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Mises on Popular Errors and Economic Method

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Source: Ludwig von Mises, The Ultimate Foundation of Economic Science: An Essay on Method, ed Bettina Bien Greaves (Indianapolis: Liberty Fund, 2006).

CHAPTER 5. On Some Popular Errors Concerning the Scope and Method of Economics

1. The Research Fable

The popular ideas concerning the methods the economists employ or ought to employ in the pursuit of their studies are fashioned by the belief that the methods of the natural sciences are also adequate for the study of human action. This fable is supported by the usage that mistakes economic history for economics. A historian, whether he deals with what is called general history or with economic history, has to study and to analyze the available records. He must embark upon research. Although the research activities of a historian are epistemologically and methodologically different from those of a physicist or a biologist, there is no harm in employing for all of them the same appellation, viz., research. Research is not only time-consuming. It is also more or less expensive.

But economics is not history. Economics is a branch of praxeology, the aprioristic theory of human action. The economist does not base his theories upon historical research, but upon theoretical thinking like that of the logician or the mathematician. Although history is, like all other sciences, at the background of his studies, he does not learn directly from history. It is, on the contrary, economic history that needs to be interpreted with the aid of the theories developed by economics.

The reason is obvious, as has been pointed out already. The historian can never derive theorems about cause and effect from the analysis of the material available. Historical experience is not laboratory experience. It is experience of complex phenomena, of the outcome of the joint operation of various forces.

This shows why it is wrong to contend that “it is from observation that even deductive economics obtains its ultimate premises.”1 What we can “observe” is always only complex phenomena. What economic history, observation, or experience can tell us is facts like these: Over a definite period of the past the miner John in the coal mines of the X company in the village of Y earned p dollars for a working day of n hours. There is no way that would lead from the assemblage of such and similar data to any theory concerning the factors determining the height of wage rates.

There are plenty of institutions for alleged economic research. They collect various materials, comment in a more or less arbitrary way upon the events to which these materials refer, and are even bold enough to make, on the ground of this knowledge about the past, prognostications concerning the future course of business affairs. Considering forecasting the future as their main objective, they call the series of data collected “tools.” Considering the elaboration of plans for governmental action as their most eminent pursuit, they aspire to the role of an “economic general staff” assisting the supreme commander of the nation’s economic effort. Competing with the research institutes of the natural sciences for government and foundation grants, they call their offices “laboratories” and their methods “experimental.” Their effort may be highly appreciated from some points of view. But it is not economics. It is economic history of the recent past.


The Study of Motives

Public opinion still labors under the failure of classical economics to come to grips with the problem of value. Unable to solve the apparent paradox of valuation, the classical economists could not trace the chain of market transactions back to the consumer, but were forced to start their reasoning from the actions of the businessman, for whom the valuations of the buyers are a given fact. The conduct of the businessman in his capacity as a merchant serving the public is pertinently described by the formula: Buy in the cheapest and sell in the dearest market. The second part of this formula refers to the conduct of the buyers whose valuations determine the height of the prices they are prepared to pay for the merchandise. But nothing is said about the process that sets up these valuations. They are looked upon as given data. If one accepts this oversimplified formula, it is certainly possible to distinguish between businesslike conduct (falsely termed economic or rational conduct) and conduct determined by other considerations than those of business (falsely termed uneconomic or irrational conduct). But this mode of classification does not make any sense if we apply it to the behavior of the consumer.

The harm done by such and similar attempts to make distinctions was that they removed economics from reality. The task of economics, as many epigones of the classical economists practiced it, was to deal not with events as they really happened, but only with forces that contributed in some not clearly defined manner to the emergence of what really happened. Economics did not actually aim at explaining the formation of market prices, but at the description of something that together with other factors played a certain, not clearly described role in this process. Virtually it did not deal with real living beings, but with a phantom, “economic man,” a creature essentially different from real man.

The absurdity of this doctrine becomes manifest as soon as the question is raised in what this economic man differs from real man. He is considered as a perfect egoist, as omniscient, and as exclusively intent upon accumulating more and more wealth. But it does not make any difference for the determination of market prices whether an “egoistic” buyer buys because he wants himself to enjoy what he bought or whether an “altruistic” buyer buys for some other reasons, for instance in order to make a gift to a charitable institution. Neither does it make any difference on the market whether the consumer in buying is guided by opinions that an unaffected spectator considers as true or false. He buys because he believes that to acquire the merchandise in question will satisfy him better than keeping the money or spending it for something else. Whether or not he aims at accumulating wealth, he always aims at employing what he owns for those ends which, as he thinks, will satisfy him best.

There is only one motive that determines all the actions of all men, viz., to remove, directly or indirectly, as much as possible any uneasiness felt. In the pursuit of this aim men are affected with all the frailties and weaknesses of human existence. What determines the real course of events, the formation of prices and all other phenomena commonly called economic as well as all other events of human history, is the attitudes of these fallible men and the effects produced by their actions liable to error. The eminence of the approach of modern marginal utility economics consists in the fact that it pays full attention to this state of affairs. It does not deal with the actions of an ideal man, essentially different from real man, but with the choices of all those who participate in social cooperation under the division of labor.

Economics, say many of its critics, assumes that everybody behaves in all his actions in a perfectly “rational” way and aims exclusively at the highest possible gain like the speculators buying and selling on the stock exchange. But real man, they assert, is different. He aims also at other ends than material advantage that can be expressed in monetary terms.

There is a whole bundle of errors and misunderstandings in this popular reasoning. The man who operates on the stock exchange is driven in this activity by one intention only, to enlarge his own competence. But exactly the same intention animates the acquisitive activity of all other people. The farmer wants to sell his produce at the highest price he can obtain, and the wage earner is anxious to sell his effort at the highest price obtainable. The fact that in comparing the remuneration that is offered to him the seller of commodities or services takes into account not only what he gets in terms of money but also all other benefits involved is fully consonant with his behavior as characterized in this description.

The specific goals that people aim at in action are very different and continually change. But all acting is invariably induced by one motive only, viz., to substitute a state that suits the actor better for the state that would prevail in the absence of his action.


