Mises wholly rejected this notion. As he explained in his 1942 essay “Social Science and Natural Science,” originally published in the Journal of Social Philosophy and Jurisprudence (Vol. 7, No. 3), while he was working for the National Bureau of Economic Research, the social and natural sciences require different methods. Economics is a human science that derives laws that take into account the complexity of human experience. These laws have the same status as the laws of the natural sciences, but due to the complexity of human action different methods are needed to derive them.

This position of methodological apriorism was not completely new to Mises, it was also the approach of the earlier Austrian tradition emphasized by Carl Menger and Eugen Boehm-Bawerk. Experiments are very important to the natural sciences but as Mises explains, “the social sciences cannot make use of experiments. The experience with which they have to deal is the experience of complex phenomena… The social sciences never enjoy the advantage of observing the consequences of a change in one element only, other conditions being equal.” So, unlike in a laboratory, economists cannot verify their statements using experience.

But by the 1950s, however, the economics profession had followed Paul Samuelson’s lead, rather than Mises’s, using the methods of formalism and positivism. Formalism had become synonymous with logical rigor and positivistic testing was the only means of conducting empirical analysis. To not follow in this direction was considered unscientific. By the 1960s economists had come to distance themselves from the exact laws of Menger and the apriorism of Mises. Indeed, with the exception of a handful of Austrian followers, they had become things of the past.

Today many have come to misinterpret the Austrian position on the role of theory and history in economics. Perhaps due to the fact that economics has become dominated by what many have called “physics envy”, most are ignorant of what Mises’s position truly was. The caricature of the position seems to be that Austrian theory places no importance on empirical analysis. In fact, empirical work is completely rejected and thus ignored. Nothing could be further from the truth.

The role of empirical analysis is still very important, but you cannot treat statistical findings in the real world as you would treat a laboratory experiment. Material provided by statistics is the outcome of historical complex forces. Thus theory is necessary to aid historical investigations. As Mises said, “There is no doubt that up to now in history only nations which have based their social order on private ownership of the means of production have reached a somewhat high stage of welfare and civilization. Nevertheless, nobody would consider this an incontestestable refutation of socialist theories.” The advancement of economics requires blending of both deduction in theory and empirical induction.

There is no doubt the profession has steered away from aprioristic approach. It is born out of the confusion over the role knowledge plays within economic theory. Austrian economics has an important place in better understanding of this problem. More economists should take the time to read the methodological work of Mises and the Austrians.

Download “Social Science and Natural Science” by Ludwig von Mises here.

This is a link to the Power Point presentation – Methodology 2010.

Her colleagues at Indiana University describe her as “humble and hardworking,” and another Nobel Prize winner, Vernon Smith, calls her a “remarkable scholar” with a passionate drive to understand human societies in all their variety. A former president of the Public Choice Society and the American Association of Political Science, Ostrom is also one of the most beloved teachers in academia. The Workshop in Political Theory and Policy Analysis at Indiana University that she co-directed with her husband, Vincent, is perhaps the ideal model for a research and graduate education center.

But what do we learn from her studies? I would argue that we learn at least three major points of style and substance. First, much of the last century of political and economic discourse has been dominated by a debate between advocates of perfect markets and perfect central planners. For one side, the demonstration of market failure was accompanied by an insistence that government would provide the necessary corrective. Ostrom was one of the core thinkers in the social sciences to say, “Hold on. Markets may fail, but government solutions also might not work.” One must always remember that Elinor and Vincent Ostrom are foundational contributors to the theory of Public Choice. But the Ostroms went further than simply demonstrating the possibility of government failure.

Smith versus Hobbes

This leads to the second point. In the history of political and economic thought the source of social order has been attributed either to the invisible hand of market coordination (Smith) or the heavy hand of state control (Hobbes). Perhaps one of the best ways to understand Elinor Ostrom’s work is to see it as working out a Hobbesian problem by way of a Smithian solution. That is perhaps a bit of a stretch but not by much. Her work on local public economies and common-pool resources focuses on actual “rules in use” (as opposed to the “rules in form”) that decentralized individuals and groups rely on to make decisions and to coordinate their behavior in order to overcome social dilemmas. Hers is an optimistic message about the power of self-governance to succeed even in difficult situations. As my colleague Alex Tabarrok put it, she sees how, through various voluntary associations, groups transform the common-pool resource situation from a “tragedy of the commons” to an “opportunity of the commons.”

