Preface by Murray N. Rothbard
Ludwig von Mises published many books and articles in his long and productive life, each of them making important contributions to the theory and application of economic science. But there stand out among them four towering masterpieces, immortal monuments to the work of the greatest economist and scientist of human action of our century. The first, which established Mises in the front rank of economists, was The Theory of Money and Credit (1912), which for the first time integrated the theory of money and the theory of relative prices, and outlined his later theory of the business cycle. Mises' second great work was Socialism (1922), which provided the definitive, comprehensive critique of socialism and demonstrated that a socialist order could not calculate economically. The third was his stupendous treatise Human Action (1949), which set forth an entire structure of economics and analysis of acting man. All three of these works have made their mark in economics, and have been featured in the " Austrian" revival that has flowered in the United States over the past decade.
But Mises' fourth and last great work, Theory and History (1957), has made remarkably little impact, and has rarely been cited even by the young economists of the recent Austrian revival. It remains by far the most neglected masterwork of Mises. And yet it provides the philosophical backstop and elaboration of the philosophy underlying Human Action. It is Mises' great methodological work, explaining the basis of his approach to economics, and providing scintillating critiques of such fallacious alternatives as historicism, scientism, and Marxian dialectical materialism.
It might be thought that, despite its great importance, Theory and History has not made its mark because, in this age of blind academic specialization, economics will have nothing to do with anything that smacks of the philosophic. Certainly, hyper-specialization plays a part, but in the last few years, interest in methodology and the basic underpinnings of economics has blossomed, and one would think that at least the specialists in this area would find much to discuss and absorb in this book. And economists are surely not so far gone in jargon and muddled writing that they would fail to respond to Mises' lucid and sparkling prose.
It is likely, instead, that the neglect of Theory and History has more to do with the content of its philosophical message. For while many people are aware of the long and lone struggle that Ludwig von Mises waged against statism and on behalf of laissez-faire, few realize that there is far greater resistance in the economics profession to Mises' methodology than there is to his politics. Adherence to the free market, after all, is now not uncommon among economists (albeit not with Mises' unerring consistency), but few are ready to adopt the characteristically Austrian method which Mises systematized and named "praxeology."
At the heart of Mises and praxeology is the concept with which he appropriately begins Theory and History: methodological dualism, the crucial insight that human beings must be considered and analyzed in a way and with a methodology that differs radically from the analysis of stones, planets, atoms, or molecules. Why? Because, quite simply, it is the essence of human beings that they act, that they have goals and purposes, and that they try to achieve those goals. Stones, atoms, planets, have no goals or preferences; hence, they do not choose among alternative courses of action. Atoms and planets move, or are moved; they cannot choose, select paths of action, or change their minds. Men and women can and do. Therefore, atoms and stones can be investigated, their courses charted, and their paths plotted and predicted, at least in principle, to the minutest quantitative detail. People cannot; every day, people learn, adopt new values and goals, and change their minds; people cannot be slotted and predicted as can objects without minds or without the capacity to learn and choose.
And now we can see why the economics profession has put up such massive resistance to the basic approach of Ludwig von Mises. For economics, like the other social sciences in our century, has embraced the myth of what Mises has properly and scornfully referred to as "scientism" -- the idea that the only truly ?scientific? approach to the study of man is to ape the approach of the physical sciences, in particular of its most prestigious branch, physics. To become truly "scientific" like physics and the other natural sciences, then, economics must shun such concepts as purposes, goals and learning; it must abandon man's mind and write only of mere events. It must not talk of changing one's mind, because it must claim that events are predictable, since, in the words of the original motto of the Econometric Society, "Science is prediction." And to become a "hard" or ?real? science, economics must treat individuals not as unique creatures, each with his or her own goals and choices, but as homogenous and therefore predictable bits of "data. " One reason orthodox economic theory has always had great difficulty with the crucial concept of the entrepreneur is that each entrepreneur is clearly and obviously unique; and neoclassical economics cannot handle individual uniqueness.
Furthermore, "real" science, it is alleged, must operate on some variant of positivism. Thus, in physics, the scientist is confronted with a number of homogeneous, uniform bits of events, which can be investigated for quantitative regularities and constants, e.g., the rate at which objects fall to earth. Then, the scientist frames hypotheses to explain classes of behavior or motions, and then deduces various propositions by which he can "test" the theory by checking with hard, empirical fact, with these observable bits of events. (Thus, the theory of relativity can be tested by checking certain empirically observable features of an eclipse.) In the Old Positivist variant, he "verifies" the theory by this empirical check; in the more nihilistic neopositivism of Karl Popper, he can only " falsify " or " not falsify " a theory in this manner. In any case, his theories must always be held tentatively, and can never, at least not officially, be embraced as definitively true; for he may always find that other, alternative theories may be able to explain wider classes of facts, that some new facts may run counter to, or falsify, the theory. The scientist must always wear at least the mask of humility and open-mindedness.
