The Influence and Significance of Human Action after 75 Years

2

How Human Action Shaped My Teaching and Research Career

THOMAS J. DILORENZO

I began my graduate studies in economics at the Virginia Polytechnic Institute and State University in the fall of 1976 (VPI changed its name to Virginia Tech once it got a better football team). The Center for Study of Public Choice was located there, and I looked forward to studying under James M. Buchanan, Gordon Tullock, and the other public choice scholars. The department was predominantly Chicago School oriented in general, with Buchanan and Tullock both being University of Chicago graduates (Buchanan in economics, Tullock in law).

Buchanan was a fellow traveler of the Austrian School, having published two impressive books on subjective cost theory—Cost and Choice (Buchanan 1999) and What Should Economists Do? (Buchanan 1979)—and a number of articles as well. Tullock was not known as an Austrian economist, but he frequently boasted that reading Human Action was what made him an economist. Because of the trial lawyer in him, he always enjoyed instigating a good debate or argument, and so he often added that “anyone who needs more than that to understand economics is stupid!”

Buchanan’s former University of Virginia student Richard Wagner, who was on the VPI faculty, was much more of an Austrian and was assigned to teach the first graduate course in microeconomics in the fall of 1976. He used two textbooks and a long reading list of academic journal articles, including Austrian School readings. The two textbooks were Human Action and Milton Friedman’s (2007) Price Theory, which was being used in the Chicago graduate program at the time. One of the final exam questions was to compare the methodologies of the study of economics in the two books.

The use of Human Action and exam questions like that in the first microeconomics course spawned a war between Buchanan and the center and their supporters in the economics department, and the imperious game theorist/mathematical economics contingent. The latter apparently wanted graduate students to spend endless hours solving mathematical puzzles as opposed to reading great economic literature like Human Action. To make matters worse from their perspective, the graduate program, which was essentially the work of Buchanan, included three courses in the history of economic thought, taught in my first year by the great Professor Edwin G. West.

There were two weekly seminars with invited economists visiting VPI, one by the Center for Study of Public Choice and the other by the economics department. The departmental seminars were a combination of public choice–type speakers and math-econ speakers. One of the math-econ speakers made a big impression on me at the time. He was a distinguished Princeton University mathematical economist who filled several blackboards up with equations with a model of the hamburger market. When Gordon Tullock said (paraphrasing), “But professor, this isn’t anything at all like the real hamburger market,” the Princeton economist’s response was (paraphrasing): “I’m not interested in the real hamburger market; I’m interested in my model.”

That, in a nutshell, was to me a crystal clear explanation of the uselessness of that approach to the study of economics, if it can even be called a study of economics. It was this conflict between the two factions that eventually led to the center leaving VPI and moving to George Mason University, where I was on the economics faculty by that time.

The mathematical economists at VPI prevailed, turned the department into a department of game theorists, and had so few students interested in graduate studies in game theory in Blacksburg, Virginia, that the PhD program was abolished by the university. I have found this intolerant, imperious, and closed-minded attitude among the “quantitative economists,” with their sneering critiques of economic literature—including literature about the history of their own discipline—to be pervasive during my forty-one-year academic career as a university economics professor. I suppose the reason for this is that they never really considered economics to be their true discipline, but rather game theory/mathematics.

This, of course, is great news for the Austrian School, where anyone in the world can do what Gordon Tullock did and become his own economist by reading Human Action! The University of Michigan students who spontaneously began chanting when Ron Paul showed up there in 2012 to campaign for the Republican nomination were not chanting “Game theory! Game theory!” They were chanting “End the Fed! End the Fed!” because they had read some of the works of Austrian economists, probably Rothbard’s (2024) What Has Government Done to Our Money?

I thought of Professor Wagner’s microeconomics course as by far the best course I took in that first year. His classroom lectures on the substance of Human Action and other Austrian literature were so fascinating to me that I couldn’t wait for the next class (and got the highest grade on the midterm!). Little did I know that such teaching would never occur again in the graduate program at VPI after that year.

