Ludwig von Mises, the Action Axiom, and Biology

Introduction

In the pursuit of science little can be said to be of greater importance than the epistemology employed.  In this regard the epistemology of the Austrian School of economic thought has been roundly criticized and rejected by mainstream economists.¹  This reaction was primarily due to Ludwig von Mises's firm stand on apriorism and the claim that praxeology, of which economics was the most developed discipline, was a new science, unconnected to previously acquired knowledge (Mises, 1966, 1-10).

English: Ludwig von Mises in his library (Photo credit: Wikipedia)

Much of the Austrian literature on epistemology since Mises's exposition² has been to explain and defend, ever more loudly and vociferously, apriorism and the apodictic certainty of conclusions derived from Mises's action axiom.  A notable exception to that literature is Barry Smith's tract on fallible apriorism (1996), which elaborated and extended Rothbard's thesis (1957) by showing that a priori knowledge, although independent of observation, is derived from observation and, hence, is synthetic a priori knowledge.

With Smith's introduction of fallibilism into Mises's system, some of the distance between it and Karl Popper's concept of conjectural knowledge was reduced.  This reconciliation has been visible in a number of efforts that attempt to bring Mises's approach into the methodological housing of Popper and other philosophers of science, notably Imre Lakatos.³  More on that in another post; but, at this moment we have another issue to address — Mises's claim that economics, and its encompassing science, praxeology, are new sciences unconnected with previous knowledge.  This claim did not sit well with those who believe all knowledge to be connected and do not have an anthropocentric view of the universe.

The Origins of Action

Mises went to great lengths to deny that human action is in any way related to action in our evolutionary ancestors, even stating that "The newborn child is not an acting being," and that "Beings of human descent who either from birth or from acquired defects are unchangeably unfit for any action... are practically not human" (1966, 14).  To do so seems to strike at the very notion that we have evolved from species that have less flexibility than we, and from whom we do not stand apart in the universe.  In this context Mises formulated what has become known as the action axiom — man acts, aiming at the improvement of his situation relative to his values (1966, 13-14).

English: Karl Popper in 1990. (Photo credit: Wikipedia)

In an address given in 1967, Karl Popper made a more general statement — that "Animals, and even plants, are problem-solvers" (1972, 145).  The idea was later stated more simply as "All life is problem solving" (1999, 100).  By this statement he meant that each life form represented, either anatomically or behaviorally, a hypothetical solution to the problem of its environment. Darwinian evolution supplied the criticism or falsification of that hypothesis.

At this point we must ask, "what problem is being solved?"  The answer lies in the action axiom — the problem of improving the situation, or survivability, of the organism.  Each organism acts, in the way it understands, to improve its situation.⁴  It appears that Popper's statement stands as a powerful axiom — possibly the basic axiom of biology — in support of Mises's more specific one and reveals biology as the epistemological basis of economics.  In fact economics is not separated from all of the other sciences, but is an outgrowth of biology.

This conclusion would most likely suit Edward O. Wilson who said "It is in biology and psychology that economists and other social scientists will find the premises needed to fashion more predictive models, just as it was in physics and chemistry that researchers found premises that upgraded biology" (1998, 206); however, Wilson did not expect the basic premise to come from a philosopher or support the Austrian methodological approach.

We do not argue here that economics has that much to learn from biology, although Wilson certainly believes it does.  Economics is clearly a human science — the most fundamental theorems depend on activities that are observable only in humans.  What we do argue is that biology supplies an axiom that is fundamental to all life that strengthens Mises's action axiom, supporting it with what Rothbard would have called a "law of reality rather than a law of thought" (1957).

At this point we must question why Hayek did not see this connection.  He knew, and was friends with, both Mises and Popper, as well as having a deep understanding of their work.  He also came from a family of biologists.  His father was a serious botanist as well as being a doctor, and Hayek helped him with botanical work and attended society meetings (Ebenstein, 2001).  At this point we can only speculate, but he may have seen Mises's and Popper's works as irreconcilable and never even contemplated a reconciliation of their views.  Perhaps he was reluctant to start down a path that could have resulted in the loss of one or both of his closest intellectual associates.  In any case, it is unfortunate that a person of his stature did not complete Mises's work by linking economics with the rest of knowledge.

Conclusion

With the modification of Mises's viewpoint on action yet another objection to the epistemology of the Austrian School can be overcome.  This modification is hardly a blow to Mises's overall system as it supports, rather than rejects, his action axiom.  At the same time it ties economics more closely to the sciences, a goal that we can only believe Mises would have supported.

