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Collection: IHS Studies in Economic Theory
Subject Area: Economics

Praxeology and Rationality - Israel M. Kirzner, The Economic Point of View [1960]

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The Economic Point of View: An Essay in the History of Economic Thought, ed. with an Introduction by Laurence S. Moss (Kansas City: Sheed Andrews McMeel, 1976).

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Praxeology and Rationality

Few features of the praxeological position seem to have been more seriously misunderstood than the very special significance that it attaches to the rationality of human action. In the praxeological view, action is rational by definition; and this has been attacked from two directions. On the one hand, it has been branded as palpably false and contrary to the facts of experience.21 On the other hand, it has been interpreted as a vicious misuse of language, in which the word “rational” has been emptied of all meaning, so that its use to describe action, while not false, conveys no information whatsoever. The insistent description of action as rational is thus a misleading attempt to appear to be saying something, without, in fact, doing anything of the sort.22 To say that a man acts rationally, it is complained, tells us nothing more about what it is that he does than that he does it. Both these types of criticism rest on a quite incomplete appreciation of how the rationality of action is used in the praxeological system.

The concept of rationality in human behavior has long been a topic for discussion in the literature on the methodology of economics. Attacks on the undue reliance which economic theory has been accused of placing upon human reason are as old as attacks on the very notion of an economic theory. Historically-minded critics of theory long ago discovered that man is possessed of “instincts,” that he is a creature of “habit,” that he is capable of being carried away by mass hysteria and other psychological aberrations. Economic theory, it was found, had blindly ignored the realities of life. Where it had not explicitly endowed economic man with an exclusive thirst for “wealth” or with an utterly selfish character, economics had apparently proceeded on the quite gratuitous assumption that men behave sensibly from the point of view of their own interests. It was easy to demonstrate how far from the truth economics must be; it was easy to point out the true character of men with their full array of impulses, instincts, and stupidities. On the other hand, it was not difficult for economists to defend their theorems as hypothetical constructions with a definite, if limited, applicability to the real world, or, alternatively, as providing norms for the appraisal of actual performance. And debates on these lines abound in the economic journals of the decades around the turn of the century and later.

In all these discussions the assumption of rationality made by traditional economic theory was treated in a special sense; and what is chiefly responsible for the misunderstandings mentioned above is the confusion of this traditional conception of rationality with the conception of it employed in praxeological discussions. The point at issue in the earlier discussions concerning the empirical validity of economic theorems that treat men as reasoning beings free of irrational impulses and instincts was the fruitfulness of a particular simplifying abstraction. The social phenomena of the real world are the consequences of human actions in which all types of influences have played a part. One of these influences stems from man's reasoning powers, which urge him to pursue a selected goal with a steadfastness and tenacity unperturbed by human weaknesses and passions. Economic theory, it was believed, investigates social phenomena on the assumption that this influence of cool reason is, in fact, sufficiently powerful to make man pursue unwaveringly a goal once chosen. And this assumption, introduced in order to make analysis possible, was criticized or defended in respect to its justifiability, in the light of the realities of human nature.

It was quite natural for the conception of rationality that was made central to praxeological ideas to be discussed in a similar fashion. When these ideas are made to hinge on a conception of rationality as a pervasive quality of all human action, they of course invited criticism as being in contradiction to the facts. And when it is pointed out that in the sense in which the praxeological view sees human actions as rational, no such contradiction exists, then the praxeological postulate of rationality is criticized as a misleading and empty use of words. It is explained, for example, that a man who is swayed from the pursuit of his own best interests by falling prey to a fleeting temptation is yet acting “rationally” in the praxeological sense. In the praxeological view, the man has simply substituted a new set of ends, represented by the fleeting temptation, for the previously chosen ends. The fact that in the eyes of an outside observer, or even in the eyes of the man himself at a cooler moment, it is the original set of ends that constitutes the man's “best interests,” is not sufficient to justify our labeling the man's pursuit of his newly selected goal as “irrational.” The selection of an end can never, as such, be judged in regard to its rationality; and there is no reason to question the rationality with which the man pursues his newly chosen end.

