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The Denial of Economics - Ludwig von Mises, Human Action: A Treatise on Economics, vol. 2 (LF ed.) [1996]

Edition used:

Human Action: A Treatise on Economics, in 4 vols., ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007). Vol. 2.

Part of: Human Action: A Treatise on Economics, in 4 vols. (LF ed.)

About Liberty Fund:

Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


The Denial of Economics

There are doctrines flatly denying that there can be a science of economics. What is taught nowadays at most of the universities under the label of economics is practically a denial of it.

He who contests the existence of economics virtually denies that man’s well-being is disturbed by any scarcity of external factors. Everybody, he implies, could enjoy the perfect satisfaction of all his wishes, provided a reform succeeds in overcoming certain obstacles brought about by inappropriate man-made institutions. Nature is open-handed, it lavishly loads mankind with presents. Conditions could be paradisiac for an indefinite number of people. Scarcity is an artificial product of established practices. The abolition of such practices would result in abundance.

In the doctrine of Karl Marx and his followers scarcity is a historical category only. It is the feature of the primeval history of mankind which will be forever liquidated by the abolition of private property. Once mankind has effected the leap from the realm of necessity into the realm of freedom1 and thereby reached “the higher phase of communist society,” there will be abundance and consequently it will be feasible to give “to each according to his needs.”2 There is in the vast flood of Marxian writings not the slightest allusion to the possibility that a communist society in its “higher phase” might have to face a scarcity of natural factors of production. The fact of the disutility of labor is spirited away by the assertion that to work, under communism of course, will no longer be pain but pleasure, “the primary necessity of life.”3 The unpleasant experiences of the Russian “experiment” are interpreted as caused by the capitalists’ hostility, by the fact that socialism in one country only is not yet perfect and therefore has not yet been able to bring about the “higher phase,” and, more recently, by the war.

Then there are the radical inflationists as represented, for example, by Proudhon and by Ernest Solvay. In their opinion scarcity is created by the artificial checks upon credit expansion and other methods of increasing the quantity of money in circulation, enjoined upon the gullible public by the selfish class interests of bankers and other exploiters. They recommend unlimited public spending as the panacea.

Such is the myth of potential plenty and abundance. Economics may leave it to the historians and psychologists to explain the popularity of this kind of wishful thinking and indulgence in daydreams. All that economics has to say about such idle talk is that economics deals with the problems man has to face on account of the fact that his life is conditioned by natural factors. It deals with action, i.e., with the conscious endeavors to remove as far as possible felt uneasiness. It has nothing to assert with regard to the state of affairs in an unrealizable and for human reason even inconceivable universe of unlimited opportunities. In such a world, it may be admitted, there will be no law of value, no scarcity, and no economic problems. These things will be absent because there will be no choices to be made, no action, and no tasks to be solved by reason. Beings which would have thrived in such a world would never have developed reasoning and thinking. If ever such a world were to be given to the descendants of the human race, these blessed beings would see their power to think wither away and would cease to be human. For the primary task of reason is to cope consciously with the limitations imposed upon man by nature, is to fight against scarcity. Acting and thinking man is the product of a universe of scarcity in which whatever well-being can be attained is the prize of toil and trouble, of conduct popularly called economic.

2

The Method of Imaginary Constructions

The specific method of economics is the method of imaginary constructions.

This method is the method of praxeology. That it has been carefully elaborated and perfected in the field of economic studies in the narrower sense is due to the fact that economics, at least until now, has been the best-developed part of praxeology. Everyone who wants to express an opinion about the problems commonly called economic takes recourse to this method. The employment of these imaginary constructions is, to be sure, not a procedure peculiar to the scientific analysis of these problems. The layman in dealing with them resorts to the same method. But while the layman’s constructions are more or less confused and muddled, economics is intent upon elaborating them with the utmost care, scrupulousness, and precision, and upon examining their conditions and assumptions critically.

An imaginary construction is a conceptual image of a sequence of events logically evolved from the elements of action employed in its formation. It is a product of deduction, ultimately derived from the fundamental category of action, the act of preferring and setting aside. In designing such an imaginary construction the economist is not concerned with the question of whether or not it depicts the conditions of reality which he wants to analyze. Nor does he bother about the question of whether or not such a system as his imaginary construction posits could be conceived as really existent and in operation. Even imaginary constructions which are inconceivable, self-contradictory, or unrealizable can render useful, even indispensable services in the comprehension of reality, provided the economist knows how to use them properly.

The method of imaginary constructions is justified by its success. Praxeology cannot, like the natural sciences, base its teachings upon laboratory experiments and sensory perception of external objects. It had to develop methods entirely different from those of physics and biology. It would be a serious blunder to look for analogies to the imaginary constructions in the field of the natural sciences. The imaginary constructions of praxeology can never be confronted with any experience of things external and can never be appraised from the point of view of such experience. Their function is to serve man in a scrutiny which cannot rely upon his senses. In confronting the imaginary constructions with reality we cannot raise the question of whether they correspond to experience and depict adequately the empirical data. We must ask whether the assumptions of our construction are identical with the conditions of those actions which we want to conceive.

The main formula for designing of imaginary constructions is to abstract from the operation of some conditions present in actual action. Then we are in a position to grasp the hypothetical consequences of the absence of these conditions and to conceive the effects of their existence. Thus we conceive the category of action by constructing the image of a state in which there is no action, either because the individual is fully contented and does not feel any uneasiness or because he does not know any procedure from which an improvement in his well-being (state of satisfaction) could be expected. Thus we conceive the notion of originary interest from an imaginary construction in which no distinction is made between satisfactions in periods of time equal in length but unequal with regard to their distance from the instant of action.

