[This article is adapted from the opening lecture at this year’s Rothbard Graduate Seminar.]
There are many good reasons why those who aspire to learn and practice sound economics should read Human Action. However, the reader should approach the book with care and humility. For a book as subtle and profound as Human Action presents several pitfalls for the careless or superficial reader. In these remarks I will briefly cite the most important reasons for reading the book. I will then dwell on a few pitfalls that may ensnare the incautious reader.
So why read Human Action? First and foremost, it is Mises’s magnum opus and the great treatise that saved Austrian economics from extinction. By the mid-1930s the Mengerian tradition had been submerged by the successive waves of the imperfect competition revolution, the Keynesian revolution, and general equilibrium theory. Not only did Mises’s treatise keep Austrian economics alive, it greatly advanced the theory and ushered it into the modern postwar era. Human Action dealt with many of the same topics as John Hicks’s Value and Capital (1939), George Stigler’s The Theory of Price (1942), and Paul Samuelson’s best-selling Economics (1948). The first two works set the postwar research programs for the Walrasian general-equilibrium and the Chicago-style partial-equilibrium approaches to economic theory, respectively. Samuelson’s textbook introduced the neoclassical synthesis which split economic theory into macroeconomics and microeconomics. Unlike these three books, which are no longer read, Human Action presented a unified structure of economic theory that integrated money, capital, and business cycles with price and value theory. Hicks’s treatise and Samuelson’s textbook had the same breadth as Human Action but were painfully disjointed; Stigler’s book focused narrowly on price theory and needed to be supplemented by Friedman’s later work on monetary theory to provide anywhere near a comprehensive coverage of economic theory.
The second reason to read Human Action is because Mises both elaborates the praxeological method and actually uses it to derive economic theorems. It is the use of the praxeological method that enables Mises to present economic theory as a coherent system. It is important to bear in mind that the bulk of Human Action is NOT a study of methodology, but a treatise on economics. As such it is an indispensable guide on how to actually do research in economic theory. Third, Human Action sowed the seeds of the subsequent rebirth of Austrian economics in the early 1960s via its influence on Murray Rothbard. Human Action is thus the crucial link between the old Viennese Austrians (especially Menger and Böhm-Bawerk) and Rothbard and contemporary Austrians. Not only did Rothbard view Mises as his mentor, Mises viewed Rothbard as his preeminent protégé.
Mises reviewed Rothbard’s treatise on economic theory Man, Economy, and State and enthusiastically endorsed it. He praised Rothbard’s work as an “epochal contribution to the general science of human action.” He then went on to declare: “Henceforth, all essential studies in these branches of knowledge will have to take full account of the theories and criticisms expounded by Dr. Rothbard.”
Mises wrote a charming and pithy inscription in Rothbard’s copy of the third edition of Human Action which reads:
To Murray N. Rothbard, pioneer of praxeological analysis with all good wishes. March 2nd, 1967.
“Pioneer of praxeological analysis”—given Mises’s well-known restraint in meting out compliments to fellow economists, this is very high praise indeed and reinforces Mises’s remarks about Rothbard’s work in a letter that Mises wrote to the French positivist philosopher Louis Rougier. Defending the praxeological method, Mises wrote:
The proof of the cake is in the eating. I can only refer to the systematic exposition of the whole doctrine of praxeology in my book Human Action and nowadays in the brilliant book of a younger man, Murray N. Rothbard, Man, Economy and State.
Mises concluded his letter to Rougier with the following entreaty:
But, please, first of all read the book of Rothbard. It is very interesting also from the epistemological point of view.
I would now like to warn you about the pitfalls you may encounter in reading Human Action. As a new reader, you will probably be captivated by Mises’s brilliant and compelling discussion of praxeology. This is understandable. However, as a young scholar, you should not succumb to the temptation to try to improve upon or even revolutionize Mises’s formulation. There are two reasons for this. First, the praxeological method, like other successful scientific methods, has demonstrated its value by producing useful results. It has led to the rebirth of Austrian economics and the subsequent flowering of vibrant research programs among contemporary Austrian scholars. There may very well exist flaws and deficiencies in the method as Mises left it. But these can only be discovered by actually using the method in trying to develop and apply economic analysis to new issues, events, and historical episodes.
