Epistemological Problems of Economics

The economist is often prone to look to mechanics as a model for his own work. Instead of treating the problems posed by his science with the means appropriate to them, he fetches a metaphor from mechanics, which he puts in place of a solution. In this way the idea arose that the laws of catallactics hold true only ideally, i.e., on the assumption that men act in a vacuum, as it were. But, of course, in life everything happens quite differently. In life there are “frictional resistances” of all kinds, which are responsible for the fact that the outcome of our action is different from what the laws would lead one to expect. From the very outset no way was seen in which these resistances could be exactly measured or, indeed, fully comprehended even qualitatively. So one had to resign oneself to admitting that economics has but slight value both for the cognition of the relationships of our life in society and for actual practice. And, of course, all those who rejected economic science for political and related reasons—all the etatists, the socialists, and the interventionists—joyfully agreed.

Once the distinction between economic and noneconomic action is abandoned, it is not difficult to see that in all cases of “resistance” what is involved is the concrete data of economizing, which the theory comprehends fully.

For example, we deduce from our theory that when the price of a commodity rises, its production will be increased. However, if the expansion of production necessitates new investment of capital, which requires considerable time, a certain period of time will elapse before the price rise brings about an increase in supply. And if the new investment required to expand production would commit capital in such a way that conversion of invested capital goods in another branch of production is altogether impossible or, if possible, is so only at the cost of heavy losses, and if one is of the opinion that the price of the commodity will soon drop again, then the expansion of production does not take place at all. In the whole process there is nothing that the theory could not immediately explain to us.

Therefore, it is also incorrect to make the assertion that the propositions of the theory hold true only in the case of perfectly free competition. This objection must appear all the more remarkable as one could sooner assert that the modern theory of price determination has devoted too much attention to the problem of monopoly price. It certainly stands to reason that the propositions of the theory should first be examined with respect to the simplest case. Hence, it is not a legitimate criticism of economic theory that, in the investigation of competitive prices, it generally starts from the assumption that all goods are indefinitely divisible, that no obstacles stand in the way of the mobility of capital and labor, that no errors are made, etc. The subsequent dropping of these elementary assumptions one by one then affords no difficulty.

It is true that the classical economists inferred from their inquiry into the problems of catallactics that, as far as practical economic policy is concerned, all the obstacles that interventionism places in the path of competition not only diminish the quantity and value of the total production, but cannot lead to the goals that one seeks to attain by such measures. The investigations that modern economics has devoted to the same problem lead to the identical conclusion. The fact that the politician must draw from the teachings of economic theory the inference that no obstacles should be placed in the way of competition unless one has the intention of lowering productivity does not imply that the theory is unable to cope with the “fettered” economy and “frictional resistances.”