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Austrian Economics and Scientific Realism

Uskala Mäki is one of the leading philosophers of economics of the past half century; moreover, he is well versed in Austrian economics, though not an adherent of the school. In this week’s column, I’d like to consider some issues he raises in his paper “Scientific Realism and Austrian Explanation” (Review of Political Economy, 1990).

Mäki is unsympathetic to what he calls “instrumentalism,” the view that economic theories aren’t true descriptions of the world but rather aim at predictive success. He supports scientific realism, according to which economic theories do try to describe and explain the real world, and he sees the Austrians as important advocates of this view.

For Mäki, realism is a matter of ontology. “In contrast to typical forms of instrumentalism, any version of scientific realism has to subscribe to the minimum idea that theoretical entities or scientific objects—i.e., entities postulated or hypothesized in scientific theories—exist” (p. 314, emphasis in original).

Austrian economics counts as objective by this standard, because it explains economic phenomena through people and their preferences, and these without doubt exist. Austrian economists don’t postulate preferences as theoretical entities designed to explain observations: the preferences are themselves observable through introspection and are used to explain other things. As Mäki puts it, “It is well-known what the ontic furniture of the world depicted by Austrian theories consists of: human individuals, their wants, intentions, beliefs, actions, etc.” (p. 322).

Mäki discusses a type of explanation he calls “explanation as redescription” and in doing so provides one of the best accounts of methodological individualism I have seen. In this kind of explanation, the Austrian economist says, “X is really Y,” that is, “X reduces to Y.” The principle of this kind of explanation that Mäki says is relevant to Austrian economics is that “[s]ocial entities are aggregates or averages of individual entities, these aggregates being invested with meaning by acting individuals” (p. 324, emphasis in original). Here is an example from Ludwig von Mises of what Mäki is talking about: “[T]he demand for money of the economic community is nothing but the sum of the demands for money of the individual economic agents composing it” (p. 326, quoting Mises, emphasis in original). Murray N. Rothbard provides this excellent illustration of the same principle: “The ‘market’ is not some sort of living entity making good or bad decisions, but is simply a label for individual persons and their voluntary interactions. If A thinks that the ‘impersonal market’ is not paying him enough, he is really saying that individuals B, C, and D are not paying him as much as he would like to receive. The ‘market’ is individuals acting” (p. 326, quoting Rothbard, emphasis in original).

Mäki mentions another principle that he thinks is basic to the realism of Austrian economics, and here I am less happy with his formulation, though the problem can readily be fixed. The principle in question is “Social entities are unintended consequences of actions by human individuals” (p. 324, emphasis in original). This is a theme familiar to all readers of Hayek, but it is not characteristic of the work of Mises or Rothbard; indeed, quite to the contrary. On this topic, the classic paper is Joseph Salerno’s “Ludwig von Mises as Social Rationalist.”

But it transpires that what Mäki has mainly in mind is that social entities and institutions come about as the consequences of human actions, and whether the actors consciously plan the outcomes is of secondary significance. In brief, Mäki is talking about the causal-genetic method pioneered by Carl Menger. He says of his own formulation of the principle: “It gives expression to the very idea of ‘causal-genetic’ explanation” (p. 235), and he to an extent allows for the point I have raised against him about conscious planning. As an example of what he means by his principle, he gives Menger’s account of the origin of money, and then says of it, “Menger admits that money, i.e., the generally accepted medium of exchange, may sometimes emerge as an intended result. However, Menger insists that it is part of the essence of money that it is a spontaneous outgrowth of an unplanned process of individual interaction” (p. 326).

To take up Mäki’s word, I do not think he has here gotten to the essence. What Menger is referring to is a case in which a society already familiar with the concept of money consciously establishes a commodity as money. But the situation I have in mind is different. Suppose that a society does not have a general medium of exchange and trades through barter. Through the process Menger describes, money comes into existence. It isn’t a necessary condition for the process to come about that the people in that society didn’t intend it. Imagine a large group of people on a desert island who are familiar with the concept of money but don’t have any money—all their dollars were lost at sea. They also have read Menger and Mises and want to create money, doing so through the process the Austrians describe. They could consciously set the process in motion, and money would result. The process need not be unintended.

Much more important than this slip is an insightful point Mäki makes about the Austrian view of causation. Human actions, the source of economic phenomena, do not operate through fixed causal laws. “The absence of empirically constant relationships or stable regularities in society has been forcefully underlined by several Austrian economists” (p. 333). Mäki gives an excellent example of this in a discussion of Mises’s rejection of the quantity theory of money. If the government increases the quantity of money in circulation, there isn’t a fixed proportional relation between the amount of the increase and the rise in prices: “[T]he relationship between the quantity of money and its purchasing power is not constant” (p. 332, quoting Mises). This lack of a fixed relationship comes about in part “because of creative innovation, learning and free will on the part of economic agents—factors stressed by Austrian economists” (p. 333).

Mäki’s article contains much more of great interest and I hope to return to it on another occasion. I urge all of those interested in Austrian methodology to read it. For obvious reasons I won’t add “as who could not be” to the preceding sentence.