Lachmann, The Significance of the Austrian School
Source: Essay in Ludwig Lachmann, 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).
The significance of the Austrian School of Economics in the History of Ideas1.
To speak of the spirit and its history in our age is a precarious undertaking. Even though one escapes the suspicion of having sat at the feet of a metaphysician such as Hegel, one still may face an indictment of “essentialism.” Fortunately, the authors of this Festschrift need harbor no such fears. Neither the celebrant of this anniversary nor the readers of this journal will be in any doubt as to what is meant by the spirit of the Austrian school in economic theory.
It is almost a century since Menger wrote the Grundsätze and founded the Austrian school.1 In this century there have been decades of triumph and decades of neglect. The favorable and unfavorable climate of the times has had much to do with the successes and failures of the school. At the end of the first century of its existence, we may expect a number of critical assessments of its ideas and their development. It is not my intention, however, to deal with problems of the history of ideas in the narrower sense.
In what follows I shall attempt to indicate the cognitive aim, intellectual trend, and typical methodology of the Austrian school in the light of some of its major achievements, and to contrast them with those of other economic schools. I maintain that there is characteristic and demonstrable “intellectual style” of the Austrian school and that this style is geared to the interpretation of cultural facts, as will have to be shown. This posture is of course in opposition to the currently dominant methodological monism of positivism, which proclaims that there is only one truly “scientific” mode of thought, namely, that of the modern natural sciences. I contrast, I shall attempt to show that the ideas and aims of the representatives of the Austrian school, perhaps unconsciously, were always directed not only toward the discovery of quantitative relationships among economic phenomena but also toward an understanding of the meaning of economic actions.
This essay, “Die geistesgeschichtliche Bedeutung der österreichischen Schule in der Volkswirtschaftslehre,” Zeitschrift für Nationalökonomie 26 (February 1966): 152–67, was translated by Robert F. Ambacher of Millersville State College and Walter E. Grinder.
It is curious that two thinkers, so different in descent, temperament, and intellectual interests as Schumpeter and Sombart, agreed in their judgment of the work of the Austrian school at least insofar as they saw in the teachings of the Viennese an imperfect preliminary to the general equilibrium theory of the Lausanne school. Schumpeter's position followed naturally from his view that Walras's accomplishment represented the very apex of the history of economic thought. He ascribed to the “defective technique” of the Viennese their failure to ascend to the true height of Walras's accomplishment after having discovered the ladder.2
Sombart's aim, on the other hand, was apparently to be able to deny any intellectual affiliation with the Austrians. For him, they belong to “taxonomic economics” (ordnende Nationalökonomie) but fare poorly compared with the Lausanners. “If there is to be any taxonomic economics, let it be Pareto's” appears to have been his verdict.3 I believe that both were mistaken because they misunderstood the cognitive aim and intellectual trend of the Austrian school.2.
Characteristic of the trend of thinking of the Austrian school is, in our view, Verstehen (understanding), introduced as a method into the theoretical social sciences. This statement in no way diminishes the significance of the concept of marginal utility, but only indicates that in the creation of this fundamental concept the Austrians had predecessors like Dupuit and Gossen, as well as contemporaries like Jevons and Walras, who, however—as we shall see—developed their own methodologies.
On the other hand, Verstehen as a method in the social sciences has, as is well known, a long and glorious history. Not only in the interpretation of texts, as in theology, jurisprudence, and philology, but also in the interpretation of the meaning of human actions, as in all history, this method has always found application. There is, however, a significant difference between understanding as historical method, as it found its systematic expression, for example, in Droysen's Historik, and understanding as a theoretical method, that is, as a method for the interpretation of typical courses of action with the aid of thought designs, for example, economic plans.4 The characteristic accomplishment of the Austrian school was, in our view, the gradual development of understanding as a method in the second sense. For them the thought design, the economic calculation or economic plan of the individual, always stands in the foreground of theoretical interest.
Before substantiating my thesis by contrasting the essential characteristics of Austrian thought with those of the classical and the Lausanne school, I must meet two obvious objections. It may seem that my interpretation of Austrian thinking cannot be reconciled with the methodological views of two thinkers like Menger and Mises.
