Money, Method, and the Market Process

I*

One of the manifestations of the present-day “revolt against reason” is the tendency to find fault with the social sciences for being purely rational. Life and reality, say the critics, are irrational; it is quite wrong to deal with them as if they were rational and open to interpretation by reasoning. Rationalism fixes its eyes upon accessory matters only; its cognition is shallow and lacks profundity; it does not penetrate to the essence of things. It is an absurdity to press into dry rational schemes and into bloodless abstractions the finite variety of life’s phenomena. What is needed is a science of irrationality and an irrational science.

The main target of these attacks is the theoretical science of human action, praxeology, and especially its hitherto best-developed part, economics or catallactics. But their scope includes the historical discipline too.

It should be realized that political motives have prompted this storm. Political parties and pressure groups whose programs cannot stand criticism based on dispassionate reasoning grasp at the straw of such an evasion. But science does not have the right to dispose of any objection merely on account of the motives which instigated it; it is not entitled to assume beforehand that a disapprobation must needs be unfounded because some of its supporters are imbued by party bias. It is bound to reply to every censure without any regard to its underlying motives and its background.

The challenge to reason and rationality did not rise in Germany. Like all other social doctrines and philosophies it had its origin in Western Europe. But it has prospered better on German soil than anywhere else. It has for a long time been the official doctrine of the Prussian universities. It has fashioned present-day German mentality, and the Nazi philosophers proudly style it “German social philosophy.” German Staatswissenschaften have refuted economics wholesale as a spurious product of the British and the Austrian mind, and German historians have disparaged the achievements of Western historiography. However, we should not forget that a long line of German philosophers and historians have brilliantly succeeded in the elucidation of the epistemological problems of history.1 Of course, to the men to whom we are indebted for these contributions no place is assigned in present-day Germany’s Hall of Fame.

It would be logical to provide at the outset of a study devoted to the problems of “rationality” and “irrationality” a precise definition of the two terms. But it is impossible to conform to this legitimate requirement. It is precisely the characteristic feature of the objections with which we have to deal that they apply terms in a vague and ambiguous manner. They defy definiteness and logical strictness as inappropriate means for grasping of life and reality and cling to obscurity on purpose. They do not aim at clarity, but at depth (Tiefe). They are proud of being inexact and of talking in metaphors.

The problem which we have to investigate is this. Is it true or not that the social sciences lost the right way because they apply discursive reasoning? Do we have to look for other avenues of approach than those provided by ratiocination and historical experience?

II

The scope of the social sciences is human action. History deals with past events, representing them from the viewpoint of various aspects. It embraces history proper, philology, ethnology; anthropology is a branch of history as far as it is not a part of biology, and psychology as far as it is neither physiology nor epistemology or philosophy. Economic history, descriptive economics, and economic statistics are, of course, history. The term sociology is used in two different meanings. Descriptive sociology deals with those historical phenomena of human action which are not viewed in descriptive economics; it overlaps to some extent the field claimed by ethnology and anthropology. General sociology, on the other hand, approaches historical experience from a more nearly universal viewpoint than that of the other historical branches. History proper, for instance, deals with an individual town or with towns in a definite period or with an individual people or with a certain geographical area. Max Weber in his main treatise deals with the town in general, i.e., with the whole historical experience concerning towns without any limitation to historical periods, geographical areas, or individual peoples, nations, races, and civilizations.2 The subject-matter of all historical sciences is the past, they cannot teach us anything which would be valid for all human actions, that means for the future too.

The natural sciences too deal with past events. Of course, every experience is an experience of something passed away; there is no experience of future happenings. But the experience to which the natural sciences owe all their success is the experience of the experiment in which the various elements of change can be observed in isolation. The facts amassed in this way can be used for induction, a peculiar procedure of inference which has given evidence of its expediency, although its epistemological and logical qualification is still an unsolved problem.

The experience with which the social sciences have to deal is always the experience of complex phenomena. They are open to various interpretations. They do not provide us with facts which could be used in the manner in which the natural sciences use the results of their experiments for the forecast of future events. They cannot be used as building materials for the construction of theories.

Praxeology is a theoretical and systematic, not a historical science. Its scope is human action as such, irrespective of all environmental and incidental circumstances of the concrete acts. It aims at knowledge valid for all instances in which the conditions exactly correspond to those implied by its assumptions and inferences. Whether people exchange commodities and services directly by barter or indirectly by using a medium of exchange is a question of the particular institutional setting which can be answered by history only. But whenever and wherever a medium of exchange is in use, all the laws of monetary theory are valid with regard to the exchanges thus transacted.3

It is not the task of this article to enquire what makes such a science of praxeology possible, what its logical and epistemological character is and what methods it applies. The study of the epistemological problems of the social sciences has been neglected for a long time. Even those authors who like David Hume, Archbishop Whately, John Stuart Mill, and Stanley Jevons were themselves eminent economists, dealt in their logical and epistemological writings only with the natural sciences, and did not bother about the peculiar character of the sciences of human action. The epistemology of the social sciences is the youngest branch of knowledge. Moreover, most of its work refers only to history; the existence of a theoretical science was long entirely ignored. The pioneer work of Senior and of Cairnes has only lately borne fruit.4 The economists mostly lack philosophical training and the philosophers are not familiar with economics. The importance of phenomenology for the solution of the epistemological problems of praxeology has not been noticed at all.5

But this article is not concerned with these tasks. We have to deal with those critics who blame the economists and the historians for having neglected the fact of “irrationality.”

