Ludwig von Mises and His Grand Tautology

December 27, 2010

by Mario Rizzo

There is a tradition of thought in economics that views the rationality of individual actions as non-falsifiable. There are variations in how this tradition might be justified. These do not concern us to any significant degree here.  For concreteness I shall examine the position of Ludwig von Mises (excerpted below) because of the purity and clarity of his argument.  

Economists want to abstract from any particular theory of human motivation. In particular, in the early years of the twentieth century, they were keen to distinguish between the subjective theory of value and hedonistic (pleasure-pain) theories associated with Bentham and later W.S. Jevons and F. Y. Edgeworth. So they wanted to say that people choose according to whatever standard they might consider important or on whatever deep basis psychologists might discover. This is not the concern of economists (or so Mises and others argued).

Therefore, when economists speak of people seeking to increase their well-being they mean that they do so in terms of whatever they consider important – pleasure, moral values, long-term interests, short-term fancy, and so forth. Economists also did not want to take a position on how carefully individuals choose what goals they want to attain. Thus, an individual increases his well-being, as he sees it, when he drinks away his paycheck as when he spends it on supporting his family.  

Suppose, however, an individual claims that he wants to support his family but uses means that are, objectively, not adequate to the end. Spending on drink does not accomplish the job.  So the individual, in this view, is simply mistaken but he is not “irrational.” He uses the best technology he knows (although he is foolish or stupid). But, more likely in this context, he is really aiming at some other goal. He wants perhaps to escape his problems in a quick and easy way even at the expense of his family.  

The root of the matter is that we have, by a methodological decision, no admissible way to determine a person’s goals except by reference to his actions. Economists infer the ends from the observed behavior. They also can infer the subjectively-perceived means or technology of attaining the ends from the behavior. At this point inferential picture is complete. Thus, we have entered into a tautology, as Mises readily admits. The effect is dramatic: Individuals are always acting to increase their wellbeing as they see it.  

This is perfectly reasonable if the purpose of the economist is simply to analyze (“predict”) behavior. The economist can alter the means-ends framework imputed to the agents until finds a plausible one that rationalizes (literally) the observed behavior. He can even build in error with respect to the means. The agents can make errors with regard to technology or expected market prices of inputs. Yet in a momentary equilibrium they are maximizing their putative objective functions. As such these functions consist simply in momentary objectives and do not necessarily reflect the agents’ conception of their own longer-run welfare.  

On the other hand, we cannot use this approach to do normative welfare economics. Consider if we did. We would be incapable of even saying that a person did not maximize his wellbeing as he saw it. Why is that not a good intellectual box? That is because the maximization statement follows definitionally from the assumption that the actor is engaged in action which, by Mises’s definition, means rational behavior. We have simply labeled the behavior rational at the outset: no argument, just an assumption. Thus, we are not saying anything about the subjective well-being of real-world individuals. We are simply drawing out the implications of what we have assumed about them.[1]  

It is important to recognize that Mises himself did not rely on the postulate of rationality as the basis of welfare economics (at least not entirely). Mises often judged government interventions in the market, for example, on the basis of how well their outcomes matched the goals of the interventionists. Thus the standard of evaluation is that of the social planner, and not of the economic agents themselves. The purpose of the attribution of frustrated goals to the agents is to show how the market might generate processes that offset or counteract the goals of the interveners. This, of course, is a positive use of the rationality postulate (Cf. Mises, Liberalism, 78 and elsewhere). 

(I should also note that some of Mises’s followers have not been so careful. They believe they have found the invincible welfare standard that “justifies” all voluntary action. Murray Rothbard is one example.)

In the extended quotation below I add italics to bring attention to the most important aspects of Mises’s argument.  

Ludwig von Mises, “The Task and Scope of the Science of Human Action,” Epistemological Problems of Economics (1933, this essay was probably written in the late 1920s), pp. 34-5.  

“Everything that we say about action is independent of the motives that cause it and of the goals toward which it strives in the individual case. It makes no difference whether action springs from altruistic or from egoistic motives, from a noble or from a base disposition; whether it is directed toward the attainment of materialistic or idealistic ends; whether it arises from exhaustive and painstaking deliberation or follows fleeting impulses and passions.  The laws of catallactics that economics expounds are valid for every exchange regardless of whether those involved in it  have acted wisely or unwisely or whether they were actuated by economic or noneconomic motives. The causes of action and the goals toward which it strives are data for the theory of action: upon their concrete configuration depends the course of action taken in the individual case, but the nature of action as such is not thereby affected.

These considerations have an evident bearing on the widespread tendency of the present age to appeal to the irrational. The concepts rational and irrational are not applicable to ends at all. Whoever wishes to pass judgment on ends may praise or condemn them as good or evil, fine or vulgar, etc. When the expressions “rational” and “irrational” are applied to the means employed for the attainment of an end, such a usage has significance only from the standpoint of a definite technology. However, the use of means other than those prescribed as “rational” by this technology can be accounted for in only two possible ways: either the “rational” means were not known to the actor, or he did not employ them because he wished to attain still other ends perhaps very foolish ones from the point of view of the observer. In neither of these two cases is one justified in speaking of “irrational” action.

