One of, if not the most fundamental difference between the Austrian school and the mainstream neoclassical school is the difference of opinion with regard to the essential epistemological character of economic propositions. The Austrian position is that economic propositions constitute a priori knowledge; that is, knowledge derived, not from observational experience, but from a true axiom. Mises has poignantly articulated the Austrian position:
“Its [economics] statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification and falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts. They are a necessary requirement of any intellectual grasp of historical events.”
Contrariwise, the neoclassical school conceives of economic propositions as a posteriori (empirical) statements, which are derived from observational experience. Whereas the Austrians understand economics to be a purely deductive science, the neoclassicals believe economics to be a historical science, akin to physics or chemistry. For the neoclassicals, knowledge of economic theory stems entirely from the experimental method. The Austrians, conversely, hold that economic knowledge arises from theoretical reasoning. Economic phenomena are simply too variable to allow for the fruitful employment of the methods of the natural sciences.
The fundamental reason for this is that economic phenomena such as market prices, interest rates, and the business cycle are the product of the actions of individuals and, unlike the subject matter of the natural sciences, human beings are not perfectly predictable. How people acted yesterday is no absolute assurance of how they will act today or tomorrow or a year from now. There is in the realm of human action no empirical constants. This fact forever precludes the use of the methods of the empirical sciences.
The neoclassicals are unable and unwilling to comprehend this immutable fact. Since the 1940s, the doctrine of empiricism-positivism has dominated the economics discipline. The positivist view is that physics is the preeminent science and that all other sciences must emulate its method, despite fundamental epistemological differences between the various fields. Accordingly, positivism is an ideology marked by a commitment to methodological monism, in contrast to the methodological dualism of the Austrian school.
If empiricism is not appropriate for economics, then what method can be employed to investigate economic phenomena? The answer is logical deduction. However, logic alone is not sufficient. A self-evident and eternally true axiom is also required. The logical deductions that can be made from that axiom are, provided the axiom is legitimate, true knowledge about reality, as opposed to merely analytic knowledge. They are what Kant has called synthetic a priori statements. How are such axioms discovered, if not by observational experience? They emanate from internal, introspectively produced experience. What’s more, these axioms are self-evident because one cannot deny their validity without self-contradiction; that is, in attempting to refute them, one would actually – implicitly – assent to their truth.
The validity of all true economic theorems and statements, then, derives not from empirical experience, but from the axiom of purposeful human action. This axiom fulfils the requirements of a Kantian synthetic a priori proposition. It cannot be rejected that this proposition is true, since the rejection would have to be regarded as a purposive action. Moreover, the axiom is also not derived from observation; it is derived from reflective experience. The various elements of action – means, ends, psychic profit, value, and so forth – exist only in the minds of acting men. It is impossible to observe, for instance, subjective value; this impossibility is inherent in the nature and meaning of subjectivity.
All these various categories of action are implied in the axiom of action. As Hoppe has said, the fact that one is able to interpret observations in terms of these categories means that one already knows what it means to act. In other words, the categories of action are logically antecedent to purposeful action.
In sum, Mises and the Austrians correctly understand that the epistemological foundation of economic science is rooted in the Kantian concept of the synthetic a priori. Economics – or to use the Misesian term: Praxeology – says that’s all true economic propositions must be demonstrated to be logically deducible from the incontrovertible axiom of purposeful human action. Those that are, are true a priori; that is, they cannot be falsified by observational experience. Therein lies the fundamental epistemological difference between the Austrian school and the neoclassical school.