In 2008, central banks injected trillions. Many feared consumer prices would explode. They didn't. So printing money doesn't cause inflation? Wrong answer. Wrong method, mostly.
In the previous chapter, you saw how the collapses from a lack of information. But then, how do economists actually process that information? This is where the paths split.
There are two radically opposed ways to approach economics.
You watch the numbers (GDP, unemployment, that kind of thing), you form a hypothesis, and you check whether past data backs it up. This is called empiricism(or positivism, in its methodological flavor).
You keep the theory that best explains the data. Until proven otherwise.
Here, you don't start from observation but from a premise you treat as indisputable, and you deduce everything else through logic, exactly like in geometry. This is the axiomatic-deductive method.
If the axioms are true, the conclusions are too. No need to measure a single triangle.
Friedrich Hayek(opens in a new tab), an economist of the Austrian school, called out what he named scientism: the urge to apply hard-science methods (physics, chemistry, that sort of thing) to human action.
“Scientism is the slavish imitation of the method and language of Science by those who study the problems of society, even though these methods do not apply to their subject.—Friedrich Hayek
But why such a pushback? For Austrians, these methods are poorly suited to what they're meant to study:
- Society isn't a lab. You can't isolate a single variable. For example, if taxes drop and growth picks up, is it because of the tax cut, or because of some new technology that showed up at the same time? Impossible to settle cleanly.
- Humans learn. Unlike a planet, a human changes their behavior the moment they know about a theory. Past data doesn't lock the future into a stable, unchanging model.
All of Austrian thought rests on a single building block, a foundational truth. It's called the praxeological axiom (from praxeology(opens in a new tab), the science of human action).
“Human beings act with a purpose.
Sounds dumb? Trust me, it's a massive thinking weapon.
Can you refute this axiom? Try to prove that human beings don't act with intention.
This is where you start to see why economic debates are so often pointless: the two sides simply don't speak the same language.
Click on each school to compare how they reason on the same question:
The Austrian school isn't trying to predict things like "GDP will rise by 1.2%". It lays out qualitative, universal laws.
For instance: "the artificial manipulation of interest rates systematically leads to a misallocation of capital". For an Austrian, this isn't an opinion up for debate, it's a logical consequence of the reasoning. You don't prove it with data, you deduce it.
Full circle here. The conclusions from the previous chapters don't spring from some political preference. They're logical consequences drawn from the very nature of the human being. What political conclusions you then draw from them, that's entirely up to you.
How about a quiz to test what stuck from this module? .