Though not an economics major at UChicago (the mathematical demands scared me away), I still love reading and learning about the various schools of thought and approaches to economic research (let them do the math for me).

As much as the Austrian School has great application in policy to the recent economic downturn (see Thomas Woods’ Meltdown), the question of method still remains. Roberto Antonio Valenzuela, a dear friend of mine, posted some thoughts in a facebook note criticizing economic methods that do not utilize a priori deduction. Yes, such a critique includes the Chicago School in its condemnation; still, I love Roberto and agree with his thoughts on the purpose and method of science. He has graciously offered to share his reflection as a guest post for the blog:

Good science requires real-world testing.

A good scientific test should allow for disproof (the criterion of falsifiability) of the hypothesis (a prediction made about natural phenomena based on a given explanatory model of observed facts). Good science is composed of collected hypotheses that have withstood attempted falsification and have demonstrated superior predictive power (we call science at this stage a “scientific theory”). This is why heliocentrism triumphed over geocentrism, wave-particle dynamics triumphed over the hypothesis of luminiferous aether, relativity triumphed over the steady-state hypothesis, etc. — they explained more things better, and their rival hypotheses were falsified by improvements in technology and metrics.

Economics has not yet reached this point. There is no economic model that can yet be called a sound scientific theory, since no economic model has superior and broadly accurate predictive power. From a scientific standpoint, economics today is approximately where physics was in the days of Copernicus: several competing models — each with partial but extremely limited explanatory power — vie for ascendancy via continual refinement; but none are in a settled and clearly superior state. This is why I am an economic agnostic for the moment (see my previous rumination, “Why I Am an Economic Agnostic”).

However, the Austrian School makes no testable predictions, proposes no criteria of falsifiability, and expressly disclaims observation and experience as valid methods for refinement of its propositions (see, e.g. Human Action, 3d ed., p. 862). Because of this, Austrian “economics” is subjective philosophy, not objective science. It has more in common with Aristotle’s Physics than with Einstein and Hawking. Its a priori approach to naturalistic questions frankly descends from medieval speculations on crystal spheres and alchemy more than from the painstaking trial-and-error real-world experimentation that has given us virtually all goods associated with modern civilization.

The success of the scientific method over the philosophical method for accurate and usable knowledge about natural fact tells me that I should not rely on Austrian economics for sound economic conclusions. Rather than proclaim that the unknown in economics (or indeed, anything in nature) is unknowable, and devolve into god-of-the-gaps philosophical speculation, I prefer at least to take a stab at observing, studying, and comprehending. This is why I do not — cannot — accept the Austrian School as a viable or valuable approach to understanding human action.