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Why Economics Needs Philosophy

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05/31/2019David Gordon

JEFF DEIST: Does economics need philosophy? The idea of a school of economics having a philosophical underpinning might strike some people as odd. Why should economists care about philosophy at all?

DAVID GORDON: Well, that’s a very good question. You see, what Mises held was that economics has a distinct method or way of proceeding, and he felt that way of proceeding was under criticism by many philosophers and social scientists of his time. I think for Mises, what was always primary was to vindicate economic theory against its detractors. He wasn’t trying to construct a philosophical system. But if people criticized economics and said “well, there’s something wrong with Austrian economics because it doesn’t depend on verifying things empirically,” Mises wanted to come up with a reply to that, so that was what really got him into philosophy.

JD: For purposes of this conversation, logic is a critical branch of philosophy. What should we think about rhetoric?

DG: Well, clearly logic is a branch of philosophy. It brings in all the sciences which use logic. Rhetoric is the general study of techniques of persuasion. There are philosophers who have written about rhetoric, Aristotle and others, but that would be a somewhat broader category than they wrote about. To the extent you’re interested in persuading others of the truth, you could consider economics rhetorical, but one point that people miss is when you’re elaborating a structure of argument, it doesn’t involve necessarily arguing in the sense of trying to have an actual debate where you have an adversary you’re trying to win over.

JD: Let’s start with Aristotle then. Can we trace a line from him to Menger, Böhm-Bawerk, and Mises?

DG: I think this is one point Murray Rothbard stressed very much. In the pamphlet I wrote called Philosophical Origins of Austrian Economics, I tried to elaborate upon that. I’m not sure everything I said in that pamphlet was right. What Aristotle thought was that in science we’re really proceeding deductively from first principles. He says this in the Posterior Analytics. So, we start off with a fundamental principle. We’re starting from what Aristotle thought: that there are essences of things and substances which means that the essence is the property something has that makes it that thing. Like “what is a human being?” It’s a rational animal. Aristotle thought we could discern these essences and that’s a theme you get in both Mises and Rothbard who started with the action axiom that human beings act.

Mises didn’t really use an Aristotelian method, but Menger was very influenced by Aristotle. Menger studied philosophy with Franz Brentano, who was one of the great authorities on Aristotle of the nineteenth century. So Menger took a lot of his notion of method from Brentano who was this Aristotelian figure. And I think that Rothbard, in particular, argues that praxeology, the science of human action, could be understood in this Aristotelian way as knowledge of essences. It’s a bit different from Mises, but I think it’s a very valuable way to proceed.

JD: Modern economics, of course, doesn’t start for several hundred more years. Menger doesn’t publish his Principles of Economics until 1871. Talk about some of the interim thinkers of the 1600s and 1700s. What about Locke? What was his influence on the Austrian school?

DG: Locke had a very interesting theory of knowledge that was a bit different from Aristotle’s. Locke thought, like Aristotle, there were essences of things, but he thought we really can’t know what they are. We’re cut off from essences. So, we do have some knowledge. We can prove we exist. We know God exists. He thought we could derive ethics as some kind of deductive system and he also thought we know there is something behind our experience, but we can’t really know what it was. So it’s a much more skeptical view. But Locke certainly had influence on economics. Remember in Human Action, Mises talks about action as the relief of felt uneasiness. I think that comes from Locke. That’s his phrase, “felt uneasiness.” But Locke wasn’t especially influential in Austrian economics. He had the labor theory of value as well as the labor theory of original acquisition, and that wasn’t so influential with Austrians. I would say his influence on Austrians was much more in the area of political philosophy with his views on natural law and his particular defense of a somewhat libertarian view. In some respects, he was close to being an anarchist, with significant differences.

JD: So we fast-forward to the 1700s. Talk about the German Historical school, which in part the Viennese economists rebelled against.

DG: The Austrians thought there are economic laws that are true for everybody. We have the law of supply and demand, which applies regardless of where you are in time. We could apply the law in primitive societies, we can apply it in the Middle Ages. Everywhere. The German Historical school said no, there are different stages of history and each stage would have its own laws that when you’re investigating, economics, you’re interested in the particular. One should amass as many facts as one can and maybe be able to get some inductive generalization about what applies to particular periods. So, it isn’t that you can reason out things before, looking at the empirical facts. You could find, for example, that free trade benefits certain economies at certain periods, but not in others.