As just one example of the inspiring brilliance of Human Action, consider the substance of chapter 15, “The Market.” In a mere sixty-six pages you learn of the spontaneous order of markets and the invisible hand theorem. Then comes the explanation of how freedom of exchange exemplifies the mutual cooperation of markets. The role of private property and of free-market prices is then explained.

The myth of the “mixed economy” comes next. Yes, we have many socialist industries operated by all levels of government, but the core of the economy is still based on capitalism and free-market pricing. The importance of capital accumulation as the starting point for economic calculation is introduced, as are the crucial roles of income, savings, and capital accumulation.

Just getting started, Mises then explains the economics of the failures of socialism, still in chapter 15! “Economics is the theory of all human action,” he then declares, and devotes the next five hundred pages to demonstrating that fact.

The role of consumer sovereignty is explained in one of the most memorable passages in Human Action, where Mises explains that it is not the bankers, plant managers, and business executives who decide what gets produced but the consumer, whom he describes as hardhearted and downright cruel when it comes to dropping one product for a slightly superior substitute that crops up.

No “mainstream” textbook says what comes next, that government, contrary to the market, is all about compulsion and coercion. Politicians decide for you what you supposedly want, then force you to pay for it with threats of fines, imprisonment, or worse.

Catallactic competition is perhaps the key to chapter 15, for it describes the Austrian view of competition as a dynamic, rivalrous, ongoing process of entrepreneurial discovery and has nothing to do with the Alice-in-Wonderland theory of “perfect” competition. In perfect competition there is no competition, as Friedrich von Hayek famously said.

Nor will you ever run across a discussion of the role of freedom in society in any “mainstream” economics text, especially Mises’s (1998, 280) statement that in the totalitarian socialist countries of his day the only real freedom was the freedom to commit suicide. Rereading that passage reminded me of stories the late Yuri Maltsev told me about how some of his friends back in the Soviet Union literally drank themselves to death at an early age, effectively committing suicide, because they saw no future, no progress, and no hope for a better life under socialism, and the only thing they really enjoyed was drinking.

In a passage that could get some college professors fired on the spot today, Mises (285–86) then sings the praises of the inequality of wealth and income based on the division of labor, entrepreneurship, saving habits, pay according to merit, work ethic, and myriad other natural economic causes. Then, instead of deploying a blur of equations about formulas for profit maximization, Mises clearly explains the role of the profit and loss system of free-market capitalism, something that everyone should understand in order to understand the colossal destructiveness of government bailouts, such as the hundreds of billions of dollars in bailouts to the big banks during the Great Recession of 2008. Such bailouts announced that bank profits are to be private, but losses are to be socialized and borne by the taxpayers one way or another.

If your typical mainstream economics textbook even mentions entrepreneurship, it is usually in a few paragraphs or maybe part of a page, along with a picture of Joseph Schumpeter and his slogan about the “creative destruction” of competition. Aside from the fact that the slogan is dead wrong about competition being “destructive” to society, it is pathetic that this all-important topic—the substance of which explains how markets really work—is largely ignored. Mises here introduces the topic with fifteen dense pages and then continues the discussion all throughout the remaining five hundred pages.

We’re not finished yet. Chapter 15 will also teach you why the words “bureaucracy” and “bureaucrat” have such negative connotations. It’s not because government bureaucrats are necessarily bad people, but because there is such a dramatic difference between profit management and bureaucratic management. Finally, you also learn the case for free trade and against protectionism. All in that sixty-six pages. You could write similar explanations of all the economic lessons learned in each of the other thirty-eight chapters of Human Action.