Action is, by definition, always rational. One is unwarranted in calling goals of action irrational simply because they are not worth striving for from the point of view of one’s own valuations. Such a mode of expressions leads to gross misunderstandings. Instead of saying that irrationality plays a role in action, one should accustom oneself to saying merely: There are people who aim at different ends from those that I aim at, and people who employ different means from those I would employ in their situation.  (Emphases added) ” 


[1] If the Misesian wanted to say that certain behavior did not advance subjective welfare he would have to say that the individual’s behavior was not “action” but simply stimulus-response.  Modern psychology, however, recognizes that there are cases in between these two poles.

37 Responses to “Ludwig von Mises and His Grand Tautology”

  1. amv Says:

    Great post. If rationality describes the enitre class of acitivities, the notion of rationality becomes analytically useless. Only if it relates to a subclass of actions, rationality is able to discriminate between outcomes. The problem with Mises’s methodology is that it led him to turn economics into a list of empty ex-ante tautologies. Rationality is a point in case. Time preference is another, closely related notion: man always and by necessity acts; action is always and by necessity rational; time preference is rational and thus expressed in each action always and by necessity. This is VACUUM ECONOMICS.

  2. amv Says:

    oh … case in point, not point in case

  3. Mario Rizzo Says:

    I agree with you completely. Mises’s search for the absolutely certain foundations of economics led him astray. In many cases, it appears as if he is saying something substantative or empirical but he is really only drawing out the implications of how he has defined certain key terms.

    I think there is much in Mises’s work that is valuable and concerns the real world. But he makes these contributions when he strays from his own method.

    On the time preference issue, I remember Israel Kirzner admitting that it is “difficult” to see what Mises conception of time preference has to do with real world interest rates. Often Kirzner would not say that Mises was wrong or did not approach an issue productively — instead he would say Mises was “difficult” or “subtle.”

  4. Roger Koppl Says:

    Mario,

    You make good Misesian points that seem to be difficult for many scholars to really get. Praxeology is tautological because it is our language for describing human action. In this regard, he was way ahead of Lakatos and the idea of a “hard core.” It could be, however, that some other language of human action might be better for economics. You might think, for example, that an “objective” or “physical” language would be more “scientific.” At some point in the story, I think, one must deal with such issues.

    Mises said that we have not been able to bridge the gap between mind and matter so far. Thus, he does not close the door on reductionism. At the end of The Sensory Order, Hayek deploys his diagonal argument to show that we cannot use physical language to describe human action without loss of information. In this sense, it seems to be logically impossible to bridge the gap between mind and matter. We cannot bridge the gap even though it seems to be true that mind is “just” matter in motion, an emergent phenomenon that can be “reduced” to physical processes “in principle.” For more or less Cantorian or Goedelian reasons, you cannot do the reduction in detail and must therefore rely on praxeological categories to describe human action. Thus, it is kind of hard to see how you could just pitch praxeology altogether. But I don’t that conclusion quite closes off further discussion.

    Mises did not rely on natural science to work out the praxeological categories. Is it possible that the new sciences of mind such as evolutionary psychology and neuroscience will suggest the need to amend praxeology? In particular, praxeology, like other notions of economic rationality, seems to assume a unified consciousness. Neuroscience seems to be trashing that notion. Is it possible that we might have to amend praxeological categories to account for the internal contradictions of human cogntion?

  5. Mario Rizzo Says:

    Roger,

    “Is it possible that we might have to amend praxeological categories to account for the internal contradictions of human cogntion?”

    I think this is a (the?) key issue. I agree that we (actors and scientists) need subjective categories to understand the world. But so-called normative economics presents a problem. We can *understand* the person who drinks his paycheck away instead of supporting his family. But this understanding should not *in itself* be transformed into a welfare statement that we “need” to respect. (I believe some Misesians do this.)

    The long-standing problem is that economists and others misunderstand “welfare” or “normative” economics. Unless we can go beyond the tautology we cannot get to statements about well-being in a way that is meaningful.

  6. chidemkurdas Says:

    This view of rationality goes with optimization models– rational behavior can be represented as optimizing an objective function, whatever that might be for the topic at hand, while deviations from rational choice are messy and hard to model. Why Mises chose to accept the methodology as broadly applicable is a question. He did not have to. It might be useful in certain contexts but not useful for understanding behavior in general.

  7. amv Says:

    @ chidemkurdas,

    rationality in Mises’s approach and in ‘modern’ optimization frameworks differ. After all, rational choice discriminates against intransitive and incomplete preferences. Although it is hard (I think impossible) to test such rationality empirically, it focuses on a SUBclass of preferences and thus “says something”, at least analytically. This is not true for Mises’s treatment of rationality.

  8. Mario Rizzo Says:

    Again, I agree with “amv.”

