The Economic Point of View: An Essay in the History of Economic Thought
The inauguration of a systematic science of economics, an achievement of the social philosophy of the Enlightenment that also begot the doctrine of popular sovereignty, was a challenge to the powers that be. Economics shows that there prevails in the succession and interdependence of the market phenomena an inescapable regularity that man must take into full account if he wants to attain ends aimed at. Even the most mighty government, operating with the utmost severity, cannot succeed in endeavors that are contrary to what has been called "economic law." It is obvious why despotic rulers as well as leaders of revolutionary masses disliked such doctrines. For them economics was the "dismal science" and they fought it indefatigably.
However, it was not the hostility of governments and powerful political parties that fomented the protracted discussions about the epistemological character and the logical method of economics in which the very existence and significance of this branch of knowledge were again and again questioned. What generated these debates was the vagueness that the early economists evinced in defining the field of their studies. It would be absurd to blame them for this want of clearness. They had sufficient reasons for concentrating upon those problems which they were trying to deal with and for neglecting others. What had stimulated their inquiry was definite issues of contemporary political controversies. Their great accomplishment was the discovery of the uniform order prevailing in the emergence of events previously considered chaotic. Only the later generations of economists were puzzled with the epistemological problems involved.
Doctor Kirzner's book provides a historical account of all the solutions suggested in this debate. It is a very valuable contribution to the history of ideas, describing the march of economics from a science of wealth to a science of human action. The author does not, in the fashion adopted by some recent histories of economic doctrines, indulge in value judgments and paradoxical observations. He prefers to follow the sober methods of the best historians of economic theories, Böhm-Bawerk and Edwin Cannan. Every economist—and for that matter everybody interested in problems of general epistemology—will read with great profit Doctor Kirzner's analyses, especially his treatment of the famous discussion between Benedetto Croce and Vilfredo Pareto or the critical examination of the ideas of Max Weber and Lionel Robbins.
Essays on the history of economic thought are to be appreciated not only purely as history. No less important is the fact that they enable us to re-examine the present state of economic theory in the light of all attempts earlier generations made for their solution. In comparing our point of view with past achievements and errors we may either detect flaws in our own theories or find new and better reasons for their confirmation. Doctor Kirzner's thoughtful essay is a real aid in such a re-examination and in this consists its great value.
LUDWIG VON MISES
The first edition of Israel M. Kirzner's The Economic Point of View was published in 1960. In the meantime, the dogmatic brand of positivism that advocated the banishment of all references to mental states from scientific explanations and their replacement by the "data of the senses" has been discredited. In addition, many contemporary philosophers concede the inherent rationality of human action, that is, man's capability of freely choosing among alternatives (as well as creatively discovering what these alternatives are); and further the indeterminateness of individual behavior on the basis of what has gone before. Yet despite these important concessions to the subjectivist position regarding methodological precepts consistent with sound scientific investigation, the full import of the teachings of Ludwig von Mises in Human Action and of Frank H. Knight in On the History and Method of Economics about the subjective character of economic phenomena either has not been fully digested by practicing economists or else has been received with great hostility by those anxious to submit their models to statistical testing.
As Kirzner's study makes clear, the subject matter of economics is human action, and a concern with the abstract character of action is what defines the economic point of view. Human action in contrast to, say, reflexive action is action directed toward goals and purposes. Furthermore, while such action often results in the measurable displacement of real world objects, the significance of such displacements cannot be adequately understood by merely correlating (or regressing) one displacement with (on) another. Economic explanations must either explicitly or implicitly make reference to individual purposes and plans; otherwise they ignore a realm of experience as real as the world of things. While modem philosophers of science often insist that to explain an event is to show that it is an instance of a scientific law, Kirzner would add this proviso: the general law must itself be explicable in terms of the purposes and plans of acting individuals. According to Kirzner, the entire science of economics is a subset of the broader (but less developed) discipline that Mises termed "praxeology," or the science of human action.
It took two hundred years for economists to discover that the subject matter of their discipline was none other than the structure of human action itself. Much of Kirzner's study is a historical survey of the various attempts economists have made to define the scope of their discipline. According to Kirzner, significant progress in this area began only in the second quarter of this century when Lionel Robbins, Mises, and Knight instituted a shift from a "search for a department of human affairs to which the adjective 'economic' applies, to a search for the appropriate aspect of affairs to which economic concepts are of relevance." Kirzner's study is controversial when he declares that, by insisting on the subjectivity of their discipline, Mises and Knight produced an advanced and more perfect understanding of what in fact constitutes economic knowledge.