But it was part of the genius of Ludwig von Mises to see that sound economics has never proceeded in this way, and to elaborate the good reasons for this curious fact. There has been much unnecessary confusion over Mises' rather idiosyncratic use of the term a priori, and the enthusiasts for modern scientific methods have been able to use it to dismiss him as a mere unscientific mystic. Mises saw that students of human action are at once in better and in worse, and certainly in different, shape from students of natural science. The physical scientist looks at homogenous bits of events, and gropes his way toward finding and testing explanatory or causal theories for those empirical events. But in human history, we, as human beings ourselves, are in a position to know the cause of events already; namely, the primordial fact that human beings have goals and purposes and act to attain them. And this fact is known not tentatively and hesitantly, but absolutely and apodictically.
One example that Mises liked to use in his class to demonstrate the difference between two fundamental ways of approaching human behavior was in looking at Grand Central Station behavior during rush hour. The " objective" or " truly scientific" behaviorist, he pointed out, would observe the empirical events: e.g., people rushing back and forth, aimlessly at certain predictable times of day. And that is all he would know. But the true student of human action would start from the fact that all human behavior is purposive, and he would see the purpose is to get from home to the train to work in the morning, the opposite at night, etc. It is obvious which one would discover and know more about human behavior, and therefore which one would be the genuine ?scientist.?
It is from this axiom, the fact of purposive human action, that all of economic theory is deduced; economics explores the logical implications of the pervasive fact of action. And since we know absolutely that human action is purposive, we know with equal certainty the conclusions at each step of the logical chain. There is no need to "test" this theory, if indeed that concept has much sense in this context.
Is the fact of human purposive action "verifiable?" Is it "empirical?" Yes, but certainly not in the precise, or quantitative way that the imitators of physics are used to. The empiricism is broad and qualitative, stemming from the essence of human experience; it has nothing to do with statistics or historical events. Furthermore, it is dependent on the fact that we are all human beings and can therefore use this knowledge to apply it to others of the same species. Still less is the axiom of purposive action "falsifiable." It is so evident, once mentioned and considered, that it clearly forms the very marrow of our experience in the world.
It is just as well that economic theory does not need "testing," for it is impossible to test it in any way by checking its propositions against homogeneous bits of uniform events. For there are no such events. The use of statistics and quantitative data may try to mask this fact, but their seeming precision is only grounded on historical events that are not homogeneous in any sense. Each historical event is a complex, unique resultant of many causal factors. Since it is unique, it cannot be used for a positivistic test, and since it is unique it cannot be combined with other events in the form of statistical correlations and achieve any meaningful result. In analyzing the business cycle, for example, it is not legitimate to treat each cycle as strictly homogeneous to every other, and therefore to add, multiply, manipulate, and correlate data. To average two time series, for example, and to proudly proclaim that Series X has an average four-month lead compared to Series Y at some phase of the cycle, means next to nothing. For (a) no particular time series may even have the four-month lead-lag, and the lags may and will range widely; and (b) the average of any past series has no relevance to the data of the future, which will have its own ultimately unpredictable differences from the previous cycles.
By demolishing the attempted use of statistics to frame or test theory, Ludwig von Mises has been accused of being a pure theorist with no interest in or respect for history. On the contrary, and this is the central theme of Theory and History, it is the positivists and behaviorists who lack respect for the unique historical fact by trying to compress these complex historical events into the Procrustean mold of movements of atoms or planets. In human affairs, the complex historical event itself needs to be explained by various theories as far as possible; but it can never be completely or precisely determined by any theory. The embarrassing fact that the forecasts of would-be economic sooth-sayers have always faced an abysmal record, especially the ones that pretend to quantitative precision, is met in mainstream economics by the determination to fine-tune the model once more and try again. It is above all Ludwig von Mises who recognizes the freedom, of mind and of choice, at the irreducible heart of the human condition, and who realizes therefore that the scientific urge to determinism and complete predictability is a search for the impossible - and is therefore profoundly unscientific.
Among some younger Austrians, an unwillingness to challenge the prevailing methodological orthodoxy has led to either the outright adoption of positivism or else the abandonment of theory altogether in behalf of a vaguely empirical institutionalism. Immersion in Theory and History would help both groups to realize that true theory is not divorced from the world of real, acting man, and that one can abandon scientistic myths while still using the apparatus of deductive theory.
Austrian economics will never enjoy a genuine renaissance until economists read and absorb the vital lessons of this unfortunately neglected work. Without praxeology no economics can be truly Austrian or truly sound.
Murray N. Rothbard
New York City, 1985