Montreal, April 15, 2004  /  No 141  
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Dr. Edward Younkins is a Professor of Accountancy and Business Administration at Wheeling Jesuit University in West Virginia. He is the author of Capitalism and Commerce
by Edward W.Younkins
          Carl Menger began the bitter conflict known as the Methodenstreit with the 1883 publication of his Investigations into the Method of the Social Sciences With Special Reference to Economics. This was twelve years after he published his Principles of Economics, the book that made him famous and enabled him to attain a prestigious chair of economics at the University of Vienna. In Investigations Menger elaborated upon the methodology he had originally presented in Principles of Economics. In Investigations he offered a written argument against the German Historical School’s idea of economics as an historically based discipline to be studied solely by the application of concrete-bound empiricism. In addition, he denied the existence of any essential differences between the natural and the social sciences. In contrast, the Historical School assumed that the natural sphere was governed by strictly universal laws, but that the search for such laws in the social realm would be futile. For the German historicist, economic theory does not possess the scientific nature of the natural sciences.
          Menger sought to develop a categorical ontology of economic reality in an Aristotelian sense. His causal-genetic method is rooted in Aristotelian metaphysics and epistemology. Menger thereby destroyed the existing structures of economic thought and established economics’ legitimacy as a theoretical science. Menger advanced an ontology of economic objects by providing a description of the exact laws of economic phenomena. In the absence of exact laws, there could not be a science of economics and without empirical realism, economics could not be termed a social science. 
          Menger argued that exact theory, theory based on a few evident axioms, is possible in economics. He reasoned that there are specific pure and simple categories which are universal, capable of being exemplified in principle in every economy, and able to be understood as universal by economic theorists. He goes on to say that exact laws are the propositions that express the relationships among these categories. These exact laws are not laws of mathematical precision, but instead are laws which follow inexorably from the essential nature of the elements involved. These laws are changeless and invariably true regardless of time and place. Exact laws are the propositions expressing universal connections among essences. Menger’s exact method is limited to essences and to elementary and rationally intelligible essential connections only. 
Different but complementary approaches to economics 
          Unlike the historicists, Menger acknowledged the coexistence of different but complementary approaches to economics. Study for the sake of knowing the individual aspects of economic phenomena is the province of economic history and statistics. The goal of attaining knowledge of the general aspects of economic phenomena belongs to the field of theoretical economics. While he insisted on the need for theoretical reasoning, Menger also explained the need for and relationship between the realistic-empirical tendency and the exact tendency in economics and the other social sciences. He argued that the exact orientation in theoretical research had a proper place next to a realistic-empirical orientation to theoretical research. This is because experience of the world in each and every instance involves both a general and an individual aspect. Men understand a concrete phenomenon in a specifically historical way through the investigation of its individual processes of development. A concrete phenomena is understood in a theoretical way when it is recognized to be a distinctive case of a particular regularity in the succession or in the coexistence of phenomena. It follows that theories, laws, and strictly universal statements are necessary for both historical and theoretical explanations. Economics as a theoretical science provides knowledge that transcends immediate particular and tangible experience. Menger thus maintains that both empirical and exact theories are descriptive of reality. Each method produces theories that differ in the degree of absoluteness or strictness from the other. 
          For the German historicists, only an historical approach would enable empirical regularities to be incorporated into theory. Menger clashes with this approach when he observes that there are no graspable laws of historical development. He says that no theories may be extracted directly from history, but contrariwise, theory is required in order to interpret history properly. Menger adamantly declares that the Historical School is mistaken when it claims that the historical method is able to produce universally valid laws and that the truth of empirical laws is more legitimate than the truth of exact or theoretical laws. 
          In his methodology, Menger stressed that economics is a science by demonstrating that there are economic regularities and that the phenomena of economic life are ordered strictly in accordance with definite laws. Insisting on the exactness of economic theory, he used the language of the pure logician when he analyzed relationships between variables. It is the knowledge of exact laws (i.e., those subject to no exceptions) which comprises scientific knowledge and scientific theory. Exact theory is developed by searching for the simplest strictly typical elements of everything real.  