Theory and Practice

A popular opinion considers economics as the science of business transactions. It assumes that economics is in the same relationship to the activities of a businessman as is the discipline of technology taught at schools and expounded in books to the activities of mechanics, engineers, and artisans. The businessman is the doer of things about which the economist merely talks and writes. Hence a businessman has, in his capacity as a practician, a better founded and more realistic knowledge, inside information, about the problems of economics than the theorist who observes the affairs of trade from without. The best method the theorist can choose to learn something about real conditions is to listen to what the performers say.

However, economics is not specifically about business; it deals with all market phenomena and with all their aspects, not only with the activities of a businessman. The conduct of the consumer—i.e., of everybody—is no less a topic of economic studies than that of anybody else. The businessman is, in his capacity as a businessman, not more closely related to or involved in the process that produces market phenomena than anybody else. The position of the economist with regard to the object of his studies is not to be compared to that of the author of books on technology to the practical engineers and workmen but rather to that of the biologist to the living beings—including men—whose vital functions he tries to describe. Not people with the best eyesight are experts in ophthalmology, but ophthalmologists even if they are myopic.

It is a historical fact that some businessmen, foremost among them David Ricardo, made outstanding contributions to economic theory. But there were other eminent economists who were “mere” theorists. What is wrong with the discipline that is nowadays taught in most universities under the misleading label of economics is not that the teachers and the authors of the textbooks are either not businessmen or failed in their business enterprises. The fault is with their ignorance of economics and with their inability to think logically.

The economist—like the biologist and the psychologist—deals with matters that are present and operative in every man. This distinguishes his work from that of the ethnologist who wants to record the mores and habits of a primitive tribe. The economist need not displace himself; he can, in spite of all sneers, like the logician and the mathematician, accomplish his job in an armchair. What distinguishes him from other people is not the esoteric opportunity to deal with some special material not accessible to others, but the way he looks upon things and discovers in them aspects which other people fail to notice. It was this that Philip Wicksteed had in mind when he chose for his great treatise a motto from Goethe’s Faust: Human life—everybody lives it, but only to a few is it known.


The Pitfalls of Hypostatization

The worst enemy of clear thinking is the propensity to hypostatize, i.e., to ascribe substance or real existence to mental constructs or concepts.

In the sciences of human action the most conspicuous instance of this fallacy is the way in which the term society is employed by various schools of pseudo science. There is no harm in employing the term to signify the cooperation of individuals united in endeavors to attain definite ends. It is a definite aspect of various individuals’ actions that constitutes what is called society or the “great society.” But society itself is neither a substance, nor a power, nor an acting being. Only individuals act. Some of the individuals’ actions are directed by the intention to cooperate with others. Cooperation of individuals brings about a state of affairs which the concept of society describes. Society does not exist apart from the thoughts and actions of people. It does not have “interests” and does not aim at anything. The same is valid for all other collectives.

Hypostatization is not merely an epistemological fallacy and not only misleads the search for knowledge. In the so-called social sciences it more often than not serves definite political aspirations in claiming for the collective as such a higher dignity than for the individual or even ascribing real existence only to the collective and denying the existence of the individual, calling it a mere abstraction.

The collectivists themselves disagree with one another in the appreciation of the various collectivistic constructs. They claim a higher reality and moral dignity for one collective than for others or, in a more radical way, even deny both real existence and dignity to the collectivistic constructs of other people. Thus, nationalists consider the “nation” as the only true collective, to which alone all individuals they consider as conationals owe allegiance, and stigmatize all other collectives—e.g., the religious communities—as of minor rank. However, epistemology does not have to deal with the political controversies implied.

In denying perseity, i.e., independent existence of their own, to the collectives, one does not in the least deny the reality of the effects brought about by the cooperation of individuals. One merely establishes the fact that the collectives come into being by the thoughts and actions of individuals and that they disappear when the individuals adopt a different way of thinking and acting. The thoughts and actions of a definite individual are instrumental in the emergence not only of one, but of various collectives. Thus, e.g., the same individual’s various attitudes may serve to constitute the collectives nation, religious community, political party, and so on. On the other hand, a man may, without discontinuing entirely his belonging to a definite collective, occasionally or even regularly in some of his actions proceed in a way that is incompatible with the preservation of his membership. Thus, e.g., it happened in the recent history of various nations that practicing Catholics cast their votes in favor of candidates who openly avowed their hostility to the political aspirations of the Church and spurned its dogmas as fables. In dealing with collectives, the historian must pay attention to the degree to which the various ideas of cooperation determine the thinking and the actions of their members. Thus, in dealing with the history of the Italian Risorgimento, he has to investigate to what extent and in what manner the idea of an Italian national state and to what extent and in what manner the idea of a secular papal state influenced the attitudes of the various individuals and groups whose conduct is the subject of his studies.

The political and ideological conditions of the Germany of his day induced Marx to employ, in the announcement of his program of nationalization of the means of production, the term “society” instead of the term “state” (Staat), which is the German equivalent of the English term “nation.” The socialist propaganda endowed the term “society” and the adjective “social” with an aura of sanctity that is manifested by the quasi-religious esteem that what is called “social work,” i.e., the management of the distribution of alms and similar activities, enjoys.


On the Rejection of Methodological Individualism

No sensible proposition concerning human action can be asserted without reference to what the acting individuals are aiming at and what they consider as success or failure, as profit or loss. If we study the actions of the individuals, we learn everything that can be learned about acting, as there are, as far as we can see, in the universe no other entities or beings that, dissatisfied with the state of affairs that would prevail in the absence of their interference, are intent upon improving conditions by action. In studying action, we become aware both of the powers of man and of the limits of his powers. Man lacks omnipotence and can never attain a state of full and lasting satisfaction. All he can do is to substitute, by resorting to appropriate means, a state of lesser dissatisfaction for a state of greater dissatisfaction.

In studying the actions of individuals, we learn also everything about the collectives and society. For the collective has no existence and reality but in the actions of individuals. It comes into existence by ideas that move individuals to behave as members of a definite group and goes out of existence when the persuasive power of these ideas subsides. The only way to a cognition of collectives is the analysis of the conduct of its members.

