How Mises Rebuilt Economics
What is the logical status of typical economic propositions such as the law of marginal utility (that whenever the supply of a good whose units are regarded as of equal serviceability by a person increases by one additional unit, the value attached to this unit must decrease as it can only be employed as a means for the attainment of a goal that is considered less valuable than the least valuable goal previously satisfied by a unit of this good) or of the quantity theory of money (that whenever the quantity of money is increased while the demand for money to be held in cash reserve on hand is unchanged, the purchasing power of money will fall)?
In formulating his answer to this question, Ludwig von Mises faced a double challenge. On the one hand, there was the answer offered by modern empiricism. The Vienna Ludwig von Mises knew was in fact one of the early centers of the empiricist movement: a movement which was then on the verge of establishing itself as the dominant academic philosophy of the Western world for several decades, and which to this very day shapes the image that an overwhelming majority of economists have of their own discipline.1
Empiricism considers nature and the natural sciences as its model. According to empiricism, the aforementioned examples of economic propositions have the same logical status as laws of nature: Like laws of nature they state hypothetical relationships between two or more events, essentially in the form of if-then statements. And like hypotheses of the natural sciences, the propositions of economics require continual testing vis-à-vis experience. A proposition regarding the relationship between economic events can never be validated once and for all with certainty. Instead, it is forever subject to the outcome of contingent, future experiences. Such experience might confirm the hypothesis. But this would not prove the hypothesis to be true, since the economic proposition would have used general terms (in philosophical terminology: universals) in its description of the related events, and thus would apply to an indefinite number of cases or instances, thereby always leaving room for possibly falsifying future experiences. All a confirmation would prove is that the hypothesis had not yet turned out wrong. On the other hand, the experience might falsify the hypothesis. This would surely prove that something was wrong with the hypothesis as it stood. But it would not prove that the hypothesized relationship between the specified events could never be observed. It would merely show that considering and controlling in one's observations only what up to now had been actually accounted for and controlled, the relationship had not yet shown up. It cannot be ruled out, however, that it might show up as soon as some other circumstances have been controlled.
The attitude that this philosophy fuels and that has indeed become characteristic of most contemporary economists and their way of conducting their business is one of skepticism: the motto being "nothing can be known with certainty to be impossible in the realm of economic phenomena." Even more precisely, since empiricism conceives of economic phenomena as objective data, extending in space and subject to quantifiable measurement — in strict analogy to the phenomena of the natural sciences — the peculiar skepticism of the empiricist economist may be described as that of a social engineer who will not guarantee anything.2
The other challenge came from the side of the historicist school. Indeed, during Mises's life in Austria and Switzerland, the historicist philosophy was the prevailing ideology of the German-speaking universities and their establishment. With the upsurge of empiricism this former prominence has been reduced considerably. But over roughly the last decade historicism has regained momentum among the Western world's academia. Today it is with us everywhere under the names of hermeneutics, rhetoric, deconstructionism, and epistemological anarchism.3
For historicism, and most conspicuously for its contemporary versions, the model is not nature but a literary text. Economic phenomena, according to the historicist doctrine, are not objective magnitudes that can be measured. Instead, they are subjective expressions and interpretations unfolding in history to be understood and interpreted by the economist just as a literary text unfolds before and is interpreted by its reader. As subjective creations, the sequence of their events follows no objective law. Nothing in the literary text, and nothing in the sequence of historical expressions and interpretations is governed by constant relations. Of course, certain literary texts actually exist, and so do certain sequences of historical events. But this by no means implies that anything had to happen in the order it did. It simply occurred. In the same way, however, as one can always invent different literary stories, history and the sequence of historical events, too, might have happened in an entirely different way. Moreover, according to historicism, and particularly visible in its modern hermeneutical version, the formation of these always contingently related human expressions and their interpretations is also not constrained by any objective law. In literary production anything can be expressed or interpreted concerning everything; and, along the same line, historical and economic events are whatever someone expresses or interprets them to be, and their description by the historian and economist is then whatever he expresses or interprets these past subjective events to have been.
