Front Page Titles (by Subject) Economics as a Social Science1 - Capital, Expectations, and the Market Process
The Online Library of Liberty
A project of Liberty Fund, Inc.
Search this Title:
Economics as a Social Science1 - Ludwig M. Lachmann, Capital, Expectations, and the Market Process 
Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy, ed. with an Introduction by Walter E. Grinder (Kansas City: Sheed Andrews and McMeel, 1977).
About Liberty Fund:
This work is copyrighted by the Institute for Humane Studies, George Mason University, Fairfax, Virginia, and is put online with their permission.
Fair use statement:
Economics as a Social Science1
In attempting to outline the main characteristics of Economics, I shall maintain a triple thesis:
By saying that Economics is a Science I mean that economists endeavour to establish systematic generâlisations about observable phenomena.
The real nature of truth, the ultimate grounds of human existence, the universal criteria of the Good and the Beautiful, are the province of the philosopher, not of the scientist. For this very reason the economist, as an economist, must refrain from making value-judgements. He is concerned with the World as it is, not with the World as it ought to be. About what ought to be men will always disagree. Arguments of this kind cannot be settled by an appeal to reason and experience. For each value-judgement presupposes another value-judgement of a higher order, and thus cannot be sustained without an appeal to the ultimate grounds of human existence. Every discussion of a value problem inevitably leads to a metaphysical problem, the kind of problem the scientist has to eschew.
The object of Economic Science is Human Action, a class of observable phenomena. But before we can begin to study its characteristics we have to meet a possible objection. Can there be a science which is not “deterministic”? If not, how can a science of human action be reconciled with our consciousness of a Free Will? I believe this objection can be met, but the problem is undoubtedly a serious one. In answering it we must, for the reasons just given, keep clear of the philosophical depths of the Free Will problem. I shall merely assume that, where human affairs are concerned, Free Will is a useful hypothesis which has not hitherto been invalidated. It is, in fact, as hypothesis which is universally accepted, even by those who profess to disbelieve in it. For how otherwise could they take part in discussions without regarding themselves as mere human gramophones emitting strange but irrelevant noises, and how could they ever hope to “convince” anybody else?
Reprinted from South African Journal of Economics 18 (September 1950).
Fortunately there is a way out of our dilemma. It lies in the distinction between means and ends. In choosing ends we are free. Choice indeed is a manifestation of Free Will. But there are some ends which are incompatible, “having one's cake and eating it” is a significant example in the economic field. Here, by making one choice, we eliminate the possibility of another. Moreover, the means at our disposal are almost always limited, and this sets further limits to our choice, whilst there are few, if any, economic problems in the Land of Cockaigne. But it is important to understand that where these means are of a kind to leave us no choice, no economic problem exists either. The nature of economic activity lies in that we have some choice, to the extent to which the means at our disposal have alternative uses. In this way the freedom of choice and the determinacy imposed on us by our limited resources can be reconciled. “Economics is the Science which studies human behaviour as a relationship between ends and scarce means which have alternative uses” according to Professor Robbins's well-known definition.2
It remains to clarify the difference between technical and economic problems. Technical problems can also be stated in terms of means and ends, but they only arise where we have one end and more than one means. How to produce gold is therefore a technical problem; whether to produce it at all, or to devote our resources to other ends, is essentially an economic one. It is the possibility of choice which makes it so.
The second part of my triple thesis contends that Economics is a Social Science as distinct form the natural sciences. I hasten to stress that the criterion of distinction does not lie in the nature of the objects studied. It would be wrong to think that “Man” constitutes a field of study intrinsically separate from “Nature.”
Natural sciences of Man can and do exist: Anatomy and Physiology are obvious examples. But it is a materialistic fallacy to believe that the material nature of the objects studied determines the fields of the various sciences. The pursuit of knowledge consists in asking a series of questions, the answers to which we try to relate to each other. And it is the relationships between the problems thus raised, and sometimes solved, and not any relationship between material objects, which constitute the field of each science.3
The difference between natural and social sciences therefore lies in the nature of the questions they ask. I have defined the method of Economics in terms of means and ends. But means and ends have no measurable “material” existence. They are categories of the mind. The angle from which economists approach their problems assumes the form of a general classification into means and ends. To them all economic phenomena have, in the first place, to be interpreted as manifestations of the human mind, of decisions to seek certain ends with given means.
