The Influence and Significance of Human Action after 75 Years

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Human Action: Foundations for the Modern Austrian School

RANDALL G. HOLCOMBE

Human Action marks a turning point in the Austrian School and marks the transition from the old Austrian School to the modern Austrian School. There is a good chance that had Ludwig von Mises not published Human Action and taught his seminar at New York University (NYU) after World War II, the Austrian School would not have survived as a distinct school of thought. Human Action laid out the fundamental principles that differentiate the Austrian School from the post–World War II mainstream, and Mises’s NYU seminar produced the scholars that allowed the school to advance in the second half of the twentieth century.

To appreciate the significance of Mises’s Human Action requires some background on the development of economic analysis through the twentieth century, and on the growing division between the Austrian School and the mainstream. The apparent differences between the foundations of the Austrian School and the mainstream were minor in the early twentieth century; those differences became increasingly obvious in the second half of the twentieth century, not because the Austrian School had changed but because of significant changes in mainstream economic analysis. Israel Kirzner (1988, 2) notes that early twentieth-century economists had “a superficial, shared understanding of markets that submerged important distinctions that would become apparent only much later.” Human Action was instrumental in illustrating those differences.

A Brief History of the Old Austrian School

Much has been written about the evolution of the Austrian School, so there is no need to cover all the details here. Up through the 1930s, as Kirzner (1988) explains, there was not a sharp distinction between the Austrian School—based on the ideas of Carl Menger (1950), first published in 1871—and the mainstream of economics. Joseph Salerno (1999) offers a good background on Menger’s work and lasting influence. Mises and Friedrich von Hayek were the school’s most visible members in the first half of the twentieth century, but many others, including Joseph Schumpeter, Fritz Machlup, Frank A. Fetter, Knut Wicksell, and Philip Wicksteed, promoted ideas and used methods very consistent with those of Mises and Hayek. The Austrian School became more visible as an alternative to the mainstream in the 1930s for two reasons, neither of which rested heavily on methodological differences.

First, the Austrian business cycle theory, put forward in 1912 by Mises (1953) and extended by Hayek (1931, 1933), was the most prominent alternative to Keynesian macroeconomics, leading to what some, even in the twenty-first century, refer to as the Hayek-Keynes debate. But note that Hayek had published much of his work on the business cycle prior to Keynes’s (1936) publication of The General Theory. Hayek’s ideas were built on a methodological foundation very consistent with mainstream thought at the time, and it was Keynes’s ideas that made a radical departure from the mainstream.

The most notable departure in Keynes’s work and the Keynesian macroeconomics that followed it was that Keynes’s theory was built on economic aggregates—consumption, investment, government spending—that were not clearly connected to individual behavior. This lack of microeconomic foundations in Keynesian macroeconomics was well recognized within the mainstream, as Phelps et al. (1970) explains. The point is that it was Keynes who deviated from what was recognized as mainstream economic methodology. The followers of Keynes would not disagree.

The second, and perhaps more significant, factor that differentiated the Austrian School from the mainstream was the socialist calculation debate. The debate was initiated in 1922 by Mises (1981), who challenged the idea that a centrally planned economy could rationally allocate resources. The Austrian School’s increasingly distinct identity at the middle of the twentieth century was based on Mises’s claim to the contrary, which was supported by Hayek and other Austrians. Mainstream economists, to the extent that they engaged in this debate, explained the benefits of central economic planning, and claimed that Mises was wrong.

Those two areas of inquiry more clearly distinguished the Austrian School from the mainstream in the 1930s but nearly led to its demise in the 1940s. Keynesian macroeconomics had displaced Austrian business cycle theory and solidly established itself as mainstream macroeconomics. Meanwhile, most of the economics profession sided against the Austrian School in the socialist calculation debate. As the mainstream viewed it, the mid-twentieth-century division between the Austrian School and the mainstream was not based primarily on differences in their theoretical foundations, but on those policy-related conclusions.

In response to Mises’s claim that rational economic calculation is not possible without markets and market prices, critics offered theories to explain why Mises was wrong (Lange 1936, 1937; Lange and Taylor 1938; Lerner 1944). At the same time, as the Soviet Union grew in power, critics pointed to Soviet economic growth as evidence that central economic planning was working, providing concrete evidence that Mises’s claim that it could not work was wrong. The Austrian School had been pushed well outside the mainstream on this issue.

