- A Liberty Classic Book Review of The Economic Point of View: An Essay on the History of Economic Thought, by Israel Kirzner.
What is economics, really? One popular answer to this question is: who cares? Economics is what economists do. Frank Knight famously quipped, in response to this attitude, “and economists are those who do economics.”
The glib, circular answer also does a poor job explaining the emotional weight of answers to this question. Economists sometimes refer to economics as “the queen of the social sciences.” Just about the nastiest thing one economist can say to another is that his or her work is “not really economics.”
On the flip side, some scholars treat economics with disdain or condescension. Whether this is due to the content of economics or the behavior of economists I leave to the reader. On more than one occasion, even friendly scholars in other fields have qualified their kind compliments to me with, “You know a lot about this, for an economist.”
Israel Kirzner surveys answers to this question in The Economic Point of View: An Essay on the History of Economic Thought. Growing out of his doctoral dissertation, Kirzner’s book surveys definitions of economics. He organizes these definitions into families, but there is a roughly chronological progression in the starting points of the chapters. The book reads as a sort of dialectic, with each successive definition offering an escape from the ambiguities and problems of the previous one. Kirzner is not trying to settle all of the disputes that crop up along the way but to trace why those who proposed new definitions find the older ones unsatisfactory.
But while The Economic Point of View avoids caricatures, like most dialectic texts it aims to draw the reader in a particular direction: from “Type A” to “Type B” economics. He borrows this distinction from a fairly obscure 1937 book (175 citations on Google Scholar as of May 2019) by L.M. Fraser, Economic Thought and Language.
- “Type A definitions consider economics as investigating a department of affairs, while Type B definitions see it as concerned with an aspect of affairs in general.” (Kirzner 17).
Most people have an implicit Type A conception of economics. Economists study what people do when they go to a bank, start a business, or make an investment. Most economists get asked for stock tips or what is going to happen with interest rates. But in many principles of economics classes—including my own—students are taught that economics is a particular perspective on all sorts of human activity, including commerce but also including politics, dating, religion, domestic life, crime, and every other sphere of social activity. This approach treats economics as a way of thinking or, in Kirzner’s words, a point of view on all departments of human life.
The narrative arc of Kirzner’s biography of economic science is the gradual shift from the study of wealth to the logic of human action. Understanding economics as the science of wealth is of course a venerable position. Before anyone held a chair in political economy, mercantilists, physiocrats, and others had investigated the source and nature of riches. But it was Adam Smith’s work that spun off a new discipline (Chapter 2).
What counts as wealth? The range of answers to this question has provoked centuries of fierce debate among economists. If everything useful counts as wealth, then economics swallows fields like law and ecology. Breathable air is useful. If we confine our attention to material goods, then economics cannot be distinguished from the study of law, culture, or any other field, for the distribution of material goods is affected by all these factors. This was precisely August Comte’s argument for why economics was not a distinct discipline and should just be a part of sociology (Kirzner 41). Try telling the typical economist that he or she should be part of the sociology department.
If wealth is what is useful, maybe what economics really studies is utility or some other conception of welfare. This is the more typical modern spin on studying wealth, and it is still popular in development economics and public policy economics. But it has the same amorphous boundaries as the study of wealth. “Welfare” as a criterion is unable to distinguish economics from other social scientific disciplines like law, political science, or sociology. Some heterodox economists might see this as a welcome departure from several decades of rational choice imperialism. And it is true that other disciplines have much to teach about wealth and welfare. But this approach leaves unanswered the question: what do economists in particular bring to this discussion?
Wealth and welfare also both raise normative questions. If something is bad for human beings, does it count as wealth? Should welfare be judged by individuals themselves or is there some other criterion? With the advent of behavioral economics and nudging, these questions are as alive today as they were in the 19th century. Does an opioid user’s behavior show that he or she benefits, or does the economist have something to say about whether the individual should use opioids? If economics studies welfare, it makes value judgments no matter how one answers this question. For economists who see their enterprise as primarily studying rather than trying to improve the world, admitting that economics has a moral dimension is a tough pill to swallow.
Critics of economics such as Thomas Carlyle clearly recognized and seized upon these unavoidable normative judgments, disparaging economics as a “pig-science” that celebrates the lower side of human nature (Kirzner 52). Such damning criticisms as these did not cease as a new definition of economics gradually emerged: the science of avarice (Chapter 3). John Stuart Mill most famously defended this view. Economics studies social phenomena as if they arise from the choices of a human stripped of every motive except self-interest (alongside “aversion to labor” and time preference). This definition remained influential for decades. Jacob Viner describes the economic impulse as trying to “get the most for the least” (Kirzner 55). The science of avarice marks a clear step in the direction of Type B definitions of economics. Economics studies society in general from the point of view of wealth-seeking in particular.
