Investigations into the Method of the Social Sciences

The Dogma of Self-Interest in Theoretical Economics and Its Position in Relation to the Theoretical Problems of the Latter

What is understood by the above “dogma” and the significance that is ascribed to it for the theory of economy.—The opinion that strict laws of economic phenomena are possible only under the erroneous assumption that people in their economic dealings are in reality guided merely by their well understood interest.—Line of argument by which the above opinion is refuted.—Inadequacy of this line of argument, as error, ignorance, external complsion, etc., in addition to public spirit, would exclude exact laws of economy, in case the line of argument in question were valid.—That the latter is based on a failure to recognize the nature of the exact orientation of theoretical research in general and of that in the field of economy in particular.—That the exact orientation of theoretical research by no means starts with the presupposition that economic humans would be actually guided only by their economic interests.—What the case really is in regard to the so-called dogma of self-interest in theoretical economics.

“Private egoism, self-interest, plays such an important role in the theory of economics, it has been brought into such an immediate and deeply radical connection with the method of obtaining laws of economy, it has exerted such a determinative effect on the whole position of our science” that we can pass over its relationship to the theoretical problems of our science here so much the less as, in our opinion, “the historical method of political economy stands in a very special relationship to the dogma of unalterable self-interest.”1

By the “dogma of self-interest” some economists understand the basic principle that the pursuit of private interest on the part of single economic individuals, uninfluenced by politico-economic government measures, must have as a consequence the highest degree of common welfare which a society can attain, considering its spatial and temporal conditions. However, we do not intend to deal here with this opinion, which is erroneous at least in its general form, for it has no immediate connection with those methodological questions which will occupy us in this section.

What claims our interest at this point is, rather, the thesis, known under the above designation, that humans truly are guided in their economic activity exclusively by consideration of their individual interests. This is a thesis which, as the representatives of the historical school of German economists assume, is placed like a basic axiom at the head of their systems of political economy by the adherents of the “unhistorical” schools of our science, at least. Its significance for the theoretical problems dealt with by us here may, meanwhile, be clear simply from the circumstance that on the part of the historical school the possibility of strict laws of economic phenomena and thus also of an economic science is thought of as dependent on its correctness. Or, with reference to the erroneousness of the above “dogma,” the possibility of a science of the “laws” of economy is simply denied and a special method, the historical method of dealing with our science, is demanded.

The line of argument of our historical economists in this case is, however, the following:

Man’s will is guided by innumerable motives in part really in contradiction with each other. Thereby, however, a strict regularity of human actions in general and of economy in particular is a priori out of the question. Only when we think of man as always being guided by the same motive, e.g., self-interest, in his economic actions, does the factor of arbitrariness appear to be out of the question, only then does each action appear to be strictly determined. Only with the above presupposition are laws of economy conceivable, accordingly, and with them also an economics in the sense of an exact science.

But now people in their actions are guided, to judge by experience, neither in general nor even in particular in their economic actions exclusively by a definite motive. For along with self-interest, which at most can be recognized as the mainspring of human economy, also public spirit, love of one’s fellow men, custom, feeling for justice, and other similar factors determine man’s economic actions. And the presupposition with which the (nonhistorical) economists of the Smith school start is accordingly false. But with the above presupposition there also collapses the basis for strict laws of economy independent of temporal and spatial conditions, and with that the basis for a science thereof, that is, a theoretical economics in the previously conceived sense of the word. The entire orientation of research thus characterized is therefore unempirical, one that violates truth. And only research purified of these erroneous presuppositions could attain results in the field of our science which correspond to the real phenomena of economy.

This is approximately the line of argument of Germany’s historical economists in fighting the “dogma of human self-interest.”2

Here we should like above all to point to a gap in the above line of argument which catches the eye of anyone to any extent familiar with psychological investigations. The circumstance that people are not guided exclusively by self-interest prohibits, in the above sense, the strict regularity of human action in general, and of economic action in particular—and thereby eliminates the possibility of a rigorous economic theory. But there is another factor, equally important, that does the same thing. I mean error, a factor which surely can be separated still less from human action than custom, public spirit, feeling for justice, and love of one’s fellow man can be separated from economy. Even if economic humans always and everywhere let themselves be guided exclusively by their self-interest, the strict regularity of economic phenomena would nonetheless have to be considered impossible because of the fact given by experience that in innumerable cases they are in error about their economic interest, or in ignorance of the economic state of affairs. Our historians are too considerate of their scholarly opponents. The presupposition of a strict regularity of economic phenomena, and with this of a theoretical economics in the multiple meaning of the word, is not only the dogma of ever-constant self-interest, but also the dogma of the “infallibility” and “omniscience” of humans in economic matters.

