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Wednesday, August 19, 2009

Human Action: The Treatise in Economics

“Next week we will discuss the master’s work.” So stated Dr. Hans Sennholz to close his graduate seminar during my junior year at Grove City College. I had owned a copy of Human Action since my freshman year, but the book was too daunting for me to really study it. I preferred to read Henry Hazlitt’s Economics in One Lesson or Ludwig von Mises’s Planning for Freedom, or Sennholz’s own The Age of Inflation. But I had read those works thoroughly. And by this time I had already taken a year-long history-of-thought course at Grove City, in which I read classics such as Adam Smith’s The Wealth of Nations, J. B. Say’s Treatise in Political Economy, and John Stuart Mill’s Principles of Political Economy. I also had read Mises’s Socialism and F. A. Hayek’s The Road to Serfdom.

Because I was a serious student of free-market economics, Sennholz invited me to join his “graduate seminar,” which met on Wednesday nights and read the classics. That year we read Carl Menger’s Principles and Investigations and Eugen von Böhm-Bawerk’s Capital and Interest. So on Sennholz’s orders I picked up my copy of Human Action and went to the library every night until I had read the book cover to cover. Thanks to my undergraduate mind and the speed with which I tried to absorb the material, I missed much more than I comprehended.

But what I did comprehend changed my life.

It was that experience more than any other that made me realize I wanted to be an economist–not just an advocate for the free market. A year later I applied, and was accepted, to law school, but decided to defer that and attend graduate school in economics instead. Studying economics in the way Mises described the discipline in Human Action seemed the appropriate path.

Over the next year I worked to clear up my misunderstandings of Mises by reading Murray Rothbard’s Man, Economy, and State and Percy Greaves’s Mises Made Easier. Then in the second semester of my senior year I reread Human Action for a senior project for Sennholz on the methodenstreit (the Austrians’ battle with the German Historical school over the legitimacy of economic theory) and the relationship between Mises and Max Weber.

A year later, when I started graduate school at George Mason University, Professor Don Lavoie impressed me when, in an undergraduate course, he held up Human Action and said to the students, “This is the greatest book ever written in economics. I love this book.” I understand what Lavoie meant. For the past 20 years I have had the good fortune to be able to use Human Action in at least one Ph.D. course every year.

No Substitute

To the American student of economics, Rothbard’s presentation in Man, Economy and State might be more straightforward than Human Action, and Israel Kirzner’s discussion in Competition and Entrepreneurship picks up more naturally than Human Action from where intermediate price theory leaves off. But to the serious student of Austrian economics, there is no substitute for a thorough reading of Human Action. Even Hayek’s Individualism and Economic Order is best read as a complement to Mises’s great work, certainly not as a substitute if you hope to understand not only Hayek’s thought and argument, but also how markets actually work and why government cannot effectively regulate, let alone plan, a modern economy.

Since it was first published, Mises’s great work has been misunderstood. It is not primarily a work in methodology; it simply lays out the methodological foundations at the beginning. It is not primarily a work about the failures of government and the superiority of the market economy, though that is a logical conclusion to draw from the work’s analysis of interventionism and socialism. It is not primarily a work in market theory and the price system, though it does place a priority on entrepreneurship and the quest for profit and the discipline of loss. It is not primarily a work dealing with money, capital, and interest, but it does devote considerable time to the coordination of economic activities through time and devotes considerable space to the nature of money and capital and the role played by interest. Finally, Human Action is not focused on the wages of workers or the pattern of international trade, but it does lay out the economic theory of factor pricing, the principle of comparative advantage in the allocation of labor, and the international division of labor and the gains from specialization and exchange.

Human Action is not exclusively any one of these things precisely because it is all of these and more. Mises wrote economics not as a series of specialized topics, but as an integrated whole grounded in the consistent and persistent study of the logic of purposive human action.

In my view there have been two great defining characteristics of economics since its birth as a discipline in the eighteenth century: the market economy’s self-regulating capacity (the invisible hand) and self-interest (rational choice). Self-regulation was the great discovery of the Schoolmen of Salamanca, the French Physiocrats, and the Scottish Enlightenment philosophers. The Austrian school of economics represents the modern refinement of this classical theory of spontaneous order. Mises inherited it from Smith, Say, Menger, and Böhm-Bawerk and developed the argument further. The unhampered market economy corrects itself through price adjustments; losses, which weed out imprudent decision makers; and profits for prudent decision makers. In the process the market directs scarce resources into wealth-creating activities and general prosperity. Through relative prices and profit-and-loss accounting, individuals’ exchanges and innovations align technology and resource availability with consumer preferences.

Coordination of Consumption and Production

One sign of Mises’s genius is that his demonstration of this harmonization was more thorough than any before him. He showed how purposive action within the institution of private property coordinates consumption desires and production plans according to the least-cost methods of production. The private-property market economy mobilizes individual initiative and enables people to rationally calculate the alternative uses of scarce resources. Consumers, buying and abstaining from buying, create profits and losses that guide business decisions and coordinate economic plans through time.

Mises’s work on rational economic calculation provided the decisive argument against socialism, but it also explains the foundation of the market order. The free market enables calculation, socialism makes it impossible, and interventionism distorts it. Without private property, freedom of contract, monetary stability, and fiscal responsibility, the process of rational economic calculation is thwarted.

Adam Smith articulated the idea of the invisible hand, but it was Mises who explained how the market economy actually works. Human Action is Mises’s fullest and finest statement of that explanation.

To put it bluntly, Human Action is the greatest work in economics in the twentieth century. It is the treatise in economics.

  • Peter Boettke is a Professor of Economics and Philosophy at George Mason University and director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center. He is a member of the FEE Faculty Network.