Whether the use of a definite ideal type is to be recommended or not depends entirely on the mode of understanding. It is quite common nowadays to employ two ideal types: Left-Wing Parties (Progressives) and Right-Wing Parties (Fascists). The former includes the Western democracies, some Latin American dictatorships, and Russian Bolshevism; the latter Italian Fascism and German Nazism. This typification is the outcome of a definite mode of understanding. Another mode would contrast Democracy and Dictatorship. Then Russian Bolshevism, Italian Fascism, and German Nazism belong to the ideal type of dictatorial government, and the Western systems to the ideal type of democratic government.
It was a fundamental mistake of the Historical School of Wirtschaftliche Staatswissenschaften in Germany and of Institutionalism in America to interpret economics as the characterization of the behavior of an ideal type, the homo oeconomicus. According to this doctrine traditional or orthodox economics does not deal with the behavior of man as he really is and acts, but with a fictitious or hypothetical image. It pictures a being driven exclusively by “economic” motives, i.e., solely by the intention of making the greatest possible material or monetary profit. Such a being does not have and never did have a counterpart in reality; it is a phantom of a spurious armchair philosophy. No man is exclusively motivated by the desire to become as rich as possible; many are not at all influenced by this mean craving. It is vain to refer to such an illusory homunculus in dealing with life and history.
Even if this really were the meaning of classical economics, the homo oeconomicus would certainly not be an ideal type. The ideal type is not an embodiment of one side or aspect of man's various aims and desires. It is always the representation of complex phenomena of reality, either of men, of institutions, or of ideologies.
The classical economists sought to explain the formation of prices. They were fully aware of the fact that prices are not a product of the activities of a special group of people, but the result of an interplay of all members of the market society. This was the meaning of their statement that demand and supply determine the formation of prices. However, the classical economists failed in their endeavors to provide a satisfactory theory of value. They were at a loss to find a solution for the apparent paradox of value. They were puzzled by the alleged paradox that “gold” is more highly valued than “iron,” although the latter is more “useful” than the former. Thus they could not construct a general theory of value and could not trace back the phenomena of market exchange and of production to their ultimate sources, the behavior of the consumers. This shortcoming forced them to abandon their ambitious plan to develop a general theory of human action. They had to satisfy themselves with a theory explaining only the activities of the businessman without going back to the choices of everybody as the ultimate determinants. They dealt only with the actions of businessmen eager to buy in the cheapest market and to sell in the dearest. The consumer was left outside the field of their theorizing. Later the epigones of classical economics explained and justified this insufficiency as an intentional and methodologically necessary procedure. It was, they asserted, the deliberate design of the economists to restrict their investigations to only one aspect of human endeavor—namely, to the “economic” aspect. It was their intention to use the fictitious image of a man driven solely by “economic” motives and to neglect all others although they were fully aware of the fact that real men are driven by many other, “noneconomic” motives. To deal with these other motives, one group of these interpreters maintained, is not the task of economics but of other branches of knowledge. Another group admitted that the treatment of these “noneconomic” motives and their influence on the formation of prices was a task of economics also, but they believed that it must be left to later generations. It will be shown at a later stage of our investigations that this distinction between “economic” and “noneconomic” motives of human action is untenable.22 At this point it is only important to realize that this doctrine of the “economic” side of human action utterly misrepresents the teachings of the classical economists. They never intended to do what this doctrine ascribes to them. They wanted to conceive the real formation of prices—not fictitious prices as they would be determined if men were acting under the sway of hypothetical conditions different from those really influencing them. The prices they try to explain and do explain—although without tracing them back to the choices of the consumers —are real market prices. The demand and supply of which they speak are real factors determined by all motives instigating men to buy or to sell. What was wrong with their theory was that they did not trace demand back to the choices of the consumers; they lacked a satisfactory theory of demand. But it was not their idea that demand as they used this concept in their dissertations was exclusively determined by “economic” motives as distinguished from “noneconomic” motives. As they restricted their theorizing to the actions of businessmen, they did not deal with the motives of the ultimate consumers. Nonetheless their theory of prices was intended as an explanation of real prices irrespective of the motives and ideas instigating the consumers.
Modern subjective economics starts with the solution of the apparent paradox of value. It neither limits its theorems to the actions of businessmen alone nor deals with a fictitious homo oeconomicus. It treats the inexorable categories of everybody's action. Its theorems concerning commodity prices, wage rates, and interest rates refer to all these phenomena without any regard to the motives causing people to buy or to sell or to abstain from buying or selling. It is time to discard entirely any reference to the abortive attempt to justify the shortcomings of older economists through the appeal to the homo oeconomicus phantom.
