The Influence and Significance of Human Action after 75 Years

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Human Action and the Foundations of Economic Prosperity

SHAWN RITENOUR

In Ludwig von Mises’s intellectual autobiography discussing his life and work in Europe prior to 1940, he reveals that he first read Carl Menger’s Principles of Economics around Christmastime in 1903. “It was through this book,” he relates, “that I became an economist” (Mises 2009, 25). As Guido Hülsmann tells us, before that, in his first years at the University of Vienna, he was schooled in historicism. Mises began his studies “a champion of interventionist statism” (Hülsmann 2007, 80). Although his turn toward free-market classical liberalism was not instantaneous, after reading Menger’s Principles he would never be the same. I have much the same relationship with the book we are celebrating.

When I encountered Mises’s Human Action for the first time as a sophomore in college, I was not a historicist, an interventionist, or a statist. My family was a blue-collar family. My dad worked in a meatpacking plant while my mother frugally managed the household budget. Without knowing any formal economic principles, I was practically schooled in comparisons of marginal cost and marginal benefit and maximizing utility per dollar spent every day. With no knowledge of the discipline of economics, I took my first microeconomics course and was immediately impressed with and interested in the sort of questions raised and the sort of analysis undertaken in answering them. I was quickly drawn to economics as a major.

I had lingering doubts, however, about whether economics was rooted in reality or built merely on constructs so artificial that their conclusions were ultimately irrelevant to the real world. While pondering this question, I purchased my first copy of Mises’s Human Action from the old Conservative Book Club, began to read it, and was delighted to find that there is an economic framework that corresponds to real human action and, hence, is worth devoting my life to studying and teaching. What Menger’s Principles was for Mises, Human Action was to me. It is the book that made me an economist.

From the time I began reading the first pages of Human Action I found Mises’s entire approach very refreshing. He did not begin by looking at reams of descriptive statistics and gross domestic product, à la Samuelson (1948). He didn’t even begin by examining individual markets or the nature of wealth. Instead, he painstakingly laid out the very foundations of economics by examining in detail the nature of human action.

His effort pays significant dividends by keeping his reader from potentially shipwrecking his economics on the rocky shoals of scientism. He refrains from constructing economic theories via abstract modeling built on unrealistic assumptions. He never models people as mere representative agents who are narrowly selfish and who act with perfect information. He does not assume benevolent and omnipotent economic planners. Consequently, the economist building on Mises is not deluded into thinking that economics is about developing elegant mathematical equilibrium models that are irrelevant for the real world of uncertainty in which optimal prices, quantities, firm sizes, and market concentrations are arrived at through the real market process.

Mises also steers clear of positivist nihilism. Mises’s foundation allows him to develop economic theorems that are true economic laws rather than hypothetical propositions always subject to being rejected by the next empirical test. The subjects causing all economic phenomena are more than inanimate objects merely reacting to stimuli. They are more than biological creatures driven by instincts. They are human beings engaging in purposeful behavior.

Human Action and the Foundations of Economics

One of the hallmarks of Mises’s Human Action is its logically consistent, systematic unfolding of economic law from realistic human action. Better than anyone before him, Mises sets the action of real human beings as the foundation for economic science. The methodological agnosticism of much of modern economics notwithstanding, this is no small matter.

I have long thought that the foundations of economics are of key importance. Twenty-five years ago, in a lecture at a Mises Institute event celebrating the publication of the Scholar’s Edition of Human Action, I noted that “when a rocket is launched, if its trajectory is off target just a degree or two, it can miss its destination by miles. The same holds true with scholarship. When one sets out on the path of the academic, it is important that he is starting from a firm foundation and that the course is true” (Ritenour 1999). This methodological point is far from being merely academic. The millions who died of starvation and disease under socialist governments are testimony to that (Courtois et al. 1999).

