Chapter 21 The Epistemological Case for Capitalism
In the early 1950s, Mises' NYU seminar dealt increasingly with epistemological questions.
As he said to Ludwig Rachman, he felt that the analysis of epistemological problems would
be the number one task in the social sciences in the coming years. He had said this in a
July 1956 meeting with Rachman. It was the topic of his last two monographs,
Theory and History 1957 and The Ultimate Foundation of Economic Science 1962. The subject had been
prominent in his thoughts and reflections since the publication of Sociology and History 1929
and Conception and Understanding 1930. It was one of the two areas in which he felt
contemporary economics was most deficient, the other one being the Theory of Economic Calculation.
In Nutsunado Economy and Human Action, he had stressed the historical significance of
the problem.
It is a complete misunderstanding of the meaning of the debates concerning the essence, scope,
and logical character of economics to dismiss them as the scholastic quibbling of pedantic
professors.
It is a widespread misconception that while pedants squandered useless talks about the
most appropriate methods of procedure, economics itself, indifferent to these idle disputes,
went quietly on its way.
In the mittorrenstreit between the Austrian economists and a Prussian historical school,
the self-styled intellectual bodyguard of the House of Hohenzollern, and in the discussions
between the School of John Bates Clark and American institutionalism, much more was at
stake than the question of what kind of procedure was the most fruitful one. The real issue
was the epistemological foundations of the science of human action and its logical legitimacy.
He had come to the conclusion that political motivations were behind these epistemological
critiques of economic science.
The main motive for the development of the doctrines of polylogism, historicism and irrationalism
was to provide a justification for disregarding the teachings of economics in the determination
of economic policies.
The socialists, racists, nationalists and etatists failed in their endeavors to refute
the theories of the economists and to demonstrate the correctness of their own spurious doctrines
Relations. It was precisely this frustration that prompted them again to negate the logical
and epistemological principles upon which all human reasoning, both in mundane activities
and in scientific research, is founded. Thus the epistemology of economics was not just
an idle pastime for ivory-towered intellectuals, it was of direct fractal call relevance.
How does economic theory relate to reality? Most economists believed, and still believe
To Mises this point of view was paradoxical. It is strange that some schools seem to approve
of this opinion and nonetheless quietly proceed to draw their curves and to formulate their
equations. They do not bother about the meaning of their reasoning and about its reference
to the world of real life and action. He himself felt it was a necessity to explain the epistemology
of Economic Science, and devoted chapters 2 and 3 of Human Action, a total of 62 pages,
to these issues. However, despite its fundamental importance, epistemology did play only an
incidental role in human action. The great organizing theme of human action was the theory
of economic calculation. Mises began with an analysis of the conditions under which
no economic calculation could take place, then turned to the discussion of economic
Economic Calculation in general, then within the market economy, and finally to those social
settings that render economic calculation impossible, socialism, or perverted juice interventionism.
From a philosophical point of view, Human Action made a sweeping case for utilitarian
social philosophy, utilitarian with a distinct Misesian flavour, and the scientific core
of this case was economics and the theory of economic calculation in particular. In
In his new book, Mises made another case for his utilitarian philosophy. This time the
argument turned on the epistemology of social analysis. Mises argued that the only scientific
interpretation of social reality was based on economics and history, and that the conclusions
of both these disciplines led to the more speculative generalisations of utilitarian
philosophy as he understood it. He showed that the major alternative approaches Marxism,
Positivism and Historicism, despite their pretensions to science, were untenable on
epistemological grounds. They were essentially metaphysical doctrines, that is, their claims
were not based on a certain fact, but on speculations, many of which, as Mises would show, were incoherent.
The new book was eventually published under the title Theory and History, and subtitled
An Interpretation of Social and Economic Evolution. It has remained one of his least read and
and at least understood works.
The difficulty lay only partly in the abstract nature of its subject.
The main hurdle was, as in several of his other writings, a lack of pedagogical effort
on his part.
Most people know what to expect when they consult a treatise on economics, but few have
any idea about the relationship between theoretical and historical approaches to social analysis.
Mises's new book was not about narrating mankind's social and economic evolution.
dealt instead with the epistemological problems of the various competing narratives. In Human
Action he had referred to these problems incidentally. He had stressed that economic analysis, starting
from the actions of individual persons, gave a purely fact-based account of the origin
of human society. The holistic approaches had been unable to do this. They explained
society by theological or metaphysical professions of faith. In Theory and History he amplified
is argumented to a sweeping epistemological vindication of the case for liberty and capitalism.
The book is divided into four parts. Part one deals with the central phenomenon of the
social sciences, value. Mises explains the nature of value and studies the implications
for a scientific analysis of human behaviour. In part two he argues that while all endeavours
to discover scientific laws must be built on the assumption of strict determinism, all
All attempts to find laws that determine the origin of ideas and value judgment have been
in vain. Marxist dialectical materialism and other theories that explain ideas in terms
of more fundamental material conditions are merely metaphysical speculation. The same
holds true for those philosophies of history that explain the evolution of society in terms
of some final destination. In part 3, Mises gives an in-depth discussion of the problems
The argument in a nutshell. For Mises the starting point is that any epistemological
speculation must lead to a determinism. This is so because the human mind is the instrument
Whatever the true nature of the universe and of reality may be, man can learn about it
only what the logical structure of his mind makes comprehensible to him.