  9. Troy Camplin Says:

    I think that we need to distinguish as Mises did between ends and means. If we know what one’s ends are, praxeology is supposed to be able to tell us what the means to achieve those ends are. Mises is not concerned with the extremes of behavior, but with what the typical person will do. They typical person will use rational means to achieve their ends, and those ends are variable and up for debate regarding desirability. Of course, suppose that one has an end in mind, but to get to that end, one has to achieve certain other ends. It is certainly possible that one can get those ends wrong and, thus, not achieve the ultimate end. The question is: does this come about because one is irrational or because one is misinformed? It seems to me that someone who is irrational would know what would achieve their ends, but who does things which go against what they know to be true. Who, other than someone who is truly mentally ill, does this? At the same time, I agree that there is something problematic in just assuming that one’s actions prove one’s goals; on the other hand, isn’t this in fact more often than not true? Especially when discussing economic behavior? If action is “the ego’s meaningful response to stimuli and to the conditions of its environment” (Human Action, 11), then we are restricted certainly to all that behavior which is meaningful, is a response, and to go back to earlier in the quote, aims “at ends and goals.” Not all action is meaningful, not all stimuli give responses, and not all behaviors aim at ends and goals. Further, many of our actions are habits and, so long as they work more or less, without too much trouble, it’s likely we will continue them. It’s not rational in the Cartesian/Continental European tradition of Reason, but it is rational in the Scottish Enlightenment sense of it. It gets all tied up in the complexities that is human decision making, including the emotional and instinctual substrata. But are these any less rational for being instinctually or emotionally founded? If we move away from Mises’ contention that only humans have action, we can see that even plants have the kind of action in the sense in which he typically uses it. The plant has a goal of being exposed to the light so photosynthesis can be maximized. It engages in actions which achieve that goal when it bends toward the light — which can include bending around objects. It’s a slower process to be sure, but it’s goal-oriented, and there is a purpose involved. Means and ends are used. And the proper means — asymmetrical growth in the stem — is used to accomplish those ends. If it fails the test of human action, it is only because he demands it be conscious. Of course, as we have learned more about animal cognition, we know that many if not most animals in fact engage in “human action” as Mises defines it. Is this a problem for his definition? I don’t think so. Animals in fact show a great deal more rationality (or at least clarity and single-mindedness) according to Mises’ definition of action than do humans, who can be easily distracted from their goals by other goals. An animal which acts irrationally is likely to get eaten or die of starvation. A human who acts irrationally is likely to be helped out by his fellow humans. This fact makes irrational behavior more likely, it seems.

    Of course, I say all this without having defined irrationality. Indeed, there has been a lot of generality in this argument. Can someone give examples of a regular person engaging in truly irrational behavior to achieve a given goal?

  10. Mario Rizzo Says:

    Troy,

    This is the crux of the issue: How do we know what a person’s ends are? If we simply impute his ends from his behavior we may develop an explanation that enables us to understand what he is doing. But then if we try to make welfare (wellbeing) conclusions on the basis of the imputed ends, we — not surprisingly — will find that he improved his wellbeing as he saw it. But this is entirely derived from the original assumption (imputation) of his ends. In reality, he might not have these imputed ends.

    Consider also: This approach doesn’t not explain why a person might choose voluntarily to constrain his behavior — say, hire somone to prevent him from drinking at a party. (I am assuming that this fellow has experience going to parties and drinking “too much.”) Are we to say simply that he changed his mind? Before he liked to drink: now his does not. Or can we say that he realized that he was not pursuing his own wellbeing? Clearly, our experience is that often the latter is the case.

    “Irrationality” can perhaps be defined in the terms of the Plato-Aristotle debate: knowing the better but doing the worse.

    Thus, beyond my original post, you can see there are *both* positive and “normative” or welfare issues here.

  11. Troy Camplin Says:

    I think one thing Mises was doing was answering those in government who said that their aims were this or that. His answer was: okay, if your aim is X, then this is what you have to do to achieve X. If, knowing this, you are still not doing what is necessary to achieve X, then we know that you have some other goal. Thus we might be able to determine what that goal is or what your true values are, since you are not pursuing the action necessary to achieve your stated goals. Might not political economy have been Mises’ ultimate goal?

    And of course one can then apply this to other individuals as well. If praxeology is indeed a science, as Mises claims, then he is simply trying to help us to understand what actions will help us to achieve our ends. (His comments on creative genius are helpful for creative types who think what they do is labor, for example — as I comment on over at Austrian Economics and Literature, linked above.) If we know what actions will help us to achieve our ends, and we still do not act according to what we state to be our ends, then it becomes obvious that our ends are other than what we claim. If we understand that, then we can see what a person is doing and advise them better than if we believe otherwise.

    Am I wrong to believe that Mises was trying to help us understand the difference between acting toward a (truly, in fact) chosen goal and acting toward a stated goal?

    How do I know what you want? Well, what are you doing? A lot of people don’t like to hear that they are in fact doing what they want to do, but isn’t that in fact the case more often than not?

    (I’m 145 pgs into Human Action, so I’m keen on having this conversation, as you can imagine.)

  12. amv Says:

    I’m happy to find myself in agreement with Mario Rizzo twice! (BTW, I use amv since my full name is just three clicks away).

