Brian Simpson teaches Reisman and Rand

Brian Simpson (the author of Markets Don’t Fail) has asked me to forward the following announcement:

National University of La Jolla, CA has a limited number of scholarships available for three online courses that focus on free-market economics and the philosophical foundations of capitalism. These scholarships are being funded by a grant from the Charles G. Koch Charitable Foundation. The scholarships cover the full tuition for the courses plus the application fee to NU. Two courses (ECO 401 and 402, Market Process Economics I and II, respectively) use Capitalism: A Treatise on Economics by George Reisman as the required textbook. One course (ECO 430 – Economics and Philosophy) uses Ayn Rand’s The Virtue of Selfishness and Capitalism: The Unknown Ideal as the required textbooks. These courses can be taken from anywhere in the world, as long as one has access to the internet. The courses incorporate live chat sessions in which the professor and students interact in a virtual classroom, much as they would in a traditional classroom. The courses run for the next time in the summer and fall of 2012. More information about the courses on the web can be found here:

ECO 401 – Market Process Economics I

ECO 402 – Market Process Economics II

ECO 430 – Economics and Philosophy

To apply for one or more of these scholarships, send your name, transcript from your high school or university, and an essay of no more than 750 words discussing why you believe you deserve a scholarship and your future education and career plans to Dr. Brian P. Simpson. Send them to<> or 11255 North Torrey Pines Rd.; La Jolla, CA 92037. Please indicate which course or courses for which you are applying for a scholarship. You can apply for one to three scholarships, depending on how many courses you are interested in taking. Note that to receive a scholarship you will have to apply to National University and enroll in the course(s). If you have questions, please contact Dr. Simpson at the email address above or 858-642-8431.

The price and wage spiral…

…is a very common explanation of inflation. The reasoning goes like this: Prices are rising. (Why are they rising? Because of the businessmen’s greed, of course!). Now the workers (usually though their unions) demand and get compensation for this, so wages rise as well. Now, there will be too little money in the economy to catch up with the rising prices and wages, so the government and the central bank step in and print more money. But now (presumably again because of businessmen’s greed) prices will rise again, and the process is repeated; and then this goes on and on.

I hardly have to tell you what is wrong with this theory – after all, only people with some common sense read this blog. But I cannot resist quoting what Rudolf Havenstein, then head of the German Reichsbank, said in a speech in August 1923, at the height of the German hyperinflation:

The wholly extraordinary depreciation of the mark has naturally created a rapidly increasing demand for additional currency, which the Reichsbank has not always been able fully to satisfy. A simplified production of notes enabled us to bring ever greater amounts into circulation. But these enormous sums are barely adequate to cover the vastly increased demand for the means of payment, which has just recently attained an absolutely fantastic level, especially as a result of the extraordinary increases in wages and salaries.

The running of the Reichsbank’s note-printing organization, which has become absolutely enormous, is making the most extreme demands on our personnel. (Quoted by Murray Rothbard in The Mystery of Banking, p. 73.)

A similar (but fictional) speech can be found in a play called Exit the Dragon:

Another thing: as the use of energy is curtailed, commodities become more scarce and luxury goods should disappear altogether, leaving more ample room for the bare necessities of life. Now, in order to get those necessities, people need money. Money is the one thing that must never be scarce. It is obvious that the less energy a shoe factory can consume, the fewer shoes it can produce, the more expensive become those shoes, and the more money people will need to buy them. The Government has therefore adopted the tenets of monetarism, but with the important proviso that the money supply must at all times be sufficient for everybody to buy everything he needs. This policy is still in its beginning stages, but you have already seen a foreshadowing of its results in an unprecedented rise in the general wage level.

But this, too, is threatened by the emergence of a motley of counterfeit money: gold coins, silver coins, precious stones, sea-shells, glass beads, old stamps, even screws and nails are sometimes used as media of exchange. Whence do they come? The Government does not mint; it prints. Again, the answer is to be found on the Black Market. This so-called money has to be managed by a group of very irresponsible men, in­deed!

Now we are just waiting for a similar speech by Ben Bernanke.