The logical structure of his mind enjoys upon man determinism, and the category of causality
As man sees it, whatever happens in the universe is the necessary evolution of forces, powers
and qualities which were already present in the initial stage of the X out of which all
things stem. All things in the universe are interconnected and all changes are the effects
of powers inherent in things. No change occurs that would not be the necessary consequence
of the preceding state. All facts are dependent upon and conditioned by their causes. No
No deviation from the necessary course of affairs is possible. Eternal law regulates everything.
In this sense, determinism is the epistemological basis of the human search for knowledge.
Man cannot even conceive the image of an undetermined universe. In such a world, there could not
be any awareness of material things and their changes. It would appear a senseless chaos.
Nothing could be identified and distinguished from anything else. Nothing could be expected
and Predicted In the midst of such an environment, man would
be as helpless as if spoken to in an unknown language.
No action could be designed still less put into execution.
Man is what he is because he lives in a world of regularity and has the mental power to
conceive the relation of cause and effect.
He emphasised that from the point of view of a perfect being, such as God, things might
look completely different.
This position can best be characterized as a Leibnizian rationalism.
This point of view implies that human action could be explained, at least in theory, in
terms of underlying material forces.
We know that human action is immediately determined by the ideas and value judgments of the acting
individuals.
But these ideas and value judgments must in turn be determined by more fundamental causes.
If such causes were physical or chemical processes, then the explanation of human behavior could
should become a branch of applied physics or applied chemistry. However, and this is
the crucial consideration that Mises had stressed already in previous work, at present nobody
knows anything about the more fundamental causes of human behaviour. Up to now all attempts
to identify laws that would explain ideas and value judgements in terms of physical,
chemical or other processes have been in vain. There are various hypotheses about what such
13 years before he had written, we may reasonably assume as hypotheses that man's mental abilities
are the outcome of his bodily features. Of course we cannot demonstrate the correctness
of this hypothesis, but neither is it possible to demonstrate the correctness of the opposite
view as expressed in the theological hypothesis. We are forced to recognize that we do not
know how out of physiological processes thoughts result. We have some vague notions of the
detrimental effects produced by traumatic or other damage inflicted on certain bodily
organs. We know that such damage may restrict or completely destroy the mental abilities
and functions of men, but that is all. All such hypotheses are therefore mere speculation.
They are philosophical or metaphysical constructs, not scientific knowledge. This point also
also applied to F.R. Hayek's The Sensory Order, a book that Mises did not cite. Hayek
had attempted to analyse the mechanism through which physiological impulses come to be translated
into mental perception. Apparently, Mises was not convinced that Hayek delivered more
than metaphysical speculation. Our deficient knowledge about the more remote causes of
human behaviour has two straightforward methodological implications. All efforts to explain the causes
and consequences of human behaviour must, at least for the time being, take individual
Methodological Human Behaviour as an ultimate point of departure. They must accept the principle
of methodological individualism. The older economists had applied this principle intuitively
and even Schumpeter, who coined the term, defended it merely on grounds of expediency.
Mises delivered an epistemological demonstration of its necessity. Methodological individualism
is rooted in deficient human knowledge. The causal analysis of individual human behaviour
We must take account of the fact that any human action has certain invariant consequences,
that is, consequences that result from like action at any place and any time. For example,
an increase in the quantity of money tends to entail an increase of the price level above
the level it would otherwise have reached, irrespective of when and where the money supply
is increased. The study of such consequences is the task of praxeology and economic science.
Human action also has contingent causes and consequences. The very same action increasing the quantity of money can be inspired by very different ideas and value judgments, and the objective consequences resulting from any action can provoke very different individual reactions at different times and places.
In other words, the causal chains through which ideas and value judgments are connected with human action are contingent.
The elicitation of these contingent causal chains is the task of historical research.
Individual value judgments and actions are ultimately given, as they cannot be traced
back to something of which they would appear to be the necessary consequence. If this were
not the case, it would not be permissible to call them an ultimate given. But they are
not, like the ultimate given in the natural sciences, a stopping point for human reflection.
They are the starting point of a specific mode of reflection, of the specific understanding
of the historical sciences of human action.
Mises stressed that this is as far as scientific analysis of human action can go.
Starting from observable human behaviour, we can explain its invariant consequences
with the help of economics, we can also explain its contingent consequences by historical
understanding and we can to some extent explain how this behaviour resulted from the ideas
and Value Judgments of the Acting Person in the particular case under consideration, again
by understanding.
Mises did not exclude the possibility that individual value judgments and ideas had invariant
causes, but again neither he himself nor anybody else knew what they were.
At present only some of the contingent causes of human action could be identified by historical
understanding on a case-by-case basis, and even this analysis was not likely to give
the full picture.
There was an unfathomable remnant that defied any explanation whatever, historical individuality.