The attitude that historicist philosophy generates is one of relativism. Its motto is "everything is possible." Unconstrained by any objective law, for the historicist-hermeneutician history and economics, along with literary criticism, are matters of esthetics. And accordingly, his output takes on the form of disquisitions on what someone feels about what he feels was felt by somebody else — a literary form which we are only too familiar with, in particular in such fields as sociology and political science.4
I trust that one senses intuitively that something is seriously amiss in both the empiricist as well as the historicist philosophies. Their epistemological accounts do not even seem to fit their own self-chosen models: nature on the one hand and literary texts on the other. And in any case, regarding economic propositions such as the law of marginal utility or the quantity theory of money their accounts seem to be simply wrong. The law of marginal utility certainly does not strike one as a hypothetical law subject forever for its validation to confirming or disconfirming experiences popping up here or there. And to conceive of the phenomena talked about in the law as quantifiable magnitudes seems to be nothing but ridiculous. Nor does the historicist interpretation seem to be any better. To think that the relationship between the events referred to in the quantity theory of money can be undone if one only wished to do so seems absurd. And the idea appears no less absurd that concepts such as money, demand for money, and purchasing power are formed without any objective constraints and refer merely to whimsical subjective creations. Instead, contrary to the empiricist doctrine, both examples of economic propositions appear to be logically true and to refer to events which are subjective in nature. And contrary to historicism, it would seem that what they state, then, could not possibly be undone in all of history and would contain conceptual distinctions which, while referring to subjective events, were nonetheless objectively constrained, and would incorporate universally valid knowledge.
Like most of the better known economists before him, Mises shares these intuitions.5 Yet in quest of the foundation of economics, Mises goes beyond intuition. He takes on the challenge posed by empiricism and historicism in order to reconstruct systematically the basis on which these intuitions can be understood as correct and justified. He thereby does not want to help bring about a new discipline of economics. But in explaining what formerly had only been grasped intuitively, Mises goes far beyond what had ever been done before. In reconstructing the rational foundations of the economists' intuitions, he assures us of the proper path for any future development in economics and safeguards us against systematic intellectual error.
Empiricism and historicism, Mises notes at the outset of his reconstruction, are self-contradictory doctrines.6 The empiricist notion that all events, natural or economic, are only hypothetically related is contradicted by the message of this very basic empiricist proposition itself: For if this proposition were regarded as itself being merely hypothetically true, i.e., a hypothetically true proposition regarding hypothetically true propositions, it would not even qualify as an epistemological pronouncement. For it would then provide no justification whatsoever for the claim that economic propositions are not, and cannot be, categorically, or a priori true, as our intuition informs us they are. If, however, the basic empiricist premise were assumed to be categorically true itself, i.e., if we assume that one could say something a priori true about the way events are related, then this would belie its very own thesis that empirical knowledge must invariably be hypothetical knowledge, thus making room for a discipline such as economics claiming to produce a priori valid empirical knowledge. Further, the empiricist thesis that economic phenomena must be conceived of as observable and measurable magnitudes — analogous to those of the natural sciences — is rendered inconclusive, too, on its own account: For, obviously, empiricism wants to provide us with meaningful empirical knowledge when it informs us that our economic concepts are grounded in observations. And yet, the concepts of observation and measurement themselves, which empiricism must employ in claiming what it does, are both obviously not derived from observational experience in the sense that concepts such as hens and eggs or apples and pears are. One cannot observe someone making an observation or measurement. Rather, one must first understand what observations and measurements are in order to then be able to interpret certain observable phenomena as the making of an observation or the taking of a measurement. Thus, contrary to its own doctrine, empiricism is compelled to admit that there is empirical knowledge which is based on understanding — just as according to our intuitions economic propositions claim to be based on understanding — rather than on observations.7
And regarding historicism, its self-contradictions are no less manifest. For if, as historicism claims, historical and economic events — which it conceives of as sequences of subjectively understood rather than observed events — are not governed by any constant, time-invariant relations, then this very proposition also cannot claim to say anything constantly true about history and economics. Instead, it would be a proposition with, so to speak, a fleeting truth value: it may be true now, if we wish it so, yet possibly false a moment later, in case we do not, with no one ever knowing anything about whether we do or do not. Yet, if this were the status of the basic historicist premise, it, too, would obviously not qualify as an epistemology. Historicism would not have given us any reason why we should believe any of it. If, however, the basic proposition of historicism were assumed to be invariantly