More on Fractional Reserve Banking

In an earlier blog post I mentioned the argument that fractional reserve banking is like insurance: an insurance company never has to pay insurance to every policy holder at the same time; likewise a fractional reserve bank does not have to pay every claim on it at the same time. This argument (as I showed) is as fraudulent as fractional reserve banking itself. There is a similar argument, comparing fractional reserve banking to bridge building:

One attempted justification of fractional reserve banking, often employed by the late Walter E. Spahr, maintains that the banker operates somewhat like a bridge builder. The builder of a bridge estimates approximately how many people will be using it from day to day; he doesn’t attempt the absurd task of building a bridge big enough to accommodate every resident of the area should he or she wish to travel on the bridge at the same time. But if the bridge builder may act on estimates of the small fraction of citizens who will use the bridge at any one time, why may not the banker likewise estimate what percentage of his deposits will be redeemed at any one time, and keep no more than the required fraction? (Murray N. Rothbard, The Mystery of Banking, p. 99.)

In other words: a fractional reserve bank does not have to fear a bank run. It is as unlikely that all depositors will claim their money on the same day or week, as it is for the whole population of an area to cross the bridge at one and the same time.

Fooled by this reasoning? Rothbard answers:

The problem with this analogy is that citizens in no sense have a legal claim to be able to cross the bridge at any given time. But holders of warehouse receipts to money emphatically do have such a claim, even in modern banking law, to their own property any time they choose to redeem it. But the legal claims issued by the banks must then be fraudulent, since the bank could not possibly meet them all.

More on Rothbard’s book another time. (I haven’t finished it yet.)

Aristotle on Egoism

It is also in The Nicomachean Ethics, book 9, that one finds Aristotle’s reasoning on egoism. Objectivists are probably already familiar with this reasoning; but I find it interesting from one particular aspect: it explains why egoism has gotten a bad name – why most people cannot even fathom the idea of rational egoism and think that egoism by its very nature has to be predatory. One can explain to them that “predatory egoism” is just the other side of altruism’s false coin – but if you have had any experience with discussing Objectivism with non-Objectivists, you will probably have found that they don’t get it anyway.

Speaking for myself: When I hear that egoism is “predatory” – that it is all about “ill-gotten gains”, swindling others out of their money, wanting to become a dictator, and all that kind of jazz – I usually ask: “From where did you get that idea? From introspection? Well, it has to be – for the only ego you have direct contact with is your own ego. So speak for yourself! Just because your ego is predatory, this does not mean that all egos are predatory.”

But I say this only because I get very mean when I have to polemicize against bad ideas. There is another reason people think this way about egoism: there are actually very few truly rational egoists around. So the only kind of “egoism” people are actually subjected to is the “predatory” kind.

Enough of my own musing on this subject; let’s see what Aristotle says. But first a semantic remark: The Greek word for “egoist” is “αυτοφιλος”, which literally means “lover of self”, and this term is used in the English translation. Now to the text:

The question is also debated, whether a man should love himself most, or someone else. People criticize those who love themselves most, and call them self-lovers, using this as an epithet of disgrace, and a bad man seems to do everything for his own sake, and the more so the more wicked he is […] while the good man acts for honour’s sake, and the more so the better he is, and acts for his friend’s sake, and sacrifices his own interests.

But the facts clash with these arguments, and this is not surprising. For men say that one ought to love best one’s best friend, and a man’s best friend is one who wishes well to the object of his wish for his sake, even if no one is to know of it; and these attributes are found most of all in a man’s attitude towards himself, and so are all the other attributes by which a friend is defined; for […] it is from this relation that all the characteristics of friendship have extended to our neighbours. […] [A man] is his own best friend and therefore ought to love himself best. It is therefore a reasonable question, which of the two views we should follow; for both are plausible.

Parenthetically, this way of reasoning is very characteristic of Aristotle: presenting two opposite views and then carefully weighing the arguments pro and con. End of parenthesis.