  13. Mario Rizzo Says:

    Troy,

    To say if you know the correct means to your stated goal but do not use these means then you must be seeking something else *is to affirm that the individual is acting rationally*. If he knows the better he cannot really do the worse.

    But this puts rationality in the form of a maintained hypothesis or hard core or metaphysical proposition. What we assume is what we will deduce.

    I agree with you that people may say all manner of things are their goals (I want to lose weight, for example) but not really mean it. So to get a clearer picture we must go beyond the single action under investigation. How does a person’s eating compare with other actions he undertakes? He may indeed be conflicted, but not necessarily.

    To understand an action is to view it in a broader context of actions and constraints.

    But the key point, I think, is that it is not easy to know what people really want. In principle, they can know the better but do the worse. However, for the analyst or paternalist to find out what they really want and how to attain it may be impossible.

  14. Rafe Says:

    The terms reason and rationality carry a lot of baggage. Someone wrote a book describing 12 different uses of “rationality” in Weber and Weber himself articulated 4 forms for his special purpose. Under these circumstances it can help to reformulate the issue using different words, for example to think in terms of human action as problem-solving. So the question becomes, what problem is the person trying to solve, what are his plans and subsidiary questions are – why this particular solution, does it work, why that problem rather than some other one etc.

    But explaining intentional (planned, Mises-rational, problem-solving) actions is only half the story, the other half is the unintended consequences when you run into the limits (parameters) of action, the responses of other people, mistakes etc.

    Unless you are tying to develop a theory of everything like Talcott Parsons after he disappeared into the vortex of general systems theory, you have to abstract from the complexity and look at sub-systems, Menger was well aware of that, he looked at the cluster of human sciences, and identified economics as the one that was concerned with the laws that controlled (limited) economic actions.

    Welfare is another term with too many different meanings. It took a while before I realised that mathematical welfare economics has nothing to do with any kind of policy for helping the poor and the suffering which I though welfare policy is about.

  15. Roger Koppl Says:

    FWIW, Mario, I think symmetry gets you a lot. I think Morgenstern’s analysis of Holmes vs. Moriarty gets at something basic. As you know, I like the computability link, whereby we show that a best reply strategy in the Holmes/Moriarty game is not computable. Going Goedelian on symmetry helps, I think, because it kills the repost that some magic new math known only to us really smart folks solves all problems and lets us experts control everything and reshape the world. Once you show something is undecidable, then there is no exit; you’re stuck with the consequences of the symmetry between the would-be expert and the persons he wishes to “help.”

  16. Current Says:

    A couple of points…

    I generally agree with Mario, I think the aspect of Mises economics that he mentions doesn’t really make sense. But, Mises didn’t base his whole view on human welfare on that of acting men. In many places he invites the reader to consider the improvements that have happened in the lives of normal people because of the market economy. He invites the reader to look (albeit subjectively) at the results of trusting people to care for their own interests.

    Secondly, although Praxeology may not be very useful for economists here I still find it useful for “clearing the air” in discussions. Take discussions about interest for example. I’ve discussed things with amateur economists where they have given many forces involved in the interest rate. On closer examination though they’re all time-preference forces of one sort or other, or they’re related to inter-temporal preference or profit expectations. The problem with explaining this to people isn’t that they’re too far away from the subject, it’s the opposite, through their own financial planning they are too near. They’ve thought about their own investments according to some plan for their own life and they don’t see commonalities in their actions. This is where Mises ideas are useful, for pulling together the complexity of the everyday language of action and pointing out what it means. But, they’re not very useful for much else in economics.


  17. Mario’s post in very important and not limited to “Austrian” isues. He raises problems I have never resolved.

    Mario asks how we can know what another’s ends are. Answering that is crucial for welfare economics.

    I will answer a question with another question. Is there any way to know what another’s goals are? If economics cannot answer that question, is that a fault of economics? Is it asking for the impossible?

    Mises allowed that psychology might answer the question. I think he was mistaken, at least based thus far on that discipline’s evolution.

    Perhaps wlefare economics is not possible. That does not trouble me, but it would be useful to resolve the issue.

  18. Andreas Hoffmann Says:

    Nice post!

    When ends following from irrational means are realized by the actor the action becomes a (subjective) mistake? The problem is that a third person can hardly observe this subjective realization of the mistake but only the ends of an action. Therefore it is not clear whether an action was purposeful or not. In most cases they may be, in others not.

  19. Pietro M. Says:

    What a post, and what a thread! I’ll have to lecture on Mises in March and probably bring this thread with me to remember the real issues. Well, it is an undergrad lectures, so it’s better I avoid it.

    I have a lot to say I hope it’s worth saying, and I won’t probably be able to write anything which is shorter than ten pages on these issues. I’m trying.

  20. Pietro M. Says:

    Part #1 of the most boring comment in world’s history.

    I both agree with Mises and with this post: I see in fact no incompatibility. All the criticisms in this post and in the comments don’t seem critiques to me, because Mises explicitly said the same things in most of his writings. There are I think philological issues in understanding Mises’s perspective which need be considered, anyway.