There is no need to add anything to what has already been said by praxeology and economics to justify methodological individualism and to reject the mythology of methodological collectivism.2 Even the most fanatical advocates of collectivism deal with the actions of individuals while they pretend to deal with the actions of collectives. Statistics does not register events that are happening in or to collectives. It records what happens with individuals forming definite groups. The criterion that determines the constitution of these groups is definite characteristics of the individuals. The first thing that has to be established in speaking of a social entity is the clear definition of what logically justifies counting or not counting an individual as a member of this group.

This is valid also with regard to those groups that are seemingly constituted by “material facts and realities” and not by “mere” ideological factors, e.g., the groups of people descended from the same ancestry or those of people living in the same geographical area. It is neither “natural” nor “necessary” that the members of the same race or the inhabitants of the same country cooperate with one another more closely than with members of other races or inhabitants of other countries. The ideas of race solidarity and racial hatred are no less ideas than any other ideas, and only where they are accepted by the individuals do they result in corresponding action. Also the primitive tribe of savages is kept together as an acting unit—a society—by the fact that its members are imbued with the idea that loyalty to the clan is the right way or even the only way open to them to take care of themselves. It is true that this primitive ideology was not seriously contested for thousands of years. But the fact that an ideology dominates people’s minds for a very long time does not alter its praxeological character. Other ideologies too enjoyed considerable longevity, e.g., the monarchical principle of government.

The rejection of methodological individualism implies the assumption that the behavior of men is directed by some mysterious forces that defy any analysis and description. For if one realizes that what sets action in motion is ideas, one cannot help admitting that these ideas originate in the minds of some individuals and are transmitted to other individuals. But then one has accepted the fundamental thesis of methodological individualism, viz., that it is the ideas held by individuals that determine their group allegiance, and a collective no longer appears as an entity acting of its own accord and on its own initiative.

All interhuman relations are the offshoot of ideas and the conduct of individuals directed by these ideas. The despot rules because his subjects chose rather to obey him than to resist him openly. The slave-holder is in a position to deal with his slaves as if they were chattels because the slaves are willy nilly prepared to yield to his pretensions. It is an ideological transformation that in our age weakens and threatens to dissolve entirely the authority of parents, teachers, and clergymen.

The meaning of philosophical individualism has been lamentably misinterpreted by the harbingers of collectivism. As they see it, the dilemma is whether the concerns—interests—of the individuals should rank before those of one of the—arbitrarily selected—collectives. However, the epistemological controversy between individualism and collectivism has no direct reference to this purely political issue. Individualism as a principle of the philosophical, praxeological, and historical analysis of human action means the establishment of the facts that all actions can be traced back to individuals and that no scientific method can succeed in determining how definite external events, liable to a description by the methods of the natural sciences, produce within the human mind definite ideas, value judgments, and volitions. In this sense the individual that cannot be dissolved into components is both the starting point and the ultimate given of all endeavors to deal with human action.

The collectivistic method is anthropomorphic, as it simply takes it for granted that all concepts of the action of individuals can be applied to those of the collectives. It does not see that all collectives are the product of a definite way in which individuals act; they are an offshoot of ideas determining the conduct of individuals.


The Approach of Macroeconomics

The authors who think that they have substituted, in the analysis of the market economy, a holistic or social or universalistic or institutional or macroeconomic approach for what they disdain as the spurious individualistic approach delude themselves and their public. For all reasoning concerning action must deal with valuation and with the striving after definite ends, as there is no action not oriented by final causes. It is possible to analyze conditions that would prevail within a socialist system in which only the supreme tsar determines all activities and all the other individuals efface their own personality and virtually convert themselves into mere tools in the hands of the tsar’s actions. For the theory of integral socialism it may seem sufficient to consider the valuations and actions of the supreme tsar only. But if one deals with a system in which more than one man’s striving after definite ends directs or affects actions, one cannot avoid tracing back the effects produced by action to the point beyond which no analysis of actions can proceed, i.e., to the value judgments of the individuals and the ends they are aiming at.

The macroeconomic approach looks upon an arbitrarily selected segment of the market economy (as a rule: upon one nation) as if it were an integrated unit. All that happens in this segment is actions of individuals and groups of individuals acting in concert. But macroeconomics proceeds as if all these individual actions were in fact the outcome of the mutual operation of one macroeconomic magnitude upon another such magnitude.

The distinction between macroeconomics and microeconomics is, as far as terminology is concerned, borrowed from modern physics’ distinction between microscopic physics, which deals with systems on an atomic scale, and molar physics, which deals with systems on a scale appreciable to man’s gross senses. It implies that ideally the microscopic laws alone are sufficient to cover the whole field of physics, the molar laws being merely a convenient adaptation of them to a special, but frequently occurring problem. Molar law appears as a condensed and bowdlerised version of microscopic law.3 Thus the evolution that led from macroscopic physics to microscopic physics is seen as a progress from a less satisfactory to a more satisfactory method of dealing with the phenomena of reality.

What the authors who introduced the distinction between macroeconomics and microeconomics into the terminology dealing with economic problems have in mind is precisely the opposite. Their doctrine implies that microeconomics is an unsatisfactory way of studying the problems involved and that the substitution of macroeconomics for microeconomics amounts to the elimination of an unsatisfactory method by the adoption of a more satisfactory method.

The macroeconomist deceives himself if in his reasoning he employs money prices determined on the market by individual buyers and sellers. A consistent macroeconomic approach would have to shun any reference to prices and to money. The market economy is a social system in which individuals are acting. The valuations of individuals as manifested in the market prices determine the course of all production activities. If one wants to oppose to the reality of the market economy the image of a holistic system, one must abstain from any use of prices.

Let us exemplify one aspect of the fallacies of the macroeconomic method by an analysis of one of its most popular schemes, the so-called national income approach.

Income is a concept of the accounting methods of profit-seeking business. The businessman serves the consumers in order to make profit. He keeps accounts to find out whether or not this goal has been attained. He (and likewise also capitalists, investors, who are not themselves active in business, and, of course, also farmers and owners of all kinds of real estate) compares the money equivalent of all the goods dedicated to the enterprise at two different instants of time and thus learns what the result of his transactions in the period between these two instants was. Out of such a calculation emerge the concepts of profit or loss as contrasted with that of capital. If the owner of the outfit to which this accounting refers calls the profit made “income,” what he means is: If I consume the whole of it, I do not reduce the capital invested in the enterprise.

