I am reading Robert Murphy’s new book, Choice. Think of it as an English translation of Human Action. I am very happy with it so far. I can see how much of The Book of Arnold can be found in Mises, and yet. . .
I still do not buy into Mises on epistemology. Murphy writes,
Mises shows that economic laws are not obvious and that they do indeed enlarge our body of knowledge, even though economic laws do not need to be verified with empirical observation.
The Anglosphere is largely empiricist, or logical positivist. We tend to believe that there are two types of truths. There are tautologies, which are embedded in language; and there are truths about the world, which are learned by observation.
A claim that 2 + 2 = 5 can be falsified using logic. A claim that pigs know how to fly can be falsified using observation.
Milton Friedman takes an empiricist view of economics. For Friedman, the economist makes predictions about the world, and those predictions are verified or falsified on the basis of observation.
Empiricists give no epistemological status to anything that appears to be a claim about the world that cannot be falsified using observation. Such claims are classified as dogma or nonsense.
Mises was no empiricist. Murphy writes,
From the starting point that humans act, the economist could logically deduce–thereby forming a tautology, it’s true–that individuals have subjective preferences with ordinal rankings, that choices come with opportunity costs, and that the value of second-order capital goods is dependent on the value of the first-order consumer goods that the individual believes they have the technological power to produce.
The way I read Murphy/Mises, economic laws are derived from insight into human nature. At least some insight into human nature comes not from observation but from introspection. The insight that comes from introspection is not falsifiable. For example, suppose I find it inconceivable that I would make choices on some basis other than benefits and costs at the margin. This makes it inconceivable to me that other people would make choices on some other basis. Hence, I appear to arrive at a statement about the world–people make choices on the basis of benefits and costs at the margin–that is not falsifiable by observation.
My take on this is that a statement such as “people make choices on the basis of benefits and costs at the margin” falls into a category that I might term “guiding dogma.” We will use a guiding dogma to make predictions about the world. However, the guiding dogma is not testable. If our predictions go awry, we will not discard the guiding dogma. Instead, we will look for something else that made our prediction go wrong.
“Guiding dogma” may be synonymous with Kuhn’s notion of “paradigm.” In physics, there are some spectacular cases in which a guiding dogma came to be replaced by a new guiding dogma.
The interesting predictions are those which go beyond a guiding dogma. For example, a prediction that a rise in the minimum wage will reduce employment is based in part on the guiding dogma of the Law of Demand. However, the prediction about the effect of the minimum wage is falsifiable empirically. Suppose that a rise in the minimum wage does not produce a decline in employment. Will we throw out the Law of Demand, or will we look for some other factor at work? My claim is that we will do the latter.
Speaking of the minimum wage, consider this sarcastic assault on Larry Summers by John Cochrane:
Never mind centuries of supply and demand, centuries of experience with minimum wages and other price controls, or even the current controversies. Never mind that who works for what business and how many do so is a little bit endogenous. Larry has a new and very clever theory about monopsonistic wage setting in the presence of recruitment and motivation costs. (One that apparently only holds at the lower end of the wage scale where minimum wages bite?)
Thus, if we were to find that an increase in the minimum wage does not reduce employment, then we would credit something like “a new and very clever theory about monopsonistic wage setting in the presence of recruitment and motivation costs” rather than reject “centuries of supply and demand.”
Incidentally, the laws of probability are also not easy to fit into the empiricist framework. When we say that the probability of a coin landing on heads is 1/2, that sounds like a statement about the world, but it also might be thought of as the definition of a fair coin. Once again, the phrase “guiding dogma” comes to mind.