Commentary on Political Economy

Sunday 15 November 2015

Carl Menger's 'Empirical-Realistic' Economic Methodology

Avant-Propos on The State of Europe:

This piece on Carl Menger once again in its broad outline wishes to focus on the "impotence" of the European State in the face of the all-out onslaught of Islamist terrorism. Just as Menger starts with "the individual", so does the European liberal-capitalist State begin first and foremost with the "rights" of the "individual", where individual "liberty" comes well before the "fraternity" that, in any case, can be founded only on the vaguest bourgeois notion of "equality" before the (bourgeois) law. The powerlessness of the European "res publica" founded on the possessive individualism of capitalist enterprise and markets was already evident from the slogan of the French Revolution.

To repeat what we have said here too many times already - a point made by Hegel in the Philosophy of History by reference to the Roman State - a State that is founded on the protection of the private rights of individuals, on property, is a contractual State - one that will never be able to protect its population from external attack. To descend to the absolutely banal, such a State is one in which when the very existence of its community is threatened, all that can be accomplished are fashion parades on the Champs Elysees or a bathetic rendition of "La Vie en Rose" by Madonna, or else the depositing of a funeral wreath at the Bataclan by Bono and his band! A bientot, mes amis!

“All things are subject to the law of cause and effect. This great principle knows no exception.” (Carl Menger, Principles of Economics, p.1.)

Menger’s key distinction between the individual and the general – from the Untersuchungen to the Irrthumer – is aimed at the power of theory to abstract from “concrete phenomena” to “phenomenal forms”, conkreten Erscheinungen and Erscheinungs-formen. Here again is the Kantian dichotomy between intuition and categories which is the origin of the Lukacsian “antinomies of bourgeois thought”. What Menger never explains is why the concrete phenomenon should start from the individual intended as “a single human being” as the foundation of “the science of political economy” rather than, say, from a community or a class – because the very notion of “individual” contains already a discrete “choice” of category that will determine the content of the “phenomenal forms”. Far from being a “scientific” foundation, the “choice” of the single human being as the epistemological foundation or “concrete phenomenon” or “individual” as the foundation for the “general”, as the concrete basis from which abstract laws of economics are to be derived, is indeed a wholly partial and unfounded one – again, from a “scientific” or “objective” perspective.

"In contrast to the absolutism of theory," says Knies,39 "the historical

conception of political economy is based on the following principle. The

theory of political economy is also a result of historical development just

as economic conditions of life are. It grows, in living connection with the

total organism of a human and ethno-historical period, with and out of

the conditions of time, of space, of nationality. It exists together with

them and continues preparing for progressive development. It has its

line of argument in the historical life of the nations, and must attribute to

its results the character of historical solutions. Too, it can present general

laws in the general part of economics in no other way than as historical

explication and progressive manifestation of the truth. It can at every

stage present itself only as the generalization of the truths recognized up

39 Knies, Politische Oekonomie nach geschichtlicher Methode (1853), p. 19 and

(1882), p. 24.

116 ] BOOK TWO

to this definite point of development, and cannot be declared absolutely

self-contained according to sum or formulation. Furthermore, the absolutism

of the theory, where it has obtained validity at one stage of historical

development presents itself only as a child of this time and designates

a definite stage in the historical development of political economy."

The error which is the basis of the above conception of the nature of

the historical orientation of research in the field of theoretical economics

is clear. The individual phases of development of our science can be

understood historically, to be sure, only in connection with the spatial

and temporal conditions from which they have emerged. Or in other

words: a literary history of our science with a correct comprehension of

its (historical!) task must not overlook the connection between the individual

phases of its development and spatial and temporal conditions.

This is, however, a postulate of every literary history, even one of the

exact natural sciences, of chemistry and physics, indeed, of any writing

of history in general. However, it has no immediate relationship at all to

those postulates of research which we have called the historical point of

view in theoretical economics (Le., retaining the fact of the development

of economic phenomena in the investigation of the general nature and the

general connection of the laws of economy).

