The Question of Economic Methodology
What is economics? It is, admittedly, a large question. So those who are not economists, the answer probably seems to be that economics is the study of GDPs, consumer price indices, rates of inflation, exchange, and interest, and countless other dreadfully boring subjects. To others, the textbook definition of economics is the study of how allocate limited resources towards unlimited wants and needs. I vehemently disagree with the former, and feel that it is the shameful fault of that scoundrel Keynes that anyone believes it to be so. With the second, I agree, but would phrase things differently.
With Mises, I believe that economics is the study of Human Action. What this means is that, far from being the mess of sloppy thinking and complex math that the villain Keynes (and, to a lesser extent, the partially misguided hero Friedman) helped create. Economics is the study of how humans allocate scarce resources. For that reason, it has to be couched, first and foremost, in an understanding, and a theory of human nature. With no understanding of the nature of humans, we can have no understanding of how humans will utilize the resources in question. Every curve and model and equation that Keynes was so fond of finds itself completely impotent if the data it has computed cannot be shown to be applicable to its subjects (as is usually the case with Keynesian economics).
If then, in order to understand economics we must first understand humans, it is proper to ask what we can know about them.
The first principle we know to be true is that humans act. This is something inherent to our nature, indeed, any attempt to disprove it must fail, as to do so, the critic must actually engage in argument, which is itself an action. We know then, that humans are acting creatures. They are not ferns, or trees.
Secondly, we know that humans always act towards their greatest perceived happiness. This is proven by the fact that, whenever a human takes an action, he chose that action over any other possible course of action available to him. It must, then, be the course he felt would yield to him the greatest possible happiness. This leads us to a third principle.
Humans arrange their wants and needs in an ordinal manner. While a human may engage in actions in rapid succession, he can still only engage in one action at a time (excepting, of course, for the brain's ability to keep the various parts of the body continuously and simultaneously functioning). So then we know that a human will always act towards his greatest happiness first, his second greatest happiness second, his third greatest happiness third, so on, and so on.
This tells us something important about trade. Namely, that no trade ever occurs which is not beneficial for both parties. The fact that both chose to engage in a trade is proof enough that both believed that they would be better off after the trade than before it, that what they would gain from it would bring to them greater happiness than what they would lose. The only exception to this being swindlers, who deceive people into believing that they offer something other than what they actually do in trade.
This sort of theory can (and does) go on for ages as myriad conclusions are derived from logically derived axioms about the nature of man. It is, by far, the best way to arrive at general principles of economics, because, at its core, economics is fundamentally a study of human nature. It is a humanity, and not a natural science. This theory of economics is laid out in two masterpieces by the great economist of our age, Ludwig von Mises. The first is Theory and History and it can be read here. The second is his 900 page magnum opus, Human Action. Also provided for free on the internet. I encourage you to read the first. Tackling the second is no small undertaking, but it is more than worth the while, if you feel up to it. I myself just recently received my copy of it, and am eagerly starting out on it, though I imagine it will take me some time to complete the greatest achievement of what was, quite possibly, economics' greatest master.
With Mises, I believe that economics is the study of Human Action. What this means is that, far from being the mess of sloppy thinking and complex math that the villain Keynes (and, to a lesser extent, the partially misguided hero Friedman) helped create. Economics is the study of how humans allocate scarce resources. For that reason, it has to be couched, first and foremost, in an understanding, and a theory of human nature. With no understanding of the nature of humans, we can have no understanding of how humans will utilize the resources in question. Every curve and model and equation that Keynes was so fond of finds itself completely impotent if the data it has computed cannot be shown to be applicable to its subjects (as is usually the case with Keynesian economics).
If then, in order to understand economics we must first understand humans, it is proper to ask what we can know about them.
The first principle we know to be true is that humans act. This is something inherent to our nature, indeed, any attempt to disprove it must fail, as to do so, the critic must actually engage in argument, which is itself an action. We know then, that humans are acting creatures. They are not ferns, or trees.
Secondly, we know that humans always act towards their greatest perceived happiness. This is proven by the fact that, whenever a human takes an action, he chose that action over any other possible course of action available to him. It must, then, be the course he felt would yield to him the greatest possible happiness. This leads us to a third principle.
Humans arrange their wants and needs in an ordinal manner. While a human may engage in actions in rapid succession, he can still only engage in one action at a time (excepting, of course, for the brain's ability to keep the various parts of the body continuously and simultaneously functioning). So then we know that a human will always act towards his greatest happiness first, his second greatest happiness second, his third greatest happiness third, so on, and so on.
This tells us something important about trade. Namely, that no trade ever occurs which is not beneficial for both parties. The fact that both chose to engage in a trade is proof enough that both believed that they would be better off after the trade than before it, that what they would gain from it would bring to them greater happiness than what they would lose. The only exception to this being swindlers, who deceive people into believing that they offer something other than what they actually do in trade.
This sort of theory can (and does) go on for ages as myriad conclusions are derived from logically derived axioms about the nature of man. It is, by far, the best way to arrive at general principles of economics, because, at its core, economics is fundamentally a study of human nature. It is a humanity, and not a natural science. This theory of economics is laid out in two masterpieces by the great economist of our age, Ludwig von Mises. The first is Theory and History and it can be read here. The second is his 900 page magnum opus, Human Action. Also provided for free on the internet. I encourage you to read the first. Tackling the second is no small undertaking, but it is more than worth the while, if you feel up to it. I myself just recently received my copy of it, and am eagerly starting out on it, though I imagine it will take me some time to complete the greatest achievement of what was, quite possibly, economics' greatest master.
posted by Ben-T | 1:26 AM
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