    ORTHOGONALIZING vs ASSUMING AWAY

    If I see a roadblock in front of me, I can either change my route or assume the roadblock does not exist. Normative economics skips the problem of the impossibility of the rational foundation of ethics by assuming an objective normative way to make decisions among conflicting preferences. The homo oeconomicus model skips the problem of not having a reliable model of the cognitive processes of human beings by assuming perfect rationality.

    Now I see that Mises is criticized for not having fallen prey to these two fallacies. He built up his system in order to avoid assumptions about ethics and cognition. Without a reliable theory of ethics and of psychology, Mises succeeded in building up economic theory by ortogonalizing the three problems. The strength of Mises’s approach is really that it is compatible with cognitive psychology, it is compatible with any system of ethics, and this compatibility is built-in in his system thanks to the avoidance of fallacies such as those of welfare economics and objective rationality.

    I think that Vassei makes this mistake. When I read his paper on Mises I had this impression, but I forgot what it was about, I just remember the impression. It is as if the issues behind Mises’s philosophy were interpreted asking the wrong questions. I’m sorry for eventual misinterpretation. Anyway, what I said applies to Vassei’s first comment in this thread.

    RATIONALITY

    Mises doesn’t use any model of rationality. A model of rationality is outside the scope of praxeology as he defines it. He was not a psychologist and came to know of no psychological theories up to this task in his lifetime. I don’t know if we now have such a theory, but I doubt it. That’s why he “orthogonalized” the problem of individual rationality in his philosophical construction. (I’m an engineer, for me “orthogonal” means “independent”).

    There is a meaning of the term rationality that has been neglected: rationality in Mises doesn’t apply to the individual, but to the scientist: “rational” means “understandable”, “investigable”. In Mises’s times there were irrationalist philosophies to cope with. There are references to this throughout Mises’s writings. Irrationalists claimed that there was no way to approach the problems of the social science in a rational way. I saw traces of these issues in a book by Hans Morgenthau of the ’30s (he criticized these irrationalists, too, but I have no idea of who they were): it was probably a commmon approach in the German-speaking philosophical circles at the start of the XX century. This is just my working hypothesis. But Mises cared about rationality in this sense: to save the use of reason in the social sciences. If this appears trivial now is probably only because the irrationalists have been criticized away from contemporary literature.

    Of course Mises also had a subjective view of rationality which applied to individuals: he said that praxeology has nothing to do with the content of the notion of rationality. This is “orthogonalization”.

  21. Pietro M. Says:

    FALSIFICATION vs APRIORI

    There is no falsification in economics, except for trivial facts. Mises saw this clearly. The apriori comes to rescue economics from historicism and irrationalism. We can know something about markets even without being able to pierce the infinite complexity of real world markets. Apriorism is the method of the self-conscious radically ignorant.

    Before making the bold claim that this is no solution at all, that it is a “vacuum theory”, let’s apply the logical structure behind economics to an applied issue. This is exactly what any economist does: the apriori is the economic way of thinking.

    Let’s consider the purchase of SUVs in Russia during the oil bubble. Apriori theory and technological knowledge tell us that SUVs are complementary to fuel, that fuel is made out of oil, and that substitution effects make the demand for SUVs fall when oil prices rise. The last effect is pure logic: it’s just like saying that 2+2=4. However, the demand for SUVs grew. The reason is obvious: Russians sell oil. There is an income effect to consider. The income effect outweighted the substitution effect: that’s all. Pure economics tells us nothing about which “force” will win. Is it thus “vacuum economics”? Not at all. We have built the logic which enables us to correctly conceptualize the issue. We can now start to start to understand what’s going on. This is real knowledge about real facts, not a tautology. But it has no predictive power: it tells us nothing about what will happen. Mises in fact never cared about prediction.

    WERTFREIHEIT

    Some misesians are not wertfrei, and to the extent they are not, they are not misesians at all. Rothbard comes to my mind. Interpreting Mises in terms of normative welfare economics makes no justice of his philosophical view of the world. The majority of his theoretical achievements are descriptive: he never believed in any form of interpersonal comparison of value or natural rights.

    So, where’s the problem if the tautological – necessary tautological – misesian approach to founding economic theory does not enable us to make normative judgements?

    THEORY AND HISTORY

    No one has cited history so far. This is a mistake committed by Rothbard in his biased defense of Mises. And the very same mistake was made by Hayek in his critique of Mises. Mises’s epistemology is not about theory: it is about theory AND history. Mises defined the notion of theory in a way that enables economists to do economics without solving lots of philosophical and psychological issues, by jumping over the roadblocks. He never claimed this was a solution to all problems of applied economics, he did claim the contrary.

    NORMATIVE ECONOMICS

    Why don’t we simple do without it? Welfare economics is all about finding objective normative principles to aggregate subjective normative judgements, which is an impossible task.

    When I need to make a moral choice, I don’t open my linear algebra textbook, I know it can contribute nothing. I can read Hoffer or Mises only to the extent that they inform me about consequences, or affect my moral sense. They cannot solve my problems: I need to choose. I may hate to be human for this, but I cannot escape it.