The tragic demise of Robert Franklin Hoxie brings the importance of economic foundations to a very personal level. Hoxie was a labor economist at the University of Chicago from 1906 to 1916 and on the US Commission on Industrial Relations from 1914 to 1915. He was also a devotee of institutionalist Thorstein Veblen. His good friend and colleague Alvin Johnson (1952, 204–7) documents the damage faulty foundations can have for an economist. Johnson (1952, 205) explains Hoxie’s economic framework as follows:

Hoxie loved Veblen with a love that passeth understanding. . . . Hoxie boasted that his whole system of thought came from Veblen. It was Veblen who had taught him that all ideas of reconciling the interests of labor and the employer were a fantastic delusion. For the minds of labor and of the employer were built out of completely different philosophic elements. The philosophy the worker had hammered into him by his job ran in terms of cause and effect—the efficient cause. The employer thought in terms of values, purposes, final causes. As well try to mate a sheep with a tunny fish as try to bring efficient cause and final cause to an agreement.

Hoxie came to understand, however, that Veblen’s economics was built on a rotten foundation, and the bad leaven leaveneth the whole lump. Alas, Hoxie was emotionally shattered. Johnson relates that on one sad day, Hoxie visited New York, to where Johnson had relocated, and asked Johnson to come to his hotel for the evening. Hoxie “was frightening in his appearance.” He told Johnson that he was finished. “I can see now, all my work has been bunk. All my writing, every lecture I have ever given, has been bunk.” When asked for the reason, Hoxie continued, “I’ve come to see through Veblen.” Hoxie told Johnson he could not understand, “How could a man be so great a scientist and such a damn fool? And the more I thought, the more the idea rode my mind: how great a scientist is he?” Upon more cogitation, Hoxie concluded that “Veblen knew his equations didn’t solve, but he used them just the same.” This realization was devastating to Hoxie. He told Johnson, “I wouldn’t care if it was just the matter of my finding out a phony I had taken for okay. But Veblen has been the premise of all my work. My work is all rotten with Veblenism.” Hoxie understood that foundations do, indeed, matter.

Johnson conversed with Hoxie for eight hours, finally sufficiently calming him enough for sleep. Johnson (1952, 207) plaintively closes his narrative by writing “I left him, promising to visit him in Chicago and renew the discussion. But before I could get around to a Chicago trip Hoxie killed himself.”

Now, my point is not that economists who do not begin with human action as their foundation will eventually become suicidal. (On the other hand, why risk it?) No, my point is that foundations matter. Hoxie came to just this important realization. He unfortunately could not find a positive way past his epiphany.

The analytical framework Mises perfects and sets forth in Human Action is useful for all of economics. It was the economic basis for my first book, Foundations of Economics: A Christian View (Ritenour 2010). One of the most important questions students of economics need to answer satisfactorily for themselves is whether the professor of economics is pulling the wool over their eyes. I needed to do so as a student, and I sense my students need to do that as well. They need to apprehend that the laws of economics are actual laws and not merely necessary conclusions implied by artificial constructs dreamed up by academics.

As I note in my Foundations of Economics, “The first six chapters of Mises’ Magnum Opus provide the seminal explanation of the nature of human action and its implication for how we discover economic truth” (Ritenour 2010, 37). Tying action to our nature as human beings, he defines human action as purposeful behavior (Mises 1998, 11). People must apply means according to their ideas to achieve ends because their means are scarce. We must, therefore, choose to satisfy some ends while leaving others unfulfilled. When acting people choose to do one thing, they are simultaneously choosing not to do something else. This choice requires that we rank our ends, which necessitates preference. Action, therefore, requires valuation, which in turn implies the concepts of benefit and cost, and ultimately profit and loss (97).

Drawing upon Carl Menger (1994, 122–28) and Eugen von Böhm-Bawerk (1959, 135–50), Mises (1998, 119–27) explains that human action implies the law of marginal utility. When applying means, a person values each unit separately. If people can obtain and apply numerous units of the same good to different ends, they will attempt to use the units of the good to satisfy their most highly valued end not already satisfied. This implies that each additional marginal unit of a good will be allocated to a less valued end. Because means are valued according to the value of the ends they serve, the larger the quantity of a good a person has, the less the marginal unit of that good will be valued, because it serves a less valued end. Hence the law of marginal utility: there is an inverse relationship between the quantity of a good and the marginal utility of that good.

The law of marginal utility further implies the laws of demand and supply. Because of the inverse relationship between the quantity of the good and the value of the marginal unit, for a buyer to be willing to buy a larger quantity, the unit’s purchase price must be lower. Hence, there is an inverse relationship between the hypothetical price of a good and the quantity of that good buyers are willing to buy.

