Epistemological Problems of Economics

Economic theory, like every theory and every science, is rationalistic in the sense that it makes use of the methods of reason?ratio. What, indeed, could science be without reason? Nevertheless, one may seek to pit metaphysical poetry, masquerading as philosophy, against discursive reasoning. However, to do this is to reject science as such.

The rejection of science, of scientific reasoning, and, consequently, of rationalism is in no way a requirement of life, as some would have us believe. It is rather a postulate fabricated by eccentrics and snobs, full of resentment against life. The average man may not trouble his head about the teachings of “gray theory,” yet he avidly seizes upon all the findings of science that lend themselves to the improvement of man’s technical equipment in the battle for the increase of his material wealth. The fact that many of those who make their living by scientific work are unable to find inner satisfaction in this employment is not an argument for the abolition of science.

However, those who rally round the standard of antirationalism in the theory of social phenomena, especially in economics and in the historical sciences, do not in the least want to do away with science. Indeed, they want to do something altogether different. They want, on the one hand, to smuggle into particular scientific chains of reasoning arguments and statements that are unable to withstand the test of a rational critique, and, on the other hand, to dispose, without relevant criticism, of propositions to which they are at a loss to raise any tenable objections. What is usually involved in such cases is a concession to the designs and ideas of political parties, though often it is simply the desire of a less gifted person-who would somehow like to be noticed at any cost-for scientific achievement. Not everyone is so honest as to admit openly what his real motive is; it is no pleasure to spend one’s whole life in the shadow of a greater man.48

If someone advocates national autarky, wants to shut his country off from trade with other countries, and is prepared to bear all the material and spiritual consequences of such a policy in order to reach this goal, then this is a value judgment, which, as such, cannot be refuted by argumentation. However, this is not really the case. The masses could be induced to make certain small sacrifices in favor of autarky, but they are scarcely ever to be moved to favor making large sacrifices for such an ideal. Only the literati are enthusiastic about poverty, i.e., the poverty of others. The rest of mankind, however, prefer prosperity to misery. Inasmuch as one can scarcely appear before the public with the argument that the attainment of this or that ideal of the literati is not too dearly bought even at the price of a considerable reduction in general prosperity, and at the same time entertain any hopes of success, one must seek to prove that its attainment imposes only an inconsiderable or no material sacrifice; indeed, that it even brings a distinct material gain. In order to prove this, in order to demonstrate that the restriction of trade and commerce with foreign countries, nationalization and municipalization, and even wars are “besides, ever so much a good business,” one must strive to insert irrational links into the chain of reasoning, because it is impossible to prove things of this kind with the rational, sober arguments of science. It is obvious that the employment of irrational elements in the train of an argument is impermissible. Ends are irrational, i.e., they neither require nor are capable of a rational justification. But what is merely the means to given ends must always be subject to rational examination.

The misunderstanding—excusable in the light of the development of the doctrines, though for that reason all the more serious—that identifies “rational” action with “correct” action is universally propagated. Max Weber expressly combated this confusion,49  although, as we have seen, he repeatedly fell into it in other passages of his writings.

“The theory of marginal utility,” says Weber, “treats . . . human action as if it took place from A to Z under the control of a businesslike calculation: calculation based on knowledge of all the relevant conditions.”51  This is precisely the procedure of classical economics, but in no way that of modern economics. Because it had not succeeded in overcoming the apparent antinomy of value, no other way remained open for classical economics than to start with the action of the businessman. Since it could not deal with the concept of use value, which it did not know how to divide into objective and subjective use value, it was unable to revert to what lies behind and, in the last analysis, governs and directs the conduct of the businessman and entrepreneur, viz., the conduct of the consumers. Whatever did not pass through a businessman’s calculations and account books was outside the orbit of classical economics. However, if one limits one’s consideration to the conduct of the businessman, then, of course, one must distinguish between the correct and the incorrect conduct of business. For as a businessman—though not also in his capacity as a consumer—the entrepreneur has as his given goal the greatest possible monetary profit of the undertaking.

Modern economics, however, does not start from the action of the businessman, but from that of the consumers, that is to say, from the action of everybody. In its view, therefore—and herein lies its “subjectivism,” in contrast to the “objectivism” of the classical economists, and, at the same time, its “objectivity,” in contrast to the normative position of the older school?action on the part of the economizing individual is neither correct nor incorrect. Modern economics is not and cannot be concerned with whether someone prefers healthful food or narcotic poisons; no matter how perverted may be the ethical or other ideas that govern his conduct, its “correctness” is not a matter to be judged by economics. Economics has to explain the formation of prices on the market, which means how prices are really arrived at, not how they ought to be arrived at. Prohibitionists see a serious failing of mankind in the consumption of alcoholic beverages, which they attribute to misunderstanding, weakness of character, and immorality. But in the view of catallactics there is only the fact that there is a demand for alcohol. He who has to explain the price of brandy is not concerned with the question whether it is “rational” or moral to drink brandy. I may think what I will about motion picture dramas, but as an economist I have to explain the formation of the market prices for the cinema, actors, and theater seats, not sit in judgment on the films. Catallactics does not ask whether or not the consumers are right, noble, generous, wise, moral, patriotic, or church-going. It is concerned not with why they act, but only with how they act.

Modern subjectivist economics—the theory of marginal utility—again takes up the old theory of supply and demand, which once had to be given up on account of the inability of the classical economists to resolve the paradox of value, and develops it further. If one sees the significance of the movements of market prices, as the modern theory does, in the fact that a state of rest is riot reached until total demand and total supply coincide, it is clear that all factors that influence the conduct of the parties on the market?and consequently also “noneconomic” and “irrational” factors, like misunderstanding, love, hate, customs habit, and magnanimity—are included.

