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On Methodology in Economics

Mises Daily: Wednesday, March 28, 2012 by

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When, in 1783, Immanuel Kant published his Prolegomena in order to dispel the confusion caused in the philosophical world by his revolutionary Critique of Pure Reason, he headed the chapters with a number of questions that could be condensed as follows: "How Is Metaphysics Possible?" If we, in turn, had to condense Ludwig von Mises's methodological position, we would have to phrase the question as follows: "How is economics possible?"

As Manuel Reventós points out in his prologue to the Catalan translation of Chapman's Economy, the science of economics, toward the end of the 19th century, found itself in the stage in which metaphysics had been at the end of the 18th century: floating between dogmatism and empiricism. Dogmatism was born with the physiocrats, developed by the classicists, and left its mark on the mathematical economists. It postulated inescapable economic laws to which man had to conform under penalty of failure. Empiricism was born with mercantilism and, through List and the historical school, arrived at "state socialism," neomercantilism, and other forms of etatism. It considered economic events only as social data, the study of which could be profitably employed by politicians to give order to economic life, thus freeing it from anarchy.

Both these trends gradually declined and their failure stimulated inquiring minds to reflect. The discredit into which economic laws had fallen seemed to justify empiricism. But neither did the control of economic life by political means prove practical. For whenever the state applied an economic measure to attain certain results, the final results proved to be quite different. Something always intervened. If it was not the discredited economic laws, what then could it be? If the economic activities of man were not ruled by "natural laws," nor could be regulated at will, then they had to have a sense of their own. And this sense was to be searched for neither by observation nor by experimentation, but by reflection. The data on economic life were available; only its sense was missing. And this could only be searched for by methodical reflection. Economic life did exist. It disobeyed natural laws and also resisted social laws. How was this possible?

The economic problem is exposed in a critical manner. In our opinion, herein lies the great contribution of Ludwig von Mises to the science of economics.

Economic life, unlike natural life, is not subject to the law of causality. In natural life the same causes always produce the same effects. In economic life the same causes may produce different effects. Why? Because man's volition interferes between causes and effects. And man's volition is not ruled by causes (past), but by aims (future). Events in human life are not ruled by the law of causality, but by that of finality. We can judge natural events starting from the two fundamental categories of Kant: time and place. In human events a third category intervenes: action. García Morente, who in our belief is the most lucid interpreter of Kant, stated that the 19th century further developed Kantism by discovering a third fundamental category explaining human evolution and progress. Action is the product of man's elective faculty. Confronted with facts, which in nature would be causes, man chooses and consequently acts. He acts whether he is confronted by an economic or any other human problem.

The study of human action is called praxeology. Economics is a part of praxeology. But what part? How do we categorize it within the praxeological group?

In economics the category of exchange which plays no role in other praxeological phenomena is added to the category of elective action. In economic life man acts to obtain what he wants. This is possible only in a bilateral way: do ut des. You give me something in exchange for what I give you; or I give you something in exchange for what you give me. Thus economics is catalactical praxeology. But the act of exchange must take place somewhere. This place (material or ideal) is the market. Everybody is always present and acting in the market, even if only in a negative way, i.e., not exchanging. Not to exchange is also to act in the market, just as the gambler at a gambling table may momentarily abstain from placing a bet.

We categorize a science on grounds of its essential, general, and permanent characteristics. Economics is human action employing the elective faculty in market exchange. Thus its fundamental categories are the elective faculty, the exchange of goods, and the market. Only in the recognition of these categories is economic thinking possible. Economics is oikos nemo, i.e., running of the home or caring for one's well-being. From the interplay of choosing between goods and services for the well-being of oneself and one's family, and choosing leisure, indifference, or sacrifice, economic life is born. Its driving force is the autonomous action of individuals. Its means is choice; its stage, the market.

