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Epistemological Problems of Economics (Institute for Humane Studies in Econ)

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EPISTEMOLOGICAL PROBLEMS IN ECONOMICS is a seminal work by Ludwig von Mises. Actually, the English translation of the title is somewhat misleading. This work (which is a collection of essays) deals not only with methodological issues but broader questions of economic theory.

Von Mises wrote in the rationalist tradition. According to him, the laws of economics (which are part of the more general laws of human action) are a priori. "Human action always confronts experience as a complex phenomenon that first must be analyzed by a theory before it can even be set in the context of the hypothesis that could be proved or disproved." [p. 30.] Statistics therefore have a limited role in economics, and cannot prove (or disprove) any theory. As von Mises notes, it is not surprising that many of the great economists were also logicians.

This work can be a bit tough to get through. Von Mises writing is clear as always, but some of the pieces deal with certain disputes of the day and contain discussions of thinkers who aren't widely studied today. For example, the names of Othmar Spann, Max Weber, Friedrich Wieser and Werner Sombart are discussed extensively. Fortunately, this edition (produced by the Ludwig von Mises Institute) contains an excellent introduction by Jorg Guido Hulsmann. Dr. George Reisman, author of CAPITALISM, translated the book into English in 1960.

This edition has a superb introduction by Guido Hulsmann, biographer of Mises, explaining the reason why Mises turned to epistemology and why he took it so seriously.

Up to the 1930s it seemed that the Austrian insights were firmly embedded in the mainstream of neoclassical economics, although Wicksell sounded an alarm in correspondence with Marshall when he deplored the drift from Menger's ideas in successive editions of Marshall's "Principles of Economics". Then the calculation debate with the socialists in the 1920s, followed by the Keynesian diversion and the rise of positivism in the philosophy of science signalled that there were deep problems and issues in epistemology and methodology that called for further investigation and resolution.

Hayek turned towards the function of dispersed knowledge in society and the "abuse of reason" project, while Mises revisited the major themes and thinkers after the marginal revolution to eliminate some errors from the legacy of Menger, Bohm Bawerk, Weber and others of less note. This book contains a series of papers, most written in the 1920s, on the key areas of value theory and epistemology.

Later, when "Human Action" fell like a stone in the profession, he concluded that the decisive battleground for the future of economics lay in the basic principles and methods of the discipline. He wrote two more books to sustain his defence of subjectivism and the a priori approach, against historicism and positivism. These are "Theory and History (1957) and "The Ultimate Foundation of Economic Science" (1962).

While Mises was working in Europe, scholars on two other continents were moving along lines that converged with Misian praxeology. In the US Talcott Parsons under the influence of Marshall, Pareto, Durkheim and Weber developed the "action frame of reference" ("The Structure of Social Action", 1937) and Karl Popper in Australasia sketched "situational analysis" ("The Poverty of Historicism", which appeared as articles in 1943/44 and the book in 1957, also "The Open Society and its Enemies" 1945 ). That was not the ideal time for collaboration between German and English speaking people and the opportunity for a merging of forces was lost. After "The Structure" Parsons embarked on general systems theory, inspired by the model of classical mechanics and Popper, mostly engrossed with physics and biology, never engaged fully with the social sciences or the Austrian school, despite his friendship with Hayek.

While Mises is conceivably the leading economist of the 20th century, his epistemological project has not helped to convince scholars in the mainstream of the strengths of the Austrian program. Maybe the program needs to be made more Austrian by injection of selected ideas from Karl Popper. This has the potential to deliver a nuanced version of methodological monism that does justice to the differences between the natural and the human sciences. The first step is to see how the quest for justified true beliefs (justificationism) has created insoluble problems and misplaced efforts to identify the sources or grounds of such beliefs and the methods required to reveal them. In brief, all attempt to conclusively justify universal propositions lead to an infinite regress.

Methodological dualism is generally based on the assumption that the natural and biological sciences find and justify universal laws by some process (possibly induction), based on observations. In contast the human sciences find and justify their universal laws by some other process of reason or intellectualisation or apprehension of essential tendencies that influence what happens in human affairs without being capable of derivation from observations.

The Popperian replies that the universal laws of the natural sciences (as we know them) are conjectures (more or less freely invented) that have stood up to tests, regardless of their origins which may well be in myths, superstitions and metaphysics. They are never justified (in the strong sense demanded by justificationists) and they are not tested directly but only by their capacity to account for observed events, in conjunction with ancillary hypothesis and statements of initial conditions. Quite likely the same applies to the universal laws of praxeology which can be used (and tested) to anticipate (or explain in historical retrospect) tendencies (pattern predictions) in the world. Of course the actual laws are quite different in different domains, as are the problems to be solved, the events explained and the observations and experiments that are employed. Explanations of events in the human sciences will need to take account of another kind of regularity in addition to the universal laws, these are the values, norms and "rules of the game", ranging from local customs to the laws of the land, including the written and unwritten rules of interpretation and application of more general principles.

On this account the laws of praxeology do not need to be grounded in the "justificationist" sense, they need to be tested by their capacity to explain events, to provide insight and understanding of processes, to stand up to criticism, to point the way to deeper problems, to integrate different field of study and to generate fruitful research programs. Just like real science!

Ludwig Heinrich Edler von Mises (1881-1973) was one of the major figures in the Austrian School of economics. (Nobel Prize winner Friedrich Hayek was a pupil of his.) Mises' major works were Human Action: A Treatise on Economics, Third Revised Edition and Socialism: An Economic and Sociological Analysis.

This book of essays was first published in German in 1933; Mises wrote in the Preface to the English language edition, "It is the aim of the essays collected in this volume to explode the errors implied in the negativistic doctrines rejecting economic theory and thereby to clear the way for the systematic analysis of the phenomena of human action and especially also of those commonly called economic. They represent, as it were, the necessary preliminary study for ... my book, 'Human Action'..."

He asserts that "It is indisputable that there is and must be an aprioristic theory of human action. And it is equally indisputable that human action can be the subject matter of historical investigation." (Pg. 7) This science of human action is a priori, not empirical. "Like logic and mathematics, it is not derived from experience; it is prior to experience." (Pg. 12-13) He later states that every conscious action is rational; "Only the ultimate goals... are beyond rationality." (Pg. 148)

He charges that collectivists "idolize... only the true state; everything else they condemn... all collectivist doctrines are harbingers of irreconcilable hatred and war to the death." (Pg. 42)

Describing the "subjective theory of value," he explains that "what is alone of importance is that a demand for alcoholic beverages exists in a definite volume and strength. One person may buy Kant's works out of a thirst for knowledge; another, for reasons of snobbery. For the market... All that counts is that they are prepared to spend a definite sum." (Pg. 168)

This book may be a useful "warm up" for someone preparing to take on Mises' "Human Action."

This is a very beautiful introduction to how the Austrian School thinks. It's also a great introduction to the Methodenstreit as well. Don't expect an exact treatise on epistemology however, it's specialized to a critique of the modern methods of economics, and a defense of the Austrian School's a priori style. There is a later book by Mises called "The Ultimate Foundation of Economic Science" which may be a more modern treatment to this subject, but I only have so much that I can read.

At the very least, it's interesting from the point of view of understanding the history of economics and culture of the Austrians.

Also, there is an extensive introduction by Hulsmann that I feel should be a book in its own right.