The modern tax laws call “income” not only what the accountant considers as the profit made by a definite business unit and what the owner of this unit considers as the income derived from the operations of this unit, but also the net earnings of professional people and the salaries and wages of employees. Adding together for the whole of a nation what is income in the sense of accountancy and what is income merely in the sense of the tax laws, one gets the figure called “national income.”

The illusiveness of this concept of national income is to be seen in its dependence on changes in the purchasing power of the monetary unit. The more inflation progresses, the higher rises the national income. Within an economic system in which there is no increase in the supply of money and fiduciary media, progressive accumulation of capital and the improvement of technological methods of production that it engenders would result in a progressive drop in prices or, what is the same, a rise in the purchasing power of the monetary unit. The amount of goods available for consumption would increase and the average standard of living would improve, but these changes would not be made visible in the figures of the national income statistics.

The concept of national income entirely obliterates the real conditions of production within a market economy. It implies the idea that it is not activities of individuals that bring about the improvement (or impairment) in the quantity of goods available, but something that is above and outside these activities. This mysterious something produces a quantity called “national income,” and then a second process “distributes” this quantity among the various individuals. The political meaning of this method is obvious. One criticizes the “inequality” prevailing in the “distribution” of national income. One taboos the question what makes the national income rise or drop and implies that there is no inequality in the contributions and achievements of the individuals that are generating the total quantity of national income.

If one raises the question what factors make the national income rise, one has only one answer: the improvement in equipment, the tools and machines employed in production, on the one hand, and the improvement in the utilization of the available equipment for the best possible satisfaction of human wants, on the other hand. The former is the effect of saving and the accumulation of capital, the latter of technological skill and of entrepreneurial activities. If one calls an increase in national income (not produced by inflation) economic progress, one cannot avoid establishing the fact that economic progress is the fruit of the endeavors of the savers, of the inventors, and of the entrepreneurs. What an unbiased analysis of the national income would have to show is first of all the patent inequality in the contribution of various individuals to the emergence of the magnitude called national income. It would furthermore have to show how the increase in the per-head quota of capital employed and the perfection of technological and entrepreneurial activities benefit—by raising the marginal productivity of labor and thereby wage rates and by raising the prices paid for the utilization of natural resources—also those classes of individuals who themselves did not contribute to the improvement of conditions and the rise in “national income.”

The “national income” approach is an abortive attempt to provide a justification for the Marxian idea that under capitalism goods are “socially” (gesellschaftlich) produced and then “appropriated” by individuals. It puts things upside down. In reality, the production processes are activities of individuals cooperating with one another. Each individual collaborator receives what his fellow men—competing with one another as buyers on the market—are prepared to pay for his contribution. For the sake of argument one may admit that, adding up the prices paid for every individual’s contribution, one may call the resulting total national income. But it is a gratuitous pastime to conclude that this total has been produced by the “nation” and to bemoan—neglecting the inequality of the various individuals’ contributions—the inequality in its alleged distribution.

There is no nonpolitical reason whatever to proceed with such a summing up of all incomes within a “nation” and not within a broader or a narrower collective. Why national income of the United States and not rather “state income” of the State of New York or “county income” of Westchester County or “municipal income” of the municipality of White Plains? All the arguments that can be advanced in favor of preferring the concept of “national income” of the United States against the income of any of these smaller territorial units can also be advanced in favor of preferring the continental income of all the parts of the American continent or even the “world income” as against the national income of the United States. It is merely political tendencies that make plausible the choice of the United States as the unit. Those responsible for this choice are critical of what they consider as the inequality of individual incomes within the United States—or within the territory of another sovereign nation—and aim at more equality of the incomes of the citizens of their own nation. They are neither in favor of a world-wide equalization of incomes nor of an equalization within the various states that form the United States or their administrative subdivisions. One may agree or disagree with their political aims. But one must not deny that the macroeconomic concept of national income is a mere political slogan devoid of any cognitive value.


Reality and Play

The natural conditions of their existence enjoined upon the nonhuman ancestors of man the necessity of mercilessly fighting one another unto death. Inwrought in the animal character of man is the impulse of aggression, the urge to annihilate all those who compete with him in the endeavors to snatch a sufficient share of the scarce means of subsistence that do not suffice for the survival of all those born. Only for the strong animal was there a chance to remain alive.

What distinguishes man from the brutes is the substitution of social cooperation for mortal enmity. The inborn instinct of aggression is suppressed lest it disintegrate the concerted effort to preserve life and to make it more satisfactory by catering to specifically human wants. Supposedly, to calm down the repressed but not fully extinguished urges toward violent action, war dances and games were resorted to. What was once bitterly serious was now sportingly duplicated as a pastime. The tournament looks like fighting, but it is only a pageant. All the moves of the players are strictly regulated by the rules of the game. Victory does not consist in the annihilation of the other party, but in the attainment of a situation that the rules declare to be success. Games are not reality, but merely play. They are civilized man’s outlet for deeply ingrained instincts of enmity. When the game comes to an end, the victors and the defeated shake hands and return to the reality of their social life, which is cooperation and not fighting.

One could hardly misinterpret more fundamentally the essence of social cooperation and the economic effort of civilized mankind than by looking upon it as if it were a fight or the playful duplication of fighting, a game. In social cooperation everyone in serving his own interests serves the interests of his fellow men. Driven by the urge to improve his own conditions, he improves the conditions of other people. The baker does not hurt those for whom he bakes bread; he serves them. All people would be hurt if the baker stopped producing bread and the physician no longer attended to the sick. The shoemaker does not resort to “strategy” in order to defeat his customers by supplying them with shoes. Competition on the market must not be confused with the pitiless biological competition prevailing between animals and plants or with the wars still waged between—unfortunately not yet completely—civilized nations. Catallactic competition on the market aims at assigning to every individual that function in the social system in which he can render to all his fellow men the most valuable of the services he is able to perform.