          Menger looked for the essence of economic relationships. He delved for those features which must be present by the nature of the relationship under study. He held that there are simple economic categories which are universal and capable of being understood as such. Exact laws are propositions expressing the relationships among such categories. There are certain elements, natures, or essences in the world as well as connections, structures, and laws regulating them, all of which are precisely universal. Menger’s term, exact laws, refers to propositions expressing universal connections among essences. A scientific theory consists of exact laws. For Menger, the goal of research in theoretical economics is the discovery of the essences and connections of economic phenomena. The aim of the theoretical economist is to recognize general recurring structures in reality. According to Menger, the universals of economic reality are not imposed or created, but rather are discovered through theoretical efforts. Economics, as an exact science, is the theoretical study of universals apprehended in an immanent realist manner. Theoretical economics understands economic universals as real objects that the mind has abstracted from particulars and isolated from other universals with which they co-exist. If a person has an idea of the essence of something, he can explain its behavior as a manifestation of its essence. In other words, the manner in which objects act depends upon what those objects are. Menger’s theoretical framework deals with the intensive study of individual economic units and the observation of how they behave. 
          Menger distinguished between the empirical-realistic orientation to theory and the exact orientation to theory. Whereas the realistic-empirical branch of economics studies the regularities in the succession and coexistence of real phenomena, the exact orientation studies the laws governing ideal economic phenomena. He explains that realistic-empirical theory is concerned with regularities in the coexistence and succession of phenomena discovered by observing actual types and typical relationships of phenomena. Realistic-empirical theory is subject to exceptions and to change over time. Theoretical economics in its realistic orientation derives empirical laws that are valid only for the spatial and temporal relationships from which they were observed. Empirical laws can only be alleged to be true within a particular spatiotemporal domain. The realistic orientation can only lead to real types and to the particular. The study of individual or concrete phenomena in time and space is the realm of the historical sciences. According to Menger, it is the aim of the practical or historical sciences to discover the principles, policies, and procedures that are needed in order to shape the phenomena according to predetermined goals.  
          The aim of the exact orientation of research is the determination of strict laws of phenomena. Exact economic laws are established through a precise understanding of the way typical economizing individuals react to given situations. Menger insisted on the precision and exactness of typical behavior. He maintained that once it is acknowledged that rational behavior is the typical behavior of economizing individuals, economists can logically derive theorems that will make up what Menger terms an exact and absolutely true theory. For Menger, theoretical research seeks to identify the simplest and strictly typical elements of everything real. 
          Menger’s view implies that economic reality manifests certain simple and intelligible structures. Economic reality is constituted in intelligible ways out of structures depending upon human thought and action. The individual and his behavior are the most basic elements by means of which Menger explains economic phenomena and derives universal laws. Mengerian economics is built on the basis of the idea that there are, in the realm of economic phenomena, indispensable structures to every economic action that are manifested in every economy. Economic universals involve economizing action on the part of individuals. These universals of economic reality are discovered through theoretical efforts and are not arbitrary creations of the economist. 
Economics as a theory of reality 
          Menger’s understanding of economic theory is essentialist and grounded in Aristotelian metaphysics. His causal-realistic economic method is a search for laws about actual, observable events. It follows that Menger’s economics is actually a theory of reality. Menger is concerned with essences and laws manifested in this world. For Menger, as well as Aristotle, what is general does not exist in isolation from what is particular. Menger’s theoretical economics studies the universal aspects of particular phenomena. These economic universals are said to exist only as instantiated in specific economic actions and institutions. For Menger, the goal of theoretical research is to discover the simplest elements of all things real which must be apprehended as strictly typical merely because they are the simplest. Of course, it is not an easy matter to discover those structures and to construct workable theories about them. There may be huge difficulties in gaining knowledge of essential structures and in converting such knowledge into the organized system of a strict theory. 
     “Menger distinguished between the empirical-realistic orientation to theory and the exact orientation to theory. Whereas the realistic-empirical branch of economics studies the regularities in the succession and coexistence of real phenomena, the exact orientation studies the laws governing ideal economic phenomena.”
          Menger’s theoretical economics is an exact science that investigates exact types and exact laws. Whereas exact types can be seen as first-order universals, exact laws may be viewed as second-order universals which are concerned with connections between and among exact types. These connections can be seen as involving real necessities. Because first order universals (such as economizing action, value, money, division of labor, sales, rent, profit, etc.) are what they are, their interrelations inevitably are of certain types. Menger contended that economists must study the essences and relations or connections between such economic phenomena. 
