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MISES, FRIEDMAN AND RAND: A METHODOLOGICAL COMPARISON

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Inquisitor Posted: Sat, Mar 22 2008 11:44 AM
Three of the most respected and influential free-market thinkers of the 20th century are Ludwig von Mises (1881-1973), Milton Friedman (1912- ), and Ayn Rand (1905-1982). The purpose of this essay is to compare and evaluate the respective methodological approaches of each of these theorists who have influenced the course of history with their ideas. We will see how and why Rand's realist approach is superior to both Mises' rationalism and Friedman's empiricism.
 

Mises' Praxeology

          Mises argued that concepts can never be found in reality, wanted to construct a purely deductive system, and was searching for a foundation upon which to build it. He was seeking a theoretical foundation that could not be questioned or doubted. He wanted to find knowledge of logical necessity and desired to escape the concrete-based empiricism of historicism. His mission became to look inward in order to deduce a system that was logically unobjectionable. Mises aspired to find laws that could only be verified or refuted by means of discursive reasoning.

          Mises' action axiom, the universal introspectively-known fact that men act, was the foundation upon which Mises built his deductive system. Action, for Mises, is the real thing. Mises said that action was a category of the mind, in a Kantian sense, that was required in order to experience phenomenal reality (i.e., reality as it appears to us). The unity found in Mises' theorems of economics is rooted in the concept of human action. Mises' economic science is deductive and based on laws of human action that he contends are as real as the laws of nature. His praxeological laws have no spatial, temporal, or cultural constraints. They are universal and pertain to people everywhere, at every time, and in all cultures.

          Human actions are engaged in to achieve goals that are part of the external world. However, a person's understanding of the logical consequences of human action does not stem from the specific details of these goals or the means employed. Comprehension of these laws does not depend on a person's specific knowledge of those features of the external world that are relevant to the person's goals or to the methods used in his pursuit of these goals. Praxeology's cognition is totally general and formal without reference to the material content and particular features of an actual case. Praxeological theorems are prior to empirical testing because they are logically deduced from the central axiom of action. By understanding the logic of the reasoning process, a person can comprehend the essentials of human actions. Mises states that the entirety of praxeology can be built on the basis of premises involving one single non-logical concept – the concept of human action. From this concept all of praxeology's propositions can be derived.

          Mises contends that the axiom of action is known by introspection to be true. In the tradition of Kant, Mises argues that the category of action is part of the structure of the human mind. It follows that the laws of action can be studied introspectively because of aprioristic intersubjectivity of human beings. Not derived from experience, the propositions of praxeology are not subject to falsification or verification on the basis of experience. Rather, these propositions are temporally and logically prior to any understanding of historical facts.

          For Mises, economic behavior is simply a special case of human action. He contends that it is through the analysis of the idea of action that the principles of economics can be deduced. Economic theorems are seen as connected to the foundation of real human purposes. Economics is based on true and evident axioms, arrived at by introspection, into the essence of human action. From these axioms, Mises derives logical implications or the truths of economics. Mises' methodology thus does not require controlled experiments because he treats economics as a science of human action. By their nature, economic acts are social acts. Economics is a formal science whose theorems and propositions do not derive their validity from empirical observations. Economics is the branch of praxeology that studies market exchange and alternative systems of market exchange.

Friedman's Predictive Approach

          Milton Friedman dismisses Mises' apriorism and aprioristic reasoning as a subjective method of considering the introspections of a person's own mind. Seeking objectivity and verifiability, Friedman prefers the empirical method which uses publicly and socially available data. As an empiricist, he considers a theory to be useful if the theory permits individuals to predict occurrences of the phenomenon. This is in opposition to Mises and many other Austrian thinkers who regard the explanation of economic phenomena as making the world understandable in terms of human action in the pursuit of values and goals.

          In his 1953 article, "The Methodology of Positive Economics," Friedman maintained that the realism or unrealism of the assumptions of economic theory is no guide to its usefulness. He rejected both introspection and the plausibility or realism of assumptions as a way of evaluating a theory. He asserted that these had no bearing on the predictive power of a theory or hypothesis with respect to its further applications. What matters to Friedman is whether or not the predictions of a theory correspond to empirical evidence. For Friedman, an instrumentalist, hypotheses are tentatively chosen because they have been successful in yielding true predictions.
 