true, then such a proposition about the constant nature of historical and economic phenomena would contradict its own doctrine denying any such constants. Furthermore, the historicist's — and even more so its modern heir, the hermeneutician's — claim that historical and economic events are mere subjective creations, unconstrained by any objective factors, is proven false by the very statement making it. For evidently, a historicist must assume this very statement to be meaningful and true; he must presume to say something specific about something, rather than merely uttering meaningless sounds like abracadabra. Yet if this is the case, then, clearly, his statement must be assumed to be constrained by something outside the realm of arbitrary subjective creations. Of course, I can say what the historicist says in English, German, or Chinese, or in any other language I wish, in so far as historic and economic expressions and interpretations may well be regarded as mere subjective creations. But whatever I say in whatever language I choose must be assumed to be constrained by some underlying propositional meaning of my statement, which is the same for any language, and exists completely independent of whatever the peculiar linguistic form may be in which it is expressed. And contrary to historicist belief, the existence of such a constraint is not such that one could possibly dispose of it at will. Rather, it is objective in that we can understand it to be the logically necessary presupposition for saying anything meaningful at all, as opposed to merely producing meaningless sounds. The historicist could not claim to say anything if it were not for the fact that his expressions and interpretations are actually constrained by laws of logic as the very presupposition of meaningful statements as such.8
With such a refutation of empiricism and historicism, Mises notices, the claims of rationalist philosophy are successfully reestablished, and the case is made for the possibility of a priori true statements, as those of economics seem to be. Indeed, Mises explicitly regards his own epistemological investigations as the continuation of the work of western rationalist philosophy. With Leibniz and Kant he stands opposite the tradition of Locke and Hume.9 He sides with Leibniz when he answers Locke's famous dictum "nothing is in the intellect that has not previously been in the senses" with his equally famous one "except the intellect itself." And he recognizes his task as a philosopher of economics as strictly analogous to that of Kant's as a philosopher of pure reason, i.e., of epistemology. Like Kant, Mises wants to demonstrate the existence of true a priori synthetic propositions, or propositions whose truth values can be definitely established, even though in order to do so the means of formal logic are insufficient and observations are unnecessary.
My criticism of empiricism and historicism has proved the general rationalist claim. It has proved that we indeed do possess knowledge which is not derived from observation and yet is constrained by objective laws. In fact, our refutation of empiricism and historicism contains such a priori synthetic knowledge. Yet what about the constructive task of showing that the propositions of economics — such as the law of marginal utility and the quantity theory of money — qualify as this type of knowledge? In order to do so, Mises notices in accordance with the strictures traditionally formulated by rationalist philosophers, economic propositions must fulfill two requirements: First, it must be possible to demonstrate that they are not derived from observational evidence, for observational evidence can only reveal things as they happen to be; there is nothing in it that would indicate why things must be the way they are. Instead, economic propositions must be shown to be grounded in reflective cognition, in our understanding of ourselves as knowing subjects. And secondly this reflective understanding must yield certain propositions as self-evident material axioms. Not in the sense that such axioms would have to be self-evident in a psychological sense, that is, that one would have to be immediately aware of them or that their truth depends on a psychological feeling of conviction. On the contrary, like Kant before him, Mises very much stresses the fact that it is usually much more painstaking to discover such axioms than it is to discover some observational truth such as that the leaves of trees are green or that I am 6 foot 2 inches.10 Rather, what makes them self-evident material axioms is the fact that no one can deny their validity without self-contradiction, because in attempting to deny them one already presupposes their validity.
Mises points out that both requirements are fulfilled by what he terms the axiom of action, i.e., the proposition that humans act, that they display intentional behavior.11 Obviously, this axiom is not derived from observation — there are only bodily movements to be observed but no such thing as actions — but stems instead from reflective understanding. And this understanding is indeed of a self-evident proposition. For its truth cannot be denied, since the denial would itself have to be categorized as an action. But is this not just plain trivial? And what has economics got to do with this? Of course, it had previously been recognized that economic concepts such as prices, costs, production, money, credit, etc., had something to do with the fact that there were acting people. But that all of economics could be grounded in and reconstructed based on such a trivial proposition and how, is certainly anything but clear. It is one of Mises's greatest achievements to have shown precisely this: that there are insights implied in this psychologically speaking trivial axiom of action that were not themselves psychologically self-evident as well; and that it is these insights which provide the foundation for the theorems of economics as true a priori synthetic propositions.
