Remember the issue of The Economist with a textbook of “Modern Economic Theory” melting away? And HM the Queen asking why economists didn’t see this crisis coming? She might now ask why most economists have also demonstrated their inability to predict even the general pattern of events.

Ludwig von Mises’ 1962 essay, The Ultimate Foundation of Economic Science: An Essay on Method is never going to top the best seller lists but it does indicate why so many highly-trained professionals are so often wrong: today’s mainstream of economic thought is founded on the wrong theory of knowledge and therefore the wrong methods.

In this dense essay, Mises explains why the epistemology of the natural sciences is not applicable to the social sciences: people think. Unlike say physics, which needs no final causes, any study of the action of people must take account of the final cause of human action. It is the human mind and the fact we act with purpose.

What distinguishes humanity from animals is this propensity to act with purpose in cooperation with others towards the substitution of more satisfactory conditions for those which are less so. Society is intangible: it is individuals in relationship.

There are two ways to organise society: either spontaneous, voluntary cooperation or obedience to commands, either contract or compulsion. It is the development of voluntary cooperation through contractual exchange which made possible the accumulation of capital which in turn made possible the heights of the natural sciences. It is not the methods of the natural sciences which alone made possible the development of the technology which has made us prosperous:

The fundamental fact that enabled man to elevate his species above the level of the beasts and the horrors of biological competition was the discovery of the principle of the higher productivity of cooperation under a system of the division of labor, that great cosmic principle of becoming. What improved and still improves the fecundity of human efforts is the progressive accumulation of capital goods without which no technological innovation could ever be practically utilized.

And yet philosophers, notably positivists, have created an intellectual climate in which only the methods of the natural sciences are considered valid and in which the now old a priori, deductive methods of the sciences of human action — the social sciences — have been discarded.

It would be easy to dismiss, except one of my academic colleagues confirms that most economists do not encounter epistemology at university. A science of economics has been taught for many years which has the wrong foundations because one school of philosophers dominated another.

And so public policy is informed by brilliant men and women who are working with broken tools. I would scarcely have thought it possible if the real events of our times had not borne it out.

I rarely quote Keynes but he said this:

…the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.

Sooner or later, the day must come when economics is re-founded on the correct theory of knowledge. Economists will then find themselves rather more useful to humanity. This book ought to speed things along.

One Comment

  1. Good post but one thing, it’s not that physics needs no final cause, of course it has a final cause. However this is not know so this can not be the starting point of an analysis. For catallactics however the final cause is known from the start and therefore this gives a firmer basis than physics which must study effects and try and infer backwards from this the causes of the effects observed.