Likewise, the law of supply is implied by the law of marginal utility. As a seller sells more units of a good, the quantity he still possesses decreases. According to the law of marginal utility, the value of the marginal unit thus increases. Therefore, in order for a seller to voluntarily sell a larger quantity, he requires a higher price for the good. There is, therefore, a direct relationship between the hypothetical price of a good and the quantity of that good sellers are willing to sell.

The point is that in Human Action Mises demonstrates that these economic laws are embedded in the nature of man. They are true and they are relevant wherever and whenever humans engage in purposeful behavior, which is to say everywhere and always.

As I wrote my Foundations of Economics, I drew upon numerous additional insights from Mises’s Human Action about the market division of labor, money prices and economic calculation, time preference and its importance for the formation and maintenance of capital, economic profit and loss and interest, factor price determination, the economics of labor unions, his definitive account of the economic consequences of price controls, and his masterful treatment of the economic problems of socialism (Mises 1998, 157–64, 201–32, 281–91, 330–36, 476–520, 521–34, 685–711, 752–73). Indeed, my entire work was built upon the theoretical foundation of Mises and his student Murray Rothbard. My students have been very thankful to learn that there is a way to discover and systematically arrange laws of economics that are compatible with reality and, therefore, suitable for helping us navigate the economic problems and policy issues that we actually face.

Human Action and the Economics of Prosperity

About eight years after the publication of my first book, I turned my attention toward writing about the nature and causes of economic prosperity. I had been prompted to consider this topic years before by a conversation I had with a graduate student who attended Grove City College’s Austrian Student Scholars Conference. He suggested to me that while Austrians have a recognized business cycle theory, they don’t have a recognized theory of economic development. His claim was not that we do not have a theory of economic progress, but that it is not recognized as such. After teaching economic expansion and development for about twenty years, my ideas on the subject had been percolating, and I decided to try to articulate a general theory of economic prosperity (Ritenour 2023). I naturally turned to Mises as a starting point in my research.

Mises’s thoughts on the process of economic progress are quite important, because of the ad hoc nature of conventional development theory. While modern growth literature has identified several factors correlated with economic progress, there is hardly any explanation of their relation to the process of economic expansion (Ritenour 2023, 4; Gould and Ruffin 1993). Modern growth theory uses an analytical framework that, by and large, fosters neither asking nor answering the right questions.

Modern growth economics relies on mathematical models that suffer from problems of aggregation and serious limitations due to their assumptions. The economic framework and insights of Mises, on the other hand, provide theoretical results pointing to a more robust and relevant theory of economic progress. Mises’s causal-realist praxeological approach allows for the development of a more holistic theory of economic expansion and development that, therefore, is more likely to provide helpful policy guidance for purposes of economic progress.

Mises is quite helpful at the beginning of this conversation with his very definition of economic progress. A progressing economy is one in which there is an increase in per capita wealth (Mises 1998, 252). He goes further, however, by helpfully noting its subjective nature. He reminds us that “goods, commodities, and wealth and all the other notions of conduct are not elements of nature; they are elements of human meaning and conduct. He who wants to deal with them must not look at the external world; he must search for them in the meaning of acting men” (92). Wealth, therefore, is not merely stuff. It is economic goods that are subjectively perceived useful to attain ends by people using them. As such, wealth cannot be scientifically measured. That is not to say that we are unable to make any judgment about whether a society has or is enjoying economic progress. It is merely to say that we do this with what Mises (252) calls “historical understanding” and not scientific measurement. We can observe people enjoying the use of more and better goods for lower prices.

The question then becomes, how do we enjoy economic progress thus described? The answer is increases in productivity and the ability to use the fruits of our production according to our subjective purposes.

Mises points us to theory of economic progress in a discussion about whether monetary inflation has historically increased general social welfare: “The question is whether the fall in purchasing power was or was not an indispensable factor in the evolution which led from the poverty of ages gone by to the more satisfactory conditions of modern Western capitalism. . . . What is needed is a clarification of the effects of changes in purchasing power on the division of labor, the accumulation of capital, and technological improvement” (464–65). Those are the three processes that result in economic progress: expansion of the division of labor, capital accumulation, and improvement in technology.