"Mises' action axiom, the universal introspectively-known fact that men act, was the foundation upon which Mises built his deductive system. Action, for Mises, is the real thing."


          Friedman contends that an hypothesis can be tested only by the conformity of its predictions or implications with observable phenomena and not by comparing its assumptions with reality. He applied the ideas developed by Karl Popper for use in the natural sciences in the realm of economics. Friedman argues that, as in the natural sciences, theories should be accepted provisionally or rejected only on the basis of the degree of correspondence of the predictions of a theory with the factual evidence obtained. Friedman asserted that a single empirical counterexample to a theory's predictions will falsify the theory. His idea of the role of testing thus involves induction via elimination or rejection. Friedman's approach is similar to the pragmatism of John Dewey.

          For Friedman, the significance of a theory is not considered to be a direct result of the descriptive realism of the theory's assumptions. In fact, he extols the virtues of descriptively false assumptions. According to Friedman, "Truly important and significant hypotheses have assumptions that are wildly inaccurate descriptive representations of reality, and in general the more significant the theory, the more unrealistic the assumptions." Friedman explains that a person cannot say that a theory's assumptions are true because any of its conclusions are true but that a person could say that there must be at least one assumption that is false whenever some specific conclusion is false.

Friedman states that for a theory to be useful it must be an oversimplification of reality and therefore a false picture of reality. He goes on to say that, depending upon the theory and its uses, some of these false pictures, along with their assumptions, may be more appropriate (i.e., more predictively accurate) than others. For Friedman, abstraction involves a theory in which many actual characteristics of reality are designated as absent from the theory. Given this perspective, every advance in knowledge, new discovery, or inclusion of additional attributes would defeat, invalidate, and falsify the previous theory. Friedman views any theory as deficient and descriptively false when it fails to specify all of the characteristics of reality including all extraneous, non-explanatory, and irrelevant characteristics. It follows that, for Friedman, all models or theories are imperfect or incomplete because they do not take into account all aspects of the economy. It is no wonder that he turned his attention to prediction rather than to explanation(1).

          It is difficult to reconcile Friedman's practice with his methodological principles. In practice, he frequently argues on the basis of the plausibility or realism of a model's assumptions. After comparing predictions with outcomes he revises hypotheses and assumptions with the intention of making them more realistic. In the light of test results, economists (including Friedman) modify their hypotheses and assumptions in an ongoing and iterative process of observation and theory. Of course, Friedman should be concerned with the realism of assumptions. How else would he know what to attempt next when his predictions fail to square with the facts? If an economist does not assess the realism of his assumptions, the process of theory modification would be inefficient, futile, and based on speculative guesswork. It is apparent that Friedman is not a great theoretical system builder and is even inconsistent with respect to conforming his theory with his practice.

Rand's Objectivism

          Ayn Rand's theory of concept formation transcends both Mises' apriorism and Friedman's empiricism. Rand explains that the acquisition of knowledge requires both induction and deduction. What is known is distinct from, and independent of, the knower. Knowledge is therefore gained via various processes of differentiation and integration from perceptual data. Empirical knowledge is acquired through observational experience of external reality. For example, people observe goal-directed actions from the outside and attain an understanding of causality and other categories of action by observing the actions of others to reach goals. Individuals also learn about causality by means of their own acting and their observation of the outcomes. Introspection is a reliable but ancillary source of evidence and knowledge with respect to what it means to be rational, purposeful, volitional, and acting human being.

          For Rand, the essential characteristics of a concept are epistemological rather than metaphysical. Concepts are epistemologically objective in that they are produced by a man's consciousness in accordance with the facts of reality. Concepts are mental integrations of factual data. Rand explains that concept formation involves the process of measurement omission. A concept is a mental integration of units possessing the same differentiating characteristics with their particular measurements omitted.