There have always been people who were emotionally unfit to conceive the fundamental principle of cooperation under the system of the division of tasks. We may try to understand their frailty thymologically. The purchase of any commodity curtails the buyer’s power to acquire some other commodity that he also wishes to get, although, of course, he considers its procurement as less important than that of the good he actually buys. From this point of view he looks upon any purchase he makes as an obstacle preventing him from satisfying some other wants. If he did not buy A or if he had to spend less for A, he would have been able to acquire B. There is, for narrow-minded people, but one step to the inference that it is the seller of A who forces him to forgo B. He sees in the seller not the man who makes it possible for him to satisfy one of his wants, but the man who prevents him from satisfying some other wants. The cold weather induces him to buy fuel for his stove and curtails the funds he can spend for other things. But he blames neither the weather nor his longing for warmth; he lays the blame on the dealer in coal. This bad man, he thinks, profits from his embarrassment.

Such was the reasoning that led people to the conclusion that the source from which the businessman’s profits stem is their fellow men’s need and suffering. According to this reasoning, the doctor makes his living from the patient’s sickness, not from curing it. Bakeries thrive on hunger, not because they provide the means to appease the hunger. No man can profit but at the expense of some other men; one man’s gain is necessarily another man’s loss. In an act of exchange only the seller gains, while the buyer comes off badly. Commerce benefits the sellers by harming the buyers. The advantage of foreign trade, says the Mercantilist doctrine, old and new, consists in exporting, not in the imports purchased by the exports.4

In the light of this fallacy the businessman’s concern is to hurt the public. His skill is the strategy, as it were, the art of inflicting as much evil as possible on the enemy. The adversaries whose ruin he plots are his prospective customers as well as his competitors, those who like himself embark upon raids against the people. The most appropriate method to investigate scientifically business activities and the market process, it is said, is to analyze the behavior and strategy of people engaged in games.5

In a game there is a definite prize that falls to the victor. If the prize has been provided by a third party, the defeated party goes away empty-handed. If the prize is formed by contributions of the players, the defeated forfeit their stake for the benefit of the victorious party. In a game there are winners and losers. But a business deal is always advantageous for both parties. If both the buyer and the seller were not to consider the transaction as the most advantageous action they could choose under the prevailing conditions, they would not enter into the deal.6

It is true that business as well as playing a game is rational behavior. But so are all other actions of man. The scientist in his investigations, the murderer in plotting his crime, the office-seeker in canvassing for votes, the judge in search of a just decision, the missionary in his attempts to convert a nonbeliever, the teacher instructing his pupils, all proceed rationally.

A game is a pastime, is a means to employ one’s leisure time and to banish boredom. It involves costs and belongs to the sphere of consumption. But business is a means—the only means—to increase the quantity of goods available for preserving life and rendering it more agreeable. No game can, apart from the pleasure it gives to the players and to the spectators, contribute anything to the improvement of human conditions.7 It is a mistake to equate games with the achievements of business activity.

Man’s striving after an improvement of the conditions of his existence impels him to action. Action requires planning and the decision which of various plans is the most advantageous. But the characteristic feature of business is not that it enjoins upon man decision-making as such, but that it aims at improving the conditions of life. Games are merriment, sport, and fun; business is life and reality.


Misinterpretation of the Climate of Opinion

One does not explain a doctrine and actions engendered by it if one declares that it was generated by the spirit of the age or by the personal or geographical environment of the actors. In resorting to such interpretations one merely stresses the fact that a definite idea was in agreement with other ideas held at the same time and in the same milieu by other people. What is called the spirit of an age, of the members of a collective, or of a certain milieu is precisely the doctrines prevailing among the individuals concerned.

The ideas that change the intellectual climate of a given environment are those unheard of before. For these new ideas there is no other explanation than that there was a man from whose mind they originated.

A new idea is an answer provided by its author to the challenge of natural conditions or of ideas developed before by other people. Looking backward upon the history of ideas—and the actions engendered by them—the historian may discover a definite trend in their succession and may say that “logically” the earlier idea made the emergence of the later idea due. However, such hindsight philosophy lacks any rational justification. Its tendency to belittle the contributions of the genius—the hero of intellectual history—and to ascribe his work to the juncture of events makes sense only in the frame of a philosophy of history that pretends to know the hidden plan that God or a superhuman power (such as the material productive forces in the system of Marx) wants to accomplish by directing the actions of all men. From the point of view of such a philosophy all men are puppets bound to behave exactly in the ways the demiurge has assigned to them.


The Belief in the Omnipotence of Thought

A characteristic feature of present-day popular ideas concerning social cooperation is what Freud has called the belief in the omnipotence of human thought (die Allmacht des Gedankens).8 This belief is, of course, (apart from psychopaths and neurotics) not maintained with regard to the sphere that is investigated by the natural sciences. But in the field of social events it is firmly established. It developed out of the doctrine that ascribes infallibility to majorities.

The essential point in the political doctrines of the Enlightenment was the substitution of representative government for royal despotism. In the constitutional conflict in Spain in which champions of parliamentary government were fighting against the absolutist aspirations of the Bourbon Ferdinand VII, the supporters of a constitutional regime were called Liberals and those of the King Serviles. Very soon the name Liberalism was adopted all over Europe.

Representative or parliamentary government (also called government by the people or democratic government) is government by officeholders designated by the majority of the people. Demagogues tried to justify it by ecstatic babble about the supernatural inspiration of majorities. However, it is a serious mistake to assume that the nineteenth-century liberals of Europe and America advocated it because they believed in the infallible wisdom, moral perfection, inherent justice, and other virtues of the common man and therefore of majorities. The liberals wanted to safeguard the smooth evolution of all people’s prosperity and material as well as spiritual well-being. They wanted to do away with poverty and destitution. As a means to attain these ends they advocated institutions that would make for peaceful cooperation of all citizens within the various nations as well as for international peace. They looked upon wars, whether civil wars (revolutions) or foreign wars, as a disturbance of the steady progress of mankind to more satisfactory conditions. They realized very well that the market economy, the very basis of modern civilization, involves peaceful cooperation and bursts asunder when people, instead of exchanging commodities and services, are fighting one another.

