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Vols No Z

ustrian Economics Newsletter

Theory and History
by
Murray N. Rothbard

Ludwig von Mises published many books and articles in

his long and productive life, each of them making important
pasonssibutions 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 cri-
Wwrtique of socialism and demonstrated that a socialist order
could not calculate economically. The third was his stupen-

dous treatise Human Action (1949), which set forth an entire Ludwig von Mises, 1881-1973

structure of economics and analysis of acting man. Allthree pot so far gone in jargon and muddled writing that they

of these works have made their mark in economics, and ould fail to respond to Mises’ lucid and sparkling prose.
have been featured in the “Austrian” revival that has flow- It is likely, instead, that the neglect of Theory and History
ered in the United States over the past decade. has more to do with the content of its philosophical mes-
But Mises’ fourth and last great work, Theory and History sage. For while many people are aware of the long and lone
(1957), has made remarkably little impact, and has rarely grruggle that Ludwig von Mises waged against statism and
been cited even by the young economists of the recent on behalf of laissez-faire, few realize that there is far greater

Austrian revival. It remains by far the most neglected mas- resistance in the economics profession to Mises’ methodol-
terwork of Mises. And yet it provides the philosophical gy than there is to his politics. Adherence to the free
backstop and elaboration of the philosophy underlying market, after all, is now not uncommon among economists
Human Action. It is Mises’ great methodological work, ex- (albeit not with Mises’ unerring consistency), but few are
plaining the basis of his approach to economics, and provid. ready to adopt the characteristically Austrian method
ing scintillating critiques of such fallacious alternatives as which Mises systematized and named “praxeclogy”
historicism, scientism, and Marxian dialectical materialism. At the heart of Mises and praxeology is the concept with
It might be thought that, despite its great importance, which he appropriately begins Theory and History: method-
Theory and History has not made its mark because, inthisage ological dualism, the crucial insight that human beings must
of blind academic specialization, economists will have noth- he considered and analyzed in a way and with a methodol-
ing to do with anything that smacks of the philosophic. ogy that differs radically from the analysis of stones, planets,
- ~Certainly, hyper-specialization plays a part, but in the last 5roms, or molecules. Why? Because, quite simply, it is the
\ CW years, interest in methodology and the basic underpin essence of human beings that they act, that they have goals
nings of economics has blossomed, and one would think and purposes, and that they try to achieve those goals.

that at least the specialists in this area would find much to Stones, atoms, planets, have no goals or preferences; hence,
discuss and absorb in this book. And economists are surely (Continued on page 2)



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(Continued from page 1)

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 quanti-
tative detail. People cannot; every day, people learn, adopt
new values and goals, and change their minds; people can-
not 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 pur-
poses, 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 homogeneous and therefore predictable bits

of “data” One reason orthodox economic theory has always
had great difficulty with the crucial concept of the entrepre-
neur is that each entrepreneur is clearly and obviously -

unique; and neo-classical economics cannot handle individ ug’

ual 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 regulari-
ties 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 variants. he “verifies: the | the-.. |.

ory by this ‘empirical check; in the more nihilistic neo-
positivism 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 idiosy-
ncratic use of the term «a priori, and the enthusiasts for
modern scientific methods have been able to use it to dis-
miss 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

events, and ¢ gropes his u way toward finding and testing ex- |
planatory 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 tenta-
tively and hesitantly, but absolutely and apodictically.

One example that Mises liked to use in his class to demon-
strate the difference between two fundamental ways of ap-
proaching human behavior was in looking at Grand Cen-
tral Station behavior during rush hour. The “objective” or

“truly scientific” behaviorist, he pointed out, would observe i
the empirical events: e.g. people rushing back and nO
aimlessly, at certain predictable times of day. And that is all

(Continued on page 3)