The “Mainstream”

My second semester of graduate microeconomics was a different world, using the standard quantitative microeconomics textbook of the day: Microeconomic Theory: A Mathematical Approach, by James Henderson and Richard Quandt (1980), with the latter having the perfect surname for a mathematical economist. Henderson and Quandt, as it was known, seemed simple minded, sometimes plain wrong, and void of economic intuition or what many call “the economic way of thinking.” It was more like an engineering school exercise than an economics book, and the same can be said of its successors in today’s textbook market, only even more so.

“The basic problem” addressed in this book, said the authors, was not explaining how and why economics is a theory of all human action but “teaching . . . economics in mathematical terms.” Why use plain English when you can use mathematical notation (or hieroglyphics) instead? “Math is the language of economics,” announces Nobel laureate economist Thomas Sargent today on his personal website (https://www.tomsargent.com/math_courses.html), where he advises prospective economics graduate students to essentially earn a math degree before even thinking of applying to graduate school in the discipline of economics.

The entrepreneur was mentioned in Henderson and Quandt, but in an odd way: the entrepreneur is “owner and manager,” whose only function is to “transform inputs into output.” No discussion of entrepreneurial alertness, speculation, promotion, arbitrage, or anything else. And the only “entrepreneurs,” by definition, were sole proprietors who are “owner and manager” at the same time. That rules out any and all entrepreneurial behavior in any other type of corporate setting, by definition. Elon Musk is not entrepreneurial by that definition—contrary to reality—nor would Steve Jobs have been, or Henry Ford or John D. Rockefeller, for that matter.

In order to transform the historic meaning of competition as dynamic, rivalrous behavior into a system of equilibrium conditions, the theory of perfect competition was invented, with its bizarre assumptions of perfection meaning homogeneous commodities, identical consumers, “numerous” firms in each industry, omniscience or “perfect information,” and zero-opportunity-cost entry into and exit from an industry. Any deviations from these assumptions, intoned Henderson and Quandt, mean a market “imperfection.” The usual recommendation was for perfect politicians and bureaucrats to then correct these imperfections, for “monopolistic elements” might then be present, which would necessitate what the authors called “appropriate” taxing and subsidizing.

There was no discussion of the role of time preference in Henderson and Quandt, who defined interest as merely the cost of borrowing or the income from lending. They also claimed that through the magic of modern mathematics it was possible to compile all of “society’s” preferences into one big “social welfare function” to represent all of society’s (“or a dictator’s,” they wrote) preferences.

As one example of how truly misleading this approach to the study of economics has been, consider the statement in Henderson and Quandt that taxes and subsidies may be appropriate to eliminate deviations from perfect competition. This notion became a stock part of the “market failure” chapters in mainstream microeconomics textbooks for decades, with many of them using the example of apple orchards and beekeepers as a source of market failure in need of taxes or subsidies for market correction. Bees help to pollinate the apple orchards at the right time of year, the argument went, but there is no mechanism to ensure that beekeepers will have their hives in the vicinity of the orchards so as to achieve that result. Therefore, there is an underproduction of both apples and honey since the apple blossoms feed the bees. There is a reciprocal positive externality, if you will, but no way to make it happen because of the ignorance of beekeepers and apple orchard owners about all of that uncollected profit.

Until Professor Steven Cheung of the University of Washington came along, that is. In an article entitled “The Fable of the Bees” published in the Journal of Law and Economics in 1973, Professor Cheung (1973) reported that for generations, very detailed contracts existed between apple orchard owners and beekeepers to address the “market failure problem” that, it turns out, was actually no problem at all. The contracts were so detailed that some even stipulated that two weeks’ warning would be given to the beekeepers before pesticides were to be sprayed on the apple trees.

The apple orchard owners and beekeepers of Washington State did not need a Nobel Prize–winning MIT mathematical economist to tell them how to make money selling apples and honey after all. There have since been many other scholarly articles documenting the falsehood of such “market failure” fables—fables that were all premised on a faulty and frankly absurd theory of competition.