In addition to providing fuel for criticisms of economics, this definition invited important challenges from within economics. One was to question whether economic motives exist at all. Is wealth acquisition an end in itself, or is it just a means to realizing other goals such as comfort and health? The second criticism comes from one of the lesser known heroes in Kirzner’s story, Philip Wicksteed. Wicksteed pointed out that standard economic models do not assume selfishness per se. Rather, they only assume “non-tuism,” which means disregarding the interests of those one directly interacts with. I might buy masks to donate to a local hospital. But when I buy them, I look for the best price. I do not spontaneously offer the seller more money. My motives may be altruistic, but my behavior fits well within the standard supply and demand model. While this is a more precise statement of what economic models assume, it is a strange limitation to place at the core of the science.
Can economics divorce itself from the thorny problem of assuming or explaining certain motives for behavior? At this point, Kirzner sacrifices chronology in order to position three other traditions in economics as dialectic responses to the science of avarice. Chapter 4 deals with economics as (a) the study of exchange and (b) the study of the system of exchanges. Chapter 5 treats economics as the science of money.
Instead of fretting over motives, “catallactics” (a name given by Bishop Whately) focuses on the act of exchange itself. What is unique about exchange among other social relations? Economists who place exchange at the heart of the discipline have a prestigious pedigree. Adam Smith leaned heavily on man’s “propensity to truck, barter, and exchange.” This approach still focuses on only one aspect of human nature, but it is a social aspect (Kirzner 70). In the 20th century, James Buchanan defended the centrality of exchange, arguing that Robbins’ definition (discussed below) confuses the distinction between understanding behavior and social engineering. Catallactics avoids the ambiguity of wealth, because the logic of exchange can be used to understand any quid pro quo relationship whether wealth is involved or not.
But exchange relationships are not isolated atoms any more than individuals are. Transactions occur as part of a web or process of other transactions. An alternative to pure catallactics, then, is for economics to take as its object the economic system as a whole. Kirzner cites Frédéric Bastiat’s view that economics studies “harmonies” and F. A. Hayek’s early thoughts on what he would later call “spontaneous order” as exemplars of this sort of view (Kirzner 89-90). The economy is a system with distinct (emergent) properties that can be analyzed, a clear “Type A” definition. But though there may be distinct economic forces, the exchanges that give rise to them are embedded in legal, political, and cultural practices. So just as we saw with wealth, Kirzner worries that this definition robs economics of its distinct standing and makes it a branch of sociology.
Another attempt to escape from the motives of economic behavior is to focus on money, an approach popularized by Alfred Marshall. Money prices have two key characteristics. Prices respond to all sorts of motives, from avarice to altruism to a sense of duty. And prices are measurable. An economics focused on prices allows for a science that predicts movements in measurable quantities. But while these are both properties of money, they are not unique to money. The quantity of apples bartered for oranges is no less measurable than the quantity of dollars that would buy those same oranges. And barter prices also respond to all sorts of motives. This is not to say money does not deserve special attention, but only that it cannot draw a useful boundary around economics. Economics as the science of money introduces a veneer of scientific credibility by focusing on measurable quantities. But this approach arbitrarily limits economies to the study of particular institutional environments (those that use money) or is indistinguishable from catallactics.
So what is economics, really? Enter Lionel Robbins. The Nature and Significance of Economic Science is by far the most influential text answering this question, right down to today. Because of scarcity, we must allocate our limited means among competing ends. Economics studies all aspects of human life from this point of view. It is a science of means, not ends. And economic tools apply to understanding any behavior constrained by scarcity. Under this definition, economics was not limited to a particular institutional environment, particular sorts of motives, or particular ethical assumptions. The genius of Robbins was in identifying a distinctively economic sector of human activity that is fairly universal without being exhaustive. Sociology, law, politics and other fields may examine the same phenomena as economics, but economics has a unique contribution to make.
Kirzner treats Robbins’s contribution as a watershed moment that his narrative has been building to. But he doesn’t stop there. The final chapter explores praxeology, the approach of his mentor (and dissertation chair) Ludwig von Mises. Praxeology means, literally, the logic of action. It is the master science of action of which economics is just one example. Building on sociologist Max Weber’s work, Mises places purpose and reason at the center of economic analysis. Individuals pursue goals and use reason to select courses of action that they expect (perhaps mistakenly) to help them realize those goals. Action is constrained by the logic of means and ends. Whatever ends individuals pursue, they desire to be more effective rather than less effective in pursuing them. The internal logic of action shapes our behavior and can serve as a hook for understanding real world phenomena.