¹ See (Blaug, 1980, 81-2) and (Samuelson, 1964, 736).
² Mises wrote extensively on methodology and epistemology, producing a volume of essays in 1933 that was later translated into English (Mises, 1960) and his final published book (Mises, 1962).
³ See (Champion, 2013), (Di Iorio, 2008) and (Rizzo, 1983).
⁴ This is not to say that there is some super-human intelligence in operation, but that natural processes have been evolutionarily selected that make the organism's choices the most likely to succeed.

Bibliography

Blaug, M. (1992). The Methodology of Economics: Or how economists explain (2nd ed.). Cambridge: Cambridge University Press.

Champion, R. (2013, March 11). The Common Ground of Parsons, Mises and Popper in the 1930s: The Action Frame of Reference, Praxeology and Situational Analysis. Retrieved from the Rathouse: the philosophy site of rafe champion: http://www.the-rathouse.com/EvenMoreAustrianProgram/Convergence.html

Di Iorio, F. (2008). Apriorism and Fallibilism: Mises and Popper on the Explanation of Action and Social Phenomena. Nuova Civiltà delle Macchine(2). Retrieved March 11, 2013, from http://www.imtlucca.it/whats_new/_seminars_docs/000195-Di_Iorio_MISES_and_POPPER.pdf

Ebenstein, A. (2001). Friedrich Hayek: A Biography. New York: Palgrave for St. Martin's Press.

Mises, L. v. (1960). Epistemological Problems of Economics. (G. Reisman, Trans.) Princeton: D. Van Nostrand Co., Inc.

Mises, L. v. (1962). The Ultimate Foundation of Economic Science: An Essay on Method. Princeton: D. Van Nostrand Co., Inc.

Mises, L. v. (1966). Human Action: A Treatise on Economics (3rd revised ed.). Chicago: Henry Regnery.

Popper, K.R. (1972). Epistemology Without a Knowing Subject. In K.R. Popper, Objective Knowledge: An Evolutionary Approach (pp. 106-52). Oxford: Oxford University Press.

Rothbard, M.N. (1957). In Defense of 'Extreme Apriorism'.Southern Economic Journal(23), 315-20.

Rizzo, M. J. (1983). Mises and Lakatos: A Reformulation of Austrian Methodology. In I. M. Kirzner (Ed.), Method, Process, and Austrian Economics: Essays in Honor of Ludwig von Mises. New York: Lexington Books. Retrieved March 11, 2013, from http://mises.org/books/methodprocess.pdf

Samuelson, P.A. (1964, September). Theory and Realism: A Reply. The American Economic Review, 54(5), 736-9. Retrieved from http://www.jstor.org/stable/1818572

Smith, B. (1996, Spring). In Defense of Extreme (Fallibilistic) Apriorism. Journal of Libertarian Studies, 12(1), 179-192.

Wilson, E. O. (1998). Consilience: The Unity of Knowledge. New York: Alfred A. Knopf.

Related articles

• Mises' Sectarianism

The Myth of a (Classical) Liberal or Libertarian Utopia

Cover via Amazon

In reading online articles and blogs it is common to find references to a "libertarian utopia."  These references are both supportive and derisive, distorting what I will claim is the idea of true liberalism.  Hayek is even referenced in this Freeman article bemoaning the fact that "we lack a liberal Utopia."  The problem with this phrase first became clear to me when I read the following words:

Contemporary socialists – "light" totalitarians in mindset and vocabulary – go wrong when they imagine that liberals are busily planning the perfect society, the best that is possible in the world, but of opposite sign to their own. [emphasis in original]¹

The reality is that there is no liberal Utopia.  Liberalism and its modern-day progeny, libertarianism, are processes rather than destinations.  In the same sense that the scientific process leads to the discovery of laws of nature, liberalism leads to the discovery of that society that best conforms to human values.  Such a society defies planning, as planning implements the values of a small elite.  It also stifles the wide-ranging experimentation – through trial and error – that is necessary to discover the institutions and businesses that are necessary in building a society that supports human values.

Of course, one may wonder, "What are human values?"  I tend to think, as did Ludwig von Mises, that most people prefer prosperity over poverty, freedom over slavery, and life over death.  There are, and always will be, predators who prey on those who live peacefully and productively.  The latter will use freedom to create the cost-effective defenses that maximize the cost of predatory behavior, eventually discarding the unwieldy blunt instrument of the state.

What is needed then is a total commitment to the free market and its concomitant competition as discovery procedure by which society progresses.  There can be no fear of unacceptable outcomes, as outcomes will reflect human values.  Yes, in some areas of the world those outcomes might be repulsive to modern westerners, but eventual progress in those regions is not going to be accelerated by murdering, threatening, or lecturing the population.