It is this kind of explanation that provokes the annoyance of the critics and incurs the charge of using the word “rational” in a viciously misleading manner. These strictures are, in fact, quite undeserved; and it is worthwhile to devote attention to clearing up the confusion on this point. We can perhaps best succeed in this by considering in some detail the contribution of Tagliacozzo, mentioned in the previous chapter, to the clarification of the notion of “economic error” or “uneconomic behavior.” Tagliacozzo deals with the “Rhine-wine” situation which had been involved in the Pareto-Croce correspondence cited earlier in this chapter at the turn of the century.

The “Rhine-wine” case concerned the man who does not wish to indulge in gluttony, who has in fact budgeted all his money for other, more highly valued purposes, but who, yielding to the temptation of the moment, buys and drinks Rhenish wine. Croce had written that by so acting the man has placed himself in contradiction with himself23 and that his sensual pleasure will be followed by a judgment of reprobation, an economic (to be carefully distinguished from a moral) remorse.24 The man is guilty of what Croce has elsewhere called “economic error”: the “failure to aim directly at one's own object: to wish this and that, i.e., not really to wish either this or that.”25 By contrasting this concept of economic error, as an error of will, with a technical error, which is an error of knowledge, Croce was enabled to criticize Pareto's distinction between logical (i.e., rational) actions, which are economic, and illogical actions, which are not. Action, Croce explains, is a fact of will, not of knowledge. The will presupposes reasoning, it is true, but action, which is the expression of will, cannot itself be qualified by adjectives such as “logical” or “illogical,” which pertain only to the application of reason.26

It was with this example of an economic error, the consumption of wine in defiance of a previously chosen program, that Tagliacozzo dealt at length. Tagliacozzo pointed out that the purchase of wine can be appraised from various vantage points. From the standpoint of full reality, no distinction between means and ends need be made at all. Wine has been purchased because such a purchase was desired, and that is all. There is no recognition of any “program” against which the man's action is to be compared and in terms of which it can incur disapproval or excite remorse. There is, consequently, no notion of an “end” separate from the means that might “bring about” the realization of the end.

From the point of view of the man's own budget plan, however, the case is very different. Here a yardstick has been set up by the man himself against which the “economic” correctness of his actions can be measured and found wanting. The artificial creation of a “plan” in the form of a prior selection of ends necessarily carries with it a “point of view” from which it is possible to appraise the wine purchase and to convict it of economic error.

Finally, the man's action can be contemplated with the realization that any one yardstick in the form of a program will necessarily be quite arbitrary; that the span of time over which such a “program” is to have validity may be as long or as short as we please. From this point of view it is clear that what is a “temptation” from the standpoint of a long-range program becomes itself an independent “program” in its own right in relation to a suitably brief span of time taken as a frame of reference. The consumption of wine has now become the desired end; the man's actions can still be appraised, but only for their consistency with this newly adopted “program.”

The distinguishing of these possible attitudes towards the wine purchase and the recognition of the relativity of the notion of an economic error enable Tagliacozzo to pursue Croce's theme to its ultimate praxeological conclusion. In a real action, taken as an independent event, there is no room for any discrepancy between the conception of a program and its realization; the two concepts coincide completely. But this understanding of the situation does not at all exhaust its significance. Actions can be “judged” with regard to the faithfulness with which they conform to “programs.” And there can exist a complete range of such “programs” against which any action may be appraised, depending on the particular frame of reference selected. The important fact is that the very conception of an economic “judgment” implies a particular tendency on the part of human beings such that deviation from it incurs (economic) “disapproval.” This tendency is one that makes for an identity of means and end, comparable to the intrinsic coincidence of means and end that is present in any real action considered as an independent event with no frame of reference other than itself. It is this “tendency” that demands “that given programs be respected; that wine not be bought, if the program does not provide for such purchase; that given means go as far as they can in the fulfilment of the ends.”27