    To conclude, all the substantive critiques to Mises’s approach I know are to be found in the opening chapters of Koppl’s book on Big Players, and I agree with them. In the end, I see almost nothing wrong in Mises, if properly read (i.e., without rothbardian eyeglasses), but there is a lot to add. That’s what Hayek did throughout his lifetime: working out the details to the misesian system, and bringing back some “history” inside “theory” by relaxing the overly rigid assumptions of the apriori method.

    PS I know I’m boring, but I agree with O’Driscoll as always. And with Koppl as almost always.

  22. Glen Says:

    I want to draw out the meaning of what amv said earlier: that rationality discriminates against intransitive and incomplete preferences.

    Setting aside informational concerns, rationality in economics has had two primary meanings: (a) consistency of means with ends, and (b) internal consistency of ends.

    The former was what concerned Mises. He was saying we could take ends as given, and simply inquire whether the means chosen are suitable to those ends. And as Mario says, Mises went further by assuming this rationality as an axiom. In a sense, he was asserting that there always exists an objective function (coordinated set of ends) that will rationalize the actions taken by a human being.

    But what about (b)? I don’t really see Mises addressing this question — although he wrote a lot, so maybe he does somewhere. Neoclassical econ assumes (b) by assuming completeness and transitivity. And behavioral econ challenges (b) by showing that people may act on internally inconsistent value scales — such as by responding differently to analytically identical presentations of the same decision problem (that is, framing).

    The behavioral challenge could present a problem for Mises’ positive project. Not necessarily an insurmountable problem — the Misesian approach could be understood as allowing frequent, even moment-to-moment, changes in an agent’s scale of values — but a problem nonetheless.

    In normative terms, however, exceptions to (b) pose a serious challenge to welfare economics, whether of the neoclassical or behavioral/paternalist variety. If people lack an internally consistent scale of vale, even intrapersonally, then we are left without any standard for welfare judgments (unless we abandon subjective value altogether). This is a major non sequiturin the behavioral/paternalist paradigm; you cannot argue against type (b) rationality while also claiming to improve welfare as measured by the agent’s subjective preferences.

  23. amv Says:

    Dear Pietro,

    I’m just finishing a paper on Hayek’s approach to rational choice, myopia, etc., making use of some more modern theories. I will also upload an improved version of my Mises paper. you’ll find them on SSRN in Feb 2011.

    (BTW, call me Arash, or Molavi, or Molavi Vasséi, or some combination thereof, yet please not Vasséi.:-))

  24. Current Says:

    To some extent I agree with Pietro.

    The normal way of thinking about welfare is to look at the micro scale. To judge whether a theoretical person’s welfare is improved by those objective normative principles Pietro is talking about. That’s when behavioural economics, the private mind, and limited rationality become important.

    Mises process is different. He looks at that area to provide the foundations of microeconomics, but not for welfare purposes. For welfare purposes he waits until he’s got to the end of examining the free market in general and then looks back at the whole system. He then condemns interventions not because of their effect on that overall system.

    Still, I’m not sure this really jumps over obstacles as efficiently as Pietro believes.


  25. [...] Ludwig von Mises and His Grand Tautology, by Mario Rizzo [...]

  26. Pietro M. Says:

    Arash:

    I’m always embarassed by three-word names, I never know if the second is a name or a surname.

    I’ll read the old paper again and look forward to reading this new one on Hayek.

  27. Pietro M. Says:

    Current:

    I’m not sure I agree with your agreement with me. :-)

    “Mises process is different. … For welfare purposes he waits until he’s got to the end of examining the free market in general and then looks back at the whole system. He then condemns interventions not because of their effect on that overall system.”

    Mises had two kinds of normative arguments.

    The former is a kind of immanent criticism which takes the form “you defend policy X because you desire an end Y and believe that X leads to Y. However, theory says X leads to non-Y, so you shall either change your policy X, or your aim Y. I think this is a great style of argument. It proves that although values may not be fully rational, they are always subject to rational analysis and reasonable discourse. This is the way I would like political debates done.

    The latter is a kind of “empirical” judgement on the ends of the “masses” of the type “everybody promises masses more bread, so masses crave for more bread, and the better policy or polity is the one which gives masses more bread”. I have doubts on this, it looks like too a simplistic anthropology.

    Hoffer said that everybody longs for self-respect, and if they can’t get it the use faith, pride and true-believerism as (poor) substitutes. I’m quite charmed by Hoffer, but I’m undecided on this issue. Maybe Mises was not too far away from understanding the “masses”. Probably in Italy it is true that masses don’t care for self-respect, but for safe and undemanding public jobs at other people’s expenses. I intuitively prefer Hoffer-type human beings.

    Neither of the two pseudo-normative arguments of Mises is a good substitute for a real welfare economics, but this problem is unsolvable, so this is really not a limitation. We can’t do much more than appealing to other people’s moral sense, analyzing the consequences of their ideas, and hope they are not too unreasonable.

