Chapter 1: The Method of Economics 13

This sort of immediate inference is very important in economics, especially of the Austrian variety. We often are given a concept and then required to deduce various features of it that follow immediately. As we shall see, the concept of “action” is the most important one we use in economics. Much of economics consists of deducing what follows from the concept of action, and a good deal of this inference is immediate rather than syllogistic.

1.	How can you find out if a statement is necessarily true?	?
2.	If a statement is necessarily true, do you need to test it to
	find out whether it is true?

ECONOMICS VS. MATHEMATICS

But if economics proceeds strictly by logic, so that you don’t have to accept statements on authority, doesn’t this mean that economics is really mathematical, after all? In math, you operate through proof. Suppose x = 5. Then, 2x = 10. (Don’t worry, this is the toughest math in the book.) 2x = 10 is true because it follows from applying the rule if you multiply one side of an equation by two, you must multiply the other side by two also. You arrive at the conclusion, 2x = 10, because that is what the rule tells you to do.

Economics also uses proof, but the way it proceeds often differs from mathematical proofs. In math, to reiterate, you operate by fixed rules on certain symbols. Once you know the rule, you can fill in the blank here with almost no thought: x = 5, 2x = ____. It’s an almost mechanical process. But this isn’t always the case in economics.

14 An Introduction to Economic Reasoning

Let’s return to immediate inference. In the last section, we gave an example of a valid immediate inference. Let’s look at an inference that on the surface looks similar:

• ALL SOCIALISTS FAVOR SUBVERSION

• THEREFORE, ALL RUSSIAN SOCIALISTS FAVOR RUSSIAN SUBVERSION

Here, the conclusion is false. The truth of the premise is consistent with the falsity of the conclusion. Suppose some Russian socialists wish to overthrow the Bulgarian government, rather than their own. If so, the premise might be true, but the conclusion would be false.

But how do we know this? No mechanical rule will tell us which immediate inferences work, and which do not. We simply have to use our judgment; and this is often true for non-immediate inference as well.

	1.	How do we know the rules of mathematics are
		correct?
?	2.	Would it be a good idea to use symbolic logic in econom-
		ics, if economics relies on immediate inferences?
	3.	Is it always best to begin by “defining your terms”? Why or
		why not?
	4.	Deduction only tells us what we already “know.” How
		might a supporter of the deductive approach reply?

Chapter 2

Action and Preference

Part I

After getting through Chapter 1, you may have wondered: what does all of this have to do with economics? In this chapter, we’ll find out. What we are going to attempt is to apply the deductive method in order to build up a science of economics. Remember, if we carry out this task correctly, we will have achieved something remarkable. Given a true starting point, our conclusions must be

true.

This at once raises a key issue. What should be chosen as the starting point? To pick the wrong initial premise threatens disaster. Suppose, for example, we started with this premise: “The economic value of a good consists of the labor necessary to make it.” This statement, as we’ll soon discover, is false. Anything we deduce from it, then, is not guaranteed to be true. Our conclusions may be true, but they won’t be true because they follow from our starting point.

It’s easy to think of true propositions that we might start with— that isn’t the problem. “2 + 2 = 4” is, unarguably, true; so is “Some U.S. presidents have been big spenders.” The hard part is to arrive at a true proposition that will lead to significant results. Fortunately, through the genius of the Austrian economist Ludwig von Mises, this problem has been solved.

THE ACTION AXIOM

The fundamental principle of economics can be stated in two words: man acts. Most of the rest of this book will endeavor to clarify

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