Economic Theory Completed

In the Dresden discussions of value theory, Mises had emphasized that a productive debate could take place only among those who did not rule out the possibility of a universally valid social theory. Those who excluded this possibility on a priori grounds were forced to endorse what Mises would eventually call polylogism—the extreme historicist hypothesis that there is no such thing as a generally valid social theory because the structure of the human mind was in a state of constant flux. According to this hypothesis, there is not just one universally valid theory of human action; there are in fact several different “logics of action.”

The most explicit champion of polylogism had been the socialist Josef Dietzgen (1828–1888), who had developed a materialistic philosophy independent of Marx and Engels.¹²⁸ In 1929, the case for polylogism came into the spotlight of scientific debate with the publication of Karl Mannheim's Ideologie und Utopie.¹²⁹ It quickly found support in all political camps. Polylogism was an expedient tool to avoid the scrutiny of arguments—especially those made by economists—and to replace the sober process of reasoning with the emotional appeal of name-calling. Advocates of polylogism “could simply declare all theories they disliked as bourgeois theories, without entering into a detailed discussion of their contents and arguments.”¹³⁰ Not surprisingly, the German racists were eager to adopt the same comfortable strategy to avoid critical debate of the ideology of the Aryan master race. Mises recalled:

Professor Biberbach of the University of Breslau distinguishes between Anglo-Saxon-Franco-Jewish mathematics and German mathematics. Professor Lenard, the winner of the Nobel Prize, believes that only German physics are true, whereas the physics of all the other nations are simply nonsense.¹³¹

A few years later, Mises explained the historical setting of this intellectual current:

Until the middle of the nineteenth century everybody took it for granted that the logical structure of the human mind is the same with every human being. All... human relations are based on this assumption. Wherever men met men, they never had any doubt in this respect. All philosophers and all laymen agreed— were unanimous in this belief.

But in the middle of the nineteenth century Karl Marx expounded a different view. According to Marx the logical structure of mind is different with the members of different classes. The human mind does not find truth but ideologies. Ideologies seem true in the eyes of the members of the same class, but are meaningless in the eyes of members of other classes. Every class produces its own ideologies, which later are debunked by ideologies of other classes. In this way Karl Marx stigmatized the philosophy of John Locke as a “bourgeois philosophy.” Later Marxians called Schopenhauer the philosopher of the rentier class and Nietzsche the philosopher of big business. Lenin, the founder of the Third International, and Frederick Adler, the secretary general of the Second International, investigated whether the physical theories of Mach are bourgeois or not. The Einstein theory of relativity is branded by some Bolsheviks as “bourgeois and reactionary.”¹³²

In the 1932 debate in Dresden, Mises pointed out that any defense of the polylogistic hypothesis involves a self-contradiction, since the exchange of arguments only makes sense if the logical structure of the human mind is independent of social or racial class:

A Marxist—and I understand by this term not only the members of a political party that swears by Marx, but all who appeal to Marx in their thinking concerning the sciences of human action—who condescends to discuss a scientific problem with people who are not comrades of his own class has given up the first and most important principle of his theory. If thought is conditioned by the thinker's social existence, how can he understand me and how can I understand him? If there is a “bourgeois” logic and a “proletarian” logic, how am I, the “bourgeois,” to come to an understanding with him, the “proletarian”? Whoever takes the Marxist point of view seriously must advocate a complete division between “bourgeois” and “proletarian” science; and the same is also true, mutatis mutandis, of the view of those who regard thought as determined by the race or the nationality of the thinker. The Marxist cannot be satisfied with separating classes in athletic contests, with a “bourgeois” and a “proletarian” Olympics. He must demand this separation above all in scientific discussion.

The fruitlessness of many of the debates that were conducted here in the Verein für Sozialpolitik as well as in the Gesellschaft für Soziologie are to be attributed more than anything else to the neglect of this principle. In my opinion, the position of dogmatic Marxism is wrong, but that of the Marxist who engages in discussions with representatives of what he calls “bourgeois science” is confused. The consistent Marxist does not seek to refute opponents whom he calls “bourgeois.” He seeks to destroy them physically and morally.¹³³

In a paper he had written in preparation for the Dresden meeting, Mises had highlighted the wider significance of polylogism, characterizing it as a “romantic revolt against logic and science” and pointing out that it “does not limit itself to the sphere of social phenomena and the sciences of human action. It is a revolt against our entire culture and civilization.”¹³⁴

In Dresden, Emil Lederer argued that this argument was considerably overblown. Mises was wrong in assuming that the being-generates-consciousness theory implied that every single instance of thought is ideology, in the Marxist sense of an intellectualization of economic interests. According to Lederer, nobody claimed that there were no universally valid theories. Logic and mathematics certainly counted. But neither could it be denied that there were other disciplines, the basic categories of which were largely dependent on “the historical situation, that is, on the social structure of the time and on the social position of the thinker.” Lederer went on:

Now the question is whether economics belongs to the first category of sciences, which totally rely on pure intuition [reine Anschauung] and logic, or to the socially determined fields of knowledge in the sense of modern sociology or, if you wish, in the sense of Marxism. Herr von Mises apparently shares the view of the Physiocrats: the latter believed that the physiocratic theory was as obliging for each rational thinker as the theorem of Pythagoras.... Herr von Mises apparently claims the same rank, the same validity for economic theory in its entire scope, and this is what I deny. It is true that economic theory has a kernel that is independent of historical economic developments. But this general or exact or pure theory, for which I feel affinities, is not the theory of economic action per se, in all its historical phases. The substance of this theory is a narrow one; it essentially covers the static process or stationary circulation [Kreislauf]. It ultimately deduces all consequences from the principle of economizing, as applied to man in his dependency on nature.¹³⁵

In his rejoinder, Mises pointed out that static economic theory did not merely apply to static processes, but especially to change. The word “static” did not mean that the subject of inquiry was a stationary economy; rather it referred to a specific method of analysis, which studied the implications of a change of one datum, ceteris paribus, i.e., under the assumption that all other data remained unchanged.¹³⁶ But Mises still had not clarified his views about the epistemological character of economic science. This was the task to which he proceeded upon his return to Vienna, where he finished an essay on “the task and scope of the science of human action.”