  28. Allan Walstad Says:

    “Yet in a momentary equilibrium they are maximizing their putative objective functions. As such these functions consist simply in momentary objectives and do not necessarily reflect the agents’ conception of their own longer-run welfare.”

    Right, except for that word “maximizing” which implies a far more comprehensive weighing of alternative actions and their imagined effects than is likely often to be the case, and which irresistibly leads down the path of barren mathematization. I would just stick with the posit that individuals make choices in pursuit of goals.

    It is quite possible, and altogether common, for individuals to pursue short-term goals that are incompatible with their long-term goals but which, in a given moment, are more attractive. Indeed, we know this and can act in advance to avoid temptation or place the short-term seductive goal out of reach — as Ulysses did by plugging the ears of his men and being tied to the ship’s mast. In another instance, one might pursue the immediately attractive goal of drunken oblivion with the choice of whiskey (because one prefers the taste) or vodka (because it produces less of a hangover). Praxeological thinking handles such cases just fine.

    “The root of the matter is that we have, by a methodological decision, no admissible way to determine a person’s goals except by reference to his actions.”

    So, we make assumptions in order to construct ordinary-reasoning models of human action in various circumstances. To the extent that we’ve made the right assumptions regarding goals, knowledge, available methods, etc., our model will conform to what we observe about the world. Compare with physics. We do not have direct access to the ultimate internal reality of atoms and subatomic particles. We only have the results of various experiments — flashes of light, readings on dials, etc. We construct models of atoms and particles and use them to try to understand or predict our observations. The difference with economics is that atoms and particles apparently have quite fixed properties expressible once and for all in terms of a relatively few mathematical parameters and relations; people are unique, highly complex and changing individuals.

    “Action is, by definition, always rational.”

    Or at least, we can define it that way for the purposes of praxeology. But if we find ourselves getting into too many unproductive arguments that turn on this definition, we can re-phrase to avoid that word.

    Thanks to Pietro M. for the incisive comments.

  29. Troy Camplin Says:

    I think that the bottom line is that a scientist studying human action can only determine goals and values from actions. The scientist must make the assumption that the person’s actions are rational in regards to their actions, which are aiming at some goal, which we can determine only by observing those actions. This is the best that the social scientist can do, since one cannot get into the heads of those one is studying. Further, since goals and values change, one cannot rely on questionaires (and such questioning can, of course, change one’s goals and values, so such intervention may change what the person is doing). So the social scientist studying human behavior can only rely on understanding human action and the fact that all human action aims toward certain goals, which are based on certain values. Understood this way, we can perhaps get out of it being a tautology.

  30. Pietro M. Says:

    You’re welcome

  31. Gene Callahan Says:

    “Consider also: This approach doesn’t not explain why a person might choose voluntarily to constrain his behavior — say, hire somone to prevent him from drinking at a party.”

    Yes, Mario, here we should look to Jon Elster’s _Ulysses Unbound_.

  32. Current Says:

    Pietro M,

    > I’m not sure I agree with your agreement with me. :-)

    I’m not so sure about it myself either :)

    > Mises had two kinds of normative arguments.
    >
    > The former is a kind of immanent criticism which takes the form “you
    > defend policy X because you desire an end Y and believe that X leads
    > to Y. However, theory says X leads to non-Y, so you shall either
    > change your policy X, or your aim Y.” I think this is a great style
    > of argument. It proves that although values may not be fully
    > rational, they are always subject to rational analysis and
    > reasonable discourse. This is the way I would like political debates
    > done.

    Yes, I agree with you there, I should have mentioned that. I think that that type of argument is useful too and useful for side-stepping the problems of ethics.

    > The latter is a kind of “empirical” judgement on the ends of the
    > “masses” of the type “everybody promises masses more bread, so
    > masses crave for more bread, and the better policy or polity is the
    > one which gives masses more bread”. I have doubts on this, it looks
    > like too a simplistic anthropology.

    It’s more those ones which I’m talking about. I have problems with this sort of simple utilitarianism too. I can’t find a good solution to them though.

    > Hoffer said that everybody longs for self-respect, and if they can’t
    > get it the use faith, pride and true-believerism as (poor)
    > substitutes. I’m quite charmed by Hoffer, but I’m undecided on this
    > issue.

    Many psychologists have emphasised the importance of self-respect. I don’t think that it’s psychological importance rules out the importance of material factors too though. It only becomes important if we have reasons to believe that some form of political organization is better at fostering self-respect, or other forms of positive psychology, than others without there being any important down-side.

    Incidentally, Hoffer’s view sounds very like Nietzche’s.

    > Maybe Mises was not too far away from understanding the
    > “masses”. Probably in Italy it is true that masses don’t care for
    > self-respect, but for safe and undemanding public jobs at other
    > people’s expenses. I intuitively prefer Hoffer-type human beings.

    I see your point. I’m sure that what Mises would say about this is that the italian people don’t have a choice they can’t all live off others.