Kirzner’s overview of these positions is informative and fair. But he clearly has a goal as well: to convince the reader that Mises is an improvement on Robbins. Where this particular book falls short is in clearly distinguishing the two on a substantive level. Both Robbins and Mises describe economics as Type B, universal, value-free, and concerned with the relationship between means and ends. Moreover, it should come as no surprise that they are so similar: Robbins’s two primary influences are Wicksteed and Mises:
- I should like, however, once more to acknowledge my especial indebtedness to the works of Professor Ludwig von Mises and to the Commonsense of Political Economy of the late Philip Wicksteed. The considerable extent to which I have cited these sources is yet a very inadequate reflection of the general assistance which I have derived from their use. (Robbins 1932, ix)
The closest that Kirzner gets to strongly distinguishing praxeology from economizing is when he discusses some objections to Robbins. A number of Robbins’s contemporaries accused his treatment of means and ends as overly positivist, trying to fit the square peg of subjective human action into the round hole of fixed and determinate categories (Kirzner 130-131, 169-170). Kirzner does not comment on whether this is a fair criticism of Robbins, but wants to prove that it has no force against Mises. A later article helps clarify why Kirzner cares about this objection. He imagines a Martian observer with his telescope pointed at the earth. The observer collects data on people moving into and out of large boxes and manages to construct a statistical model that roughly predicts their movements. There are two times per day in particular when there is a great deal of activity. But without the concept of purpose, the Martian observer is missing an important piece of the story: the people are getting on and off of buses going to work and then going home. While Kirzner is right to insist that focusing on purpose gives us access to a unique sort of knowledge about social phenomena, he (probably rightly) avoids accusing Robbins of making that mistake.
More relevant to Kirzner’s conclusion is his debate with Gary Becker on rationality and economic analysis, helpfully included in the Liberty Fund edition of The Economic Point of View. In a 1962 Journal of Political Economy article, Becker argues that economics does not require an assumption of rational behavior. Budget constraints can weed out behaviors that deviate from the standard equilibrium predictions of price theory. When the price of milk goes up, more business plans that sell milk can be profitable. So even if behavior is randomly chosen, it can still be predicted by standard economic models. Quantity supplied will increase. This argument coheres with Becker’s broader corpus, which applies the tools of economics to traditionally sociological questions. Becker is the Type B, Robbinsian economist par excellence.
Kirzner argues, contra Becker, that some minimal sense of rationality is vital for understanding market behavior. At a minimum, agents must be purposive. Becker’s models assume price-taking behavior: firms and households take the market price as given. But if conditions change, Kirzner argues, then someone has to change the price. In the real world, not everyone can be a literal price taker. So it must be the case that frustrated buyers or sellers revise their plans in order to explain changes in market prices.
Becker’s rejoinder is brief and largely scolds Kirzner for not having a mathematical model to back up his point. As with many debates one gets the sense that the authors are talking past each other. Kirzner wants to explain behavior, which is impossible if there is not some principle which can do the explaining. Becker wants to predict behavior, so all he needs is a map from conditions to outcomes. But despite this frustrating misunderstanding, the debate’s inclusion is useful because it clarifies what is at stake in Kirzner’s discussion of praxeology.
“Does Kirzner’s magical mystery tour of the history of economics matter in a world where economics is becoming increasingly empirical?”
But who cares? Does Kirzner’s magical mystery tour of the history of economics matter in a world where economics is becoming increasingly empirical? This question remains a hot topic. The value of Kirzner’s approach is not in passing judgment on whether certain work counts as economics. The value is in preserving and developing a distinct and useful point of view on social phenomena. Praxeology has something to say.
But this admonition cuts both ways. If there is a distinctively economic point of view, it does not follow that other points of view are not valuable. The economist should also recognize that other disciplines have valuable insights into Type A phenomena such as “the operations of the merchant” that are considered “economic.” Identifying a definite contribution for economics situates the discipline in an intellectual division of labor with other disciplines. Let’s not lose sight of the gains from specialization and trade.
Which brings us back to Chapter 4. For each definition of economics except praxeology, Kirzner highlights certain tensions and shortcomings. But he never gets around to it when discussing economics as catallactics, the science of exchange. (He critiques Joseph Schumpeter’s reductive version of the view, but not the view in general.) Perhaps he would treat catallactics as nothing more than an application of praxeology. But this approach would ignore the possibility that there might be something distinct about exchange. Exchange is not reducible to action. Since it takes two (or more), it involves problems of communication and coordination that a lone Robinson Crusoe does not confront. Perhaps it is more helpful to see praxeology and catallactics as complements, rather than substitutes. They are two different but necessary pieces of a still distinct machinery of economic science.
There are many ways to survey the history of economics. The Economic Point of View, in Type B fashion, offers its own useful vantage point: how did economists understand their own scholarly enterprise? Kirzner acknowledges that books like his may be “doomed to be wordy disquisitions fertile in nothing but the stimulation of sterile controversies” (p. 6). He largely evades this pitfall, providing a helpful (though definitely wordy) perspective on economists’ constantly evolving self-identity.