Epistemological Problems of Economics

1. The Basic Concept of Action and its Categorial Conditions

The starting point of our reasoning is not behavior, but action, or, as it is redundantly designated, rational action. Human action is conscious behavior on the part of a human being. Conceptually it can be sharply and clearly distinguished from unconscious activity, even though in some cases it is perhaps not easy to determine whether given behavior is to be assigned to one or the other category.

As thinking and acting men, we grasp the concept of action. In grasping this concept we simultaneously grasp the closely correlated concepts of value, wealth, exchange, price, and cost. They are all necessarily implied in the concept of action, and together with them the concepts of valuing, scale of value and importance, scarcity and abundance, advantage and disadvantage, success, profit, and loss. The logical unfolding of all these concepts and categories in systematic derivation from the fundamental category of action and the demonstration of the necessary relations among them constitutes the first task of our science. The part that deals with the elementary theory of value and price serves as the starting point in its exposition. There can be no doubt whatever concerning the aprioristic character of these disciplines.

The most general prerequisite of action is a state of dissatisfaction, on the one hand, and, on the other, the possibility of removing or alleviating it by taking action. (Perfect satisfaction and its concomitant, the absence of any stimulus to change and action, belong properly to the concept of a perfect being. This, however, is beyond the power of the human mind to conceive. A perfect being would not act.) Only this most general condition is necessarily implied in the concept of action. The other categorial conditions of action are independent of the basic concept; they are not necessary prerequisites of concrete action. Whether or not they are present in a particular case can be shown by experience only. But where they are present, the action necessarily falls under definite laws that flow from the categorial determinacy of these further conditions.

It is an empirical fact that man grows old and dies and that therefore he cannot be indifferent to the passage of time. That this has been man’s experience thus far without exception, that we do not have the slightest evidence to the contrary, and that scarcely any other experience points more obviously to its foundation in a law of nature?all this in no way changes its empirical character. The fact that the passage of time is one of the conditions under which action takes place is established empirically and not a priori. We can without contradiction conceive of action on the part of immortal beings who would never age. But in so far as we take into consideration the action of men who are not indifferent to the passage of time and who therefore economize time because it is important to them whether they attain a desired end sooner or later, we must attribute to their action everything that necessarily follows from the categorial nature of time. The empirical character of our knowledge that the passage of time is a condition of any given action in no way affects the aprioristic character of the conclusions that necessarily follow from the introduction of the category of time. Whatever follows necessarily from empirical knowledge?e.g., the propositions of the agio theory of interest?lies outside the scope of empiricism.

Whether the exchange of economic goods (in the broadest sense, which also includes services) occurs directly, as in barter, or indirectly, through a medium of exchange, can be established only empirically. However, where and in so far as media of exchange are employed, all the propositions that are essentially valid with regard to indirect exchange must hold true. Everything asserted by the quantity theory of money, the theory of the relation between the quantity of money and interest, the theory of fiduciary media, and the circulation-credit theory of the business cycle, then becomes inseparably connected with action. All these theorems would still be meaningful even if there had never been any indirect exchange; only their practical significance for our action and for the science that explains it would then have to be appraised differently. However, the heuristic importance of experience for the analysis of action is not to be disregarded. Perhaps if there had never been indirect exchange, we would not have been able to conceive of it as a possible form of action and to study it in all its ramifications. But this in no way alters the aprioristic character of our science.

These considerations enable us to assess critically the thesis that all or most of the doctrines of economics hold only for a limited period of history and that, consequently, theorems whose validity is thus limited historically or geographically should replace, or at least supplement, those of the universally valid theory. All the propositions established by the universally valid theory hold to the extent that the conditions that they presuppose and precisely delimit are given. Where these conditions are present, the propositions hold without exception. This means that these propositions concern action as such; that is, that they presuppose only the existence of a state of dissatisfaction, on the one hand, and the recognized possibility, on the other, of relieving this dissatisfaction by conscious behavior, and that, therefore, the elementary laws of value are valid without exception for all human action. When an isolated person acts, his action occurs in accordance with the laws of value. Where, in addition, goods of higher order are introduced into action, all the laws of the theory of imputation are valid. Where indirect exchange takes place, all the laws of monetary theory are valid. Where fiduciary media are created, all the laws of the theory of fiduciary media (the theory of credit) are valid. There would be no point in expressing this fact by saying that the doctrines of the theory of money are true only in those periods of history in which indirect exchange takes place.

