Abstract
In the preceding the fundamental a priori aspects of Praxeology have been elucidated and discussed, including methodological apriorism , subjectivism , individualism, dualism as well as the categories of action. To complete the description of Praxeology it remains to clarify how a practitioner of the science proceeds. This is a required for understanding how it would be applied to new areas, such as leadership studies.
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Notes
- 1.
These were presented earlier in the introduction.
- 2.
As an example of the importance of deriving action based definitions von Mises (1996, p. 255) complains that “money” lacks a rigorous praxeological definition. However, he downplays the harm of this particular case, saying that the term “commonly used” employed in defining money is vague, but that “this vagueness in the denotation of money in no way affects the exactitude and precision required by praxeological theory” (von Mises 1996, p. 398).
- 3.
Indeed, von Mises stated the need for an economist to be well versed in many fields of science and said:
When I once expressed this opinion in a lecture, a young man in the audience objected. “You are asking too much of an economist,” he observed; “nobody can force me to employ my time in studying all these sciences”. My answer was: “Nobody asks or forces you to become an economist.” (von Mises 1962 p. 4)
- 4.
There are two subjectivist fields of study that are important to the praxeologist and delve into the particulars of events. These are the fields of history and the psychology of purposeful action, where praxeological theorems are used at a different level “of theoretical observation and interpretation of the social world” (Schuetz 1943). Praxeological theorems may in these fields be employed to attempt approximate explanations or uncertain predictions regarding specific social facts, e.g.: the extent of the drop of market prices (von Mises 1996, p. 118).
- 5.
The latter may be strongly substantiated human tendencies such as the disutility of labor, the desire for wealth, the preference for more over less, and the preference for consuming now over later or they may be of a more tentative and situational nature. These tendencies cannot be quantitative laws but they can in principle be tested for specific settings; one can test whether the assumptions hold in reality.
- 6.
As such they are reminiscent of the words of Wittgenstein (2002, p. 17): “If we want to study the problems of truth and falsehood, of the agreement and disagreement of propositions with reality, of the nature of assertion, assumption, and question, we shall with great advantage look at primitive forms of language in which these forms of thinking appear without the confusing background of highly complicated processes of thought. When we look at such simple forms of language the mental mist which seems to enshroud our ordinary use of language disappears. We see activities, reactions, which are clear-cut and transparent. On the other hand we recognize in these simple processes forms of language not separated by a break from our more complicated ones. We see that we can build up the complicated forms from the primitive ones by gradually adding new forms”.
- 7.
Rothbard (2009, p. 576) explains that von Mises did not use the word “model” because of its connotation of physicalist bias. Imaginary constructions are not like the models of engineering, because they contain imaginary elements that do not exist in reality but are mere tools for thinking and do not represent complete systems of parts.
- 8.
The statement is found in footnote number 4 on the cited page.
- 9.
This may be at least part of the explanation for why von Mises’ Praxeology has not been adopted in other fields than economics to any notable degree. It is noteworthy that von Mises’ student Rothbard makes extensive and systematic use of imaginary constructions in “Man, Economy, and State with Power and Market” he does not discuss what they are or how to use them. Moreover, his overriding concern is economic theory based on his ethics and not universal Praxeology.
- 10.
One reason why this methodology remains obscure but for the trained praxeologist is that von Mises uses it throughout his magnum opus “Human Action”, but does not actually discuss it in any detail until page 236 (von Mises 1996).
- 11.
von Mises states: “What we can “observe” is always only complex phenomena. What economic history, observation, or experience can tell us is facts like these: Over a definite period of the past the miner John in the coal mines of the X company in the village of Y earned p dollars for a working day of n hours. There is no way that would lead from the assemblage of such and similar data to any theory concerning the factors determining the height of wage rates” (von Mises 1962, p. 74).
- 12.
They especially involve hypothesizing the absence of some aspect of reality in order to deduce its role or effect. An example is using the hypothetical absence of an urge for satisfaction for the purpose of elucidating the fundamental category of felt uneasiness, i.e. that no dissatisfaction means no action. Another example is how time preference is elucidated through “an imaginary construction in which no distinction is made between satisfactions in periods of time equal in length but unequal with regard to their distance from the instant of action” (von Mises 1996, p. 237).
- 13.