Perhaps we ought to mark off such arguments from each other and determine how far and in what respects each view is right. Now if we grasp the sense in which each school uses the phrase “lover of self”, the truth may become evident. Those who use the term as one of reproach ascribe self-love to people who assign to themselves the greater share of wealth, honours, and bodily pleasures; for those are what most people desire, and busy themselves about as if they were the best of all things, which is the reason, too, that they become objects of competition. So those who are grasping with regard to these things gratify their appetites and in general their feelings and the irrational element of the soul; and most men are of this nature (which is the reason why the epithet has come to be used as it is – it takes its meaning from the prevailing type of self-love, which is a bad one); justly, therefore, are men who are lovers of self in this way reproached for being so. That it is those who give themselves the preference in regard to objects of this sort that most people usually call lovers of self is plain; for if a man were always anxious that he himself, above all things, should act justly, temperately, or in accordance with any other of the virtues, and in general were always to try to secure for himself the honourable course, no one would call such a man a lover of self or blame him.

Many words to make a simple (but important) point: that the egoism or self-love of a bad man is something bad. Now, over to an equally wordy explanation of why the egoism or self-love of a good man is something good:

But such a man would seem more than the other a lover of self; at all events he assigns to himself the things that are noblest and best, and gratifies the most authoritative element in himself and in all things obeys this; and just as a city or any other systematic whole is most properly identified with the most authoritative element in it, so is a man; and therefore the man who loves this and gratifies it is most of all a lover of self. Besides, a man is said to have or not to have self-control according as his reason has or has not the control, on the assumption that this is the man himself; and the things men have done on a rational principle are thought most properly their own acts and voluntary acts. That this is the man himself, then, or is so more than anything else, is plain, and also that the good man loves most this part of him. Whence it follows that he is most truly a lover of self, of another type than that which is a matter of reproach, and as different from that as living according to a rational principle is from living as passion dictates, and desiring what is noble from desiring what seems advantageous.

Notice how close Aristotle is to Objectivism here: good men follow reason; lesser men are driven by their emotions or passions. (I’m tempted to say that Aristotle must have read Ayn Rand carefully.) You may also notice how far he is from David Hume – who infamously wrote that “reason is, and should be, a slave to the passions”.

Those, then, who busy themselves in an exceptional degree with noble actions all men approve and praise; and if all were to strive towards what is noble and strain every nerve to do the noblest deeds, everything would be as it should be for the common weal, and everyone would secure for himself the goods that are greatest, since virtue is the greatest of goods.

In other words, there is no conflict between a good man’s egoism or self-love and the “common weal”.

And now we come to Aristotle’s conclusion:

Therefore the good man should be a lover of self (for he will both himself profit by doing noble acts, and will benefit his fellows), but the wicked man should not; for he will hurt both himself and his neighbours, following as he does evil passions. For the wicked man, what he does clashes with what he ought to, but what the good man ought to do he does; for reason in each of its possessors chooses what is best for itself, and the good man obeys his reason. (The Nicomachean Ethics, Book 9, Section 8; translation David Ross.)

Or in my own shorter formulation: The egoism of a good man is good; the egoism of a wicked man is wicked.

I mentioned in my earlier blog post, Aristotle on friendship, that only good people can be true friends, because a good man could never want to be “bosom friends” with somebody bad – which raises the question: Could bad men, then, be friends with one another? This question has to be answered in the negative; I will quote some more from Aristotle:

Such a man [a good or virtuous man] wishes to live with himself; for he does so with pleasure, since the memories of his past acts are delightful and his hopes for the future are good, and therefore pleasant. His mind is well stored too with subjects of contemplation. And he grieves and rejoices, more than any other, with himself; for the same thing is always painful, and the same thing always pleasant; and not one thing at one time and another at another; he has, so to speak, nothing to regret.

Therefore, since each of these characteristics belongs to the good man in relation to himself, and he is related to his friend as to himself (for his friend is another self), friendship too is thought to be one of these attributes, and those who have these attributes to be friends.

So this is why there can be friendship among good men. But what about wicked or evil men? Those men seek company, but they basically do it because they are afraid of being alone:

Wicked men seek for people with whom to spend their days, and shun themselves; for they remember many a grievous deed, and anticipate others like them, when they are by themselves, but when they are with others they forget. And having nothing loveable in them they have no feeling of love to themselves. […]

Therefore the bad man does not seem to be amicably disposed even to himself, because there is nothing in him to love […]. (The Nicomachean Ethics, Book 9, Section 4.)