However, the case is entirely different with the thesis of those who would subordinate theory to history. What they maintain is that propositions derived from the universally valid theory are not applicable to historical periods in which the conditions presupposed by the theory are present. They assert, for example, that the laws of price determination of one epoch are different from those of another. They declare that the propositions of the theory of prices, as developed by subjective economics, are true only in a free economy, but that they no longer have any validity in the age of the hampered market, cartels, and government intervention.

In fact, the theory of prices expounds the principles governing the formation of monopoly prices as well as of competitive prices. It demonstrates that every price must be either a monopoly price or a competitive price and that there can be no third kind of price. In so far as prices on the hampered market are monopoly prices they are determined in accordance with the laws of monopoly price. Limited and hampered competition that does not lead to the formation of monopoly prices presents no special problem for the theory. The formation of competitive prices is fundamentally independent of the extent of competition. Whether the competition in a given case is greater or smaller is a datum that the theory does not have to take into account since it deals with categorial, and not concrete, conditions. The extent of the competition in a particular case influences the height of the price, but not the manner in which the price is determined.

The Historical School has not succeeded in providing any proof of its assertion that the laws derived from the universally valid theory do not hold for all human action independently of place, time, race, or nationality. In order to prove this it would have had to show that the logical structure of human thinking and the categorial nature of human action change in the course of history and are different for particular peoples, races, classes, etc. This it could never demonstrate; indeed, philosophy has established the very opposite as the truth.1

Nor were the adherents of the Historical School ever able to point to any instance of a proposition for which the claim could be made that observation had established it as an economic law with merely temporal, local, national, or similarly limited validity. They were unable to discover such a proposition either a priori or a posteriori. If thinking and action were really conditioned by place, time, race, nationality, climate, class, etc., then it would be impossible for a German of the twentieth century to understand anything of the logic and action of a Greek of the age of Pericles. We have already shown why the a posteriori discovery of empirical laws of action is not possible.2  All that the “historical theory” could present was history—very poor history, to be sure, but, considered from a logical point of view, history nevertheless, and in no sense a theory.

2. A Priori Theory and Empirical Confirmation

New experience can force us to discard or modify inferences we have drawn from previous experience. But no kind of experience can ever force us to discard or modify a priori theorems. They are not derived from experience; they are logically prior to it and cannot be either proved by corroborative experience or disproved by experience to the contrary. We can comprehend action only by means of a priori theorems. Nothing is more clearly an inversion of the truth than the thesis of empiricism that theoretical propositions are arrived at through induction on the basis of a presuppositionless observation of “facts.” It is only with the aid of a theory that we can determine what the facts are. Even a complete stranger to scientific thinking, who naively believes in being nothing if not “practical,” has a definite theoretical conception of what he is doing. Without a “theory” he could not speak about his action at all, he could not think about it, he could not even act. Scientific reasoning is distinguished from the daily thinking of everyone only in seeking to go further and in not stopping until it reaches a point beyond which it cannot go. Scientific theories are different from those of the average man only in that they attempt to build on a foundation that further reasoning cannot shake. Whereas in everyday living one is usually content to accept uncritically ideas that have been handed down, to carry a burden of prejudices and misunderstandings of all kinds, and to allow fallacies and errors to pass as true in cases where it is not easy to avoid them; scientific theories aim at unity and compactness, clarity, precision, apodictic evidence, and freedom from contradiction.