The other reason to resist the urge to prematurely take on the task of revising praxeology becomes apparent when we reflect on the careers of economists who made major contributions to methodology. Mises himself did not begin to seriously work on methodological issues until he was nearly fifty years old and had already written major treatises on monetary theory and the economics of socialism, in addition to several other important books and articles on business cycle theory and political economy. In other words, Mises’s development of praxeology grew out of his reflections on the brilliant work on economic theory that he himself had already accomplished.
Likewise, Murray Rothbard did not address methodological concerns at any length until after he had published a pathbreaking essay on utility and welfare economics, completed a multivolume treatise on economic theory, and applied Austrian business cycle theory to a study of America’s Great Depression. In his treatise Man, Economy, and State, Rothbard used Mises’s praxeological method to derive the entire corpus of economic theory. It included only a brief appendix on praxeology. Rothbard, like Mises, was nearly fifty years old before he seriously addressed methodology in several substantial essays in the mid-1970s. In these essays—and after all his work in pure and applied economic theory—Rothbard expressed only a few quibbles with Mises’s statement of the praxeological method.
A counterexample of an economist who prematurely turned to methodology is Carl Menger, the founder of the Austrian school. Menger’s brilliant Principles of Economics (1871) was supposed to be merely the introductory volume of a four-volume work on theoretical economics. But before he could advance further in this project, Menger was diverted by the hostile reception of his book by the German historical school. He responded with his notable book on methodology, Investigations into the Method of the Social Sciences with Special Reference to Economics (1883). Mises said that Menger’s book “did not satisfy me.” He preferred the earlier works of the classical economists Nassau Senior and John E. Cairnes. Mises also regarded both very highly as economic theorists. Unlike Senior and Cairnes, Menger did not fully comprehend the method he actually used in his theoretical work. Menger’s later articles “Money” and “On Capital Theory,” showed that he had much more to contribute to advancing economic theory. And he well may have done so had he pursued his original project and postponed his investigations in methodology until later in his career. It is no coincidence that Böhm-Bawerk wrote very little on methodology but contributed much more to economic theory then Menger did.
My point, then, is that you should not read Human Action in order to scrutinize praxeology in isolation from its use as a method for deriving and critically appraising economic theory. For example, take the proposition “actors value leisure.” Is it a subsidiary empirical postulate, which is true of our world? Or is it rather an immediate implication of the action axiom, which is true of all conceivable worlds inhabited by acting beings? This question should not be one that absorbs your attention as a primary research topic. If there are reasons to dispute Rothbard and Mises’s contention that it is indeed an empirical postulate, then these reasons will reveal themselves soon enough in your research on mundane but important economic problems relating to wage rigidities, intertemporal substitution of labor, and so on. Discoursing in a vacuum about the exact nature of the postulate is likely to be a barren project of little interest to anyone.
In general, when writing on methodology, the attitude of Austrian scholars—both senior and junior—should be one of caution and humility. The method of praxeology is the construction of fictitious worlds in which certain elements of action are imagined away. But these imaginary constructs are not the product of arbitrary whim or fancy; they are constrained and shaped by the problem at hand and are intended to facilitate the deduction of laws of concrete economic reality. However, because there is no strict formula for their contrivance and use, it is easy for even the most experienced and perceptive theorists to mishandle them. For example, Menger and Böhm-Bawerk—and to a lesser extent—Hayek misused the neutral money construct, which is indispensable for the deduction of the elementary laws of value and exchange but nearly useless in analyzing a money economy.
As Mises put it:
The method of imaginary constructions is indispensable for praxeology; it is the only method of praxeological and economic inquiry. It is, to be sure, a method very difficult to handle because it can easily result in fallacious syllogisms. It leads along a sharp edge; on both sides yawns the chasm of absurdity and nonsense. Only merciless self-criticism can prevent a man from falling headlong into these abysmal depths. (p. 238)
Reading Human Action may stimulate another impulse that should be resisted. Mises’s ubiquitous critiques of the methods and uses of mathematical economics, econometrics, and macroeconomics are so incisive and compelling that you may be lured into thinking of Austrian economics as mainly a literary bludgeon to be used to beat back the errors of modern mainstream economics. But this would be an error. Human Action is liberally peppered with such criticisms, because Mises was fighting a rearguard action, defending the remnants of the Mengerian theoretical tradition. Yet, remember, he was also simultaneously greatly advancing that tradition. Today Austrian economics, thanks primarily to the Mises Institute, is very much alive and flourishing and is increasingly attracting research interest from mainstream economists as well as from scholars in business disciplines. Thanks to Mises, our main task today is to further develop Austrian economics by addressing problems that mainstream economists are having trouble finding solutions to. Our primary aim should be to enlighten and persuade, not to denigrate and provoke.
