Mises Wire

Mises Killed Homo Economicus Long before Thaler

The Atlantic magazine shouts the headline. “Richard Thaler wins the Nobel Prize in Economics for killing Homo Economicus.” For sure, the father of behavioral economics has done some good stuff. However, he didn’t kill Homo Economicus, Ludwig von Mises did.

In Epistemological Problems of Economics, Ludwig von Mises explains that the homo economicus would be the perfect businessman, conducting an enterprise for maximum profit: “By means of diligence and attention to business he strives to eliminate all sources of error so that the results of his action are not prejudiced by ignorance, neglectfulness, mistakes, and the like.”

However, Mises recognized that we aren’t all calculating businessmen, and wrote,

It did not escape even the classical economists that the economizing individual as a party engaged in trade does not always and cannot always remain true to the principles governing the businessman, that he is not omniscient, that he can err, and that, under certain conditions, he even prefers his comfort to a profit-making business.

Mises wrote that there is only purposeful behavior or human action. “Praxeology does not employ the term rational,” Mises wrote in Money, Method, and the Market Process, explaining that the “opposite of action is not irrational behavior, but a reactive response to stimuli on the part of the bodily organs and of instincts, which cannot be controlled by volition.”

In Mises’s view, economics doesn’t deal with homo economicus at all, but with homo agens: man “as he really is, often weak, stupid, inconsiderate, and badly instructed.”

Mises continued, “We do not have to dwell upon the contradictions and logical inconsistencies involved in this use of words. The qualification of ends is without significance for praxeology, the science of means, not ends. That mortal men are not infallible and that they sometimes choose means which cannot bring about the ends sought is obvious.”

When seeking out the proper ends, Mises pointed out it is left to technology and therapeutics. He explained,

It is the task of applied economics to discover the appropriate methods for the attainment of definite ends in the realm of social cooperation. But if the scientists fail in these endeavors or if the acting men do not correctly apply the means recommended, the outcome falls short of the expectations of the acting individuals. Yet, an action unsuited to the end sought is still an action.

In the book, Rothbard vs. the Philosophers: Unpublished Writings on Hayek, Mises, Strauss, and Polanyi, edited by Roberta Modugno, Rothbard takes his mentor Mises to task for this view, writing of Mises’s view that the use of medicine men employing magic for curing disease or rainmaking in the Middle Ages was not irrational, because it was purposeful action.

Rothbard believes we can look back and call it irrational because magic can’t achieve the ends it is supposed to achieve. “The use of magic is therefore irrational, whether in the past, present, or future,” writes Rothbard.

Well sure, however, Mises’s point was that those folks were acting on the best information they had at the time (with considerably less brain power to work with than Rothbard).

Thaler attempted to use his data to predict how people would behave in the real world. He believes people’s irrationality can be predicted and even influenced by political policy, “Nudging.”  

Mises saw it differently.   

Understanding is always based on incomplete knowledge. We may believe we know the motives of the acting men, the ends they are aiming at, and the means they plan to apply for the attainment of these ends. We have a definite opinion with regard to the effects to be expected from the operation of these factors. But this knowledge is defective. We cannot exclude beforehand the possibility that we have erred in the appraisal of their influence or have failed to take into consideration some factors whose interference we did not foresee at all, or not in a correct way.

Thalar told the NY Times, he’d spend the prize money “as irrationally as possible.”  

Should Mises ever win the Nobel posthumously, his estate, will no doubt spend the money rationally.

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