by Joe D


The Austrian school of economics teaches a methodology of which favors building up theories based on axioms of human action. The Austrian school says that these axioms need no empirical verification. Any methodology that rejects empirical testing of theories could be flawed if its not true. Once the scientific revolution reaches the social sciences, any school of thought that denies the empirical method will have to be abandoned just as happened in the physical and biological sciences. Apparently there are economists who call themselves Austrians but are not orthodox in that they accept some empirical testing of their theories. I believe any economic theory must be tested however, not just some peripheral theories, and I will argue for this general rule.

When we study economics, we are dealing with observables. The prices of products, exchange rates of different national currencies, and the employment rate are all things we can observe. If we have a theory about how such things work, we can test that theory’s predictions with what we observe and tell how good the theory is based on how close our predictions came to reality. A theory about economics will either make predictions about reality that can be observed or it will not. If it does not make any predictions that we can check, then how can we test the validity of the theory? If this theory does make predictions, it is meaningful because its claims about the world can be found to be true or false. If this theory continuously succeeds at making correct predictions, we say this is a good theory, at least in the situations that we’ve tested it in. If there are parts of our theory that can be discarded while still retaining all of our theory’s predictive power, those parts should be discarded.

Of course advocates of the Austrian school have objections to these arguments and insist that the empirical method is not a good one for economics. I emailed one of them following an article of his I saw at which rejected the empirical method. He replied to what I wrote with these things, which are pretty standard arguments from the advocates of the “rejection of empirical testing.”

He started by saying that some things, like the law of demand, are set in stone and that if it wasn’t true, then we’d have to throw out all our textbooks because we wouldn’t know if the law of demand would be true the next day. But this is bad reasoning because if all our textbooks are wrong, we are best off admitting it frankly and starting anew instead of lying to ourselves to make things easier. Also, if an economic law has passed numerous tests and made many true predictions it is very reasonable to believe it will continue to do so, the very reason we empirically test a theory is to find out how reliable it is.

He stated that one of the central tenets of Austrian economics is that the laws of human action are not falsifiable. But falsifiability is an absolute requirement of a scientific theory. If a theory makes predictions about reality, it can be falsified. All we’d have to do is find what predictions it makes, then test if those predictions are true. If a theory makes predictions that turn out to be false, we know our theory is wrong. Our Austrians seem to be saying that if we observe one thing and our theory tells us something else, we should ignore what we just saw and continue believing in our theory. Our theory won’t be falsifiable only if it makes no predictions, and if it makes no predictions, it’s useless for anything.

He later said that the premises for human action come from the long-term observations of human behavior and don’t need to be continually tested to see if they’re true. So he’s saying here that situations have been observed where some law appears to hold, in fact numerous situations have backed up the validity of the law. But of course this new situation isn’t any less valid than any of the others, it happened and if we’re interested in the truth, we can’t ignore it. Part of scientific reasoning is that we try to prove our theories wrong instead of right. We put them to all sorts of tests to see if they always make correct predictions, and if they continuously pass our tests, we call them good theories and depend on them, though of course they’re always up for more testing in other situations and to be tested more accurately. If we have a theory that passes all of our tests for a long time, but then we find a new situation where the theory fails, we don’t throw out the theory altogether. Instead we say that the old theory is valid under the circumstances where it was successfully tested before and invalid under the new situations. We’d study these new situations and come up with new theories that explained economic behavior there. Finally, we would, if possible, find one theory that could give correct predictions under the new and old situations without any artificial separation between the two.

He also says that the laws of economics are true because of a certain understanding of how human beings act. The problem with this is that the theory that is built up is nothing more than an idealization of what human beings are. It is how a certain person believes that human beings act, but it’s a fairly informal way of trying to figure things out and really isn’t something we can depend on. So once we have this economic system built up from our understanding of how humans act, we have to scientifically test it to find if it is true.

I hope I’ve convinced you of how unreasonable they are and why any theory of economics must be scientifically tested. For a long time, the social sciences acted like they were immune from scientific testing. Fortunately the tide is turning as we can see from the latest Nobel prize awards. In the future, hopefully every theory will be empirically tested before being accepted as true.

Joe D is a physics student at the University of Minnesota.