The theories of Gustav Schmoller, Adolph Wagner, and various others were important. Schmoller was very influential in scholarship about the history of Prussia. He wrote a great deal on the Prussian economy. Mises’s view of this was very interesting. He said, the real thrust of the Historical school’s views is that they didn’t like the idea that there were economic laws because this might limit what the state could do. Suppose, for example, we know by applying basic economic principles, that if you put into effect minimum wage laws, it’s going to cause unemployment. So then, if you don’t want unemployment, you can’t put in minimum wage laws. You shouldn’t do that, but the German Historical school didn’t like that and they said this is limiting the state. So, in Mises’s view, they were trying to undermine economic theory to promote their ends.

JD: They’re talking about economics as a historical discipline, with no universal laws or independent theory. It can’t be studied independently of history and other fields. Menger and Mises reject this.

DG: Yes, that’s right. Instead of thinking, as Mises did, there is a science that we can get just by thinking about our notion of action — trying to figure out what’s involved in that — they said we have to study the particular. Some of them did very important work on particular historical periods, but they didn’t believe in economic laws. So, they would say, we have to just study what’s going on at the time. We might eventually be able to come up with some kind of generalization that would apply to different periods, but not for now.

JD: And the German Historical school still held sway, in Germany and the Austro-Hungarian Empire, well into the 1800s and even 1900s.

DG: Yes. They lasted through the twentieth century. One of the great figures of the school was Werner Sombart, whom Mises knew. They were on fairly friendly terms. He was teaching until 1930, when they were really dominant. When the German historians named the Austrian school as opposed to the German Historical, the term “Austrian” was coined with the implication that Austria was stuck in the past, the future was really with Germany and Prussia. So, if you say “the Austrian school,” you’re saying “outdated reactionary group,” rather than progressive. They were certainly influential, not only in Germany, but they were very similar to a group in the US called the Institutionalists, who were very influential in the late nineteenth century and early twentieth century. There were even Austrians who were influenced by the Historical school. So, Mises had them very much in mind when he was writing Human Action, this was one of the main groups he wanted to oppose.

JD: Of course, there are two other Germans we need to consider, Hegel and Immanuel Kant. Both lived into the 1800s, but not by much. Talk about both these figures and their influence on Austrian thought.

DG: Kant said that in philosophy people hadn’t agreed on what the correct solution is to the various philosophical problems, like how can we prove that God exists or how we know if there is an external world. So, there are all sorts of disagreements on all of these various philosophical systems. He said the philosophers have so far made a basic mistake. Instead of asking, “what is the nature of the world,” what they should be studying is our knowledge. We should ask, “what are the categories that we use in trying to get knowledge?” And by thinking about that, then we would get some answers to the philosophical questions. For Kant, we can’t know the world as it is in itself. All we can know is the world as we construct it through using our concepts. There is a given element also, which is intuition. You get to space and time through intuition and we apply concepts to that, so that gives us the world that we know, which he called appearance. That’s the only world accessible to us.

JD: No wonder Ayn Rand called him evil. Constructing reality and using intuition certainly sounds very un-Randian.

DG: Oh yes, you know, she called him the machine gunner of the mind. There’s something to be said for that and it does introduce some kind of a skeptical way of looking at things, but Kant didn’t think he was a skeptic. He thought the world of appearances is the one we’re dealing with. So we do have knowledge of that.

But there are various views on what the relation is between the world that we know, which is called the phenomenal world, and then this other noumenal real world. So, he then thought that limits our knowledge. However, we could go beyond that in a certain way because we also know we’re ethical beings. We can recognize through reason that we have certain requirements, certain things we ought to do, just by thinking about them. He thought we could, from the concept of what we ought to do, get a notion of what was ethically required. This is his famous categorical imperative. When he applied this to his political views in practice to a large extent, it was reminiscent of classical liberalism. He believed in property rights and favored some sort of welfare state, but it would have to be very limited. He favored a peaceful foreign policy. He wanted some kind of federation of republics.

Now, Hegel reacted very much to this. He thought Kant was a great philosopher, but he said, “look, Kant is wrong in thinking that we’re limited to our own concepts. We really do know the world as it exists.” The mistake he thought Kant made was that Kant is assuming that there is some kind of separation between reason and the world. In fact, the world is rational, the world is reason developing itself, so there is no separation between the two and our minds are really just reason coming into consciousness. So, Hegel thought, that as the universe develops, rationality is increasingly coming to self-consciousness. And in ethics, in political philosophy, Hegel reacted somewhat against Kant. He said Kant is right that there is a sphere of freedom, but where he made the mistake is trying to come up with these abstract rules that were completely separate from the concrete lives of real people. In Hegel’s view, this concrete life is manifested in the state. A famous sentence from one of his writings is, “The State is the march of God on Earth.” That’s not a very classical liberal state, although if you look at his main work on political philosophy, which is called Philosophy of Right, Hegel says that people are free to make exchanges. But this isn’t freedom fully developed. It develops more when you have the state.

