Explanation of the roles of praxeological law and historical judgment or “understanding” may be provided by the following example: If the supply of a medium of exchange increases; and if the demand for that medium remains the same; then, the purchasing power of that medium will decline. This is a praxeological law.
How may an historian apply this law? He must first determine whether or not a decline in purchasing power (increase in prices) has taken place. This involves difficulties of an historical-statistical nature; it is not a problem for praxeology or that elaborated division of it known as “economic theory” or “catallatics.” Once he has determined that a fall in purchasing power of the medium has taken place, he searches for an explanation by applying the praxeological-catallatic law. He investigates the historical situation to discover whether there has been an increase in the supply of the medium. If he finds a considerable increase in the supply, he is then in a position to assert three truths:
- It is an historical fact that the purchasing power of medium X has declined to such and such an extent.
- It is an historical fact that the supply of the medium X has increased to such and such an extent.
- The praxeological law just mentioned. It is therefore concluded: that a significant cause of the decline, [(1)], was the increase in supply, [(2)].
If he finds no increase in supply, then he deduces that a fall in demand for the medium was the cause of the fall in purchasing power. Such is an example of what is involved in the work of historical explanation.
The work of the “economic theorist”, or praxeologist, is to elaborate the laws (such as ) from the various axioms and according to the rules of logic. Clearly neither Mises nor myself has ever cited “facts as if they provided support for his conclusions and for the axioms, postulates, and logical procedures.” I cited facts such as “dollar gaps” not as proof or test, but as illustrations of the working of praxeological laws in (modern) historical situations. It is a praxeological law that if the government (or any other agency exercising the power of violence) intervenes in the market to establish a valuation of any commodity below what would be the market valuation, a shortage of the commodity develops. Gresham’s Law is a subdivision of this law applied to media of exchange, which, in turn, leads to the explanation of the “dollar gap”. The historian sees a shortage of dollars in relation to pounds develop in England, and using praxeological laws, explains it as the consequence of governmental over-valuation of the pound in relation to the dollar. In no way does he test or “prove” the theory.
— Murray N. Rothbard, Praxeology: Reply to Mr Schuller