Mises explained, the characteristics of individual men, their ideas and judgments of value as
well as the actions guided by those ideas and judgments, cannot be traced back to something
of which they would be the derivatives. There is no answer to the question why Frederick
II invaded Silesia, except because he was Frederick II. It follows that the social sciences
Social analysis, at least for the time being, cannot be bound with the natural sciences
into a unified body of scientific knowledge.
This ignorance splits the realm of knowledge into two separate fields, the realm of external
events, commonly called nature, and to the realm of human thought and action.
For methodological reasons, the social sciences are separate from the natural sciences.
Mises called this the principle of methodological dualism.
Social analysis, if it just sticks to the known facts, must explain all social phenomena
as resulting from individual action, and the causal chain of events must start and end
with the ideas and value judgments of individuals. Scientific endeavours within the constraints
of methodological individualism and methodological dualism entail the development of the disciplines
called praxeology and history. The former is the discipline that describes the invariant
consequences of human action that result regardless of time and place. The latter is
History describes in retrospect how the acting person perceived the situation in which he
had to act, what he aimed at, what he believed to be the means at his disposition, and it
Ludwig uses the general laws provided by economics and the natural sciences to describe the objective
impact that the acting person had through his behaviour.
Thus, the mission of history is to describe the drama of social and economic evolution
from the point of view of its protagonist.
Its specific tool is psychology, or specific understanding, or Mises' favourite expression
– thymology.
Of the two disciplines, economics had the most momentous practical implications.
Mises, in Theory and History
Thymology has no special relation to praxeology and economics.
The popular belief that modern, subjective economics, the marginal utility school, is
founded on or closely connected with psychology is mistaken.
Praxeology is not concerned with the events which, within a man's soul or mind or brain,
produce a definite decision between an A and a B.
It takes it for granted that the nature of the universe enjoins upon man choosing between
incompatible ends.
Its subject is not the content of these acts of choosing, but what results from them, action.
It does not care about what a man chooses, but about the fact that he chooses and acts
in compliance with a choice made.
The thymological analysis of man is essential in this study of history.
It conveys all we can know about the ultimate ends and judgments of value, but as has been
In human action Mises had shown that economic analysis leads directly to laissez-faire conclusions.
He demonstrated that government intervention entails consequences that are unwanted even
from the point of view of the champions of these interventions. In theory and history
he completed the case for capitalism from the epistemological point of view. In particular
he took on those theories that were grounded on an explicit or implicit rejection of methodological
individualism and methodological dualism. His basic argument against the approaches of Marxism,
teleological philosophies of history and positivism was that they had no scientific underpinning
Whatever. They were based on certain beliefs about social and economic evolution, but they
had not delivered the goods. Their most fundamental tenets could neither be refuted nor verified
with the tools of science, reason and observation. Moreover, to the extent that they did make
propositions about ascertainable facts, they were wrong or incoherent at the crucial junctures
of the Argument. For example, Marxism, and the various philosophies of history, could
not explain how the general direction in which they believed society was moving resulted
from individual action. Positivism blithely disregarded the fact that there are no constant
relationships in observable human behaviour. The champions of historicism contradicted
themselves whenever they championed any government policy whatever, while holding to the notion
that there was no such thing as economic law. Strictly speaking, these were metaphysical
or quasi-religious doctrines, not science. Science and the Culture of Salatory Descent
As Mises saw it, the task of metaphysics, philosophy and religion was to slake the unquenchable
human thirst for knowledge and certainty, he remarked. Those divines who saw that nothing
Nothing but revelation could provide man with perfect certainty were right. Human scientific
inquiry cannot proceed beyond the limits drawn by the insufficiency of man's senses and
the narrowness of his mind. And even more clearly, a few years later, the human mind
in its search for knowledge resorts to philosophy or theology precisely because it aims at an
explanation of problems that the natural sciences cannot answer. There were questions to which
which science had not yet provided an answer, what determines the behaviour of atoms, and
there were questions to which science could not give any answers. Was there a beginning
of time? Does the soul die? Science could give answers only to the extent that it could
rely on ascertainable facts. There was a scientific interpretation of social and economic evolution
only to the extent that there were ascertainable facts that warranted this interpretation.
But even then there were basic assumptions underlying any scientific analysis of facts
that could not themselves be demonstrated. It is contradictory to expect that logic could
be of any service in demonstrating the correctness or validity of the fundamental logical principles.
All that can be said about them is that to deny their correctness or validity appears
to the human mind nonsensical and that thinking guided by them has led to modes of successful
Now, Mises did believe that metaphysics, philosophy and religion also relate to reality in some
some way, but the problem is that their interpretation of reality cannot be verified by reason and
observation. Therefore, they cannot be demonstrated as a scientific proposition can be demonstrated.
And the espousal of a metaphysical or religious doctrine, therefore, cannot be grounded on
such a demonstration, but must rely essentially on a value judgment.
And Mises insisted that value judgments and ultimate ends are beyond any rational examination.
They could only be examined by applying some standard of evaluation, but as soon as one
applies such a standard, the end under consideration would no longer be an ultimate end, rather
it would become a means for the attainment of the proposed standard.
It follows that truly ultimate ends could not possibly be demonstrated by reason and
observation.