While the socialist calculation debate was, at least, a debate, the Austrian business cycle theory was not even a part of the discussion as Keynesian macroeconomics completely displaced all other theories of business fluctuations. By the 1940s, the Austrian School, primarily identified with the work of Mises and Hayek, was left behind as economic theory developed. Those who were identified as associated with the Austrian School passed away or drifted toward the mainstream. Hayek (1944, 1952, 1960), perhaps the most visible Austrian School economist in the 1940s, shifted his research interests in other directions. It is not much of an exaggeration to say that by 1950, Mises was the only remaining active member of the old Austrian School.

Human Action and the Transition to the Modern Austrian School

While there was not a huge gap in methodological foundations between the Austrian School and the mainstream in the first half of the twentieth century, that gap widened after the 1940s because of developments in mainstream economics. The ideas and methodology of the Austrian School remained based on the foundation that had been developed since the time of Adam Smith (1937), as Peter Boettke (2012; chap. 19) explains. In the second half of the twentieth century, it was mainstream economics that departed from the mainline tradition that preceded it.

The trajectory of mainstream economic theory was set by Paul Samuelson’s (1947) Foundations of Economic Analysis, which stands in contrast to Mises’s (1998) Human Action, published in 1949. The two books, published within a few years of each other, set the tone for the development of mainstream economic theory and Austrian economic theory.

Both books were similar in intent. They were designed as treatises, by which I mean books that begin with first principles and develop the foundations for the entire discipline. I deliberately put the word “foundations” in my title because just as Samuelson intended his book to lay the foundations of economic analysis for the future development of the discipline, as his title says, Mises also intended his book to lay the foundations for the discipline. While similar in intent, the two books have very different visions of those foundations.

As stated above, the Austrian School had essentially narrowed to one person, Mises, by the middle of the twentieth century. Mises began teaching his Austrian economics seminar at NYU in 1948. Human Action provided the methodological foundations for the seminar, and Mises’s students from that seminar were the beginning of the modern Austrian School. Most prominent among them were Murray Rothbard and Israel Kirzner, who developed a following and led the Austrian School into the twenty-first century.

Looking at the history of the Austrian School, it is not an overstatement to say that the foundations of the modern Austrian School all trace back to Human Action. There are other great works written by Austrian School scholars, but by the mid-twentieth century, the Austrian School—except for Mises—had vanished as Samuelson defined the foundations of economic analysis in mathematical terms and Keynesian economics provided the foundations for macroeconomics.

Mises was the guardian and promoter of the Austrian School’s ideas through his NYU seminar, and the students in that seminar went on to promote the ideas Mises was teaching. Rothbard and Kirzner both acknowledged Mises’s influence on their thinking, declared themselves to be students of Mises, and said that their work was building on and extending the ideas found in Human Action. Mises had other students who promoted his work, but Rothbard and Kirzner were the most influential. They, in turn, influenced a new generation of Austrian School scholars. After dwindling down to almost nothing at midcentury, the Austrian School’s influence grew throughout the second half of the twentieth century.

My Introduction to the Austrian School

To help illustrate the influence of Mises, and of Human Action, on the resurgence of the Austrian School in the second half of the twentieth century, let me draw on my own experience as a student and, later, professor. I majored in economics as an undergraduate at the University of Florida, enrolled from 1968 to 1972, and received a very mainstream economic education, with one prominent exception I will mention momentarily. I learned neoclassical microeconomic theory from C. E. Ferguson (1969), the most neoclassical of neoclassical economists. My macroeconomics was 100 percent Keynesian—IS-LM, multipliers—all aggregate analysis with no individual behavior, no human action. This was the standard for a university curriculum in economics at the time. I had no idea that there was an Austrian School of economics. Although I was assigned one short article by Hayek (1961), I was unaware of his other work, and the Austrian School was never discussed in any of my classes.

In my junior year I took a special topics course on public choice that used Buchanan and Tullock (1962) as one of its texts. Their approach to the analysis of government decision-making was very attractive—a good alternative to that offered by neoclassical economics. The mainstream approach was to identify market failures—reasons why the market might not allocate resources perfectly—and mathematically describe the conditions for optimal resource allocation. The government should then implement those optimal conditions.What Buchanan and Tullock explained was that those in government would not have sufficient information to implement those optimality conditions, and even if they did, government decision-makers would not have the incentive to do so.

Interested in studying with Buchanan and Tullock, I began graduate school in 1972 at Virginia Tech, where both were on the faculty. In an era when many mainstream economists viewed government interventions in the economy very favorably, Buchanan and Tullock both had reputations for favoring free markets and freedom more generally. They were classical liberals, and the brightest students who were attracted to the Virginia Tech graduate program were those who had similar ideas.