We are far from asserting that with the above dogmas the entirety of presuppositions of a rigorous theory of economic phenomena, in the sense in which our historians think of it, is already exhausted. Rather, it is clear to anyone not completely inexperienced in methodological investigations that they would have to be complemented by a series of other similar dogmas (in the realm of economic phenomena especially the dogma of complete freedom from external compulsion, among others). These are dogmas which, we have no doubt, could offer the representatives of the historical school just as rewarding as effortless a field of ingenious criticism. But precisely what has been said should suffice to point out what is most evident, what astonishing nonsense the greatest minds of all nations have been coming up with for thousands of years as they have sought for rigorous theories of social phenomena. In what a pitiable state of error humanity would still be today if the historical school of German economists had not opened its eyes.

To be sure, in contrast to such an epoch-making upheaval in the field of social sciences, the circumstance must appear somewhat strange that those errors with which scholars in the economic field are reproached are to be observed in a completely analogous way in all the remaining realms of theoretical research, but especially in the realm of research in nature. It is strange that accordingly a whole series of theoretical sciences becomes invalid and worthless upon closer examination, without even a suspicion of this having been aroused previously in the minds of our natural scientists.

For the most important and most basic of the theoretical natural sciences also suffer from the same weakness for which our historical economists reproach previous theories of social science. Chemistry and physics, too—no less, however, a series of other exact sciences like mechanics, mathematics, etc.—appear, when measured by the critical standard of our historians, contrary to reality, unempirical, and therefore in need of the same reform as theoretical economics.

Chemistry does not teach us “real concepts” of definite groups of concrete phenomena. Its elements and compounds are, rather, unempirical in their complete purity, they are not to be observed in nature uninfluenced by human art; indeed, to some extent, they cannot be prepared synthetically. Pure gold, pure hydrogen and oxygen, and their pure compounds are not given empirically, either per se, or in that ideally strict measure which the laws of chemistry presuppose. Chemistry operates with factors which are unempirical qualitatively and in certain respects quantitatively also. It furthermore does not deal with substances in the totality of their phenomenal form. It apprises us of their nature and laws, not in respect to all sides of their being, but only to a specific one. Chemistry, to use the language of our historical economists, starts with the dogma that the basic chemical substances and their compounds are empirically present in their complete purity, that ideally they are exactly measurable, that gold and oxygen in their real phenomenal form are exactly identical in all places and at all times. Moreover, it is concerned with only one single side of the real world, and its laws are accordingly, in contrast to the totality of the world of phenomena, based upon arbitrary assumptions and unempirical.

As we probably do not need to amplify any further, the same is true of physics, and in particular of mechanics and mathematics.

Pure mechanics starts in the case of its most important laws with the arbitrary and nonempirical assumption that bodies move in a vacuum, that their weights and their paths are measured exactly, that their centers of gravity are determined exactly, that the forces by which bodies are moved are known exactly and are constant, that no disturbing factors develop their activity; and thus—to use the language of our historians—it starts with a thousand other arbitrary, unempirical dogmas. And just like mathematics, whose unempirical presuppositions probably need not be pointed out particularly (think of the mathematical point, the mathematical line, the mathematical surface, etc.!), they, too, do not deal with the world of real pheenomena in its totality, but only with a single side of it. Also in this respect they are therefore, in contrast to “full empirical reality,” arbitrary and unempirical; they are lamentable confusions of the human mind!

And up to now no one has suspected all these false dogmas, until the historical school of German economists finally opened our eyes, in part with full awareness, in part with the instinct of genius. It did this without becoming aware of the full extent of the really epoch-making upheaval being effected in the realm of exact research. Truly, our historical economists can be rather proud of this achievement of theirs.

But back to the matter in all seriousness! The exact orientation of theoretical research in the realm of social phenomena—and only in respect to this can there properly be any question of the dogma of self-interest—has, as we have already set forth fully, the task “of reducing human phenomena to the expressions of the most original and the most general forces and impulses of human nature.” It has the task “of hereupon examining to what formations the free play of each individual basic propensity of human nature leads, uninfluenced by other factors (especially by error, by ignorance of the situation, and by external compulsion).” When we pursue this orientation of research, we attain to a set of social theories, each of which, to be sure, reveals to us only the understanding of a particular side of the phenomena of human activity. Accordingly, each abstracts from full empirical reality. But all, taken together, teach us to understand the ethical world in a fashion similar to that made possible by those theoretical sciences which result from comparable observation of nature.3