The characteristic mark of ultimate ends is that they depend entirely on each individual's
Mises' personal and subjective judgment, which cannot be examined, measured, still
less corrected by any other person. Each individual is the only and final arbiter in matters concerning
his own satisfaction and happiness. Notice that Mises admitted the existence of errors
in regard to one's value judgments. He also took it for granted that one could enjoy art.
The point was, again, that each individual is his own judge. Even the venerable idea
of Justice interpreted as an ultimate end cannot be demonstrated. One has to rely on
intuition and interpretation of one's inner voice. Yet how can disagreements between different
intuitions and different inner voices be settled? Moreover, and most importantly, justice is
not an ultimate end. It is a means for the attainment of social cooperation.
All these ethical doctrines have failed to comprehend that there is, outside of social
Biological Bonds and proceeding temporally or logically the existence of society, nothing
to which the epithet just can be given. A hypothetical isolated individual must under
the pressure of biological competition look upon all other people as deadly foes. His
only concern is to preserve his own life and health. He does not need to heed the consequences
which his own survival has for other men. He has no use for justice. His only solicitudes
are hygiene and defence. But in social cooperation with other men, the individual is forced to
abstain from conduct incompatible with life in society. Only then does the distinction
between what is just and what is unjust emerge. It invariably refers to inter-human social
Social Relations. What is beneficial to the individual without affecting his fellows, such
as the observance of certain rules in the use of some drugs, remains hygiene.
The ultimate yardstick of justice is conduciveness to the preservation of social cooperation.
Conduct suited to preserve social cooperation is just. Conduct detrimental to the preservation
of society is unjust. This raises an important practical problem for all systems of social
The problem appears as soon as one raises the question, how do the members of such systems
deal with dissenters? The question concerns the particular members of different collectivist
systems of social organisation. Their starting point is the moral postulate that the collective
takes precedence over the individual. If a man assigns a higher value to the concern
of a collective, then, to his other concerns, and acts accordingly, that is his affair.
So long as the collectivist philosophers proceed in this way, no objection can be raised, but
they argue differently. They elevate their personal judgements of value to the dignity
of an absolute standard of value. They urge other people to stop valuing according to
their own will, and to adopt unconditionally the precepts to which collectivism has assigned
Absolute Eternal Validity. What happens, though, when individuals are reluctant to
espouse the collectivist agenda? Mises emphasized that the collectivists depend on violence
to solve this problem. There is, of course, but one way to make one's own judgments
of value supreme. One must beat into submission all those dissenting. This is what all representatives
of the various collectivist doctrines are striving for. They ultimately recommend the
the use of violence and pitiless annihilation of all those whom they condemn as heretics.
Collectivism is a doctrine of war, intolerance and persecution. If any of the collectivist
creeds should succeed in its endeavours, all people but the great dictator would be deprived
of their essential human quality. They would become mere soulless pawns in the hands of
a monster. Again, the basic problem of all collectivist schemes is that, in their argument,
We willy-nilly have to rely on value judgments, and value judgments cannot be proven to be
right or wrong. In contrast, the facts of science are ascertainable by all people. Anyone
can check for himself the veracity of what the scientists say. He can convince himself
that one course of action is feasible while another is not, or that one course of action
leads to a desired outcome while another one fails to do so. Science has nothing to say
It may about ultimate ends or value judgments, but it does provide knowledge about the earthly
means to attain earthly ends.
It is therefore the foremost tool for men to find a minimal agreement for cooperation
in the world, despite their differences in beliefs and value judgments.
Catholics, Protestants, Jews and Muslims might not agree on theological questions, but all
of them can check for themselves that a greater division of labour is more productive than
The
characteristic feature of a free society is that it can function in spite of the fact
that its members disagree in many judgments of value. In the market economy, business
serves not only the majority but also various minorities, provided they are not too small
A few years later, Mises went beyond this defense of dissent to a position of advocacy.
Not only is dissent compatible with the functioning of a free society, it was actually the driving
What transformed the stagnant conditions of the good old days into the activism of capitalism
was not changes in the natural sciences and in technology but the adoption of the free
enterprise principle. The great ideological movement that started with the Renaissance
continued in the Enlightenment and in the nineteenth century culminated in liberalism
produced both capitalism, the free market economy, and its political corollary or, as
the Marxians have to say, its political superstructure, representative government and the individual's
civic rights, freedom of conscience, of thought, of speech, and of all other methods of communication.
It was in the climate created by this capitalistic system of individualism that all the modern
intellectual achievements thrived. Never before had mankind lived under conditions like those
This culture of sanitary dissent was ultimately the product of freedom and thought and speech.
But its more proximate cause was the discovery and dissemination of economic science.
The development and practical application of this new discipline, concluded Mises, was
the most spectacular event of modern history.
Heroic Elites in a Mass Democracy Yet by the mid-1950s, capitalism and classical
liberalism were everywhere on the retreat. How was it possible that the great majority
of Westerners had forgotten or failed to appreciate the most spectacular event of modern history?
In Theory and History, Mises outlined his account of the rise and fall of classical liberalism.