While I had never heard of the Austrian School prior to arriving at graduate school, many of my classmates were very familiar with the school and had read its major works. Although many faculty members were sympathetic to the school’s ideas, including both Buchanan and Tullock, my real introduction to the Austrian School came from my classmates. As Mises had intended, Human Action provided the foundations of Austrian economic analysis. Rothbard’s (2004) Man, Economy, and State (published in 1962) was intended to fill the same role and was required reading—required not by the faculty, but by my classmates. We were very excited when Israel Kirzner’s (1973) Competition and Entrepreneurship appeared during our graduate years.

Many Austrian School economists view public choice as an alternative to the Austrian School, but public choice in general and Buchanan (1964, 1969) in particular have a very Austrian approach to economics. As I see it, the Austrian School is a school of thought, and public choice is an area of inquiry, so they are not competing schools of thought at all. One can take an Austrian approach to public choice, just as one can take an Austrian approach to industrial organization, monetary theory, or any other area of inquiry. I say this in response to the possible comment “He’s not an Austrian economist; he’s a public choice economist.” The two are not incompatible.

Richard Wagner, another public choice economist very sympathetic to Austrian ideas, joined the Virginia Tech faculty while I was a student there, and he alerted me to a conference to be held on Austrian economics in June 1974, which I attended. The faculty were Murray Rothbard, Israel Kirzner, and Ludwig Lachmann. Little did I realize at the time that the conference, which was held in South Royalton, Vermont, would be cited as the beginning of a rebirth of the Austrian School. Many of the individuals who led the resurgence of the Austrian School in the last quarter of the twentieth century attended that conference. From Mises came Rothbard and Kirzner, and from Rothbard and Kirzner came a new generation of Austrian School scholars.

In 1982 I was a faculty member at Auburn University when Lew Rockwell founded the Mises Institute there. The faculty in the Auburn economics department were very sympathetic to the Austrian School. Roger Garrison, one of the people I first met at the 1974 South Royalton conference, deserves special mention, and perhaps was responsible for attracting Lew to Auburn. The Institute held seminars and workshops which provided the opportunity both to learn more and to do more Austrian-oriented research.

The preceding discussion has been an attempt to place Human Action within the context of its importance to the modern Austrian School, and within the context of the development of economic analysis more generally. My own experience was typical of economic education at the time. The significance of Human Action lies in the ideas it develops. A complete analysis of those ideas would require more pages than the original book. What follows is a discussion of some key ideas that have influenced my work and that lend insight into the remarkable economic progress that has occurred since the beginning of the Industrial Revolution.

Acting Man: The Ultimate Foundation

Many contemporary Austrian School scholars have made substantial contributions to the modern Austrian School, but those contributions all trace back to Human Action, in that the school advanced through the work of Mises’s NYU students, and their students. The ultimate foundation in Human Action is Mises’s discussion of acting man. Mises (1998, 18) says, “Human action is necessarily always rational. . . . The ultimate end of action is always the satisfaction of some desires of the acting man.” This stands in contrast to the neoclassical utility theory that makes assumptions about the way that individuals respond to the choices they face: the neoclassical theory of consumer choice gives no choices to the choosing individuals.

The neoclassical methodology is clearly explained by George Stigler and Gary Becker (1977). Economists assume that individuals have stable utility functions with certain properties, and when choices present themselves, individuals refer to their utility functions to make their choices. In this setting, choice is a reflex. If the same alternatives present themselves, individuals will make the same choices, and economic analysis takes place by examining how individuals respond to changes in relative prices and incomes. This, Friedman (1953) says, allows the theory to develop testable hypotheses. But it also eliminates any real choice from the neoclassical theory of consumer choice.

Mises (1998, 11) says, “Conscious or purposeful behavior is in sharp contrast to the unconscious behavior, i.e., the reflexes and involuntary responses of the body’s cells and nerves to stimuli.” But neoclassical utility theory, as explained by Stigler and Becker, depicts human action as just that type of reflex. In the same way that a person’s heart will involuntarily beat faster if the person accelerates from a walk to a run, people’s fixed and unchanging utility functions determine the choices they make. Within that neoclassical framework, behavior is deterministic. Mises begins with the recognition that people have free will.

Faced with the same circumstances, an individual may choose to do something different today than the individual did yesterday. In an uncertain world, rather than one of static equilibrium, people may take risks that outside observers are unable to understand. Mises (18–19) says, “Since nobody is in a position to substitute his own value judgment for those of the acting individual, it is vain to pass judgment on people’s aims and volitions. No man is qualified to declare what would make another man happier or less discontented.” Neoclassical utility theory creates a barrier to understanding innovative and entrepreneurial behavior (Holcombe 1989, chap. 9).

