The Epistemological Case for Capitalism

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[This article is excerpted from chapter 21 of Mises: The Last Knight of Liberalism.] In the early 1950s, Mises’s NYU seminar dealt increasingly with epistemological questions. As he said to Ludwig Lachmann, he felt that the analysis of epistemological problems would be the number one task in the social sciences in the coming years.1 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

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[This article is excerpted from chapter 21 of Mises: The Last Knight of Liberalism.]

In the early 1950s, Mises’s NYU seminar dealt increasingly with epistemological questions. As he said to Ludwig Lachmann, he felt that the analysis of epistemological problems would be the number one task in the social sciences in the coming years.1 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 Nationalökonomie 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 talk about the most appropriate method of procedure, economics itself, indifferent to these idle disputes, went quietly on its way. In the Methodenstreit between the Austrian economists and the 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.2

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. It was precisely this frustration that prompted them to negate the logical and epistemological principles upon which all human reasoning both in mundane activities and in scientific research is founded.3

Thus the epistemology of economics was not just an idle pastime for ivory-tower intellectuals; it was of direct practical relevance. How does economic theory relate to reality? Most economists believed — and still believe today — that their propositions concern only hypothetical conditions never actually given in real life. 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.”4 He himself felt it was a necessity to explain the epistemology of economic science and devoted chapters two and three 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 calculation in general, then within the market economy, and finally to those social settings that render economic calculation impossible (socialism) or pervert its use (interventionism). From a philosophical point of view, Human Action made a sweeping case for utilitarian social philosophy — “utilitarian” with a distinct Misesian flavor. And the scientific core of this case was economics and the theory of economic calculation in particular.

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 generalizations 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 ascertainable 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.5 It has remained one of his least read and 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. Many 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. It 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.”6 In Theory and History, he amplified this argument into 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 behavior. In part two, he argues that, while all endeavors to discover scientific laws must be built on the assumption of strict determinism, all attempts to find laws that determine the origin of ideas and of value judgments 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 three, Mises gives an in-depth discussion of the problems of scientific historical analysis, developing the approach of the Southwest German School of historiography. In part four, finally, he critically dissects various speculations about history. In what follows, we will discuss the major elements of his contribution.

The Argument in a Nutshell

For Mises, the starting point is that “[a]ny epistemological speculation must lead toward determinism.” This is so because the human mind is the instrument through which we learn about all things, and our human mind has a determinist bent. It cannot help thinking that all things are strictly determined by certain causes.

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 enjoins 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 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.7

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 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 behavior. Up to now all attempts to identify laws that would explain ideas and value judgments in terms of physical, chemical, or other processes have been in vain. There are various hypotheses about what such basic determination could look like. But not a single one of them has ever been validated.8 All such hypotheses are therefore mere speculation. They are philosophical or metaphysical constructs, not scientific knowledge.9

Our deficient knowledge about the more remote causes of human behavior has two straightforward methodological implications. All efforts to explain the causes and consequences of human behavior must, at least for the time being, take individual human behavior 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 behavior 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 of 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.

But 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 elucidation of these contingent causal chains is the task of historical research.10

Mises stressed that this is as far as scientific analysis of human action can go. Starting from observable human behavior 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 behavior 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.11

It follows that the social sciences, 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 the realm of human thought and action.”12 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 endeavors 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 the discipline that (1) describes value judgments from the point of view of the acting person and (2) describes how individual actions and other relevant factors combined with one another in a given objective context to produce a definite outcome. 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 uses the general laws provided by economics and the natural sciences to describe the objective impact that the acting person had through his behavior. Thus the mission of history is to describe the drama of social and economic evolution from the point of view of its protagonists. Its specific tool is “psychology” or “specific understanding” or — Mises’s favorite expression — “thymology.”

Of the two disciplines, economics had the most momentous practical implications.13 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 behavior. 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.

1. He had said this in a July 1956 meeting with Lachmann. See Lachmann to Mises, letter dated September 17, 1956; Grove City Archive: Lachmann file.
2. Mises, Human Action, p. 4.
3. Ibid., p. 6.
4. Ibid.
5. Mises, Theory and History (New Haven: Yale University Press, 1957).
6. Mises, Human Action, p. 145. See also ibid., pp. 145-147.
7. Mises, Theory and History, pp. 73f. He emphasizes 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. See G.W. Leibniz, Nouveaux essais sur l’entendement humain, preface, p. 28. On the importance of Leibnizian rationalism for Austrian intellectual life, see William M. Johnston, The Austrian Mind (Los Angeles: University of California Press, 1972), chap. 19. Johnston is however unconvinced that the Austrian School of economics was influenced by the Leibnizian tradition. See ibid, pp. 86f.
8. Thirteen years before, he had written: “We may reasonably assume as hypothesis 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.” Omnipotent Government (Spring Mills, Penn.: Libertarian Press, 1985 [1944]), p. 156.
9. This point also applied to F.A. Hayek’s Sensory Order (Chicago: University of Chicago Press, 1952), a book that Mises did not cite. Hayek had attempted to analyze 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.
10. 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, Theory and History, p. 310, emphasis added.
11. Mises, Theory and History, p. 183.
12. Mises, Theory and History, p. 1.
13. “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.” Mises, Theory and History, p. 271, emphasis added. “The thymological analysis of man is essential in the study of history. It conveys all we can know about ultimate ends and judgments of value. But as has been pointed out above, it is of no avail for praxeology and of little use in dealing with the means applied to attain ends sought.” Mises, Theory and History, p. 280.