enough for macroeconomic
work, their preferences, technology, and endowments have typically been
so simplified, and so much has been abstracted, that it is often difficult
to take their predictions in some directions seriously." Research efforts
within the New Classicist camp, however, are directed toward further extension
of this modeling technique. Questions about validity are neither answered
nor seriously contemplated. According to Sargent [1987, p. 7], the technique
"rests on faith that insights about the laws of motion of economic aggregates
can be acquired by building models of economies that are internally consistent.
Such faith perseveres despite the fact that internal consistency is always
purchased with simplification and abstraction."
In the view of Robert Lucas
this faith is strong enough to establish a new method of achieving understanding
and a new meaning for the word "theory." Writing about economic fluctuations,
Lucas [1981, p. 219] asserts that "One exhibits understanding of business
cycles by constructing a model in the most literal sense: a fully
articulated artificial economy which behaves through time so as to imitate
closely the time series behavior of actual economies. The Keynesian macroeconomic
models were the first to attain this level of explicitness and empirical
accuracy; by doing so they altered the meaning of the term 'theory' to
such an extent that the older business cycle theories could not really
be viewed as 'theories' at all."
The spinning continues on
the superficial analogy that in Mises's judgment had been spun out too
long several decades ago. Economic understanding in Mises's own view in
achieved by identifying causeandeffect relationships between individual
actions in the marketplace and the economic phenomena to which they give
rise. No amount of faith can transform the articulation of an artificial
economy into an understanding of a real one. The mathematical modeling
that characterizes New Classicist literature is not a means of achieving
economic understanding but is rather a substitute for it.
IV. Concluding Remarks
Studies of Mises and his methods and comparisons of his praxeological
reasoning with the more modern econometric and mathematical modeling techniques
are fruitful pursuits. Such studies, of course, provide no pat formulas
for devising economic theories or for establishing their validity and relevance,
but they do provide some valuable guidance.
It has become popular to
insist that no methodological taboos be issued—except for the taboo against
issuing taboos. I propose as a second exception the taboo issued earlier
in this paper: "Do not allow the applicability of mathematical or statistical
methods to define the scope of economics." In terms of the Venn diagram
depicting the overlap between mathematics and economics, the taboo translates
into the imperatives: Redeploy the border guards. Accept responsibility
for demonstrating that mathematically derived results have economic relevance;
refrain from drawing conclusions about realworld economies that hinge
critically on some assumption made for the sake of mathematical tractability.
In one sense these imperatives
are weak ones. Who could explicitly reject them and expect to maintain
intellectual respectability? In another sense they are not so weak. Their
implicit rejection pervades modern economic literature. The actual observance
of these imperatives would require a radical—and salutary—change in the
way modern economists go about their business.
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Notes
* The author wishes to thank Sven Thommesen (U.C.L.A.)
and Parth Shah (Auburn University) for helpful comments on an earlier draft
of this paper.
1. Praxeology can be interpreted as
"action logic" in which it is recognized that actions (a) transpire through
time and (b) are motivated by perceived causeandeffect relationships.
In Mises' own words [1966, p. 99], "What distinguishes epistomologically
the praxeological system from the logical system is precisely that it implies
the categories of time and causality."
2. For an illuminating contrast between
"cause and effect" and "mutual determination" in the context of production
theory, see Rothbard [1970, pp. 27780].
3. Ludwig Lachmann [1978] provides
an insightful critique of this relationship. His own dissatisfaction with
the neoRicardian theory derives from the absence of an adequate microeconomic
foundation. In particular, the neoRicardians are in clear violation of
Lachmann's second rule: "In discussing a system of action..., we are not
entitled to abstract from the springs of human action, the purposes sought
by individuals and the plans in which they find their expression by assuming
their modus operandi to be known and therefore predictable" [1978,
p. 6].
4. The mathematician in his limited
role as "pattern maker" and the statistician in his similarly limited role
are discussed by Hayek [1967].
5. Assumptions are often made for the
sake of conceptual rather than mathematical tractability. Mises, for instance,
never hesitated to invoke the ceteris paribus assumptioneven when
it was clearly unrealistic. Debate in recent years about
the merits of realism per se has been particularly unproductive.
See Musgrave [1981] for a fruitful recasting of this methodological issue.
6. For a critical exposition of the
Cambridge controversy and a methodological treatment of the specific issues,
see Lachmann [1978, pp. 1517], Yeager [1979, pp. 18793], and Garrison
[1979, pp. 22124].
7. Arjo Klamer's conversations with
Lucas, Sargent, and Townsend [Klamer, 1984] lend support to this interpretation.
