The Influence and Significance of Human Action after 75 Years

9

Dualism and Calculation: What Mises Taught Me about Economics and Capitalism

ROBERT P. MURPHY *

Mark Twain reputedly said, “When I was a boy of fourteen, my father was so ignorant I could hardly stand to have the old man around. But when I got to be twenty-one, I was astonished at how much the old man had learned in seven years.” I have had a similar experience with Mises’s Human Action, but with a higher baseline. When I first read it as a senior in high school, I thought it was an amazing work. But each time I reread it over the ensuing decades, I was astonished to discover how much more Mises had (seemingly) learned in the interim, not just in economics, but in philosophy, physics, and even mathematics.

In this essay I focus on two key lessons that I have taken from Human Action which I did not fully appreciate in my early readings of the great book. Of course, Mises’s exposition remained the same throughout, but my own understanding of the underlying issues has deepened over the years. I am now in a position to fully appreciate the significance Mises attached to the two items—to wit: the methodological dualism necessary in economic science and the role of economic calculation in market economies.

Methodological Dualism

To understand Mises’s position on methodological dualism, we must first remind ourselves of his overall framework. Indeed, when I first obtained his book in high school, I wondered, “Why is it called Human Action? Why not Economics or How the Market Works?”

In the very first sentence of the book, published in 1949, Mises explains that economics is “the youngest of all sciences” (Mises 1998, 1). This new science “conveyed knowledge which could be regarded neither as logic, mathematics, psychology, physics, nor biology.” This new science ushered in a profound transformation in the study of society:

The discovery of the inescapable interdependence of market phenomena overthrew [the old normative approach]. Bewildered, people had to face a new view of society. They learned with stupefaction that there is another aspect from which human action might be viewed than that of good and bad, of fair and unfair, of just and unjust. In the course of social events there prevails a regularity of phenomena to which man must adjust his action if he wishes to succeed. It is futile to approach social facts with the attitude of a censor who approves or disapproves from the point of view of quite arbitrary standards and subjective judgments of value. One must study the laws of human action and social cooperation as the physicist studies the laws of nature. Human action and social cooperation seen as the object of a science of given relations, no longer as a normative discipline of things that ought to be—this was a revolution of tremendous consequences for knowledge and philosophy as well as for social action. (2)

Beyond the revolution in the discovery of economics itself was the internal revolution famously dubbed the Marginal Revolution, dating to the independent discoveries in the early 1870s (albeit with different styles of exposition) by Carl Menger, Léon Walras, and William Stanley Jevons of what we now call “subjective marginal utility theory.” This theoretical revolution not only overturned the classical cost, or objective, theory of value, but it expanded the frontiers of the science:

For a long time men failed to realize that the transition from the classical theory of value to the subjective theory of value was much more than the substitution of a more satisfactory theory of market exchange for a less satisfactory one. The general theory of choice and preference goes far beyond the horizon which encompassed the scope of economic problems as circumscribed by the economists from Cantillon, Hume, and Adam Smith down to John Stuart Mill. It is much more than merely a theory of the “economic side” of human endeavors and of man’s striving for commodities and an improvement in his material well-being. It is the science of every kind of human action. Choosing determines all human decisions. In making his choice man chooses not only between various material things and services. All human values are offered for option. All ends and all means, both material and ideal issues, the sublime and the base, the noble and the ignoble, are ranged in a single row and subjected to a decision which picks out one thing and sets aside another. Nothing that men aim at or want to avoid remains outside of this arrangement into a unique scale of gradation and preference. The modern theory of value widens the scientific horizon and enlarges the field of economic studies. Out of the political economy of the classical school emerges the general theory of human action, praxeology. The economic or catallactic problems are embedded in a more general science, and can no longer be severed from this connection. No treatment of economic problems proper can avoid starting from acts of choice; economics becomes a part, although the hitherto best elaborated part, of a more universal science, praxeology. (Mises 1998, 3; emphasis added)

Thus we see why Mises titled his book Human Action, even though it was (as the subtitle informs us) a treatise on economics. When the subjective, marginal utility revolution transformed the economists’ explanation for market prices, the new architecture was a general theory of choice per se, not simply “economical” choices. And it was this new framing—of economics’ being a subset of praxeology—that crystallized the need for methodological dualism.