We do well to heed the strategic advice of the Beatles in the song “Revolution”:
But if you go carrying pictures of Chairman Mao, you ain’t gonna make it with anyone anyhow.
None of this means of course that you should not engage in hard-edged critiques of relevant mainstream theory when applying or building on the Misesian theoretical edifice. For example, criticizing nominal GDP targeting, which is a policy currently being advocated by market monetarists and is based on the quantity theory of money, is a worthy and important endeavor. Writing a paper that simply rehashes Mises’s and Rothbard’s criticisms of the quantity theory? Not so much.
Some senior Austrian economists have fallen into a similar trap of seeking to rebut every new criticism of Austrian economics, no matter how insignificant the critic or minor the issue at stake. In doing so, they endlessly recite chapter and verse of Misesian doctrine as if it were a static and closed system. This research strategy obscures the fact that the praxeological method is a powerful tool of economic research. It stunts its use as a means of discovering new truth through analysis of novel and unique events and policies, such as the economic downturn caused by state and local government shelter-in-place orders and mandated shutdowns of “nonessential” businesses. An equally unproductive inclination that you may experience after studying Human Action is to fixate on and nitpick certain fundamental conceptions that underlie the chain of praxeological deductions. Such projects often start off as semantic quibbles but end up in grievous error. I will give two recent examples.
One Austrian scholar has challenged Mises’s conception of land as a permanent and original factor of production. He argues that land cannot be distinguished from capital goods, because, according to the laws of thermodynamics, nothing is permanent and everything in the universe is always in the process of becoming something else. But this confuses cosmological permanence with praxeological permanence. From the standpoint of human actors, basic land as standing room—that is, as a site for productive activity—never needs to be replaced in the structure of production, unlike raw materials, equipment, and industrial and commercial structures. A second argument that the author brings against the land–capital goods distinction is that even the ownership of a parcel of wilderness involves capital formation, that is, the prior investment of time, energy, and other resources. This empirical claim misses the point, however, because it is backward looking and is completely irrelevant to the question of the permanence or nonrenewability of the resource in the capital structure.
A more egregious example of semantics trumping analysis is an essay that claims, “money is de facto a capital good,” contrary to Mises and Rothbard. The coauthors of the essay argue their case with metaphors and never address any substantive questions. They do not explain how it could be that land is discounted against and traded for money in the real world, even though money and land are both viewed as producer goods that yield a perpetual stream of productive services. They provide no answer to how the value of money is determined by the imputation process that determines the discounted marginal revenue product of all other capital goods. If the money that has been input into the production process is the total amount of money spent by the capitalist, then money receiving its own marginal product implies that the total product is twice as large as it actually is. The reason is that the total must be shared among the money invested and the inputs it is spent on. For example, $1,000 invested for a year at a 10 percent return would be required to yield around $2,100 rather than $1,100 to ensure that the money input receives its share of the product. Furthermore, if money is indeed a capital or future good, how exactly is the present value of a capital good and therefore its price calculated in terms of money? The authors do not tell us. Also left unanswered is the question of why capitalist-entrepreneurs should combine and transform capital goods into lower-order capital goods only to exchange them for money, which, according to the authors, is a higher-order capital good used in their production.
There are further questions. What exactly does it mean for the determination of the interest rate and consumer prices in this topsy-turvy world that money, a future good, must be discounted when spent on present consumer goods? Do present consumer goods bear a double premium over money, that is, over both the capital good money which is invested in their production and the capital good money for which they exchange? The mind boggles at such questions. But our innovators blithely ignore them. They are so narrowly focused on their isolated conceptual innovation that they fail to give adequate thought to its implications for the overall system of economic theory.
I have tried to give you a small taste of how a careless reading of Human Action can lead to a sterile or retrogressive research projects. It is the purpose of this week to assist you in a productive and creative reading of this great work.