Theories about action are implicit in the very words we use in acting, and still more in those we use in speaking about action. The frequently lamented semantic ambiguities3  that plague our efforts to achieve precision in science have their roots precisely in the fact that the terms employed are themselves the outcome of definite theories held in common-sense thinking. The supporters of historicism were able to believe that facts can be understood without any theory only because they failed to recognize that a theory is already contained in the very linguistic terms involved in every act of thought. To apply language, with its words and concepts, to anything is at the same time to approach it with a theory. Even the empiricist, who allegedly works without presuppositions, makes use of theoretical tools. They are distinguished from those produced by a scientific theory only in being less perfect and therefore also less useful.

Consequently, a proposition of an aprioristic theory can never be refuted by experience. Human action always confronts experience as a complex phenomenon that first must be analyzed and interpreted by a theory before it can even be set in the context of an hypothesis that could be proved or disproved; hence the vexatious impasse created when supporters of conflicting doctrines point to the same historical data as evidence of their correctness. The statement that statistics can prove anything is a popular recognition of this truth. No political or economic program, no matter how absurd, can, in the eyes of its supporters, be contradicted by experience. Whoever is convinced a priori of the correctness of his doctrine can always point out that some condition essential for success according to his theory has not been met. Each of the German political parties seeks in the experience of the second Reich confirmation of the soundness of its program. Supporters and opponents of socialism draw opposite conclusions from the experience of Russian bolshevism. Disagreements concerning the probative power of concrete historical experience can be resolved only by reverting to the doctrines of the universally valid theory, which are independent of all experience. Every theoretical argument that is supposedly drawn from history necessarily becomes a logical argument about pure theory apart from all history. When arguments based on principle concern questions of action, one should always be ready to admit that nothing can “be found more dangerous and more unworthy of a philosopher than the vulgar pretension to appeal to an experience to the contrary,”4  and not, like Kant and the socialists of all schools who follow him, only when such an appeal shows socialism in an unfavorable light.

Precisely because the phenomena of historical experience are complex, the inadequacies of an erroneous theory are less effectively revealed when experience contradicts it than when it is assessed in the light of the correct theory. The iron law of wages was not rejected because experience contradicted it, but because its fundamental absurdities were exposed. The conflict between its most clearly controvertible thesis—that wages tend toward the minimum needed for subsistence—and the facts of experience should have been easily recognized. Yet it is even today just as firmly entrenched in lay discussion and public opinion as in the Marxian theory of surplus value, which, incidentally, professes to reject the iron law of wages. No past experience prevented Knapp from presenting his state theory of money,*  and no later experience has forced his supporters to give up the theory.

The obstinacy of such unwillingness to learn from experience should stand as a warning to science. If a contradiction appears between a theory and experience, we always have to assume that a condition presupposed by the theory was not present, or else that there is some error in our observation. Since the essential prerequisite of action?dissatisfaction and the possibility of removing it partly or entirely?is always present, only the second possibility—an error in observation—remains open. However, in science one cannot be too cautious. If the facts do not confirm the theory, the cause perhaps may lie in the imperfection of the theory. The disagreement between the theory and the facts of experience consequently forces us to think through the problems of the theory again. But so long as a re-examination of the theory uncovers no errors in our thinking, we are not entitled to doubt its truth.

On the other hand, a theory that does not appear to be contradicted by experience is by no means to be regarded as conclusively established. The great logician of empiricism, John Stuart Mill, was unable to find any contradiction whatever between the objective theory of value and the facts of experience. Otherwise he would certainly not have made the statement, precisely on the eve of a radical change in the theory of value and price, that as far as the laws of value were concerned, there remained nothing more to be explained either in the present or in the future; the theory was quite perfect.”5  An error of this kind on the part of such a man must ever stand as a warning to all theorists.