Modern economists are generally quite comfortable with some variant of Robbins's definition of economics as a discipline concerned with the allocation of scarce means among alternative ends where the means themselves are capable of a variety of applications. What they are apparently less willing to do is go beyond Robbins and insist, after Mises, that the science must be founded on an analysis of the subjective categories of human action because these categories provide the only firm grounding for economic laws. Modern economists tend to consider economic laws useful, not because they are consistent with our understanding of human action, but because they help organize large bodies of business and government data. Often economists act as if the only importance of economic theory is the ease and elegance with which it helps shuffle and reshuffle large bodies of statistical data (an unfortunate consequence of the novelty and increased availability of high-speed computers).
In recent years the problem or 'grounding aggregate relationships on microeconomic foundations has attracted some attention among economists. This concern is certainly in the spirit of the program Mises and other members of the subjective school advocated many years ago. But it is also important to realize that aggregate relationships are themselves worthless if the statistical data on which they are based distort the underlying reality they are supposed to represent.
Consider, for example, the notion of "cost" and how it is often misnamed by economists. The cost of a specific action to a decision maker is the next best opportunity he gives up when he chooses that course of action over all others. The cost of a certain action is always related to another course of action that has not been taken. But if the other course of action has not been taken, then there is no record of it in the market. Thus, at best, what economists call the "cost of production," or the money outlay of a firm in producing an object, may represent the value of the next best application of these resources to the other market participants; but whether or not these expenses also measure the opportunity cost forgone by the firm's decision maker is another question. A firm may be making a money rate of return of 20 percent on its financial investment at one point in time and be quite satisfied. At another point in time a money return of 22 percent may not be enough to keep that firm in the industry if it discovers an opportunity for making greater profits still. Clearly the connection between recorded, or accounting, costs and those costs that influence human choice may be so tenuous that statistical laws founded on the former will reveal very little about human action itself.
In the last decade or so applied economics has become synonymous with trying to change the behavior or specific values of statistical aggregates. The important question of how these statistics are at all related to the qualitative choices made by acting individuals is treated as if it were unworthy of serious scholarly investigation or as if it were something better left to government accountants. Thus, where once the goal of a sound monetary policy was to guarantee a stable and secure currency, the modern concern is that of "stabilizing prices," which frequently means no more than keeping the consumer price index constant at some base-period value or else permitting departures from that base value according to some definite and predictable rule. Often a government policy designed to contribute to the fullest utilization of resources becomes bogged down to the point of an obsession with the behavior of the Bureau of Labor Statistics' estimate of unemployment. The fact that time spent unemployed may be used for an entirely different purpose in 1975 from that used in 1933 does not seem to bother many economists.
If, however, one considers the most important task of applied economics to be the discovery of the type of institutional structure that provides for the greatest coordination of individual plans and efforts, then the subjective character of the discipline is brought to the forefront. Here the goal of science is to aid men not in maximizing or minimizing some statistical average, but in eliminating or lessening the frustrations that occur when the plans of one individual come into conflict with those of another: For example, it is not the physical existence of capital on which the prosperity of society's members depends but rather the position these goods play in the plans of acting individuals. One need not go so far as some members of the subjectivist school and argue that statistical investigations are of absolutely no value in the derivation of economic laws. It is sufficient to insist that the meaning of such measurements be constantly checked against the underlying human plans and purposes that they allegedly represent.
Thus at the very heart of the science of economics is the idea that capital goods, consumer goads, costs of production, and the like take on economic significance, not because of their physical characteristics or the procedures of tax accounting, but because of the meaning their individual owners attach to them in the course of pursuing their ends. It is my hope that this new edition of Kirzner's study of The Economic Point of View will reacquaint economists with the subjective basis of their science and help to engender a more critical attitude toward modern-day research methods.
LAURENCE S. MOSS
To Our Parents
The present essay is an attempt to explore with some thoroughness an extremely narrow area within the field of the history of economic thought. Although this area is narrow, it merits a scrutiny quite out of proportion to its extension, relating as it does to fundamental ideas around which the entire corpus of economic thought has revolved for some two centuries. It remains as true today as ever before that the direction taken by economic theory is in large measure determined by the "point of view" adopted by the economist as his special perspective. It is in this connection that the present study seeks to make its contribution, by setting up the problem in its proper context as a chapter in the history of ideas.
The nature of the subject matter, in this instance, has made thoroughness in its exploration a matter of extreme difficulty, exhaustiveness a sheer impossibility. In general my aim has been to provide a careful survey of the literature relevant to each of the ideas treated, while resolutely refusing to succumb to those imperious temptations which would have turned my book into an annotated bibliography. This has frequently moved me to refrain from mentioning works of considerable importance in order to avoid fruitless repetition of ideas already cited from other sources. Despite the self-restraint exercised in this regard, I have felt it wise to relegate all notes and references to the end of the book, in order to make for a smoother account in the body of the work.