Traditional economic theory argues that public goods cannot be provided through the market. Traditional Public Choice theory argues that government often fails to provide solutions. Ostrom shows that decentralized groups can develop various rule systems that enable social cooperation to emerge through voluntary association. A point that sometimes trips up readers is that Ostrom often focuses on situations where the technology of parceling property into private plots does not exist. In these situations she studies collective, but non-State decision-making over common-pool resources. While private-property solutions are not employed in such cases, the “rules in use” that do operate accomplish what private property would have accomplished. We find rules that limit access and that make individuals in the group accountable for their misuse of the resource. We also find enforcement of those rules. In short, the analyst must be willing to look at both the form and function of rules in a variety of social situations. There is a diversity of institutions at work in different societies that promote voluntary cooperation. As social scientists, we have to be able to understand them. There are rules that are in use, rules that are stated but not in use, rules that go by one name but that in practice do something else, and rules that tightly fit use, form, and function. Ostrom has insisted that social scientists must understand the rules that govern human behavior–both the way we interact with one another and the way we interact with nature. Some rules systems promote human betterment through the promotion of peaceful social cooperation and wealth creation; others thwart human progress by ensuring violence and poverty. It is actually that simple, and that profound.

The foundation of the social order of a free people is self-governance, not governmental authority and centralized power. Decentralized decision making that drills deep into the local social dilemmas real people face, that mobilizes incentives within a local rule structure, and that utilizes local knowledge is how the process of institutional development assures that self-governance is effective governance, enabling fallible human beings to reasonably manage scarce resources and the relationships among themselves.

Understanding Diverse Societies

The final point I want to stress concerning Ostrom’s research comes as a methodological message. Elinor’s work is humanistic and scientific. She is trying to understand human societies in all their variety. To do so she had to get up close and personal: from local government in California to irrigation systems in Nepal–and everything in between. Her field work in economics and political economy is guided by the logic of human choice. She describes her research program as “a behavioral approach to the rational choice theory of collective action.” If you take away the academic language, it translates into a research program that begins with human beings and their purposes and plans, and ends with their stumbling and groping to find voluntary solutions to difficult social dilemmas through norms, conventions, and rules.

Let me conclude by bringing this back to my title: Why should people who care about liberty rejoice in this choice for the prize? There is an ideological importance to the work of Elinor Ostrom. She has not stressed it in her work, but Vincent has ventured into the field of social philosophy. My favorite book of his is The Meaning of Democracy and the Vulnerabilities of Democracies (1997). In that work Vincent asks what are the preconditions for a self-governing citizenry. He answers that a self-governing society must be composed of citizens fully capable of embracing the “cares of thinking and the troubles of living.” Unfortunately, the machinations of democratic politics—with interest-group manipulation, logrolling, rent-seeking, and the vote motive—tend to undermine the capacity for self-governance among a people.

Nothing in this should be interpreted as deterministically pessimistic. The message is that hope is to be found not in the State but in the people. A society of free and responsible individuals who are able to form voluntary associations will solve the social dilemmas they confront through various means of self-governance.

Nobody has done more than Elinor Ostrom, both in her research and in her teaching/mentor capacity at the Workshop in Political Philosophy and Policy Analysis, to help us understand the self-governing rules and institutions that work to elicit cooperation in a wide variety of societies. And nobody has done more to alert us to the damage governments can do when they attempt to impose alien rules on local peoples from afar—especially when their own systems are already addressing social dilemmas in their own way. Elinor demands that we understand and respect institutional diversity in our world, to see the ingenuity and wisdom in local solutions and in the entrepreneurial creativity and resourcefulness of individuals throughout the developed and less-developed world. Transcending the older debates in social science and public policy, Elinor Ostrom’s work emphasizes the richness of the institutional environment and the creative solutions that arise when individuals are free to form associations and work within a network of informal rules that promote individual responsibility and collective accountability.

Supporters of FEE and readers of The Freeman are attracted to the vision of a society of free and responsible individuals. Elinor Ostrom’s research gives us a window into the diverse world of associations that do not fit neatly into the categories of “market” or “State” but nevertheless are essential to peaceful and prosperous social cooperation.