~


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Theory and History | ~ test theory, Ludwig von Mises has been accused of being a
(Continued from page 2) 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 com-
plex 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 soothsayers 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 1 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 com-
plete. predictability is a search for the impossible — and is

he would know. But the true student of human action
WEY vould start from the fact that all human behavior is purpo-
sive, and he would see the purpose is to get froma 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
peksasshatcencept | has much sense.ip 4 this context.
Is the Fact of human purposive action “verifiable?” Is it
“empirical?” Yes, but certainly not in the precise, or quanti-
tative 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. Murray N. Rothbard, Professor of Economics at New York
It is just as well that economic theory does not need Polytechnic Institute, is S. J. Hall Distinguished Visiting
“testing.” for it is impossible to test it in any way by checking Professor of Economics at the University of Nevada for
its propositions against homogeneous bits of uniform 1984-85. © )
events. For there are no such events. The use of statistics This article is excerpted from Professor Rothbard’s intro-
and quantitative data may try to mask this fact, but their duction to the new Mises Institute edition of Ludwig von

therefore profoundly unscientific.
Austrian economics will never enjoy a genuine renais-
sance until economists read and absorb the vital lessons of
this unfortunately neglected work. Without praxeology no
economics can be truly Austrian or truly sound.

seeming precision is only grounded on historical events that Mises” Theory and History.
are not homogeneous in any sense. Each historical event is a |
N complex, unique resultant of many causal factors. Since it is

Bc ik, id Ein, Tu
UTE, it cannot be “used fora pOSItivis. dic 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 legiti-
mate to treat each cycle as strictly homogeneous to every
other, and therefore to add, multiply, manipulate, and cor-
relate 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
Ko elevance to the data of the future, which will have its own
ultimately unpredictable differences from the previous cy-

cles. AEN editors and Institute praduate students Mark Thornton and Don
By demolishing the attempted use of statistics to frame or ~~ Boudreaux.



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Books : son’s 1938 book. Entitled “‘What is Truth’ in Economics?’
(Continued from page 5) and reprinted in On the History and Method of Economics,
Knight's witty piece is well worth reading today. r
Mises, predictably enough, comes under heavy criticism,
though the charges against him are sometimes puzzling. His
methodological views are characterized both as “very forth-
right” and as “unclear” in certain respects. Mises certainly
can be faulted, as can most authors, for certain internal gaps |

Hutchison interjects his political concerns (their presence
is frankly indicated by the book’s title) even more directly
into Chapter 7, “Austrians on Philosophy and Method
(since Menger), an essay which was previously un-
published, The bulk of this chapter is a survey of the
methodological views of Bohm-Bawerk, Wieser, Mises,

“Hayek I” (pre-1937), and “Hayek II” (post-1937). In the final ~ in the explication of his views. But Hutchison can hardly be
section on “Dilemmas of Modern Austrians” Hutchison credited with having read Mises diligently enough to dis-

. Co cover such . “ * Mises’
offers a baldly political-strategic argument for rejecting whi or gaps He aes dogma ee eee
aptiorism: “For claims to establish a priori judgements of e misquotes) that “Action is, by definition, always

LL , 41s rational, wi i i ati
‘apodictic certainty’ or ‘beyond the possibility of dispute, h \ without showing on Svident ET -
. _ es what Mises meant rational. i
together with comprehensive denunciation as ‘Positivist’ y utchison does grab ho

oo . i. 1s of an interesting and vital issue when h i)
and ‘Empiricist’ of the criteria of testability and falsifiability, Poser £ ; Jevelos i © h ¢ eo (p- 209)
a LL : ow far praxeology can develop it o i -
may serve to support infallibilist, authoritarian and anti- p BY p 1s theorems without spec

libertarian attitudes and to “play “into “the "Hands ‘6f the” ifying the extent of. knowl

have. But he tak: Mise
enemies of freedom. It is very dangerous for any individual ave. But he takes no note of two passages in which Mises

indicates that particular auxiliary assumptions concernin
ot group to claim access to significant a priori and infallible P y ptic ning
i» . 41 knowledge are indeed part of such praxeological theories as
politicoeconomic judgements, beyond the possibility of dis-

pute and testing. Obviously anyone who did dispute them Gresham's law (Ep istemological Problems of Economics, pp. 87-
R 88) and the Austrian theory of the trade cycle {*Elastic
would be a kind of psychiatric case.