Hegel thought that up to this time, the Prussian state, as a limited monarchy, was the highest development of reason. He didn’t claim this would always be true, but at that time, the Prussian state was the most advanced. Hegel was quite aware of economics. He read Adam Smith and James Steuart, who was an early mercantilist writer. But he didn’t really develop an economic theory.

JD: Kant also discussed the importance of a priori knowledge, which is reflected in Misesian praxeology. How does Kant help us understand economics?

DG: In this way, suppose we get the law of supply and demand, thinking about who has a surplus or a shortage. But we know that minimum wage laws will result in unemployment. So then, if we can figure this out a priori, then we don’t have to say, “well, this is just a hypothesis, let me apply it to the real world and maybe it will turn out that minimum wages don’t cause unemployment.” We will be able to tell because we have this economic law that there will always be some effect from the minimum wage law. It may be that other things will override it, but we’ll know that the law has some effect in the world. It isn’t something that we have to investigate. So, the way it applies to economics is that it enables us to have a theoretical discipline that isn’t subject to further testing. We can be wrong and make mistakes in our deductions, but we can’t be wrong in the sense that it’s open to future investigation whether our reasoning, even if it is correct, arrives at truth or not. If we reason correctly from true premises, then what we come up with is true, then that’s it. That’s unpopular with many philosophers.

JD: Contrast this with the logical positivists of Mises’s time. His own brother, Richard, the mathematician, disagreed with him very strongly on method and logic for example. Give us the context of the time in which Mises developed his views, and the opposition he faced.

DG: There was a group of logical positivists, the Vienna Circle, originally headed by Moritz Schlick, who was a professor of philosophy at Vienna and a lot of the top philosophers of that time attended that group. They said there is a priori knowledge, but this is just really conventional, this is just definitions or parts of definitions. So, what they would say is, suppose I say something like this: “we choose our most highly valued preference.” We have a preference scale, this one is the one that ranks highest, so I’m going to choose that. They said, “that doesn’t tell you anything. That’s a tautology because it’s just saying you’re choosing whatever one you’re choosing. You’re just defining the highest value preference is the one you in fact, choose.”

For the Vienna Circle, if you want to know what’s true in the world, the only way we can find out is by investigating, by doing empirical work. One example they might use: suppose one says, “how many people are going to attend the Austrian Economics Research Conference next month?” The way you would find out is to see how many people show up. We couldn’t figure that out just by thinking about it. They have to find out by using their senses, their empirical senses, what actually is the case. But in the Austrian view — Mises’s view — that isn’t always true. Sometimes you can realize things have to be a certain way just by thinking about them. The positivists say no, if it isn’t empirical knowledge, then it’s a tautology. It doesn’t tell you anything. So, they said, “if you want to know what’s going on in the world, you just have to look at matters, investigate them.” What you would get would not be what has to be the case, but just what is the case. “Laws” developed this way would really not be statements of what’s necessary in this very strong sense that we have in other types of scientific laws like math.

JD: What would you say is Mises’s best rebuttal to this? Where in his writings, whether in Human Action or perhaps in The Ultimate Foundation of Economic Science, does he lay out his best philosophical case for the method of economics? Where do we find his most philosophical work?

DG: Well, I would say probably two. The first, say, 110 or 150 pages of Human Action. The second chapter of the book is titled “The Epistemological Problems of the Sciences of Human Action.”

JD: I noticed to my surprise that Kant is not specifically mentioned in Human Action. Mises mentions him very briefly in Liberalism, but as you point out even when Mises resorts to Kantian language nothing in his argument depends on Kant. Elaborate on this for us.

DG: Suppose you don’t know the game of chess, have never heard of it and then you see people moving these pieces on a board and just see them moving them in various ways. You wouldn’t understand what’s going on unless you had the concept of chess, you wouldn’t be able to figure out what they’re doing. Similarly, we can see people moving their bodies in various ways, but we wouldn’t know what they’re doing. But, once we have Mises’s concept of action we can understand things. So, in that respect, that’s a Kantian idea that you have to have certain concepts in order to understand what’s going on in various activities. But Mises doesn’t depend on particular controversial points in Kant’s theory of knowledge by any means. He’s not adopting a Kantian system at all, I don’t think, even though Mises is a very widely read scholar in philosophy and other disciplines.