It is certainly not psychologically evident that with every action an actor pursues a goal; and that whatever the goal may be, the fact that it was pursued by an actor reveals that he must have placed a relatively higher value on it than on any other goal of action that he could think of at the start of his action. It is not evident that in order to achieve his most highly valued goal an actor must interfere or decide not to interfere — which, of course, is also an intentional interference — at an earlier point in time in order to produce a later result; nor is it obvious that such interferences invariably imply the employment of some scarce means — at least those of the actor's body, its standing room, and the time absorbed by the action. It is not self-evident that these means, then, must also have value for an actor — a value derived from that of the goal — because the actor must regard their employment as necessary in order to effectively achieve the goal; and that actions can only be performed sequentially, always involving a choice, i.e., taking up that one course of action which at some given time promises the most highly valued results to the actor and excluding at the same time the pursual of other, less highly valued goals. It is not automatically clear that as a consequence of having to choose and give preference to one goal over another — of not being able to realize all goals simultaneously — each and every action implies the incurrence of costs, i.e., forsaking the value attached to the most highly ranking alternative goal that cannot be realized or whose realization must be deferred, because the means necessary to attain it are bound up in the production of another, even more highly valued goal. And lastly, it is not evident that at its starting point every goal of action must be considered worth more to the actor than its cost and capable of yielding a profit, i.e., a result whose value is ranked higher than that of the foregone opportunity, and yet that every action is also invariably threatened by the possibility of a loss if an actor finds, in retrospect, that contrary to his expectations the actually achieved result in fact has a lower value than the relinquished alternative would have had.
All of these categories which we know to be the very heart of economics — values, ends, means, choice, preference, cost, profit and loss — are implied in the axiom of action. Like the axiom itself, they are not derived from observation. Rather, that one is able to interpret observations in terms of such categories requires that one already knows what it means to act. No one who is not an actor could ever understand them, as they are not "given," ready to be observed, but observational experience is cast in these terms as it is construed by an actor. And while they and their interrelations were not obviously implied in the action axiom, once it has been made explicit that they are implied, and how, one no longer has any difficulty recognizing them as being a priori true in the same sense as the axiom itself is. For any attempt to disprove the validity of what Mises has reconstructed as implied in the very concept of action would have to be aimed at a goal, requiring means, excluding other courses of action, incurring costs, subjecting the actor to the possibility of achieving or not achieving the desired goal and so leading to a profit or a loss. Thus, it is manifestly impossible to ever dispute or falsify the validity of Mises's insights. In fact, a situation in which the categories of action would cease to have a real existence could itself never be observed or spoken of, since to make an observation and to speak are themselves actions.
All true economic propositions, and this is what praxeology is all about and what Mises's great insight consists of, can be deduced by means of formal logic from this incontestably true material knowledge regarding the meaning of action and its categories. More precisely all true economic theorems consist of
- an understanding of the meaning of action,
- a situation or situational change — assumed to be given or identified as being given — and described in terms of action-categories, and
- a logical deduction of the consequences — again in terms of such categories — which are to result for an actor from this situation or situational change.
The law of marginal utility, for instance,12 follows from our indisputable knowledge of the fact that every actor always prefers what satisfies him more over what satisfies him less, plus the assumption that he is faced with an increase in the supply of a good (a scarce mean) whose units he regards as of equal serviceability, by one additional unit. From this it follows with logical necessity that this additional unit can then only be employed as a means for the removal of an uneasiness that is deemed less urgent than the least valuable goal previously satisfied by a unit of such a good. Provided there is no flaw in the process of deduction, the conclusions which economic theorizing yields, no different in the case of any other economic proposition from the case of the law of marginal utility, must be valid a priori. These propositions' validity ultimately goes back to nothing but the indisputable axiom of action. To think, as empiricism does, that these propositions require continual empirical testing for their validation is absurd, and a sign of outright intellectual confusion. And it is no less absurd and confused to believe, as historicism does, that economics has nothing to say about constant and invariable relations but merely deals with historically accidental events. To say so meaningfully is to prove such a statement wrong, as saying anything meaningful at all already presupposes acting and a knowledge of the meaning of the categories of action.