To see why, let us first quote Mises’s elaboration on what “human action” entails: “Human action is purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful response to stimuli and to the conditions of its environment, is a person’s conscious adjustment to the state of the universe that determines his life” (11). Although the definition of “human action” as “purposeful behavior” is straightforward, there is a wealth of significance packed into this two-word combo. I can illustrate with a trivial example: Suppose you, the reader, see my hand move to a bottle of water, my fingers curl around it, my arm move to bring the bottle to my lips, and my head tilt back as the water flows into my open mouth.

You might explain such observations by saying, “He was thirsty.” Notice how many assumptions are packed into that statement. In the first place, to talk in this manner reflects the observer’s decision to invoke a subjective will that somehow adds to our understanding of an event. This is not at all how the natural scientist proceeds—she doesn’t “explain” a waterfall by saying, “The ground was thirsty.”

Beyond this, to describe my scenario with the statement “He was thirsty” also suggests that this subjective will—which has the desire to quench thirst—also has a theory of cause and effect about how to quench thirst. In other words, the observer of a man drinking water assumes that the man understands why this means will satisfy his desired end.

Third, the explanation assumes that the intangible, psychic will has the ability to influence the material world. In our specific example, saying “He was thirsty” only makes sense if we assume that I somehow control my fingers, arm, and mouth.

To reiterate, there is an obvious sense in which these remarks are trivial. Yet the underlying issues are incredibly profound, even though in our everyday life we take them for granted. Removed from our current context, if I were to announce, “I can control matter with my mind!” I would be dismissed as an unscientific charlatan. But if you watch my hand move a bottle of water to my lips and observe, “He was thirsty,” you are implicitly assuming that my mind can control matter, at least to some extent.

Two Separate Realms

Mises highlighted the qualitative gulf between the subjective world of the mind and objective world of matter: “Reason and experience show us two separate realms: the external world of physical, chemical, and physiological phenomena and the internal world of thought, feeling, valuation, and purposeful action. No bridge connects—as far as we can see today—these two spheres. Identical external events result sometimes in different human responses, and different external events produce sometimes the same human response. We do not know why” (Mises 1998, 18).

After this humbling admission—which holds to this day, despite the progress that has been made in neuroscience—Mises declared: “In the face of this state of affairs we cannot help withholding judgment on the essential statements of monism and materialism. We may or may not believe that the natural sciences will succeed one day in explaining the production of definite ideas, judgments of value, and actions in the same way in which they explain the production of a chemical compound as the necessary and unavoidable outcome of a certain combination of elements. In the meantime we are bound to acquiesce in a methodological dualism” (18; emphasis added).

In the quotation above I have stressed the word “methodological.” Mises was not taking a stand on whether humans “really” have disembodied egos (not to speak of souls) that somehow interact with our physical bodies, or whether consciousness is merely a “user illusion” that will one day be dropped from the toolkit of the social scientist. Mises was simply arguing that for the present, the economist must proceed as if these are two distinct realms, because in the arena of market phenomena, the analyst cannot possibly proceed by reference to blind, mechanical processes devoid of subjective minds. An engineer or an architect could make many interesting statements concerning the laws of mechanics in reference to the New York Stock Exchange, but the content of the exchange’s activities can only be described by first postulating the existence of other minds.

Hans Hoppe on Mises’s Contribution

In his Economic Science and the Austrian Method, Hans Hoppe credited Mises’s action axiom as the fulfillment of Kantian epistemology:

It is true, as Kant says, that true synthetic a priori propositions are grounded in self-evident axioms and that these axioms have to be understood by reflection upon ourselves rather than being in any meaningful sense “observable.” Yet we have to go one step further. We must recognize that such necessary truths are not simply categories of our mind, but that our mind is one of acting persons. Our mental categories have to be understood as ultimately grounded in categories of action. And as soon as this is recognized, all idealistic suggestions immediately disappear.