On the other hand, the liberals understood very well the fact that the might of the rulers ultimately rests, not upon material force, but upon ideas. As David Hume has pointed out in his famous essay On the First Principles of Government, the rulers are always a minority of people. Their authority and power to command obedience on the part of the immense majority of those subject to them are derived from the opinion of the latter that they best serve their own interests by loyalty to their chiefs and compliance with their orders. If this opinion dwindles, the majority will sooner or later rise in rebellion. Revolution—civil war—will remove the unpopular system of government and the unpopular rulers and replace them by a system and by officeholders whom the majority consider as more favorable to the promotion of their own concerns. To avoid such violent disturbances of the peace and their pernicious consequences, to safeguard the peaceful operation of the economic system, the liberals advocate government by the representatives of the majority. This scheme makes peaceful change in the arrangement of public affairs possible. It makes recourse to arms and bloodshed unnecessary not only in domestic but no less in international relations. When every territory can by majority vote determine whether it should form an independent state or a part of a larger state, there will no longer be wars to conquer more provinces.9

In advocating rule by the majority of the people, the nineteenth-century liberals did not nurture any illusions about the intellectual and moral perfection of the many, of the majorities. They knew that all men are liable to error and that it could happen that the majority, deluded by faulty doctrines propagated by irresponsible demagogues, could embark upon policies that would result in disaster, even in the entire destruction of civilization. But they were no less aware of the fact that no thinkable method of government could prevent such a catastrophe. If the small minority of enlightened citizens who are able to conceive sound principles of political management do not succeed in winning the support of their fellow citizens and converting them to the endorsement of policies that bring and preserve prosperity, the cause of mankind and civilization is hopeless. There is no other means to safeguard a propitious development of human affairs than to make the masses of inferior people adopt the ideas of the elite. This has to be achieved by convincing them. It cannot be accomplished by a despotic regime that instead of enlightening the masses beats them into submission. In the long run the ideas of the majority, however detrimental they may be, will carry on. The future of mankind depends on the ability of the elite to influence public opinion in the right direction.

These liberals did not believe in the infallibility of any human being nor in the infallibility of majorities. Their optimism concerning the future was based upon the expectation that the intellectual elite will persuade the majority to approve of beneficial policies.

The history of the last hundred years has not fulfilled these hopes. Perhaps the transition from the despotism of kings and aristocracies came too suddenly. At any rate, it is a fact that the doctrine that ascribes intellectual and moral excellence to the common man and consequently infallibility to the majority became the fundamental dogma of “progressive” political propaganda. In its farther logical development it generated the belief that in the field of society’s political and economic organization any scheme devised by the majority can work satisfactorily. People no longer ask whether interventionism or socialism can bring about the effects that their advocates are expecting from them. The mere fact that the majority of the voters ask for them is considered as an irrefutable proof that they can work and will inevitably result in the benefits expected. No politician is any longer interested in the question whether a measure is fit to produce the ends aimed at. What alone counts for him is whether the majority of the voters favor or reject it.10 Only very few people pay attention to what “mere theory” says about socialism and to the experience of the socialist “experiments” in Russia and in other countries. Almost all our contemporaries firmly believe that socialism will transform the earth into a paradise. One may call it wishful thinking or the belief in the omnipotence of thought.

Yet the criterion of truth is that it works even if nobody is prepared to acknowledge it.


The Concept of a Perfect System of Government

The “social engineer” is the reformer who is prepared to “liquidate” all those who do not fit into his plan for the arrangement of human affairs. Yet historians and sometimes even victims whom he puts to death are not averse to finding some extenuating circumstances for his massacres or planned massacres by pointing out that he was ultimately motivated by a noble ambition: he wanted to establish the perfect state of mankind. They assign to him a place in the long line of the designers of utopian schemes.

Now it is certainly folly to excuse in this way the mass murders of such sadistic gangsters as Stalin and Hitler. But there is no doubt that many of the most bloody “liquidators” were guided by the ideas that inspired from time immemorial the attempts of philosophers to meditate on a perfect constitution. Having once hatched out the design of such an ideal order, the author is in search of the man who would establish it by suppressing the opposition of all those who disagree. In this vein, Plato was anxious to find a tyrant who would use his power for the realization of the Platonic ideal state. The question whether other people would like or dislike what he himself had in store for them never occurred to Plato. It was an understood thing for him that the king who turned philosopher or the philosopher who became king was alone entitled to act and that all other people had, without a will of their own, to submit to his orders. Seen from the point of view of the philosopher who is firmly convinced of his own infallibility, all dissenters appear merely as stubborn rebels resisting what will benefit them.

The experience provided by history, especially by that of the last two hundred years, has not shaken this belief in salvation by tyranny and the liquidation of dissenters. Many of our contemporaries are firmly convinced that what is needed to render all human affairs perfectly satisfactory is brutal suppression of all “bad” people, i.e., of those with whom they disagree. They dream of a perfect system of government that—as they think—would have already long since been realized if these “bad” men, guided by stupidity and selfishness, had not hindered its establishment.

A modern, allegedly scientific school of reformers rejects these violent measures and puts the blame for all that is found wanting in human conditions upon the alleged failure of what is called “political science.” The natural sciences, they say, have advanced considerably in the last centuries, and technology provides us almost monthly with new instruments that render life more agreeable. But “political progress has been nil.” The reason is that “political science stood still.”11 Political science ought to adopt the methods of the natural sciences; it should no longer waste its time in mere speculations, but should study the “facts.” For, as in the natural sciences, the “facts are needed before the theory.”12

One can hardly misconstrue more lamentably every aspect of human conditions. Restricting our criticism to the epistemological problems involved, we have to say: What is today called “political science” is that branch of history that deals with the history of political institutions and with the history of political thought as manifested in the writings of authors who disserted about political institutions and sketched plans for their alteration. It is history, and can as such, as has been pointed out above, never provide any “facts” in the sense in which this term is used in the experimental natural sciences. There is no need to urge the political scientists to assemble all facts from the remote past and from recent history, falsely labelled “present experience.”13 Actually they do all that can be done in this regard. And it is nonsensical to tell them that conclusions derived from this material ought “to be tested by experiments.”14 It is supererogatory to repeat that the sciences of human action cannot make any experiments.

It would be preposterous to assert apodictically that science will never succeed in developing a praxeological aprioristic doctrine of political organization that would place a theoretical science by the side of the purely historical discipline of political science. All we can say today is that no living man knows how such a science could be constructed. But even if such a new branch of praxeology were to emerge one day, it would be of no use for the treatment of the problem philosophers and statesmen were and are anxious to solve.