          Mises explained that a man's introspective knowledge that he is conscious and acts is a fact of reality and is independent of external experience. Mises deduced the principles of economics and the complete structure of economic theory entirely through the analysis of the introspectively-derived a priori idea of human action. While it is certainly important to understand and acknowledge the useful role of introspection in one's life, it is also necessary to realize that its role is limited, secondary, and adjunct to the empirical observation and logical analysis of empirical reality. It would have been better if Mises had said that external observation and introspection combine to reveal that people act and employ means to achieve ends. Introspection aids or supplements external observation and induction in disclosing to a man the fundamental purposefulness of human action.

          Randian epistemology recognizes that Mises' action axiom could be inductively derived from perceptual data. Human actions would then be viewed as performed by entities who act in accord with their natural attributes of rationality and free will. All the essential principles and laws of economics could then be deduced from the action axiom.

          The Randian or Objectivist view is that the best way for judging a model or a theory is to examine the plausibility of its assumptions. As Ayn Rand herself would put it, "Check your premises." Things which the assumptions abstract from should pertain importantly to the problem under examination. An hypothesis, complete with its assumptions, is both explanatory and predictive if it abstracts the crucial and common elements from the mass of detailed and complex conditions surrounding the phenomenon to be explained and furthers valid predictions of that phenomenon. The Objectivist view is that economic and other theories need to omit a lot of details. Randian realism does not require that all nonexplanatory extraneous particulars be specified.

          The Randian conception of abstraction is to attend to some aspects or attributes of a phenomenon and to exclude others. From this perspective, certain actual characteristics are simply absent from specification or measurement. This is far different from and superior to Friedman's view that some actual characteristics are specified as nonexistent or lacking. From a Randian perspective, new knowledge may expand or refine a theory, concept, or model but it does not necessarily contradict or invalidate it. In other words and contrary to Friedman's view, the theory does not have to be descriptively false(2).

          Ayn Rand's methodological approach overcomes the false alternatives of rationalism and empiricism by explaining how abstract knowledge of reality can be soundly derived from valid perceptual experience. Her method for overcoming these dichotomies includes a number of processes such as differentiation, induction, integration, deduction, reduction, measurement omission, and so on.

 

1. See Roderick T. Long, "Realism and Abstraction in Economics: Aristotle and Mises versus Friedman." Austrian Scholars Conference 10 (Ludwig von Mises Institute, March 2004).
2. Ibid.

Source

 

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JAlanKatz replied on Sat, Mar 22 2008 5:09 PM

Inquisitor:
For example, people observe goal-directed actions from the outside and attain an understanding of causality and other categories of action by observing the actions of others to reach goals.

I tend to point to this as where she goes wrong.  How do peple observe goal-directed actions from the outside?  What is it about the action that tells you it is goal-directed, rather than, say, epileptic?  What do you look for in your observations to make that determination?

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Excellent read; despite having not read much Mises (and next to none of Friedman), I understood the explanations enough to move along.  I have to say, I'm susprised with how much I find myself agreeing with Rand, specifically within this essay. 

Although, I was an A.J. Ayer fan before reading any of Rand, so I suppose I shouldn't be surprised.   

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jimmy replied on Sat, Mar 22 2008 9:08 PM

JAlanKatz:
I tend to point to this as where she goes wrong.  How do peple observe goal-directed actions from the outside?  What is it about the action that tells you it is goal-directed, rather than, say, epileptic?  What do you look for in your observations to make that determination?

Perhaps buying and selling on the stock markets is a good example of this. Someone sitting there watching stocks go up and down suddenly sees the stock drop really quickly and they get a gut wrenching feeling in their stomach and a strong desire just to get out, sell, sell, sell! They have to be a seasoned veteran and even then still consciously restrain themselves in order to resist this "knee jerk" response... but quite a few market participants fail to overcome that sinking feeling in their stomach and consequently they do sell.

To what degree is this action a conscious goal directed action and to what extent is it simple reflex, like recoiling when you touch a hotplate? Mises acknowledged that not all actions were economic actions (of choice) but that some, such as recoiling from a hot plate, were reflex. I wonder if yet more again are a bit of a mix of the two...