Instead, an epistemology claiming the existence of true, synthetic a priori propositions becomes a realistic epistemology. Since it is understood as ultimately grounded in categories of action, the gulf between the mental and the real, outside, physical world is bridged. As categories of action, they must be mental things as much as they are characteristics of reality: For it is through actions that the mind and reality make contact. (Hoppe 2007, 20; emphasis added)

It would perhaps be too bold to conclude that Mises had solved the mind-body problem, but as Hoppe’s remarks underscore, his praxeological framework at the very least shines a spotlight on the issue and links the two realms in its very essence.

Economic Calculation Underpins Civilization

It is well known that Mises (starting with a 1920 article written in German) launched a withering critique of socialism that culminated in a full-blown debate including Hayek and Lionel Robbins versus socialist theorists. To understand the problems facing a socialist central planner is the flip side of appreciating the role that calculation plays in solving that problem in a market economy.

So if we want to understand why so few economists grasped the problems with socialism as Mises did, we can simply link it to their failure to understand money prices. In other words, it is no coincidence that Mises (2009), in part 2, chapters 1 and 2, of his 1912 Theory of Money and Credit, gave a satisfactory explanation of the valuation of money, and then went on to pen his critique of socialism in 1920 (as discussed more fully below). Only an economist who understood at a deep level the connection between subjective preferences and objective money prices would be in a position to articulate the fundamental weakness of socialism.

Mises himself recognized the connection between the various strands of his thought when he wrote, referring to the German-language predecessor to Human Action: “My Nationalökonomie finally afforded me the opportunity to present the problems of economic calculation in their full significance. . . . Only in the explanations offered in the third part of my Nationalökonomie did my theory of money achieve completion. Thus I had accomplished the project that had presented itself to me thirty-five years earlier. I had merged the theory of indirect exchange with that of direct exchange into a coherent system of human action” (Mises 2013, 111–12).

Specifically, economic calculation allows an entrepreneur to evaluate whether an operation—be it an entire firm or merely one of its divisions or even product lines—is creating outputs that are more valuable than the resources it uses. In order to have a “common denominator” the inputs and outputs must all trade against a common item—namely, money.

To drive home just how much significance he attached to his concept of “economic calculation,” Mises argued that civilization itself rests upon it: “Our civilization is inseparably linked with our methods of economic calculation. It would perish if we were to abandon this most precious intellectual tool of acting. Goethe was right in calling bookkeeping by double entry ‘one of the finest inventions of the human mind’” (Mises 1998, 231).

Pushing more deeply, we can see the qualitative hurdle that calculation overcomes:

It was cognition of what is going on within a world in which action is computable and calculable that led men to elaboration of the sciences of praxeology and economics. Economics is essentially a theory of that scope of action in which calculation is applied or can be applied if certain conditions are realized. No other distinction is of greater significance, both for human life and for the study of human action, than that between calculable action and noncalculable action. Modern civilization is above all characterized by the fact that it has elaborated a method which makes the use of arithmetic possible in a broad field of activities. This is what people have in mind when attributing to it the—not very expedient and often misleading—epithet of rationality. (200; emphasis added)

To reiterate, only an economist who had started from “ground zero” and considered the implications of subjective value theory—of an individual preferring a to b—and then built upon that foundation, could be in a position to fully appreciate the subtle yet crucial service that money prices perform.

Misesian Calculation versus Hayekian Knowledge

To amplify the interpretation of the previous section, we can observe that even within the ranks of self-described Austrian economists, the Misesian emphasis on calculation can be misunderstood. An excellent illustration is the conflation of the (Misesian) “calculation problem” of socialism with the (Hayekian) “knowledge problem.” Although the two concepts are related, and each is an important flaw in socialism, it is important not to lump them together and argue that Mises and Hayek “were saying the same thing” in their arguments with the socialist theorists.

Specifically, the Hayekian knowledge problem flows from the inability of central planners to access the dispersed expertise among the members of society, including not just technical experts but also the “man-on-the-ground,” localized knowledge specific to an individual factory or warehouse. Moreover, some types of knowledge are tacit—such as knowing how to ride a bicycle—and cannot be articulated into words and conveyed to a central committee.