What is most important is to embrace the idea that liberalism – the free (or freed) market – is the platform upon which progress depends.  The end state defies prior description, but we can have confidence that it will conform to human values.

^*In the body of the post an unmodified reference to "liberal" is a reference to "classical liberal."
¹Revel, Jean-François, Last Exit to Utopia, (2009 New York, Encounter Books), 54.

In Defense of Karl Popper and Piecemeal Social Engineering

Karl Popper in 1990. (Photo credit: Wikipedia)
Karl R. Popper was one of the most influential philosophers of science in the 20^th century.  His ideas on inductivism and falsifiability transformed the philosophy of science, creating credibility when he turned his mind to the social sciences.  Over the course of his lifetime he moved from a strong commitment to social democracy to support for liberal democracy, possibly due to the influence of his longtime friend, Friedrich Hayek.

In The Open Society and Its Enemies Popper proposed something he called “piecemeal social engineering.”[1]  In this regime he suggested that governments implement small societal changes and then critically evaluate the results.  He also mentioned that private individuals and businesses were participants in this process saying:

Even a man who opens a new shop, or who reserves a ticket for the theatre, is carrying out a kind of social experiment on a small scale ;  and all our knowledge of social conditions is based on experience gained by making experiments of this kind.[2]

In the context that Popper suggested it most free market advocates would find his view of social engineering to be anathema; but if we view it critically and in the context of Popper’s more abstract ideas, specifically “evolutionary epistemology,” we can come to a different and positive conclusion.

Consider Bryan Magee’s representation of Popper’s view of problem solving in society when he says, “Because he regards living as first and foremost a process of problem-solving he wants societies which are conducive to problem-solving.”[3]  When Popper suggested that liberal democracies could legislate small changes in the societal structure, evaluate the results and either repeal or retain the changes he was arguing against utopian views and for such a society.  As such it was a significant advancement in thinking about societal changes and a sensible argument against all utopian schemes.  Unfortunately, Popper was naïve about the ability of governments, even those of liberal democracies, to evaluate the results of their actions and to learn from them.

Governments are unable to learn from their mistakes for a number of reasons:

1. The individuals supporting a specific experiment risk citizens’ resources, not their own.
2. In a mixed economy, government does pay market prices for the resources it consumes, but as a monopoly it forces the populace to pay arbitrary prices for the goods and services it provides.
3. There is no signal such as profit or loss that can inform the experimenters of their success or failure.  In fact, it is widely suggested that government should undertake projects that are “desired” but that generate losses.

In addition to the inability of governments to learn, they impose their experiments on the entire populace, eliminating the possibility of parallel, competitive experiments through which more progress could be made.
As mentioned earlier, Popper did suggest that businesses could, in effect, also participate in piecemeal social engineering by implementing different business plans and offering revised or different products.  He failed to realize that what seemed to him to be a minor component was in fact the most significant and could accomplish his goal of societal evolution more effectively.
The fact is that businesses in the free market have built-in mechanisms that signal difficulties and facilitate learning:

1. The individuals involved are risking their own or investors’ resources – resources that are freely given and are at risk in the project.  This risk factor dampens the enthusiasm for projects that appear fantastic or utopian as opposed to realistic.
2. Businesses charge prices that must reflect customers’ values.
3. If income minus expenses is negative that signals that the business’s inputs are not creating a value for consumers that justifies the consumption of resources.  The individuals involved must make the decision whether to continue to consume capital or abandon the project.

Businesses are naturally competitive and are generally unable to impose their plans on the population, making it possible for multiple plans to be executed simultaneously across various industries.

Thus, we can say that Popper’s idea – piecemeal experimentation with the expectation of finding problem solutions – was sensible, but his means – governments of liberal democracies – could not accomplish that end.  On the other hand, a society free of government intervention and based on profit and loss has the tools required to accomplish it.

---

[1] Popper, Karl R., The Open Society and Its Enemies, Volume I: The Spell of Plato, (New York: Harper & Row, 1963), 158.
[2] Ibid, 162.
[3] Magee, Bryan, Philosophy and the Real World: An Introduction to Karl Popper, (La Salle, Illinois: Open Court, 1985), 75.

Personal Value Judgments

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In the, so far, excellent foreword to Ludwig von Mises's Epistemological Problems of Economics, Jörg Guido Hülsmann makes the following curious statement:

The discipline of economics dealt with human action to the extent that the acting person could base his decisions on personal value judgments and economic calculations, whereas praxeology dealt with human choices guided by personal value judgments alone.