Action means conscious behavior or purposive activity. It differs as such from the biological, physiological, and instinctive processes going on within human beings. It is behavior open to the regulation and direction by volition and mind. Its field coincides with the sphere within which man is free to influence the course of events. As far as man has power to bring about an effect or a change, he necessarily acts, whether he does something or refrains from doing anything. Inactivity and passivity, letting things alone, are the outcome of a choice, are therefore action whenever a different form of behavior would be possible. He who endures what he could change acts no less than he who interferes in order to attain another result. A man who abstains from influencing the operation of physiological and instinctive factors which he could influence also acts. Action is not only doing but no less omitting to do what possibly could be done.

Most of a man’s daily behavior is simple routine. He performs certain acts without paying special attention to them. He does many things because he was trained in his childhood to do them, because other people behave in the same way and because it is customary in his environment. He acquires habits, he develops automatic reactions. But he indulges in these habits only because he welcomes their outcome. As soon as he discovers that the pursuit of the habitual way may hinder the attainment of ends considered as more desirable, he changes his attitude. A man brought up in an area in which the water is clean acquires the habit of heedlessly drinking, washing, and bathing. When he moves to a place in which the water is polluted by morbific germs, he will devote the most careful attention to procedures about which he never bothered before. He will watch himself permanently in order not to hurt himself by indulging unthinkingly in his automatic reactions and in his traditional routine. The abandonment of a settled practice into which a man has fallen is not an easy task. It is the main lesson to be learned by all those who aspire to achievements above the level of the masses. (To break off the consumption of habit-creating drugs often requires the employment of therapeutical procedures.) The fact that an act is in the regular course of affairs performed spontaneously, as it were, does not mean that it is not due to conscious volition. Indulgence in a routine which possibly could be changed is action.

Action is the mind’s response to stimuli, i.e., to the conditions in which nature and other people’s actions place a man. It differs as such from the functional reaction of the bodily organs. It is the outcome of a man’s will. Of course, we do not know what will is. We simply call will man’s faculty to choose between different states of affairs, to prefer one and to set aside the other, and we call action behavior aiming at one state and forsaking another. Action is the attitude of a human being aiming at some ends.

Praxeology is not concerned with the metaphysical problem of free will as opposed to determinism. Its fundamental insight is the incontestable fact that man is in a position to choose among different states of affairs with regard to which he is not neutral and which are incompatible with each other, i.e., which he can not enjoy together. It does not assert that a man’s choice is independent of antecedent conditions, physiological and psychological. It does not enter into a discussion of the motives determining the choice. It does not ask why a customer prefers one pattern of a necktie to another or a motorcar to a horse and buggy. It deals with the choosing as such, with the categorical elements of choice and action.

Neither does praxeology concern itself about the ultimate goals of human activity. We will have to deal with this problem too. For the moment we have only to emphasize that praxeology does not have to question ultimate ends, but only to study the means applied for the attainment of any ends. It is a science of means, not of ends.

The investigation of the fitness of concrete means to attain, by complying with the laws of nature, definite ends in the field of the practical arts, is the task of the various branches of technology. Praxeology does not deal with technological problems, but with the categorical essence of choice and action as such, with the pure elements of setting aims and applying means.

Praxeology is not based on psychology and is not a part of psychology. It was a bad mistake to call the modern theory of value a psychological theory and it was a confusion to link it up with the Weber-Fechner Law of Psychophysics.6 ,7

Praxeology deals with choice and action and with their outcome. Psychology deals with the internal processes determining the various choices in their concreteness. It may be left undecided whether psychology can succeed in explaining why a man in a concrete case preferred red to blue or bread to lyrics. At any rate such an explanation has nothing to do with a branch of knowledge for which the concrete choices are data not needing further explanation or analysis. Not what a man chooses, but that he chooses counts for praxeology.

The motives and springs of action are without concern for the praxeological investigation. It is immaterial for the formation of the price of silk whether people ask for silk because they want to be protected against cold weather or because they find it beautiful or because they want to get more sexual attractiveness. What matters is that there is a demand of a given intensity for silk.

Yet, modern psychology has brought about some results which may arouse the interest of praxeology. It was once usual to consider the behavior of lunatics and neurotics as quite nonsensical and “irrational.” It is the great merit of Breuer and Freud that they have disproved this opinion. Neurotics and lunatics differ from those whom we call sane and normal with regard to the means which they choose for the attainment of satisfaction and with regard to the means which they apply for the attainment of these means. Their “technology” is different from that of sane people, but they do not act in a categorically different way.8 They aim at ends and they apply means in order to attain their ends. A mentally troubled person with whom there is still left a trace of reason and who has not been literally reduced to the mental level of an animal, is still an acting being. Whoever has the remnants of a human mind cannot escape the necessity of acting.

III

Every human action aims at the substitution of more satisfactory conditions for less satisfactory. Man acts because he feels uneasy and believes that he has the power to relieve to some extent his uneasiness by influencing the course of events. A man perfectly content with the state of his affairs would not have any incentive to change things; he would have neither wishes nor desires, he would not act because he would be perfectly happy. Neither would a man act who, although not content with his condition, does not see any possibility of improving it.