Therefore, economics is neither pursuit of wealth, nor the production or distribution of commodities and services, nor their consumption. These are results, purely external manifestations which also appear outside the scope of economics. As Mises has repeatedly stated, production, distribution, consumption, and the satisfaction of the urge to amass wealth are also feasible by means not freely elective, such as politics or, more concretely, totalitarianism in any of its forms. But this is not economics. These actions only concern economics when they originate from the autonomous action of man exercising his elective faculty in the market. Only under this condition could the following characteristic phenomena, which always were considered to comprise economics, be brought about: supply and demand, mechanism of prices, money and credit, etc.

What we have just set forth constitutes the fundamental basis of economic theory. As Rudolf Stammler very accurately asserted, a theory is a doctrine of general validity. It is the exposition of the pure form of a certain scientific matter by means of a special focus or method. In our case it is the praxeological-catalactical focus of human action. The concrete and changing matters of human activity lack unity, order, and individuality. They receive these characteristics only from the method. Thus human action resulting from reflection on goods to be desired and to be offered in exchange may be an economic case or one of a different nature, depending upon the method applied. If we inquire why a man acts in a certain way today, instead of yesterday or tomorrow, why he selects one commodity or service instead of others, and why he offers in exchange one good or medium of exchange instead of others, then we apply psychology and not economics. We are dealing with economics when we regard the individual act as an elective act in the market. We are not interested in motives or "causes" that may have brought about a definite action at a definite time and place. This is the field of the psychologist. For the economist the elective-catalactical action of man is the ultimate given. It is the point of departure for our science and provides unity for an organic theory, that is to say, an explanation of the phenomena and problems resulting from man's use of his elective faculty in the market. If we start from this point of view we can logically explain and relate all economic phenomena.

In short, no event in itself is economic. Only the methodical focus makes it so. Thus we cannot study an economic event until we know the meaning of an "economic event." Economics, like any other science, necessarily starts from an a priori synthetical assertion. For economics it is the following: economic activity is elective-catalactic action. This a priori synthetical assertion has its raison d'être, for it allows us to understand and explain economic phenomena. It makes economics possible. Through its form it gives individuality and organic unity to material events which we used to consider intuitively as economic events. It also enables us to discard those concepts which, despite their economic appearance (monopolies, for example), are not economic events although they may influence economic life.

Starting from the synthetic assertion that defines economics, the science of economics proceeds in an analytical way, searching for fundamental elements, in order to construct the theory of economic life. First it searches for the primary categories of economic thought. According to Mises, human action is the fundamental element; but not every action is economic — only catalactic action is. It necessarily concerns commodities and services, even in the case of elective rejection. Being directed to future uses it necessarily entails insecurity, risks, etc.

According to Mises, the foregoing reasoning explains how the categories of economic thought flow from the primary category of action and from reflection on the circumstances in which action takes place. As he repeatedly points out, the science of economics does not study an imaginary economy but the real economic life which it endeavors to comprehend systematically through its general elements or essential forms. The primary categories then produce the secondary categories: value, price, cost, calculation, etc. Economics thus proceeds from fundamental to secondary and tertiary categories until the building of economic theory is completed.

However, there is one problem to which an answer has not yet been given by economists, not even by Mises who in his Human Action did not give us a theory but a treatise on economics. Even a theory is not the whole of a science, but merely the unitarian, organic, and exhaustive explanation of its object at which we arrive by the method implicit in the a priori synthetic assertion, establishing its definition. That is to say, theory furnishes us with the explanation of the object in question. Then the method of realization, which is a technical problem, must be searched for. This does not imply that man is to receive advice on the use of his elective faculty in catalactic action. Mises stated correctly that economics is not an axiological science and does not solve problems of justice or morals. Our task is to search for the most adequate means to attain the end that man has chosen.