Among human efforts those which are aimed at the anticipation and provision of material (economic) needs are by far the most common and most important. In the same way, among human impulses that which impels each individual to strive for his well being is by far the most common and most powerful. A theory which would teach us to what crystallizations of human activity and what forms of human phenomena action oriented to the provision of material needs leads, on the assumption of the free play of that powerful economic impulse, uninfluenced by other impulses and other considerations (particularly error or ignorance); a theory, especially, which would teach us what quantitative effects would be produced by a definite quantity of the influence in question: such a theory simply must provide us with a certain understanding. It cannot provide understanding of human phenomena in their totality or of a concrete portion thereof, but it can provide understanding of one of the most important sides of human life. “The exact theory of political economy” is a theory of this kind, a theory which teaches us to follow and understand in an exact way the manifestations of human self-interest in the efforts of economic humans aimed at the provision of their material needs. It is thus a theory which does not have the task of teaching us to understand generally and in their totality social phenomena or even human phenomena, indeed not even those social phenomena which are commonly called “economic.” It has only the task of affording us the understanding of a special side of human life, to be sure, the most important, the economic. On the other hand the understanding of the remaining sides of it could only be attained by other theories which would make us aware of the formations of human life from the point of view of the remaining propensities (e.g., from the point of view of public spirit, of the strict sway of the ideal of justice, etc.).

The great theoreticians in the realm of ethical phenomena have from the beginning started out with these methodological points of view. With this point of view Plato and Aristotle also approached the task of constructing theories of social phenomena. With this point of view, finally, the great founder of our science also wrote his work on the wealth of nations, but along with it a theory of moral sentiments, in which he made public spirit as well as self-interest a pivotal point in his work, which was so epoch-making for political economy.

If now we return to the so-called “dogma” of human self-interest, which, in the view of the historical school of German economists, is supposed to form such a disturbing contrast to “full empirical reality,” there is scarcely need of any further discussion for us to recognize this view as a misunderstanding of justified methodological outlooks which guided the great founders of the ethical sciences in their scholarly activity. No more than pure mechanics denies the existence of air-filled spaces, of friction, etc.; no more than pure mathematics denies the existence of real bodies, surfaces, and lines which deviate from the mathematical; no more than pure chemistry denies the influence of physical factors in the formation of real phenomena, or pure physics the influence of chemical factors, although each of these sciences considers only one side of the real world and abstracts from all the rest—no more than these does the economist assert that humans are actually guided only by self-interest or else are infallible and omniscient. He does not, because he makes the formations of social life the object of his research from the point of view of the free play of human self-interest uninfluenced by secondary considerations, by error, or ignorance. The dogma of human self-interest in the conception of our historical political economists is a misunderstanding.

Aristotle and Hugo Grotius were certainly not in doubt that other factors contributed to the formation of states beside the impulse for socializing or for community. Hobbes was certainly not in ignorance of the fact that the conflict of interests of separate individuals was not the sole mover of social formations, just as Spinoza knew that the impulse of self-preservation was not their sole mover. And Helvetius, Mandeville, and A. Smith knew just as well as any adherent of the historical school of German economics that self-interest does not exclusively influence the phenomena of human life. If the last of these had only written his own theory of public spirit! What distinguishes him and his school from our historians is the fact that he neither confused the history of economy with its theory nor even followed one-sidedly that orientation of research which I designated above with the expression empirical-realistic. Nor, finally, did he become a victim of the misunderstanding of seeing in theoretical investigations conducted from the point of view of the free play of human self-interest uninfluenced by other powers the acknowledgement of the “dogma” of human self-interest as the only actual mainspring of human actions. And I do not doubt that German economics also, as soon as its representatives become fully aware of the misunderstanding I am dealing with, will again assume the orientation of research discussed here, which is thoroughly justified and indispensable for the understanding of economic phenomena, even if it has long neglected it sadly, and it will also in turn contribute its share to the development of this orientation. The highly unsatisfactory state of exact research in the realm of economic phenomena is a powerful challenge to the German economists, too, to leave the wrong path which isolates them. It is a challenge to them to apply their strength again to the great problem of developing an exact theory of economics along with the effort to establish realistic knowledge in the field of economy and especially along with the effort to interpret economic phenomena historically.

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4 K. Knies, Die Politische Oekonomie vom Standpunkte der geschichtlichen Methode (1853), p. 147.