One objection might be that in Menger's Untersuchungen, for decades considered the methodological catechism of the school, understanding as a method of the theoretical social sciences, and especially of economics, is never mentioned.5 On the contrary, Menger declared again and again that the task of the social sciences, as of the natural sciences, is to find “exact laws.” Sombart thus appears to be correct when he characterized the Unter-suchungen as the “most significant methodological work dealing with economics in the manner of the natural sciences.”6
We must, however, take into account the intellectual climate of the years in which Menger's work originated. In the first place, understanding as a method of theoretical culture study was scarcely known in 1883, the year in which both Dilthey's Einleitung in die Geisteswissenschaften [Introduction to the Social Sciences] and Menger's Untersuchungen were published. Secondly, with the publication of Menger's work the Methodenstreit began. Menger, in particular, attacked the attempts of Schmoller and his friends to impose historical understanding on the theoretical social sciences, for example, economics, as the only legitimate method. Hence, one could hardly expect much sympathy from Menger for variants of the same methodology still awaiting elucidation even if he had known them. But he did not.
Third, and probably most important, the real theoreticial work of the Austrian school had scarcely begun in 1883. Neither Wieser nor Böhm-Bawerk had appeared on the scene. Paradoxical as it may seem, the method defended by Menger in his Untersuchungen was neither his own nor the one followed by his disciples, but really that of the classical school. Mises correctly observed: “The transition from the classical to the modern system was not completed all at once, but gradually: it took considerable time until it became effective in all areas of economic thought, and a still longer time had to elapse before one became aware of the full significance of the completed change.”7 Hence I might say that what later on became the characteristic method of the school had scarcely made an impact in 1883.
Fourth, the day came when even Menger saw himself compelled to oppose the methods of the natural sciences in economics. In two letters to Walras, of June 1883 and February 1884, he insisted that we are dealing not only with quantitative relationships but also with the “essence” of economic phenomena. He also asked how with the aid of mathematics one could ascertain the essence, for example, of value, rent, or the entrepreneur's profit.8 However, since mathematics is essential to the modern natural sciences, Menger's attack was directed just as much against the latter as against the former. And if it is permissible to equate the “comprehension of essence” with the “interpretation of meaning,” we may conclude that Menger's intention in both letters was to defend the possibility of an economic theory designed to interpret meaning. It is of particular interest that both letters were written almost immediately after the completion of the Untersuchungen.
Another objection might be that Mises ascribed understanding as a method peculiar to the historical sciences, and that our formulation is incompatible with his distinction between Begreifen and Verstehen. The apparent contradiction, however, is purely verbal. Mises admitted explicitly: “In itself, it would be conceivable to define as understanding any procedure directed toward the comprehension of the meaning of things,” and that is precisely our standpoint. He continued, “As things are today, we must resign ourselves to contemporary language usage. We want therefore, within the procedure directed toward the comprehension of the meaning of things, a procedure of which the sciences of human conduct make use to separate ‘Begreifen’ and ‘Verstehen.’ ‘Begreifen’ seeks to comprehend the meaning of things by discursive thought; ‘Verstehen’ seeks the meaning through a total empathy with the total situation under consideration.“9
I do not believe that today's usage demands this distinction. It is nevertheless clear, I hope, that the method here ascribed to the Austrian school is the same as the one Mises labeled “Begreifen.” This method, which aims at discovering the meaning of things, apparently conflicts with most methods used in and suitable to the natural sciences.3.
I shall now investigate in detail the characteristics peculiar to Austrian thinking. Let us first contrast it with that of the classical school. I shall, however, disregard Adam smith, who is too firmly rooted in the eighteenth century for our problems to concern him. For to the mentality of his time natural law and the “natural economic order” were each “a piece of nature,” and conceptual distinctions such as we shall have to make were completely foreign to it.
With Ricardo and his disciples it was different. They consciously emulated natural science. The cognitive aim was the ordering of economic processes in terms of quantities. Such theory could be called successful insofar as it was able to determine quantitative relationships. Typical of the classical intellectual style are three characteristics.
First, the central problem: the distribution of income among the three factors of production: labor, land, and capital. This distribution is determined by two “laws,” which are regarded as empirical laws of nature (and they would be, if they really generally applied!), namely, the Malthusian law of population and the law of diminishing returns to land.