- . : Expectations’ and the Austrian Theory of the Trade Cycle;
Now this is a very peculiar argument, particularly from a RE )
: ne LL .. Economica, August 1943, p. 251}. Hutchison instead flubs
methodologist who so rightly insists on the scientific merit
ea. . . the matter by asking whether Mises assumes “rational ex-
of distinguishing clearly between positive and normative

Lo . ectations, and then quoting a statement irrelevant to chit
statements. It is rather an unfair rhetorical trick, first of all, P ’ “ g

to link apriorism with “infallibilism” The “infallibility” question. The passage he quotes states only that market i

claimed by praxeologists for deductive theorems, such as economics or catallactics applies to all exchange regardless
diminishing marginal utility and the negative slope of de- of how foolish one may think the ends pursued by ex-

mand schedules, is a far cry from the infallibility claimed by changers.

authoritarian despots for themselves. Would Hutchison de- Hutchison next professes to be puzzled regarding the t

i» le status of equilibrium concepts and equilibrating processes in
nounce claims by mathematicians to the infallibility of the sored D 2 10g pro:
Mises’ thought. But rather than look into Mises’ writings on
Pythagorean theorem? He might demur on the ground that

cL ... these topics, the author simply takes Mises to task for E
mathematicians as such do not pronounce on politi

: alleged opagueness. This seems arather irresponsible proce- ;
coeconomic matters. But neither do praxeologists as such
RE ~dure.-What.is a: " :

make politicoeconomic judgments, let alone claim nfallibil- SH Pa ii Ri ime
re ff EET complete ‘absence of any reference 15es > sharp distinc-
ity for them. Their apriorism is limited to the realm of pure

. . ) tion between theory and history. One must appreciate this
theory, and does not extend to history or politics. Neither oT ¥ y PP oo
. distinction to have any hope of understanding the limited
Mises nor Hayek, so far as [ know, has ever accused his

iy distance Mises took apriorism, and, conversely, the impor-
intellectual opponents of lunacy. p ’ ’ v p

oo : ta h for histori :
As for “playing into the hands of the enemies of freedom,’ i role be ho N t historical ork bution Hutchi ;
one is entitled to doubt whether the Misesian approach is ndoubtedly the most novel contribution Hutchison ot

riskier on that score than the Popperian fallibilist approach. oN he the history x Da fhousht is the division of
that regards the prediction of shortages as a result of newly ayek Ito a “Hayek Lan aye © dividing

proposed price controls, say, as a tentative hypothesis point is located at the publication date of “Economics and
: .

The sections of this chapter that deal with Bohm-Bawerk Knowledge,” which is said to represent Hayek II's rejection
and Wieser are relatively unobjectionable, though Wieser’s of the Misesian ideas on method that had dominated Hayek

i . : i: _ I's thought. There are indeed differences between Hayek and;
- support for introspection is rather unfairly criticized. Mises. but th bab] 1 ; “
Hutchison. notes in passing that Frank H. Knight once Ises, Sue there is Prongly 22 great a danger of aveisiaiing =

. as of understating them. Hayek has continued since 1937 to
upheld Wieser’s doctrine as “essentially sound” This state- g y 7

ment by Knight came in a scathing essay-review of Hutchi- {Continued on page 6)



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Books

T. W. Hutchison, The Politics and Menger’s essentialist outlook on economic theory, though

Phil osophy of Economics: Marxians, not very cogently. For example, Hutchison asserts (p. 181)
Kevnesians. and Austrians that “a genuine law of demand, unlike Menger’s ‘exact’ law,
y ’ J must be testable or falsifiable” He does not explain how

(New York: New York U ty Press, 1981)

ew York: New York University Press, '

what he calls the “law of demand, the proposition that a rise
Reviewed by Lawrence H. White in demand results in a rise in price, might operationally be
shown as “false” Neither does he explain why formulating it
in a non-falsifiable way would render it not a genuine law.
Of course what is usually meant by “the law of demand” is
the proposition that the lower the price faced, the greater
the quantity demanded, i.e. that demand curves slope
downward. Here the same questions arise: Could this be
“falsifiadt: “Harticularly when foriiilated carefully as a ceteris
paribus proposition? If not, why does that disqualify it from
being a “genuine law”? The issue here is not simply verbal, as
Hutchison rightly insists. The issue is: What is illegitimate
or unscientific about a proposition being non-falsifiable,
particularly when it is deducible from non-falsifiable (or
definitional or axiomatic or “hard-core”) statements con-
cerning preferences or utility?