    But, I understand what you’re pointing to. Libertarians are uneasy with non-assertive forms of enjoyment, with some forms that don’t involve doing or making. I’m not really so worried about that though. I don’t think that in the long run there is any sort of socialistic civilisation possible that allows this sort of enjoyment to continue for the masses forever or even for very long. I think challenges are part of reality. Although we may be able to hypothesis about civilisations where everyone lies about all day smoking joints in reality they can’t exist without major consequences.

    I think this is important because in some ways we don’t have to be so strict about our view of utilitarianism. We don’t have to rule out this or that form of enjoyment because they could never really dominate.

    Mill thought it was better to be Socrates sad than a pig happy. Mill was s bit of an intellectual toff in my opinion. His fear though was that there could be a way of society being stupid and happy. But economics in a finite world shows this is very doubtful.

    > Neither of the two pseudo-normative arguments of Mises is a good
    > substitute for a real welfare economics, but this problem is
    > unsolvable, so this is really not a limitation. We can’t do much
    > more than appealing to other people’s moral sense, analyzing the
    > consequences of their ideas, and hope they are not too unreasonable.

    I’m not convinced that “real welfare economics” can’t be done at some level. But, you’re right, no perfect or absolute form of it can ever be possible.

  33. Greg Says:

    So far, the thread mostly concerns the consequences and difficulties of this tautology for welfare economics. However, it seems to me that with respect to positive economics, there are also some difficulties, which require to ask what kind of “explanation” and “analysis” can be given with this concept of rationality (not only within the Misean picture but in general as Mises is not the last who makes use of this tautology).
    Mario Rizzo writes:
    Entering a tautology “is perfectly reasonable if the purpose of the economist is simply to analyze (“predict”) behavior. The economist can alter the means-ends framework imputed to the agents until finds a plausible one that rationalizes (literally) the observed behavior. He can even build in error with respect to the means. The agents can make errors with regard to technology or expected market prices of inputs. Yet in a momentary equilibrium they are maximizing their putative objective functions. As such these functions consist simply in momentary objectives and do not necessarily reflect the agents’ conception of their own longer-run welfare”.
    I see the point when one wants to explain ex post the behavior by an agent by providing a rationalization of the behavior. Although one could argue that providing a rationalization of a kind of behavior is something very different from providing an adequate explanation of the behavior in the sense of providing a causal relationship between cause of behavior and the behavior that can be observed (depends on what one takes as an adequate explanation), I don’t see how the use of this tautology can be reasonable for an economist who aims at analyzing or predicting behavior. As was posted before, the analysis is based purely on speculation as we cannot observe causes, but just ascribe to the agent some sort of preferences that, again, might help to rationalize behavior. But predicting behavior is not possible as we have to know the preferences of the agent in order to predict what he is going to do, that in turn are only revealed by the behavior we were aiming at predicting in the first place. It seems that we either have difficulties with making any predictions or we have to accept the assumption of stable preferences. Both ways seem thus to raise the question when positive economics need to be based on more realistic behavioral foundations.


  34. [...] perspectives on topics which we take for granted as decided—a perfect example is Rizzo’s recent criticism of Mises’ action axiom that forms the kernel of praxeological economic [...]


  35. [...] of the theory of value and choice. As readers of this blog will know, I have been critical of Ludwig von Mises’s approach to rationality which makes irrational action impossible, by definition. Behavioral economics is causing us all (or [...]


  36. [...] is not the only place where I agree with Rizzo on Mises. Here is another example. But apparently Rizzo goes against the Party Line. Oh [...]

  37. Alex Kalish Says:

    In regards to mises not explaining why someone might hire another to prevent him/her from drinking later in the night…well it does. (my apology if I am repeating anything I couldn’t sit through the entire thread)

    It is a basic problem of misinformation. Let us assume for bob that doing well on his exam is a means to an end of being successful. Now let us also say that having a good social network is also a means to an end of being successful. Bob’s parents have always told him grades are the most important factor in being successful, however this might exaggerate the true calculation of how important this actually is to bob’s version of success. We are constantly adjusting these values in our head. When bob is planning to have his friend thwart his drinking adventures he is without the “situational knowledge” of being at the party and actually being informed as to what it feels like to be around friends and be the one guy not drinking. You can estimate how difficult the choice will be before hand and he did by calling his friend to make sure he comes and prevents bob from drinking, but you cannot fully grasp the knowledge firsthand. The friend is basically bob spending resources to resupply vital information at a later time. The annoying voice of the friend can remind him of the pains of talking to his parents about sub par grades. When bob gets to the party he is confronted with the choice of using the means of a social network or good grades to reach his end goals (i.e. trying not to get ostracized by friends while keeping grades high). Maybe having friends keeps him happy while he is in school. There is no way for us to know how truly important studying is when we are with friends, nor how important socializing is when we are studying if only one choice is marginally better with information being the deciding factor. His information about either of the two means will change in every situation but his ultimate goal remains the same. The point is that multiple means can lead to multiple ends but in the end we do what we think will reach that ultimate end goal for us. There is no such thing as knowing better but doing worse. There is only thinking one knows better when one is actually misinformed.

    Either way… still no way an analysis figures it out if Bob has this much trouble.


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