The Long FAQ on Liberalism
A Critique of the Austrian School of Economics:
How, then, do Austrians understand anything that goes on in
the economy? Through an approach called methodological subjectivism.
Kirzner defines this as the recognition "that the actions
of individuals are to be understood only by reference to the knowledge,
beliefs, perception and expectations of these individuals."
Austrians claim that attempting to understand individual actions
through statistics or other group generalizations is mistaken,
for all the reasons outlined in the previous section. By comparison,
mainstream economists find it useful to know that unemployment
has risen from 6 to 12 percent, because that means more workers
will be competing for fewer jobs, and they will be reducing their
wage demands to get them. It doesn't matter what the individual
wants, plans or believes -- his decision to accept a lower wage
is being determined by a market force larger than himself. And
one can accept the mainstream view while acknowledging there may
be exceptions to the generalization.
The undeniable existence of market forces is something that subjectivists
have had to grapple with. Gunning explains the history of their
"In classical economics, the behavior of subjects was thought
to be governed by the forces of nature. The classical economists
searched for laws of economic interaction -- inevitable outcomes
of economic interaction that were beyond the control of the actors.
A good way to see this viewpoint is to return to the unemployment
example given above. If unemployment rises from 6 to 12 percent,
that's because countless individuals acting on their own knowledge
made it happen. If market forces exist, it's not for impersonal
reasons, but because subjective individuals interact on the market.
"The old subjectivist economists did not deny that there
were outcomes of interaction that were beyond the control of any
It is true that no specific individual
plans the totality of economic interaction. However, this does
not mean that interaction should be attributed to the forces of
nature. Instead, the outcome must be regarded as a somewhat unpredictable,
yet logical, outcome of the choices of the individuals involved
in the interaction." (2)
The realization that humans act on their knowledge gave rise to
what Gunning calls the "new subjectivism." He continues:
"Mises discovered the new subjectivism by trying to understand
the method of the old subjectivists
The old subjectivists
sought to explain economic interaction in terms of their assumptions
about subjects' characteristics: wants, abilities, expectations,
knowledge and plans of subjects. But they did not explain why
it was appropriate to assume the subjects have these characteristics.
Mises classified the idea that "humans act" as a
priori knowledge, since it is something that humans instinctively
know and accept. (Its opposite would be "humans involuntary
react.") Mises held this idea to be as true as any mathematical
form of a priori knowledge, such as "two plus two
equals four." And just as math helps scientists understand
physical behavior, the knowledge that "humans act" helps
economists understand economic behavior. All economic logic flows
from this axiom. Mises used it to build his own logical theory
of human economic action, called praxeology. (Hayek did
not subscribe to praxeology, hence the current rift in the Austrian
"Thinking, to be meaningful, must be connected with some
goal. It is therefore a part of choosing
and choosing are not two separate activities. They are intimately
related. In view of this, the phrase 'thinking and choosing' is
cumbersome. A simpler term is acting. When Mises wanted to refer
to thinking and choosing, he used the term action. When the economist
studies subjects, said Mises, she is studying human actions."
There are several problems with subjectivism, both new and old.
Even granting the premise that humans are endowed with free will,
there is no denying that even impersonal forces affect human actions
to a very large degree. Both mainstream and Austrian economists
agree that economics is "primarily concerned with the efficient
allocation of scarce resources among competing uses." (4)
But resources are often discovered by accident -- for example,
the well-driller who strikes oil, the sailor who discovers an
island, or the coal miner who finds gold. Technology is also often
discovered or invented by accident as well, as in the invention
of plastics. These accidents of history ripple through the economy,
sometimes radically altering its supply and demand, and creating
the market forces to which people must respond.
Even natural disasters throw entire economies into new
directions. For example, the steam engine was considered equal
to or even superior than the gasoline engine from 1890 to 1914.
But then a national epidemic of hoof-and-mouth disease led to
the withdrawal of horse troughs, which is where steam cars refilled
with water. The disappearance of a market for steam engines brought
their thriving research and development to a halt, whereas gasoline
engines profited from another 80 years of research and development.
(5) Thus, an accident of history is responsible for the big oil
companies of today, and the direction of an entire global economy
(not to mention the attendant pollution problems). Is this economic
activity primarily traceable to the beliefs, plans or expectations
of subjective individuals? Of course not.
An Austrian might argue that individuals are nonetheless responsible
for searching out resources and inventions. But even eliminating
the luck involved with finding them, the fact remains that entire
market forces are unleashed by the discoveries of a relatively
few people. The subjective effect that Austrians evoke is actually
slight; the vast majority of people are not subjectively interacting
with each other on the market, but are responding to market trends
created by a small group of discoverers. Even if it were possible
for everyone on the market to contribute a discovery, theirs would
be only a tiny fraction of the total; they would still be inundated
by the market forces unleashed by everyone else's.
Next Section: Methodological Individualism
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1. Israel M. Kirzner, The Meaning of Market Process
(New York: Routledge, 1992).
2. J. Patrick Gunning, The New Subjectivist Revolution
(Savage, Md.: Rowman & Littlefield Publishers, 1991), p. 19.
3. Ibid., pp. 20.
4. Stephen Casler, Introduction to Economics (New York:
HarperCollins, 1992), p.3. Compare to Rockwell's statement: "Austrians
view economics as a tool for understanding how people both cooperate
and compete in the process of meeting needs, allocating resources,
and discovering ways of building a prosperous social order."
5. W. Brian Arthur, "Competing Technologies and Economic
Prediction," Options, International Institute for
Applied Systems Analysis, Laxenburg, Austria (April, 1984), pp.