Reading Human Action, you are inevitably impressed by the enormous depth of Mises’s knowledge, not only of economic theory and the history of economic thought but also of psychology, philosophy, political philosophy, political economy, critiques of the inappropriate use of mathematics, and more. The mathematical economists like Henderson and Quandt seemed like mental midgets (I mean size-challenged persons) by comparison.

Human Action was my gateway drug to Austrian economics. Although I was familiar with some of the other Austrian economists, such as Hayek and Israel Kirzner, from reading The Freeman as an undergraduate, I had not read any of their scholarly work. It was Human Action that motivated me to expand my education in the Austrian School, and so I did.

Early Applications

My early academic research was shaped by Austrian School and public choice economics. The whole edifice of antitrust law and economics seemed counterintuitive to me in light of the Austrian view of competition as a dynamic, rivalrous process of entrepreneurial discovery. So when even Chicago School economists like George Stigler, who were so critical of “regulatory capture,” said that the one exception—the one type of government regulation that is truly in the public inter-est—is antitrust regulation, I smelled a rat.

My suspicions were proven correct by Dominick Armentano’s (1990) outstanding 1983 book Antitrust and Monopoly: Anatomy of a Policy Failure. In it he documented that in the fifty-five most famous federal antitrust cases up to that time, in each and every instance the businesses sued by the government for violating the antitrust laws were dropping prices, expanding production, inventing and marketing new products, increasing product quality, or some combination thereof. They were the most innovative and competitive, in other words, and for that they were prosecuted to the detriment of their customers but to the benefit of their less efficient competitors.

But the Chicago School regulatory critics clung to their theory that there was still a golden moment of antitrust, around 1890, that justified the Sherman Antitrust Act. I proved even that to be a falsehood in a 1985 article in the International Review of Law and Economics entitled “The Origins of Antitrust: An Interest-Group Perspective” (DiLorenzo 1985). In that article I showed that all of the industries accused of “monopolization” to justify the 1890 Sherman Act had in fact been cutting their costs and prices for decades, expanding production, and inventing myriad new products, and were by far the most dynamic and competitive industries in the US at the time. Antitrust was always a protectionist racket.

In a 1988 article in Economic Inquiry, Jack High and I wrote of how every academic economist in America was opposed to antitrust regulation in principle in 1890 because they all thought of competition as the Austrians always have, and therefore concluded that antitrust regulation was inherently incompatible with competition (DiLorenzo and High 1988). We also argued that once the perfect competition model was more widely accepted—by the 1930s—more and more economists were in favor of antitrust. But the economists of 1890 saw the effects of the merger wave of the late 1880s—greater production, more products, lower prices for years and years—and were not taken in by any theories of “perfection.” Then there is the comment by George Stigler (1982) that economists embraced antitrust regulation once they learned that they could make considerably more than the minimum wage as antitrust consultants.

Thanks to my understanding of competition in the Austrian tradition, I was also suspicious of the “natural monopoly” story about how public-spirited politicians created government-mandated monopolies in the late nineteenth and early twentieth centuries to protect economically defenseless Americans from rapacious “natural” monopolists in the public utilities industries. Such regulation promised the best of both worlds: The advantages of economies of scale would be maintained, and benevolent and public-spirited politicians would set prices at competitive levels. Maybe it’s just my personal quirkiness, but I thought that mandating monopolies in the name of protecting consumers from monopolies sounded, well, crazy.

In “The Myth of Natural Monopoly,” I showed that the standard story of one “large” firm using economies of scale to monopolize electric power, water supply, telephone, and other utilities industries simply never happened and was always just a theory concocted by statist economists to justify state control of those industries (DiLorenzo 1996). It was government-mandated monopoly in these industries that created—guess what?—monopoly power over hapless consumers for the benefit of powerful special corporate interests and their political benefactors. When utility monopoly began, it was a loot-sharing scheme between the government grantees of monopoly power and the governments themselves, who shared in the monopoly loot by being paid a contractual percentage of gross revenues every year as a form of hidden taxation—hidden in utility bills.

