Is ”Austrian” Economics ”Rampant Rationalism”?

Facebook note from July 2011 (slightly edited).

A while ago, in a Facebook note (later reproduced on my web site[1]), I quoted someone who said that the “Austrian” objections to fractional reserve banking is an example of “the rampant rationalism of the Austrian school” – to which I answered that this is an example of the rampant empiricism of some Objectivists.

I won’t address fractional reserve banking here[2] but focus on this accusation against the “Austrians”.

What is rationalism? Originally, it is the name of a school of philosophy (the big names being Descartes, Spinoza and Leibniz) that held that true knowledge is arrived at by reason alone, as apart from experience. – The opposite school, of course, is empiricism (exemplified by John Locke, George Berkeley and David Hume), that held that true knowledge comes from experience, as apart from reason. (There are many differences between those thinkers, but as a rough approximation those definitions hold true.) Those two schools represent two sides of a false dichotomy, but I hardly have to explain this to students/supporters of Objectivism.

But the word is also used by Objectivists in a slightly different sense (the difference being that it is not used about a philosophical school, but about a kind of psycho-epistemological malady): the habit of using abstractions not thoroughly grounded in experience (“floating abstractions”), of making deductions in a cognitive vacuum. – “Empiricism” is also used in a transferred sense: if someone merely gathers disconnected facts and fails to integrate and to abstract from them – if someone is “concrete-bound” – he is said to be an empiricist.

OK, this is a bad habit.

But what makes “Austrian” economics rationalistic in this sense? It is the insistence of Mises and many of his followers that economics is an “aprioristic” science, that its theorems are not derived from experience (they certainly apply to experience, but are not derived from it) The whole of economics, on this view, is derived from the “category of action”, sometimes also called the “axiom of action”. [3] This reflects a heavy Kantian influence on Mises and his followers, and, of course, a Kantian influence is always bad, isn’t it? A theory such as Kant’s can only lead to disasters, when put to practice.

But wait a minute now. Of all the schools of economics, “Austrianism” is the one closest to the truth. It is the only economic school that champions full, laissez-faire capitalism. (There are some “Austrians”, e.g. Hayek, who are not fully consistent on this point, but it is true as a general rule – “for the most part”, as Aristotle would say.) But how could this be, if rationalism and “apriorism” can only have disastrous consequences? Wouldn’t one instead expect the “Austrians” to be Marxists or Keynesians or environmentalists or even theocratic thugs?

Or take the connection to real-life events in today’s world. Who best predicted the current financial crisis? The bursting of such bubbles as the IT bubble and the real-estate bubble? Well, most of them are economists of the “Austrian” school.[4]

Other schools of economics may be accused of “rampant empiricism”. A case in point is the German Historical School. Members of this school merely gathered historical and statistical data, and even rejected the very idea that there can be such things as “economic law” (such as the law of supply and demand). They ended up as socialists (“Kathedersozialisten” or “socialists of the chair”).[5]

There is also a British (or English) Historical School, but it does not seem to be much better. For example, according to Wikipedia:

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.)

But the paradox remains: If rationalism is such a bad thing, and if Immanuel Kant is the worst of all philosophers (and even “the most evil man in mankind’s history”), then why do we get the best economic theories from someone who was a rampant rationalist, even a Kantian?

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Addendum: A particularly obnoxious example of calling “Austrian” economics rationalist I found in a blog post from 2006 by Diana Hsieh, Fractional Reserve Banking: Fraud or Not?. After quoting the relevant part from Reisman’s Capitalism on why a 100% gold standard is morally superior to any “fractional” system (p. 957f), she dismisses it without giving any real counter-argument, and then writes:

Over the past few years, I’ve heard various Objectivist scholars complain of the heavy rationalism of George Reisman’s work.

Although Diana Hsieh has a PhD in philosophy, she obviously has not learned what is wrong with giving an ad verecundiam argument. But then, “various Objectivist scholars” have good reason to find rationalizations for how they have treated George Reisman. Accusing him of having this psycho-epistemological malady is as good a rationalization as any (or as bad, rather).


[1] It is also included in my essay Is Fractional Reserve Compatible with Objectivism?.

[2] If you are interested, you may read my collected blog posts on the subject.

[3] See on this my blog post Is Action an A Priory Category?.

[4] A case in point is George Reisman’s article When Will the Bubble Burst?. But there are other examples.

[5] If you want to know more about this, read Carl Menger’s Investigations into the Method of the Social Sciences.

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