Strictly speaking, only the increase of satisfaction (decrease of uneasiness) should be called end, and accordingly all states which bring about such an increase means. In daily speech people use a loose terminology. They call ends things which should be rather called means. They say: This man knows only one end, namely, to accumulate more wealth, instead of saying: He considers the accumulation of more wealth as the only means to get more satisfaction. If they were to apply this more adequate mode of expression, they would avoid some current mistakes. They would realize that nobody else than the individual himself can decide what satisfies him better and what less. They would conceive that judgments of value are purely subjective and that there is no such thing as an absolute state of satisfaction or happiness irrespective of the desires of the individual concerned. In fact, he who passes a judgment of an alleged end, reduces it from the rank of an end to that of a means. He values it from the viewpoint of an (higher) end and asks whether it is a suitable means to attain this (higher) end. But the highest end, the ultimate goal of human action, is always satisfaction of an individual’s desire. There is no other standard of greater or lesser satisfaction than the individual judgments of value, different with various people and with the same people at various times. What makes a man feel uneasy and less uneasy is established by every individual from the standard of his own will and judgment, from his personal valuation. Nobody is in a position to decree what could make a fellow man happier. The innate spirit of intolerance and the neurotic “dictatorship complex” instigate people to dispose blithely of other people’s will and aspirations. Yet, a man who passes a judgment on another man’s aims and volitions does not declare what would make this other man happier or less discontented; he only asserts what condition of this other man would better suit himself, the censor.

From this point of view we have to appreciate the statements of eudaemonism, hedonism, and utilitarianism. All the objections raised against these schools are invalid, if one attaches to the terms happiness, pain, pleasure, and utility formal meaning. Happiness and pleasure are what people consider as such; useful are things which people consider as appropriate means for the attainment of aims sought. The concept of utility as developed by modern economics means suitability to render some services which are deemed as useful from any point of view. This is the meaning of the axiological subjectivism [subjectivism in value theory] of modern economics. It is at the same time the test of its impartiality and scientific objectivity. It does not deal with the ought, but with the is. Its subject matter is, e.g., the explanation of the formation of prices as they really are, not as they should be or would be if men were to act in a way different from what they really do.

IV

Praxeology does not employ the term rational. It deals with purposive behavior, i.e., human action. The opposite of action is not irrational behavior, but a reactive response to stimuli on the part of the bodily organs and of the instincts, which cannot be controlled by volition. If we were to assign a definite meaning to the term rationality as applied to behavior, we could not find another meaning than: the attitude of men intent on bringing about some effects.

The terms irrational and irrationality are mostly used for censuring concrete modes of action. An action is called irrational either because the censor disapproves of the end (i.e., of the way in which the acting individual wants to attain satisfaction) or because the censor believes that the means employed were not fit to produce the immediate effect aimed at. But often the qualification of an action as irrational involves praise; actions aiming at altruistic ends, inspired by noble motives and executed to the detriment of the acting man’s material well-being are considered as irrational.

We do not have to dwell upon the contradictions and logical inconsistencies involved in this use of words. The qualification of ends is without significance for praxeology, the science of means, not ends. That mortal men are not infallible and that they sometimes choose means which cannot bring about the ends sought is obvious.

It is the task of technology and of therapeutics to find the right means for the attainment of definite ends in the field of the practical arts. It is the task of applied economics to discover the appropriate methods for the attainment of definite ends in the realm of social cooperation. But if the scientists fail in these endeavors or if the acting men do not correctly apply the means recommended, the outcome falls short of the expectations of the acting individuals. Yet, an action unsuited to the end sought is still an action. If we call such an unsuitable and inexpedient action irrational, we do not deprive it of its qualification as purposive activity and we do not at all invalidate the assertion that the only way to conceive it essentially and categorically is provided by praxeology.

Economics does not deal with an imaginary homo oeconomicus as ineradicable fables reproach it with doing, but with homo agens as he really is, often weak, stupid, inconsiderate, and badly instructed. It does not matter whether his motives and emotions are to be qualified as noble or as mean. It does not contend that man strives only after more material wealth for himself and for his kin. Its theorems are neutral with regard to ultimate judgments of value, and are valid for all actions irrespective of their expediency.

It is the scope of history and not of praxeology to investigate what ends people aim at and what means they apply for the realization of their plans.

V

It is a frequent mistake to assume that the desire to procure the base necessities of life and health is more rational than the striving after other amenities. It is true that the appetite for food and warmth is common to men and other mammals and that as a rule a man who lacks food and shelter concentrates his efforts upon the satisfaction of these urgent needs and does not care for other things. The impulse to live, to preserve one’s own life and to take advantage of every opportunity of strengthening one’s vital force is a primal feature of life, present in every living being. However, to yield to this impulse is not—for man—an inextricable necessity.

All other animals are unconditionally driven by the impulse to preserve their own life and by the impulse of proliferation. They are, without a will of their own, bound to obey the impetus which at the instant prevails. It is different with man. Man has the faculty of mastering his instincts. He can rein both his sexual appetites and his will to live. He can give up his life when the conditions under which alone he could preserve it seem intolerable. Man is capable of dying for a cause or of committing suicide. To live is for man the outcome of a choice, of a judgment of value.