In the centre of his reflection was the relationship between elites and masses, a relationship
that he analysed within the framework of his epistemological reflection. In other writings,
he had already stressed the fundamental historical fact that social progress, in particular the
rise of capitalism, had resulted from the efforts of a small group of individuals.
The most amazing thing concerning the unprecedented change in earthly conditions brought about
by capitalism is the fact that it was accomplished by a small number of authors and a hardly
greater number of statesmen who had assimilated their teachings.
Not only the sluggish masses, but also most of the businessmen who, by their trading,
made the laissez-faire principles effective, failed to comprehend the essential features
of their operation.
Even in the heyday of liberalism, only a few people had a full grasp of the functioning
of the Market Economy. Western civilization adopted capitalism upon recommendation on
the part of a small elite. How is this possible? Because ultimately society is ruled by ideas.
Small groups who spread their ideas can therefore have, in due time, a disproportionate impact
on social organization. A rather superficial and shallow view of the problems of government
saw the distinction between freedom and despotism in an outward feature of the system of rule
and Administration, namely, in the number of people exercising direct control of the
social apparatus of coercion and compulsion. The way to a realistic distinction between
freedom and bondage was opened two hundred years ago by David Hume's immortal essay
on the first principles of government. Government, taught Hume, is always government of the many
by the few. Power is therefore always ultimately on the side of the governed, and the governors
have nothing to support them but opinion.
Now Mises combined this insight with his epistemology of the social sciences. If Hume was right,
that ideas rule society, and if it was true that no scientific account could be given
on how new ideas emerge in general, then it follows that new ideas were the true driving
force in human history.
History is the record of human action. Human action is the conscious effort of man to substitute
more satisfactory conditions for less satisfactory ones.
Ideas determine what are to be considered more and less satisfactory conditions and
what means are to be resorted to alter them.
Thus, ideas are the main theme of this study of history.
The genesis of every new idea is an innovation.
It adds something new and unheard of before to the course of world affairs.
The reason history does not repeat itself is that every historical state is the consummation
of the operation of ideas different from those that operated in other historical states.
The essence of civilization is ideas. If we try to distinguish different civilizations,
the differential specifica can be found only in the different meanings of the ideas that
determine them. It follows that intellectual elites were the true elites in comparison
to which the mighty and powerful of any age are just the executors of ideas developed
in Previous Ages. The creative genius was the hero, the true driving force of history.
Every man, whether great or small, lives and acts within the frame of his age's historical
circumstances. These circumstances are determined by all the ideas and events of the preceding
ages, as well as by those of his own age. The titan may outweigh each of his contemporaries.
He is no match for the united forces of the dwarfs. A statesman can succeed only insofar
as his plans are adjusted to the climate of opinion of his time, that is, to the ideas
that have got hold of his fellows' minds. He can become a leader only if he is prepared
to guide people along the paths they want to walk and toward the goal they want to attain.
A statesman who antagonizes public opinion is doomed to failure. No matter whether he
is an autocrat or an officer of a democracy, the politician must give the people what they
It is different with the pioneers of new ways of thinking and new modes of art and literature.
The path-breaker who disdains the applause he may get from the crowd of his contemporaries
does not depend on his own age's ideas. The genius work, too, is embedded in this sequence
of historical events. It is conditioned by the achievements of preceding generations
and is merely a chapter in the evolution of ideas, but it adds something new and unheard
of to the treasure of thoughts and may in this essence be called creative. The genuine
history of mankind is the history of ideas, and in searching for their origin we inevitably
come to a point at which all that can be asserted is that a man had an idea, whether the name
of this man is known or not is of secondary importance. In Mises's worldview, in which
Which all things and all thoughts are the necessary consequence of antecedent causes,
ideas were the one dynamic element of social evolution. The discoverers and promoters of
new ideas, the creative geniuses, were the social vanguard, the elite that led humanity
onto new paths, both good and bad.
Mises's stress on the particularities of the genius is a pervasive feature of his thought,
starting from Gemeinwirtschaft via Human Action, 1949, to Theory and History, 1957, and Ultimate
Foundation of Economic Science, 1962. It is not known where his inspiration came from,
but it cannot be excluded that he took it for granted that educated people would know
the theoretician who had insisted on the categorical difference between mere talents, be it ever
so great, and true genius. Weininger wrote at the beginning of the century,
Someone may have a talent, for example, the mathematical talent by birth, and to an extraordinary degree, he will then be able to digest the most difficult chapters of this science with but small effort, but it does not follow that for this reason he has any genius, which is the same thing as originality, individuality, and condition of his own productivity.
Conversely, there are great geniuses who have not developed any special talent to a high
degree. Just think of Novalis or Jean-Paul. Talent is hereditary. It may be the common
good of a family, the Bachs. Genius is not transferable. It is never general, but always
individual, Johann Sebastian. But in order to play this role, they had to be aware of
their responsibility. Now, the problem was that the majority of the rationalist philosophers
They assumed that all men are endowed with the same power of reasoning. They ignored the
difference between clever people and dullards, even that between the pioneering genius and
and the vast crowds of simple routinists, who at best can espouse the doctrines developed
by the great thinkers, but more often are incapable of comprehending them. As the rationalists
saw it, every sane adult was intelligent enough to grasp the meaning of the most complicated
theory. If he failed to achieve it, the fault lay not in his intellect, but in his education.
