21. The Epistemological Case for Capitalism

0:00Chapter 21 The Epistemological Case for Capitalism In the early 1950s, Mises' NYU seminar dealt increasingly with epistemological questions. As he said to Ludwig Rachman, he felt that the analysis of epistemological problems would be the number one task in the social sciences in the coming years. He had said this in a July 1956 meeting with Rachman. It was the topic of his last two monographs, Theory and History 1957 and The Ultimate Foundation of Economic Science 1962. The subject had been prominent in his thoughts and reflections since the publication of Sociology and History 1929 and Conception and Understanding 1930. It was one of the two areas in which he felt contemporary economics was most deficient, the other one being the Theory of Economic Calculation.

0:54In Nutsunado Economy and Human Action, he had stressed the historical significance of the problem. It is a complete misunderstanding of the meaning of the debates concerning the essence, scope, and logical character of economics to dismiss them as the scholastic quibbling of pedantic professors. It is a widespread misconception that while pedants squandered useless talks about the most appropriate methods of procedure, economics itself, indifferent to these idle disputes, went quietly on its way. In the mittorrenstreit between the Austrian economists and a Prussian historical school, the self-styled intellectual bodyguard of the House of Hohenzollern, and in the discussions between the School of John Bates Clark and American institutionalism, much more was at stake than the question of what kind of procedure was the most fruitful one. The real issue was the epistemological foundations of the science of human action and its logical legitimacy.

1:51He had come to the conclusion that political motivations were behind these epistemological critiques of economic science. The main motive for the development of the doctrines of polylogism, historicism and irrationalism was to provide a justification for disregarding the teachings of economics in the determination of economic policies. The socialists, racists, nationalists and etatists failed in their endeavors to refute the theories of the economists and to demonstrate the correctness of their own spurious doctrines Relations. It was precisely this frustration that prompted them again to negate the logical and epistemological principles upon which all human reasoning, both in mundane activities and in scientific research, is founded. Thus the epistemology of economics was not just an idle pastime for ivory-towered intellectuals, it was of direct fractal call relevance.

2:42How does economic theory relate to reality? Most economists believed, and still believe To Mises this point of view was paradoxical. It is strange that some schools seem to approve of this opinion and nonetheless quietly proceed to draw their curves and to formulate their equations. They do not bother about the meaning of their reasoning and about its reference to the world of real life and action. He himself felt it was a necessity to explain the epistemology of Economic Science, and devoted chapters 2 and 3 of Human Action, a total of 62 pages, to these issues. However, despite its fundamental importance, epistemology did play only an incidental role in human action. The great organizing theme of human action was the theory of economic calculation. Mises began with an analysis of the conditions under which no economic calculation could take place, then turned to the discussion of economic Economic Calculation in general, then within the market economy, and finally to those social settings that render economic calculation impossible, socialism, or perverted juice interventionism.

3:57From a philosophical point of view, Human Action made a sweeping case for utilitarian social philosophy, utilitarian with a distinct Misesian flavour, and the scientific core of this case was economics and the theory of economic calculation in particular. In In his new book, Mises made another case for his utilitarian philosophy. This time the argument turned on the epistemology of social analysis. Mises argued that the only scientific interpretation of social reality was based on economics and history, and that the conclusions of both these disciplines led to the more speculative generalisations of utilitarian philosophy as he understood it. He showed that the major alternative approaches Marxism, Positivism and Historicism, despite their pretensions to science, were untenable on epistemological grounds. They were essentially metaphysical doctrines, that is, their claims were not based on a certain fact, but on speculations, many of which, as Mises would show, were incoherent.

5:00The new book was eventually published under the title Theory and History, and subtitled An Interpretation of Social and Economic Evolution. It has remained one of his least read and and at least understood works. The difficulty lay only partly in the abstract nature of its subject. The main hurdle was, as in several of his other writings, a lack of pedagogical effort on his part. Most people know what to expect when they consult a treatise on economics, but few have any idea about the relationship between theoretical and historical approaches to social analysis. Mises's new book was not about narrating mankind's social and economic evolution. dealt instead with the epistemological problems of the various competing narratives. In Human Action he had referred to these problems incidentally. He had stressed that economic analysis, starting from the actions of individual persons, gave a purely fact-based account of the origin of human society. The holistic approaches had been unable to do this. They explained society by theological or metaphysical professions of faith. In Theory and History he amplified

6:08is argumented to a sweeping epistemological vindication of the case for liberty and capitalism. The book is divided into four parts. Part one deals with the central phenomenon of the social sciences, value. Mises explains the nature of value and studies the implications for a scientific analysis of human behaviour. In part two he argues that while all endeavours to discover scientific laws must be built on the assumption of strict determinism, all All attempts to find laws that determine the origin of ideas and value judgment have been in vain. Marxist dialectical materialism and other theories that explain ideas in terms of more fundamental material conditions are merely metaphysical speculation. The same holds true for those philosophies of history that explain the evolution of society in terms of some final destination. In part 3, Mises gives an in-depth discussion of the problems The argument in a nutshell. For Mises the starting point is that any epistemological speculation must lead to a determinism. This is so because the human mind is the instrument

7:32Whatever the true nature of the universe and of reality may be, man can learn about it only what the logical structure of his mind makes comprehensible to him. The logical structure of his mind enjoys upon man determinism, and the category of causality As man sees it, whatever happens in the universe is the necessary evolution of forces, powers and qualities which were already present in the initial stage of the X out of which all things stem. All things in the universe are interconnected and all changes are the effects of powers inherent in things. No change occurs that would not be the necessary consequence of the preceding state. All facts are dependent upon and conditioned by their causes. No No deviation from the necessary course of affairs is possible. Eternal law regulates everything.