Nevertheless, it’s sometimes surprising the range of Mises’s knowledge. For example, in Human Action, when he’s talking about quantum mechanics, he says quantum mechanics has some implications for free will. So, he quotes works on quantum mechanics. He’s up on all sorts of things, but he isn’t adopting a particular school.

I should say also: One thing I see when I talk of Human Action over a great many years at the Mises Institute is that a mistake a lot of people make is, they think well, because Mises discusses philosophical topics, they think he’s trying to solve some philosophical problems. One problem is: how do we know that there is a real world out there? Maybe we just have certain experiences and you could imagine, Descartes’s malicious demon that’s deceiving us, how do we know the world really exists? That isn’t a problem he is addressing, he’s not trying to solve problems of philosophical skepticism. It would be odd if we were saying how to explain the recession of 2008, it would be kind of strange to say, “well look, how can you talk about explaining the recession in 2008 when we haven’t even proved there’s an external  world yet.” That wouldn’t make sense. So, we need to get he’s talking about the world we live in and he’s seeing economics as one of the sciences. It’s not part of philosophy. He’s just thinking that there’s a particular method in science, an a priori method that we can use. This is one of his objections to Karl Popper, who was a philosopher also from Vienna, and had some connection with the Vienna Circle but reacted very strongly against them. But Popper had a view that a statement is scientific if it can be falsified. So, they say, well, economics, as Mises conceded, it wouldn’t be falsifiable because if these laws of economics were a priori truths, then nothing can show they’re false. What Mises said is if you’re trying to come up with what is scientific, you should look at the actual sciences in question. You should do that and take that into account in trying to come up with your criteria of what’s a scientific statement.

JD: Let’s talk about the philosophy of Murray Rothbard.

DG: Rothbard was a very systematic thinker. He was interested in a great many things, but Rothbard in his philosophical views, he had been very much influenced by Aristotle and Thomas Aquinas and he made a study of scholastic philosophy. So he adhered to this view where he studied the essences of things in order to gain knowledge of them. He was able to absorb information very rapidly and had tremendous bibliographic knowledge and if you asked him something, he could just give you a bibliography immediately. He knew scholastic material very well and studied it a lot. For a while, his group, which was called The Circle Bastiat, attended sessions of Ayn Rand’s circle. Rand was a remarkable thinker in her own right. Although she hadn’t studied history of philosophy very systematically, she developed views that were in many respects similar to those of Aristotle. So, there was some convergence there. He didn’t really take it from her, but there was some convergence, because he was in his philosophical focus, very much an Aristotelian, like her. He didn’t really write on metaphysics, he wrote on epistemology insofar as it applies to economics, but he was very influenced by Aristotelian and Thomistic ethics and developed that further. He developed natural law thinking on that basis.

JD: We think of Aquinas as a philosopher, as a legal theorist, and of course as a religious thinker. Most people probably think of him more as a religious thinker than a philosopher per se.

DG: The relation between theology and philosophy is one of the most contested topics in the study of Aquinas. I would say he was a philosopher as well as a theologian in that a good many of his works are commentaries on Aristotle. He wrote books on how you could convert people who don’t accept Christianity, not presupposing that theology is true. For him, in fact, there was some knowledge that could be obtained just by reasoning, and there was certain knowledge that couldn’t be obtained by reasoning. This you could get only by faith, which is from revelation. But for him, even some of the knowledge obtained through reasoning could show why we should accept the Church’s teachings.

JD: When Rothbard makes the normative case for laissez-faire in The Ethics of Liberty, he makes that normative case without appeal to higher powers. He relies on a secular morality as the foundation for a free and just society. What’s his biggest influence there?

DG: Well, I think in this he talks about people as self-owners. You could say “why are we self-owners?” I think he would rely on an Aristotelian focus.

JD: Maybe this is my own Protestant upbringing, but when we talk about self-ownership it sounds inherently incompatible with Christianity. If you’re a Christian you believe you were made in the image of God, and thus you’re not some wholly independent being. You don’t “own” yourself as part of God’s creation.

DG: Yes. Well, that’s a very interesting objection. If you look at Locke, Locke did believe that God really owns everybody. He also defends the self-ownership principle.

JD: God owns everybody?

DG: The claim here is God created us so God really owns us. But under that, we’re in charge of our own lives, so it’s something like this: suppose for all practical purposes, unless God is directly trying to tell us something, we’re in charge of our own lives. The fact God owns everything doesn’t mean someone else can go around saying, “I’m God’s representative, so you have to do this, do that.” No one has direct access to God in that way that would justify that person imposing various limits on what a person can do. The notion of God owning us does have some bite to it in the real world. For example, many theologians have thought it’s wrong for you to commit suicide. Because God owns you, you don’t have the right to end your own life because that would be inconsistent with God’s ownership. You could say, you could acquire property in the world because subject to God’s ultimate ownership, you’re really free to homestead land at least under certain conditions.