Secondly, the central concept: value. This is a concept denoting “substance,” which bears the typical traits of an older natural science. It is the measure of all economic things, as well as the fundamental norm of all exchange processes. But why exchange takes place at all is never discussed. In business the measure of all things is the monetary unit. The economist, knowing that the value of money fluctuates, distrusts this standard. Ricardo believed that he had found a measure free from this defect in the quantity of work necessary for the production of each good. Gradually, and almost without his noticing it, the measure became for him the substance of all economic processes, if not their cause. For us all that matters is that the classical “objective” theory of value is based on a concept denoting “substance.”
Third, economic man appears in classical theory only in his capacity as a factor of production. This means not merely that the consumer is not an economic subject, but that homo oeconomicus is always a producer. It means, moreover, that the only transactions of economic interest are those one performs in one's capacity as a factor of production: as a worker, as a landowner, or as a capitalist. Within these three classes, all members are regarded as equal. This assumption of homogeneity of the factors of production has odd consequences for the realism of classical theory.10 All capitalists, whether they invest wisely or unwisely, receive the average rate of profit on their invested capital. Malinvestments, capital losses, and bankruptcies do not exist. The assumed homogeneity of the factors of production makes it impossible to evaluate the success of any economic activity. Fundamentally, we cannot really speak of economic activity here. As in nature, people react to the current external conditions of their economic existence: they do not act.
It is only against this background of the classical thought that the specific accomplishment of the Austrian school becomes transparent. It can perhaps best be characterized in the following manner: Here, too, one strives to discover laws. But, no matter what Menger might originally have believed, the laws of catallactics are logical laws, vérités de raison. From the law of marginal utility there gradually developed an economic calculus, that is, a “logic of choice.” How this logic is related to reality, so that real processes can be interpreted with its help, is an important question and will be discussed later on.
The significance of the Austrian school in the history of ideas perhaps finds its most pregnant expression in the statement that here man as an actor stands at the center of economic events. Certainly, manifold quantitative economic relationships are also for the Austrian school in the first place the cognitive object of economic inquiry. But the determination of these quantitative relationships is not the ultimate objective. One does not stop there; for these relationships flow from acts of the mind that have to be “understood,” that is, their origin, their significance, and their effects must be explained within the framework of our “common experience” of human action.
Also important for understanding the Austrian school is that here, in contrast to the classical school, men are viewed as highly unequal. Each one has different needs and abilities. The quantities and prices of goods sold in the market depend on these individual needs and abilities. This fact is exactly what the subjective theory of value stresses. Each economic agent through his action imprints his individuality on economic events. Man as a consumer cannot be squeezed into any homogeneous class. The same may be said of man as a producer. The concept of opportunity costs disrupts the homogeneity of the cost factors and broadens the area of subjectivity, which now also embraces the theory of production.
Finally, in the work of the Viennese school the classical concept of value undergoes a fundamental change. Value is no longer a “substance” inherent in goods. The central concept of Viennese theory is evaluation, an act of the mind. The value of a good now consists in a relationship to an appraising mind. Owing to the heterogeneity of needs, it is highly improbable that the same good will be given the same appraisal by different economic agents.11 Out of the Ricardian concept of quasisubstance has emerged a concept of mental relationships.4.
My next task is to differentiate the specific characteristics of the Viennese school from those of the Lausanne school. It has been maintained that there are no fundamental differences between the two schools, that it is only a question of variations on the same theme, namely, of modern subjective value theory. I consider this view misleading and will attempt to show which fundamental differences do in fact exist here. Above all, this view ignores the fact that Austrian thinkers go far beyond the mere ordering of quantitative relationships, an activity much cultivated in Lausanne and elsewhere.