8:33In this sense, determinism is the epistemological basis of the human search for knowledge. Man cannot even conceive the image of an undetermined universe. In such a world, there could not be any awareness of material things and their changes. It would appear a senseless chaos. Nothing could be identified and distinguished from anything else. Nothing could be expected and Predicted In the midst of such an environment, man would be as helpless as if spoken to in an unknown language. No action could be designed still less put into execution. Man is what he is because he lives in a world of regularity and has the mental power to conceive the relation of cause and effect. He emphasised that from the point of view of a perfect being, such as God, things might look completely different.

9:23This position can best be characterized as a Leibnizian rationalism. This point of view implies that human action could be explained, at least in theory, in terms of underlying material forces. We know that human action is immediately determined by the ideas and value judgments of the acting individuals. But these ideas and value judgments must in turn be determined by more fundamental causes. If such causes were physical or chemical processes, then the explanation of human behavior could should become a branch of applied physics or applied chemistry. However, and this is the crucial consideration that Mises had stressed already in previous work, at present nobody knows anything about the more fundamental causes of human behaviour. Up to now all attempts to identify laws that would explain ideas and value judgements in terms of physical, chemical or other processes have been in vain. There are various hypotheses about what such 13 years before he had written, we may reasonably assume as hypotheses that man's mental abilities are the outcome of his bodily features. Of course we cannot demonstrate the correctness

10:34of this hypothesis, but neither is it possible to demonstrate the correctness of the opposite view as expressed in the theological hypothesis. We are forced to recognize that we do not know how out of physiological processes thoughts result. We have some vague notions of the detrimental effects produced by traumatic or other damage inflicted on certain bodily organs. We know that such damage may restrict or completely destroy the mental abilities and functions of men, but that is all. All such hypotheses are therefore mere speculation. They are philosophical or metaphysical constructs, not scientific knowledge. This point also also applied to F.R. Hayek's The Sensory Order, a book that Mises did not cite. Hayek had attempted to analyse the mechanism through which physiological impulses come to be translated into mental perception. Apparently, Mises was not convinced that Hayek delivered more than metaphysical speculation. Our deficient knowledge about the more remote causes of human behaviour has two straightforward methodological implications. All efforts to explain the causes and consequences of human behaviour must, at least for the time being, take individual

11:43Methodological Human Behaviour as an ultimate point of departure. They must accept the principle of methodological individualism. The older economists had applied this principle intuitively and even Schumpeter, who coined the term, defended it merely on grounds of expediency. Mises delivered an epistemological demonstration of its necessity. Methodological individualism is rooted in deficient human knowledge. The causal analysis of individual human behaviour We must take account of the fact that any human action has certain invariant consequences, that is, consequences that result from like action at any place and any time. For example, an increase in the quantity of money tends to entail an increase of the price level above the level it would otherwise have reached, irrespective of when and where the money supply is increased. The study of such consequences is the task of praxeology and economic science.

12:36Human action also has contingent causes and consequences. The very same action increasing the quantity of money can be inspired by very different ideas and value judgments, and the objective consequences resulting from any action can provoke very different individual reactions at different times and places. In other words, the causal chains through which ideas and value judgments are connected with human action are contingent. The elicitation of these contingent causal chains is the task of historical research. Individual value judgments and actions are ultimately given, as they cannot be traced back to something of which they would appear to be the necessary consequence. If this were not the case, it would not be permissible to call them an ultimate given. But they are not, like the ultimate given in the natural sciences, a stopping point for human reflection.

13:28They are the starting point of a specific mode of reflection, of the specific understanding of the historical sciences of human action. Mises stressed that this is as far as scientific analysis of human action can go. Starting from observable human behaviour, we can explain its invariant consequences with the help of economics, we can also explain its contingent consequences by historical understanding and we can to some extent explain how this behaviour resulted from the ideas and Value Judgments of the Acting Person in the particular case under consideration, again by understanding. Mises did not exclude the possibility that individual value judgments and ideas had invariant causes, but again neither he himself nor anybody else knew what they were.

14:15At present only some of the contingent causes of human action could be identified by historical understanding on a case-by-case basis, and even this analysis was not likely to give the full picture. There was an unfathomable remnant that defied any explanation whatever, historical individuality. Mises explained, the characteristics of individual men, their ideas and judgments of value as well as the actions guided by those ideas and judgments, cannot be traced back to something of which they would be the derivatives. There is no answer to the question why Frederick II invaded Silesia, except because he was Frederick II. It follows that the social sciences Social analysis, at least for the time being, cannot be bound with the natural sciences into a unified body of scientific knowledge.