Economics encounters many modus faciendi problems in its path, especially in the fields of money, economic calculation, etc. In treatises on economics these problems usually are intermingled with purely theoretical problems, which is not only antimethodical but also dangerous. For sometimes this is the reason a technical solution is given too great an importance insofar as the fundamental theoretical problem is subordinated to it. We all remember the confusion created in economic theory by the feud between monometalists and bimetalists. In jurisprudence we are now witnessing a similar aberration. The state is a juridical person. Now, the juridical person is a fiction of the technique of law. But notwithstanding, the state has lately been invested with ontological reality. People talk of the interests of the state, of state sovereignty, etc. And so we arrive at the omnipotent government, so justly attacked by Mises. We believe that in this area important work is to be done by the economist. Careful distinction must be made in economics between theoretical problems of principle and technical problems of application. Both must be presented distinctly separated in treatises on economics, especially those for students.

But economics is not only theory and technique; it is also practice, i.e., the solution of concrete cases. Mises does not expressly mention it, but he does so implicitly when he speaks of "history."[1] According to him, the method of history is understanding, not comprehension which characterizes theory. He speaks of history as the understanding of past events. But man not only understands or endeavors to understand history, he makes it. He makes it by acting in concrete cases, by exercising his faculty of election — that is, he solves praxeological problems. As Mises repeats so insistently, he solves them through reasoning, classifying the data, the pros and cons that cause him to elect and act in order to attain a panoramic view which enables him to choose the proper road. It is not enough for him theoretically to comprehend the kind of action to be taken (in this case an economic action), nor to master the technical instruments which were not invented for his specific case, but for a larger group of cases. He must also take into consideration the individual circumstances of the concrete case he is facing, estimating the relevancy of each circumstance in itself, its relation to others, its relation to the precedents of similar cases in the past, and to the desired end. In short, he must judge the case in perspective and in relief. To a certain degree he must consider it as if he were confronting a minor premise (Untersatz) searching for the major premise (Obersatz) to which he can submit the case and thus reach the conclusion which will determine his elective action.

We repeat, neither a theoretical comprehension nor the mastery of the technical means is sufficient for this. He must go deeper and exercise what Mises calls specific understanding, and which may also be called criterion, discretion, or savoir faire. In a word, he must interpret the case. His situation is like that of an historian who endeavors to understand an historical case, but he not only has to understand; he must also act. Mises advances a number of rules of understanding for the interpretation of past events. We believe that economists should also endeavor to find interpreting rules that serve as guides for the solution of practical cases and the discovery of the major premise, even if such guides are not exact or infallible. Indeed, it is deplorable to err in the interpretation of past historical cases as, for example, in the interpretation of the last depression. But it is fatal to err in actions affecting the future, especially if they concern not only an individual, but also a collective body. The examples of the revaluation of the pound sterling after the First World War and its devaluation by the last Labour government clearly demonstrate this. The fatal effects of both measures for British citizens and even for non-Britishers can only be attributed to a lack of understanding of the measures to be taken. We, therefore, believe that economists should not neglect the practical problems, that they should endeavor to find exact rules for the interpretation of economic phenomena. Books should be written and courses be organized to help all those who, in some way or other, endeavor to solve practical eases, to avoid the pitfalls that may divert them from the true path of realizing economics in practice.

Let us conclude by returning to the beginning. We believe that Professor von Mises has done in economics what Kant did in metaphysics. He has demonstrated how economics is possible. But it is one thing to know "what is possible," and another to know reality. Today nobody can philosophize ignoring Kant. In the future nobody will be able to deal with economics ignoring Mises. But we are still only in the beginning. As he has put it so well, economics is a young science. It must be made to grow, and we have endeavored to make a few suggestions to stimulate this growth. Of course, we do not hope to achieve its perfection because

there is no such thing as perfection in human knowledge, nor for that matter in any other human achievement. Omniscience is denied to man.… Science does not give us absolute and final certainty.… A scientific system is but one station in an endlessly progressing search for knowledge.… But to acknowledge these facts does not mean that present day economics is backward. It merely means that economics is a living thing — and to live implies both imperfection and change.[2]

Notes

[1] Ludwig von Mises, Human Action, Yale University Press, New Haven, Conn., pp. 47–58.

[2] Ibid., p. 7.