And here is a nice rounding-out quote:

Thus the friendship of bad men turns out an evil thing (for because of their instability they unite in bad pursuits, and besides they become evil by becoming like each other), while the friendship of good men is good, being augmented by their companionship; and they are thought to become better too by their activities and by improving each other […] (The Nicomachean Ethics, Book 9, Section 12.)

(My Scandinavian readers can also read an essay I wrote several years ago: The Historical Roots of Anti-Egoism.)

Rand Debating Kant

James Stevens Valliant (the author of The Passion of Ayn Rand’s Critics) recently published an article on Capitalism Magazine, Ayn Rand’s Critics. It is about the sad (and at this point in history, rather boring) fact that those who criticize Ayn Rand do not even bother to try to understand her ideas. Right at the beginning, he writes:

Can anyone doubt the truth of writer David Mamet’s recent comments about arguing politics?  Defining what he meant by “Brain Dead Liberalism,” he suggested that unless you can state your opponent’s position with such accuracy that he or she would agree, “Yes, that’s what I think,” no meaningful debate is even possible.

I read somewhere long ago that the medieval scholastics had a debating rule much like the Mamet test. Before you argue against your opponent, you were required to present a summary of his views, and he would tell you whether this summary was adequate or not. This might be laborious, but it would certainly serve to prevent straw man arguments. (I don’t remember where I read it, and it might not even be true. But it struck me as a very reasonable thing to do.)

Now, let me engage in a flight of fancy. Imagine a debate under this rule taking place between Ayn Rand and Immanuel Kant. Ayn Rand would start out as follows:

Man is blind, because he has eyes – deaf, because he has ears – deluded, because he has a mind – and the things he perceives do not exist, because he perceives them. Is this a fair summary of your philosophy, professor Kant?

What would professor Kant answer?

Oh, yes, that is indeed the essence of my philosophy. Thank you, Miss Rand, for summarizing it so succinctly.

Or would he answer:

Oh, no, that is a total distortion of my philosophy. Before you come here to debate me, you should read my Critique of Pure Reason carefully. Or if this book is too heavy, you should at least read my Prolegomena. I know it is a common misconception that I should have claimed that the world of phenomena is a mere delusion; but this is precisely the misconception I answer in Prolegomena. As for the argument that I should deny the evidence of our senses, I refer you to my book Anthropology from a Pragmatic Point of View: in this book I maintain explicitly that our senses neither betray us nor confuse us. Of course, I cannot vouch for the accuracy of the English translations. But I have heard that you can read German, so you may consult the originals.

Maybe I should turn the table and let Kant summarize Ayn Rand’s philosophy – but I haven’t figured this out. All I can say off-hand is that he would probably brand her as “the most evil woman in womankind’s history” – because she elevates to a virtue what Kant regarded as the “radical evil” in man: egoism or self-love as the base of ethics.

(As my Scandinavian readers may know, I have written quite extensively on Immanuel Kant in Swedish. I cannot do this in English, because I have to give illustrative quotes to prove my points, and I only read him in Swedish translations; occasionally, I check against the German original.)

Aristotle on Friendship

(This is an adaptation of a blog post I wrote in Swedish a couple of days ago.)

On Facebook one is “friends” with all one’s contacts – even those one has never met in real life, and even those one has not heard about before one gets a “friends request”. The new competitor to Facebook, Google+, on the other hand, makes a distinction between a circle of “friends” and a circle of “acquaintances”. This made me wonder about where one draws the line between an “acquaintance” and a “friend”; and I recalled that Aristotle discusses various types of friendship in The Nicomachean Ethics.

In fact, Aristotle devotes two whole books (book 8–9) in The Nicomachean Ethics to this subject. To make a long story short, he distinguishes between three types of friendships: friendship for the sake of utility, friendship for the sake of pleasure, and true friendship, where people like or love one another for what they are. An example of the first type would be a business acquaintance; and this kind of friendship ends when the utility ends. Or one might be friendly with one´s dentist, because he performs a useful service; but this is a friendship that ends when one leaves the dentist’s office and does not come back until one’s next visit to the dentist.