My exploration of the subject dealt with in this book began several years ago while writing my doctoral dissertation under Professor Mises. Much of the material gathered in my work on that project has provided a useful foundation for the broader investigation undertaken in preparation for the present volume. Grateful appreciation is here accorded for the assistance which enabled me to pursue my researches at that time, first as Volker Fellow, and then as an Earhart Fellow, at New York University.
My intellectual debt to the unique contributions made by Professor Mises to the epistemological problems discussed in my book is, I believe, sufficiently evident throughout the work itself. Here I take particular pleasure in recording the friendly patience and warm encouragement which he has shown me unstintingly throughout the project, as well as the inspiration which I have derived from his own enthusiasm and penetrating integrity of thought, as unfolded in countless discussions, both privately and in seminar.
I have benefited on numerous occasions from highly valuable discussions on various aspects of the study with my colleagues in the Department of Economics, School of Commerce, New York University. I am, in addition, particularly grateful to Dean T. L. Norton and Professor T. J. Anderson, Chairman of the Department, for making special arrangements to lighten my teaching duties during a part of the time spent in research on this project, as well as for their constant encouragement during its completion. Valuable assistance in connection with questions of style and clarity of expression has been gratefully received from Dr. Arthur Goddard. Responsibility for the shortcomings of the work is, of course, undividedly my own.
I have, finally, the pleasant if somewhat difficult task of acknowledging my wife's contribution, both tangible and intangible, to the emergence of the volume. My indebtedness in this regard (as well as the difficulty of its expression) is the deeper for the peculiar circumstance that the altogether indispensable nature of this contribution is itself in large measure to be ascribed to conditions rendering it at the same time exceptionally meritorious.
ISRAEL M. KIRZNER
New York, N. Y.
The author gratefully acknowledges his indebtedness to the courtesy of the following institutions, associations, and publishers:
The American Economic Association (for permission to quote from their publications, including the Survey of Contemporary Economics, 1949); George Allen and Unwin Ltd. (for permission to quote from N. Senior, Outline of Political Economy, and J. Bentham, Economic Writings, edited by Stark); Jonathan Cape Limited (for permission to quote from L. Mises, Socialism, and L. Robbins, The Economic Causes of War); Columbia University Press (for permission to quote from E.R.A. Seligman, Economic Interpretation of History, 1902, and from Political Science Quarterly, 1901); the editorial Board of Economica (for permission to quote from Economics, 1933, 1941); the editor of the Economic Record and the Melbourne University Press (for permission to quote from the Economic Record, No. 61, November, 1955); The Free Press (for permission to quote from Max Weber on the Methodology of the Social Sciences); Harper and Brothers (for permission to quote from F. H. Knight, The Ethics of Competition); Harvard University Press (for permission to quote from the Quarterly Journal of Economics and from H. Myint, Theories of Welfare Economics, 1948); William Hodge and Co. Ltd. (for permission to quote from Max Weber, Theories of Social and Economic Organization); Howard Allen, Inc. (for permission to quote from K. Boulding, The Skills of the Economist); Richard D. Irwin, Inc. (for permission to quote from T. Scitovsky, Welfare and Competition); Kelley and Millman, Inc. (for permission to quote from W. Mitchell, The Backward Art of Spending Money); Alfred A. Knopf, Inc. (for permission to quote from S. Patten, Essays in Economic Theory, edited by R Tug well); Longmans, Green and Co., Ltd. (for permission to quote from R Hawtrey, The Economic Problem); The Macmillan Company, New York (for permission to quote from L. Haney, History of Economic Thought, 1949, F.S.C. Northrop, Logic of the Sciences and Humanities, 1949, A. Marshall, Principles of Economics, 1920); Macmillan and Co. Ltd., London (for permission to quote from Economic Journal, International Economic Papers, and works by Croce, Hutchinson, Jevons, Macfie, Marshall, Robbins, and Pigou; for the Pigou works acknowledgment is gratefully extended also to the St. Martin's Press, Inc., New York); Oxford University Press and the Clarendon Press, Oxford (for permission to quote from the Proceedings of the British Academy, and from 1. Little, Critique of Welfare Economics); Routledge and Kegan Paul Ltd. (for permission to quote from P. Wicksteed, The Common Sense of Political Economy, F. A. Hayek, Road to Serfdom, and G. Myrdal, Value in Social Theory); Staples Press (for permission to quote from E. Cannan, Wealth, E. Cannan, Theories of Production and Distribution, D. H. Robertson, Economic Commentaries); University of Chicago Press (for permission to quote from F. A. Hayek, Road to Serfdom, F. H. Knight, History and Method of Economics, and from the Journal of Political Economy); The Viking Press, Inc. (for permission to quote from T. Veblen, The Theory of the Leisure Class, The Place of Science in Modern Civilization, Essays in Our Changing Order, and W. Mitchell [editor], What Veblen Taught); Yale University Press (for permission to quote from L. Mises, Human Action).
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