Rothbard is probably best called agnostic. I think his atheism wasn’t as strong in his later years as earlier. His later position is something like, if there is a God, his actions and his knowledge would be so far different from normal, we wouldn’t really be able to grasp what he was doing. This is more in conformity with Aristotle because Aristotle did believe that God really takes no notice of what’s going on in the world and Aristotle says God is thinking about his own activities, his own being, and is not concerned with human beings.

JD: David, let’s talk about Ayn Rand. Both Mises and Rothbard knew her personally, and both socialized with her at one time. Many people think she was a highly derivative philosopher, that she didn’t exhibit much original thought. Many people disagree, and think she was a brilliant philosopher who developed a fully complete system of original ideas on her own. Tell us about her relationships with Mises and Rothbard, how they may have influenced her, and vice-versa.

DG: It is true that some of her thought certainly resembles Aristotle in many points, but she was able to get a lot of her views independently. I think in some respects, she deviated in an incorrect way from Aristotle. She was certainly a significant thinker in philosophy. I frequently disagree with her, but she’s certainly someone who’s worth reading.

We also know a bit about her thinking on Mises because she used to make notes on books she was reading. We have her notes on Human Action and one note on that always makes me laugh. She said that Mises usually talks about supply and demand, but one place he talks about demand and supply and she thought that there was something suspicious about that, but she didn’t say what it was. So, she thought Mises was extremely good with economic theory, but she thought he didn’t have the right theory of knowledge. She took him to be a Kantian and she didn’t like this. They met a few times in person and Mises liked her Atlas Shrugged. He thought she was portraying the businessman as a hero, she was really doing something very valuable, but apparently they didn’t get along. There’s this story Henry Hazlitt invited both for dinner and they had some big falling out. They both had very strong personalities.

Now, Murray Rothbard, when he first heard about her, he tended not to like her much because he thought she was a very dogmatic thinker and if you disagreed with her, she would exclude you and he thought the tendencies in her personal way of dealing with people, he didn’t like. So, he tended very much to stay away from her and was suspicious of her, but when Atlas Shrugged came out, he really liked it, admired her writing, so for a while, his group met with her group, but they didn’t get along. The thing she most opposed in Murray’s thinking was that Murray did not believe in the need for government, the state would be replaced by competing protection agencies. She was very much against that. She thought that would lead to having no law and order. There were also other issues as well.

JD: There’s a famous conversation, recounted in Nathaniel Branden’s biography of Rand, where she asked Rothbard how police and court services would be provided under anarchy. Rothbard responds with “private, competing defense agencies” and Rand expressed in horror: “You mean as in civil war?” Let’s just say their respective philosophies of governance diverged.

DG: There were other issues as well. One was that Murray’s wife, JoAnn Rothbard, also a great friend of mine, was a quite devout Protestant. So Rand wanted her to listen to some tapes by Nathaniel Branden on why God doesn’t exist and he felt that any rational person after listening to these tapes would be converted to atheism. So, if they listened to them and if she wasn’t converted to atheism, then Murray should divorce her. Of course, he wasn’t having any of that. of Barbara Branden’s master’s thesis where she said that, and used that argument. So then, when the volume came out, for some reason the citations to Branden were taken out, and Rand and Branden and the Rand group got very angry about it. They said, “oh, he’s plagiarized Barbara Branden.” In fact, the argument wasn’t original with her,
it’s a very common argument. So, they were very angry and they protested, and they went to the publisher. And then Murray wrote to Mises, and Mises replied and said, “what’s going on here, everybody knows about this argument, what are they complaining about?” But the Randians never forgot it.

JD: David, one final question. Menger, Mises, Hayek, and the older Austrians all pre-dated the rise of postmodern philosophy in the late twentieth century. Did Rothbard address postmodernism, and what effects do you think it has on economics today?

DG: Rothbard did address postmodernism in his essay “The Hermeneutical Invasion.” There are many different varieties of postmodernism but in general, postmodernists attack the notion of truth as fixed
and unalterable. Rothbard resisted this, relying on his Aristotelian realistic views. Fortunately, postmodernism hasn’t influenced economics as much as it has the humanities.

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Cite This Article

Gordon, David, "Why Economics Needs Philosophy," The Austrian 5, no. 2 (2019): 4–12.

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