This means that among the observable phenomena which economists, like other scientists, attempt to relate to each other, human decisions play a most prominent part. In fact the business of the economist consists in very little else but asking what human choices have caused a given phenomenon, say a change in price, or output, or employment.
But behind these choices we must not go. Why female fashions change more rapidly than male fashions, why more people prefer the music of Irving Berlin to that of Stravinsky than the other way round, is no business of ours. The economic consequences (implications, if you like) of the choice once it is made, not the psychological causes, belong to the province of Economics.4
The difference between natural and social sciences may further be illustrated by the different part played in both by notions which originally were commonly used in both.
The concept of “Purpose,” for example, has long been discarded by the older natural sciences like physics, and has now even been expunged from biology. Yet, it remains an indispensable tool of the social sciences. Where human action is concerned, a purely behaviouristic approach can answer none of our questions. It certainly cannot explain, i.e. make intelligible, a single human act, let alone a complex series of acts of production and exchange.
The same applies to the “continuity of environment.” In the natural sciences this is an axiom. The “uniformity of Nature” has long been recognised as the logical basis of inductive inference. Natura non facit saltum. But in the social sciences where, of course, we also have to assume some continuity of environment, it is not an axiom. Its logical basis is here an assumption about purposes, and such an assumption may, in a concrete case, be falsified. Whether we turn on the wireless, post a letter, or wait for a train, in each case our conduct is guided by an implicit assumption that the purposes in the pursuit of which men yesterday operated the social environment in which we live, will continue to inspire them to-day. The probability we assign to such assumptions is evidently something entirely different from that with which we expect the moon to rise to-night. A general strike, for instance, would upset our assumptions in the former case, while Nature, broadly speaking, does not go on strike.
The idea of Causality falls into the same class of notions discarded by modern natural science, but which the social sciences must retain. The very “anthropomorphic connotations” which make the concept so suspect in the eyes of modern scientists eager to purge their terminology of anything not “observable,” make it valuable to us. After all, we are concerned with the “anthropomorphic.” For us it is not true that all we can observe are the uniformities of sequence between “events.” Our object of study is the pattern of relationships between decisions made and the practical carrying out of these decisions, the co-ordination of means and ends. For us the category “means and ends” is logically prior to any observation we make, and the phenomena we observe are to us not just “events” in themselves meaningless. For us our observations fall at once into two distinct classes, human decisions and all other social phenomena. And inasmuch as decisions have to be made before they can be carried out and have consequences, we are entitled to regard them as social causes.
That the making of decisions, the co-ordination of means and ends, takes the form of mental processes does not, of course, mean that it is not “observable.” Without the assumption that we and our fellow-men, broadly speaking, “know what we are doing,” there could not only be no social science, there could be no social life. The social scientist, we may conclude, not merely describes but explains social phenomena by reducing them to acts of the mind. We may therefore say that the “causes” of these phenomena are our choices, co-ordinated in the form of plans.
These plans may, of course, fail. Very few things ever go according to plan. In war, for example, nothing ever does, not even for the victorious side. It remains true none the less that the outcome of a war is the cumulative result of the conflicting plans of both belligerents. Could anybody describe the course of a war otherwise than in terms of the rival plans successively adopted, failures though they all were? We may therefore conclude that cause and effect as well as means and ends are fundamental categories of the social sciences.
Compared with the natural sciences the social sciences are in some respects inferior, in others superior. Their inferiority rests in their inability to predict and control. As human action is governed by choice, and choice is free, there can be no prediction of our actions. All attempts to smuggle in predictability by the large back-door labelled “the Law of large numbers” are bound to fail since human events lack the quality of “randomness” essential for this purpose. The essence of social life consists in that men get to know about each other and modify their conduct in accordance with such a knowledge. Human action, directed by knowledge gained in that process of intercommunication which is the very texture of society, can never be regarded as “random.”
