The System in an Overview

In the introduction (virtually identical in Human Action), Mises set the agenda for the book. The treatise would present the system of economic science in the light of two central problems that had been neglected in all previous works in the field: epistemology and value theory.⁵

He then offered his system in 751 pages, organized into six parts. Now all his previous discoveries could appear in their correct context, along with the new elements that he had developed during his Geneva years.

Part 1 deals with the features of human action that exist under all conceivable conditions of action. After a first chapter in which he gives an initial characterization of action, emphasizing in particular the distinction between behavior and action, Mises deals with the epistemological problems of the science of action (chapter 2).⁶ He then turns to a more detailed analysis of action (chapter 3) in which he argues that phenomena such as exchange, price, costs, success and failure, and profit and loss are not given only in the context of a market economy, but are features of human action in general; they are categories of action.

In chapter 3 he also deals with the categories of means and ends, and of preference. Mises did not follow the terminology of the older Austrian School in speaking of value. Instead he used the term preference, which better conveys that the category of action is rooted in human choice. This terminological decision certainly helped to avoid confusion, especially since Menger, the father of Austrian value theory, had emphasized that value had nothing to do with human free will.⁷ According to Menger's Principles, economic science studies the relation between man's needs and the economic goods necessary to satisfy those needs. In Walras's Éléments, as well as in the mainstream of the 1930s and 1940s and up until the 1980s, economic science was essentially about prices and quantities traded on the market. But in Nationalökonomie, the true object of the science was understood to be human action, and in particular choice.

In another noteworthy passage of part 1, Mises presents for the first time the law of diminishing marginal utility as a praxeological law.⁸ It has nothing to do with the psychological phenomenon of satiation. Rather, the law concerns the simple fact that larger supplies of a homogeneous good can serve more ends than smaller supplies. Yet these additional ends are, by virtue of the very fact that they are additional ends, less important than those already served with the smaller supply. Here Mises departs from all other economists, most notably from Wieser, who had adopted Gossen's psychological interpretation of the law. Mises draws a sharp line between praxeology and psychology, and he emphasizes the ramifications of this in other important passages of the book. We will take a look at some of these below.

In part 2, our author deals with those features of human action that come into play whenever an individual interacts with other individuals. Later in the book, he analyzes the particularities of the three fundamental types of social systems: the market economy (part 4), socialism (part 5), and the hampered market economy (part 6).

He also restates the theory of society that he had presented in Socialism, but this time in its proper context.⁹ He stresses the “Ricardian Law of Association” and the crucial role of reason in shaping human society.

In part 3, he completes twenty years of intellectual assimilation of his 1920 essay on the impossibility of economic calculation in socialist commonwealths. In some thirty-five pages, he finally offers a general theory of economic calculation; what is more, he presents it in its proper place, namely, before turning to the analysis of any concrete system of human cooperation (parts 4–6). Of course he had anticipated this architectonic necessity in the essays on value theory he wrote in the late 1920s. But it is one thing to stress the difference between valuation (preference) and calculation in a general argument; it is quite another to apply this insight in concrete analysis.

Part 4, on the market economy, is over 400 pages—more than half the book. Here Mises restates a good number of the theories he had developed in previous works: the theory of monopoly prices, the theory of money and credit, his famous business cycle theory, the theory of wages, and the doctrine of the harmony of interests of all market participants. But rather than simply repeating himself, he presents thoroughly revised versions of his previous thoughts. He expands the monopoly theory he first developed in Socialism, placing special emphasis on the discussion of Marxist monopoly theory. He presents the theory of the harmony of interests in an entirely new formulation, and rejects the Anglo-Saxon theories of Keynes and of Robinson and Chamberlin (imperfect competition). In the theory of money, he brooks no exception to the rule that political modifications of the money supply are unwarranted from an economic point of view, and, finally, he integrates his business cycle theory with interest theory, a subject he had never addressed before in writing.

Besides interest, the central novelty in his analysis of the market economy was his emphasis on the role of the entrepreneur. Mises carefully distinguished between entrepreneurs as those who take successful action in an uncertain world, and entrepreneurship in the sense of a fundamental economic function—the bearing of risk under uncertainty. It is this economic function that gives rise to the specific income component of profit and loss. It was one of the great contributions of Nationalökonomie to clarify the role of this entrepreneurial function in the workings of the market economy. Yet Mises felt he could not achieve this without a somewhat roundabout exposition. To define entrepreneurship, it is necessary to give a proper definition of profit and loss. But for Mises this was impossible without a clarification of the nature of equilibrium and its role in economic science. He therefore saw himself forced to start part 4 with a somewhat basic chapter dealing with the methods necessary for the discursive analysis of the market economy—with various equilibrium concepts in particular. Only then did he feel that the ground had been laid to explain the nature and significance of entrepreneurship.

In part 5, which deals with socialist societies, Mises does not restate all the main findings of Socialism. Rather, he concentrates on the centerpiece of his refutation of the socialist program: the impossibility of economic calculation wherever the means of production are collectively owned. Thus part 5 must be considered an extension of part 3. Mises discusses the schemes of socialist calculation developed in the 1930s, most notably in the Anglo-Saxon world. He refutes the idea of generating prices through an artificial market and also contests the notion that mathematical economics could overcome the calculation problem, even theoretically.

In part 6, he delivers a far more comprehensive and detailed discussion of interventionism than he had in his essays from the mid-1920s. The general line of the argument remained the same: interventionism is counterproductive because it does not attain the professed ends of its authors.

Nationalökonomie featured entirely new and important contributions. Even in those places where Mises restates his older doctrines, he has revised them—often substantially. It was therefore highly unusual for Gottfried von Haberler to claim a few years later, in a confidential evaluation for Yale University Press, which considered commissioning a translation of the book, that it contained hardly anything new.¹⁰