In the last eighty years, prominent Austrian thinkers in each generation have found it necessary to draw a dividing line between their mode of analysis and that of the school of Lausanne. I have already mentioned Menger's two letters to Walras. Almost three decades later Wieser himself was impelled to defend the “psychological” method adopted by him and his colleagues against the “mechanistic” method Schumpeter had borrowed from the Lausanners and his teacher Mach.12 Twenty years later, H. Mayer attacked the “cognitive value of functional price theories” and subjected it to a sharp and thorough criticism.13 And as late as 1948, Leo Illy, in a chapter in Das Gesetz des Grenznutzens [The Law of Marginal Utility],14 rightly criticized the defects of certain price theories that merely order price phenomena without explaining them. So the differences existed, and they still do. It is for us to determine those characteristics of the Austrian style of thought to which formalistic analysis cannot do justice.
Now it is not to be denied that Austrian theorists have not always adroitly defended their position. The “occasional blunders and unfortunate formulations in the application of their method of research,” which Hans Mayer justifiably criticized, have often impaired the effectiveness of their arguments.15 for example, Wieser always spoke of the Austrian as the “psychological” school, although he admitted that “perhaps our method would be exposed to fewer misunderstandings, if one had called it not the psychological but the psychical, although this name as well as well would still be open to misunderstanding. Our object is, simply, the consciousness of economic man with its wealth of general experience, i.e., that experience which every practical man possesses and which therefore, every theoretician as a practical man finds in himself, without the need first to acquire such experience by means of special scientific methods.”16 But Max Weber had already made clear, three years before Wieser, that the alleged “psychological” foundation of the Viennese theory was based on a misconception: “The rational theory of price formation not only has nothing to do with the concepts of experimental psychology, but has nothing to do with a psychology of any kind, which desires to be a ‘science’ going beyond everyday experience.... The theory of marginal utility and every other subjective value theory are not psychologically, but—if one desires a methodological term—‘pragmatically’ based, i.e., involve the use of the categories ‘ends’ and ‘means.’”17
In other respects, too, the methodological defense of the Austrian school was not always successful. To speak of “the cause of value” is obviously questionable. One lays oneself open to the objection that the economic system constitutes a general nexus of relationships within which “causes” can only be ordered as a class and, as such, have to be dealt with as “data”. The distinction between “genetic-causal” and “functional” price theories, which as we shall see, positively strikes at the heart of the matter, met with the same objection.18 The opponents maintained that, with a general interdependence of all quantities and prices, each individual quantity and price is, at the same time, the effect and cause of others. Against the distinction between “price formation theory” and “price change theory,” the latter valid only within the framework of comparative statics, the argument was advanced that in disequilibrium the same forces must influence price, whether or not equilibrium existed before. In the timeless statics of the Lausanne theory this argument is certainly valid, but otherwise it is not.
The difference between the Vienna and the Lausanne school is already reflected in the assumptions made by both. Among these, the role of time is of special significance. It is certainly not overstating the case if we say that the real disagreement concerns, in the first place, the significance attributed to the element of time. Lausanne theory is meaningful within the framework of timeless statics; the world of the Austrian school, on the other hand, requires time for its full meaning. This is not just a matter of the level of abstraction; it is much more than that.
Austrian theory needs the dimension of time, since all human action is only possible in time. The Lausanne theory of equilibrium not only does not require time; it requires time's exclusion. From the very beginning, Edgeworth and Walras clearly saw that any passage of time before the state of equilibrium is reached renders that state itself indeterminate, since all data-changing events happening on the path to a state of equilibrium help to determine that state. Lausanne theory requires, then, that all transactions undertaken on the path to equilibrium can be nullified, whether by “recontract” or by other means. This is the essence of timeless statics. For the Austrians, however, it is exactly these transactions, undertaken in the course of time, that are their real objects of interest, since conscious human action is bound to plans, and all plans require a time dimension.
I described how, in the course of the development of the Austrian theory, a theory of economic calculus gradually unfolded as a corollary of the law of marginal utility. Economic plans depend on the economic calculations of each agent. The interplay of economic plans accounts for the market phenomena. Now, there is certainly a general nexus of all market phenomena, and the Austrians by no means denied this fact. However, they took relatively little interest in the forces that operate in this connection, since these could operate only in a timeless world, that is, in a world without change. What appeared to them much more urgent was to take into account the continual need, in a constantly changing world, to adapt economic plans to these changes. For in such a world a general condition of equilibrium cannot be achieved. We thus see why economic plans occupy a central place in Austrian theory, while the general nexus of market phenomena is neglected. One takes one's orientation from reality.