It is the same with the desire to live in affluence. The very fact of asceticism evidences that the striving after more amenities is not inextricable but rather the result of a choice. Of course, the immense majority prefer life to death and wealth to poverty.

On the other hand, it is arbitrary to consider only the satisfaction of the body’s physiological needs as “natural” and therefore as “rational” and everything else as “artificial” and therefore as “irrational.” It is the characteristic feature of human nature that man seeks not only food and shelter like all other animals, but that he aims also at other kinds of satisfaction, that he has specifically human needs too. It was the fundamental error of the iron law of wages that it ignored this fact.

VI

The concrete judgments of value are not open to further analysis. We may assume that they are absolutely dependent upon and conditioned by their causes. But as long as we do not know how external (physical and physiological) facts produce in a human “soul” definite thoughts and volitions resulting in concrete acts, we have to face an insurmountable dualism. In the present state of our knowledge, the fundamental statements of positivism and monism are mere metaphysical postulates devoid of any scientific foundation. Reason and experience show us two separate realms: the external world of physical and physiological events and the internal world of thought, feeling, and purposeful action. No bridge connects—as far as we can see today—these two spheres. Identical external events result sometimes in different human responses, and different external events produce sometimes the same human response. We do not know why.

We have not yet discovered other methods for dealing with human action than those provided by praxeology and by history. The suggestion of pan-physicalism that the methods of physics be applied to human actions is futile. The sterility of the pan-physicalist recipe is beyond doubt. In spite of the fanatical propaganda of its advocates nobody has ever made use of it. It is simply inapplicable. Positivism is the most conspicuous failure in the history of metaphysics.

The concrete judgments of value and the resulting acts are for history ultimate data. History tries to collect all relevant facts and it has, in this attempt, to make use of all knowledge provided by logic, mathematics, the natural sciences, and especially by praxeology. But it can never succeed in reducing all historical facts to external events open to an interpretation by physics and physiology. It must always reach a point beyond which all further analysis fails. Then it cannot establish anything else than that it is faced with an individual or unique case.

The mental act for dealing with such historical facts is, in the philosophy of Bergson, une intuition, namely la sympathie par laquelle on se transporte a l’intérieur d’un objet pour coincider avec ce qu’il a d’unique, et par conséquent d’inexprimable.9 German epistemology calls the act das spezifische Verstehen der Geisteswissenschaften, or simply Verstehen. I suggest it be translated into English as “specific understanding” or simply as “understanding.” The Verstehen is not a method or a mental process which the historians should apply or which epistemology advises them to apply. It is the method which all historians and all other people always apply in commenting upon social events of the past and in forecasting future events. The discovery and the delimitation of the Verstehen was one of the most important contributions of epistemology. It is not a blueprint for a science which does not yet exist and is to be founded.

The uniqueness and individuality which remains at the bottom of every historical fact when all the means for its interpretation provided by logic, praxeology, and the natural sciences have been exhausted is an ultimate datum. But, whereas the natural sciences cannot say anything else about their ultimate data than that they are such, history can try to make its data intelligible. Although it is impossible to reduce them to their causes—they would not be ultimate data, if such a reduction were possible—the observer can understand them because he is himself a human being. We may call this faculty to understand congeniality and sympathetic intelligence. But we have to guard against the error to confuse the understanding with approval, be it only conditional and circumstantial. The historian, the anthropologist, and the psychologist sometimes register actions which are for their feelings simply repulsive and disgusting; they understand them only as actions, i.e., in establishing the underlying aims and the technological and praxeological methods applied. To understand an individual case does not mean to explain, still less to excuse it.

Neither must understanding be confused with the act of aesthetic empathy by virtue of which an individual aims at an aesthetic enjoyment of a phenomenon. Einfühlung [empathy] and Verstehen are two radically different attitudes. It is a different thing, on the one hand, to understand historically a work of art, to determine its place, its meaning, and its importance in the chain of events and, on the other hand, to appreciate it emotionally as a work of art. One can look at a cathedral with the eyes of an historian. But one can look at the same cathedral either as an enthusiastic admirer or as an unaffected and indifferent tourist. One can look at a mountain range with the eyes of a naturalist—a geologist, a geographer, or a zoologist—or with the eye of a beauty-seeker—with disgust as the ancients used to do, or with the modern enthusiasm for the picturesque. The same individuals are capable of different modes of reaction, of the aesthetic appreciation and of the scientific grasp either of the Verstehen or of the natural sciences.

The understanding establishes the fact that an individual or a group of individuals have engaged in a definite action emanating from definite judgments of value and choices and aiming at definite ends. It further tries to appreciate the effects and the intensity of the effects brought about by an action. It tries to assign to every action its relevance, i.e., its bearing upon the course of events.

The historian gives us an account of all facts and events concerning the battle of Waterloo as complete and exact as the material available allows. As far as he deals with the forces engaged and with their equipment, with the tactical operations, with the figures of soldiers killed, wounded, and made prisoners, with the temporal sequence of the various happenings, with the plans of the commanders and with their execution, he is grounded on historical experience. What he asserts is either correct or contrary to fact, is either proved or disproved by the documents available or vague because the sources do not provide us with sufficient information. Other experts will either agree with him or will disagree, but they will agree or disagree on the ground of a reasonable interpretation of the evidence available. So far the whole discussion must be conducted with reasonable affirmations and negations. But that is not the total work to be achieved by the historian.

