The great economist Ludwig von Mises showed that economics can be deduced from the axiom that human beings act: individuals consciously select ends and apply scarce means to achieve them. By examining the logical implications of that undeniable fact, one can come to understand the concepts value, cost, time preference, supply, demand, money, price, profit, interest, and so on.
In light of this, it is noteworthy that Mises was also an accomplished historian. And more than that, he was an important historiographer; that is, he was interested in the why and how of history. This theorist who is so identified with the a priori method in economics (deduction from an axiom) is equally committed to the conviction that knowledge of history and its methods is indispensable to understanding the world.
Mises expounded on both matters in his underappreciated book Theory and History: An Interpretation of Social and Economic Evolution, first published in 1957. He was intent on showing that the method of economics had to be different from the method of the natural sciences because we have intimate knowledge of human action from the "inside." Molecules and planets have no motivation or discretion in how they move, so scientists can only observe, amass data from homogeneous events, look for regularities, test hypotheses, and formulate laws subject to the discovery of new evidence. But human beings do have motivation and discretion; they act on the basis of values, ideas, knowledge, and expectations — none of which are rigidly determined the way a billiard ball's path is determined by its physical environment.
Furthermore, social "scientists" know this — because they are themselves acting individuals. So unlike in the natural sciences, anyone who studies economics has insider knowledge of the ultimate source of his subject: the acting individual. He brings to his discipline a familiarity no physicist can bring to his.
Where does history come in? The science of human action — which Mises called praxeology — describes the formal, logical structure of action: the implications of choosing A over B — no matter what those may be — and the dedication of means and time to its achievement.
Economics is not directly concerned with the specific ends chosen by particular individuals. That's a subject for history and what Mises called "thymology," or psychology in its non-experimental sense. Economics takes these as given and proceeds to analyze the unintended consequences of human action in the marketplace, the effects on prices, supply, and so on.
But Mises acknowledged that there is much more to know about the world than abstract economic laws and the broad particulars of "the economy." We also need to understand certain details of our present social lives — and to understand the present we must understand the past. Hence, the importance of studying history.
Many people profess an interest in history, but they often make pronouncements about things, especially government activities, in a historical vacuum. When this is called to their attention, they may suddenly turn disdainful of history, as though it frustrates their wishful thinking. The best example of this occurred in 1979 during the Islamic revolution in Iran. You'll recall that the U.S. embassy was seized and the occupants were held hostage for a long while.
When President Carter was asked if the event was related to the 1953 CIA-sponsored overthrow of Iran's elected secular prime minister in favor of the autocratic Shah, he scoffed, "That's ancient history."
Mises's chapters on history in Theory and History are refreshing in their uncompromising methodological individualism. Much of what he says is self-evident once it's stated, but it needs saying because so much history looks like an account of disembodied actions performed by abstractions such as nations, societies, and governments. We all need reminding that only individuals act, and they act on the basis of (explicit or implicit) ideas. As philosopher Gilbert Ryle put it in The Concept of Mind, "Men are not machines, not even ghost-ridden machines. They are men — a tautology which is sometimes worth remembering."
While individuals are each born into a specific context historically, culturally, and otherwise, their ideas are not determined mechanistically. Mises rejected the approach to history marked by environmental determinism. "Many ideas are the response elicited by the stimulus of a man's physical environment," Mises wrote "But the content of these ideas is not determined by the environment. To the same physical environment various individuals and groups of individuals respond in a different way." Likewise, he rejected Marx's economic determinism.
The ultimate reality for historians should be the acting individual. "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 derivatives. There is no answer to the question why Frederick II invaded Silesia except: because he was Frederick II. …[T]he genuine history of mankind is the history of ideas. It is ideas that distinguish man from all other beings. Ideas engender social institutions, political changes, technological methods of product, and all that is called economic conditions. 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."
In one fell swoop Mises debunked all philosophies of history, which presume arbitrarily that mankind's activities are destined achieve a preset goal. He also dismissed the view that history passes through predetermined stages.
All approaches to history that dispense with the purposeful individual are fatally flawed. But this does not mean that history is consciously designed by individuals. Mises wrote:
History is made by men. The conscious intentional actions of individuals, great and small, determine the course of events insofar as it is the result of the interaction of all men. But the historical process is not designed by individuals. It is the composite outcome of the intentional actions of all individuals. No man can plan history. All he can plan and try to put into effect is his own actions which, jointly with the actions of other men, constitute the historical process. The Pilgrim Fathers did not plan to found the United States.
There can be many reasons to study history, and one of them is to understand what's happening today. "There is no such thing as a nonhistorical analysis of the present state of affairs," Mises wrote. "The examination and description of the present are necessarily a historical account of the past ending with the instant just passed. The description of the present state of politics or of business is inevitably the narration of the events that have brought about the present state."
History and Economics
Do history and economics intersect? For Mises, one cannot understand history without understanding economics, or human action more generally.. Since studying actual human activity is not like studying the movement of molecules, one will end up in a hopeless morass if one tries to examine social phenomena without the theoretical lens provided by praxeology and economics. As Murray Rothbard wrote in his preface to Theory and History:
One example that Mises liked to use in his class to demonstrate the difference between two fundamental ways of approaching human behavior was in looking at Grand Central Station behavior during rush hour. The " objective" or "truly scientific" behaviorist, he pointed out, would observe the empirical events: e.g., people rushing back and forth, aimlessly at certain predictable times of day. And that is all he would know. But the true student of human action would start from the fact that all human behavior is purposive, and he would see the purpose is to get from home to the train to work in the morning, the opposite at night, etc. It is obvious which one would discover and know more about human behavior, and therefore which one would be the genuine "scientist."
Unfortunately, few historians understand economics. And that's a shame, because, as Mises pointed out, "Books on history, especially those on the history of one's own country, appeal more to the general reader than do tracts on economic policy. … Actually they [the historians] have merely popularized the teachings of pseudo economists…. The neo-mercantilist doctrines of the balance of payments and of the dollar shortage give an image of present-day world conditions very different from that provided by an examination of the situation from the point of view of modern subjectivist economics."
One cannot understand history without understanding economics, but one also cannot fully understand economic policy — or government policy in general — without understanding history. A proposal to set up a government bureau to, say, control the price of milk can be demolished by economic theory, but it can be demolished twice over by a historical perspective on the politician's and bureaucrat's penchant for expanding their power and for exploiting — and even fabricating — problems ("crises") to justify that expansion. (For details, see Robert Higgs's Crisis and Leviathan: Critical Episodes in the Growth of American Government.) A superficially benign government mission will look malignant in the light of the state's historical record. Even libertarians can go badly astray relying on pure a priori reasoning in judging government policy. While the a priori — in Rothbard's broadly and qualitatively empirical sense — is essential to economic understanding, when it comes to vigilance toward the state, the a priori is no substitute for historical knowledge.
As Mises wrote, "History looks backward into the past, but the lesson it teaches concerns things to come." One should avoid defending any government activity before consulting history.
First published at Foundation for Economic Education on August 3, 2007 and is reprinted with the kind permission of the author Sheldon Richman.
The views expressed are those of the author, and not necessarily those of the Nassau Institute (which has no corporate view), or its Advisers or Directors.