Epistemological Problems of Economics

In 1960, in the preface to the first English-language edition of this volume of essays, Mises wrote, “They represent... the necessary preliminary study for the thorough scrutiny of the problems involved such as I tried to provide in my book Human Action, a Treatise of Economics“ (p. VII).

This brief indication of the position these essays occupy in the evolution of Mises’ thought is certainly helpful. It is easy to see, for instance, that the first essay “The Task and Scope of the Science of Human Action”—which had not been published before 1933, the date of the German edition of the volume—is in fact an extensive sketch of the main ideas of the methodological Part One of Human Action.

Most of the other essays originally appeared in German journals devoted to the social sciences in the late 1920s. In them, the critical purport is evident. In a number of forays directed against rival methodological positions, Mises attempts to safeguard his own edifice, as yet under construction. As he put it in 1960:

In order to examine the legitimacy of all these objections, it seemed to me imperative not only to demonstrate positively the logical character of the propositions of economics and sociology, but also to evaluate critically the teachings of a few representatives of historicism, empiricism, and irrationalism. This, of necessity, determined the outward form of my work. It is divided into a number of independent essays which, with the exception of the first and most comprehensive, were published previously. From the outset, however, they were conceived and planned as parts of a whole. [p. xvi]

Almost half a century has passed since these essays saw the light of day. To appreciate them, we have to recall not only the circumstances of the time in which they were written, but also Mises’ own position and temperament as a man of ideas.The essays were written in the last years of the Weimar Republic and were addressed to a German academic audience in which support for, and understanding of, the market economy, never very strong in these circles, had almost vanished. It was not a good time for subtlety. Nor could we expect the nuances of enlightened thought to find ready understanding. We have all the more reason to admire the high level on which Mises conducts his argument, his endeavor to demonstrate that problems of epistemology underlie disputes on the mundane matters of economic policy.

When Mises wrote these essays, he was of course already well known (to his German readers) as a monetary theorist; and in the early 1920s, he had established his reputation as a foremost critic of socialism in all its forms. In these essays, however, he is staking a new claim to be listened to?namely as a methodologist.

For most Austrian and German economists of the 1920s the Methodenstreit was a quarrel of the past, a most unhappy affair best forgotten. How could sensible people doubt that theory and history were both equally legitimate forms of the pursuit of knowledge? Since both protagonists in the dispute, Menger and Schmoller, appeared to accept this, it was hard to see what the violent quarrel was about.

Mises took an altogether different view. For him, the Methodenstreit was by no means over. In his view, what was at stake was not theory as such, viz., empirical generalizations; but the particular kind of theory Menger had defended, based on necessary, not on contingent knowledge. Menger had seen the task of economics as establishing what he called “exact laws,” laws which require no experience to confirm or disconfirm them. He admitted of course the existence of empirical generalizations, but took little interest in them. His was an Aristotelian position, Our knowledge of essences permits us to arrive at “exact laws” by means of deduction. He regarded the law of value as an instance of such a law. In respect of their search for such laws, he saw no difference between natural and social sciences.

But about the turn of the century, a change in the philosophy of science associated with the names of Mach and Poincaré took place, which stressed the provisional and hypothetical nature of all scientific knowledge and the consequent need for empirical confirmation of all theories.

Mises regarded himself as Menger’s true heir, certainly in the field of methodology. Owing to the change in the climate of opinion mentioned, Menger’s position in this field had, by the 1920s, become difficult to defend. But Mises did not flinch from his task. He distinguished between our abstract knowledge of action and our knowledge of concrete situations in which action has to be taken. He admits that “if we pursue definite plans, only experience can teach us how we must act vis-a-vis the external world in concrete situations” (p. 13). He continues,

However, what we know about our action under given conditions is derived not from experience, but from reason. What we know about the fundamental categories of action—action, economizing, preferring, the relationship of means and ends, and everything else that together with these, constitutes the system of human action—is not derived from experience. We conceive all this from within, just as we conceive logical and mathematical truths, a priori, without referring to any experience. Nor could experience ever lead anyone to the knowledge of these things if he did not comprehend them from within himself. [pp. 13-14]

Thus to swim against the tide took courage, a quality Mises never lacked. It also meant that in his endeavor he had many enemies and few friends, even in his own Vienna. For his was a challenge to positivists and empiricists of almost every school, not merely to the somewhat attentuated remnants of what by 1930 was left of the German Historical School. We have to remember that at precisely this time Vienna had become the headquarters of logical positivism, of the Vienna Circle of Carnap and Schlick. With this in mind, it is possible to feel that his critical ardor was somewhat unevenly distributed among his enemies, far too much of it devoted to the German historians and too little to logical positivism?not to mention the rising school of existentialism.

What, then, did he accomplish in these essays— In the first of them he accomplished two things. First, he detached subjective value theory from its older dependence on a theory of wants. For Menger, wants were almost physiological facts, hence we were able to distinguish between “real” and “imaginary” ones. Mises established human preferences as the ultimate springs of action and showed that they find a place within the framework of a logic of means and ends which must form the basis of any theory of action that is to satisfy the demands of our reason. We freely choose our ends within the constraints nature imposes upon us. It is the universal scarcity of means that limits the range of our action.