Nor can there be “control” in the full scientific sense of the word. A zoologist making a breeding experiment with guineapigs need have little fear that the guinea-pigs, knowing that they are being watched, will change their breeding habits. But a politician experimenting with taxation or import control measures will very soon find that the objects of his experiments are guided in their action by inspired guesses about how long he will stay in office.
I said there can be no control in the full scientific sense of the word. I do not wish to be misunderstood. Nothing is farther from my mind than to deny the possibility of social control. The essential point is that social control requires the willing co-operation of those whose actions are to be controlled. And co-operation, like every other type of action, requires a continuous effort of the human will. Without it control cannot succeed.5
I do not wish to deny the possibility of what I would call “negative prediction,” based on inconsistency. If an economist observes a government trying, at one and the same time, to reduce the cost of living and to create an export surplus, he can predict that one of these actions will be a failure. To uncover such inconsistencies and to warn the public that what the politicians propose to do cannot be done, is, in all countries, perhaps the most important public duty of economists in our time.
With such meagre and unimpressive contributions to human progress to their credit, wherein lies the superiority of the social sciences? In the fact that they can go beyond mere description and correlation, and render the social world intelligible by reducing the phenomena of human action to that irreducible final cause: human choice. The natural sciences, after all, adopted their present-day methods after centuries spent in a vain search for ultimate causes, not out of strength but out of despair. I can see no cogent reason why we, who are in a more fortunate position, should follow their lead. We shall never know why a rose smells as it does, but I can see no insurmountable obstacle to our knowing why a perfume, say Chanel No. 5, smells as it does. In the second case we can ask the creators what they had in mind; in the first we cannot. In the social sciences the quest for final causes is a meaningful enterprise, and in this lies their superiority.
The third part of my thesis is that economics is an analytical social science, as distinct from the descriptive social sciences, or History. In a moment I shall return to the very important relationship between Economics and History. Before doing so, however, I must stress that the only successful method of the analytical social sciences is the “compositive” method.
The modus operandi of all sciences consists in analysing complex phenomena into their elements. Where not causation but correlation is the type of relationship under examination, its degree may provide the standard of comparison. But where causation is our quest, the elements of our analysis must be the causes of the phenomenon observed. Only where we can account for all the necessary and sufficient conditions can we claim to have grasped all the elements of the problem.
The logical character of the relationship between a phenomenon and its elements raises, of course, a number of crucial issues with which I need not deal here. But at least the most fundamental aspect of this problem requires some comment. The question has been asked, with what right we apply the logic of our minds to the external phenomena of nature. There are, of course, a number of answers to this question, not all of them consistent in themselves, few consistent with each other. But where Human Action is concerned, fortunately the matter is much simpler. For the Logic with which we think is also the Logic with which we act. As Professor Mises has put it: “Human Action stems from the same source as human reasoning. Action and reason are congeneric and homogeneous; they may even be called two different aspects of the same thing. That reason has the power to make clear through pure ratiocination the essential features of action is a consequence of the fact that action is an offshoot of reason.”6
The Logic of Action is essentially a Logic of Success. We start by imagining a desired state of affairs as aim of our action, and call its achievement “success.” We then proceed to eliminate all those courses of action which, in the situation as we see it, would be inconsistent with this achievement. What remains is the course of action we take.
It is not hard to guess that I shall be accused of excessive methodological rationalism. “Where,” I shall probably be asked, “is there any room left for the non-rational aspects of behaviour, for custom and habit, for the overwhelming force of passion, and the all-pervasive influence of human inertia?” The answer to this objection is that by making choice, whatever it is and however motivated, the starting point of our analysis we have already taken care of these objections. Not the psychological causes of human decisions, but their logical consequences form the subject-matter of the analytical social sciences.