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Imo, Mises' argument on human action (as far as I understand it) is a seductive argument, but ultimatley doesn't add up due to apriorism; being a casual reader of Ayer, I already did not think apriorism itself is sound.  The essay helps clarify (especially for Freidman, which I had previously had trouble comprehending) the weak spot of Mises, and how Rand's stance addresses this.  


This essay also reminded me of a good Ayer quote I remember coming across, of which I thought was somewhat related:


"Philosophers have been attracted by the idea of a purely demonstrative use of words because they wanted to make the best of both worlds. They have sought as it were to merge their language with the facts it was supposed to picture; to treat its signs as symbols, and yet bestow upon them the solidity which belongs to the facts themselves, the facts being simply there without any question of doubt or error arising. But these aims are incompatible. Purely demonstrative expressions are in their way secure; but only because the information which they give is vanishingly small. They point to something that is going on, but they do not tell us what it is."

*(This would've been my previous post but I had forgotten the above quote...)

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JAlanKatz replied on Sun, Mar 23 2008 6:07 PM

Nitroadict:
The essay helps clarify (especially for Freidman, which I had previously had trouble comprehending) the weak spot of Mises, and how Rand's stance addresses this.  

Then can you please explain just how one identifies, purely through empirical evidence, the difference between a person striving towards chosen ends, and a person having an epileptic fit?

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Neither Ayer nor any other logical positivist is in any position to question the soundness of rationalism, given the shaky grounds their own theories rest upon. I'm not a Kantian anymore, but of the two, rationalism is able of answering difficult questions that positivism simply collapses when faced with (and this is why pure empiricism is no longer in fashion, at least as far as the world outside idiot economists is concerned.) Geoffrey Plauche has a good paper on methodology in the reading list, and Hoppe's In Defense of Extreme Rationalism reveals the inadequacies of any approach that rejects truths that are synthetic a priori. Hollis' and Nell's Rational Economic Man is good too. 

 

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Indeed, I am a casual reader of Ayer (as well as others on this page), so I feel as if I'm being a bit reckless jumping into a discussion without knowing the land too well; one of the things which I didn't know, in-depth, is rationalism.  I will try and start reading the Plauche piece (as well as looking into the Hoppes and Nell books mentioned) tonight; perhaps I'll understand this thread a bit more afterwards.  I apologize my philosophical virginity.

Despite inexperience, it's hard for one to not comment on things in a discussion that make sense :).

As for the previous post; I'd imagine using biological methods would be able to differentiate between the two.  Medicals scans could detect current conditions of said person' brain, in which data would illuminate on whether or not they are having a seizure or not.  Of course, this is assuming that the person manages to survive seizuring for the amount of time required for such scans to occur.    

There is neurochemical differences between those states, though; empirical data could be gathered to specify which one is occuring.

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Well I don't mean to discourage you, it's just that positivism is not the best of places to seek a sound methodology. I think once you've read the sources I cited (as well as the one cited by the paper in the OP) you'll come out with a better understanding of the topic, perhaps better than even what you'd get at a university.

 

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No worries, actually; I had read of positivism's criticisms before (as early as when I first started reading it via wikipedia), but it always helps to get a better understand of how as well.  The only discouraging thing is the snail's pace I've been going at, in terms of getting my hand's dirty with various readings.  

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JAlanKatz replied on Sun, Mar 23 2008 10:00 PM

Nitroadict:
There is neurochemical differences between those states, though; empirical data could be gathered to specify which one is occuring.

Ok - so now you just need to establish that you can do it once.  That is, you need to show that you can find a person who is definitely engaged in purposeful action, in order to measure the neurochemical state of his brain.  Then you'll have something you can compare future people to.  So, how will you do this the first time?  Also, once you've done it, you'll need to establish which particular facts about the neurochemical status allowed you to make the distinction, and why.  I submit that this can't be done.

To make it relevant, though, you'll next have to connect it to actual people doing epistemology - that is, this most certainly is not how economists make the distinction.  So it will remain to show how we, in our normal life, make the differentiation.

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Niccolò replied on Tue, Mar 25 2008 8:34 PM

 Mises = Good

 M. Friedman = Bad

 Rand = Ugly

 


The Origins of Capitalism

And for more periodic bloggings by moi,

Leftlibertarian.org

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