Hayek on the unique perspective of Austrian economics
After reading former NPRI contributor Doug French's Mises Institute column today about Hayek's famous "Pretense of Knowledge" speech and how it applies to the contemporary debate over monetary policy, I was struck by a key passage from Hayek's original 1974 lecture. Hayek clearly delineates the key difference between the Austrian School of economics and all other schools of thought when he says:
It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences - an attempt which in our field may lead to outright error.
While Austrian theory, in many cases, leads to conclusions about the appropriateness of particular public policies that are similar to that of the Friedmanites or the public choice theorists, the method of arriving at those conclusions is, for Austrians, dramatically different. The Austrian School is the only school of thought to recognize that the study of economics is a social science for which quantitative theorems might hold true in a general sense but not in an absolute sense. All other schools of thought treat economics as a "hard science" in which professionals can accurately predict future conditions simply by inputing data into an analytic software program.
This approach fails to view the study of economics for what it really is: the study of human action, wherein the actions of every individual are determined by a unique set of circumstances and an entirely unique set of noncomparable preferences and values. When this recognition is the starting point for economic analysis, it quickly becomes clear that the assumptions built into most econometric models are void from the outset. Hence, it is unsurprising when the models fail to accurately predict the impact of particular public policies.
Instead, the Austrian School teaches that the only truths to be known about economics are those that can be derived by logical inferrence or mathematical definition. Human action is based on the "axiom of action" which is that individuals will act in a manner that they believe will bring about their greatest happiness (irrespective of whether they incorrectly choose the means for attaining a specific end). When economic analysis begins with this aprioristic and irrefutable foundation, the conclusions which follow are equally irrefutable provided that the logic or mathematical proofs employed are performed without error. Other schools of thought can never legitimately make this claim because they are based on assumptions, such as the comparison and quantification of individual utility scales, that are fundamentally flawed.