It might be held, however, that Lausanne theory also takes account of the economic plans of individuals since they enter into its system as “data”. But the utility—and supply—functions in the work of Walras, and indifference curves in the work of Pareto, do not reflect real economic plans as we know them from our own experience. They must provide for every possible situation if the state of equilibrium is to be determinate. In fact they are comprehensive lists of alternative plans, comprehensive enough for unlimited application. Obviously, this requirement is quite beyond the capacity of the human mind. “No person will be in a position to indicate, truthfully and with mathematical accuracy, an infinite number of combinations of goods which would all be equally important to him. The expression ‘experiment’, used here by Pareto, is completely unsuitable: we have here simply the figment of an experiment.19
For the general theory of equilibrium, such functions are certainly as essential logical foundation. The difference between a taxonomic (ordnende) and a verstehende economics becomes quite apparent here. What is a logical necessity for the former must be considered as an absurdity by the latter. Here, the two schools part company for good.20
The methodology borrowed from the natural sciences may eschew concern with the alien—and dangerous!—theme of the construction of economic plans. However, it can do so only by assuming that all conceivable plans are already “given” from the start!
Pareto saw much more clearly than his predecessor Walras that genuine economic plans do not really fit into the model of the Lausanne school, and that to use them as “data” one must first divest them of their nature as mental acts. This is the truemeaning of the famous sentence: “L'individu peut disparaitre, pourvu qu'ilnous laisse cette photographie de ses goῦts.”21 Here plainly man as economic agent does not stand at the center of economic life. This statement of course makes sense only in a timeless stationary world in which these photographs would retain permanent validity. Everyday human acts shape the real world anew. Accordingly, all attempts to attach a time dimension to the timeless theory of equilibrium and thus to make it “dynamic” must fail.
It is probably unnecessary to discuss in detail a criticism once marshalled against the Austrian school regarding the so-called “circle of economic determination.” Viennese economists were charged with becoming entangled in circular reasoning since, on the one hand, market prices were derived from the valuations of the economic agents, and, on the other hand, the determination of these very valuations required prices already given.Illy showed that the reasoning in reality was not circular and that the criticism confused prices expected and prices actually paid.22 Economic agents must certainly orient themselves to prices they expect, but they by no means have to be the prices then formed in the market. In the system of equations of the Lausanne school, it is of course impossible to distinguish between expected and paid prices. This is again a necessary consequence of timeless statics.5.
We saw that the methodology of the Austrian school evolved gradually, for a long time without the members of the school being aware of it. It sometimes happened that the methodological pronouncements of some of its most prominent members lacked programmatic validity—often even for the time in which they were expressed. This was true, for example, of Menger's Untersuchungen. Moreover, Menger, concerned with establishing “exact laws,” never clearly distinguished between logical laws and empirical laws, between vérités de raison and vérités de fait.
As mentioned above, during its development marginal utility theory became a theory of economic calculus and of economic plans, and thereby a genuine “logic of choice.” But as late as 1911, Wieser referred to “common experience” as the ultimate basis of economic knowledge. It is to Mises that we owe the clear formulation of the logic of choice. However, as regards the actual relevance of this logic to human action, it will be seen that common experience is still indispensable to us.
In Hayeks's work are to be found penetrating discussions of the “scientistic” style of thought and its inadequacy for the problems of the social sciences,23 but also the first indication of problems of economic theory lying beyond the pure logic of choice.24 What matters here is, above all, the state of knowledge as a spring of human action and the process of its changes in time.
I now come to the main question of this section: how can a system of pure logic, like that of the logic of choice, provide factual knowledge? The answer follows form the essence of my thesis: the distinction between logic and factual knowledge is justified in the realm of nature, where no meaning is directly accessible to us, and in which care must thus constantly be taken to distinguish between our concepts and reality. In the realm of human action it is different. Here such a distinction seems unjustified. On the one hand we are unable to verify or falsify our schemes of thought as hypotheses by predicting concrete events. Scientific tests are not available to us since they require a complete description of that concrete “starting position” in which the test is to take place. Every human action, however, depends on the state of knowledge of the actors. A verification test therefore would require an exhaustive description of the state of knowledge of all actors, also according to the mode of distribution—an obvious impossibility. Otherwise, however, the starting position is not exactly defined, and no real test is possible.