The Division of Labor

Mises has much to say about all three. The division of labor is a process of specialization of production according to efficiency. By specialization we mean each person producing a particular good or set of goods in excess of his personal consumption. Who specializes in what within the division of labor will be determined by efficiency. The different tasks are taken up by whoever is the low-opportunity-cost producer. Now, Mises was not, of course, the first to recognize the contribution of the division of labor to prosperity. We can go as far back as Plato (1937), who writes in The Republic (2.370c), “All things are produced more plentifully and easily and of a better quality when one man does one thing which is natural to him and does it at the right time, and leaves other things.” And of course we know that Adam Smith (1937, 3–21) and other classical economists (Say 1964, 90–99; Ricardo 2004, 273–76) recognized benefits of the division of labor.

Mises however, emphasizes several points about exchange and the division of labor that are innovative. One is his expanding of David Ricardo’s law of comparative advantage to a full-fledged law of association (Mises 1998, 158–63). It is not only that different countries with different opportunity costs in the production of various goods could benefit from specialization and exchange; what is true of people in different countries is true of everyone, everywhere trade occurs.

While economists call this principle the “division of labor,” it actually applies to all factors of production. There is a division of capital goods according to efficiency and a division of land according to efficiency. Each factor of production is efficient in some line of production. As each factor is allocated according to efficiency, people will reap the most output for the resources utilized.

Because exchange opens the door for participation in the market division of labor, Mises further identifies exchange as the basis for society, along the same lines as the French Liberal School (Tracy 1970, 6; Bastiat 2007, 2:83). Mises (1998, 157–58) understands that the division of labor and human cooperation is the fundamental social phenomenon. He sees the division of labor as “the social tie” that, along with reason and language, is uniquely human (Shenoy 2010, 22). In so doing, he also explicitly rejects social Darwinism as a theory for the development of society (Mises 1998, 175). Society is not a competitive struggle for survival. It is the product of cooperation, not conflict.

Mises (464) understands that the division of labor developed historically over a long period of time. What he desires to investigate is what makes human society possible—that is, what brought about cooperation, society, and civilization. He finds that society is only possible because of the greater productivity of the division of labor and because of people’s recognition of this fact (160). Society, therefore, rests on the great variety of different skills and desirability of labor, capital endowments, and available natural resources (144, 160).

The expansion of the market division of labor brings a number of social effects in its wake. As people specialize according to efficiency, the differences leading to the benefits of the division of labor are intensified (163–64). Specialization of production further differentiates geographic regions, enhancing the distinction between rural and urban areas. It results in the collection in different areas of various production operations such as agriculture, manufacturing, mining, and software development.

Importantly, for Mises (144) man’s reason is capable of perceiving that participating in the market division of labor is a primary means by which people more fully achieve their ends by serving others. Society, therefore, is the result of human action (Mises 1998, 143, 188; Salerno 1990). Cooperation is a form of action, hence society is the product of purposeful behavior. This prompts Mises to assert that “any given social order was thought out and designed before it could be realized.” At the same time, he qualifies this claim by noting that

this temporal and logical precedence of the ideological factor does not imply the proposition that people draft a complete plan of a social system as the utopians do. What is and must be thought out in advance is not the concerting of individuals’ actions into an integrated system of social organization, but the actions of individuals with regard to their fellow men and of already formed groups of individuals with regard to other groups. Before a man aids his fellow in cutting a tree, such cooperation must be thought out. Before an act of barter takes place, the idea of mutual exchange of goods and services must be conceived. It is not necessary that the individuals concerned become aware of the fact that such mutuality results in the establishment of social bonds and in the emergence of a social system. The individual does not plan and execute actions intended to construct society. His conduct and the corresponding conduct of others generate social bodies. (Mises 1998, 188)

People act in cooperation to better attain their personal ends. In other words, what they must perceive is how cooperating and working together helps achieve the end. The specific pattern of production and social organization will develop naturally as people specialize according to efficiency. For society to flourish people must recognize that the market division of labor allows us to be more productive, act accordingly, and, importantly, embrace and support the social institutions that make it possible: namely private property and sound money.

Capital Accumulation

The market division of labor is praxeologically linked with the capital structure, which means it is not limited only by the extent of the market, as Adam Smith tells us; it is also limited by the extent of saving and investment. In fact, the division of labor is one reason capital-intensive production is economically possible. It makes no sense to invest in an industrial pizza oven to bake one pizza. In direct-use production, all production processes would be very short. The market division of labor, on the other hand, consists of a multistage, intertemporal structure of production. This structure of production incorporates the structure of economically productive capital goods.