The battle resulted in a crushing defeat of the French army. There are many facts, indubitably established on the basis of documentary evidence, which could be taken to account for this outcome. Napoleon suffered from illness, he was nervous, he lacked self-confidence. His judgment and his comprehension of the situation were no longer what they used to be. His plans and orders were in many respects inappropriate. The French army was hastily organized, numerically too weak and its soldiers were partly veterans tired from the endless wars, partly inexperienced recruits. Its generals were not equal to their task, there was especially Grouchy’s serious blunder.10 On the other hand, the British and the Prussians fought under the imminent leadership of Wellington and of Gneisenau, their morale was excellent, they were well organized, richly equipped, and strong in number. To what extent did these various circumstances and many others contribute to the outcome? This question cannot be answered from the information derived from the data of the case, it is open to various interpretations. The historian’s opinions concerning them can neither be confirmed nor refuted in the same way in which we can confirm or refute his statement that the vanguard or Blücher’s11 army arrived at a certain hour on the battlefield.

Let us take another example. We have plenty of figures available concerning the German inflation of the years, 1914–1923. Economic theory provides us with all the knowledge needed for a perfect grasp of the causes of price changes. But this knowledge does not give us quantitative definiteness. Economics is, as people say, qualitative and not quantitative. This is not due to an alleged backwardness of economics. There are in the sphere of human action no constant relations between magnitudes. For a long time many economists believed that there exists one relation of this character. The thorough demolition of this unfounded assumption was one of the most important achievements of modern economic research. Monetary theory has proved in an irrefutable way that the rise of prices caused by an increase of the quantity of money can never be proportional to this increase. Thus it destroyed by its process analysis the only stronghold of an inveterate error. There cannot be any such thing as measurement in the field of economics. All statistical figures available have importance only for economic history; they are data of history like the figures concerning the battle of Waterloo; they tell us what happened in a unique and non-repeatable historical case. The only way to utilize them is to interpret them by Verstehen.

The rise of German prices in the years of the First World War was not only due to the increase of the quantity of bank notes. Other changes contributed too. The supply of commodities went down because many millions of workers were in the army and no longer worked in the plants, because government control of business reduced productivity, because the blockade prevented imports from abroad, and because the workers suffered from malnutrition. It is impossible to establish by other methods than by Verstehen how much each of these factors—and of some other relevant factors—contributed to the rise of prices. Quantitative problems are in the sphere of human action not open to another solution. The historian can enumerate all the factors which cooperated in bringing about a certain effect and all the factors which worked against them and may have resulted in delaying and mitigating the final outcome. But he can never coordinate the various causes in a quantitative way to the effects produced. The Verstehen is in the realm of history the substitute, as it were, for quantitative analysis and measurement which are unfeasible with regard to human actions outside the field of technology.

Technology can tell us how thick a steel plate must be in order not to be pierced by a bullet fired at a distance of 300 yards from a Mauser rifle. It thus can answer the question why a man who took shelter behind a steel plate of a known thickness was hurt or not hurt by a shot fired. History is at a loss to explain with the same assurance why Louis Philippe lost his crown in 1848 or why the Reformation succeeded better in the Scandinavian countries than in France. Such problems do not allow any other treatment than that of the specific understanding.

The understanding is not a method which could be used as a substitute for the aprioristic reasoning of logic, mathematics and praxeology or the experimental methods of the natural sciences. Its field lies where these other methods fail: in the description of a unique and individual case not open to further analysis—its qualitative service—and in the appraisal of the intensity, importance, and strength of the various factors which jointly produced an effect—its service as a substitute for the unfeasible quantitative analysis.

The subject of the historical understanding is the mental grasp of phenomena which cannot be totally elucidated by logic, mathematics, praxeology, and the natural sciences and as far as they cannot be elucidated by science and reason. It establishes the fact that scientific enquiry has reached a point beyond which it cannot go further, and tries to fill the gap by Verstehen.12 One may, if one likes, qualify the Verstehen as irrational because it involves individual judgments not amenable to criticism by purely rational methods. However, the method of understanding is not a free charter to deviate from the certified results obtained from the documentary evidence and from its interpretation through the teachings of the natural sciences and of praxeology. The Verstehen oversteps its due limits if it ventures to contradict physics, physiology, logic, mathematics, or economics. The abuses which many German scholars made of the geisteswissenschaftliche Methode and the spurious attempts of the German Historical School to substitute an imaginary verstehende Nationalökonomie for praxeological economics cannot be charged to the method itself.

German Geisteswissenschaften have preached the gospel of what should be an irrational science. They have substituted arbitrary judgments for reason and experience. They derive from intuition knowledge about historical events which the documents available do not provide or which are contrary to the facts as established by careful examination of the documents available. They do not refrain from drawing conclusions contradicting the statements of economic theory which they cannot refute on logical grounds. They are not afraid to produce absurdities. Their only justification is the reference to the irrationality of life.