A big part of the public choice research agenda during my VPI days was on the economics of rent seeking. An early example was lobbying for protectionist tariffs, with the act of lobbying designated as an economic “waste” or “social cost” since the opportunity cost of that activity would be trying to earn money the old-fashioned way instead—through product improvement and/or cost and price reduction or innovation.

That was all well and good, but in their own act of rent seeking, some of the public choice scholars attempted to widen the scope of rent seeking to include such competitive, free-market activities as advertising, product differentiation, and research and development. In “The Domain of Rent-Seeking Behavior: Private or Public Choice?” published in the International Review of Law and Economics, I explained why, in light of the Austrian theory of competition, these were all normal, competitive activities and should not be labeled as a wasteful “social cost” (DiLorenzo 1984). I later published a second article on this subject in the Journal of Institutional and Theoretical Economics (DiLorenzo 1988).

Then, when my old professor and George Mason colleague James Buchanan won the Nobel Prize in 1986, Chuck Baird, the editor of the Review of Austrian Economics, asked me to write an article for the journal about Buchanan’s connection to the Austrian School, which I did. In “The Subjectivist Roots of James Buchanan’s Economics,” I explained his contributions to subjective cost theory, as discussed above, and how they influenced the work that he was most known for—in public finance. I also criticized him for abandoning his subjective cost theory background in some of his articles, especially one in which he argued for the abolition of inheritance, one of his lifelong pet peeves. I concluded that his best work was inspired by Austrian-based subjective cost theory and that some of his worst was when he abandoned that tradition (DiLorenzo 1990).

These are a few examples of my research that was inspired by Austrian economics. I was also inspired by Mises’s comments in Human Action on the study of history.

Mises on the Study of History

“A mercantilist or neo-mercantilist must necessarily be at variance with an economist,” Mises wrote in Human Action; also “Subjective economics produces historical works very different from those based on mercantilist doctrines” (Mises 1998, 53). Such comments are what convinced me to write The Real Lincoln (DiLorenzo 2003) and Hamilton’s Curse (DiLorenzo 2008). Having been a Civil War history buff, I began studying Lincoln’s economic policy ideas in the late 1990s to see if there might be a way to combine my hobby of Civil War history with my profession of economics. After attending a number of Civil War history lectures at the Smithsonian Institution in Washington, DC, featuring all the Ivy League bigshot scholars in the field, I began asking them what readings I could pursue about Lincoln’s economics. Several of them recommended Lincoln and the Economics of the American Dream by Gabor Borrit (1978).

The book’s economic commentary was grade-schoolish, saying such things as that Lincoln supported protectionist tariffs because, being so big hearted, he wanted the common man to have a chance to become wealthy and prosperous the way he had become wealthy and prosperous. The implication was that “prosperity” would be the result of protectionist tariffs, central banking, and corporate welfare, the three legs of the Lincoln/Republican Party of 1861 political platform, things that Lincoln had spent the previous twenty-eight years of his political career advocating. He was a mercantilist, through and through, as any student of economics should immediately recognize. But not one student of American history, even the most prominent in the academic history profession, apparently. I ended up writing three books about Lincoln the mercantilist.

Alexander Hamilton is the real father of crony capitalism, or mercantilism, in America, labeling the combination of protectionism, central banking, and corporate welfare “the American System.” It was in reality the rotten, corrupt, impoverishing system of British mercantilism in drag—British mercantilism without the British. I was motivated to write Hamilton’s Curse in response to a silly book by John Steele Gordon entitled Hamilton’s Blessing. Hamilton famously announced that a large public debt would be a blessing because it would tie the moneyed class that would purchase the government bonds to the government and help guarantee that all of Hamilton’s planned tax increases would prevail. The moneyed class would want to ensure that there was enough money in the treasury to pay the principle and interest on their bonds, according to the Machiavellian Hamilton, and would therefore be a powerful political force for bigger government. Understanding subjectivist economics enables you to see through several centuries of political fog regarding a figure like Hamilton.