Together with the consciousness of a chosen set of ends that comprise a program there is an inevitable consciousness of an inclination to reduce all the means and resources required for the attainment of the program to the same rank as the chosen purposes themselves. Failure to achieve such a complete coordination of ends and means, which spells susceptibility to the distractions of “temptations of the moment,” can be sustained only at the expense of fighting free of this conscious inclination—a struggle that makes up the sense of economic error. Now in so far as all human action is teleological and is the expression of purposes consciously chosen, it is clear that all action must necessarily be part of the operation of the tendency toward the identification of means and end. The man who has cast aside a budget plan of long standing in order to indulge in the fleeting pleasure of wine still acts under a constraint to adapt the means to the new program. Should a fit of anger impel him to forgo this program as well and to hurl the glass of wine at the bartender's head, there will nonetheless be operative some constraint—let us say the control required to ensure an accurate aim—which prevents his action from being altogether rudderless. It is here that praxeology has grasped the possibility of a new scientific range of explanation of social phenomena. Precisely because man's actions are not haphazard, but are expressions of a necessity for bringing means into harmony with ends, there is room for explanation of the content of particular actions in terms of the relevant array of ends.28

During the course of this discussion of the nature of economic error, the sense in which praxeology sees human action as “rational” will have become abundantly clear. It will also have become clear how the praxeological use of the concept of rationality is quite unaffected by both types of criticisms that we noticed to have been levelled against it. Its description of all human action as rational constitutes a proposition that is, in fact, incapable of being falsified by any experience, yet does, nevertheless, convey highly valuable information. Action is necessarily rational because, as we have seen, the notion of purpose carries with it invariably the implication of requiring the selection of the most reasonable means for its successful fulfilment.29 Such a proposition cannot be proved empirically false because, as we have seen, programs can be changed, so that evidence that a man no longer “follows his best interests” proves only that he has chosen a new “program” the necessary requirements of which no longer permit him to follow—what used to be identified as—his best interests. Despite the impossibility of its empirical contradiction, this proposition yet conveys highly useful information because the insight it provides makes possible the derivation, in regard to whatever program is relevant in given circumstances, of highly developed chains of theorems. The kind of knowledge that such theorems can convey, their dependence on the praxeological postulate of rationality, and the implications of the italicized qualification in the previous sentence will become more easily comprehensible in the subsequent sections of this chapter.

[[21]]For an example of this kind of criticism, see J. Robinson, Economics Is a Serious Subject (Cambridge, 1932), p. 10.

[[22]]For this type of objection, see L. M. Fraser, Economic Thought and Language, p. 37 n.; T. W. Hutchison, Significance and Basic Postulates of Economic Theory, pp. 115 ff.

[[23]]Croce's characterization of the action of a man yielding to temptation as placing himself in contradiction to himself finds a recent echo in a passage in Little's Critique of Welfare Economics, p. 23. Little makes it clear that what is meant by a man's maximization of his utility is simply his behaving in the way in which he said he would behave. “Roughly speaking, maximizing utility means telling the truth.”

[[24]]International Economic Papers, No. 3, p. 201. For an appraisal of Croce's position, see A. L. Macfie, An Essay on Economy and Value, Appendix B, pp. 143 ff.

[[25]]International Economic Papers, No. 3, p. 177.

[[26]]Professor Mises has not recognized the close similarity to his own position which is evidenced in Croce's writing (see L. Mises, Theory and History, p. 308). What appears to be the principal point of difference between their positions has little relevance to the conception of the character of economic science. Both writers emphasize the rationality of all human action; both recognize that a chosen program may fail to be adhered to either because of a technical error (an error of knowledge) or because of the choice of a new program of ends with respect to which action will be “rational.” Where the two writers disagree is that the discarding of a chosen program in favor of one chosen in response to a “temptation of the moment” is, for Croce, itself a special kind of error—an economic error, an error of will. For Mises, there is room for only one kind of error, an error of knowledge (see Theory and History, p. 268). The conscious abandonment of a chosen program under the influence of a fleeting temptation is considered “positively” as merely the adoption of a new set of ends instead of the old, and that is all.

[[27]]G. Tagliacozzo, “Croce and the Nature of Economic Science,” Quarterly Journal of Economics, May, 1945, pp. 319–320.

[[28]]Especially relevant to the considerations of this section are Mises' strictures on Weber's “ideal type” of rational economic behavior. See above, note 10.

[[29]]The proposition that the notion of purpose implies a constraint that one select the most suitable means for the fulfilment of the purpose is not a proposition about that purpose. The proposition as such cannot, for example, be “explained” (as Macfie does) by the postulation of a moral urge to fulfil one's purposes. Rather, the proposition, on the praxeological view, sets forth the nature of purpose itself. The statement that man's actions are purposeful is thus only another way of saying that man feels constrained to match means to ends.