15:01This ignorance splits the realm of knowledge into two separate fields, the realm of external events, commonly called nature, and to the realm of human thought and action. For methodological reasons, the social sciences are separate from the natural sciences. Mises called this the principle of methodological dualism. Social analysis, if it just sticks to the known facts, must explain all social phenomena as resulting from individual action, and the causal chain of events must start and end with the ideas and value judgments of individuals. Scientific endeavours within the constraints of methodological individualism and methodological dualism entail the development of the disciplines called praxeology and history. The former is the discipline that describes the invariant consequences of human action that result regardless of time and place. The latter is History describes in retrospect how the acting person perceived the situation in which he had to act, what he aimed at, what he believed to be the means at his disposition, and it Ludwig uses the general laws provided by economics and the natural sciences to describe the objective

16:23impact that the acting person had through his behaviour. Thus, the mission of history is to describe the drama of social and economic evolution from the point of view of its protagonist. Its specific tool is psychology, or specific understanding, or Mises' favourite expression – thymology. Of the two disciplines, economics had the most momentous practical implications. Mises, in Theory and History Thymology has no special relation to praxeology and economics. The popular belief that modern, subjective economics, the marginal utility school, is founded on or closely connected with psychology is mistaken. Praxeology is not concerned with the events which, within a man's soul or mind or brain, produce a definite decision between an A and a B.

17:14It takes it for granted that the nature of the universe enjoins upon man choosing between incompatible ends. Its subject is not the content of these acts of choosing, but what results from them, action. It does not care about what a man chooses, but about the fact that he chooses and acts in compliance with a choice made. The thymological analysis of man is essential in this study of history. It conveys all we can know about the ultimate ends and judgments of value, but as has been In human action Mises had shown that economic analysis leads directly to laissez-faire conclusions. He demonstrated that government intervention entails consequences that are unwanted even from the point of view of the champions of these interventions. In theory and history he completed the case for capitalism from the epistemological point of view. In particular he took on those theories that were grounded on an explicit or implicit rejection of methodological individualism and methodological dualism. His basic argument against the approaches of Marxism,

18:28teleological philosophies of history and positivism was that they had no scientific underpinning Whatever. They were based on certain beliefs about social and economic evolution, but they had not delivered the goods. Their most fundamental tenets could neither be refuted nor verified with the tools of science, reason and observation. Moreover, to the extent that they did make propositions about ascertainable facts, they were wrong or incoherent at the crucial junctures of the Argument. For example, Marxism, and the various philosophies of history, could not explain how the general direction in which they believed society was moving resulted from individual action. Positivism blithely disregarded the fact that there are no constant relationships in observable human behaviour. The champions of historicism contradicted themselves whenever they championed any government policy whatever, while holding to the notion that there was no such thing as economic law. Strictly speaking, these were metaphysical or quasi-religious doctrines, not science. Science and the Culture of Salatory Descent As Mises saw it, the task of metaphysics, philosophy and religion was to slake the unquenchable

19:48human thirst for knowledge and certainty, he remarked. Those divines who saw that nothing Nothing but revelation could provide man with perfect certainty were right. Human scientific inquiry cannot proceed beyond the limits drawn by the insufficiency of man's senses and the narrowness of his mind. And even more clearly, a few years later, the human mind in its search for knowledge resorts to philosophy or theology precisely because it aims at an explanation of problems that the natural sciences cannot answer. There were questions to which which science had not yet provided an answer, what determines the behaviour of atoms, and there were questions to which science could not give any answers. Was there a beginning of time? Does the soul die? Science could give answers only to the extent that it could rely on ascertainable facts. There was a scientific interpretation of social and economic evolution only to the extent that there were ascertainable facts that warranted this interpretation.

20:48But even then there were basic assumptions underlying any scientific analysis of facts that could not themselves be demonstrated. It is contradictory to expect that logic could be of any service in demonstrating the correctness or validity of the fundamental logical principles. All that can be said about them is that to deny their correctness or validity appears to the human mind nonsensical and that thinking guided by them has led to modes of successful Now, Mises did believe that metaphysics, philosophy and religion also relate to reality in some some way, but the problem is that their interpretation of reality cannot be verified by reason and observation. Therefore, they cannot be demonstrated as a scientific proposition can be demonstrated.

21:58And the espousal of a metaphysical or religious doctrine, therefore, cannot be grounded on such a demonstration, but must rely essentially on a value judgment. And Mises insisted that value judgments and ultimate ends are beyond any rational examination. They could only be examined by applying some standard of evaluation, but as soon as one applies such a standard, the end under consideration would no longer be an ultimate end, rather it would become a means for the attainment of the proposed standard. It follows that truly ultimate ends could not possibly be demonstrated by reason and observation. The characteristic mark of ultimate ends is that they depend entirely on each individual's Mises' personal and subjective judgment, which cannot be examined, measured, still less corrected by any other person. Each individual is the only and final arbiter in matters concerning his own satisfaction and happiness. Notice that Mises admitted the existence of errors in regard to one's value judgments. He also took it for granted that one could enjoy art.