3. Theory and the Facts of Experience

The science of action deals only with those problems whose solution directly or indirectly affects practical interests. It does not concern itself, for reasons already explained,6  with the complete development of a comprehensive system embracing all the conceivable categories of action in their broadest generality. The peculiar advantage of this procedure is that, by giving preference to the problems encountered under the actual conditions in which action takes place, our science is obliged to direct its attention to the facts of experience. It is thereby prevented from forgetting that one of its tasks consists in the determination of the boundary between the conditions of action accessible to and requiring categorial comprehension, on the one hand, and the concrete data of the individual case, on the other. The theory must constantly concern itself with the actual facts of the individual and nonrepeatable case because only this offers it the possibility of showing where (conceptually, though perhaps not spatially, temporally, or in some other respect that would be perceptible to the senses) the realm of theoretical comprehension ends and that of historical understanding begins. When the science that aims at universally valid knowledge has so perfected its methods as to reach the furthest limit to which the theory can be pursued?that is, the point at which no condition of action open to categorial comprehension remains outside its range if experience has demonstrated the advisability of its inclusion?that science will still be obliged to treat also a part of the problems of descriptive, statistical, and historical research. Otherwise it could in no way succeed in recognizing and marking off its own domain. This task of demarcation is proper to it, and not to the empirical, descriptive sciences, because it is logically prior to them.

To be sure, even this procedure conceals many dangers. Sometimes one neglects to distinguish the universally valid from the historical; the methods are confounded, and then unsatisfactory results are obtained. Thus Böhm-Bawerk’s ingenious exposition of the theory of interest, for example, suffered especially from an insufficient separation between the two modes of procedure.

4. The Distinction Between Means and Ends: The “Irrational”

Most of the objections raised against the science of action stem from a misconception of the distinction between means and ends. In the strict sense, the end is always the removal of a dissatisfaction. However, we can doubtless also designate as an end the attainment of that condition of the external world which brings about our state of satisfaction either directly or indirectly, or which enables us to perform, without further difficulties, the act through which satisfaction is to be obtained. If the removal of the feeling of hunger is the end sought, the procuring of food and its preparation for eating can also be considered as ends; if one seeks the removal of the feeling of cold as an end, the heating of one’s quarters can just as well be called an end. If additional measures are needed for the removal of dissatisfaction, then the attainment of any particular step along the way toward the desired final condition is also designated as an end. In this sense the acquisition of money in the market economy and, proximately, the division of labor are designated as ends of action; in this sense too the attainment of all things that indirectly promote the end of want-satisfaction appear as proximate or intermediate ends.

In the course of attaining the primary end, secondary ends are attained. A man walks from A to B. He would choose the shortest route if other, secondary ends did not demand satisfaction. He makes a detour if he can walk in the shade a little longer; if he can include in his walk another place, C, which he wants to look for; if, by doing so, he can avoid dangers that may be lying in wait for him on the shortest route; or if he just happens to like the longer route. If he decides on a detour, we must infer that at the moment of decision the attainment of such secondary ends was of greater importance in his judgment than the saving of distance. Consequently, for him the “detour” was no detour at all, since his walk brought him greater satisfaction or?at least from the point of view that he took of his situation at the moment of decision?was expected to bring greater satisfaction than the attainment of his destination by the shorter route. Only one who does not have these secondary ends in mind can call the longer way a detour. As far as our stroller was concerned, it was the correct route, that is, the route that promised the greatest satisfactions.7

Since satisfaction and dissatisfaction depend only on the subjective view of the individual, there is no room for argument on this question in a science that does not presume to establish a scale of values or to make judgments of value. Its conception of an end, in the strict sense, is more deductive than empirical: ends are determined by the wishes and the desires of the individual. Whenever reference is made to the greater or lesser appropriateness of means, this can only be from the point of view of the acting individual.

We must next deal with the objection of those who never weary of asserting that man does not act rationally at all. It has never been disputed that man does not always act correctly from the objective point of view; that is, that either from ignorance of causal relations or because of an erroneous judgment of the given situation, in order to realize his ends he acts differently from the way in which he would act if he had correct information. In 1833 the method of healing wounds was different from that used in 1933, and in 2033 still another way will presumably be thought suitable. Statesmen, field marshals, and stock-market speculators act differently at present from the way in which they would act if they knew exactly all the data needed for an accurate judgment of conditions. Only a perfect being, whose omniscience and omnipresence would enable him to survey all the data and every causal relationship, could know how each erring human being would have to act at every moment if he wanted to possess the divine attribute of omniscience. If we were to attempt to distinguish rational action from irrational action, we should not only be setting ourselves up as a judge over the scales of value of our fellow men, but we should also be declaring our own knowledge to be the only correct, objective standard of knowledge. We should be arrogating to ourselves the position that only an all-knowing being has the power to occupy.