In economics this means that every concrete transaction depends, among other things, on the expectations of the participants. To test an economic theory in concreto, we must, then, be able, at the point of time of theory formulation, to predict the expectations of economic agents at the (future) point of time of the verification test. It is easy to see why the representatives of a taxonomic economics are eager to keep the problem of expectations at arm's length as far as possible.
For “understanding” in economics, on the other hand, some methods are available that, though closed to the natural sciences, lend themselves for interpreting human actions. The historian inquires into the meaning and significance of concrete actions of individuals and groups. This whole method is inapplicable in the natural sciences. The history of science shows that research is confined to the ordering of quantitative relationships. In the theoretical cultural sciences, on the other hand, the significance of typical courses of action is interpreted with the aid of schemes of thought, such as the logic of choice. The approach is justified by the fact that all human action, at least insofar as it is of scientific interest, is oriented to plans. Plans are logical constructs immanent to the course of action. A plan serves the economic agent as a guideline; he orients himself to it. The social sciences can thus use plans as means of interpretation. Actions certainly are events in space and time and, as such, are observable. But observation alone cannot reveal meaning; for this, methods of interpretation are needed.
Why exactly is the logic of choice the scheme needed for interpreting economic actions? The logic of choice is a “logic of success”; its categories are means and ends. Why should we opt for precisely this method in interpreting economic transactions? Common experience gives us the answer: in economic life most people seek success. The striving for success as the meaning of economic action warrants the validity of the logic of choice.
Thus Mises was correct when he asserted that only logic, and not experience, can warrant the validity of economic theories— as opposed to Wieser, who in his critique of Schumpeter invoked common experience.25 And logic certainly is immanent in all human action. But this alone does not mean that the logic of success, which depends upon means and ends, is also the logic governing all action. Conceivably another kind of logic, one employing other categories, might be applicable here. In order to claim the validity of just this logic of success for economic life, we have to invoke common experience.
Finally we have to remember that, in a dynamic world there are economic problems that the logic of choice by itself cannot master. While it explains the designing of economic plans under given conditions, the revision of economic plans in the course of time, as well as the entire range of the problems of expectations, are outside the realm of logic. At best, we may say that in a stationary world economic plans will be adapted more and more to real conditions. It is exactly on this fact that the theory of general equilibrium of the Lausanne school rests.6.
I do not wish to conclude these observations without taking a brief look at the future tasks of “verstehende,” or “interpretative,” economics.
Our main aim, naturally, must be to preserve and defend in all directions the methodological independence of the theoretical social sciences in general, and of economics in particular. This certainly does not mean that methods may never be borrowed from other disciplines. The relevant question, however, always is whether these methods, however successful they may be outside the realm of economics, are able to serve our purposes, namely, the interpretation of human action.
If we keep this question in mind, we shall continue the work of Menger under the altered circumstances of our own time. In this we need only follow precedents already given in the work of the Austrian school. According to one of its most perceptive thinkers, E. Schams, we must always distinguish, in accepting mathematical methods, between “the mathematical form of the statement” (ansetzendes Denken) and the “material constants” to which it refers; only the uncritical acceptance of the latter into economic science is inadmissible.26
No doubt the task outlined here is not simple, especially in our time. In recent decades, especially in Anglo-Saxon countries, an unbelievable narrowing and impoverishment of the philosophical outlook has taken place. Today, innumerable economists everywhere, some in responsible positions, who have never learned of the existence of our problems, naively believe that the scientific method is the only legitimate one in all fields of knowledge.