Yet as important as Hayek’s insights are in order to understand the practical impossibility of rational resource allocation with political central planning, such considerations are not what Mises had in mind with his own case. For the sake of argument, Mises stipulated at the start of his demonstration that the hypothetical socialist planners would not only be committed to the commonweal, but also have access to all of the relevant engineering and other facts needed to determine what combinations of goods and services were technologically possible to produce, given the available resources. Thus, for the sake of argument, Mises assumed away the problem of corruption and any Hayekian knowledge problems:

The director wants to build a house. Now, there are many methods that can be resorted to. Each of them offers, from the point of view of the director, certain advantages and disadvantages with regard to the utilization of the future building, and results in a different duration of the building’s serviceableness; each of them requires other expenditures of building materials and labor and absorbs other periods of production. Which method should the director choose? He cannot reduce to a common denominator the items of various materials and various kinds of labor to be expended. Therefore he cannot compare them. He cannot attach either to the waiting time (period of production) or to the duration of serviceableness a definite numerical expression. In short, he cannot, in comparing costs to be expended and gains to be earned, resort to any arithmetical operation. The plans of his architects enumerate a vast multiplicity of various items in kind; they refer to the physical and chemical qualities of various materials and to the physical productivity of various machines, tools, and procedures. But all their statements remain unrelated to each other. There is no means of establishing any connection between them. (Mises 1998, 694; emphasis added)

As the quotation above makes clear, Mises assumed that the various technological trade-offs would be known to the director. Nonetheless, Mises argued that because they would lack private property in the factors of production, the socialist rulers would have no genuine market prices to guide their evaluation of possible plans. Even ex post, the planners would have no way of objectively assessing whether their orders to every member of society had involved an efficient use of resources. We can see this clearly in his reaction to the “trial and error” suggested solution for socialist planning:

The entrepreneurs and capitalists do not have advance assurance about whether their plans are the most appropriate solution for the allocation of factors of production to the various branches of industry. It is only later experience that shows them after the event whether they were right or wrong in their enterprises and investments. The method they apply is the method of trial and error. Why, say some socialists, should not the socialist director resort to the same method? The method of trial and error is applicable in all cases in which the correct solution is recognizable as such by unmistakable marks not dependent on the method of trial and error itself. If a man mislays his wallet, he may hunt for it in various places. If he finds it, he recognizes it as his property; there is no doubt about the success of the method of trial and error applied; he has solved his problem. . . .

Profit tells the entrepreneur that the consumers approve of his ventures; loss, that they disapprove. The problem of socialist economic calculation is precisely this: that in the absence of market prices for the factors of production, a computation of profit or loss is not feasible. (700–701)

Even within the historical socialist calculation debate itself, the opponents of Mises and Hayek certainly noted the distinction in their respective positions. After Mises’s (1935) initial salvo (in a 1920 article in German), H. D. Dickinson in 1933 argued that Mises had overstepped. In principle the central planners could devise an efficient use of society’s resources, given the production functions, consumer preferences, and available stocks of labor, land, etc. After all, mathematical economics had shown how such elements could be used to determine a competitive equilibrium in a model of a market economy, and so there was no logical roadblock to central planners using the same approach for a socialist economy. As Dickinson (1933, 238) put it, “It is the object of this article to refute the first of Mises’s criticisms of socialism and to show that a rational pricing of instrumental goods is at least theoretically possible in a socialistic economy.”

In response, Hayek (1935, 207) conceded that this “mathematical solution” from Dickinson (and other socialist economists) “is not an impossibility in the sense that it is logically contradictory.” Yet Hayek still thought the appeal to a system of simultaneous equations in a Walrasian framework wasn’t answering Mises’s challenge, because “what is practically relevant here is not the formal structure of this system, but the nature and amount of concrete information required if a numerical solution is to be attempted and the magnitude of the task which this numerical solution must involve in any modern community” (208).

