21. The Epistemological Case for Capitalism

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.