Second, Mises opened the way for others to make use of the logic of means and ends as the basis of economic science. The first step on this way was successfully taken by Lord Robbins in 1932 with his famous definition of the subject matter of economics in terms of ends and means. That definition soon won almost universal acclaim. What Professor Hayek in “Economics and Knowledge” (1937) described as “The Pure Logic of Choice” is of course identical with the Misesian notion. Unfortunately, in the decade of the 1940s, it fell into oblivion. What is today known as neoclassical economics rests on a theory of choice in which ends are not freely chosen by economic agents, but “given” to them in the form of indifference curves: a badly misnamed theory of choice forced into the Procrustean bed of determinism.

The second essay, “Sociology and History,” stirred up a good deal of interest when it was first published in 1929. There, Mises makes an attempt to come to terms with the work of Max Weber. It was an ambitious undertaking, and Mises faced a formidable task. It would be impossible for us to describe all the nuances of this encounter in these few pages. The reader must bear in mind that when Mises first published the essay, nine years after Weber’s death, the literature on Weber was scanty even in German. So Mises had little guidance.

In one sense, the two thinkers were allies in the endeavor to set up a science of action, a generalizing discipline concerned with matters of culture. In this sense, they are both “sociologists,” even though Mises later came to prefer the term “praxeology,” he tells us. Both were philosophically Neo-Kantians, though of different brands. Both agreed that economics has to be regarded as part of the wider discipline concerned with human action.

But they were at odds in the way they conceived of the new science. Mises, following Menger, drew a sharp distinction between Theory and History and attributed great importance to it. To Weber on the other hand, as to the whole German Historical School, this difference was entirely a matter of degree, and not of kind. Mises recognizes and deplores that for Weber

the difference between sociology and history is considered as only one of degree. In both, the object of cognition is identical. Both make use of the same logical method of forming concepts. They are different merely in the extent of their proximity to reality, their fullness of content and the purity of their ideal-typical constructions. Thus Max Weber has implicitly answered the question that had once constituted the substance of the Methodenstreit entirely in the sense of those who denied the logical legitimacy of a theoretical science of social phenomena. According to him, social science is logically conceivable only as a special, qualified kind of historical investigation. [p. 77]

In his critique of Weber’s methodology, Mises makes two important points. First, he criticizes Weber’s distinction between “purposive-rational” (zweckrational) and “value-rational” (wertrational) action.

This leads us to an examination of the types of behavior that Weber contrasts with rational (zweckrational) behavior. To begin with, it is quite clear that what Weber calls “valuational” (wertrational) behavior cannot be fundamentally distinguished from “rational” behavior. The results that rational conduct aims at are also values and as such they are beyond rationality.... What Weber calls “valuational” conduct differs from rational conduct only in that it regards a definite mode of behavior also as a value and accordingly arranges it in the rank order of values. [p. 83]

That seems a rather conclusive argument.

Second, Mises is highly critical of the Ideal Type, Weber’s fundamental concept to be employed in social studies. Here, he was not alone. A fierce controversy developed on the meaning and merits of this elusive notion, a controversy in the course of which some of Weber’s admirers turned into his most severe critics. In the end everybody seemed to agree that the Ideal Type is much too wide a concept to be useful and that it would have to be narrowed down, but it appeared impossible to reach agreement on the direction in which this should be done.

In The Legacy of Max Weber (Berkeley, California: Glendessary Press, 1971), I have suggested that we make The Plan, and not the Ideal Type, the starting point and fundamental concept of a theory of social action. As means and ends, the two notions to which Mises assigned the character of fundamental concepts of the theory of action, are combined and given concrete shape in plans, it would seem that in this way Mises’ objection may be met. (See ibid, pp. 26-34.)

The last essay, “Inconvertible Capital,” was originally Mises’ contribution to a festschrift for the Dutch economist C.M. Verrijn Stuart.

There, in dealing with “the influence of the past on production” and “the malinvestment of capital,” Mises indicated some problems to which Austrian capital theory later devoted attention. His argument has important implications.

The capital stock at any point of time never is what it would be had the present been correctly foreseen at those moments in the past when the relevant investment decisions were made, when the present was still the future. Hence, the capital stock never has its “equilibrium composition,” and the general equilibrium model cannot be applied to problems concerning capital.

In the essay, Mises does not actually point out this implication, though Professor Hayek in chapter II of his Pure Theory of Capital (1941) did. As often happens to pioneers of thought, Mises did not at once grasp all the implications of the facts the general importance of which he had discovered.

For most of his life Mises, as we saw, had to swim against the tide. Undaunted, he may well have derived some satisfaction from his lonely struggle. With the rather grotesque exception of the market socialists, who on occasion did pay him their regards, the academic world ignored him. His few friends admired his courage and tenacity, even though in their hearts they may often have wished there were fewer occasions to display these qualities.

Of late, however, the high tide of logical positivism appears to be receding, even in the Anglo-Saxon world. In certain circles, we notice, it has even become fashionable to say that different disciplines may have to use different languages. Perhaps it is not too much to hope that in the climate of opinion now taking shape various nuances of enlightened discourse, hitherto neglected, will find a readier understanding and that the “language” of means and ends will come to be recognized as a legitimate medium in which to express human thought about action.

Ludwig M. Lachmann
Johannesburg
March/April 1978