The historical development of a science, argues Menger here, must be distinguished from the content of its scientific advance: whereas the former is doubtless affected by ideographic or idiosyncratic factors, the latter cannot be so affected by epistemological definition – because what is “scientific” cannot as such be determined by idiosyncratic or “singular” factors. But here Menger clearly misunderstands and so misrepresents the far more incisive point that Knies was making in the quotation cited by Menger above. Knies is saying that the “theory” of social reality and the social “reality” itself are effectively one and the same thing in the sense that, first, our theory of reality is limited by our present historical conditions, and second and most important, the factors that condition our scientific search and discovery of “reality”, whether physical or social, are the same ones that guide our theoretical understanding of this “reality”. The fact that this “reality” is never “perfectly” or completely understood is not due to some failure in our research but to the fact that our scientific research into “reality” is reality itself! Reality is our activity! Vivo ergo cogito, as Nietzsche instructed us!

Menger’s confusion of these elementary matters is quite evident in this passage as is also the causational or aetiological approach to “the exact theory of political economy”:

Among human efforts those which are aimed at the anticipation and

provision of material (economic) needs are by far the most common and

most important. In the same way, among human impulses that which

impels each individual to strive for his well-being is by far the most common

and most powerful. A theory which would teach us to what crystallizations

of human activity and what forms of human phenomena action

oriented to the provision of material needs leads, on the assumption of

the free play of that powerful economic impulse, uninfluenced by other

impulses and other considerations (particularly error or ignorance); a

theory, especially, which would teach us what quantitative effects would

be produced by a definite quantity of the influence in question: such a

theory simply must provide us with a certain understanding. It cannot

provide understanding of human phenomena in their totality or of a concrete

portion thereof, but it can provide understanding of one of the most

important sides of human life. “The exact theory of political economy" is

a theory of this kind, a theory which teaches us to follow and understand

in an exact way the manifestations of human self-interest in the efforts of

economic humans aimed at the provision of their material needs. (Investigations, p.87.)


And Helvetius, Mandeville,

and A. Smith knew just as well as any adherent of the historical school of

German economics that self-interest does not exclusively influence the

phenomena of human life. If the last of these had only written his own

theory of public spirit! What distinguishes him and his school from our

historians is the fact that he neither confused the history of economy with

its theory nor even followed one-sidedly that orientation of research

which I designated above with the expression empirical-realistic. Nor,

finally, did he become a victim of the misunderstanding of seeing in theoretical

investigations conducted from the point of view of the free play of

human self-interest uninfluenced by other powers the acknowledgement

of the "dogma" of human self-interest as the only actual mainspring of

human actions. (p.88)

Menger’s “empirical-realistic” method presumes that there is an under-lying (literally, sub-stantial) reality that scientific activity actually dis-covers or un-covers or researches pro-gressively over time. But this notion of Progress is extremely fatuous in any real epistemological sense because what we “discover” as we proceed with scientific research is that this research as activity - and not any under-lying, essential “reality” - is the real essence of science! The insuperable problem with Menger’s specific argument is, of course, that it is quite impossible to identify “individual self-interest” in any way whatsoever, and certainly not in the “quantitative” sense that he clearly intends – as a determinant of market prices, still less as a determinant of value. The problem is not that Adam Smith or whoever failed to distinguish between self-interest and other human interests; the problem is that it is impossible to make such a distinction - and therefore their attempts to put economic inquiry on solid “scientific” and non-political or non-ethical grounds were doomed from the start! The distinction between “positive” and “normative” proves once again to be most elusive for bourgeois science.

Indeed, Menger is so confused about these conceptual relations that he is forced to defend his isolation of the single human being as the “individual” of economic theory by presenting it as the ready-made “individual concrete phenomenon” on which the “phenomenic forms” of economic theory” are based! This is clearly a circuitous definition in which the “individual” as against the “singular” is what lends itself to theorizing through the “typical” and, vice versa, the typical is what is yielded by the theoretical analysis of the individual! The two concepts – the individual and the typical – hold each other up like two drunken sailors leaning against a lamp-post!

