Last Knight Live Blog 24 - Kraus

January 28, 2008 6:57 AM by Wladimir Kraus (Archive)

It is said that no other book on economics has done more to advance sound economics than Human Action: A Treatise on Economics. The book is a product of many years of scholarship and reflection on purely abstract aspects of science of economics and most pressing problems confronting practical economic affairs. It offers a grand system of thought; it integrates a great many ideas and major doctrines ranging from epistemology to business cycle theory into one unified whole to comprehend the forces that shape the contours of economic life in a modern division of labor society.

But only few people know that the essence of Human Action, which was written in English and published in the United States, was already present in an earlier book under the German title Nationalökonomie, which Mises wrote while in Geneva. In Chapter 17, A Treatise on Economics, Prof. Hülsmann presents a summary of this book.

Once again, I was stunned by Prof. Hülsmann's outstanding ability to identify and pin down in a very accessible language the most abstract and difficult themes in this large treatise. We are offered not only a superb description of main ideas but also his own fresh perspective, which makes the reading of the book an interesting and exciting event. Any serious student of Austrian economics will find in the present chapter a veritable treasure chest of unexpected insights, ideas, issues and theoretical puzzles to keep him busy for a long time.

Prof. Hülsmann identifies two broad themes Nationalökonomie is centered around: the value theory and epistemology. Since I commented on the theory of value already on a number of occasions, I would like to make some brief remarks on Mises's epistemological case.

Epistemology is defined as the theory of knowledge (or, alternatively, of cognition) and is one of pillars of philosophy. The theory deals with questions such as: what is knowledge, how to distinguish between correct and incorrect knowledge, how is knowledge acquired and enlarged etc.

In order to understand why so much of Mises's efforts and time went into this very difficult philosophical area, we need to keep in mind the historical context of intellectual battles that Mises was involved in at the time. Mises aimed to show that there are objective laws in economics, just like in physics, that operate outside of human will and consciousness. This was important in order to fight back ambitious but ultimately misguided plans of various sorts of social engineers to manipulate human nature and society at large according to (usually) some egalitarian ideal. The bottom-line is that if there are indeed immutable laws then all these plans are doomed to failure. To be sure, aside of its ideological aspect, the problem of objective economic laws is also important from the standpoint of logic and proper method for economics.

But to build an epistemological case for the existence of economic laws meant to confront a number of distinct facts, all relating to the nature of social science. In contrast to natural phenomena, all economic phenomena are ultimately creations of human will and consciousness. Goods and services are produced, bought and sold by conscious actions of men, money prices are established on the basis of specific amounts of money exchanged against specific amounts of goods and services, wages and salaries are paid, dividends are distributed etc., etc. by human beings who have specific economic objections in their minds. Austrian economists have been known for emphasizing precisely the fact that all social phenomena are products of ideas, perceptions, specific understanding, evaluations, expectations of individuals, some of which change constantly as humans learn more about their physical and social environment.

Yet despite the fact that society is comprised of men, is shaped by men, its structure and inner interrelations are continuously modified by conscious actions of men, it is also absolutely true that, for example, there is an equilibrium average money (and real) wage rate in the economic system that cannot be increased by any kind and amount of consciousness efforts without causing unemployment, or that there is an equilibrium amount of aggregate profit and an average rate of profit, or that shortages and chaos in production and distribution of goods and other effects created by price controls cannot be eliminated by a government decree or popular consent, or that continuous rise of the average price level can only result from a continuous increase of the money supply.

The general difficulty with the idea of immutable laws in social sciences is thus to be found precisely in this apparent conflict. On the one hand, there is the radical uncertainty about human preferences, human expectations, and human knowledge (Kirzner, Lachmann). On the other, the economic system displays remarkable regularities in the occurrence of its key phenomena, the profound rationality manifest in the distinct orderliness of economic life under capitalism is apparent. The great scientific task in social sciences is thus to reconcile the primacy of human consciousness and action when it comes to social phenomena with the claim that there are things outside of our control, be it as individuals or as society as a whole, even in the realm of human affairs and that these things exist according to laws of the nature which can be grasped and used in the practice to improve human life and well-being. Sound economics teaches us precisely that.

The fundamental failure of those schools that refuse, intentionally or not, to accept the very existence of immutable laws resides in their failure to reconcile this apparent conflict. In this group belong the German Historical School AND various currents in the Austrian economics, from Lachmanians to hermeneuticians. Though, the latter are clearly led astray by their overemphasis of the subjective element of social phenomena at the expense of objective parameters that develop in the process of social interactions and which in turn constrain human action.

The great achievement of Mises is that he succeeded in proving the case that any attempts to forcibly impose restrictions on the spontaneous order of a free society must necessarily backfire, produce unintended consequences, and generally not accomplish the goals that served as rationale for those restrictions. And this constitutes the essence of his immortal contributions. But, unfortunately, as far as his specific epistemological defense of economics as a science of immutable laws is concerned, it is unsatisfactory and this might be one of major reasons for the proliferation of radical subjectivists.

It is a vast subject but I think the main problem is that he attempted to prove the existence of economic laws with the notion of the logical structure of human mind. The logical structure of human then implies purposeful human action. The purposefulness of human action, which in turn implies consciousness and rationality, is then offered as proof of the existence of economic laws! I would like to argue that just because humans act purposefully and rationally, this fact does not establish anything about the existence of specific economic laws that govern a capitalist economic system, not to mention the further important problem that such method does not provide any means to arrive at a description of these laws.