23:01The point was, again, that each individual is his own judge. Even the venerable idea of Justice interpreted as an ultimate end cannot be demonstrated. One has to rely on intuition and interpretation of one's inner voice. Yet how can disagreements between different intuitions and different inner voices be settled? Moreover, and most importantly, justice is not an ultimate end. It is a means for the attainment of social cooperation. All these ethical doctrines have failed to comprehend that there is, outside of social Biological Bonds and proceeding temporally or logically the existence of society, nothing to which the epithet just can be given. A hypothetical isolated individual must under the pressure of biological competition look upon all other people as deadly foes. His only concern is to preserve his own life and health. He does not need to heed the consequences which his own survival has for other men. He has no use for justice. His only solicitudes are hygiene and defence. But in social cooperation with other men, the individual is forced to

24:13abstain from conduct incompatible with life in society. Only then does the distinction between what is just and what is unjust emerge. It invariably refers to inter-human social Social Relations. What is beneficial to the individual without affecting his fellows, such as the observance of certain rules in the use of some drugs, remains hygiene. The ultimate yardstick of justice is conduciveness to the preservation of social cooperation. Conduct suited to preserve social cooperation is just. Conduct detrimental to the preservation of society is unjust. This raises an important practical problem for all systems of social The problem appears as soon as one raises the question, how do the members of such systems deal with dissenters? The question concerns the particular members of different collectivist systems of social organisation. Their starting point is the moral postulate that the collective takes precedence over the individual. If a man assigns a higher value to the concern of a collective, then, to his other concerns, and acts accordingly, that is his affair.

25:30So long as the collectivist philosophers proceed in this way, no objection can be raised, but they argue differently. They elevate their personal judgements of value to the dignity of an absolute standard of value. They urge other people to stop valuing according to their own will, and to adopt unconditionally the precepts to which collectivism has assigned Absolute Eternal Validity. What happens, though, when individuals are reluctant to espouse the collectivist agenda? Mises emphasized that the collectivists depend on violence to solve this problem. There is, of course, but one way to make one's own judgments of value supreme. One must beat into submission all those dissenting. This is what all representatives of the various collectivist doctrines are striving for. They ultimately recommend the the use of violence and pitiless annihilation of all those whom they condemn as heretics.

26:23Collectivism is a doctrine of war, intolerance and persecution. If any of the collectivist creeds should succeed in its endeavours, all people but the great dictator would be deprived of their essential human quality. They would become mere soulless pawns in the hands of a monster. Again, the basic problem of all collectivist schemes is that, in their argument, We willy-nilly have to rely on value judgments, and value judgments cannot be proven to be right or wrong. In contrast, the facts of science are ascertainable by all people. Anyone can check for himself the veracity of what the scientists say. He can convince himself that one course of action is feasible while another is not, or that one course of action leads to a desired outcome while another one fails to do so. Science has nothing to say It may about ultimate ends or value judgments, but it does provide knowledge about the earthly means to attain earthly ends.

27:20It is therefore the foremost tool for men to find a minimal agreement for cooperation in the world, despite their differences in beliefs and value judgments. Catholics, Protestants, Jews and Muslims might not agree on theological questions, but all of them can check for themselves that a greater division of labour is more productive than The characteristic feature of a free society is that it can function in spite of the fact that its members disagree in many judgments of value. In the market economy, business serves not only the majority but also various minorities, provided they are not too small A few years later, Mises went beyond this defense of dissent to a position of advocacy.

28:28Not only is dissent compatible with the functioning of a free society, it was actually the driving What transformed the stagnant conditions of the good old days into the activism of capitalism was not changes in the natural sciences and in technology but the adoption of the free enterprise principle. The great ideological movement that started with the Renaissance continued in the Enlightenment and in the nineteenth century culminated in liberalism produced both capitalism, the free market economy, and its political corollary or, as the Marxians have to say, its political superstructure, representative government and the individual's civic rights, freedom of conscience, of thought, of speech, and of all other methods of communication.

29:16It was in the climate created by this capitalistic system of individualism that all the modern intellectual achievements thrived. Never before had mankind lived under conditions like those This culture of sanitary dissent was ultimately the product of freedom and thought and speech. But its more proximate cause was the discovery and dissemination of economic science. The development and practical application of this new discipline, concluded Mises, was the most spectacular event of modern history.

30:05Heroic Elites in a Mass Democracy Yet by the mid-1950s, capitalism and classical liberalism were everywhere on the retreat. How was it possible that the great majority of Westerners had forgotten or failed to appreciate the most spectacular event of modern history? In Theory and History, Mises outlined his account of the rise and fall of classical liberalism. In the centre of his reflection was the relationship between elites and masses, a relationship that he analysed within the framework of his epistemological reflection. In other writings, he had already stressed the fundamental historical fact that social progress, in particular the rise of capitalism, had resulted from the efforts of a small group of individuals. The most amazing thing concerning the unprecedented change in earthly conditions brought about by capitalism is the fact that it was accomplished by a small number of authors and a hardly greater number of statesmen who had assimilated their teachings.