Hutchison certainly cannot be faulted for criticizing

It should be obvious from the sub-title of this book that it
holds potential interest for Austrian economists, if for no
other reason than it represents an evaluation of the Aus-
trian school by an “outside” critic. T.W. Hutchison is, of
sousse, not Just any critic. He is a well known and well
ii pdubistorian’. of econemigadhgught-and:economic...
m————y Those familiar with his earlier works, from
The Significance and Basic Postulates of Economic Theory
(1938) to Knowledge and Ignorance in Economics (1977), will
know him as an emphatic advocate of Popperian falsifica-
tionism for economics. They will therefore not be surprised
that the bottom line of Hutchison'’s methedological advice
to Austrians is: drop the apriorism of Wieser, Mises, and
early Hayek, and embrace the “Popperian insights” of the
ater Hayek. Even Misesian Austrians will nonetheless find

wi Menger where their views diverge. But he can be faulted for
some material here to engage their interest and assent as well ) oo .
. evidently failing to understand Menger on a crucial point,
as much seemingly calculated to annoy them. CLL
the concept of economic institutions as unintended conse-
The book is a collection of nine largely unrelated essays, Co. .
, ) quences of individual actions. Hutchison confuses the
six of which have been published before. Two deal with . } ’
. agents’ lack of intention to produce an overall pattern with
Marxian political economy, one with the Cambridge .
Cw co unawareness of the way in which the pattern is formed. In
School, one with “Keynes versus the Keynesians,” one with . , }
. , fact a Mengerian explanation of the way in which prices are
Walter Eucken and the German Social-Market Economy; .
: formed, without any agent intending to produce uniform
two with the philosophy and method of the Austrian econo- ;
: a. . and market-clearing prices, loses none of its relevance in a
mists, and the last two with general methodological issues in
economic and ic theorizing. . This. revie world Givalile dict!) populated entirely by seapomiaally

en its rr en a - focus on ea
trian” chapters.

An earlier version of chapter 6, “Carl Menger on Philoso-

phy and Method,” was previously published in 1973 in a

volume edited by J.R. Hicks and W. Weber, Carl Menger and

the Austrian School of Economics. The chapter consequently

calls for only a brief mention here. Hutchison ably conducts

the reader on a tour of Menget’s treatise on methodology,

Problems of Economics and Sociology. (The original title of

Hutchison’s essay was “Some Themes from Investigations into

Method,” where Investigations into Method represents a more

oo literal translation of the title of Menger’s work.} Students

: 0 have not read Menger’s book may profit from this

‘aspect of the chapter, though it is naturally a poor substitute
for reading the original.

In addition te giving a survey Hutchison criticizes * (Continued on page 4)

son’s statement ®. 185) hac here { is certainly less and less

scope for this kind of ‘organic, unselfconscious behavior
and institutions, as social and economic knowledge, and its
communication, grows and spreads” While it may be true
that governments find intervention more tempting the
more statistics they gather, this does not mean that the
spread of information makes obsolete the distinction be-
tween institutions ‘organically’ evolved and institutions de-
liberately designed. Hutchison seems determined to obliter-
ate the conceptual distinctions between designed and
undesigned order, and between intervention and non-
intervention, when he states {p. 186) that “a free-market
economy must today be just as consciously and deliberately
constructed or ‘planned’ as some socialist experiments.”