The method of imaginary constructions is indispensable for praxeology; it is the only method of praxeological and economic inquiry. It is, to be sure, a method difficult to handle because it can easily result in fallacious syllogisms. It leads along a sharp edge; on both sides yawns the chasm of absurdity and nonsense. Only merciless self-criticism can prevent a man from falling headlong into these abysmal depths.

3

The Pure Market Economy

The imaginary construction of a pure or unhampered market economy assumes that there is division of labor and private ownership (control) of the means of production and that consequently there is market exchange of goods and services. It assumes that the operation of the market is not obstructed by institutional factors. It assumes that the government, the social apparatus of compulsion and coercion, is intent upon preserving the operation of the market system, abstains from hindering its functioning, and protects it against encroachments on the part of other people. The market is free; there is no interference of factors, foreign to the market, with prices, wage rates, and interest rates. Starting from these assumptions economics tries to elucidate the operation of a pure market economy. Only at a later stage, having exhausted everything which can be learned from the study of this imaginary construction, does it turn to the study of the various problems raised by interference with the market on the part of governments and other agencies employing coercion and compulsion.

It is amazing that this logically incontestable procedure, the only one that is fitted to solve the problems involved, has been passionately attacked. People have branded it as a prepossession in favor of a liberal economic policy, which they stigmatize as reactionary, economic royalism, Manchesterism, negativism, and so on. They deny that anything can be gained for the knowledge of reality from occupation with this imaginary construction. However, these turbulent critics contradict themselves as they take recourse to the same method in advancing their own assertions. In asking for minimum wage rates they depict the alleged unsatisfactory conditions of a free labor market and in asking for tariffs they describe the alleged disasters brought about by free trade. There is, of course, no other way available for the elucidation of a measure limiting the free play of the factors operating on an unhampered market than to study first the state of affairs prevailing under economic freedom.

It is true that economists have drawn from their investigations the conclusion that the goals which most people, practically even all people, are intent on attaining by toiling and working and by economic policy can best be realized where the free market system is not impeded by government decrees. But this is not a preconceived judgment stemming from an insufficient occupation with the operation of government interference with business. It is, on the contrary, the result of a careful unbiased scrutiny of all aspects of interventionism.

It is also true that the classical economists and their epigones used to call the system of the unhampered market economy “natural” and government meddling with market phenomena “artificial” and “disturbing.” But this terminology also was the product of their careful scrutiny of the problems of interventionism. They were in conformity with the semantic practice of their age in calling an undesirable state of social affairs “contrary to nature.”

Theism and Deism of the Age of Enlightenment viewed the regularity of natural phenomena as an emanation of the decrees of Providence. When the philosophers of the Enlightenment discovered that there prevails a regularity of phenomena also in human action and in social evolution, they were prepared to interpret it likewise as evidence of the paternal care of the Creator of the universe. This was the true meaning of the doctrine of the predetermined harmony as expounded by some economists.4 The social philosophy of paternal despotism laid stress upon the divine mission of kings and autocrats predestined to rule the peoples. The liberal retorted that the operation of an unhampered market, on which the consumer—i.e., every citizen—is sovereign, brings about more satisfactory results than the decrees of anointed rulers. Observe the functioning of the market system, they said, and you will discover in it too the finger of God.

Along with the imaginary construction of a pure market economy the classical economists elaborated its logical counterpart, the imaginary construction of a socialist commonwealth. In the heuristic process which finally led to the discovery of the operation of a market economy this image of a socialist order even had logical priority. The question which preoccupied the economists was whether a tailor could be supplied with bread and shoes if there was no government decree compelling the baker and the shoemaker to provide for his needs. The first thought was that authoritarian interference is required to make every specialist serve his fellow citizens. The economists were taken aback when they discovered that no such compulsion is needed. In contrasting productivity and profitability, self-interest and public welfare, selfishness and altruism, the economists implicitly referred to the image of a socialist system. Their astonishment at the “automatic,” as it were, steering of the market system was precisely due to the fact that they realized that an “anarchic” state of production results in supplying people better than the orders of a centralized omnipotent government. The idea of socialism—a system of the division of labor entirely controlled and managed by a planning authority—did not originate in the heads of utopian reformers. These utopians aimed rather at the autarkic coexistence of small self-sufficient bodies; take, for instance, Fourier’s phalanstère. The radicalism of the reformers turned toward socialism when they took the image of an economy managed by a national government or a world authority, implied in the theories of the economists, as a model for their new order.

[1. ]Cf. Engels, Herrn Eugen Dührings Umwälzung der Wissenschaft (7th ed. Stuttgart, 1910), p. 306. [Friedrich Engels’ book is available in English translation: Herr Eugen Dühring’s Revolution in Science (Anti-Dühring). London: Lawrence & Wishart, 1934, p. 312.]

[2. ]Cf. Karl Marx, Zur Kritik des sozialdemokratischen Parteiprogramms von Gotha, ed. Kreibich (Reichenberg, 1920), p. 17. [Karl Marx’s work cited has been translated into English as The Criticism of the Gotha Program (1875); an excerpt appears in Max Eastman, ed. Capital, the Communist Manifesto and Other Writings by Karl Marx. (New York: Random House’s Modern Library edition, 1932). The quote on this page of Human Action appears on p. 7 of the Eastman anthology.]

[3. ]Cf. ibid.

[4. ]The doctrine of the predetermined harmony in the operation of an unhampered market system must not be confused with the theorem of the harmony of the rightly understood interests within a market system, although there is something akin between them. Cf. below, pp. 673–82.