31:02Not only the sluggish masses, but also most of the businessmen who, by their trading, made the laissez-faire principles effective, failed to comprehend the essential features of their operation. Even in the heyday of liberalism, only a few people had a full grasp of the functioning of the Market Economy. Western civilization adopted capitalism upon recommendation on the part of a small elite. How is this possible? Because ultimately society is ruled by ideas. Small groups who spread their ideas can therefore have, in due time, a disproportionate impact on social organization. A rather superficial and shallow view of the problems of government saw the distinction between freedom and despotism in an outward feature of the system of rule and Administration, namely, in the number of people exercising direct control of the social apparatus of coercion and compulsion. The way to a realistic distinction between freedom and bondage was opened two hundred years ago by David Hume's immortal essay on the first principles of government. Government, taught Hume, is always government of the many

32:06by the few. Power is therefore always ultimately on the side of the governed, and the governors have nothing to support them but opinion. Now Mises combined this insight with his epistemology of the social sciences. If Hume was right, that ideas rule society, and if it was true that no scientific account could be given on how new ideas emerge in general, then it follows that new ideas were the true driving force in human history. History is the record of human action. Human action is the conscious effort of man to substitute more satisfactory conditions for less satisfactory ones. Ideas determine what are to be considered more and less satisfactory conditions and what means are to be resorted to alter them. Thus, ideas are the main theme of this study of history.

32:54The genesis of every new idea is an innovation. It adds something new and unheard of before to the course of world affairs. The reason history does not repeat itself is that every historical state is the consummation of the operation of ideas different from those that operated in other historical states. The essence of civilization is ideas. If we try to distinguish different civilizations, the differential specifica can be found only in the different meanings of the ideas that determine them. It follows that intellectual elites were the true elites in comparison to which the mighty and powerful of any age are just the executors of ideas developed in Previous Ages. The creative genius was the hero, the true driving force of history.

33:42Every man, whether great or small, lives and acts within the frame of his age's historical circumstances. These circumstances are determined by all the ideas and events of the preceding ages, as well as by those of his own age. The titan may outweigh each of his contemporaries. He is no match for the united forces of the dwarfs. A statesman can succeed only insofar as his plans are adjusted to the climate of opinion of his time, that is, to the ideas that have got hold of his fellows' minds. He can become a leader only if he is prepared to guide people along the paths they want to walk and toward the goal they want to attain. A statesman who antagonizes public opinion is doomed to failure. No matter whether he is an autocrat or an officer of a democracy, the politician must give the people what they It is different with the pioneers of new ways of thinking and new modes of art and literature.

34:41The path-breaker who disdains the applause he may get from the crowd of his contemporaries does not depend on his own age's ideas. The genius work, too, is embedded in this sequence of historical events. It is conditioned by the achievements of preceding generations and is merely a chapter in the evolution of ideas, but it adds something new and unheard of to the treasure of thoughts and may in this essence be called creative. The genuine history of mankind is the history of ideas, and in searching for their origin we inevitably come to a point at which all that can be asserted is that a man had an idea, whether the name of this man is known or not is of secondary importance. In Mises's worldview, in which Which all things and all thoughts are the necessary consequence of antecedent causes, ideas were the one dynamic element of social evolution. The discoverers and promoters of new ideas, the creative geniuses, were the social vanguard, the elite that led humanity

35:43onto new paths, both good and bad. Mises's stress on the particularities of the genius is a pervasive feature of his thought, starting from Gemeinwirtschaft via Human Action, 1949, to Theory and History, 1957, and Ultimate Foundation of Economic Science, 1962. It is not known where his inspiration came from, but it cannot be excluded that he took it for granted that educated people would know the theoretician who had insisted on the categorical difference between mere talents, be it ever so great, and true genius. Weininger wrote at the beginning of the century, Someone may have a talent, for example, the mathematical talent by birth, and to an extraordinary degree, he will then be able to digest the most difficult chapters of this science with but small effort, but it does not follow that for this reason he has any genius, which is the same thing as originality, individuality, and condition of his own productivity.

36:42Conversely, there are great geniuses who have not developed any special talent to a high degree. Just think of Novalis or Jean-Paul. Talent is hereditary. It may be the common good of a family, the Bachs. Genius is not transferable. It is never general, but always individual, Johann Sebastian. But in order to play this role, they had to be aware of their responsibility. Now, the problem was that the majority of the rationalist philosophers They assumed that all men are endowed with the same power of reasoning. They ignored the difference between clever people and dullards, even that between the pioneering genius and and the vast crowds of simple routinists, who at best can espouse the doctrines developed by the great thinkers, but more often are incapable of comprehending them. As the rationalists saw it, every sane adult was intelligent enough to grasp the meaning of the most complicated theory. If he failed to achieve it, the fault lay not in his intellect, but in his education.