The assertion that there is irrational action is always rooted in an evaluation of a scale of values different from our own. Whoever says that irrationality plays a role in human action is merely saying, that his fellow men behave in a way that he does not consider correct. If we do not wish to pass judgment on the ends and the scales of value of other people and to claim omniscience for ourselves, the statement, “He acts irrationally,” is meaningless, because it is not compatible with the concept of action. The “seeking to attain an end” and the “striving after a goal” cannot be eliminated from the concept of action. Whatever does not strive after goals or seek the attainment of ends reacts with absolute passivity to an external stimulus and is without a will of its own, like an automaton or a stone. To be sure, man too is as far outside the effective range of his action as a reed in the wind. But in so far as he is able to do anything, he always acts: even negligence and passivity are action if another course of conduct could have been chosen. And the conduct that is determined by the unconscious, in the Freudian sense, or by the subconscious, is also action in so far as conscious behavior could prevent it but neglects to do so. Even in the unconscious and apparently senseless behavior of the neurotic and the psychopath there is meaning, i.e., there is striving after ends and goals.”8

Everything that we say about action is independent of the motives that cause it and of the goals toward which it strives in the individual case. It makes no difference whether action springs from altruistic or from egoistic motives, from a noble or from a base disposition; whether it is directed toward the attainment of materialistic or idealistic ends; whether it arises from exhaustive and painstaking deliberation or follows fleeting impulses and passions. The laws of catallactics that economics expounds are valid for every exchange regardless of whether those involved in it have acted wisely or unwisely or whether they were actuated by economic or noneconomic motives.9  The causes of action and the goals toward which it strives are data for the theory of action: upon their concrete configuration depends the course of action taken in the individual case, but the nature of action as such is not thereby affected.

These considerations have an evident bearing on the widespread tendency of the present age to appeal to the irrational. The concepts rational and irrational are not applicable to ends at all. Whoever wishes to pass judgment on ends may praise or condemn them as good or evil, fine or vulgar, etc. When the expressions “rational” and “irrational” are applied to the means employed for the attainment of an end, such a usage has significance only from the standpoint of a definite technology. However, the use of means other than those prescribed as “rational” by this technology can be accounted for in only two possible ways: either the “rational” means were not known to the actor, or he did not employ them because he wished to attain still other ends?perhaps very foolish ones from the point of view of the observer. In neither of these two cases is one justified in speaking of “irrational” action.

Action is, by definition, always rational. One is unwarranted in calling goals of action irrational simply because they are not worth striving for from the point of view of one’s own valuations. Such a mode of expressions leads to gross misunderstandings. Instead of saying that irrationality plays a role in action, one should accustom oneself to saying merely: There are people who aim at different ends from those that I aim at, and people who employ different means from those I would employ in their situation.

• 1See below pp. 102 f. for a further discussion of this point.
• 2Supra, pp. 9 ff.
• 3Cf. Wieser, Über den Ursprung und die Hauptgesetze des wirtschaftlichen Wertes (Wien, 1884), pp. I ff.
• 4 Kant, Critique of Pure Reason, “Transcendental Doctrine of Elements,” Part II, Second Division, Book I, Section I.
• *Cf. the English translation of his book with this title by H. M. Lucas and J. Bonar (London, 1924).
• 5J. S. Mill, Principles of Political Economy (London, 1867), III, 265.
• 6Supra, pp. 14 ff.
• 7Cf. Robbins, An Essay on the Nature and Significance of Economic Science (London, 1932), p. 23.
• 8Cf. Freud, Lectures on the Introduction to Pvychoanalysis, 17th lecture.
• 9Cf. Wicksteed, The Common Sense of Political Economy, ed. by Robbins (London, 1933), 1, 28.