Teleology & Economics: An Introduction
Economics is a science which studies purposeful behavior.
By J.W. Rich
Imagine for a moment that you are approaching the study of economics without any previous knowledge or experience. As far as economic knowledge is concerned, your mind is a pure tabula rasa. For anyone in such a position, what is the first step for you to take to begin the process of understanding economics? Well, the first would be to find a dictionary and flip to the “E” section, but after that the first order of business is establishing a framework by which you can obtain knowledge in the subject. To put it more succinctly, you need a method.
In search of an economic method, our intuitions would lead us first to the method of empiricism. This method is the same base that underlies the branches of the natural sciences (biology, chemistry, geology, etc). The mantra of empiricism is truth established through observation. Using our senses, we can observe the outside world and determine truths about it from what we see. While there are some complications involved, such as the occasional unreliability of our senses, empiricism has a good track record in many of the fields in which it is applied. Given that economics does try to understand the outside world, it seems like empiricism is a logical choice for an economic method.
How specifically would empiricism be applied in the study of economics? Through utilization of the empirical method, we can observe the interaction of entities in the outside world and infer truth about their qualities through those observations. For example, by kicking a rock with my shoe, I can learn about the qualities of the rock through the interaction of these two entities. This learning dynamic is illustrated in the following graphic:
Shoe (Qualities: sturdy, firm, pliable) —> Rock (Qualities: ???) —> Effect (Qualities: The rock rolls across the ground)
What can I learn about the rock as a result of my “experiment”? Because the rock doesn’t morph or contort after my kick, I can infer that the rock is solid and not easily contorted. Similarly, because the rock doesn’t not shatter upon impact and instead rolls along the ground intact, I can infer that the rock is durable and will not easily break. By conducting these and other “tests” - such as biting, throwing, or hitting the rock - I can discern other qualities about it as well. As I discern these assorted qualities, I become more and more knowledgeable about the nature of this rock.
The core of empiricism lies in the idea of prediction. If one can successfully and consistently predict the outcome of an interaction between two entities, then one effectively understands those two entities (or at least, the qualities that are relevant for those entities' interaction). Thus, for me to be able to truly say that I know all relevant aspects of this rock, I must be able to predict what will happen if I kick it again. If I am unable to do so, if the rock does something unexpected after I kick it, such as hovering in the air, then I must conduct additional experiments and collect more observational data to discern more knowledge about this rock.
We can apply this same prediction-based model of empiricism to economics as well. Below is an illustration of an economic experiment where the response of consumers to an increase in the price of a good is being tested:
Price Increase in a Good (Qualities: more costly) —> Consumer (Qualities: ???) —> Effect (Qualities: a decrease in demand)
From all appearances, it looks like we just apply empirical methods to studying the reaction of consumers as we did with kicking rocks, and then we will be able to formulate truths about human behavior that are relevant for economics. However, there is a very important difference in the behavior of rocks and the behavior of humans. Whenever the rock is kicked by the shoe, the rock does not think to itself, “Here comes the shoe! Better make sure I am steady and firm!” As a matter of fact, the rock doesn’t have any thoughts at all. It does not desire to have the qualities that it has - those qualities are simply inert aspects of its being. What it means to be a rock is to have the qualities of solidness and durableness. Human beings, on the other hand, are quite different. Human beings have desires and motivations. They act purposefully - not just react to the world around them. Thus, the qualities they express in their actions are a reflection of their desires, wishes, and aspirations. To understand their actions, then, we must understand the motivations behind those actions.
Taking this into account, our adjusted model is as follows:
Price Increase in a Good (Qualities: more costly) —> Consumer (Qualities: intentional and motivated behavior) —> Effect (Qualities: a decrease in demand)
Can we now apply empirical methods to discover economic truths? No, we cannot. We can observe the actions of individuals, but we can never observe the motivations that lay behind those actions. We can observe consumers buying less of a product because of an increased price, but those observations do not give us any insight as to the personal-motivational causes of that action. If economics cannot tell us why it is that people - such as consumers, producers, and investors - are doing the things they do, then it has little to no ability to provide any understanding of the world around us.
This does not mean that the empirical method itself is unsound. In the areas of study where empirical methods are appropriate, they are useful for extracting truth from the outside world. However, in areas of study where there are facts beyond the reach of empirics - such as the purposeful nature of action in the social sciences - empirical methods cannot be utilized, or at least, only in certain areas for specific purposes.
If we reject empiricism, however, then this puts us back at square one. Without the use of empirics, what method are we to use to conduct economics? Luckily, we do have an answer. In economics, we have the fortunate position of being the objects of our study. Economics is, most fundamentally, the study of human beings - a group that we ourselves are a part of. This means that we do have some intuitive insight into the operative nature of action - specifically, the purposeful qualities that it possesses. Ludwig von Mises referred to this inherent knowledge of the nature of action as Praxeology. The system of Praxeology starts from the core axiom that “human beings act” - a statement that is both true and unable to be disproven. The core insight of Praxeology, however, is that purposeful action entails the usage of means for the attainment of ends. Actors have goals in mind that they wish to accomplish and specify the means that can be used to achieve those goals.
It is from this single insight about the nature of action that truths about economics can be logically deduced. For example, if actors utilize means for the attainment of ends, then we can infer that these ends will have varying levels of importance placed upon them. If this were not so, and all ends were valued equally, then no end would ever be selected to act upon. However, if ends are valued unequally, then we can array these ends in terms of most important to least important. It is according to this value scale that consumers make decisions to purchase goods. The laws of economics, such as the Law of Diminishing Marginal Utility or the Law of Demand can be derived using this step-by-step logical process starting from the action axiom.
What implications does Praxeology have for understanding economics? First, it means that economics proceeds not from going out into the world and observing it, but in logical deduction to discern economic truths. There are aspects of the outside world that we can “plug in” to our economic analysis to ensure that our conclusions are relevant for the world we are living in (such as the assumption that businesses will pursue profit), but these are only additions to our theory and not theory per se.
Secondly, it means that economics is not a science concerned with prediction. Within empirical methods, prediction is the qualifier of truth. To be able to predict the outcome of future events is what it means to have knowledge of the entities pertaining to these events. Within a Praxeological method, however, prediction loses its preeminence because the truth of economic statements is not a question of observation. As long as economic theory has been correctly derived from first principles, then the veracity of that theory is not in doubt. To question its validity on the basis of prediction-making would be equivalent to questioning the validity of a geometric theorem because of its ability to fulfill predictions. Doing so is a clear and blatant category error. Prediction does have a place in a Praxeological framework, but not as a “gatekeeper” determining good theory from bad. Rather, prediction is just a tool of applied economic analysis - a way for us to take economic theory and project it into the outside world.
Lastly, it means that economics must always be viewed first and foremost as a teleological science. All the facts and theories of economics are facts and theories about purposeful action. To lose sight of this fact is to completely misunderstand the scope and subject matter of economics. Human beings are not rocks, as was illustrated above. To treat them as equivalent is not only a tragic methodological error, but fatal to the entire system of thought built upon it. Sound methodology is not an optional or tertiary element of economics, but the first and most important question for any economist to answer. To avoid this question or to reject its importance ensures not only a lack of understanding in the individual, but a guarantee of unsound economic analysis.
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