5 Cf. Schmoller, Ueber einige Grundfragen (Jena, 1875), p. 42.

6 See p. 61.

• 1Aside from these conceptual elaborations which I have suggested, and which, I conceive, might well achieve utility because of the suggestion they so easily carry that Menger’s problems were general problems of social science transcending the specifically economic sphere, I should like at this point to make two comments about the whole matter of ignorance, on which Menger touched only very partially if interestingly. First, then, it should be quite clear by now that Menger did in fact and at least touch on ignorance as a problem in economy and society. The economic agents who lay the initial foundations of the institution of money, in Menger’s representation, are plainly unaware that they are doing so. The indirection by which the institution is built up and the intermediacy involved in its building are not planned. A general blueprint of the institution is not aboriginally in anyone’s “mind.” No structure is deliberately built, with indirection, intermediacy, and “attractiveness of intermediates” purposively set up so that some agents “manipulate” others (however “benevolently”) into making the institution. Ignorance that the building is indeed going up is initially universal. Menger was aware that there are situations in which ignorance (ignorance, that is, at least, of outcomes—such as the money institution—toward which action undertaken is due to lead) works more “effectively” toward certain ends than would knowledge of and planning toward those same ends. And his insight has been exploited, as by Hayek. (It is clear, incidentally, that the insight is susceptible of indiscriminate exploitation in favor of rather uncritical laissez-faire biases.) But just when or under what circumstances has ignorance been functional in the past or is it functional in the present? It is not enough to illustrate by adducing particular cases where ignorance has been or is functional. We need a theory of ignorance in economy and society that will render a scheme of analysis enabling us to do more than illustrate the functional or dysfunctional character of ignorance in particular circumstances; that will, ideally, by way of example, allow us to say, given certain specific kinds of activity, whether ignorance or knowledge of prospective outcomes is likely to be functional—ignorance or knowledge on whose part, in what measure, in what mixture, and so on. A host of problems is suggested hereby which I shall not even mention. We are very far indeed, at least as yet, from a developed theory of the kind I suggest. And it would be merely silly to “criticize” Menger for not achieving such a theory. But this may again help to suggest that his questionings had even broader significance than he knew.
• 2The second comment on ignorance I should like to make is that the entire set of notions bearing on “ignorance”—and, for that matter, on “subconscious wisdom,” and the like—needs careful rescrutiny. It is clear that when, in the vein of organic social theory, someone asserts, let us say, that some action based on traditional modes of acting is both “ignorant” and “wise,” an interesting and significant perspective is suggested. This may be roughly represented as follows. As actors pursue their interest they apply such knowledge germane to the solution of their problems as they can discover. The knowledge becomes built into their activity. Its original background in problem-solving is often forgotten, and the behavior founded on knowledge is then passed on from one generation to another simply as normative. That is to say, one must, or is required to, do such and so, and either no explanation is needed or a perfectly adventitious “explanation” is afforded. As bits of “wisdom” are built into heritable biological modes of functioning, so bits of wisdom are analogously represented as built into social institutions. Ignorance and knowledge become mixed or compounded. Hayek again has said some very pertinent things about this mixture or compounding, though he does not so label it, and he has properly stressed that “the result of the experimentation of many generations may embody more experience than any one man possesses”; that under civilization “the individual benefits from more knowledge than he is aware of”; that in view of this heritage of knowledge, built into the actions of individuals even if they themselves do not know that it is, the idea that “all useful institutions” must of necessity be “deliberate contrivances” becomes untenable. Actors frequently do “better than they know” merely because they “know” better than they are aware of knowing. But the temptation to weave paradoxes around this kind of insight should be allowed only under careful control. All of this interesting matter, as I suggest, needs careful review. What is the precise value of organic analogies in these premises? Is it genuinely fruitful for social science purposes to construe the term “information” in a very broad sense and allow that both organisms and societies “store” it? What, if any, differentiations is it useful to make in regard to both the “storing” process and the “information”? The critical stance that Menger assumed eighty years ago toward the naïvetés of then current organic theories should certainly encourage us today to beware of facile metaphors, while of course we may remain open to significant efforts at generalizations that bind the organic and the social.
• 3Menger’s sketch of organic theory, sketch though it be, is suggestive in still other directions than those I have indicated. Brief allusion to two I have not referred to thus far may be allowed. At page 152, again in connection with the origin of money, Menger makes the following observation: “The problem which science has to solve here consists in the explanation of a social phenomenon, of a homogeneous way of acting on the part of the members of a community for which public motives are recognizable, but for which in the concrete case individual motives are hard to discern.” Individual motives, on the line of economic self-interest, do not involve envisaging an institution which “serves the common welfare.” Inevitably, the paradox that Mandeville among others had stressed is hereby suggested. Private economic “lusts” or “vices” lead to public “virtues.” In referring to Mandeville’s paradox, Weber had aptly written of “jene Kraft, ‘die stets das Böse will und stets das Gute schafft.’ ” Menger’s individual agents, too, act on economic appetites, but unwittingly create the “good” institution of money. This is another of the matters that it is easy to believe Menger might have treated in detail in the comprehensive treatise he never completed.
• 4There are of course numerous problems for a democracy posed by analysis of the role of ignorance in economic and social life, problems that cannot be touched upon here.
• 5Ibid., pp. 62, 22, 21.
• 6Op. cit., p. 33. Social theory is also well acquainted with the paradox in which there appears rather that power that constantly seeks the “good” and constantly achieves the “bad.” A fine example is provided in Robert K. Merton’s Science, Technology and Society in Seventeenth Century England, Osiris 4 (Bruges: Saint Catherine Press, Ltd., 1938), pp. 360–632.