History of economic thought

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The History of economic thought is the history of theories concerning human action, and especially concerning the market process.

The Significance of the Advent Economic Science

To quote Ludwig von Mises:

Economics is the youngest of all sciences. In the last two hundred years, it is true, many new sciences have emerged from the disciplines familiar to the ancient Greeks. However, what happened here was merely that parts of knowledge which had already found their place in the complex of the old system of learning now became autonomous. The field of study was more nicely subdivided and treated with new methods; hitherto unnoticed provinces were discovered in it, and people began to see things from aspects different from those of their precursors. The field itself was not expanded. But economics opened to human science a domain previously inaccessible and never thought of. The discovery of a regularity in the sequence and interdependence of market phenomena went beyond the limits of the traditional system of learning. It conveyed knowledge which could be regarded neither as logic, mathematics, psychology, physics, nor biology.[1]

Systematic treatments of logic, psychology, and biology were given as early as the 4th century B.C.[2] The sciences of mathematics and physics are even older.[3] Since ancient times, writers have made fragmentary insights into praxeological and economic considerations. However, economics as a science did not emerge until Richard Cantillon's Essai Sur La Nature Du Commerce En Général (written in 1730, and published in 1755), which was the first unitary and systematic treatment of the market process.[4]


The approach taken with social philosophy before the advent of economic science was largely normative and utopian.[5] Yet, according to Mises,

"The discovery of the inescapable interdependence of market phenomena overthrew this opinion. Bewildered, people had to face a new view of society. They learned with stupefaction that there is another aspect from which human action might be viewed than that of good and bad, of fair and unfair, of just and unjust. In the course of social events there prevails a regularity of phenomena to which man must adjust his actions if he wishes to succeed. It is futile to approach social facts with the attitude of a censor who approves or disapproves from the point of view of quite arbitrary standards and subjective judgments of value. One must study the laws of human action and social cooperation as the physicist studies the laws of nature. Human action and social cooperation seen as the object of a science of given relations, no longer as a normative discipline of things that ought to be--this was a revolution of tremendous consequences for knowledge and philosophy as well as for social action."[5]

This "value-free" approach to the social sciences is known as "wertfreiheit".

The Classification of Economic Science

The methods with which the early economists discovered ineluctable laws in the realm of human affairs were fundamentally different from the methods that natural philosophers used to discover ineluctable laws in the realm of nature. While cognizant of the significance of their discoveries, the early economists did not realize how monumental their new methods were in the history of science.

In the new science everything seemed to be problematic. It was a stranger in the traditional system of knowledge; people were perplexed and did not know how to classify it and to assign it its proper place. But on the other hand they were convinced that the inclusion of economics in the catalogue of knowledge did not require a rearrangement or expansion of the total scheme. They considered their catalogue system complete. If economics did not fit into it, the fault could only rest with the unsatisfactory treatment that the economists applied to their problems.[6]

Nassau William Senior (1790-1864) was one of the earliest economists to spell out the distinctness of the method of economic science. Further progress was made on this front by Carl Menger[7] (1840-1921). The radical distinctions between economics and the other social sciences, and between the social sciences in general and the natural sciences, were finally fully elaborated by Ludwig von Mises[8].

The Limitations of Classical Political Economy

The "Classical Political Economy" tradition of Adam Smith and David Ricardo failed to formulate a sound theory of value and prices. They were unable to make the theoretical connection between market prices and consumer preferences. For this reason, consumers were left largely out of the picture. This limited the new method introduced by economic science to the treatment of people in their roles as producers. Thus economics was scorned as a useless science which only dealt with a fictional "Home Economicus" (a man only concerned with monetary profit). As Mises explains,

"For more than a hundred years, however, the effects of this radical change in the methods of reasoning were greatly restricted because people believed that they referred only to a narrow segment of the total field of human action, namely, to market phenomena. The classical economists met in the pursuit of their investigations an obstacle which they failed to remove, the apparent antinomy of value. Their theory of value was defective, and forced them to restrict the scope of their science. Until the late nineteenth century political economy remained a science of the "economic" aspects of human action, a theory of wealth and selfishness. It dealt with human action only to the extent that it is actuated by what was --very unsatisfactorily--described as the profit motive, and it asserted that there is in addition other human action whose treatment is the task of other disciplines. The transformation of thought which the classical economists had initiated was brought to its consummation only by modern subjectivist economics, which converted the theory of market prices into a general theory of human choice."[9]

By "modern subjectivist economics", Mises is referring to economics after the formulation of the Marginal Theory of Value, which, by explaining the link between market prices and consumer preferences, finally permitted the application of the methods introduced by economic science to the "whole man": man as consumer, as well as producer.


Mises goes on to write,

For a long time men failed to realize that the transition from the classical theory of value to the subjective theory of value was much more than the substitution of a more satisfactory theory of market exchange for a less satisfactory one. The general theory of choice and preference goes far beyond the horizon which encompassed the scope of economic problems as circumscribed by the economists from Cantillon, Hume, and Adam Smith down to John Stuart Mill. It is much more than merely a theory of the "economic side" of human endeavors and of man's striving for commodities and an improvement in his material well-being. It is the science of every kind of human action. Choosing determines all human decisions. In making his choice man chooses not only between various material things and services. All human values are offered for option. All ends and all means, both material and ideal issues, the sublime and the base, the noble and the ignoble, are ranged in a single row and subjected to a decision which picks out one thing and sets aside another. Nothing that men aim at or want to avoid remains outside of this arrangement into a unique scale of gradation and preference. The modern theory of value widens the scientific horizon and enlarges the field of economic studies. Out of the political economy of the classical school emerges the general theory of human action, praxeology. The economic or catallactic problems are embedded in a more general science, and can no longer be severed from this connection. No treatment of economic problems proper can avoid starting from acts of choice; economics becomes a part, although the hitherto best elaborated part, of a more universal science, praxeology.[10]

Mises himself was the first economist to explicitly delineate the "general theory of human choice" that subjective value theory made possible. He first began to do so in his "Epistemological Problems in Economic Science"(1933), in which he referred to the general theory of human choice as "sociology". He further advanced the theory in "Human Action" (1940), in which he referred to it as "praxeology".

See also


  1. Ludwig von Mises, "Introduction, 1. Economics and Praxeology", Human Action, online edition, referenced 2010-02-05.
  2. In Aristotle's Organon, De Anima, and biological works
  3. Systematic treatments of mathematics were given by the ancient Egyptians and Babylonians. Systematic treatments of physics were given by the pre-socratic philosophers.
  4. Murray N. Rothbard, "Richard Cantillon: The Founding Father of Modern Economics, Excerpted from "An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith" (1995), referenced 2010-02-07.
  5. 5.0 5.1 Ludwig von Mises"INTRODUCTION, 1. Economics and Praxeology", Human Action, online edition, reference 02-07-2011
  6. Mises, Ibid.
  7. "Untersuchungen uber die Methode der Sozialwissenschaften und der politischen Okonomie insbesondere (Investigations into the Method of the Social Sciences with Special Reference to Economics)"
  8. In "Epistemological Problems of Economics", "Human Action", "Theory and History", and "The Ultimate Foundation of Economic Science".
  9. Mises, ibid.
  10. Mises, ibid.