Once all people have enjoyed a perfect education, all will be as wise and judicious as the most
Eminent Sage, He added, The second shortcoming of rationalism was its neglect of the problem
of erroneous thinking. Most of the rationalist philosophers failed to see that even honest
men sincerely devoted to the search for truth could err. This prepossession prevented them
from doing justice to the ideologies and the metaphysical doctrines of the past. A doctrine
of which they disapproved could, in their opinion, have been promoted only by purpose
Schumpeter had discussed the shortcomings of the classical doctrine of democracy along
very similar lines.
Both Schumpeter and Mises would highlight the crucial role of leadership in the operation
of the market and in politics.
In distinct contrast to Schumpeter, however, Mises stressed intellectual leadership.
He also insisted that leadership could be good or bad.
It could promote the preservation and flourishing of society, but it could also hurt and destroy
it.
Mises held that as a consequence of this error of the 18th century rationalists and perpetuated
by the 19th century socialists, the dull masses were increasingly reluctant to accept intellectual
leadership from anyone but those who flattered them.
They were imbued with the mystical notion that the mass of the people can never be wrong,
that society could do without the guidance of intellectuals.
Faced with this situation, the classical liberals still endorsed democracy, and so did Mises.
It was true that mass democracy had led straight to the dictatorship of the proletariat and
the autocracy of Hitler, Mussolini, Peron and other modern successors of the Greek tyrants,
but the crucial question was whether any alternative political system could have prevented these
excesses.
Despite the political and humanitarian catastrophes of the 20th century, Mises did not abandon
and the case for democracy. Rather, he appealed to the elites to accept their responsibilities
by engaging in public debate and enlightening their fellow citizens about the right cause
of action. If the small minority of enlightened citizens who are able to conceive sound principles
of political management do not succeed in winning the support of their fellow citizens
and converting them to the endorsement of policies that bring and preserve prosperity,
The cause of mankind and civilization is hopeless. There is no other means to safeguard a propitious
development of human affairs than to make the masses of inferior people adopt the ideas
of the elite. This has to be achieved by convincing them. It cannot be accomplished by a despotic
regime that instead of enlightening the masses beats them into submission. In the long run
the ideas of the majority, however detrimental they may be, will carry on. The future of
of mankind depends on the ability of the elite to influence public opinion in the right direction.
What does this imply more specifically for libertarian intellectuals, who wish to steer
social evolution toward greater freedom? Do they have to make the case for a particular
form of government or for a particular design of constitutions? Mises would have none of
this. The form of government was a completely secondary problem, because tyranny could exist
under any of the possible system. He argued that the primary challenge for libertarian
intellectuals was to preserve a climate of opinion that tolerated dissent. Hume's insight
that governors have nothing to support them but opinion, logically followed to its conclusion,
completely changed the discussion concerning liberty. The mechanical and arithmetical point
of view was abandoned. If public opinion is ultimately responsible for the structure of
of Government, it is also the agency that determines whether there is freedom or bondage.
There is virtually only one factor that has the power to make people unfree, tyrannical
public opinion. The struggle for freedom is ultimately not resistance to autocrats or
olycarchs, but resistance to the despotism of public opinion. It is not the struggle
of the many against the few, but of minorities, sometimes of a minority of but one man, against
The Majority The worst and most dangerous form of absolutist
rule is that of an intolerant majority.
Such is the conclusion arrived at by Tocqueville and John Stuart Mill.
Without an elite defending tolerance, there could be no culture of dissent, no competition
and progress in the economic sphere.
Mises was not being naïve in ascribing this responsibility to intellectuals.
They were the heroes of the drama of human history, yes, but they also had to be truly
He knew from bitter personal experience that a pro-capitalist intellectual could not expect lavish material rewards.
A case in point was the commercial book market. A true pioneer could not expect a high income on a free market.
Reverence to the great authors and artists has always been limited to small groups.
The book market is flooded by a downpour of trivial fiction for the semi-barbarians,
Barbarians, but this does not prevent great authors from creating imperishable works.
The decisive consideration was again that no alternative social system held better promise.
It is of course true that in the market economy not those fare best who from the point of
view of an enlightened judgment ought to be considered as the most eminent individuals
of the human species. The uncouth hordes of common men are not fit to recognise duly the
and the merits of those who eclipse their own wretchedness.
They judge everybody from the point of view of the satisfaction of their desires.
Thus boxing champions and authors of detective stories enjoy a higher prestige and earn more
money than philosophers and poets.
Those who bemoan these facts are certainly right, but no social system could be devised
that would fairly reward the contributions of the innovator whose genius leads mankind
and to ideas unknown before and therefore first rejected by all those who lack the same inspiration.
The only consolidation for great but unsuccessful intellectuals was that the pioneers in business
did not fare any better.
The much defamed acquisitiveness of promoters and speculators succeeds daily in providing
the masses with commodities and services unknown before.