Menger fails to identify to any degree whatsoever what makes an individual a concrete phenomenon and what makes it only a “singular phenomenon”. Similarly, he makes us none the wiser about the distinction between individual and general, concrete phenomenon and phenomenic forms. It is quite obvious in the passage below that Menger bases his distinctions on vague notions of “history” and “theory”. But we cannot identify this difference if we simply define “individual” and “general” or “typical” or “form” with “theory”, and “singular” and “concrete phenomenon” with “history”. Indeed, as this long passage illustrates quite conclusively, Menger seems to think that a simple distinction between singular and collective, on one hand, and concrete phenomenon or individual and typical on the other is sufficient to clarify his overall methodological aim of isolating the general from the individual.

2 See Appendix I: "The Nature of National Economy." 3 The "individual" is by no means to be confused with the "singular," or, what is the same thing, individual phenomena are by no means to be confused with singular phenomena. For the opposite of "individual" is "generaL" whereas the opposite of a "singular phenomenon" is the "collective phenomenon." A definite nation, a definite state, a concrete economy, an association, a community, etc., are examples of individual phenomena, but by no means of singular phenomena (but of collective phenomena instead); whereas the phenomenal forms of the commodity, of the use value, of the entrepreneur, etc., are indeed general, but not collective phenomena. The fact that the historical sciences of economy represent the individual phenomena of the latter by no means excludes their making us aware of these from the collective point of view.

Menger is confusedly aware of this, which is why he hastens to distinguish between “single” and “collective” phenomena – again to stress that “individual” does not mean “single” as distinct from “collective” – that, in other words, the scientific foundation of political economy cannot be purely numerical. But if “individual” does not mean “single”, if it is to mean, as Menger intends, “concrete phenomenon”, in what way can the single individual with which he starts his “science” be or represent the “concrete phenomenon” on which the phenomenic forms of “the exact theory of political economy” are to be erected?

This is precisely the error into which Menger has fallen. For, in selecting the single human being as the theoretical basis or “individual” from which his “general” is to be derived, he has failed to specify what makes a single human being “individual” rather than just “singular”! The only factor that he can identify is “human self-interest”. But any student of human history and human affairs should know that “human self-interest” is simply impossible to define and to theorise for “economic” purposes! Furthermore, Menger simply assumes, quite unjustifiably, that human “material needs” are ipso facto “economic”: but this assumption is entirely wrong! If by “economic” we mean “exchange of goods by different legal owners”, it is clear that this is both practically and historically a much narrower area of “human material needs” and of human activity. And this is what Knies was indicating in the quotation above.

Individualism presupposes inter-subjectivity and ownership, and both presuppose a social definition of Value, - which is consequently why “subjective value” is an oxymoron. If you asked Menger what makes self-interest “economic”, he would say that it is “material needs”. But material needs are not and cannot be confined to “individuals” because it is quite simply impossible to parcel out “social needs” into “individual needs” just as it is impossible to dissect social labour into “individual labours”!

If you asked Menger - and all bourgeois economists -, what determines market prices, he would say it is self-interest and specifically “economic” self-interest. But then, if you asked him what measures self-interest, he would say that it is market prices! The identification and measurement of “self-interest”, at least in a causative or aetiological and then even axiological sense (in terms of the ethical claim of producers to products) is the “anthropological” conundrum with which Menger struggled most of his later life: his burgeoning yet fruitless studies in ethnography and his preoccupation with the theory of money truly expose this “desperation” in his theoretical quest, as Hayek attests:

But his interests and the scope of the proposed work continued to expand to wider and wider circles. He found it necessary to go far in the study of other disciplines. Philosophy, psychology and ethnography claimed more and more of his time, and the publication of the work was again and again postponed. In 1903 he went so far as to resign from his chair at the comparatively early age of 63 in order to be able to devote himself entirely to his work, Hayek, “Carl Menger”, Intro. to Principles, p.32)

