Mises Daily Articles
Some Considerations on Economic Laws
Writing many years ago, Luigi Einaudi pointed out how it had become the fashion after World War I to proclaim that the war had demonstrated the spuriousness of all economic laws. In reality the war provided an almost experimental confirmation of their validity. The alleged spuriousness simply consisted in the fact that the war provided politicians with an opportunity to commit a multiplicity of blunders, the inevitable effects of which were then ascribed to the war.
During the period of dictators' miracles, the recurring phrase of the bankruptcy of economic theory became almost deafening. Those titans bragged of their power to bend to their will even economic laws, as if a politician needed strength of character to violate, rather than to respect those laws.
But this did not suffice. Even today we must listen to the fatuous talk by all kinds of administrators and economic planners on the "rejection" of economic theory for the sake of politics.
It seems strange that in these matters theorists are primarily accused of abstractness, as if it were possible for a science not to be abstract, for science proceeds by general, schematic concepts. The political "realists" probably do not believe that abstract intellect itself is an instrument of action, and that a concept, to prove useful, must be abstract. The laws of economics are practical only insofar as they are abstract. It goes without saying that action also requires the intervention of that faculty which the ancient logicians called "secunda Petri" and which Kant called "judgment." We may name it "intuition." It serves to apply the general scheme to the concrete case. Without this faculty, according to Kant, a judge can possess all of juridical knowledge and yet be a fool. But to assume that intuition can act alone would be to believe that the "clinical eye" can exempt the doctor from a knowledge of medicine.
It is possible that those who deny the validity of economic laws may assume the role of champions of human liberty against naturalistic determinism. Alluding to the physicists' discovery of the principle of indetermination in natural phenomena, they find it completely indefensible to believe in determination in the phenomena of the human world.
In reality the concept of law can be similarly applied to nature and human action alike. The difference does not lie in the object, but in the method and point of view. At the beginning of this century Dilthey, Windelband, and Rickert in Germany, and Croce in Italy opposed the positivists' application of the methods of natural science to history. They raised the objection that historical knowledge was not the science of classes and general laws, but of individual facts. Their objection was irrefutable even though certain philosophers of history are still pretending to arrive at the "laws" of history from events and then explaining the events themselves in the light of these "laws."
But if historical knowledge actually deals with individual facts, the elaboration of experience for practical purposes deals with the general. Nothing prevents us from extending this method also to the world of human behavior, provided, however, we bear in mind that life is always more varied and unpredictable than our schematization. Economic history as an historical science must aim at the individuality of facts; but economics, with due respect for the memory of Schmoller and the historical school of economics, is not merely knowledge of the past. The economic theorist is the successor and heir of the economic adviser who, in the past, counseled the sovereign on matters of financial policy.
Indeed it is fallacious to assume that in formulating a law the economist subjects human will to necessity. On the contrary, he merely attributes to the individual the capacity to act freely according to his interest. Having established that man acts in a utilitarian manner, the economist proceeds from an established situation and then anticipates the action which man will freely choose in his own interest.
The champions of politics probably will be surprised to learn that they prove themselves to be pure idealists in contesting the validity of economic laws. They forget that man is and remains an economic creature in spite of his noble sentiments; that he must satisfy his own vital needs and that he does so with gratification. In final analysis, however, these idealists reveal themselves as believers in force and the efficacy of police measures which are to curb the egoism of individuals and, as Hegel proclaimed, are to raise them from the level of base nature to the "ethical" level of the state. The affirmation of the validity of economic laws thus is identical with the affirmation of an insuppressible economic "nature" in man, which indeed is not the whole man — for he is also art, thought, moral, and religious life — but it is a factor or vital element of his nature.
It must be admitted, however, that a layman who turns to an economic treatise to search for economic laws will be disappointed. He usually finds a description of the structure and operation of modern economic society, its monetary system, markets, banks, stock exchanges, corporations, taxes, duties, etc. He will find an explanation of the disturbances and damages which may affect this organism together with suggested remedies. Such a treatise is apt to create the belief that the laws which it sets forth concern the proper functioning of a particular society, the capitalist society, under the assumption of a free market, free choice of consumers, and free initiative of private producers. Without these premises or in a different organization of society, the laws of economics are said to be different like the non-Euclidean geometries which proceed from different postulates. But the truth is that these laws operate in all human societies, even in associations of ascetic abnegation or monastic communities.
The active element in laws is the factor of utility which is always alike, for it is a form or category of activity of the human mind. From this point of view all laws are comprised in only one — namely, that man, besides being a "spiritual" being, is also utilitarian. He is so in a manner not only insuppressible but also legitimate because he lives on earth and not in the kingdom of heaven. An economic law classifies the situation, renders it typical, and thus abstracts. Economics determines a certain number of typical situations which may even be infinite, in order to calculate or rather to deduce the subsequent action of the economic factor, i.e., individual interest. Therefore, contrary to the natural sciences which are empirical and merely summarize the data of experience and group them in their classes and laws, the science of economics "calculates." It deduces from certain abstract premises. In the calculation it reduces the terms of the useful, such as damages, profits, losses, and gains, to quantity. For this reason it adopts the form of a mathematical calculation.
Max Weber, who sought to deprive the law of its character of naturalistic necessity, set forth the concept of "ideal type." According to him, given certain premises, it is probable that concrete action takes place in conformity to the "type" which is deduced from those premises. In reality, the "type" concerns the premises; in other words, the situation abstractly presumed, as for instance, free competition.
The typical situations from which laws are deduced are, we repeat, schemes which more or less adhere to reality. The economic factor, however, is not abstract, but a real force, even though science must reduce it to quantitative terms for the sake of calculation. There may be instances in which patriotic enthusiasm, charity, so-called social morality, etc., induce individuals to act outside of and perhaps against their immediate advantage. But in a society of men and not of saints and heroes, all these ideal impulses cannot normally and permanently expel and suppress this economic factor which by nature and definition is individualistic.
It is a matter of fact that the science of economics came into being in the 18th century as a result of the "discovery of the useful," that is to say, of positive value and the fecundity of the economic interest in man's life. Comparing the origin of economics with that of aesthetics, Benedetto Croce called both sciences "worldly" and even "diabolic." According to him, both attribute positive and autonomous value to activities which in themselves, strictly speaking, are not moral. But it is a fact that the forerunners of economics praised those private vices and transformed them into public benefits. They approved as courage, initiative, and enterprise what the ancient morality had condemned as sins of avarice and cupidity.
From Adam Smith on, some economists even attempted in vain to reduce moral life itself to utility. On the other hand, socialism, though proclaiming itself "materialistic," attempts to revive ascetic morality. It does so not only by condemning entrepreneurial profit as theft, but also by advocating a "social" morality according to which the individual is to labor not for himself, but for society. Socialism claims to repress the very economic factor in the economic world itself, rejecting or even censuring that formidable vital force. But moralistic edification and ideological propaganda cannot suffice to stimulate zeal. Socialism then returns to individual interest by means of a system of "incentives." Since even this seems insufficient it turns to forced labor. And yet, since not even the merciless dictator can deprive the human soul of that vital motive, economic laws reappear also in collectivist societies, alive and petulant, in the form of guilt and crime, sabotage and treason, or less vividly as black markets.