38:03Once all people have enjoyed a perfect education, all will be as wise and judicious as the most Eminent Sage, He added, The second shortcoming of rationalism was its neglect of the problem of erroneous thinking. Most of the rationalist philosophers failed to see that even honest men sincerely devoted to the search for truth could err. This prepossession prevented them from doing justice to the ideologies and the metaphysical doctrines of the past. A doctrine of which they disapproved could, in their opinion, have been promoted only by purpose Schumpeter had discussed the shortcomings of the classical doctrine of democracy along very similar lines.

38:48Both Schumpeter and Mises would highlight the crucial role of leadership in the operation of the market and in politics. In distinct contrast to Schumpeter, however, Mises stressed intellectual leadership. He also insisted that leadership could be good or bad. It could promote the preservation and flourishing of society, but it could also hurt and destroy it. Mises held that as a consequence of this error of the 18th century rationalists and perpetuated by the 19th century socialists, the dull masses were increasingly reluctant to accept intellectual leadership from anyone but those who flattered them. They were imbued with the mystical notion that the mass of the people can never be wrong, that society could do without the guidance of intellectuals. Faced with this situation, the classical liberals still endorsed democracy, and so did Mises.

39:37It was true that mass democracy had led straight to the dictatorship of the proletariat and the autocracy of Hitler, Mussolini, Peron and other modern successors of the Greek tyrants, but the crucial question was whether any alternative political system could have prevented these excesses. Despite the political and humanitarian catastrophes of the 20th century, Mises did not abandon and the case for democracy. Rather, he appealed to the elites to accept their responsibilities by engaging in public debate and enlightening their fellow citizens about the right cause of action. If the small minority of enlightened citizens who are able to conceive sound principles of political management do not succeed in winning the support of their fellow citizens and converting them to the endorsement of policies that bring and preserve prosperity, The cause of mankind and civilization is hopeless. There is no other means to safeguard a propitious development of human affairs than to make the masses of inferior people adopt the ideas of the elite. This has to be achieved by convincing them. It cannot be accomplished by a despotic

40:40regime that instead of enlightening the masses beats them into submission. In the long run the ideas of the majority, however detrimental they may be, will carry on. The future of of mankind depends on the ability of the elite to influence public opinion in the right direction. What does this imply more specifically for libertarian intellectuals, who wish to steer social evolution toward greater freedom? Do they have to make the case for a particular form of government or for a particular design of constitutions? Mises would have none of this. The form of government was a completely secondary problem, because tyranny could exist under any of the possible system. He argued that the primary challenge for libertarian intellectuals was to preserve a climate of opinion that tolerated dissent. Hume's insight that governors have nothing to support them but opinion, logically followed to its conclusion, completely changed the discussion concerning liberty. The mechanical and arithmetical point of view was abandoned. If public opinion is ultimately responsible for the structure of

41:46of Government, it is also the agency that determines whether there is freedom or bondage. There is virtually only one factor that has the power to make people unfree, tyrannical public opinion. The struggle for freedom is ultimately not resistance to autocrats or olycarchs, but resistance to the despotism of public opinion. It is not the struggle of the many against the few, but of minorities, sometimes of a minority of but one man, against The Majority The worst and most dangerous form of absolutist rule is that of an intolerant majority. Such is the conclusion arrived at by Tocqueville and John Stuart Mill. Without an elite defending tolerance, there could be no culture of dissent, no competition and progress in the economic sphere.

42:34Mises was not being naïve in ascribing this responsibility to intellectuals. They were the heroes of the drama of human history, yes, but they also had to be truly He knew from bitter personal experience that a pro-capitalist intellectual could not expect lavish material rewards. A case in point was the commercial book market. A true pioneer could not expect a high income on a free market. Reverence to the great authors and artists has always been limited to small groups. The book market is flooded by a downpour of trivial fiction for the semi-barbarians, Barbarians, but this does not prevent great authors from creating imperishable works. The decisive consideration was again that no alternative social system held better promise.

43:20It is of course true that in the market economy not those fare best who from the point of view of an enlightened judgment ought to be considered as the most eminent individuals of the human species. The uncouth hordes of common men are not fit to recognise duly the and the merits of those who eclipse their own wretchedness. They judge everybody from the point of view of the satisfaction of their desires. Thus boxing champions and authors of detective stories enjoy a higher prestige and earn more money than philosophers and poets. Those who bemoan these facts are certainly right, but no social system could be devised that would fairly reward the contributions of the innovator whose genius leads mankind and to ideas unknown before and therefore first rejected by all those who lack the same inspiration.