Therefore, Schelting’s statement that economic theory “assumes a society that arose only through the operation of economic factors”[51] does not apply to modern economics if one understands the term “economic factors” in Schelting’s sense. In another section,52  I point out that even Menger and Böhm-Bawerk did not completely grasp this logical fundamental of the theory they founded and that not until later was the significance of the transition from the objective to the subjective theory of value appreciated.

No less inaccurate is the assertion, made in accordance with the view universally prevailing among the supporters of the Historical-Realist School, that “the other chief fictions of abstract theory are ‘free competition’ and the absolute insignificance of governmental and other acknowledged regulations for the development of the cooperative economic action of economic subjects.”53  This does not even apply to classical economics. Scarcely anyone would want to maintain that the modern theory has bestowed too little attention on the problem of monopoly prices. The case of limited competition on the buyers’ or sellers’ side offers the theory no special problem: it always has to deal only with the subjects appearing and acting on the market. Nothing else is to be predicated of those who may still enter the market if no factors hold them back than that their supervention would change the market situation. Nor does the theory?and this is true of both the classical and the modern?assume the “absolute insignificance of governmental and other acknowledged regulations.” It devotes very searching investigations to these “interferences” and constructs a special theory of price controls and interventionism.

Mitscherlich too maintains that the theory of marginal utility is “best tailored for the free economy.” For that reason, the Middle Ages would “not at all have been able to think of it.” There it would have been “pointless.” “What, indeed,” he asks, “would the Middle Ages have said to the statement of a Carl Menger when he argues: ‘That final degree of intensity of the want which can still be satisfied by the given supply—i.e., the marginal utility—serves as the measure of valuation’?”54

It may be presumed that the Middle Ages would have understood no more of the modern theory of price formation than of Newtonian mechanics or of the modern notions of the functions of the heart. Nevertheless, rain drops fell no differently in the Middle Ages than they do today, and hearts did not beat otherwise than they do now. Though the men of the Middle Ages would not have understood the law of marginal utility, they nevertheless did not and could not act otherwise than as the law of marginal utility describes. Even the man of the Middle Ages sought to apportion the means at his disposal in such a way that he attained the same level of satisfaction in every single kind of want. Even in the Middle Ages the wealthier man did not differ from the poorer man only in that he ate more. Even in the Middle Ages no one voluntarily exchanged a horse for a cow unless he valued the cow more highly than the horse. Even at that time the interventionist acts of the government and other institutions of compulsion brought about effects no different from those which the modern theory of price controls and intervention points out.

The objection is urged against modern economic theory that the economy of free competition necessarily” constitutes “its basic schema” and that it is unable to “comprehend theoretically the organized economy of the present, the economy of regulated competition” and the “entire phenomenon of imperialism.”55  When this objection is raised, it suffices to point out that what historically started the battle against the theory and has given that battle its pertinacity and its popularity is the fact that precisely on the basis of the theory, and only on this basis, is an accurate judgment possible of the effects both of every individual interventionist measure and of the total phenomenon of interventionism in all of its historical forms. One simply turns the facts of history upside down when one maintains that the Historical School rejected economic theory because the latter was incapable of explaining the historical phenomenon of interventionism. In fact, the theory was rejected precisely because one had to arrive at an explanation on the basis of it. This explanation, however, was not politically acceptable to the adherents of the Historical School, but, on the other hand, they were at a loss to refute it. Only by equating “theoretically comprehend” with “uncritically glorify” can one assert that modern economics has not theoretically comprehended the phenomenon of imperialism.

And certainly no one who has followed the political and economic discussions of recent years with even the slightest attentiveness will want to deny that everything that has been done for the elucidation of the problems presented by the “regulated” economy was accomplished exclusively by theorists with the methods of “pure” theory. Not to mention currency problems and monopoly prices, let us remind ourselves only of the discussions concerning the cause of unemployment as a permanent phenomenon and those concerning the problems of protectionism.56

Three assumptions, Max Weber thinks, underlie abstract economic theory: the social organization of an exchange economy, free competition, and strictly rational action. We have already discussed free competition and strictly rational—i.e., purposive—action. For the third assumption the reader is referred, on the one hand, to the starting point of all investigations of the modern school, viz., the isolated, exchangeless economy, which some sought to ridicule as the Robinson Crusoe economy; and, on the other hand, to the investigations concerning the economy of an imaginary socialist community.57

• 48Freud reports a case in which this was openly admitted. Freud, “Zur Geschichte der psychoanalytischen Bewegung,” Sammlung Kleiner Schriften zur Neurosenlehre, 4th Series (2nd ed.; Vienna, 1922), p. 57.
• 49Cf. Max Weber, Wissenschaftslehre, p. 503.
• 51Schelting, “Die logische Theorie der historischen Kulturwissenschaft von Max Weber und im besonderen sein Begriff des Idealtypus,” p. 721.
• 52Cf. below pp. I 71 ff.
• 53Schelting, loc. cit., P. 721.
• 54Mitscherlich, “Wirtschaftswissenschaft als Wissenschaft,” <em>Schmollers Jahrbuch</em>, L, 397.
• 55Salin, <em>Geschichte der Volkswirtschaftslehre</em> (2nd ed.; Berlin, 1929), pp. 97 f.
• 56Cf. Heckscher, op. cit., p. 525.
• 57Weber, Wissenschaftslehre, p. 190.