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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Is Life Worth Living?

You may think I must be severely depressed to even ask such a question, but I am not; it was prompted by an excerpt from Human Action (the very last chapter of the book) which was recently posted at the Ludwig von Mises Institute. I quote:

Science does not value, but it provides acting man with all the information he may need with regard to his valuations. It keeps silence only when the question is raised whether life itself is worth living.

This is eminently true. If you were to ask this question of yourself, no science could tell you the answer; the only one who can answer it is you. – But if you even read this, this is proof enough that you do find life worth living; if not, you would already be dead: you would have committed suicide in any manner available, including stopping eating.[1]

Not even the science of ethics could tell you the answer. This science (and I refer here, of course, to the Objectivist ethics) can tell you that there is an inextricable link between “life” and “value” – that it is only to living beings that values are possible and necessary – and it can tell you that life is the ultimate standard of value. And then it can offer you advice about how to go about living successfully to make it even more worth living: use your reason, use your own mind, be productive, honest, just – all the things enumerated in the catalog of virtues in Galt’s speech. And you have to apply this as best you can to all the concrete situations in your life (which is not always easy). But if you really think that “life is not worth living”, all this is of no avail. If life itself loses its value, what else could be of value?

Mises repeats his point a little later in the text:

It is true, praxeology and economics do not tell a man whether he should preserve or abandon life. Life itself and the unknown forces that originate it and keep it burning are an ultimate given, and as such beyond the pale of human science. The subject matter of praxeology is merely the essential manifestation of human life, viz., action.

Praxeology and economics can tell you many things – for example, it can tell you why capitalism is the proper social system and why socialism is doomed to fail. But this, too, is based on the idea that life is worth living: if it were not, what would it matter if you live in a free society or under tyranny and slavery? If your life were truly not worth living, neither would it matter whether you are free or a slave.[2]

This far, I agree with Mises. (The point is virtually self-evident, so I have merely elaborated on a self-evidence above.) Now to a “bone of contention”: Mises’ insistence that science is – and should be – wertfrei or value-free. In other words, science does not, and should not, pass judgments of value. Such judgments are outside the scope of science. Wherever they belong, they do not belong in science; neither in the natural sciences, nor in the humanities.

Well, the natural sciences do not make value judgments – for example, physics does not tell us whether gravity is good or bad; it just tells us that there is such a phenomenon as gravity. But even so, it tells us that it is a bad thing to jump from an airplane without the aid of a parachute. But this concerns the implications of scientific knowledge, not the content of the science. – And the very pursuit of science is based on the idea that knowledge is a value. But that concerns the scientist’s motivation in pursuing science, not the content of the science.

But is this true about economics as well? (Or about the humanities in general, but I want to focus on economics.) Well, the economist as well as the natural scientist must be motivated by the idea that knowledge is a value; and the knowledge, once acquired, implies “oughts” and value judgments. For example, once an economist has arrived at the insight that capitalism leads to prosperity and socialism to misery, it would be ludicrous to abstain from saying that we ought to have capitalism, and that socialism is bad.

But what about the content of economics, apart from the motivation to study it and the implications of it? This is what Mises has to say:

While many people blame economics for its neutrality with regard to value judgments, other people blame it for its alleged indulgence in them. Some contend that economics must necessarily express judgments of value and is therefore not really scientific, as the criterion of science is its valuational indifference. Others maintain that good economics should be and could be impartial, and that only bad economists sin against this postulate.

The semantic confusion in the discussion of the problems concerned is due to an inaccurate use of terms on the part of many economists. An economist investigates whether a measure a can bring about the result p for the attainment of which it is recommended, and finds that a does not result in p but in g, an effect which even the supporters of the measure a consider undesirable. If this economist states the outcome of his investigation by saying that a is a bad measure, he does not pronounce a judgment of value. He merely says that from the point of view of those aiming at the goal p, the measure a is inappropriate.

Observe that the word “bad” here expresses a value judgment. But the economist should not have used this word? He should have used words like “undesirable” or “inappropriate” instead? This may be semantic hair-splitting, but certainly those words, too, express value judgments.

There is no escape from value judgments. As Ayn Rand explains:

In answer to those philosophers who claim that no relation can be established between ultimate ends or values and the facts of reality, let me stress that the fact that living entities exist and function necessitates the existence of values and of an ultimate value which for any given entity is its own life. Thus the validation of value judgments is to be achieved by reference to the facts of reality. The fact that a living entity is, determines what it ought to do. So much for the issue of the relation between “is” and “ought”. (The Virtue of Selfishness, p. 17.)

And later in the same book:

Moral evaluations are implicit in most intellectual issues; it is not merely permissible, but mandatory to pass moral judgments when and where appropriate; to suppress such judgment is an act of moral cowardice. But a moral judgment must always follow, not precede (or supersede), the reasons on which it is based. (P. 143.)

In my own words: Value judgments, or moral judgments, must never be divorced from the facts of reality.

But saying this in a modern philosophy class is like swearing in church. Modern philosophy takes it for granted, even axiomatic, that values are divorced from reality. No “ought”, it teaches to young, defenseless minds, can ever be derived from an “is”; no value can ever be derived from facts.[3]

I think this idea is the most stupid idea ever uttered in the whole history of philosophy. Anyone who has not yet passed through a modern philosophy class (and punished with a lower grade for disagreeing with this idea) knows that an “ought” is derived from an “is”. To take an example I have used before: what clothes you should wear is determined by the weather; when it is 30o cold outside, you don’t go out in shorts; when it is 30o warm, you don’t put on your fur coat. But modern philosophy teaches you this does not matter; not even the fact that you might freeze to death matters.

Every time anyone makes an analysis of the facts and then makes a recommendation based on this analysis, he is deriving an “ought” from an “is”. He may study gravity and then recommend a parachute, to repeat the example above. Or he may be an economist and be asked to analyze the pros and cons of taxation; if he is a good, “Austrian”, economist, he will find that taxes are harmful and that taxes on “the rich” will eventually harm “the poor” as well. So he will recommend lower taxes, or even the abolishment of taxes.[4] But on the premise that an “ought” must not be derived from an “is”, he cannot allow himself to make that recommendation!

I will not insult Mises by calling him a “modern philosopher”; but in this case I believe he has bought the Humean idea of the is/ought or fact/value dichotomy.

In case someone should think I am unfair to Mises, that I have refrained from quoting some good stuff, and that my criticisms are mere nit-picking, I would like to end by quoting George Reisman:

Even on the occasions when I found it necessary to disagree with him […] I always found what he had to say to be extremely valuable and a powerful stimulus to my own thinking. I do not believe that anyone can claim to be really educated who has not absorbed a substantial measure of the immense wisdom present in his works. (Ludwig von Mises: Defender of Capitalism.)

He is a powerful stimulus to my thinking, too. And you are not educated until you have read him.

This blog post is getting long; an “is” that implies an “ought”: that I should stop here.


[1]) Old people often lose their appetite when death is approaching. Unlike suicide, this is not a choice; it is nature’s way of telling that life is about to end.

[2]) One famous philosopher has claimed that it is one’s duty to preserve one’s life only when life has become unbearable – before that, preserving life is just an “inclination”. But this amounts to saying that life is worth living only when it is not worth living any longer. I could hardly agree less.

[3]) The origin of this idea is David Hume; but you already know this.

[4]) For the question how the legitimate functions of government should be financed, I refer you to Ayn Rand’s essay “Government Financing in a Free Society” in The Virtue of Selfishness.