44:09The only consolidation for great but unsuccessful intellectuals was that the pioneers in business did not fare any better. The much defamed acquisitiveness of promoters and speculators succeeds daily in providing the masses with commodities and services unknown before. A horde of plenty is poured upon people for whom the methods by means of which all these These marvellous gadgets are produced are incomprehensible. These dull beneficiaries of the capitalistic system indulge in the delusion that it is their own performance of routine jobs that creates all these marvels. They cast their votes for rulers who are committed to a policy of sabotage and destruction. They look upon big business necessarily committed to catering to mass consumption as upon the foremost public enemy and to prove of every measure that, The Study of History Mises devoted all of part three to the discussion of the nature, scope and methods of historical research. This might be surprising from the pen of an economist, but keep in mind that Mises was interested in economics as a tool to guide action. In his early years as a student

45:21at the University of Vienna, this practical concern had made him dissatisfied with the are methods taught by the historical school. A passage from theory and history sums up the problem. The historicist's fateful error consisted in the belief that this analysis of the past in itself conveys information about the course future action has to take. What the historical account provides is the description of the situation. The reaction depends on the meaning the actor gives it, on the ends he wants to attain, and on the means he chooses for their attainment. By the 1950s a sort of neo-historicism was in full swing and about to conquer Western academia. The new movement was led by statisticians and econometricians who held precisely the views that Mises had rejected more than 50 years earlier. In correspondence with Neumeier he lamented, They are full of contempt for what they call metaphysical economics. Only facts, they say, that these facts are history, and not facts in the sense in which the natural sciences employ this term, remains unknown to them.

46:27The official doctrine of all these research institutions, government economists, university economists and so on, is, for instance, that the socialist program is not to be refuted by metaphysics, but by facts. They point out, for instance, that profits are only X percent of the national income of only Y percent of the sales dollar Mises had turned to economics because this discipline provided knowledge about something on which historical research was mute, even with the advanced techniques of econometrics, namely the objective suitability of means to attain social ends, yet the same overarching and Practical Motivation preserved his lifelong interest in the study of history.

47:21In Theory and History, Mises set out to explain why and how historical knowledge had to complement economics as a guide for human action, thus he closed a great parenthesis opened during his days in the Grünberg seminar. In his previous works, he had outlined the division of labour between praxeology and history. He had presented history as a sort of residual discipline that sought to come to grips with Problems that could not be addressed by the exact disciplines, Mises wrote on page 50 of Human Action, The scope of understanding is the mental grasp of phenomena which cannot be totally elucidated by logic, mathematics, praxeology, and the natural sciences to the extent that they cannot be cleared up by all these other sciences. It must never contradict the teachings of these other branches of knowledge. He had singled out in particular the problem Problem of assigning relative quantitative weights to different causes that combine into an observable effect. Mises called this the problem of relevance. The only way to tackle

48:21this was to apply the specific tool of the historian – understanding or verstehen. The historian can enumerate all the factors which cooperated in bringing about a known effect and all the factors which worked against them and may have resulted in delaying and and Mitigating the Final Outcome. But he cannot coordinate, except by understanding, the various causative factors in a quantitative way to the effects produced. He cannot accept by understanding, assigned to each of n factors, its role in producing the effect p. Understanding is in the realm of history the equivalent, as it were, of quantitative analysis and measurement. But the understanding of the relative quantitative contribution of any one cause to a combined Effect could not be independently verified or refuted.

49:09As a consequence, the problem of relevance was the source of insuperable disagreement between men of science, and Mises stressed that it was in fact the only source of lasting disagreement. Historical understanding can never produce results which must be accepted by all men. Historians may disagree for various reasons, they may hold different views with regard to the teachings of the non-historical sciences. They may base their reasoning on a more or less complete familiarity with the records. They may differ in the understanding of the motives and aims of the acting men, and of the means applied by them. All these differences are open to a settlement by objective reasoning. It is possible to reach a universal agreement with regard to them, but as far as historians disagree with regard to judgments of relevance, it is impossible to find a solution which all sane men must accept, and in theory and history speaking of the same problem, the precariousness of forecasting is mainly due to the intricacy of this problem. It is not

50:11only a rather puzzling question in forecasting future events, it is no less puzzling in retrospect for the historian. In theory and history, Mises wanted to flesh out his theory of understanding. He did not believe that the necessarily subjective judgments of Relevance, somehow made history root-use. Despite its deficiencies, only the discipline of history could solve certain problems that were of utmost practical importance. In particular, history alone could provide an analysis of the context of action. Mises stressed that human action was always embedded in concrete circumstances of time and place. Action was a conscious response to a given situation, and it could succeed only if the acting person and understood the present. But there is no such thing as a non-historical analysis of the present state of affairs. The examination and description of the present are necessarily a historical account of the past, ending with the instant just past. The description of the present state of politics, or of business, is inevitably the narration of the events

51:15that have brought about the present state. If, in business or in government, a new man When the businessman takes the helm, his first task is to find out what has been done up to the last minute. The statesman as well as the businessman learns about the present situation from studying the records of the past. Mises knew what he was talking about. Reporting on current business and political conditions had been his daily bread for many years. Moreover, at two critical junctures he had analyzed the state of affairs in politics in Nation, State and Economy, 1919, and in Omnipotent Government, 1944, he had analyzed the forces at work in the rise of aggressive nationalism and statism, as well as their cataclysmic endings in the two world wars. At the onset of the Cold War, he had added a third piece, Bland Chaos, 1946, which told the tale of the rise of the Soviet Union to its position of power. Thus he was in a good position to challenge those of his readers

