It is all too common a trait to attempt to dismiss an economic claim on the grounds that the economic claim in question applies “only in theory,” and not in the real world. It is argued that economics makes an array of assumptions which are fantastically impossible, and therefore, in spite of what may be sound reasoning from those premises, has no relation to the events of the real world. And to be fair, this is true of some schools of economics, such as the neoclassical school, with models assuming perfect competition, perfect information, and whatnot.
However, Austrian economics makes no such otherworldly assumptions: economics is treated as a subset of praxeology in the Austrian school, and is therefore based on the action axiom, or the simple fact that people act with certain goals in mind. That is a statement that cannot simply be dismissed as not applying to the real world. There are a few auxiliary postulates, but these merely guide the progression of economics; and are likewise real features of the world, such as the fact that leisure is one of the things that people value. The otherworldly assumptions of the neoclassical school have no equivalent in Austrian economic theory, which indeed focuses on the aspects of the real world such as a lack of perfect information that the neoclassicals assume away.
The crucial point here is that, if the reasoning from these premises is sound, then if what they assume is true, then so is the theory. To quote Ludwig von Mises, “All the propositions established by the universal theory hold to the extent that the conditions that they presuppose and precisely delimit are given. Where these conditions are present, the propositions hold without exception.” This is unquestionable: to question it would be to question reasoning itself, an endeavor for which there can be no recourse. A sound theory of money, for example, is descriptive of the real world if the real world economy being analyzed uses something seen as money according to the theory.
What is often proposed as being an alternative to theory is empiricism, where one attempts to “test” economic theories in the “real world” to either falsify or verify them, with no recourse to the theories themselves. It is posited that if a theory cannot be falsified, it cannot be considered true, or descriptive of reality, and that theories can be demonstrated to be false using empirical evidence. This is the most brought up criticism of Austrian economics by both academic economists and by the public in general, if they are aware of Austrian economics at all, that is.
However, this criticism is entirely based upon long-standing myths in economic thinking. In reality, it is impossible to verify or refute an economic theory on the basis of empirical evidence. An economic theory describes how an economy works, and the process by which anything functions does so because there are certain causal relations that exist. However, by looking at empirical data, there is no way to determine causation in a complex system such as society. This leads us to the first reason why it is impossible to test theories in economics: there is no way to conduct a controlled experiment in a complex system where no variables can be controlled. A change in one variable can never be shown empirically to result in a change in another variable.
The second reason why it is impossible to test economic theories is because the fundamental data at the base of the economic system have no basic constant relations between one another. For example, no one would ever propose that a rise in the price of potatoes of 50% will always and everywhere result in a decrease in the quantity demanded of potatoes by 50%. In physics and chemistry, such constant relations do exist and experimentation is the method by which they are determined. In economics, the personal values of individual people determine such things as the demand for potatoes, and these personal values are arbitrary, subjective, and changing. No one would ever stop and think that a certain condition will cause for all people and at all times the exact same response in everyone. People react different to the same conditions.
Knowledge of these important facts about the foundation of economic science, the Austrian school of economics does not attempt to make quantitative predictions about economic variables, but instead tries to describe how the economy works in general, i.e. at all times and for all places and people. A remarkable body of thought has then been developed from simple, axiomatic propositions, and the best evidence for this is in the great economic treatise by Ludwig von Mises Human Action. It should now be evident that the most fundamental assumption of most people on economics, that economic ideas and theories need to be proven with empirical evidence, has no basis and is impossible to comply with. Instead, a logical, or apriori, method is the only method suitable.
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