Another set of insights from Mises that forms a large part of the theory of economic prosperity is, therefore, related to the importance of capital accumulation. Mises explains that a progressing economy is actuated not only by an expanding market division of labor, but also by an increase in available productive capital goods (292). Capital goods are produced means of production: the tools, machines, factories, and intermediate goods necessary for making products, be they commodities or services. Indeed, all goods serving the end of generating income contribute to capital by increasing the productivity of the user (261). They enable people to produce a greater quantity of output per unit of land and labor than could be produced without capital goods. Additionally and more importantly, capital goods allow people to produce a multitude of goods that could not be had at all without them. By increasing our productivity, capital goods advance people in time toward their objective of producing consumer goods.

Before capital goods can be used, however, they must be produced. In order to accumulate capital, therefore, people must be willing to put off present consumption so that they will have resources available to invest in production of capital goods. They must be willing to lengthen the structure of production to include production stages before the stage in which consumer goods are produced. Iron ore must be mined and then refined into steel in order for the steel to be transformed into an oven that can be used to bake a pizza. Because each of these stages requires some amount of restriction of consumption to fund the production of capital goods, as Mises (487) explains, “saving is the first step on the way toward improvement of material well-being and toward every further progress on this way.” The increased production that allows for increases in per capita wealth identified as economic progress is the result of an increase in capital per capita, and the investment in the production of useful capital goods is funded by saving and investment.

Given the debates over the relative importance of capital and technology for economic growth (Harrod 1939; Domar 1946; Solow 1957; Easterly 2002, 25–69; Ritenour 2019, 2023, 134–43), another important yet underappreciated contribution in Mises’s Human Action is his very conception of capital. Mises (1998, 261) conceives of capital as a tool of economic calculation and defines it as the sum of the whole complex of goods destined for acquisition evaluated in money terms. By “destined for acquisition” he means used for production and sale of products. So capital is closely related to the stock of assets owned by the firm. However, that these goods are “evaluated in money terms” makes capital a monetary accounting fund embodied in capital goods. As such, this sum is the starting point of economic calculation. Capital, therefore, is neither merely a fund of investable money nor merely a stock of physical capital goods. As Mises (500) explains, “There is no such thing as an abstract or ideal capital that exists apart from concrete capital goods . . . [C]apital is always embodied in definite capital goods and is affected by everything that happens with regard to them. The value of an amount of capital is a derivative of the value of the capital goods in which it is embodied.” As the value of an entrepreneur’s capital goods goes, therefore, so goes his capital.

This helps explain why capital spending per se does not necessarily contribute to economic prosperity. As Mises (295) puts it, “Capital does not ‘beget’ profit.” Investment must be spent accumulating specific capital goods allocated toward the production of specific products that can be sold for a profit, because only then can the capital goods maintain or increase their capital value.

Technological Improvement

In addition to Mises’s emphasis on the division of labor and capital accumulation, he also has much to say about the relation of technology to economic expansion and development. He clearly understands that a key source of economic progress was technical improvement (9, 155, 164). It is important to note, also, that Mises knows better than most contemporary development economists that technology is not autonomous. For it to be operationally useful in production, it must be embodied in physical capital goods and production processes.

Mises understands, for example, that technology does not determine the entrepreneur’s production technique. Rather, it is his “supply of capital goods available at the moment that determines which of the many known technological methods of production will be employed” (493). Mises asserts that what holds back underdeveloped countries, such as Romania was in the 1800s, is not a lack of technical knowledge, but the quantity of capital goods needed to put the technology into practice. Indeed, because capital is scarce, there is always unused technology that could be applied toward the attainment of some end that must remain unmet because of a lack of necessary capital goods embodying that technology (526). When considering the speed with which a society enjoys the benefits from technical advance, he similarly notes that “what slows down technological improvement is not the imperfect convertibility of capital goods, but their scarcity. We are not rich enough to renounce the services which still utilizable capital goods could provide” (510).