===== PAGE 6 =====

The Ludwig von Mises Institute  couined from page 4

Board of Visitors uphold subjectivism, methodological dualism, and method i
.. +. ological individualism, particularly in “The Facts of the
Mrs. Ludwig von Mises, Chairman Ellice McDonald, Jr. Social Sciences” (1943) and part one of the The Counter-
New York City Greenville, Delaware . Revolution of Science (1942-1944).
Jobn V. Depson, Vice Chatman. Ron Pal "Hutchison embraces “Hayek II” for embracing a Popper-
Opelika, Alabama Washington, D.C. = re a C1 « » CL
ian falsificationism which “sweeps out of court” the position
E A. Hayek Murray N.. Rothbard Wi d Mises. Perh h X of rhetorical .
University of Freiberg New York Polytechnic Institute ‘Of Wieser and Ivlises. Ferhaps the peak ott etorica EXCESS 13
. reached when (p. 218) Hutchison declares: “But it would be
Henry Hazlitt Hans E Sennhok: CT oo } . :
Wilton, Connecticut Grove City College ~~. disastrous to collapse into the kind of obscurantism which
LE refuses to recognize, or to try to uphold, any common
epistemological criteria as standards which should be shared
Entrepreneurs Council J Co CL
~ by natural and social scientists alike (as Popper has always
Burton S. Blumert, Chairman Robert D. Love. insisted). That way lies the permissive chaos in which the |
Burlingame, California, ~~ Wichita, Kansas =~ principle | that ‘anything goes’ will r ripen into the : dogmas of -
Arnold Bernhard ~~ LJ. Mahoney HE - ‘mob rule, %d%55 usher in the fetatorship ‘of some . genocidal
New York, New York Charleston, South Cafolina” popular or ‘proletarian’ boss, such as “the great scientist;
James U. Blanchard, III J. W. Middendorf, Il. ~~ Stalin” This can hardly be regarded as a scholarly argument
Metairie, Louisiana Washington, D:C. against the position that the social sciences can have strict
Douglas R. Casey A. Minis, Jr. = ~~ standards which are not the standards of natural science.
Weshingion, D.C. Savannah, Georgi a kK Hutchison is prone to blur Austrian apriorists together
Sopert 1 ag | avid H, adden with Paul Feyerabend, the advocate of “methodological
’ 4 [¢ [4 ’ NOLS ) , » ‘ . ‘

: : anarchism,’ and with Martin Hollis and Edward ]. Nell, the
William A. Dunn Tyson E. Poppell Ca, , » ,
Stuart. Florida Fort Worth. Toxds ~ 7 gprioristic-Marxian critics of neoclassical economics, wher, 3
Kenneth J. Geibino Catherine D. Roland : “a careful scholarship would keep the distinctness of thelr
Beverly Hills, California Andalusia, Alabama ~~, - several positions in focus. The tendency to tar them all with
John M. Harber, III John L. Ryan the same brush is especially pronounced in the book’s final
Birmingham, Alabama Indianapolis, Indiana ~~. chapter. (Hutchison does of course recognize the incompati-
Robert D. Kephart Frank P. Samford, Jr. = +. bility of Marxism with Austrianism, and indeed seems to
Largo, Florida Birmingham, Alabama ~ think it clever to suggest that intellectual conflicts between
David H. Keyston Raleigh L. Shaklee © -  apriorists of the two camps could be settled only by vio-
San Mateo, California Oakland, California © * lence. In fact a reasonable dialogue is possible, as shown by
H. E Langenberg Mark Skousen ©. Don C. Lavoie’s essay-review of Hollis and Nell in the
5t. Lows, Missouri Merrifi ield, Virginia oe Journal of Libertarian Studies of Fall 1972). ne ii
Flugh 2. Cr perter Robbins Taylor Jr. ~~ i++ distortion created by blur iig All thtee grou |

Nn, Yi! y .
moma a gomery “anti-positivists” is the suggestion (p. 279} that Misesians fail
to observe the normative/positive distinction and the
Executive Staff : definitional/empirical distinction. The first distinction is
Llewellyn H. Rockwell, Ie. | clearly insisted on by Mises. A version of the second (not, to
Director be sure, the analytic/synthetic version) is present in Mises
Roger W. Garrison distinction between theory and history which, as we have
Associate Director for Academic Affairs already noted, Hutchison fails to notice.

Patricia Heckman
Program Manager

yoardelle Orr ator Dr. White, an adjunct scholar of the Mises Institute, is Co

Lo 9 Assistant Professor of Economics at New York University,
Christi C. Swain y ao?

Office Administrator

“