10. The Procedure of Economics
The scope of praxeology is the explication of the category of human action. All that is needed for the deduction of all praxeological theorems is knowledge of the essence of human action. It is a knowledge that is our own because we are men; no being of human descent that pathological conditions have not reduced to a merely vegetative existence lacks it. No special experience is needed in order to comprehend these theorems, and no experience, however rich, could disclose them to a being who did not know a priori what human action is. The only way to a cognition of these theorems is logical analysis of our inherent knowledge of the category of action. We must bethink ourselves and reflect upon the structure of human action. Like logic and mathematics, praxeological knowledge is in us; it does not come from without.
All the concepts and theorems of praxeology are implied in the category of human action. The first task is to extract and to deduce them, to expound their implications and to define the universal conditions of acting as such. Having shown what conditions are required by any action, one must go further and define—of course, in a categorial and formal sense—the less general conditions required for special modes of acting. It would be possible to deal with this second task by delineating all thinkable conditions and deducing from them all inferences logically permissible. Such an all-comprehensive system would provide a theory referring not only to human action as it is under the conditions and circumstances given in the real world in which man lives and acts. It would deal no less with hypothetical acting such as would take place under the unrealizable conditions of imaginary worlds.
But the end of science is to know reality. It is not mental gymnastics or a logical pastime. Therefore praxeology restricts its inquiries to the study of acting under those conditions and presuppositions which are given in reality. It studies acting under unrealized and unrealizable conditions only from two points of view. It deals with states of affairs which, although not real in the present and past world, could possibly become real at some future date. And it examines unreal and unrealizable conditions if such an inquiry is needed for a satisfactory grasp of what is going on under the conditions present in reality.
However, this reference to experience does not impair the aprioristic character of praxeology and economics. Experience merely directs our c
uriosity toward certain problems and diverts it from other problems. It tells us what we should explore, but it does not tell us how we could proceed in our search for knowledge. Moreover, it is not experience but thinking alone which teaches us that, and in what instances, it is necessary to investigate unrealizable hypothetical conditions in order to conceive what is going on in the real world.
The disutility of labor is not of a categorial and aprioristic character. We can without contradiction think of a world in which labor does not cause uneasiness, and we can depict the state of affairs prevailing in such a world.23 But the real world is conditioned by the disutility of labor. Only theorems based on the assumption that labor is a source of uneasiness are applicable for the comprehension of what is going on in this world.
Experience teaches that there is disutility of labor. But it does not teach it directly. There is no phenomenon that introduces itself as disutility of labor. There are only data of experience which are interpreted, on the ground of aprioristic knowledge, to mean that men consider leisure—i.e., the absence of labor—other things being equal, as a more desirable condition than the expenditure of labor. We see that men renounce advantages which they could get by working more—that is, that they are ready to make sacrifices for the attainment of leisure. We infer from this fact that leisure is valued as a good and that labor is regarded as a burden. But for previous praxeological insight, we would never be in a position to reach this conclusion.
A theory of indirect exchange and all further theories built upon it—as the theory of circulation credit—are applicable only to the interpretation of events within a world in which indirect exchange is practiced. In a world of barter trade only it would be mere intellectual play. It is unlikely that the economists of such a world, if economic science could have emerged at all in it, would have given any thought to the problems of indirect exchange, money, and all the rest. In our actual world, however, it is an essential part of economic theory.
The fact that praxcology, in fixing its eye on the comprehension of reality, concentrates upon the investigation of those problems which are useful for this purpose, does not alter the aprioristic character of its reasoning. But it marks the way in which economics, up to now the only elaborated part of praxeology, presents the results of its endeavors.
Economics does not follow the procedure of logic and mathematics. It does not present an integrated system of pure aprioristic ratiocination severed from any reference to reality. In introducing assumptions into its reasoning, it satisfies itself that the treatment of the assumptions concerned can render useful services for the comprehension of reality. It does not strictly separate in its treatises and monographs pure science from the application of its theorems to the solution of concrete historical and political problems. It adopts for the organized presentation of its results a form in which aprioristic theory and the interpretation of historical phenomena are intertwined.