How should we approach our task? First of all, we must continuously stress the inadequacy of the products of intellectual inquiry that ignores the meaning of actions. We must always be prepared to ask our opponents the following questions: Whence? By what means? To what end? When, for example, the designers of macroeconomic models present to us their creations, we may certainly admire their elegance: we may not, however, neglect to ask from which actions of the economic agents these models spring. We must also always ask what expectations guide these actions, and what would occur if these expectations were altered. When, moreover, such model builders attempt to include technical progress in their models, for example, in the form of a “technical progress function,” they must be shown that they are attempting to grasp meaningful action by an intellectual method to which meaning is alien, and that a significant discussion of these interesting problems is thereby made impossible. But we must not rest content with criticism of a method of inquiry that defies meaning; we must show the fruitfulness of the verstehende method in its various applications. There are, we may show, alternatives to equilibrium analysis. Certainly, in the analysis of a state of disequilibrium, we cannot dispense with an account of the equilibrating forces, but that does not mean that we must describe in its entirety a state of equilibrium, which is never really attained, decorated with formulas and equations. We can save ourselves that endeavor. All that is important is that every state of disequilibrium presents possibilities for profitable activity—be it income, capital grains, or even only the avoidance of losses. Each disequilibrium stimulates alert minds, but by no means all minds, to profitable action, and this action will reduce the chances for further profit. That is all that may be said. The cumbersome pedantry of the usual market models, with their alleged “precision,” is an obstacle rather than a help to understanding. What has happened to “perfect competition” should be enough of a warning.
Even outside the special field of economic theory, the need for the defense of the methods of inquiry specific to the cultural disciplines presents tasks that are as pressing as they are difficult. Here it is most important to put the methodological independence of the social sciences on a firm epistemological basis.
Since the Renaissance the theory of knowledge has taken its orientation almost exclusively from the methods of the natural sciences. For these sciences, which deal with apparently “meaningless” events, there is no alternative, in the absence of other criteria of comparison, but to attempt to make their theories and observable events agree in such a manner that predictions concerning these events may be made, and then “verified.” With human activity, however, this is impossible, since every action depends on the state of knowledge of the agent at the point in time of the action, which is not predictable at the point in time of the formulation of the theory. What, then, must the social scientist do to distinguish useful from useless theories? Which criteria of valid knowledge are at his disposal?
Since we lack successful prediction as a means of evidence, we must of course devote special care to the validity of our theoretical assumptions. The Austrian school has always done so, as, for example, we saw above in the criticism of the Lausanne theory. Also, in the theoretical social sciences a gap between scheme of thought and reality may have a different significance than in the natural sciences. For their task is essentially the comparative study of schemes of the agents, on the one hand, and typical courses of action, on the other. Here the significant and meaningful character of both can serve as tertium comparationis. In such comparative studies deviations from the planned schedule are often more interesting than a smooth course proceeding according to plan would have been. An economic plan as an observed fact does not lose its significance for us when it fails. On the contrary, we owe to such a plan our criterion of success, which alone allows us to speak of failure. A coherent plan of action that no one applies often allows us to draw interesting conclusions concerning the character of the situation, including the expectations entertained by the agents.
In these reflections I have taken the economic plan of an individual as the prototype of the scheme of thought lying at the base of action, mainly on account of its central significance for economic theory of Austrian character. Economic agents orient themselves to plans. There is no parallel for this in the study of the physical world. But to what facts do the planners orient themselves when making their plans? Partly to natural data, and partly to the actual or expected actions of other people. But there also are certain superindividual schemes of thought, namely, institutions, to which the schemes of thought of the first order, the plans, must be oriented, and which serve therefore, to some extent, the coordination of individual plans. They constitute, we may say, “interpersonal orientation tables,” schemes of thought of the second order. To them praxeology, for which until now the plan and its structure have understandably occupied the foreground of interest, will increasingly have to turn in time to come.
[]Grundsätze der Volkswirtschaftslehre [Foundations of Political Economy] (Vienna, 1871); 2d ed. By Karl Menger, Jr. (1923); translated as Principles of Economics (Glencoe, Ill., 1950).
[]2. J. A. Schumpeter, History of Economic Analysis (New York, 1954), p. 918. “They [the Austrians], too, found the ladder. Defective technique only prevented them from climbing to the top of it. But they did climb as high as their technique permitted. In other words: we must see in he Jevons-Menger utility theory an embryonic theory of general equilibrium or, at all events, a particular form of the unifying principle that is at the bottom of any general-equilibrium system. Though they did not make it fully articulate, mainly because they did not understand the meaning of a set of simultaneous equations, and though they saw in marginal utility the essence of their innovation instead of seeing in it a heuristically useful methodological device, they are nonetheless, just like Walras, among the founding fathers of modern theory.”