Let us take an example from a serious and scholarly book available in English translation. Mr. Ernst Kantorowicz, an historian of the esoteric circle of the poet and visionary Stephen George, in his biography of the German Emperor Frederick II, gives a correct account of the constitutional changes which took place in the reign of this Hohenstaufen monarch. Frederick’s position in Germany was extremely precarious because his hereditary Norman kingdom of Sicily drew him into conflicts with the Pope and the Italian republican cities. He lacked the strength to preserve his royal authority in Germany and was forced to abandon most of the crown’s rights, and to grant ample privileges to the princes. What followed, says Kantorowicz quite correctly, “was the almost sovereign independence of each individual prince in his territory” which “definitely hindered the amalgamation of the German people into one German State.”13 So far, Kantorowicz is still on the basis of sound Verstehen and in perfect agreement will all other serious historians. But then comes the amazing interpretation of the visionary and mystic; he adds: “Yet in a higher sense Frederick II perfected and completed the unified German Empire. He strengthened the princes’ power ... with more exalted statesmanship believing that the power and the brilliance of his own imperial scepter would not pale in giving forth light but would gain radiance and would shine the brighter the more mighty and brilliant and majestic were the princes whom Caesar Imperator beheld as equals round his judgment seat. The princes are no longer columns bearing as a burden the weight of the throne. ... They become piers and pillars expressive of upward-soaring strength, preparing the glorious elevation of the prince of princes and king of kings who is born aloft on the shoulders of his peers, and who in turn exalts both kings and princes.”14 It is true that some phrases used by the princes at the Diet preceding the extortion of the privilege had a similar ring. The princes were polite, they did not want to fill the emperor with too much bitterness and were anxious to gild the pill which they forced him to swallow. When Hitler reduced Czechoslovakia to vassalage status he too sugared the pill by the establishment of the protectorate. Yet, hardly any historian would dare to say that “in a higher sense” Hitler “perfected and completed” the country’s independence by granting it the protection of the mighty Reich. Frederick II disintegrated the Holy Empire by the privileges granted to the princes. It is absurd to assert that “in a higher sense” he perfected and completed it. No metaphorical speech and no appeal to the irrational can render such a dictum any more tenable.

Understanding entitles the historian to determine the role played by the two privileges in question in the evolution of the Empire’s political structure, to determine, as it were, the quantity of their effect. He might, for instance, express the opinion that the role usually attributed to them has been exaggerated and that other events were more destructive than these privileges and he could try to prove his thesis, his mode of understanding. But it is inadmissable to say: yes, this happened, such were its consequences; yet “in a higher sense” it was just the contrary.

Human knowledge can never transcend the cognition conveyed by reason and experience. If there is any “higher sense” in the course of events, it is inaccessible to the human mind.

VII

A school of thought teaches that there is an eternal, irreconcilable antagonism between the interests of the individual and those of the collectivity. If the individual selfishly seeks after his own happiness, society comes to grief. Social cooperation and civilization are only possible at the cost of the individual’s well-being. The existence of society and its flowering require permanent sacrifices on the part of its members. Therefore, it is unthinkable to imagine a human and purely rational origin of moral law and social cooperation. Some supernatural being has blessed mankind with the revelation of the moral code and has entrusted great leaders with the mission of enforcing this law. History is not the interplay of natural factors and purposive human activity which, within certain limits, are open to an elucidation by reason, but the result of the interference of transcendental factors, repeated again and again. History is destiny, and reason can never fathom its depths.

The conflict between the good and the evil, between collectivism and individualism, is therefore eternal and insoluble. What separates social and moral philosophies and political parties is a divergence of world views, a disparity of ultimate judgments of value. This discord is rooted in the deepest recesses of a man’s soul and innate character; no ratiocination or discursive reasoning can brush it away or reconcile its contrasts. Some men are born with the divine call to leadership, others with the endowment to espouse spontaneously the cause of the great whole and to subordinate themselves of their own accord to the rule of its champions; but the many are incapable of finding the right way, they aim at the happiness of their own wretched selves and have to be tamed and subjugated by the conquering dictators. Social philosophy can consist in nothing else than in the cognition of the eternal truth of collectivism and in the unmasking of the spurious fallacies and pretensions of individualism. It is not the result of a rational process, but rather an illumination with which intuition blesses the elect. It is vain to strive after genuine social and moral truth by the application of the rational methods of logic. To the chosen, God or Weltgeist gives the right intuition; the rest of mankind has simply to forsake thinking and to obey blindly the God-given authority. True wisdom and the counterfeit doctrines of rationalistic economics and rationalistic history can never agree in the appreciation of historical and social facts, of political measures and of an individual’s actions. Human reason is not an appropriate tool to acquire true knowledge of the social totality; rationalism and its derivatives, economics and critical history, are fundamentally erroneous.15

The fundamental assumption of this doctrine, namely, that social cooperation is contrary to the interests of the individuals and can be achieved only at the expense of the individual’s welfare, has long since been exploded. It was one of the great achievements of British social philosophy and classical economics that they developed a theory of social evolution which does not need to refer to the miraculous appearance of leaders endowed with superhuman wisdom and powers. Social cooperation and its corollary, division of labor, serve better the selfish interests of all individuals concerned than isolation and conflict. Every step toward peaceful cooperation brings all concerned an immediate and discernible advantage. Men cooperate and are eager to intensify cooperation exactly because they are anxious to pursue their selfish interests. The sacrifices which the individual makes for the maintenance of social cooperation are only temporary; if he abstains from antisocial actions which could give him small immediate gains, he profits much more by the advantages which he derives from the higher productivity of work performed in the peaceful cooperation of the division of labor. Thus, the principle of association elucidates the forces which integrated the primitive hordes and tribes and step by step widened out the social units until finally the oecumenical Great Society came into being. There is in the long run no irreconcilable conflict between the rightly understood selfish interests of the individuals and those of society. Society is not a Moloch to whom man has to sacrifice his own personality. It is, on the contrary, for every individual the foremost tool for the attainment of well-bring and happiness. It is man’s most appropriate weapon in his struggle for survival and improvement. It is not an end, but a means, the most eminent means for the attainment of all human desires.