As I say, the socialist opponents were quick to interpret Hayek’s response as a partial retreat to a more defensible position. In his 1936 rebuttal, Oskar Lange first paid mock homage to Mises (saying the Central Planning Board in a socialist state should erect a statue of the Austrian) for putting his finger on a legitimate issue which previous socialist writers had failed to appreciate. However, Lange thought that the strong version of Mises’s challenge had been met. When considering Hayek’s response to Dickinson and other proponents of the mathematical solution, Lange wrote: “Thus Professor Hayek and Professor Robbins [in their emphasis on the staggering number of equations necessary to actually implement the mathematical solution] have given up the essential point of Professor Mises’ position and retreated to a second line of defence. On principle, they admit, the problem is soluble, but it is to be doubted whether in a socialist community it can be solved by a simple method of trial and error, as it is solved in the capitalist economy” (Lange 1936, 56; emphasis in original). Although I am of course sympathetic to the Mises/Hayek/ Robbins side in this grand debate, I can find no fault in Lange’s commentary on this specific point. He is correct; Hayek was retreating from the strong version of Mises’s original claim.

To distinguish between Misesian calculation and Hayekian knowledge, I like the framing Joe Salerno gave in a 1994 reply to Leland Yeager, who himself had argued that if Hayek’s knowledge problems could be solved, then a central planner could rely on a supercomputer to efficiently allocate resources, just as economists do in their models of a market economy. Salerno responded:

As [Salerno, Murray Rothbard, and Jeffrey Herbener] have repeatedly emphasized, the Misesian demonstration of the logical impossibility of socialism is not predicated on the central planners’ incapacity to perform tasks that can conceivably be carried out by individual human minds (e.g., discovery of factual and technical knowledge, mathematical computations, managerial monitoring, and prevention of labor shirking, etc.). Rather, it is concerned with the lack of a genuinely competitive and social market process in which each and every kind of scarce resource receives an objective and quantitative price appraisement in terms of a common denominator reflecting its relative importance in serving (anticipated) consumer preferences. This social appraisement process of the market transforms the substantially qualitative knowledge about economic conditions acquired individually and independently by competing entrepreneurs, including their estimates of the incommensurable subjective valuations of individual consumers for the whole array of final goods, into an integrated system of objective exchange ratios for the myriads of original and intermediate factors of production. It is the elements of this coordinated structure of monetary price appraisements for resources in conjunction with appraised future prices of consumer goods which serve as the data in the entrepreneurial profit computations that must underlie a rational allocation of resources. (Salerno 1994, 112)

After quoting from some of his previous work, Salerno stated: “It is obvious from the foregoing passages that I conceive appraisement as neither knowledge nor arithmetic, but as something new under the sun, introduced into the world only when the institutional prerequisites of a market economy are fulfilled. The social process of appraising thus transcends the purely individual operations of knowing and computing at the same time that it complements them in creating the indispensable conditions for rational choosing by entrepreneurs and resource owners cooperating in the division of labor” (Salerno 1994, 113–14; emphasis added).

In my view, Salerno has faithfully upheld the Misesian perspective on calculation. The institution of private property in the factors of production, along with the widespread use of a money commodity, allowed for the emergence of something qualitatively new, and not a “mere” repackaging of preexisting information. In my 2018 article on the topic, I motivated the point with the following analogy:

When we use a thermometer to measure the temperature inside an oven in a commercial bakery, the device transmits information to us. There really is an objective “fact of the matter” of the kinetic energy of the air molecules bouncing around inside the oven, and the thermometer is an imperfect way of translating that data to us, in a form our minds can comprehend and incorporate into our decisions. But there’s no doubt that the oven really has a temperature, regardless of our measuring it with a thermometer.

In contrast, when we ask, “How much economic value does the oven possess?” then that is a fundamentally different question. This isn’t an objective fact that is embedded in the arrangement of matter. The question takes into account all of the subjective preferences of everyone on the planet, as well as their expectations about the possibility of transforming matter into different forms. It is a mind-boggling question, in fact, that can only be answered by setting up a market economy and then making informed guesses as to what people would be willing to pay for the oven. (Murphy 2018)

Conclusion

In summary, among other contributions we can credit Mises in Human Action for bridging two pairs of seemingly isolated concepts. First, in the context of the action axiom and Mises’s advocacy of methodological dualism, Mises bridged subjective teleology and mechanical operations, or what can be distilled as the mind-body problem.