But economic calculation simply augments personal value judgments.  Any analogy might be the use of a scale when confronted by two sacks of potatoes.  Which one should I buy?  The scale is a tool that can aid me in that decision, assuming that I want to buy a greater weight of potatoes for my money.  However, the color of the potatoes, their apparent age and quality may override my desire for the greater weight.  The scale simply supplies a quantitative input to my value judgment, the basis for every choice I make.

If the statement were instead, "personal value judgments in the context of economic calculations," I would be in complete agreement.  I suspect that Dr. Hülsmann would change the phrasing himself if asked about this seeming separation of value judgments and economic calculation.

Update: Further on,  Dr. Hülsmann does, indeed, seem to come more into alignment with my understanding of the Austrian view.

The GDP Fixation

Every Friday I receive a free investment letter from John Mauldin, an investment advisor who has enough credibility to get on CNBC, hold conferences with top speakers and produce an investment letter read by millions. Recently, he has been harping on GDP (as in GDP = C + I + G + (X-M), where C is consumption, I is investment, G is government spending, X is exports and M is imports). Now, if we accept that increased GDP is good, then any decrease in G is bad. However, some economists disagree and suggest that G should, in fact, be subtracted from the equation, as government spending is spending that people would otherwise forgo or channel into activities other than invading Iraq, bailing out banks or purchasing car companies that have failed to be competitive. Such an economist is Murray N. Rothbard who, in America's Great Depression, describes a measure he calls the Gross Private Product, or GPP. To quote him (pg 224),

In the pleasant but illusory world of "national product statistics," government expenditures on goods and services constitute an addition to the nation's product. Actually, since government's revenue, in contrast to all other institutions, is coerced from the taxpayers rather than paid voluntarily, it is far more realistic to regard all government expenditures as a depredation upon, rather than an addition to the national product. (emphasis in original)

So, Rothbard's equation is

GPP = C + I - G + (X-M)

where G now represents the maximum of government revenues and government spending - the value it extracts from the economy. Rothbard elaborates more on GPP and the reader may want to follow up on his ideas. In fact, I think that Rothbard may be too harsh on government spending, as there is some value produced in some spending - it's just impossible to know what it is as it is not subject to consumer sovereignty or profit and loss.

Now, if Mauldin were like Paul Krugman - that is completely ignorant of the Austrian School of economics and a shill for Democrats - I wouldn't blame him. However, Mauldin does know about the Austrian School and was apparently present when Gary North and Mark Skousen interviewed F. A. Hayek. Mauldin does disagree with the Austrian Business Cycle Theory (ABCT) and has said in his newsletter that he is more inclined to Irving Fisher's views; but how can a thinking person suggest that G - government spending - must not be reduced too quickly as it will lead to a reduction in GDP and further economic pain? Yes, a reduction of government spending will injure some parts of the population, but that capital is then freed up for productive uses. The longer we delay that reduction the greater - and wider - will be the pain.

Article in Liberty Magazine

Liberty has published the issue online that contains an article I wrote called "Laissez Faire Justice" on the cover and "Marketing Morality" in the table of contents. It is an expanded and edited (by Liberty editors) version of my previous post "Competition as a Discovery Procedure for Ethics."

2021/10/15 Edit: Replace heading link and dead article link to reflect live URLs.

Banking, Theory, and the Crucible of Free Markets

Recently, a salvo was fired by Joseph T. Salerno in the battle between those who argue for 100% banking reserves (characterized by Salerno as the Neo-Currency School) and those who support a more lax approach, represented by Lawrence H. White. You can find White's response here. Aside from disputing what von Mises meant when he wrote about banking on a number of occasions, it seems that Salerno's argument is that the creation of fiduciary media is sufficient to create business cycles, while White's claim is that the creation of fiduciary media in the right amount prevents depressions. To both of them I say that their approaches are simply business models. If consumers value the 100% reserves model more, it may dominate. If the fractional reserve model serves their needs better, we may see the opposite. And the likely result is that some combination of the models will co-exist, even in the same institution. And, if business cycles persist, entrepreneurs will either learn to live with them, as humanity has learned to live with the unknown future, or banks will adjust their actions to mitigate the financial impacts, learning from their market failures and successes. Policy disputes are important in societies with large amounts of state intrusion, and if either Salerno or White had any chance of their arguments affecting the course of the Obama, or any other, Administration, I would be encouraging them to pull out the stops to make their points. However, their arguments are for a free society, and consumers expressing their preferences will be the final arbiters.