That every human action has to be judged and is judged by its fruits or results is an old truism. It is a principle with regard to which the Gospels agree with the often badly misunderstood teachings of the utilitarian philosophy. But the crux is that people widely differ from one another in their appraisal of the results. What some consider as good or best is often passionately rejected by others as entirely bad. The utopians did not bother to tell us what arrangement of affairs of state would best satisfy their fellow citizens. They merely expounded what conditions of the rest of mankind would be most satisfactory to themselves. Neither to them nor to their adepts who tried to realize their schemes did it ever occur that there is a fundamental difference between these two things. The Soviet dictators and their retinue think that all is good in Russia as long as they themselves are satisfied.

But even if for the sake of argument we put aside this issue, we have to emphasize that the concept of the perfect system of government is fallacious and self-contradictory.

What elevates man above all other animals is the cognition that peaceful cooperation under the principle of the division of labor is a better method to preserve life and to remove felt uneasiness than indulging in pitiless biological competition for a share in the scarce means of subsistence provided by nature. Guided by this insight, man alone among all living beings consciously aims at substituting social cooperation for what philosophers have called the state of nature or bellum omnium contra omnes [“war of all against all”] or the law of the jungle. However, in order to preserve peace, it is, as human beings are, indispensable to be ready to repel by violence any aggression, be it on the part of domestic gangsters or on the part of external foes. Thus, peaceful human cooperation, the prerequisite of prosperity and civilization, cannot exist without a social apparatus of coercion and compulsion, i.e., without a government. The evils of violence, robbery, and murder can be prevented only by an institution that itself, whenever needed, resorts to the very methods of acting for the prevention of which it is established. There emerges a distinction between illegal employment of violence and the legitimate recourse to it. In cognizance of this fact some people have called government an evil, although admitting that it is a necessary evil. However, what is required to attain an end sought and considered as beneficial is not an evil in the moral connotation of this term, but a means, the price to be paid for it. Yet the fact remains that actions that are deemed highly objectionable and criminal when perpetrated by “unauthorized” individuals are approved when committed by the “authorities.”

Government as such is not only not an evil, but the most necessary and beneficial institution, as without it no lasting social cooperation and no civilization could be developed and preserved. It is a means to cope with an inherent imperfection of many, perhaps of the majority of all people. If all men were able to realize that the alternative to peaceful social cooperation is the renunciation of all that distinguishes Homo sapiens from the beasts of prey, and if all had the moral strength always to act accordingly, there would not be any need for the establishment of a social apparatus of coercion and oppression. Not the state is an evil, but the shortcomings of the human mind and character that imperatively require the operation of a police power. Government and state can never be perfect because they owe their raison d’être to the imperfection of man and can attain their end, the elimination of man’s innate impulse to violence, only by recourse to violence, the very thing they are called upon to prevent.

It is a double-edged makeshift to entrust an individual or a group of individuals with the authority to resort to violence. The enticement implied is too tempting for a human being. The men who are to protect the community against violent aggression easily turn into the most dangerous aggressors. They transgress their mandate. They misuse their power for the oppression of those whom they were expected to defend against oppression. The main political problem is how to prevent the police power from becoming tyrannical. This is the meaning of all the struggles for liberty. The essential characteristic of Western civilization that distinguishes it from the arrested and petrified civilizations of the East was and is its concern for freedom from the state. The history of the West, from the age of the Greek π?λις [city-state] down to the present-day resistance to socialism, is essentially the history of the fight for liberty against the encroachments of the officeholders.

A shallow-minded school of social philosophers, the anarchists, chose to ignore the matter by suggesting a stateless organization of mankind. They simply passed over the fact that men are not angels. They were too dull to realize that in the short run an individual or a group of individuals can certainly further their own interests at the expense of their own and all other peoples’ long-run interests. A society that is not prepared to thwart the attacks of such asocial and short-sighted aggressors is helpless and at the mercy of its least intelligent and most brutal members. While Plato founded his utopia on the hope that a small group of perfectly wise and morally impeccable philosophers will be available for the supreme conduct of affairs, anarchists implied that all men without any exception will be endowed with perfect wisdom and moral impeccability. They failed to conceive that no system of social cooperation can remove the dilemma between a man’s or a group’s interests in the short run and those in the long run.

Man’s atavistic propensity to beat into submission all other people manifests itself clearly in the popularity enjoyed by the socialist scheme. Socialism is totalitarian. The autocrat or the board of autocrats alone is called upon to act. All other men will be deprived of any discretion to choose and to aim at the ends chosen; opponents will be liquidated. In approving of this plan, every socialist tacitly implies that the dictators, those entrusted with production management and all government functions, will precisely comply with his own ideas about what is desirable and what undesirable. In deifying the state—if he is an orthodox Marxian, he calls it society—and in assigning to it unlimited power, he deifies himself and aims at the violent suppression of all those with whom he disagrees. The socialist does not see any problem in the conduct of political affairs because he cares only for his own satisfaction and does not take into account the possibility that a socialist government would proceed in a way he does not like.

The “political scientists” are free from the illusions and self-deception that mar the judgment of anarchists and socialists. But busy with the study of the immense historical material, they become preoccupied with detail, with the numberless instances of petty jealousy, envy, personal ambition, and covetousness displayed by the actors on the political scene. They ascribe the failure of all political systems heretofore tried to the moral and intellectual weakness of man. As they see it, these systems failed because their satisfactory functioning would have required men of moral and intellectual qualities only exceptionally present in reality. Starting from this doctrine, they tried to draft plans for a political order that could function automatically, as it were, and would not be embroiled by the ineptitude and vices of men. The ideal constitution ought to safeguard a blemishless conduct of public affairs in spite of the rulers’ and the people’s corruption and inefficiency. Those searching for such a legal system did not indulge in the illusions of the utopian authors who assumed that all men or at least a minority of superior men are blameless and efficient. They gloried in their realistic approach to the problem. But they never raised the question how men tainted by all the shortcomings inherent in the human character could be induced to submit voluntarily to an order that would prevent them from giving vent to their whims and fancies.