We do not have to enter into a detailed critique of the statements of the collectivist doctrine. We have only to establish the fact that the acts of the allegedly collectivist parties do not comply with the tenets of this philosophy. The political representatives of these parties occasionally in their speeches referred to collectivist slogans and connived at the propagation of party songs of the same tenor. But they do not ask their followers to sacrifice their own happiness and well-being at the altar of the Collectivity. They are anxious to demonstrate by ratiocination that the methods which they recommend will in the long run serve best the selfish interests of their followers. They do not ask any other sacrifices than temporary ones which, as they promise, will at a later time be rewarded by hundredfold booty. The Nazi professors and the Nazi rhymesters say: “Efface yourself for Germany’s splendor, give your wretched lives in order to make the German Nation live forever in glory and grandeur.” But the Nazi politicians use a different argument: “Fight for your own preservation and for your future well-being. The enemies are firmly resolved to exterminate the noble race of Aryan heroes. If you do not resist, you all are lost. But if you take up the challenge courageously, you have a chance of defeating the onslaught. Many will be killed in action, but they would not have survived if the devilish plans of our foes were not to meet any resistance. Much more will be saved if we fight. We have the choice between two alternatives only: certain extermination of us all, if the enemies conquer, on the one hand, and the survival of the great majority in case of our victory on the other hand.”

There is no appeal to the “irrational” in this purely rational—although not reasonable—reasoning. But even if the collectivist doctrine were correct, and people, in forsaking other advantages, aimed at the flowering of the Collective only under the persuasion or compulsion exercised on the part of the superhuman leaders, all the statements of praxeology would remain unshaken and history would not have any reason to change its methods of approach.

VIII

The real reason for the popular disparagement of the social sciences is reluctance to accept the restrictions imposed by nature on human endeavors. This reluctance is potentially present in everybody and is overwhelming with the neurotic. Men feel unhappy because they cannot have two incompatible things together, because they have to pay a price for everything and can never attain full satisfaction. They blame the social sciences for demonstrating the scarcity of the factors which preserve and strengthen the vital forces and remove uneasiness. They disparage them for describing the world as it really is and not as they would like to have it, i.e., as a cosmos of unlimited opportunities. They are not judicious enough to comprehend that life is exactly an active resistance against adverse conditions and manifests itself only in this struggle, and that the notion of a life free from any limitations and restrictions is even inconceivable for a human mind. Reason is man’s foremost equipment in the biological struggle for the preservation and expansion of his existence and survival. It would not have any function and would not have developed at all in a fool’s paradise.16

It is not the fault of the social sciences that they are not in a position to transform society into a utopia. Economics is not a “dismal science,” because it starts from the acknowledgment of the fact, that the means for the attainment of ends are scarce. (With regard to human concerns which can be fully satisfied because they do not depend on scarce factors, man does not act, and praxeology, the science of human action, does not have to deal with them.) As far as there is scarcity of means, man behaves rationally, i.e., he acts. So far there is no room left for “irrationality.”

That man has to pay a price for the maintenance of social institutions enabling him to attain ends which he deems as more valuable than this price made, than these sacrifices brought for them, is obvious. It is futile to disguise the impotent dissatisfaction with this state of affairs as a revolt against an alleged dogmatic orthodoxy of the social sciences.

If the “rational” methods of economic theory demonstrate that an a results in a p, no appeal to irrationality can make a result in a q. If the theory was wrong, only a correct theory can refute it and substitute a correct solution for an incorrect one.

IX

The social sciences have not neglected to give full consideration to all those phenomena which people may have in mind in alluding to irrationality. History has developed a special method for dealing with them: understanding. Praxeology has built up its system in such a way that its theorems are valid for all human action without any regard to whether the ends aimed at are qualified, from whatever point of view, as rational or irrational. It is simply not true that the social sciences are guilty of having left untouched a part of the field which they have to elucidate. The suggestions for the construction of a new science whose subject matter has to be the irrational phenomena are of no account. There is no untilled soil left for such a new science.

The social sciences are, of course, rational. All sciences are. Science is the application of reason for a systematic description and interpretation of phenomena. There is no such thing as a science not based on reason. The longing for an irrational science is self-contradictory.

History will one day have to understand historically the “revolt against reason” as one of the factors of the history of the last generations. Some very remarkable contributions to this problem have already been published.

Economic theory is not perfect. No human work is built for eternity. New theorems may supplement or supplant the old ones. But what may be defective with present-day economics is certainly not that it failed to grasp the weight and significance of factors popularly qualified as irrational.