The number of hours worked in a community is, as a rule, fixed by custom, but it certainly has an economic effect: it determines the magnitude of output. The remuneration of officials is everywhere determined outside the marketplace; it remains true none the less that it has an effect on the supply and demand of their services. The most ardent traditionalist who regards it as his main vacation in life to maintain an existing way of life and social order, must seek to make this order “work”; otherwise it will not survive.
I now turn to the relationship between the analytical social sciences and History. Perhaps a Professor of Economics and Economic History may crave the indulgence of his audience if, on an occasion like this, he spends a few minutes pondering the correct relationship between the two halves of his function. But something more serious is here involved. The relationship between the analytical social sciences and History encompasses, in the social field, the problems of “theory” and “fact,” or, to be more precise, the whole set of problems which concern the relationship between the formal-logical apparatus of a science and its empirical material.
At once we are confronted with a dilemma. If Economic Science and Economic History both deal with the same empirical phenomena, is not one of them superfluous? Is there anything the one could tell us which the other could not? In trying to solve this dilemma it has been said that History deals with facts, Theory with inductive generalizations from these facts. If this were so, History could not be regarded as a science, for the mere accumulation of facts is, of course, not a scientific, but a pre-scientific scientific activity. But it is readily seen that this view of the matter is quite wrong.
It is plainly impossible to write the simplest village chronicle, let alone a biography, or the history of wars and revolutions on a purely behaviouristic basis, without an attempt at causal explanation, that is to say, without referring to ends sought and means employed. This simply follows from the fact that all History deals with Human Action which cannot be rendered intelligible otherwise. It is also hardly an accident that the method I have described, the method of explaining social phenomena in terms of human decisions, possibly rival and conflicting decisions, was originally developed in the writing of History. Not in the sense that its logical character and implications were at all clearly realised, they were not, but for the simple reason that History cannot be written otherwise.
So we seem to be thrown back on our dilemma. If Theory and History both aim at causal explanation, is one of them superfluous? The answer has to be sought in the methodological principle I mentioned earlier in this address. It is not the nature of our empirical material, but the nature of the questions we ask of our material, that determines the boundaries between sciences. But do not the theorist and the historian both ask causal questions of their material? They do, but the questions of the one presuppose the answers to those of the other.
The work of the historian consists largely, though not exclusively, in applying the broad generalizations of theory to concrete facts. The relationship between the analytical social sciences and History is, broadly speaking, the same as that between pure and applied science. Whether the historian ascribes the vicissitudes of the British economy of the postwar period to “suppressed inflation” (teruggedrongen inflasie) or to Full Employment, in either case his historical judgement involves the valid existence of some general theory linking money and employment. Whether he sees the chief cause of the French Revolution in the stubborn blindness of a ruling class which failed to make concessions when there was still time to make them, or whether he sees it in the equally disastrous blindness of a rising professional class (to wit, the modern professional politician of legal extraction), neither explanation would make sense without a theory about the relationship between social stratification and political power.
In the language of modern Logic, the function of the historian is to “fill in” the descriptive signs between the logical signs, to tell us what ends by what means men in a given situation pursued. In applying the general means-ends category to concrete historical facts new problems are encountered. The applied scientist knows many woes that are undreamt of in the philosophy of pure science. The general “scarce-means-multiple-ends” scheme, for example, works well enough where we have to deal with the action of one man, as in a biography, or an organized group, say, a company, a party, a nation. It works less well where the situation we study is the result of the complex interplay of a large number of social forces. Like every other scientist the historian dislikes having to handle too many variables. And the temptation to treat as constant what one knows not to be a constant is often very strong. In the worst cases this takes the form of seeking an explanation of phenomena observed by “personifying” the forces whose very modus operandi should be explained, and ascribing means and ends to such pseudo-characters, for example, if the evolution of the modern form of the joint-stock company is “explained” as an “indispensable tool of Capitalism.” This, of course, is not History but mythology, somewhat reminiscent of the Olympian interventions in he struggles of the Homeric heroes whenever the author is at a loss to account for their actions. Explanations of events in the history of a group in terms of the Hegelian “group spirit,” or the “culture patterns” currently in anthropological fashion fall into the same class of pseudo-explanations.