However, the main deficiency of this allegedly realistic approach to the problem is not this alone. It is to be seen in the illusion that government, an institution whose essential function is the employment of violence, could be operated according to the principles of morality that condemn peremptorily the recourse to violence. Government is beating into submission, imprisoning, and killing. People may be prone to forget it because the law-abiding citizen meekly submits to the orders of the authorities so as to avoid punishment. But the jurists are more realistic and call a law to which no sanction is attached an imperfect law. The authority of man-made law is entirely due to the weapons of the constables who enforce obedience to its provisions. Nothing of what is to be said about the necessity of governmental action and the benefits derived from it can remove or mitigate the suffering of those who are languishing in prisons. No reform can render perfectly satisfactory the operation of an institution the essential activity of which consists in inflicting pain.

Responsibility for the failure to discover a perfect system of government does not rest with the alleged backwardness of what is called political science. If men were perfect, there would not be any need for government. With imperfect men no system of government could function satisfactorily.

The eminence of man consists in his power to choose ends and to resort to means for the attainment of the ends chosen; the activities of government aim at restricting this discretion of the individuals. Every man aims at avoiding what causes him pain; the activities of government ultimately consist in the infliction of pain. All great achievements of mankind were the product of a spontaneous effort on the part of individuals; government substitutes coercion for voluntary action. It is true, government is indispensable because men are not faultless. But designed to cope with some aspects of human imperfection, it can never be perfect.


The Behavioral Sciences

The self-styled behavioral sciences want to deal scientifically with human behavior.15 They reject as “unscientific” or “rationalistic” the methods of praxeology and economics. On the other hand, they disparage history as tainted with antiquarianism and devoid of any practical use for the improvement of human conditions. Their allegedly new discipline will, they promise, deal with every aspect of man’s behavior and thereby provide knowledge that will render priceless services to the endeavors to improve the lot of mankind.

The representatives of these new sciences are not prepared to realize that they are historians and resorting to the methods of historical research.16 What frequently—but not always—distinguishes them from the regular historians is that, like the sociologists, they choose as the subject matter of their investigations conditions of the recent past and aspects of human conduct that most historians of former times used to neglect. More remarkable may be the fact that their treatises often suggest a definite policy, as allegedly “taught” by history, an attitude which most of the sound historians have abandoned long since. It is not our concern to criticize the methods applied in these books and articles nor to question the rather naive political pre-possessions occasionally displayed by their authors. What makes it advisable to pay attention to these behavioral studies is their neglect of one of the most important epistemological principles of history, the principle of relevance.

In the experimental research of the natural sciences everything that can be observed is relevant enough to be recorded. As, according to the a priori that is at the outset of all research in the natural sciences, whatever happens is bound to happen as the regular effect of what preceded it, every correctly observed and described event is a “fact” that has to be integrated into the theoretical body of doctrine. No account of an experience is without some bearing on the whole of knowledge. Consequently, every research project, if conscientiously and skillfully performed, is to be considered as a contribution to mankind’s scientific effort.

In the historical sciences it is different. They deal with human actions: the value judgments that incited them, the serviceableness of the means that were chosen for their performance, and the results brought about by them. Each of these factors plays its own role in the succession of events. It is the main task of the historian to assign as correctly as possible to every factor the range of its effects. This quasi quantification, this determination of each factor’s relevance, is one of the functions that the specific understanding of the historical sciences is called upon to perform.17

In the field of history (in the broadest sense of the term) there prevail considerable differences among the various topics that could be made the subject of research activities. It is insignificant and meaningless to determine in general terms “the behavior of man” as the program of a discipline’s activities. Man aims at an infinite number of different goals and resorts to an infinite number of different means for their attainment. The historian (or, for that matter, the behavioral scientist) must choose a subject of relevance for the fate of mankind and therefore also for the enlargement of our knowledge. He must not waste his time in trifles. In choosing the theme of his book he classifies himself. One man writes the history of liberty, another man the history of a card game. One man writes the biography of Dante, another the biography of a fashionable hotel’s headwaiter.18

As the great subjects of mankind’s past have already been dealt with by the traditional historical sciences, what is left to the behavioral sciences is detailed studies about the pleasures, sorrows, and crimes of the common man. To collect recent material about these and similar matters no special knowledge or technique is required. Every college boy can immediately embark upon some project. There is an unlimited number of subjects for doctoral dissertations and more sizable treatises. Many of them deal with quite trivial themes, devoid of any value for the enrichment of our knowledge.

These so-called behavioral sciences badly need a thorough reorientation from the point of view of the relevance principle. It is possible to write a voluminous book about every subject. But the question is whether such a book deals with something that counts as relevant from the point of view of theory or of practice.

[1. ]John Neville Keynes, The Scope and Method of Political Economy (London, 1891), p. 165.

[2. ]See especially Mises, Human Action, pp. 41–44 and 145–153, and Theory and History, pp. 250 ff.

[3. ]A. Eddington, The Philosophy of Physical Science (New York and Cambridge, 1939), pp. 28 ff.

[4. ]Mises, Human Action, pp. 660 ff.

[5. ]J. v. Neumann and O. Morgenstern, Theory of Games and Economic Behavior (Princeton University Press, 1944); R. Duncan Luce and H. Raiffa, Games and Decisions (New York, 1957); and many other books and articles.

[6. ]Mises, Human Action, pp. 661 ff.

[7. ]Games arranged for the entertainment of spectators are not games proper, but show business.

[8. ]Freud, Totem und Tabu (Vienna, 1913), pp. 79 ff.

[9. ]The first condition for the establishment of perpetual peace is, of course, the general adoption of the principles of laissez-faire capitalism. About this problem, see Mises, Human Action, pp. 680 ff., and Mises, Omnipotent Government (New Haven: Yale University Press, 1944 [Spring Mills, Penn.: Libertarian Press, 1985]), pp. 89 ff.

[10. ]Symptomatic of this mentality is the weight ascribed by politicians to the findings of public opinion polls.

[11. ]C. Northcote Parkinson, The Evolution of Political Thought (Boston, 1958), p. 306.

[12. ]Ibid., p. 309.

[13. ]Ibid., p. 314.

[14. ]Ibid., p. 314.

[15. ]One must not confuse the “behavioral sciences” with behaviorism. About the latter, see Mises, Human Action, p. 26.

[16. ]Of course, some of these scholars deal with problems of medicine and hygiene.

[17. ]See above, p. 66.

[18. ]Karl Schriftgiesser, Oscar of the Waldorf (New York, 1943), 248 pages.

Last modified April 10, 2014