- 1. On the Vienna Circle see V. Kraft, Der Wiener Kreis (Vienna: Springer, 1968); for empiricist-positivist interpretations of economics see such representative works as Terence W Hutchison, The Significance and Basic Postulates of Economic Theory [Hutchison, an adherent of the Popperian variant of empiricism, has since become much less enthusiastic about the prospects of a Popperized economics — see, for instance, his Knowledge and Ignorance in Economics — yet he still sees no alternative but to cling to Popper's falsificationism anyway.]; Milton Friedman, "The Methodology of Positive Economics," in idem, Essays in Positive Economics; Mark Blaug, The Methodology of Economics; a positivist account by a participant in Mises's Privat Seminar in Vienna is F. Kaufmann, Methodology of the Social Sciences; the dominance of empiricism in economics is documented by the fact that there is probably not a single textbook, which does not explicitly classify economics as — what else? — an empirical (a posteriori) science.
- 2. On the relativistic consequences of empiricism-positivism see also Hoppe, A Theory of Socialism and Capitalism (Boston: Kluwer Academic Publishers, 1989), chapter 6; idem, "The Intellectual Cover for Socialism."
- 3. See Ludwig von Mises, The Historical Setting of the Austrian School of Economics (Auburn, Ala.:Ludwig von Mises Institute, 1984); idem, Erinnerungen (Stuttgart: Gustav Fischer, 1978); idem, Theory and History, chapter 10; Murray N. Rothbard, Ludwig von Mises: Scholar, Creator, Hero (Auburn, Ala.: Ludwig von Mises Institute, 1988); for a critical survey of historicist ideas see also Karl Popper, The Poverty of Historicism; for a representative of the older version of a historicist interpretation of economics see Werner Sombart, Die drei Nationalökonomien (Munich: Duncker & Humblot, 1930); for the modern, hermeneutical twist Donald McCloskey, The Rhetoric of Economics (Madison: University of Wisconsin Press, 1985); Ludwig Lachmann, "From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society," Journal of Economic Literature (1976).
- 4. On the extreme relativism of historicism-hermeneutics see Hoppe, "In Defense of Extreme Rationalism"; Murray N. Rothbard, "The Hermeneutical Invasion of Philosophy and Economics," Review of Austrian Economics (1988); Henry Veatch, "Deconstruction in Philosophy: Has Rorty Made it the Denouement of Contemporary Analytical Philosophy," Review of Metaphysics (1985); Jonathan Barnes, "A Kind of Integrity" Austrian Economics Newsletter (Summer 1987); David Gordon, Hermeneutics vs. Austrian Economics (Auburn, Ala.: Ludwig von Mises Institute, Occasional Paper Series, 1987); for a brilliant critique of contemporary sociology see St. Andreski, Social Science as Sorcery (New York: St. Martin's Press, 1973).
- 5. Regarding the epistemological views of such predecessors as J. B. Say, Nassau W. Senior, J. E. Cairnes, John Stuart Mill, Carl Menger, and Friedrich von Wieser see Ludwig von Mises, Epistemological Problems of Economics, pp. 17–23; also Murray N. Rothbard, "Praxeology: The Methodology of Austrian Economics," in Edwin Dolan, ed., The Foundations of Modern Austrian Economics (Kansas City: Sheed and Ward, 1976).
- 6. In addition to Mises's works cited at the outset of this chapter and the literature mentioned in note 40, see Murray N. Rothbard, Individualism and the Philosophy of the Social Sciences (San Francisco: Cato Institute, 1979); for a splendid philosophical critique of empiricist economics see Hollis and Nell, Rational Economic Man; as particularly valuable general defenses of rationalism as against empiricism and relativism — without reference to economics, however, — see Blanshard, Reason and Analysis; Kambartel, Erfahrung und Struktur.
- 7. For an elaborate defense of epistemological dualism see also Apel, Transformation der Philosophie, 2 vols, and Habermas, Zur Logik der Sozialwissenschaften.
- 8. See on this in particular Hoppe, "In Defense of Extreme Rationalism."
- 9. See Mises, The Ultimate Foundation of Economic Science, p. 12.
- 10. See Kant, Kritik der reinen Vernunft, p. 45; Mises, Human Action, p. 38.
- 11. On the following see in particular Mises, Human Action, chapter 4; Murray N. Rothbard, Man, Economy, and State (Los Angeles: Nash, 1962), chapter 1.
- 12. On the law of marginal utility see Mises, Human Action, pp. 119–27 and Rothbard, Man, Economy, and State, pp. 268–71.