Human Action and Entrepreneurship

Mises’s theory of human action provides a foundation for understanding entrepreneurship and economic progress, something that has remained beyond the grasp of mainstream growth theory. One reason is that mainstream growth models depict growth as an equilibrium phenomenon, but it is not. A second reason is that growth theory focuses on income growth, but income will grow slowly if at all without the economic progress that brings with it new and improved goods and services.

The phenomenon is better described as progress rather than growth, because it rests on those entrepreneurial innovations that change the nature of the economy. Growth does not occur as an economy produces more of what it has produced before. Motor vehicles displace horse-drawn travel, jet aircraft displace railroads and steamships, and smart phones displace telegraphs. The reason market economies have grown so much since the beginning of the Industrial Revolution is that entrepreneurs have introduced innovations into the economy. That growth could not have occurred without the progress that brought with it new and improved goods.

Mainstream economic theory rests on a foundation of general equilibrium, and the general equilibrium framework requires the assumption that people make their economic choices with reference to stable and “well-behaved” utility functions. Under certain assumptions, the result is a unique, stable general equilibrium. One of the most remarkable economic phenomena in the history of the world, the sustained economic progress that has occurred since the beginning of the Industrial Revolution, cannot be understood in this framework. This progress is not an equilibrium phenomenon, and the neoclassical framework is inadequate for understanding it. Human Action provides a theoretical foundation for understanding economic progress.

Calling a state of general equilibrium the evenly rotating economy, Mises (1998, 249) observes, “Action is to make choices and to cope with an uncertain future. But in the evenly rotating economy there is no choosing and the future is not uncertain as it does not differ from the present known state.” This equilibrium approach leaves no room for the entrepreneurial innovation that generates economic growth. The neoclassical equilibrium growth path depicts income growth, not the progress that results from the introduction of new and improved goods into the economy.

Mises (255) says, “Entrepreneur means acting man in regard to the changes occurring in the data of the market.” The economy is always changing, and thus, Mises (253) adds, “The outcome of action is always uncertain. Action is always speculation.” Mises (11) says human action “is a person’s conscious adjustment to the state of the universe that determines his life.”

Mises’s depiction of human action contrasts sharply with the neoclassical view in which people refer to stable utility functions to determine what actions to take. Mises’s depiction of action incorporates the ability of people to be entrepreneurial, to vary their choices in attempts to discover ways of doing things that improve over what has been done in the past (Holcombe 1989, chap. 9). The contrast between Mises’s depiction of human action and neoclassical utility maximization lays the foundation for the remainder of Human Action, and for much of the follow-up research done by contributors to the Austrian School.

Entrepreneurship and Economic Progress

As mentioned above, the most significant phenomenon in economic history has been the sustained economic progress that has occurred in the few hundred years since the beginning of the Industrial Revolution. Much of my work in the Austrian tradition has attempted to extend the connection from human action to entrepreneurship that Mises made to understanding economic progress. Mises discusses at length the way that entrepreneurs adjust to ever-changing economic conditions, but without referencing the economic progress that accompanies those changing conditions.

This is true of the Austrian analysis of entrepreneurship more generally. Kirzner (1973) depicts entrepreneurship as the noticing of previously unnoticed profit opportunities, emphasizing the equilibrating effects of entrepreneurship but neglecting the direct causal relationship between entrepreneurship and economic progress. Mises lays the theoretical foundation, further developed by Kirzner (1973), that opens the door to extending his analysis of entrepreneurship to understand the remarkable economic progress the world has seen in the last several centuries.

The Austrian School has not completely neglected the role that entrepreneurship has played in producing progress. Schumpeter (1947) makes a direct connection between entrepreneurship and economic progress, noting the creative destruction that is inherent in a capitalist economy. New and improved goods and services, and more efficient production processes, displace the old. While Kirzner and Schumpeter both emphasized the role of entrepreneurship in an economy, there is an interesting contrast between them. Kirzner emphasized the equilibrating nature of entrepreneurship, while Schumpeter depicted entrepreneurship as disruptive and disequilibrating.

These activities of entrepreneurs are two sides of the same coin (Holcombe 1998, 2007). In both cases, entrepreneurs are seeking profits by looking for ways to combine resources in productive ways that create more value than the cost of the resources used in production. Entrepreneurial activity can disrupt and destabilize an existing market, as Schumpeter described, which opens the opportunity for additional entrepreneurial activity to respond to the disruption and restabilize the economy, as Kirzner described. My work in entrepreneurship starts with reconciling Schumpeter’s and Kirzner’s analyses of entrepreneurship (Holcombe 1998, 2007).