52:14who might disagree, let those who want to reject their preceding statements undertake to describe any present situation in philosophy, in politics, on a battlefield, on the stock exchange, in an individual business enterprise, without reference to the past. But how far back should history be studied? Was it practical or necessary for statesmen and business leaders to seek instruction about more than the past few years before they took Office. He observed that there is no point in history at which we can stop our investigation fully satisfied that we have not overlooked any important factor. There was no a priori rule that could be helpful in deciding where to stop historical research. The usefulness of further knowledge could only be determined after completion of additional research.

53:02In any case, it was a grave error to believe that increasing remoteness in time meant decreasing practical relevance. The mere fact that an event happened in a distant country and a remote age does not in itself prove that it has no bearing on the present. Jewish affairs of 3,000 years ago influenced the lives of millions of present-day Christian Americans more than what happened to the American Indians as late as in the second part of the 19th century. In the present-day conflict of the Roman Church and the Soviet, there are elements that trace back to the The Great Schism of the Eastern and Western Churches that originated more than a thousand years ago. The specific intellectual tool applied in historical research was understanding or Verstehen, the term introduced by the Southwest German School of Historiography.

53:53In his previous writings, Mises had referred to and endorsed the historical works of this school. In theory and history, he developed his own account of the theory of Verstehen. He presented it as a tool to unearth facts provided by introspection and by contact with other human beings. It signifies the cognition of human emotions, motivations, ideas, judgments of value and volitions, a faculty indispensable to everybody in the conduct of daily affairs and no less indispensable to the authors of poems, novels and plays as well as to historians. Human Epistemology calls this mental process of the historians the specific understanding of the historical sciences of human action. However, it is not a mental process exclusively resorted to by historians. It is applied by everybody in daily intercourse with all his fellows. It is a technique employed in all inter-human relations. It is practiced by children in the nursery and kindergarten, by businessmen in trade, by politicians and Statesmen in Affairs of State. Mises was reluctant to use the word psychology to describe this

55:01approach because by the early 1950s the new discipline of experimental psychology had become fairly entrenched and was about to become identified with psychology per se. In order to avoid confusion he introduced a new term to designate the traditional humanistic discipline of psychology. Cymology is what everybody learns from intercourse with his It is what a man knows about the way in which people value different conditions, about their wishes and desires, and their plans to realize these wishes and desires. It is the knowledge of the social environment in which a man lives and acts, all with historians, of a foreign milieu about which he is learned by studying special sources. Mises observed that the members of the Southwest German School were unaware of the existence of economic theory, but this did not diminish their achievements in the clarification of the logical nature of history.

55:55In theory and history, Mises made an important contribution to the theory of Verstehen. He pointed out that the main application of Verstehen was not in the analysis of the past, but as a tool for anticipating the future. There were in fact two types of historians, the historian of the past as well as the historian of the future, that is, acting man. The South West German School and its followers such as Alfred Schutz had in their writings exclusively dealt with the historian of the past, but the most urgent question related to the historian of the future, the main epistemological problem of this specific understanding is, how can a man have any knowledge of the future value Judgments and Actions of Other People The traditional method of dealing with this problem, commonly called the problem of the alter ego or fremdverstehen, is unsatisfactory. It focused attention upon grasping the meaning of other people's behaviour in the present or, more correctly, in the past. But the task with which acting man, that is, everybody, is faced in all relations with his fellows

57:01does not refer to the past, it refers to the future. To know the future reactions of other Entrepreneurial is the first task of acting man. Knowledge of their past value judgments and actions, although indispensable, is only a means to this end. What then is the logical character of the Verstehen of future action? Mises is unequivocal. The historian of the future is essentially an intellectual entrepreneur. All his knowledge concerns contingent data of the past that cannot be generalized. How can such information and about particular circumstances of time and place be used to forecast the future. There is only one way. The historian of the future must guess what the future will be. Forecasting is inherently speculative and uncertain when it comes to anticipating future human behaviour.

57:53Psychology in this sense of thymology is a branch of history. It derives its knowledge from historical experience. All that thymology can tell us is that in the past definite What men or groups of men were valuing and acting in a definite way. Whether they will in the future value and act in the same way remains uncertain. All that can be asserted about their future conduct is speculative anticipation of the future based on the specific understanding of the historical branches of the sciences of human action. He later gave a more operational description of the intellectual process involved. Out of what we know about a man's past behaviour, we construct a scheme about what we call his and his character. We assume that this character will not change if no special reasons interfere and, going a step farther, we even try to foretell how definite changes in conditions will affect his reactions. This insight delivered a clue to the vexed problems of cultural history, a discipline riddled with chauvinistic and nihilistic prejudices.

58:57Mises would have nothing of the sort of cultural relativism that the young Levi Strauss had champion, just a few years before, he believed in the