The Importance of Economic Foundations

 

A hypothetical thought experiment: suppose we have two people sit in separate rooms and have each read a book. One person reads a traditional Neoclassical economics textbook. The other reads a copy of Ludwig von Mises’ “Human Action”. After they have finished their respective reading assignments, we put them in the same room and have them converse about economics using exclusively the information that they had just read. How much agreement would they come to? Very little.

Why would this be the case? After all, they both read books on economics. The subject matter of both books, broad speaking, is the same. One would expect that the information contained therein would be broadly the same as well. Economics is economics, so to speak. Certainly, we would not expect such disagreement if the subject matter of the books had been changed. If they were not books on economics, but instead Physics, then we would expect that the two individuals would have found plenty of common ground between them. Why then, is there disagreement?

Let us return to the books in question. “Human Action” and a traditional economics textbook are, contrary to what we might expect, quite different from each other. In fact, if one lays them side-by-side, the differences are immediate and striking. For example, “Human Action” uses very little math, and even where math is used, it is never the primary focus of the analysis. In a traditional textbook, the entire book is infused with math in every page. The entire science itself is usually taught with a mathematical focus.

Furthermore, Mises does not use any graphs. It is difficult to imagine a modern textbook without graphs. Economics is always identified with the graphs it uses. If one were to randomly poll laypersons about their knowledge of economics, graphs and their usage would almost certainly be the most commonly associated chart eristic of the science. However, Mises refrains from their use altogether.

Most importantly, Mises spends the first 200 pages or so on the foundations of economic analysis. A Neoclassical textbook would generally spend the first chapter on foundational ideas, perhaps, but never any more than that. Even this single chapter is usually just a list of ways to “think like an economist” or various assumptions commonly made in the economics field. Obviously, Mises lends much more importance to this issue of foundational principles of the whole of economics.

Upon reflection, it is this difference of views on the foundations of economics, more than any point of departure, that leads to the diverging views on economics as a whole. Different understandings of the base underlying all of economic analysis will lead to vastly different conclusions in that analysis. The premises that one starts from will affect the first conclusions drawn from them. Those first conclusions lead to secondary conclusions, which lead in turn into an entire body of thought. The point at which one begins this process of drawing conclusions is of primary concern. In architecture, the base is the most important part of the structure. The architecture of ideas is no different.

This importance of foundations may be so, but why would there be such a disparity between the foundations of economics in Mises and the Neoclassicals? It certainly seems like economics should just be economics, similar to how physics is just physics. The difference stems from the attention placed by each school of thought on the intellectual foundation of economics. The Austrian School approach, embodied by Mises, has much more focus placed on these foundations. Mises approaches economics with a view of human action in mind. Specifically, Mises starts from the action axiom, which is the necessarily true statement that “humans act”. This is done as a conscious and purposeful effort to understand economics as being a product of rational action. We start from that understanding and work our way forwards to discern and uncover economics truths about the world.

The Neoclassical approach has no such emphasis on the base of economic study. The first chapter in a traditional textbook will usually have some assumptions that we make as economists and ways that economists think about the world. That is the extent to which foundational principles are given any attention. The entire question is merely glossed over as if it were of no importance. Compared to the Misesian approach, the Neoclassical approach lacks any emphasis whatsoever on the question of the foundations of economic science.

This difference in foundational principles is not trivial. If in the process of constructing a system of thought, such as economics, we have a flaw in our foundation, that flaw can compromise the entire structure. An error in our foundation will echo into the entire body of thought, placing the whole of the enterprise into jeopardy.

We can see this principle at work throughout the history of scientific thought. Newtonian Physics was once thought to be able to explain the motions and forces of the world around us. For centuries, it was the accepted view of understanding the science of physics. However, Newtonian Physics found itself unable to explain all the questions that scientists had to ask. Inquiries about the nature of gravity, for example, could not be answered by Newton’s system. It was built on a flawed foundation. It was not until Einstein’s theory of General Relativity that those questions could then be answered on a (presumed) solid foundation.

The rules of the foundations of science apply equally to the foundations of economics. A failure to reject a flawed foundation will lead us to flawed conclusions. To understand and elucidate an epistemologically sound basis for the study of economics is not a meaningless armchair exercise, but rather, the most primary and most important job of any economist. Before any other economic question can be answered, the question of economic foundations must be answered. Without a solid foundation, there is no point continuing any further into the economic realm. If one cannot be sure that the conclusions that one draws are correct and sound, why bother?

This is the importance of the Misesian approach to economic foundations. Mises understands the absolute necessity of the foundations of the study of economics. He recognizes the gravity of the question. Because he recognizes this fact, he thoroughly and clearly lays out his understanding of those foundations for economics in the first 200 pages of “Human Action”. He is not engaging in mere philosophizing; he is giving the reader the reasons to read the rest of the book.

In light of the importance of economics foundations, the Neoclassical approach falls woefully short. It not enough to list assumptions about the world. Those assumptions must be supported with arguments. It is not enough to posit the usefulness of empirical methods for economic use, those methods must be demonstrated to be sound. If we do not ensure the soundness of our foundations, our system of thought will crumble and collapse.

It is of the utmost importance that we do not stumble our way into the study of economics. Foundational principles cannot be ignored. To do so would be to blindingly walk our way into economic analysis without a guide to ground us in our journey. Truth would be maddingly elusive in such a situation. Rather, our primary emphasis should be placed on foundational principles. Their importance cannot be understated. Sound economics depends upon sound foundations; and in turn, a prosperous and wealthy society depends upon sound economics.

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