Ludwig von Mises
On the Development of the Subjective Theory of Value
4. Economics and Psychology
The expression "Psychological School" is frequently employed as a designation of modern subjectivist economics. Occasionally too the difference, in Method that exists between the School of Lausanne and the Austrian School is indicated by attributing to the latter the "psychological" method. It is not surprising that the idea of economics as almost a branch of psychology or applied psychology should have arisen from such a habit of speech. Today, neither these misunderstandings nor their employment in the struggle carried on over the Austrian School are of anything more than historical and literary interest.
Nevertheless, the relationship of economics to psychology is still problematical. The position due Gossen's law of the satiation of wants yet remains to be clarified.
Perhaps it will be useful first to look at the route that had to be traversed in order to arrive at the modern treatment of the problem of price formation. In this way we shall best succeed in assigning Gossen's first law its position in the system, which is different from the one it occupied when it was first discovered.
The earlier attempts to investigate the laws of price determination foundered on the principle of universalism, which was accepted under the controlling influence of conceptual realism. The importance of nominalistic thought in antiquity, in the Middle Ages, and at the beginning of the modern era should not, of course, be underestimated. Nevertheless, it is certain that almost all attempts to comprehend social phenomena were at first undertaken on the basis of the principle of universalism. And on this basis they could not but fail hopelessly. Whoever wanted to explain prices saw, on the one hand, mankind, the state, and the corporative unit, and, on the other, classes of goods here and money there. There were also nominalistic attempts to solve these problems, and to them we owe the beginnings of the subjective theory of value. However, they were repeatedly stifled by the prestige of the prevailing conceptual realism.
Only the disintegration of the universalistic mentality brought about by the methodological individualism of the seventeenth and eighteenth centuries cleared the way for the development of a scientific catallactics. It was seen that on the market it is not mankind, the state, or the corporative unit that acts, but individual men and groups of men, and that their valuations and their action are decisive, not those of abstract collectivities. To recognize the relationship between valuation and use value and thus cope with the paradox of value, one had to realize that not classes of goods are involved in exchange, but concrete units of goods. This discovery signalized nothing less than a Copernican revolution in social science. Yet it required more than another hundred years for the step to be taken. This is a short span of time if we view the matter from the standpoint of world history and if we adequately appreciate the difficulties involved. But in the history of our science precisely this period acquired a special importance, inasmuch as it was during this time that the marvelous structure of Ricardo's system was first elaborated. In spite of the serious misunderstanding on which it was constructed, it became so fruitful that it rightly bears the designation "classical."
The step that leads from classical to modern economics is the realization that classes of goods in the abstract are never exchanged and valued, but always only concrete units of a class of goods. If I want to buy or sell one loaf of bread, I do not take into consideration what "bread" is worth to mankind, or what all the bread currently available is worth, or what 10,000 loaves of bread are worth, but only the worth of the one loaf in question. This realization is not a deduction from Gossen's first law. It is attained through reflection on the essence of our action; or, expressed differently, the experience of our action makes any other supposition impossible for our thought.
We derive the law of the satiation of wants from this proposition and from the further realization, which is obtained by reflecting upon our action, that, in our scales of importance, we order individual units of goods not according to the classes of goods to which they belong or the classes of wants which they satisfy, but according to the concrete emergence of wants; that is to say, before one class of wants is fully satisfied we already proceed to the satisfaction of individual wants of other classes that we would not satisfy if one or several wants of the first class had not previously been satisfied.
Therefore, from our standpoint, Gossen's law has nothing to do with psychology. It is deduced by economics from reflections that are not of a psychological nature. The psychological law of satiation is independent of our law, though understandably in harmony with it, inasmuch as both refer to the same state of affairs. What distinguishes the two is the difference of method by which they have been arrived at. Psychology and economics are differentiated by their methods of viewing man.
To be sure, Bentham, who may be numbered among the greatest theorists of social science, and who stood at the peak of the economics of his time, arrived at our law by way of psychology and was unable to make any application of it to economics; and in Gossen's exposition it appeared as a psychological law, on which economic theory was then constructed. But these facts in no way invalidate the distinction that we have drawn between the laws of economics and those of psychology. Bentham's great intellect did not serve one science only. We do not know how Gossen arrived at his cognition, and it is a matter of indifference as far as answering our question is concerned. The investigation of the way in which this or that truth was first discovered is important only for history, not for a theoretical science. It is, of course, obvious that the position that Gossen then assigned the law in his system can have no authoritative standing in our view. And everyone knows that Menger, Jevons, and Walras did not arrive at the resolution of the paradox of value by way of Gossen's law.