On the other hand, von Mises’ well-known student Murray Rothbard is a notable critic of his teacher’s notion of value freedom (Block 2005; Gunning 2005a, b; Rothbard 1976). His main contention is based on a misunderstanding, as Rothbard (1976) asks, “how could von Mises know what advocates of the particular policy consider desirable?” As we have seen, however, von Mises simply assumes that most interventionists, not all, are after greater wealth and cooperation through the division of labor driven by consumer sovereignty. Moreover, there is the possibility that they state what their goal is explicitly. As for Rothbard’s objection to von Mises that “no one can decide upon any policy whatever unless he makes an ultimate ethical or value judgment,” this is of course true (Rothbard 1976). However, as we have also seen, von Mises is not concerned about evaluating goals per se, he proposes rather to evaluate policies in light of stated goals.
- 14.
Accordingly, von Mises’ admits that monopoly is harmful based on his principles; monopoly power contravenes the notions of the harmony of rightly understood interest since the monopolist is no longer strictly serving the consumer by optimizing the division of labor (von Mises 1996, pp. 271–272). He even expresses sympathy with the demand “to expropriate all private property and to redistribute it equally among all members of society” in an agricultural society where property is merely inherited (von Mises 1962, p. 113). This is unlike in a market economy where profits are reinvested in higher productivity of labor through competition for the betterment of consumers (von Mises 2010). Yet another point of difference von Mises has with some liberalists is that he dismisses anarchism, holding that “government is indispensable because men are not faultless” (von Mises 1962, pp. 98–101).
- 15.
von Mises (1996, p. 673) argues that the division of labor makes things cheaper, not more expensive, because with “the higher productivity of labor performed under the division of tasks, the supply of goods multiplies,” which again makes things cheaper for everyone and is thus in the interest of all. The power of this mechanism is such that “every man, even the humblest, obtains in one day more satisfactions than he could produce for himself in several centuries” (Bastiat 2001, p. 4). This realization regarding the division of labor is the theorem of the harmony of rightly understood interest, or long term interests, as opposed to those of the short term (von Mises 2007, p. 32). That is, the division of labor makes peaceful cooperation a selfish self-interest of the individual, because it makes one better off in the log-run than the short turn gains of robbery. It makes society the foremost means for an individual to attain his material aims (von Mises 1990b).
However, the theorem of the harmony of rightly understood interest is also connected to the notion of consumer sovereignty, or the idea that in a market society it is consumer demand that ultimately directs production activities (von Mises 1996, pp. 673–674). This is because profitable entrepreneurial initiative in employing factors of production depends entirely upon estimating consumer demands correctly. This means that with the exception of monopoly/oligopoly there is no conflict of interest between buyers and sellers.
- 16.
Friedman (1984) has expressed a similar view on the relationship between economics and interventionist goals, arguing that the difference between the scientific “what is” is in practice more or less equivalent to the normative “what ought to be,” because the notions of what “ought to be” are very often shared. Thus, disagreements on economic policy are mainly about predictions and not the sought ends. For example, underlying the debate about minimum wage is the “underlying consensus on the objective of achieving a ‘living wage’ for all”, thus the disagreement is on whether minimum wage legislation is helpful for achieving this. Similarly, expectations regarding the effects of "so-called ‘economies of scale’ account very largely for divergent views about the desirability or necessity of detailed government regulation of industry” (Friedman 1984).
- 17.
von Mises states that if those that resort to an intervention measure “think that the attainment of this goal is more important than the disadvantages brought about by the restriction—i.e. the curtailment in the quantity of material goods available for consumption—the recourse to restriction is justified from the point of view of their value judgments”. They incur costs and pay a price in order to get something that they value more than what they had to expend or to forego. Nobody, and certainly not the theorist, is in a position to argue with them about the propriety of their value judgments (von Mises 1996, pp. 755–756).
- 18.
von Mises calls this image the evenly rotating economy, which was described earlier.
- 19.
von Mises states: “Economics, in speaking of entrepreneurs, has in view not men, but a definite function. This function is not the particular feature of a special group or class of men; it is inherent in every action and burdens every actor. In embodying this function in an imaginary figure, we resort to a methodological makeshift. The term entrepreneur as used by catallactic theory means: acting man exclusively seen from the aspect of the uncertainty inherent in every action” (1996, p. 252–253).
In reality, however … “[u]nder a system based upon private ownership in the means of production, the scale of values is the outcome of the actions of every independent member of society. Everyone plays a twofold part in its establishment first as a consumer, secondly as producer. As consumer, he establishes the valuation of goods ready for consumption. As producer, he guides production-goods into those uses in which they yield the highest product” (von Mises 1951, p. 120).
- 20.