Some economic historians explain almost everything that happened between 1815 and 1914 as either the result, or at least a concomitant, of the “process of industrialization.” Here we postulate a given change, or rather, a given process of continuous change, as a quasi-external “cause,” and assume that everything that happens constitutes a “response” of the social group concerned to the initial and continuous “stimulus.” One can hardly grudge a working scientist an attempt to reduce the number of his independent variables to manageable proportions, but at the same time it is possible to feel that the cases in which the results of this method will be an unqualified success will be few. It is, for example, obvious that the process of industrialization in Britain, Germany, and the United States produced, besides a number of similar, also certain highly significant dissimilar results which it is also the task of the historian to explain. All this reminds us of a passage from Tocqueville:
M. de la Fayette has said somewhere in his memoirs that the exaggerated system of general causes provides wonderful comfort to mediocre politicians. I would add that it also does this admirably for mediocre historians. It always provides them with some really good reason which, in the most difficult part of their book, will promptly get them out of all trouble, and encourages the weakness or laziness of the mind, while all the time paying homage to its profundity,
I trust these remarks will not be construed as a criticism of historical method. They are not. The historical method, as outlined above, is the only method that enables us to understand complex social phenomena. My remarks were prompted by a desire to see some of the applications of this method improved, not to see it replaced by another method. I cannot help feeling that to the working historian notions like “Industrialization” or “Colonization” offer a frame of reference which is too wide and therefore can explain very little. I am pleading for a narrowing of the frame of reference used for the explanation of certain concrete events, not for a narrowing of the scope of historical method.
In fact, there are fields of study in which the historical method if it were used more widely, might be used to great advantage. In recent years, in all countries, large quantities of statistical figures have been turned out by official and semiofficial bodies, by research institutions and ad hoc agencies. While it is always useful to know more facts, it is undeniable that from the point of view of gaining knowledge, the results have, on the whole, been rather meagre and often disappointing. The reason for this lies in the simple fact that statistical figures merely depict certain aspects of historical events, and these events, to become accessible to our minds, require an interpretation of the statistical picture. Without such an interpretation statistics have no meaning. By themselves they tell no story. From all the excellent statistical information about economic conditions in Europe which the Economic Commission for Europe has recently put at our disposal, we would yet fail to learn the most important single fact about Europe's economy in the post-war years: that in every country outside the British Isles and Scandinavia the attempts of the interventionists to impose and maintain a “controlled economy” have failed.
The so-called “Trade Cycle” offers another instance in which the historical method might be more widely employed. Almost from the time the ups and downs of modern economic life began to attract attention, economists have shown themselves eager “to explain it all,” to grasp the essence of the phenomenon by various devices. Theorists tried to catch the elusive ghost by tying him up with long deductive chains derived from a few general assumptions. But as they could hardly ever agree on which assumptions to start from, their quest failed to succeed. “Empirical” economists, their positivistic faith undimmed by logical reasoning, sat poring over innumerable series of production, price, and employment figures, waiting patiently for a moment of inspiration that would show them what was cause and what effect.
To-day it is becoming more and more clear that these ups and downs do not conform to a single invariant pattern. There is no such thing as a Trade Cycle in the sense of a periodically recurrent movement of a given number of variables.7 Unlike the celestial bodies the modern body-economic does not obey the laws of uniform rotation. Each economic crisis has to be studied as an historical event. But it is now also possible to see that the effort spent on the construction of so many theoretical models was by no means in vain. The inconsistency of the various models disappears once we realize that each historical crisis was due to a different configuration of circumstances. And to find its proper model of explanation for each crisis is essentially the task of the economic historian.