Mises planned to publish this piece as the introductory chapter of a new book on fundamental problems of economic analysis. The book would contain various essays he had published in the past five years in the fields of epistemology and value theory. The idea was to clarify the very foundations of economic science, not only by a general discussion of its philosophical character, but also by restating the core concepts of value and capital theory. The book would therefore contain both an introduction to economics from the point of view of the philosophy of science, and actual economic analyses of value and of inconvertible capital. The first three chapters, on epistemology, consumed some 60 percent of the volume. The next four chapters dealt with value theory, and the concluding essay was his contribution to the Verreijn Stuart festschrift.

Mises finished revising the manuscript over Christmas 1932 and on January 3, 1933 wrote to Gustav Fischer to propose the book for publication. Fischer did not believe the book would sell well, but agreed to publish it. By mid-April, Mises received the first copies of Grundprobleme der Nationalökonomie (Fundamental Problems of Economics).¹³⁷

His new essay on “the task and scope of the science of human action” was chapter one. It would be the keystone of the system of economics Mises had been working on for years. Taking up Lederer's challenge, Mises argued that economic laws were true a priori, on a par with the laws of logic and mathematics.¹³⁸ To the present day, this has remained one of his most controversial tenets, but the debate resulted in most cases from a misunderstanding of his position. Twentieth-century social scientists typically argued that science was always based on “experience” and that any proposition that was based instead on some arbitrary “a priori” principle was therefore not scientific. Mises agreed. He had been a proponent of rigid fact-orientation since his early years as a student. He had enthusiastically supported Max Weber in the controversy on value judgments, arguing that the proper sphere of science was the world as it is—not as it should be. Mises himself rigorously held to the notion that true science was always concerned with verifiable facts.

So why were his epistemological views controversial? Most other social theorists believed that the facts relevant for the social sciences could be known through observation-based methods of inquiry. Here Mises disagreed. In the tradition of Carl Menger's quest for “empirical theory,” he believed that economic theory describes facts of the real world such as the one that human beings make choices.¹³⁹ But facts of this sort cannot be observed—it is impossible for example to look at choices, to smell them or touch them. Economics is not an empirical science in this sense, but it is a science nevertheless, because the facts it deals with are true even though they are unavailable to the human sensory apparatus. The proper method to analyze them is through “discursive reasoning.”

Mises stressed again his conviction that economics is part of a more general social theory. And now he gave more precision to what this general theory was all about. It was a theory of human action:

The science of human action that strives for universally valid knowledge is the theoretical system whose hitherto best elaborated branch is economics. In all of its branches this science is a priori, not empirical. Like logic and mathematics, it is not derived from experience; it is prior to experience. It is, as it were, the logic of action and deed.¹⁴⁰

How did Mises address Lederer's argument that only a part of economic theory was universally valid, namely, the aspect that dealt with the equilibrium relationship between human action and nature? Mises argued that “universal validity” does not imply that all laws of human action apply in every single instance of human behavior. Rather, it means that a law applies whenever the conditions specified by it are given. Whether or not they are is an empirical question; but once this is stipulated, the law holds true on a priori grounds.

For example, we are unable to grasp the concept of economic action and of economy without implying in our thought the concept of economic quantity relations and the concept of an economic good. Only experience can teach us whether or not these concepts are applicable to anything in the conditions under which our life must actually be lived. Only experience tells us that not all things in the external world are free goods. However, it is not experience, but reason, which is prior to experience, that tells us what is a free and what is an economic good.¹⁴¹

Some of the empirical conditions under which human action can take place are universally given. For example, all human actions occur during the passage of time and all acting persons age in the course of time. Other empirical conditions such as the use of money are of a more contingent nature. But however universal or contingent these conditions are, it remains true that once they are given, they cause certain objective effects, which are the subject matter of the a priori theory of human action.

Because the theory of human action does not rely on data gathered through the senses, but rather on a priori facts that we come to know through discursive reasoning, it cannot possibly be verified or refuted by experience gained exclusively through observations. Mises highlighted the practical implications of this fundamental epistemological fact:

Human action always confronts experience as a complex phenomenon that first must be analyzed and interpreted by a theory before it can even be set in the context of an hypothesis that could be proved or disproved; hence the vexatious impasse created when supporters of conflicting doctrines point to the same historical data as evidence of their correctness. The statement that statistics can prove anything is a popular recognition of this truth. No political or economic program, no matter how absurd, can, in the eyes of its supporters, be contradicted by experience. Whoever is convinced a priori of the correctness of his doctrine can always point out that some condition essential for success according to his theory has not been met. Each of the German political parties seeks in the experience of the second Reich confirmation of the soundness of its program. Supporters and opponents of socialism draw opposite conclusions from the experience of Russian bolshevism. Disagreements concerning the probative power of concrete historical experience can be resolved only by reverting to the doctrines of the universally valid theory, which are independent of all experience. Every theoretical argument that is supposedly drawn from history necessarily becomes a logical argument about pure theory apart from all history.¹⁴²