          Menger denies that exact laws supply knowledge simply for its own sake. He contends that even exact laws assist people in controlling and predicting reality thereby enabling them to live more successfully. According to Menger, even exact laws are practical in helping us to control and enjoy our existence. They are practical primarily because they are exact. Exact laws contribute to our understanding of the real world. In other words, both the realistic and exact orientations are means for understanding, predicting, and controlling economic phenomena. These two orientations allow people to understand the whole sphere of economic phenomena each contributing in its own characteristic fashion. 
          Menger finds it necessary to justify inductively the basic causal categories that are arrived by the analytic part of scientific method. The scientist needs to learn to recognize the general recurring structures in constantly changing reality. He says that theoretical knowledge is gained only by apprehending the phenomenon in question as a special case of a particular regularity in the succession or in the co-existence of phenomena. Economic reality manifests specific simple intelligible structures which the economic theorist is capable of grasping. 
          Menger endeavored to develop a categorical ontology of economic reality which he said could not be attained through any mere inductive enumeration of cases. Exact laws are not simply derived from empirical inquiry. He states that they can be scientifically authenticated but not through the tabulation of approximate statistical data based on a finite number of observation statements. Of course, Menger’s exact theory is necessarily partially based on empirical inquiry that reveals what is typical about economic behavior. After what is typical is discovered, logically derived theories are thus developed from the typical elements to construct a strictly exact and true theory. These theories make up the form which expresses the essences of economic phenomena. Such theories are developed via a process of introspection or internal reflection as part of a logical process based on deductive reasoning from inductively-derived concepts. 
          It is apparent that Menger recognized the difference between empirical knowledge and strict empiricism as a method. Although empirical knowledge originates from the use of a person’s senses, it also necessitates the use of one’s reason to interpret and analyze the data supplied by the senses. All knowledge can be said to be empirical in the sense that it begins with observed experience of external reality. On the other hand, strict empiricism or positivism states that a person is incapable of knowing the essence of a class of entities and therefore can only know the particular concrete entities they study. It follows that the approach of the empiricist with respect to the verification of knowledge must be continual testing to find out if past relationships between entities still hold.  
          Menger says that we can find regularity all around us and that, through common sense and scientific reasoning, we can reduce complex abstractions down to their simplest elements which are strictly typical and from these we can build exact laws. He explains that the main goal of theoretical activity is to search for laws and to propose theories and strictly universal statements. 
Exact laws vs. empirical laws 
          In explaining the transition from particulars (i.e., real types) to universals (i.e., exact types), Menger contends that it is acceptable to omit principles of individuation such as time and space. In order to derive exact laws it was first essential to identify the essential defining quality or essence in individual phenomena that underpins their recognition as representations of that type. Menger thus sought the simplest elements of everything real (i.e., the typical phenomena) in solving the problem of universals or concepts. To find the simplest elements, a person must abstract from all particular spatiotemporal circumstances. 
          Experience, reason, and insight are critical and essential to have a science of economics. Exact laws involve introspection and an act of mental effort based on inductive and deductive processes of logic. However, these exact laws are not constructions of the mind but rational descriptions of eternal configurations and regularities in real economic life. Menger believed that general connections or typical relationships between economic phenomena could be apprehended in an exact sense as exact laws. He maintained that the regularities in the coexistence and succession of phenomena discerned through the exact approach allowed for no exceptions because of the process of cognition through which they were discovered. In his search for economic laws, he aspired to isolate them and to utilize the simple elements so acquired to deduce more complicated phenomena from the simplest. The exact orientation reveals to us the simplest and strictly typical constitutive factors of phenomena. Exact laws, laws of complicated phenomena which are built up out of simple elements, result from the exact orientation. Exact laws are rarer than empirical laws and are laws without exceptions and are exact for all times and places. They are validated in reality, but not with formal empirical testing. Strictly universal theories can only be constructed at the expense of empiricism. Menger says that it is a methodological absurdity to assume that an economist can test conclusions derived from exact laws by means of empirical evidence. Conclusions arrived at through the exact orientation cannot be corrected or altered by evidence produced through the empirical approach. 