The normal function of organisms is conditioned by the function

of their parts (organs), and these in turn are conditioned

by the combination of the parts to form a higher unit, or by

the normal function of the other organs.-A similar observation

about social phenomena.-Organisms exhibit a purposefulness

of their parts in respect to the function of the whole

unit, a purposefulness which is not the result of human calculation,

however.-Analogous observation about social phenomena.-

The idea of an anatomical-physiological orientation

of research in the realm of the social sciences results as a

methodological consequence of these analogies between social

structures and natural organisms. (Headings to Part 3 of ‘Investigations’)

Schmoller1 retorted in a polemical form which was necessitated by the occasion, but as regards the subject-matter his approach was by no means simply a negative one. Already at this time he recognized not only that some of Menger's critical observations were justified but also how essentially similar the causal nexus in social science and natural science is; he also described the explanation of social phenomena in the form of cause and effect and in the form of laws—for him at this time both coincided—as the aim of scientific effort. Indeed we find even the far-reaching proposition that all perfect science is 'deductive', that is, that the state of ideal perfection is only reached when it has become possible to explain concrete phenomena completely with the help of theoretical premises. This proposition implies the acknowledgment that such a state of the science is possible in principle—even if in actual fact it


should remain unattainable for us. It also implies a complete rejection of the specifically historical belief in the 'incalculable’ and essentially 'irrational' nature of social events.

The aim of all “scientific activity”, of what Nietzsche called with awesome perspicacity “the will to Truth”, is to arrive at the total “deducibility” of life: “that is, that state of ideal perfection where it becomes possible to explain concrete phenomena completely with the help of theoretical premises”. To explain….and, most important, to predict! Schumpeter meaningfully leaves out the necessary corollary to “the state of ideal perfection” that scientific activity is truly aimed at – not least in the field of “economic science”. The true aim of scientific truth is to remove the normative sphere from human action. Either science is “perfect” and impervious to the sphere of choice and ethics – to values -, or else it is imperfect and cannot be “science” at all! If science is perfect deduction or calculation, no room can be left for history in the field of science. This is precisely what Schumpeter says in the quotation above: This “implies a complete rejection of the specifically historical belief in the ‘incalculable’ and essentially ‘irrational’ nature of social events”.

For it makes no sense to think that an individual’s behavior is “idio-syncratic” – meaning “irrational” – whereas the behavior of many individuals becomes more “rational” by reason of the larger numbers. It makes even less sense to associate “irrationality” or “idiosyncrasy” with “freedom”. These are fallacies into which the Old Historical School very easily fell, only to be attacked by the Historical School of Law (Savigny, Jhering) even before Weber (Roscher und Knies). Indeed, as Weber duly pointed out, “rationality” in the sense of “acting in one’s own interest” and not “irrationality” constitutes the true “freedom” of the individual in society.

But here already, with Savigny and the Historical School of Law and then Windelband, “rationality” is dictated by numbers, by the nomo-thetic. More correctly, rationality no longer has any substantive ethical value in terms of practical human action as it always had in all Western metaphysics from Plato onwards. With the Neoclassics, and explicitly with Weber, rationality becomes naked Rationalisierung – a specific methodical and therefore “rational” – “rational” because methodical! - exercise of social power aimed at maximizing the accumulation of capital or objectified labour.

Menger fails to see just how problematic this nexus between individual idiosyncrasy or “freedom” and general or typical nomothetic “predictability” is, and then above all how impossible the distinction between “individual or concrete phenomena” and the “typical forms”, both in terms of the choice of direction of scientific “research” (Weber, Wissenschaft als Beruf) and the choice of application of that “research”. And finally between “laws” and “things”.

Weber and Menger are right to insist that what is irrational is the individual-social distinction. Yet neither of them was ever able to reconcile individual content and general form – the concrete and the abstract in social theory.