A horde of plenty is poured upon people for whom the methods by means of which all these
These marvellous gadgets are produced are incomprehensible. These dull beneficiaries of the capitalistic
system indulge in the delusion that it is their own performance of routine jobs that
creates all these marvels. They cast their votes for rulers who are committed to a policy
of sabotage and destruction. They look upon big business necessarily committed to catering
to mass consumption as upon the foremost public enemy and to prove of every measure that,
The Study of History
Mises devoted all of part three to the discussion of the nature, scope and methods of historical
research. This might be surprising from the pen of an economist, but keep in mind that
Mises was interested in economics as a tool to guide action. In his early years as a student
at the University of Vienna, this practical concern had made him dissatisfied with the
are methods taught by the historical school. A passage from theory and history sums up
the problem.
The historicist's fateful error consisted in the belief that this analysis of the past
in itself conveys information about the course future action has to take. What the historical
account provides is the description of the situation. The reaction depends on the meaning
the actor gives it, on the ends he wants to attain, and on the means he chooses for their
attainment. By the 1950s a sort of neo-historicism was in full swing and about to conquer Western
academia. The new movement was led by statisticians and econometricians who held precisely the
views that Mises had rejected more than 50 years earlier. In correspondence with Neumeier
he lamented,
They are full of contempt for what they call metaphysical economics. Only facts, they say,
that these facts are history, and not facts in the sense in which the natural sciences employ this term, remains unknown to them.
The official doctrine of all these research institutions, government economists, university economists and so on,
is, for instance, that the socialist program is not to be refuted by metaphysics, but by facts.
They point out, for instance, that profits are only X percent of the national income of only Y percent of the sales dollar
Mises had turned to economics because this discipline provided knowledge about something
on which historical research was mute, even with the advanced techniques of econometrics,
namely the objective suitability of means to attain social ends, yet the same overarching
and Practical Motivation preserved his lifelong interest in the study of history.
In Theory and History, Mises set out to explain why and how historical knowledge had to complement
economics as a guide for human action, thus he closed a great parenthesis opened during
his days in the Grünberg seminar.
In his previous works, he had outlined the division of labour between praxeology and
history.
He had presented history as a sort of residual discipline that sought to come to grips with
Problems that could not be addressed by the exact disciplines, Mises wrote on page 50 of
Human Action, The scope of understanding is the mental grasp of phenomena which cannot
be totally elucidated by logic, mathematics, praxeology, and the natural sciences to the
extent that they cannot be cleared up by all these other sciences. It must never contradict
the teachings of these other branches of knowledge. He had singled out in particular the problem
Problem of assigning relative quantitative weights to different causes that combine into
an observable effect. Mises called this the problem of relevance. The only way to tackle
this was to apply the specific tool of the historian – understanding or verstehen.
The historian can enumerate all the factors which cooperated in bringing about a known
effect and all the factors which worked against them and may have resulted in delaying and
and Mitigating the Final Outcome.
But he cannot coordinate, except by understanding, the various causative factors in a quantitative
way to the effects produced.
He cannot accept by understanding, assigned to each of n factors, its role in producing
the effect p.
Understanding is in the realm of history the equivalent, as it were, of quantitative analysis
and measurement.
But the understanding of the relative quantitative contribution of any one cause to a combined
Effect could not be independently verified or refuted.
As a consequence, the problem of relevance was the source of insuperable disagreement
between men of science, and Mises stressed that it was in fact the only source of lasting
disagreement.
Historical understanding can never produce results which must be accepted by all men.
Historians may disagree for various reasons, they may hold different views with regard
to the teachings of the non-historical sciences.
They may base their reasoning on a more or less complete familiarity with the records.
They may differ in the understanding of the motives and aims of the acting men, and of
the means applied by them.
All these differences are open to a settlement by objective reasoning.
It is possible to reach a universal agreement with regard to them, but as far as historians
disagree with regard to judgments of relevance, it is impossible to find a solution which
all sane men must accept, and in theory and history speaking of the same problem, the
precariousness of forecasting is mainly due to the intricacy of this problem. It is not
only a rather puzzling question in forecasting future events, it is no less puzzling in retrospect
for the historian. In theory and history, Mises wanted to flesh
out his theory of understanding. He did not believe that the necessarily subjective judgments
of Relevance, somehow made history root-use. Despite its deficiencies, only the discipline
of history could solve certain problems that were of utmost practical importance. In particular,
history alone could provide an analysis of the context of action. Mises stressed that
human action was always embedded in concrete circumstances of time and place. Action was
a conscious response to a given situation, and it could succeed only if the acting person
and understood the present. But there is no such thing as a non-historical analysis of
the present state of affairs. The examination and description of the present are necessarily
a historical account of the past, ending with the instant just past. The description of
the present state of politics, or of business, is inevitably the narration of the events
that have brought about the present state. If, in business or in government, a new man
When the businessman takes the helm, his first task is to find out what has been done up
to the last minute.
The statesman as well as the businessman learns about the present situation from studying
the records of the past.
Mises knew what he was talking about.
Reporting on current business and political conditions had been his daily bread for many
years.