Friends for the sake of pleasure are those who like to talk to each other, to sometimes share a beer or a dinner on the town, to go to sports events or the theatre or the opera together, etcetera, etcetera. This is a more lasting kind of friendship; but it also comes to an end, when the pleasure comes to an end. If such friends are separated (if, for example, one of them moves to another town), the friendship will tend to evaporate.

The third, and best, kind of friendship can only occur between good people (nobody would like to be “bosom friends” with somebody bad). Such a friend is, in Aristotle’s words, “another self”, an “alter ego”; such friends rejoice and grieve together; they always wish one another well; the affection or love one feels for such a friend  is akin to the affection and love one feels for oneself.

This is a short summary, and I have left out a lot. For example, Aristotle also discusses friendship within a family; and he has the interesting observation that young people easily find “friends of pleasure”, but those friendships are also easily dissolved; while old and sour people (such as myself) have a hard time finding such friends.

So what does this have to do with Facebook and Google+? The question is, how many really true and good friends could one have? This is what Aristotle writes about this:

Should we, then, make as many friends as possible, or […] should a man neither be friendless nor have an excessive number of friends?

To friends made with a view to utility this saying would seem thoroughly applicable; for to do services to many people in return is a laborious task and life is not long enough for its performance. Therefore friends in excess of those who are sufficient for our own life are superfluous, and hindrances to the noble life; so that we have no need of them. Of friends made with a view to pleasure, also, few are enough, as a little seasoning in food is enough.

But as regards good friends, should we have as many as possible, or is there a limit to the number of one’s friends? […] [F]or friends […] there is a fixed number – perhaps the largest number with whom one can live together (for that, we found, is thought to be the very characteristic of friendship); and that one cannot live with many people and divide oneself up among them is plain. Further, they too must be friends of one another; and it is a hard business for this condition to be fulfilled with a large number. It is found difficult, too, to rejoice and to grieve in an intimate way with many people, for it may likely happen that one has at once to be happy with one friend and to mourn with another. Presumably, then, it is well not to seek to have as many friends as possible, but as many as are enough for the purpose of living together; for it would seem actually impossible to be a great friend to many people. This is why one cannot love several people; love is ideally a sort of excess of friendship, and that can only be felt towards one person; therefore great friendship too can only be felt towards a few people.

What, then, has Aristotle to say about those who have hundreds or even thousands of Facebook friends?

Those who have many friends and mix intimately with them all are thought to be no one’s friend, except in the way proper to fellow citizens, and such people are also called obsequious. In the way proper to fellow citizens, indeed, it is possible to be the friend of many and yet not be obsequious but a genuinely good man; but one cannot have with many people the friendship based on virtue and on the character of our friends themselves, and we must be content if we find even a few such. (The Nicomachean Ethics. Book 9, Section 10; translated by David Ross.)

Well, I should not accuse those who have many Facebook friends of obsequiousness – it is Facebook that has defined “friend” in such a way that virtually anyone could be subsumed under the concept. But what about Google+? Well, I have quite a few “friends for pleasure” – people whose status updates and comments I like to read, and even some that I like to share a beer with. But friends that I would always rejoice and grieve with? With the possible exception of my lady-friend (and my mother, when she was still alive) I cannot even remember having had such a close friend. So I am content with having only acquaintances on Google+.

Update February 9, 2016: Aristotle’s point illustrated:

I found this on a Facebook group called Ik heb liever weinig echte vrienden dan veel schijnheilige vrienden (i.e. “I would rather have few genuine friends than many sanctimonious friends”).

Induction in Economics

A very preliminary remark

The first part of this essay is a Facebook note I wrote some months ago; the second part is added now.

Ludwig von Mises – the “dean of Austrian economics” – maintained that economics is a purely deductive (even “aprioristic”) science, and that induction has no role whatsoever to play in economics. An illustrative quote:

Reasoning is necessarily always deductive. This was implicitly admitted by all the attempts to justify ampliative induction by demonstrating or proving its logical legitimacy, i.e., by providing a deductive interpretation of induction. The plight of empiricism consists precisely in its failure to explain satisfactorily how it is possible to infer from observed facts something concerning facts yet unobserved. (Ludwig von Mises, The Ultimate Foundation of Economic Science, p. 21.)