Although the entrepreneurial bidding process drives an economy towards equilibrium, it never reaches it. It is entrepreneurship that is the difference between an economy of robots and a dynamic growing one of human beings. Moreover, the above approach differs from that of the general equilibrium model by virtue of its emphasis on entrepreneurship; the existence of entrepreneurship means that there is no equilibrium (Gunning 1997a).
- 21.
von Mises (1996, p. 250) states in this regard: “The mathematical economist’s disregard dealing with the actions which, under the imaginary and unrealizable assumption that no further new data will emerge, are supposed to bring about the evenly rotating economy. They do not notice the individual speculator who aims not at the establishment of the evenly rotating economy but at profiting from an action which adjusts the conduct of affairs better to the attainment of the ends sought by acting, the best possible removal of uneasiness. They stress exclusively the imaginary state of equilibrium which the whole complex of all such actions would attain in the absence of any further change in the data. They describe this imaginary equilibrium by sets of simultaneous differential equations. They fail to recognize that the state of affairs they are dealing with is a state in which there is no longer any action but only a succession of events provoked by a mystical prime mover. They devote all their efforts to describing, in mathematical symbols, various “equilibria,” that is, states of rest and the absence of action. They deal with equilibrium as if it were a real entity and not a limiting notion, a mere mental tool. What they are doing is vain playing with mathematical symbols, a pastime not suited to convey any knowledge”.
- 22.
It has been mentioned earlier that profit and loss are subjective concepts that reflect the success or failure in becoming better off, and are as such present in all action, not only those reflecting monetary transactions (von Mises 2007, p. 210).
- 23.
von Mises states about the economic function of the entrepreneur: “The specific entrepreneurial function consists in determining the employment of the factors of production. The entrepreneur is the man who dedicates them to special purposes. In doing so he is driven solely by the selfish interest in making profits and in acquiring wealth. But he cannot evade the law of the market. He can succeed only by best serving the consumers. His profit depends on the approval of his conduct by the consumers” (von Mises 1996, pp. 290–291). In this way, entrepreneurs cause “the (prospective) means of production to be used to produce goods for the consumer” over time (Gunning 2001). They cause the division of labor. Moreover, by bids for factors of production they drive the price formations for all such factors. However, this process is ultimately driven by consumer goods prices which in turn are driven by subjective value judgments on the demand side (von Mises 1996, p. 332).
- 24.
von Mises (2008c) states: “In the capitalist system of society’s economic organization the entrepreneurs determine the course of production. In the performance of this function they are unconditionally and totally subject to the sovereignty of the buying public, the consumers. If they fail to produce in the cheapest and best possible way those commodities which the consumers are asking for most urgently, they suffer losses and are finally eliminated from their entrepreneurial position. Other men who know better how to serve the consumers replace them”.
- 25.
What is meant here is capitalist saving, for there are two types of saving in von Mises’ economics: plain saving and capitalist saving. The first is just the postponement of a fixed quantity of goods for consumption. The second is where a choice is made “between the immediate consumption of a quantity of goods and the later consumption either of a greater quantity or of goods which are fit to provide a satisfaction which—except for the difference in time—is valued more highly” (von Mises 1996, p. 486).
- 26.
This is assuming no inflation and no monopoly powers.
- 27.
Since an evenly rotating economy has no change, what is normally entrepreneurial work would be simply the algorithmic arrangement of resources for production. Similarly, capital would be provided at an unchanging rate of interest plus any unchanging inflation rate assumed.
- 28.
von Mises made an original contribution to the arguments against socialism beyond those based on the lack of incentives in the absence of private property (Rothbard 1991). He elucidated the calculation problem that a planned economy would invariably face in the absence of a real market.
- 29.
In fact, the evenly rotating economy used to picture a fully “planned” economy of automons is unachievable by socialism. This is because one would first need entrepreneurial bidding to reach such a hypothetical situation (von Mises 1996, p. 244). von Mises states: “When we think of the stationary society, we think of an economy in which all the factors of production are already used in such a way as, under the given conditions, to provide the maximum of the things which are demanded by consumers. That is to say, under stationary conditions there no longer exists a problem for economic calculation to solve. The essential function of economic calculation has by hypothesis already been performed” (von Mises 1951, p. 139).
- 30.
von Hayek’s argument serves to compliment and expand on an aspect of the argument of von Mises presented above in less technical terms (Boettke 2006).
- 31.
However, this rate is not equal to the gross interest rate in reality, because this rate also includes:
-
1.