Entrepreneurship

Finally, throughout Human Action is the recognition that the market division of labor, capital accumulation and utilization, and the productive use of technology all require wise entrepreneurial judgment in order for economic progress to result. Entrepreneurship, therefore, is a fourth contributor to economic prosperity. Indeed, all the activity in the market division of labor and capital structure must be coordinated by entrepreneurs.

Economic progress requires wise entrepreneurial judgments across many different margins. It entails decisions about what sort of goods will be demanded in the future, how many of said goods will be demanded, what will be the most profitable type of product, where it is best produced and supplied, and what the optimal scale of operation and the optimal time of availability are, given the above constraints. Entrepreneurs must make many judgments regarding capital investment as well: the optimal capital intensity of the production process, its desired durability, its specificity, and the quantity of capital goods in which to invest.

Likewise, the profitable use of technology in production necessarily requires entrepreneurial decision-making. Mises (106, 301–4, 345–46) notes that the very decision to use technology is entrepreneurial and that it is the entrepreneur who applies technology in production. This requires entrepreneurial judgment because there is no perfect information regarding technology (92–93). Which technology is appropriate depends on circumstances as perceived by the entrepreneur (504–5). Economic calculation, therefore, is just as vital for efficient utilization of technology as it is for the use of factors of production (207–9). Finally, specific actions regarding the magnitude and quality of specific research and development must also be decided upon.

Achieving economic progress is particularly challenging because the profit and loss process in our dynamic economic order is continual. No producer or society can rest on the laurels of past profits.

One of Mises’s great achievements is demonstrating that entrepreneurs must use economic calculation if they are to direct factors of production toward their most valued uses (201–32). Market prices allow entrepreneurs to make meaningful comparisons of social value between different consumer and producer goods because money prices are all enumerated in terms of the monetary unit. These comparisons are meaningful and socially beneficial because, in a free society, the objective prices are determined by the subjective preferences of buyers and sellers. When entrepreneurs reap a profit, therefore, they do so precisely by providing those goods that people value the most in the least costly manner.

These four sources of economic progress—the market division of labor, capital accumulation, technological advance, and entrepreneurship—all must work together synergistically for society to enjoy economic progress and the development of civilization. Expanding the market division of labor requires capital accumulation, and the multitude of decentralized specialized production must be coordinated by entrepreneurs for it to yield an increased quantity and quality of consumer goods people find helpful in serving their ends. Likewise, an extensive capital structure makes possible the market division of labor, and to foster economic progress, capital must be allocated in the right place at the right time. The use of technology in ever-more-specialized machines is also made possible by the division of labor (164), and, as we have seen, technology is only productive when embodied in existing capital goods, so it requires saving and investment to advance and is enhanced by the market division of labor.

Economic progress, therefore, is the happy consequence of a highly developed division of labor taking advantage of an increasing capital stock embodying appropriate technology that is wisely invested by entrepreneurs. This is the process of what Jesús Huerta de Soto (2009) calls “dynamic efficiency.” This outcome requires the social institutions of private property and sound money (Mises 1998, 264–66). Because the development of the division of labor is only possible via voluntary exchange, its extension will occur only in a society with institutions supporting voluntary trade. Voluntary exchange requires private property. To take advantage of the division of labor and benefit from the economic development that flows from it, members of society must have the right to property.

Likewise, Mises explains that for capitalists to accumulate capital, they must be secure in their property. If, for example, the state enforces confiscatory taxation, regulation of business, and price controls, capital accumulation is hindered (730–73, 802–7). Taxes reduce both the ability and the incentive to save and invest, while regulations and price controls direct capital away from their most highly valued ends.

The entrepreneur’s need for monetary market prices to calculate profit and loss also points to the necessity of private property and sound money. Only voluntary prices are manifestations of the subjective values of the buyers and sellers in society. Again, voluntary exchange requires private property. Without voluntary exchange there can be neither money nor market prices. Falsification of prices due to monetary inflation at best leads entrepreneurs astray; at worst it leaves them paralyzed (568–83). Without rational economic calculation, economic decision-makers have no way to know how to allocate factors wisely. Capital is consumed, and standards of living fall.

In short, in his great book Human Action, Mises lays down the solid foundation upon which sound economics must be built and applies true economic laws toward helping us understand the nature and process of economic prosperity. In so doing, he shows us that the free society—with its private property and sound money—is the vital environment enabling economic progress and thereby encouraging human flourishing.

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