Moreover, at two critical junctures he had analyzed the state of affairs in politics
in Nation, State and Economy, 1919, and in Omnipotent Government, 1944, he had analyzed
the forces at work in the rise of aggressive nationalism and statism, as well as their
cataclysmic endings in the two world wars. At the onset of the Cold War, he had added
a third piece, Bland Chaos, 1946, which told the tale of the rise of the Soviet Union to
its position of power. Thus he was in a good position to challenge those of his readers
who might disagree, let those who want to reject their preceding statements undertake
to describe any present situation in philosophy, in politics, on a battlefield, on the stock
exchange, in an individual business enterprise, without reference to the past.
But how far back should history be studied? Was it practical or necessary for statesmen
and business leaders to seek instruction about more than the past few years before they took
Office.
He observed that there is no point in history at which we can stop our investigation fully
satisfied that we have not overlooked any important factor.
There was no a priori rule that could be helpful in deciding where to stop historical research.
The usefulness of further knowledge could only be determined after completion of additional
research.
In any case, it was a grave error to believe that increasing remoteness in time meant decreasing
practical relevance.
The mere fact that an event happened in a distant country and a remote age does not
in itself prove that it has no bearing on the present. Jewish affairs of 3,000 years
ago influenced the lives of millions of present-day Christian Americans more than what happened
to the American Indians as late as in the second part of the 19th century. In the present-day
conflict of the Roman Church and the Soviet, there are elements that trace back to the
The Great Schism of the Eastern and Western Churches that originated more than a thousand
years ago.
The specific intellectual tool applied in historical research was understanding or Verstehen,
the term introduced by the Southwest German School of Historiography.
In his previous writings, Mises had referred to and endorsed the historical works of this
school.
In theory and history, he developed his own account of the theory of Verstehen.
He presented it as a tool to unearth facts provided by introspection and by contact with
other human beings.
It signifies the cognition of human emotions, motivations, ideas, judgments of value and
volitions, a faculty indispensable to everybody in the conduct of daily affairs and no less
indispensable to the authors of poems, novels and plays as well as to historians.
Human Epistemology calls this mental process of the historians the specific understanding
of the historical sciences of human action. However, it is not a mental process exclusively
resorted to by historians. It is applied by everybody in daily intercourse with all his
fellows. It is a technique employed in all inter-human relations. It is practiced by
children in the nursery and kindergarten, by businessmen in trade, by politicians and
Statesmen in Affairs of State. Mises was reluctant to use the word psychology to describe this
approach because by the early 1950s the new discipline of experimental psychology had
become fairly entrenched and was about to become identified with psychology per se.
In order to avoid confusion he introduced a new term to designate the traditional humanistic
discipline of psychology. Cymology is what everybody learns from intercourse with his
It is what a man knows about the way in which people value different conditions, about their wishes and desires, and their plans to realize these wishes and desires.
It is the knowledge of the social environment in which a man lives and acts, all with historians, of a foreign milieu about which he is learned by studying special sources.
Mises observed that the members of the Southwest German School were unaware of the existence of economic theory, but this did not diminish their achievements in the clarification of the logical nature of history.
In theory and history, Mises made an important contribution to the theory of Verstehen.
He pointed out that the main application of Verstehen was not in the analysis of the past, but as a tool for anticipating the future.
There were in fact two types of historians, the historian of the past as well as the historian
of the future, that is, acting man. The South West German School and its followers such
as Alfred Schutz had in their writings exclusively dealt with the historian of the past, but
the most urgent question related to the historian of the future, the main epistemological problem
of this specific understanding is, how can a man have any knowledge of the future value
Judgments and Actions of Other People
The traditional method of dealing with this problem, commonly called the problem of the
alter ego or fremdverstehen, is unsatisfactory. It focused attention upon grasping the meaning
of other people's behaviour in the present or, more correctly, in the past. But the task
with which acting man, that is, everybody, is faced in all relations with his fellows
does not refer to the past, it refers to the future. To know the future reactions of other
Entrepreneurial is the first task of acting man. Knowledge of their past value judgments
and actions, although indispensable, is only a means to this end.
What then is the logical character of the Verstehen of future action? Mises is unequivocal.
The historian of the future is essentially an intellectual entrepreneur. All his knowledge
concerns contingent data of the past that cannot be generalized. How can such information
and about particular circumstances of time and place be used to forecast the future.
There is only one way. The historian of the future must guess what the future will be.
Forecasting is inherently speculative and uncertain when it comes to anticipating future
human behaviour.
Psychology in this sense of thymology is a branch of history. It derives its knowledge
from historical experience. All that thymology can tell us is that in the past definite
What men or groups of men were valuing and acting in a definite way. Whether they will
in the future value and act in the same way remains uncertain. All that can be asserted
about their future conduct is speculative anticipation of the future based on the specific
understanding of the historical branches of the sciences of human action.
He later gave a more operational description of the intellectual process involved. Out
of what we know about a man's past behaviour, we construct a scheme about what we call his
and his character. We assume that this character will not change if no special reasons interfere
and, going a step farther, we even try to foretell how definite changes in conditions
will affect his reactions. This insight delivered a clue to the vexed
problems of cultural history, a discipline riddled with chauvinistic and nihilistic prejudices.
Mises would have nothing of the sort of cultural relativism that the young Levi Strauss had
champion, just a few years before, he believed in the