Profit for dealing with risk and uncertainty. For example, “risks involved in moneylending do not affect the height of originary interest; they affect the entrepreneurial component included in the gross market rate”; (von Mises 1996, p. 541).
-
2.
A “price premium” for “future changes in purchasing power” which if correctly calculated would leave one with a neutral rate of interest (von Mises 1996, p. 542).
Gross market interest rates then, include originary interest, profit and a price premium (von Mises 1996, p. 537-546). However, the profit portion is bid down by entrepreneurs towards “the ratio which corresponds to that of originary interest” (von Mises 1996, 551).
-
1.
- 32.
von Mises (1996, p. 578) states: “The process of readjustment, even in the absence of any new credit expansion, is delayed by the psychological effects of disappointment and frustration. People are slow to free themselves from the self-deception of delusive prosperity. Businessmen try to continue unprofitable projects; they shut their eyes to an insight that hurts. The workers delay reducing their claims to the level required by the state of the market; they want, if possible, to avoid lowering their standard of living and changing their occupation and their dwelling place. People are the more discouraged the greater their optimism was in the days of the upswing. They have for the moment lost self-confidence and the spirit of enterprise to such an extent that they even fail to take advantage of good opportunities. But the worst is that people are incorrigible. After a few years they embark anew upon credit expansion, and the old story repeats itself”.
- 33.
With regard to the incorrigibility mentioned by von Mises above, Smith (1991) has demonstrated in laboratory experiments some of the psychological dynamics of the boom and bust cycle. He eloquently describes them as follows: “Some are puzzled by the failure of shares to trade at fundamental dividend value, and with the ‘panic buying’ they observe. Many report amazement at the speed with which a market crash can occur, and that they had expected to sell out ahead of the others when the crash came. Once the market turns, some are hesitant to sell, because they can’t bring themselves to cash out the capital loss, or because they hope for a recovery. Many report a reluctance to sell before the crash because they were ‘too greedy’. Somehow, the volatile behavior of the market was due to the other traders. Although they have no causal explanation of their experience (prices rise ‘without cause’) and their consensus forecasts never predict the crashes, their comments are consistent with the market observations, with a self-reinforcing expectations view of the boom, and with the tendency of the market crash to dividend value to take two or three periods to occur” (Smith 1991).
- 34.
Other explicit assumptions for the pure market are: no intervention foreign to the market itself, division of labor, private ownership, market exchange and a government that preserves the market system (von Mises 1996, p. 237–238).
- 35.
von Mises (1996, p. 655) himself recognizes the problem that “The laws concerning liability and indemnification for damages caused were and still are in some respects deficient … the right of property would entitle the proprietor to claim all the advantages which the good’s employment may generate on the one hand and would burden him with all the disadvantages resulting from its employment on the other hand. …. But if some of the consequences of his action are outside of the sphere of the benefits he is entitled to reap and of the drawbacks that are put to his debit, he will not bother in his planning about all the effects of his action”.
- 36.
von Mises’ concern with regard to the legal institution of joint-stock companies was not from the viewpoint of its viability in light of consumer sovereignty, but to refute the socialist argument that such companies are proof of the viability of socialist bureaucracy.
- 37.
Corrected from “front trouble and front risk”.
- 38.
von Hayek (1957, p. 116) states in this regard: “…little intellectual effort has been directed to the question in what way this legal framework [i.e. contractual law] should be modified to make competition more effective. The main field in which these problems arise and the one from which I can best illustrate my point is, of course, the law of corporations and particularly that concerning limited liability. I do not think that there can be much doubt that the particular form legislation has taken in this field has greatly assisted the growth of monopoly or that it was only because of special legislation conferring special rights-not so much to the corporations themselves as to those dealing with corporations-that size of enterprise has become an advantage beyond the point where it is justified by technological facts”.
- 39.
Such institutional problems are not well accounted for in von Mises’ model since he associates all risk bearing and allocation of the factors of production with the entrepreneur (von Mises 1996, pp. 290–291). Hence, it assumes a very tight relationship between responding to consumer demands “correctly” and the whip of profit and loss accountability for any deviance. However, when one separates the appraisal and factor employment role of the entrepreneur from that of full liability for decisions made, one could affect decision making dynamics substantially away from what pure consumer sovereignty in the market dictates.
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Tonsberg, T.A., Henderson, J.S. (2016). Methodological Procedures in Praxeology. In: Understanding Leadership in Complex Systems. Understanding Complex Systems. Springer, Cham. https://doi.org/10.1007/978-3-319-40445-5_11
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