Schumpeter (1947, 82) observes that “the essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process. . . . Capitalism, then, is by nature a form or method of economic change and not only never is but never actually can be stationary.” Entrepreneurs are constantly introducing innovations into the economy that produce more value for consumers. If some firms are entrepreneurial, all must be, or they will be left behind by those that are. This is the creative destruction Schumpeter described as inherent in capitalism.

Mainstream economics, following Solow (1956), has focused on economic growth, which is measured by aggregate output or income. It depicts output, Q, as a function, f, of capital, K, and labor, L, so Q = f(K, L), notation that will be familiar to all economists. An issue with this formulation is that output could not grow as fast as it has without new and improved goods and services. The Q people consume today is not the same Q that they consumed in the past. Romer (1986) builds on that neoclassical framework to endogenize technological change, but innovation is more than technological advances: it is, as Kirzner (1973) notes, the discovery of previously unnoticed profit opportunities.

The neoclassical equilibrium approach to firm behavior depicts product differentiation as providing the advantage to consumers of a choice of similar but different products. That static view of product differentiation which appears in all standard microeconomic theory textbooks overlooks the most important aspect of product differentiation (Holcombe 2009). Firms do not differentiate their products to make them different; they differentiate their products to make them better. That is how they maintain and increase their customer base. Incremental improvements in products, along with some major innovations, are the engine of economic progress.

This cannot be understood within a model in which economic output is depicted as a homogeneous Q. Mises emphasizes that individuals are always acting within the context of an uncertain future. The continual changes that occur in the economy open profit opportunities. When markets are disrupted, the entrepreneurship described by Kirzner (1973) acts to equilibrate them. But many of those disruptions are the result of the entrepreneurial innovations described by Schumpeter (1947). The entrepreneurial activities of some create entrepreneurial opportunities for others.

One insight that follows from this line of reasoning is that the primary source of current entrepreneurial opportunities is past entrepreneurship. One innovation opens the opportunity for further innovations (Holcombe 2003). The discovery of unexploited profit opportunities does not use up entrepreneurial opportunities; it creates more. When the microprocessor was developed, it opened the opportunity for entrepreneurs to produce personal computers, which opened the opportunity to develop new operating systems for firms like Apple and Microsoft, which opened the opportunity to develop new navigation devices such as mice, touchpads, and touchscreens, along with the opportunity to create new computer programs. When institutions are designed to allow the market process to work, the entrepreneurship of some opens entrepreneurial opportunities for others (Holcombe 2013, 2021). One consequence is that some economies will be more entrepreneurial than others.

I have focused here on my own work on entrepreneurship to show how Mises’s foundations in Human Action have inspired me to advance the ideas of the Austrian School. While I am always happy to promote my own work (shouldn’t scholars always want to do that?), I am only one of a large and growing number of individuals pursuing economics in the Austrian tradition. The ideas presented in this section provide a brief example of the influence Mises has had, and continues to have, in the modern Austrian School.

Conclusion

The significance of Human Action can be seen by comparing it to Samuelson’s Foundations of Economic Analysis. Both were written in the late 1940s, and both were intended to provide foundations for economic analysis. While the mainstream followed Samuelson, Mises’s Human Action, coupled with his NYU seminar, kept the Austrian School alive. There are too many differences between the two books to list them all, but one big one, going back to Mises’s title, is the way they depict human action.

Mises was one of the greatest proponents of capitalism, and was beyond a doubt the leading critic of central economic planning. Human Action is oriented toward showing the advantages of market institutions and the economic problems that arise without them. But no book is going to be the last word on anything, and my thought was that the foundation Human Action provides can be built on to better understand economic progress, and to better appreciate the essential role that entrepreneurship plays in generating progress. The foundations in Mises (1998) open the door to these insights. The foundations in Samuelson (1947) close off that line of inquiry.

I have focused heavily on how Human Action has influenced me and laid a foundation for my work. Multiplying that by the thousands of others who have been similarly influenced reveals only a part of the book’s influence. Without Human Action, there is the real possibility that the Austrian School would not have survived into the twenty-first century.

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Holcombe (2020) gives an overview of the school’s history.

A good example is Samuelson (1973, 883). Published in the year Mises died, Paul Samuelson’s text says that while per capita income in the Soviet Union is half that of the United States, he forecasts that because of its faster economic growth rate due to its centrally planned economy, the Soviet Union should catch up to the United States in per capita income, perhaps as soon as 1990 and almost surely by 2010.

Keynesian macroeconomics deviated significantly from Keynes (1936) and was largely based on Hicks (1937), who interpreted Keynes in a static equilibrium framework.

See Bator (1958) for an example of the neoclassical economics to which the Austrian School offered an alternative.

See Buchanan (1975) for a discussion of this point.

Vaughn (2001) discusses the significance of that event.