Second, in the context of his critique of socialism and his emphasis on the importance of monetary calculation, Mises showed how the myriad ordinal preference rankings of individuals can be amalgamated into objective social appraisals for which cardinal numbers—and hence arithmetical operations—are applicable.

To this day, most economists aren’t even aware of such nuanced distinctions. Not only was Mises aware of the subtle problems involved, but in Human Action he showed the economist how to solve them.

References

Dickinson, H. D. 1933. “Price Formation in a Socialist Commonwealth.” Economic Journal 43, no. 170 (June): 237–50. https://doi.org/10.2307/2224464.

Hayek, F. A. 1935. “The Present State of the Debate.” In Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism by N. G. Pierson, Ludwig von Mises, Georg Halm, and Enrico Barone, edited by F. A. Hayek, 201–43. London: Routledge and Kegan Paul. https://mises.org/library/book/collectivist-economic-planning.

Hoppe, Hans-Hermann. 2007. Economic Science and the Austrian Method. Auburn, AL: Ludwig von Mises Institute. https://mises.org/library/economic-science-and-austrian-method.

Lange, Oskar. 1936. “On the Economic Theory of Socialism: Part One.” Review of Economic Studies 4, no. 1 (October): 53–71. https://doi.org/10.2307/2967660.

Mises, Ludwig von. 1935. “Economic Calculation in the Socialist Commonwealth.” In Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism by N. G. Pierson, Ludwig von Mises, Georg Halm, and Enrico Barone, edited by F. A. Hayek, 87–130. London: Routledge and Kegan Paul. https://mises.org/library/book/collectivist-economic-planning.

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

———. 2009. The Theory of Money and Credit. Translated by [H]. E. Batson. Auburn, AL: Mises Institute. https://mises.org/library/theory-money-and-credit.

———. 2013. Notes and Recollections; with, The Historical Setting of the Austrian School of Economics. Edited by Bettina Bien Greaves. Indianapolis: Liberty Fund. https://oll.libertyfund.org/titles/mises-notes-and-recollections-with-the-historical-setting-of-the-austrian-school-of-economics-2013.

Murphy, Robert P. 2006. “Cantor’s Diagonal Argument: An Extension to the Socialist Calculation Debate.” Quarterly Journal of Austrian Economics 9, no. 2 (Summer): 3–11. https://mises.org/quarterly-journal-austrian-economics/cantors-diagonal-argument-extension-socialist-calculation-debate.

———. 2018. “Socialism: The Calculation Problem Is Not the Knowledge Problem.” Mises Wire, March 16, 2018. https://mises.org/mises-wire/socialism-calculation-problem-not-knowledge-problem.

———. 2023. “Bob Murphy Explains His Favorite Hans Hoppe Work.” The Bob Murphy Show, episode 257, January 11, 2023. Podcast, MP3 audio, 43:40. https://www.bobmurphyshow.com/episodes/ep-257-bob-murphy-explains-his-favorite-hans-hoppe-work/.

Salerno, Joseph. 1994. “Reply to Leland B. Yeager on ‘Mises and Hayek on Calculation and Knowledge.’” Review of Austrian Economics 7, no. 2 (September): 111–25. https://doi.org/10.1007/BF01101945.

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* I would like to thank David Gordon and Joseph Salerno for providing citations.

As I explain in Murphy (2023), I myself did not fully appreciate the philosophical significance of the action axiom until reading Hoppe’s analysis.

Mises’s (1935) critique of socialism was translated into English and published in Hayek’s (1935) collection.

The material in this section draws upon my online article “Socialism: The Calculation Problem Is Not the Knowledge Problem” (Murphy 2018), which itself relies heavily on my journal article “Cantor’s Diagonal Argument: An Extension of the Socialist Calculation Debate” (Murphy 2006).