It is obvious that this mode of procedure is enjoined upon economics by the very nature and essence of its subject matter. It has given proof of its expediency. However, one must not overlook the fact that the manipulation of this singular and logically somewhat strange procedure requires caution and subtlety, and that uncritical and superficial minds have again and again been led astray by careless confusion of the two epistemologically different methods implied.
There are no such things as a historical method of economics or a discipline of institutional economics. There is economics and there is economic history. The two must never be confused. All theorems of economics are necessarily valid in every instance in which all the assumptions presupposed are given. Of course, they have no practical significance in situations where these conditions are not established. The theorems referring to indirect exchange are not applicable to conditions where there is no indirect exchange. But this does not impair their validity.24
The issue has been obfuscated by the endeavors of governments and powerful pressure groups to disparage economics and to defame the economists. Princes and democratic majorities are drunk with power. They must reluctantly admit that they are subject to the laws of nature. But they reject the very notion of economic law. Are they not the supreme legislators? Don't they have the power to crush every opponent? No war lord is prone to acknowledge any limits other than those imposed on him by a superior armed force. Servile scribblers are always ready to foster such complacency by expounding the appropriate doctrines. They call their garbled presumptions “historical economics.” In fact, economic history is a long record of government policies that failed because they were designed with a bold disregard for the laws of economics.
It is impossible to understand the history of economic thought if one does not pay attention to the fact that economics as such is a challenge to the conceit of those in power. An economist can never be a favorite of autocrats and demagogues. With them he is always the mischief-maker, and the more they are inwardly convinced that his objections are well founded, the more they hate him.
In the face of all this frenzied agitation it is expedient to establish the fact that the starting point of all praxeological and economic reasoning, the category of human action, is proof against any criticisms and objections. No appeal to any historical or empirical considerations whatever can discover any fault in the proposition that men purposefully aim at certain chosen ends. No talk about irrationality, the unfathomable depths of the human soul, the spontaneity of the phenomena of life, automatisms, reflexes, and tropisms, can invalidate the statement that man makes use of his reason for the realization of wishes and desires. From the unshakable foundation of the category of human action praxeology and economics proceed step by step by means of discursive reasoning. Precisely defining assumptions and conditions, they construct a system of concepts and draw all the inferences implied by logically unassailable ratiocination. With regard to the results thus obtained only two attitudes are possible: either one can unmask logical errors in the chain of the deductions which produced these results, or one must acknowledge their correctness and validity.
It is vain to object that life and reality are not logical. Life and reality are neither logical nor illogical; they are simply given. But logic is the only tool available to man for the comprehension of both. It is vain to object that life and history are inscrutable and ineffable and that human reason can never penetrate to their inner core. The critics contradict themselves in uttering words about the ineffable and expounding theories—of course, spurious theories—about the unfathomable. There are many things beyond the reach of the human mind. But as far as man is able to attain any knowledge, however limited, he can use only one avenue of approach, that opened by reason.
No less illusory are the endeavors to play off understanding against the theorems of economics. The domain of historical understanding is exclusively the elucidation of those problems which cannot be entirely elucidated by the nonhistorical sciences. Understanding must never contradict the theories developed by the nonhistorical sciences. Understanding can never do anything but, on the one hand, establish the fact that people were motivated by certain ideas, aimed at certain ends, and applied certain means for the attainment of these ends, and, on the other hand, assign to the various historical factors their relevance so far as this cannot be achieved by the nonhistorical sciences. Understanding does not entitle the modern historian to assert that exorcism ever was an appropriate means to cure sick cows. Neither does it permit him to maintain that an economic law was not valid in ancient Rome or in the empire of the Incas.
Man is not infallible. He searches for truth—that is, for the most adequate comprehension of reality as far as the structure of his mind and reason makes it accessible to him. Man can never become omniscient. He can never be absolutely certain that his inquiries were not misled and that what he considers as certain truth is not error. All that man can do is submit all his theories again and attain to the most critical reexamination. This means for the economist to trace back all theorems t
o their unquestionable and certain ultimate basis, the category of human action, and to test by the most careful scrutiny all assumptions and inferences leading from this basis to the theorem under examination. It cannot be contended that this procedure is a guarantee against error. But it is undoubtedly the most effective method of avoiding error.
Praxeology—and consequently economics too—is a deductive system. It draws its strength from the starting point of its deductions, from the category of action. No economic theorem can be considered sound that is not solidly fastened upon this foundation by an irrefutable chain of reasoning. A statement proclaimed without such a connection is arbitrary and floats in midair. It is impossible to deal with a special segment of economics if one does not encase it in a complete system of action.
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