• *[Reprinted from Philosophy and Phenomenological Research 4, no. 4 (June 1944)—Ed.]
• 1For a critical presentation of these theories, cf. Talcott Parsons’ The Structure of Social Action (New York, Macmillan, 1937); Raymond Aron, German Sociology [1938] (Westport. CT.: Greenwood Press, 1954).
• 2[Max Weber, The City, Don Martindale and Gertrud Neuwirth, trans, and eds. (New York: The Free Press, 1958)—Ed.]
• 3The term “praxeology” was first used by Espinasin an essay published in the Revue Philosophique vol. 30, pp. 114ff., and in his book Les Origines de la Technologie (Paris: F. Alcon, 1897), pp. 7ff. It was later applied by Slutsky in his essay “Ein Beitrag zur formal-praxeologischen Grundlegung der Ökonomik,” Academie Oukräienne des Sciences, Annales de la Classe des Sciences Sociales-Economiques 4 (1926).
• 4Cf. Nassau W. Senior, Political Economy, 6th ed. (London: J. J. Griffen, 1872); John E. Cairnes, The Character and Logical Method of Political Economy, 2nd ed. (London: Macmillan, 1875); Lionel Robbins, An Essay on the Nature and Significance of Economic Science, 2nd ed. (London: Macmillan, 1935); Mises, Epistemological Problems of Economics [1933] (New York, 1981); Human Action, 3rd ed. (Chicago: Henry Regenry, 1966); Alfred Schutz, The Phenomenology of the Social World [1932] (Evanston, Ill.: Northwestern University Press, 1967); F. A. Hayek, The Counter-Revolution of Science ([1952]; Indianapolis, Ind.: Liberty Press, 1979).
• 5The book of Josef Back, Die Entwicklung der reinen Ökonomie zur nationalökonomischen Wesenswissenschaft (Jena: Gustav Fischer, 1929) is unsatisfactory because of the author’s poor knowledge of economics. All the same, this book would deserve a better appreciation than it received.
• 6Cf. Max Weber, “Marginal Utility Theory and the So-Called Fundamental Law of Psychophysics” [1905], Social Science Quarterly (1975): 21–36; Mises, Human Action, 3rd ed. (Chicago: Henry Regnery, 1966), pp. 125–27.
• 7[“Ernst H. Weber (1795–1878) proclaimed in his law of psyco-physics that the least noticeable increase in the intensity of a human sensation is always brought about by a constant proportional increase in the previous stimulus. Gustav T. Fechner (1801–1887) developed this into the Weber-Fechner Law that said to increase the intensity of a sensation in arithmetical progression, it is necessary to increase the intensity of the stimulus in geometric progression,” Mises Made Easier: A Glossary for Ludwig von Mises’ Human Action, Percy L. Greaves, Jr., comp. (Dobbs Ferry, N.Y.: Free Market Books, 1974), p. 147—Ed.]
• 8It may be of some interest for the history of ideas that young Sigmund Freud collaborated as a translator in the German edition of John Stuart Mill’s collected works edited by Theodor Gomperz, the Austrian historian of ancient Greek philosophy. Joseph Breuer too was, as the present writer can attest, well familiar with the standard works of utilitarian philosophy.
• 9Cf. Henri Bergson, La Pensée et le mouvant, 4th ed. (Paris: F. Alcan, 1934), p. 205. [Passage translated as “The sympathy with which one enters inside an object in order to identify thereby what it has that is unique and therefore inexpressible,” Mises Made Easier: A Glossary for Ludwig von Mises’ Human Action, Percy L. Greaves, Jr., comp. (Dobbs Ferry, N.Y.: Free Market Books, 1974), p. 76—Ed.]
• 10[Emmanuel Grouchy, one of Napoleon’s generals, through an error of judgment delayed notifying Napoleon of movements of the British forces in what would become the French army’s last attempt to stave off the defeat at Waterloo—Ed.]
• 11 [Gebhard von Blücher was commander of the Prussian forces that aided the German, British, and Dutch armies to defeat Napoleon at Waterloo in 1815—Ed.]
• 12The important problem of various conflicting modes of Verstehen (for instance: the Catholic and the Protestant interpretation of the Reformation, or the various interpretations of the rise of German Nazism) must by treated in a special essay.
• 13Cf. E. Kantorowicz, Frederick the Second, 1194–1250, E. O. Lorimer, trans. (London: Constable, 1931), pp. 381-82.
• 14C.F. Ibid., pp. 386–87.
• 15Such are the teachings of the German Historical School of the Social Sciences, whose latest exponents are Werner Sombart and Othmar Spann. It may be worthwhile to note that Catholic philosophy does not endorse the collectivist doctrine. According to the teachings of the Roman Church natural law is nothing but the dictates of reason properly exercised, and man is capable of acquiring its full knowledge even if unaided by supernatural revelation. “God so created man as to bestow on him endowments amply sufficient for him to attain his last end. Over and above this He decreed to make the attainment of beatitude yet easier for man by placing within his reach a far simpler and far more certain way of knowing the law on the observance of which his fate depended.” Cf. G. H. Joyce, article “Revelation” in The Catholic Encyclopedia vol. 13 (New York: Encyclopedia Press, 1913), pp. 1–5.
• 16Cf. Benedetto Croce, History as the Story of Liberty, S. Sprigge, trans. (New York: W. W. Norton, 1941), p. 33.