[]W. Sombar, Die drei Nationalökonomien (Munich, 1930), pp. 136–37. “The result of our investigations is clearly established.... We could observe that the majority carried out its work with unclear and incomplete concepts of the essence of the scientific method. Only the relationists or functionalists, i.e., the adherents of the ‘mathematical’ school, have thought the problems through and arrived at a clear and consistent method. Every friend of lucid thought must therefore feel some sympathy for these economists. They alone, also, have earned the respected title of ‘exact’ researchers, which so many other adherents of the scientific method in economics have most unjustly arrogated to themselves.” (The last sentence is, of course, a sideswipe at Menger.)
[]J. G. Droysen, “Historik,” in Vorlesungen über Enzyklopädie und Methodologie der Geschichte (Munich: Hrsg. Von Rudolf Hübner, 1937).
[]Carl Menger, Untersuchungen über die Methode der Sozialwissenschaften und der politischen Ökonomie insbesondere. [Inquiries into the Method of Social Sciences and Particularly Political Economy] (Leipzig, 1883); translated as Problems of Economics and Sociology (Urbana, Ill.1963).
[]W. Sombart, op. cit., p. 159.
[]Ludwig von Mises, Grundprobleme der Nationalökonomie (Jena, 1933), p. 67n; translated as Epistemological Problems of Economics (Princeton, 1960).
[]W. Jaffe, “Unpublished Papers and Letters of Léon Walras,” Journal of Political Economy, 1935, p. 200.
[]L. Mises, op. cit., p. 125.
[]Only for land is this not valid. Ricardo's rent theory rests on the heterogeneity of land.
[]H. Mayer, “Zur Frage der Rechenbarkeit des subjektiven wertes,” in Festschrift für Alfred Amonn (Bern, 1953), p. 76, n. 6. “The exact conception of the process by itself and the feel for language should have made it clear that to speak of subjective values as though they were a property of goods, is an elliptical and at bottom misleading way of expression: we are dealing with the process of evaluation, and this takes place not according to ‘larger’ or ‘smaller,’ but according to a higher or lower position within a hierarchy.”
[]F. v. Wieser, “Das wesen und der Hauptinhalt der theoretischen Nationalökonomie,” in Gesammelte Abhandlungen (Tübingen, 1929), pp. 10–34.
[]H. Mayer, “Der Erkenntniswert der Funktionellen preistheorien,” in Die Wirtschaftstheorie der Gegenwart, 2 vol. (Vienna, 1932) 2: 147–239.
[]L. Illy, Das Gesetz des Grenznutzens (Vienna, 1948).
[]H. Mayer, loc. Cit., p. 150.
[]F. v. Wieser, loc. cit., p. 16.
[]M. Weber, “Die Grenznutzlehre und das psychophysische Grundgesetz,” in Gesammelte Aufsätze zur Wissenschaftslehre, 2d ed., 1951, p.396.
[]H. Mayer, loc cir., p.148.
[]A. Mahr, “Indifferenzkurven und Grenznutzenniveau,” Zeitschrift für Nationalökonomie 14 (1954): 325 SS.
[]Pareto saw very well how absurd it is to ask a poor peasant woman how many diamonds she would buy at a given price if she were a millionairess, but the logic of his system forced such assumptions upon him. Cf. V. Pareto, Manuel d' Economie Politique, 2d ed. (Paris, 1927), p. 260.
[]V.Pareto, ibid., p.170.
[]Leo Illy, Das Gesetz des Grenznutzens(Vienna, 1948), ch.6, pp. 183–238
[]F. A. Hayek, “Scientism and the Study of Society,” Economica 9 (1942): 267; 10 (1943): 34 ff.; 11 (1944) 27 ff.
[]F. A. Hayek, “Economics and Knowledge,” in Individualism and Economic Order (London, 1949), pp. 33–56.
[]L. Mises, loc. Cit., pp. 21–22.
[]Cf. E. Schams, “Die zweite Nationalökonomie,” Archiv für Sozialwissenschaft 64 (1930): 453 ff.; and “Wirtschaftslogik,” Schmollers Jahrbuch 58 (1934): 513 ff.