The study of history is not just a recording of facts, Mises (1998, 53) wrote: “History can never be studied without presuppositions, and . . . nonhistorical branches of knowledge [like economics] must determine the establishment of historical facts” and their meaning. Austrian economics can be a lens through which many important historical events are studied. Thus, wrote Mises, “changes in the teachings of the nonhistorical sciences consequently must involve a rewriting of history.”

The discussion of interventionism in Human Action also informed my research and writing of How Capitalism Saved America (DiLorenzo 2004), in which I discuss numerous episodes in history where government interventionism created calamity after calamity, after which a greater degree of economic freedom came to the rescue, thereby “saving” America and Americans from at least some of the follies of the country’s “only native criminal class,” as H. L. Mencken called them—namely, politicians.

References

Armentano, Dominick T. 1990. Antitrust and Monopoly: Anatomy of a Policy Failure. 2nd ed. Oakland, CA: Independent Institute.

Boritt, G. S. 1978. Lincoln and the Economics of the American Dream. Memphis: Memphis State University Press.

Buchanan, James M. 1979. What Should Economists Do? Indianapolis: Liberty Fund.

———. 1999. Cost and Choice: An Inquiry in Economic Theory. Indianapolis: Liberty Fund.

Cheung, Steven N. S. 1973. “The Fable of the Bees: An Economic Investigation.” Journal of Law and Economics 16, no. 1 (April): 11–33. https://doi.org/10.1086/466753.

DiLorenzo, Thomas J. 1984. “The Domain of Rent-Seeking Behavior: Private or Public Choice?” International Review of Law and Economics 2, no. 4 (December): 185–97. https://doi.org/10.1016/0144-8188(84)90005-X.

———. 1985. “The Origins of Antitrust: An Interest-Group Perspective.” International Review of Law and Economics 5, no. 1 (June): 73–90. https://doi.org/10.1016/0144-8188(85)90019-5.

———. 1988. “Property Rights, Information Costs, and the Economics of Rent Seeking.” Journal of Institutional and Theoretical Economics 144, no. 2 (April): 318–32.

———. 1990. “The Subjectivist Roots of James Buchanan’s Economics.” Review of Austrian Economics 4, no. 1 (December): 180–95. https://doi.org/10.1007/978-94-017-3454-7_6.

———. 1996. “The Myth of Natural Monopoly.” Review of Austrian Economics 9, no. 2 (September): 43–58.

———. 2003. The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War. New York: Three Rivers Press.

———. 2004. How Capitalism Saved America: The Untold Story of Our Country, from the Pilgrims to the Present. New York: Three Rivers Press.

———. 2008. Hamilton’s Curse: How Jefferson’s Archenemy Betrayed the American Revolution—and What It Means for Americans Today. New York: Three Rivers Press.

DiLorenzo, Thomas J., and Jack C. High. 1988. “Antitrust and Competition, Historically Considered.” Economic Inquiry 26, no. 3 (July): 423–35. https://doi.org/10.1111/j.1465-7295.1988.tb01505.x.

Friedman, Milton. 2007. Price Theory. London: Routledge.

Henderson, James, and Richard Quandt. 1980. Microeconomic Theory: A Mathematical Approach. New York: McGraw-Hill.

Mises, Ludwig von. 1998. Human Action: A Treatise on Economics. Scholar’s ed. Auburn, AL: Ludwig von Mises Institute. https://mises.org/library/book/human-action.

Rothbard, Murray N. 2024. What Has Government Done to Our Money? 6th ed. Auburn, AL: Mises Institute. https://mises.org/library/book/what-has-government-done-our-money.

Stigler, George J. 1982. “The Economists and the Problem of Monopoly.” In “Papers and Proceedings of the Ninety-Fourth Annual Meeting of the American Economic Association.” Special issue, American Economic Review 72, no 2 (May): 1–11. https://www.jstor.org/stable/1802294.