The Economic Point of View: An Essay in the History of Economic Thought
By Israel Kirzner
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…. [From the Preface]
Laurence S. Moss, ed.
First Pub. Date
Kansas City: Sheed and Ward, Inc.
2nd edition. Foreword by Ludwig von Mises.
The text of this edition is copyright ©1960, The Institute for Humane Studies. Introduction to the second edition is copyright ©1976, The Institute for Humane Studies. Reprinted by permission of the Institute for Humane Studies.
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.