Introduction

When I first started reading Ludwig von Mises, it struck me that he was what I would refer to as a systems thinker. Describing Austrian economists as systems thinkers helps me understand and describe the Austrian method. I realize this is a somewhat unorthodox description, but I think it holds true to the generally accepted descriptions of the Austrian method.

Systems can be understood on three basic levels: events, patterns of behavior, and structure. An event consists of an individual happening, e.g., today the temperature reached 45°F. That temperature reading tells you something about the day but little else about the system. A parent of behavior consists of a series of events over time, e.g., the temperature has averaged 52° over the last six months. The structure of the system consists of the elements that cause consistent patterns of behavior and include relatively predictable events, e.g., these temperature measurements have been taken at a specific longitude and latitude at a particular time of year and they take into consideration other elements of the climate.

Markets can accurately be described as human systems. That means that their behavior can be somewhat unpredictable. As a result, unlike systems in the physical world, the structure of human systems is continually changing. Thus events and patterns of behavior become relatively unpredictable. The adaptive nature of human systems requires that any description of those systems have a grounding in reason more than research.

The primary structural element of a human system consists of the mental models of the individuals in that system. Since no one can accurately describe the mental models of individuals, the Austrian economist must rely on reason to identify consistent elements of the mental models of human beings.

If the economist consistently applies these a priori elements, they can formulate sound theories about economic markets.

I will describe briefly the primary a priori elements that, when applied rigorously, can accurately describe market behavior.

Subjective value

Individual humans always and everywhere determines the value of goods and services.

By always and everywhere, I mean this principle applies to all actors in an economy regardless of what level of production or consumption they operate.

Action Axiom (Praxeology)

Humans always act with purpose. Even nonaction represents an act. Mises used the action axiom to develop a logical framework he referred to as praxeology.

Markets, therefore, consist of a network of individuals acting.

Deductive Reasoning

The Austrian school of economics has adopted deductive reasoning in its methodology. Because they began with a priori assumptions, they must use those as fundamental premises and logical arguments.

In deductive reasoning, if you begin with a true premise and apply sound reasoning, you must arrive at a sound conclusion.

Deductive reasoning gives the Austrian economist a firm basis from which to develop sound conclusions.

Conclusion

I mean for this to be only an introduction to the Austrian method. I will cover these topics frequently and in more depth in future publications.

You probably won’t find a reference to systems thinking in any other discussion of The Austrian Method, but I think it’s helpful to understand how the Austrians identified the structure of economic systems and, as a result, have also identified the primary drivers of economic activity.

Please look for more discussions of the important elements of subjective value, human action, deductive reasoning, and other processes used in applying the Austrian method.