          Menger states that the results of exact research are true only under certain assumptions which in reality may not always be present. His theoretical system applies only to problems stated under carefully defined presuppositions. In fact, an abstract statement or pure type of relationship found through the exact orientation may be considered realistic and representative of objectively existing facets of the economy even if the pure type does not have an exact ontological correlate. Because of disturbing factors in reality, there is no guarantee that a pure type can be studied in pure form in empirical reality. Menger’s argument for an exact orientation of theoretical research is independent of empirical testing. However, his theoretical research does establish the existence of strictly typical elements by means of an only partially empirical-realistic analysis which does not then consider whether or not these elements are present in reality or independent phenomena. The empirical search is only a limited one because it is irrelevant to see if the considered elements are pure or if they are mixed with disturbing influences. Menger’s exact theory applies only if the elements are pure because such flawlessness or completeness is presupposed by his approach. It follows that a theoretical understanding of concrete phenomena cannot be achieved through mere inductive enumerations of cases that are subject to contaminating influences. Whereas exact economics makes us aware of the laws holding for an abstractly conceived economy, an empirical-realistic economy makes us aware of the regularities in the succession and coexistence of real but isolated economic phenomena in their full empirical reality thus containing numerous elements not emergent from that abstraction.  
          According to Menger, theoretical sciences in their exact orientation abstract from disturbing factors such as error, ignorance, and external compulsion. Accordingly, Menger’s exact laws rely on the following definite presuppositions which in reality do not always apply: (1) People tend to be selfish, egoistic, or self-interested; (2) People tend to be rational; (3) People have full, complete, or perfect knowledge of the economic situation with which they are confronted; and (4) People are uninfluenced by error, ignorance, and external compulsion (i.e., they are free and uncoerced by government). There can be exact laws to the extent that individuals are rational, self-interested, informed, and free. For example, Menger would contend that an essential relationship necessarily exists between needs, values, and prices unless the relationship is hindered by disturbing factors such as government interferences like price controls. When Menger’s four conditions exist, we can have exact laws and economic prices. In their absence, the best we can have are real prices. For a realist like Menger the only way to arrive at essences from a succession of concretes is to conceive of an abstract world that holds to his four conditions. There are no guarantees that exact laws will correspond to empirical laws given the actual relationships which the world of phenomena offers to us. History occurs with theory and consists of the numerous empirical facts that form matter in an Aristotelian sense. 
          According to Menger, the variance or divergence between the theorems of exact theory and the results of empirical studies is not a distinguishing characteristic of economics and the other social sciences, but instead, also pertains to the natural sciences. In physics, the actual movements of bodies do not conform to the theories of pure physics just as in economics exact theory does not exactly correspond to the observed behavior of economic actors. 
          Menger’s scientific realism involves the use of isolation and abstraction. During the process of isolation, the economist selects a limited set of elements from a total situation or task environment and excludes the other elements from mental analysis. Isolation, a subset of abstraction, involves the separation of a universal attribute of the object of study from its other characteristics. Exact theoretical sciences study solitary particular sides of phenomena and abstract from disturbing factors. 
          Menger identified fundamental motives for human behavior including the economic, moral sentiments, altruism, and justice. He thus isolated or delineated the boundaries between corresponding scientific disciplines such as economics, ethics, social philosophy, and justice. Each of these disciplines would study the behavior of human beings from one of these viewpoints while excluding the others. In addition, within each discipline, the functioning of any one basic human drive or motive could be studied by abstracting from disturbing factors which are present in the real world. Mere isolation does not guarantee that a factor can be studied in pure form. To study it in pure form, one must abstract from other factors which restrict the total operation of that single factor. 
          With respect to economics as an exact theoretical science, Menger abstracts from disturbing factors such as error, ignorance, the presence of external force, and the extent to which an individual is influenced by the various fundamental motives for human behavior. Economics as an empirical discipline would isolate economics from other fundamental motives but would not abstract from disturbing factors. However, economics as an exact theoretical discipline would isolate and abstract economics from other fundamental motives and from disturbing factors. The exact method is concerned with isolated aspects of ideal phenomena. 
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