This view obviously clashes with Objectivism. One may excuse Mises on the grounds that he had no opportunity to read David Harriman’s The Logical Leap, which explains the relationship of induction to deduction. However, Harriman’s book deals only with induction in physics and the closely related subjects of astronomy and chemistry (and in philosophy). So I will make an attempt to apply what Harriman writes to economics. It will be only an attempt.

The basis of induction is sense perception. And what is perceived by the senses are actually some simple and basic causal connections. For example, a toddler may observe that when he puts a newspaper into a fire, it will burn. (If the newspaper is damp, it will burn slower.) If he puts his hand into the fire, it will hurt. If he pours water on the fire, the fire will go out. Etc. (Anyone could find other examples.) What the toddler is actually perceiving is causal connections (“fire causes paper to burn” or “my hand to hurt”, “water causes the fire to go out”). Those generalizations are at the bottom of more advanced identifications of causal connections (such as “gravity is the cause of tides and of many other phenomena”).

Is there a similar perceptual starting point for economics? Are there causal connections in economics that a toddler could see with his own eyes? That is the question I will try to answer.

Every science must start with some basic concepts – and the process of concept formation is an inductive process, while the process of applying a concept, once it has been formed, is a deductive process:

[T]he process of forming and applying concepts contains the essential pattern of two fundamental methods of cognition: induction and deduction.

The process of observing the facts of reality and of integrating them into concepts is, in essence, a process of induction. The process of subsuming new instances under a known concept is, in essence, a process of deduction. (Ayn Rand, Introduction to Objectivist Epistemology, p. 28.)

What concepts are basic in economics? There are many, but two that I can think of off-hand are “money” and “exchange”.

A toddler can form the concept “money” by merely observing coins and/or notes. (He would have to learn from some adult that those mysterious little things are called “money”; and it is hardly immediately evident why both coins and certain pieces of paper are both subsumed under the concept “money”; but he will learn that later on.)

What about “exchange” and its relation to “money”? Well, the toddler may accompany his father (or mother or some adult) to a store and observe that his parent passes a coin or note to the store owner, and that this has the peculiar effect of making the store owner pass a bottle of milk (or whatever) to the parent. He is observing an instance of causation, just like when he observed that fire burns paper (etc). It is still mysterious to him exactly what the causal connection is (does the money cause a bottle of milk to pass over, or is it the bottle of milk that causes money to pass over? It may take the toddler some times to understand that this is a case of “reciprocal causation” – and of course that there are other underlying causes yet to be discovered.)

And I have to stress that this is a very preliminary remark. More work has to be done.

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To show that Mises took a Kantian approach, let me quote the following:

A new epistemology of rationalism aimed at the refutation of this [John Locke’s] integral empiricism. Leibniz added to the doctrine that nothing is in the intellect that had not previously been in the senses the proviso: except the intellect itself. Kant, awakened by Hume from his “dogmatic slumbers”, put the rationalistic doctrine upon a new basis. Experience, he taught, provides only the raw materials out of which the mind forms what is called knowledge. All knowledge is conditioned by the categories that precedes any data of experience both in time and in knowledge. The categories are a priori; they are the mental equipment of the individual that enables him to think and – we might add – to act. As all reasoning presupposes the a priori categories, it is vain to embark upon attempts to prove or to disprove them. (The Ultimate Foundation of Economic Science, p. 11.)

So, for Mises, economics rests upon a priori categories not derived from experience but logically and chronologically prior to experience.

Murray Rothbard is actually better (and closer to Objectivism) on this point:

Most writers on the 1929 depression make the same grave mistake that plagues economic studies in general – the use of historical statistics to “test” the validity of economic theory. We have tried to indicate that this is a radically defective methodology for economic science, and that theory can only be confirmed or refuted on prior grounds. Empirical fact enters into the theory, but only at the level of basic axioms and without relation to the common historical-statistical “facts” used by present-day economists. (America’s Great Depression, p. 81; emphasis added.)

