Anti-Psychologism

Mises's exposition of economic science differed decisively from all modern authors in that it drew a sharp line between praxeology and psychology. This has remained a defining feature of the works of his disciples.

Mises did not contest that the psychological background of a person, his worldview, knowledge, conscious motivations, subconscious urges, and so on have an immediate impact on his behavior. Neither did he ignore the important psychological problems that his friend F.A. Hayek began to stress in those years, in particular, that of knowledge acquisition. Mises's point was that there were also laws of human behavior that exist in complete independence of these psychological dispositions.

For example, in chapter 4, Mises discusses ends and means, scales of values, and scales of needs. He does not deal with the question of how or why people select ends and means, or how or why they have certain values and certain needs. He argues that in every human action we do use means to attain ends, and that needs and values can be ranked.¹¹ In chapter 15 (“The Market”) he points out that consumers are sovereign because their buying decisions steer the market.¹² This is obviously true, irrespective of what consumers buy or the reason why they make these purchases. Therefore he does not deal with these questions. In chapter 16 (“Prices”) Mises states that the number of market participants determines how narrow the margins are within which prices are determined. Yet this implies that the number of market participants has no influence on how prices are formed. Irrespective of the number of market participants, market prices are always determined by the decisions of marginal buyers and sellers.¹³ Thus, all prices can be explained as a result of the mere fact that market participants prefer one good A to another good B.¹⁴

Praxeology is the science of these laws. It examines the ramifications of the mere fact that a man makes this or that choice. Considering the relationship between a choice and its consequences, praxeology examines the suitability of different means to attain particular ends. In praxeological analysis, the ends are “given,” not in the sense that human beings cannot choose them or that the choice of the right end is not problematic, but in the sense that the choice of ends is outside the scope of this particular science.¹⁵

With respect to the knowledge of market participants, Mises emphasized the fact that the individual market participants are not equally well informed. Yet even if they all had the same information they would appraise this information differently¹⁶

As to equilibrium, he stated again and again that the market never reaches such a state, that it is a mere mental construct the only function of which is to analyze profits and losses. That is, the equilibrium construct is needed to explain a particular component of price spreads. It is not required to explain prices (wages, interest, commodity prices) as such.¹⁷

Consequently, in Mises's view, equilibrium is not the right benchmark for the evaluation of the market. To critics of economic science who complain that the market never produces a perfect balance between different goods and services, Mises replies in two steps.¹⁸ First, he points out that this fact of imbalance does not refute economic doctrine because economic science explains any state of affairs as it results from the fact that consumers make certain valuations. Second, he observes that the relevant benchmark for the market is government intervention. And because government officials are not supermen, one cannot make the a priori assumption that entrusting them with the maintenance of the market will bring improvement. As the analysis of government interventionism shows, the very opposite is the case.