The Basis of Economics

September 17, 1962

The new book by Prof. Ludwig von Mises, The Ultimate Foundation of Economic Science (148 pages, Van Nostrand, $4.50), is what its title implies—a basic investigation not only of the methods appropriate to economics but of how we can discover and prove its fundamental truths and propositions.

His theme might be stated negatively. He tries to show that the present fashionable idea that all sciences, including economics, must imitate the methods of physics, that they must be empirical, experimental, statistical, and quantitative, is not itself a scientific idea, but an arbitrary assumption. He rejects materialism, panphysicalism, and logical positivism, in fact, as “metaphysical” ideas that have perverted and set back rather than advanced economics and have led toward a philosophy of collectivism and totalitarianism. Economics, he contends, rests on an utterly different basis. Its subject is human action. In acting, men strive constantly to substitute a more satisfactory state of affairs for a less satisfactory state. In short, all men pursue ends, and resort to means in order to attain these ends.

I shall not attempt here to follow in detail Mises’s “epistemological” argument, but rather point to some of the practical conclusions to which it leads. One of these is his rejection of the tremendous emphasis placed in recent years on economic statistics and on “mathematical economics.”

MATHEMATICAL MIRAGE

Hosts of authors, deluded by the idea that the sciences of human action must ape the technique of the natural sciences, are intent upon a “quantification” of economics. They assume that economics ought to imitate chemistry, which has progressed from a qualitative to a quantitative state. Their motto is the positivistic maxim: Science is measurement. But in the sphere of economics, i.e., of human action, Mises answers, there are no constant relations between any factors. Consequently, no measurement, no quantification is possible. The only measurable magnitudes that the sciences of human action encounter are quantities of the environment in which man lives and acts—acres of land, bushels of wheat, tons of coal. But these quantities tell us nothing about values, which depend upon human preferences, choices, means, and ends.

Statisticians get into insoluble dilemmas when they indulge, for example, in the modern sport of measuring “the national income.” “Income” itself is a somewhat arbitrary accountant’s concept, as the concept of “the national income” is an arbitrary political concept. Mises shows how this illusive concept depends on changes in the purchasing power of the monetary unit. The more inflation progresses, the higher the national income. Within an economic system in which there is no increase in the supply of money, progressive accumulation of capital and the improvement in technological methods of production to which it led would result in a progressive drop in prices. The amount of goods available for consumption would increase. The average standard of living would improve. But none of these changes would be made visible in the national income statistics.

HOW CONSUMERS RULE

Some of the most interesting passages in Mises’ book deal with issues not directly connected with his central theme. In one of these he explains why private ownership of the means of production so effectively serves the public interest:

“The owner of producers’ goods is forced to employ them for the best possible satisfaction of the wants of the consumers. He forfeits his property if other people eclipse him by better serving the consumers. . . . Private property in the factors of production is a public mandate, as it were, which is withdrawn as soon as the consumers think that other people would employ it more efficiently. By the instrumentality of the profit-and-loss system, the owners are forced to deal with ‘their’ property as if it were other people’s property entrusted to them under the obligation to utilize it for the best possible satisfaction of the virtual beneficiaries, the consumers. . . . It is precisely the necessity to make profits and to avoid losses that forces the ‘exploiters’ to satisfy the consumers to the best of their abilities.”