So, in Rothbard’s view, at least the basic axioms of economics are derived from experience; which is actually an advance over Mises.

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PS. I should mention that David Harriman actually takes up the very same objection to induction that Mises writes about. Here is a short quote:

As a rule, the attempt to validate induction has taken the form of attempting to reduce induction to deduction. (The Logical Leap, p. 30.)

The Logical Leap itself is an attempt to validate induction inductively. But I won’t go further into that, because you can always read the book.

Some less preliminary remarks

There is one large difference between the natural sciences (such as physics) and the humanities or social sciences (such as economics). It is not hard to grasp this difference, but it needs to be pointed out.

In the natural sciences, experimentation is crucial. The heroes of natural sciences, such as Galileo and Newton (and later, Faraday and Maxwell) performed lots of experiments. Characteristically, in experimentation, one keeps one factor constant and varies some other factor to note what difference this makes.

But in economics and the other social sciences, there is no such thing as experimentation. This, by the way, is a point that Mises stresses over and over again. But this means that the inductive method Harriman describes in The Logical Leap cannot be “translated” into the social sciences.

(Some people undoubtedly try to make experiments in the social sciences. There is much talk about the “communist” or “Soviet” experiment. But we certainly know today – and should have known from the beginning – that those experiments with human life simply end up in total disaster.)

The only kind of experiments one can do in the social sciences is “thought experiments”. Mises, for example, uses “imaginary constructions” (such as “the static state” and “the evenly rotating economy”.) Those imaginary construction have no counterpart in reality; they are merely used as aids to thought; reality can be compared to those imaginary constructions.

A similar case may be found in George Reisman’s Capitalism. He starts out with the assumption of invariable money, something that simply does not exist in reality. But having analyzed what would happen under invariable money, he then adds in what would happen under a gold standard, and then what happens under fiat money.

The way Mises and Reisman uses this deductive method is perfectly sound. But there is a grave danger with it, if one confuses those imaginary standards with reality or makes them the standard for judging reality. This is most readily seen in the idea of “pure and perfect competition”. There is no such thing in reality; but the adherents of this theory think this is how reality should be and recommend policies on this basis. The result, as I am sure you all know, is antitrust legislation. (The “pure and perfect refutation” of this theory is contained in Reisman’s essay Platonic Competition, included in Capitalism, p. 430ff.)

To summarize, I do not think induction plays the same crucial role in economics as it does in physics. But to say that economics is only deduction (as Mises says when he calls the subject “aprioristic”) is going too far; the simple, basic concepts used in economics have to be formed inductively (if for no other reason because concepts are never formed deductively; they can only be applied deductively).

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Now, there are a couple of schools of economics that claim to be using induction and shun the deductive approach to the subject. The best known of those schools is the “German Historical School”. This school objected to classical economics on the grounds that it was “too abstract”, that the theorems of the classical school were divorced from reality, and that the proper way of approaching the subject was meticulous historical and statistical studies. The proponents of this school are also known as the “socialists of the chair” (“Kathedersozialisten”). The errors of this school are thoroughly dealt with by Menger and Mises (the seminal work on the subject being Menger’s Investigations into the Method of the Social Sciences).

Another such school is the “English Historical School”. With this I am not familiar; but I will quote a couple of lines from Wikipedia on this school to show where it leads:

They rejected the hypothesis of “the profit maximizing individual” or the “calculus of pleasure and pain” as the only basis for economic analysis and policy. They believed that it was more reasonable to base analysis on the collective whole of altruistic individuals. (Italics mine.)

Both those schools actually reject economic science altogether. They do not attempt to ground economic theories in perceptible reality; they aim to replace economic theory with history and statistics. If this is an inductive approach, then it must be an improper form of induction.

To try to integrate economic history with economic theory would be a worthy undertaking. But it would have to consist of applying sound (Austrian or Austro-Classical) economic theory to history, not the other way ‘round.

I will give the last word to Ludwig von Mises (unfortunately, I don’t remember the source for this quote):

Facts don’t speak; they have to be spoken about by a theory.