We may therefore conclude that the spheres of History and the analytical social sciences, so far from overlapping, are actually complementary. The historian endeavours to render his narrative intelligible by means of causal imputation. But if I study the causes of an event E, I can meaningfully attribute it to, say, factors A and B only if I have some prior general knowledge which makes me think that the class of events to which A and B belong may, in general, generate events of the class to which E belongs. If, on the other hand, two other factors, C and D, belong to a class of which there is no reason to believe that in any circumstances they could give rise to events of the class E, we shall refuse them causal status a priori, before even beginning the study of the facts. If we hear it suggested that a nation was ruined by the incompetence of its rulers, all we can do is turn to the facts. It is a plausible hypothesis, for in general it is possible for incompetence to have such results. But a hypothesis attributing the ruin of a nation to a lack of matrimonial virtues on the part of its rulers need not even be investigated.
The chief task of the analytical social scientist is to tell the historians what factors will not bear a causal imputation. The general analytical schemes of theory furthermore provide the historian with alternatives of explanation. But the actual choice of the alternative, the act of causal imputation itself, is very much the historian's own. It requires that specific understanding of a concrete situation, that ability to weigh each element of it in accordance with its proper significance, for which no general theory, however broadly conceived and elegantly formulated, can offer a substitute. On the other hand, all causal imputation has to depend on broad and general frames of reference describing connections between classes of events. It is the task of the analytical social sciences to provide, in the social sphere, such frames of reference and build a system out of them, for the historian and for all of us.
You may have noticed that in the later part of this address the concept of Economics became almost imperceptibly fused with that of analytical Social Science. This is as it ought to be. I trust I shall not be thought guilty of “economic Imperialism” if I claim that Economics has more nearly approached the ideal of a closed theoretical system in which all propositions are linked to each other and the number of fundamental hypotheses reduced to a bare minimum, than any other social science. This can hardly be an accident. No doubt such an achievement was easier for a science which deals with a sphere of life in which conduct has to be rational, on penalty of bankruptcy, and which can thus use the Logic of Action as the logical cement of its own edifice. But although possibly more difficult elsewhere, I do not think it is an achievement entirely beyond the power of other social sciences. After all, it is not merely in business life that failure carries extreme penalties. If Economics studies the implications of consumers' choice and business decisions, I can at least imagine a Political Sociology which applies the same method to voters' choice and political decisions. The fundamental principle that inconsistent action cannot succeed, that feasible plans must at least be free of inherent contradictions, applies wherever and whenever men strive for success.
At the beginning of this address I paid homage to my eminent predecessors. Let me, in this concluding passage, cast a glance into the future. My distinguished successor in this Chair, who fifty years hence may perhaps address a similar audience on “The Social Sciences in the Twentieth Century,” will undoubtedly have much richer material to draw upon. But I venture to doubt whether he will find it necessary to modify in their essence, to add much to or to detract from, the few logical principles of Social Science I have set before you to-day.
[]An Inaugural Lecture given at the University of the Witwatersrand on 19th April, 1950. The chair was taken by the Vice-Chancellor Dr. H. R Raikes.
[]Lionel Robbins, An Essay on the Nature and Significance of Economic Science (London: Macmillan & Co., 1962), p.16.
[]Max Weber, Gesammelte Aufsäze zur Wissenschaftslehre (Tübingen: J. C. B. Mohr, 1922), p.166.
[]This delimitation is not arbitrary. It simply follows the natural frontier of our conscious thought, which is also that of Logic. Human Action controlled by the mind has a logical structure and can thus be “understood.” Those subconscious processes, on the other hand, which precede the choice of purpose and the decision to act, lack this natural structure. They are to us “external phenomena,” essentially structure-less, just like any other event we happen to observe.
[]Forty years ago it was said of a highly civilized country in Europe that there the government was so universally loved and respected, that it was quite sufficient for them to say that they did not want a certain thing to be done, and everybody would start doing it!
[]L. v. Mises, Human Action (New Haven: Yale University Press, 1949), p. 39.
[]So much is now more or less generally agreed. Dr. J. R. Hicks, in his recent Contribution to the Theory of the Trade Cycle (Oxford: Clarendon Press, 1950), although he still speaks of “cycles,” makes it clear that he does not mean uniform sequences of identical constellations.