I wish to contest the opinion of those who question the existence of laws of economic behavior by referring to human free will, since their argument would deny economics altogether the status of an exact science. Whether and under what conditions a thing is useful to me, whether and under what conditions it is a good, whether and under what conditions it is an economic good, whether and under what conditions it possesses value for me and how large the measure of this value is for me, whether and under what conditions an economic exchange of goods will take place between two economizing individuals, and the limits within which a price can be established if an exchange does occur—these and many other matters are fully as independent of my will as any law of chemistry is of the will of the practicing chemist. The view adopted by these persons rests, therefore, on an easily discernible error about the proper field of our science. For economic theory is concerned, not with practical rules for economic activity, but with the conditions under which men engage in provident activity directed to the satisfaction of their needs. Economic theory is related to the practical activities of economizing men4 in much the same way that chemistry is related to the operations of the practical chemist. Although reference to freedom of the human will may well be legitimate as an objection to the complete predictability of economic activity, it can never have force as a denial of the conformity to definite laws of phenomena that condition the outcome of the economic activity of men and are entirely independent of the human will. (Principles, Preface, p.48)

Menger wisely draws a distinction, then, between “the complete predictability of economic activity”, which would in fact turn economic theory into a perfect “science”, and “the conformity to definite laws of phenomena that condition the outcome of the economic activity”. In other words, what makes economic science consistent with free human activity is the fact that science cannot entirely predict or determine human choices, but it can specify the “conditions” of those choices or activity. But given that scientific activity, by definition, will never reach this state of “ideal perfection”, of “complete predictability”, it is utterly evident that “science” can never be “science” because it must always and everywhere remain “scientific activity”. There can never be, therefore, what Hayek and Robbins were aiming at when they described economics as “the science of choice” – for the simply devastating reason that perfect science leaves us no choice, and imperfect science itself can only be a “choice”, an “activity”! Thus, “scientific choice” is either a pleonasm – a petitio principii -, or else it is an oxymoron – a contradictio in adjecto. Economics then becomes “the choice of the science of choice” that is, a normative and political decision to apply a specific “method” prescribed by “economists” to the choice of social policy!

Interestingly, Menger includes in the domain of economics the question of “whether” something is “useful”. But then the question of “will” must be included unless we assume that some exchanges must take place and the exchange is pure barter. This “anthropology” is something the other Neoclassics will omit from their “science” because it points to the uncomfortable sphere of use values that are supposedly only “subjective”. Of course, marginal utility theory cannot be concerned with use values because it claims that they are inscrutable, metaphysical entities. Menger’s “empirical-realistic method” reasons in humanistic essentialist or anthropological terms of cause and effect, of “wealth”. By contrast, utility can only be thought of in relative and subjective terms of potential “exchange” – in terms of “marginal utility”. But if these matters of “will” are omitted, the sphere of “whether” and “usefulness” is barred from economics! If they are excluded from economic inquiry, then the content of economics is emptied out: economics becomes pure exchange, pure formal mathematical relations whereby “there is no change in the exchange”! Economics then becomes a study not of use values or technical pro-duction but a mere “tool” (cf. Schumpeter adopting Joan Robinson’s “box of tools” definition of economics) indicating what prices may signify in terms of inscrutable and unknowable, wholly subjective “utilities”. Menger’s subjectivism thus needs to be distinguished from the pure self-interest of neoclassical economic analysis.

Note how Schumpeter distinguishes, in a quotation given above, between “cause and effect” and “economic laws” – suggesting that “the box of tools” contains just “tools of analysis” and not empirical findings of causal relationships – which both Menger and Schmoller did:

He [Schmoller] also described the explanation of social phenomena in the form of cause and effect and in the form of laws—for him at this time both coincided—as the aim of scientific effort.

This is similar to Hayek’s pointing out Menger’s “error” of seeing economic laws as “causational” whereas they are means-ends, science-of-choice, “rational” or “pure logic of choice” relations:

2. An exception should, perhaps, be made for Hack’s review in the Zeitschrift für die gesamte Staatswissenschaft, 1872, who not only emphasized the excellence of the book [Menger’s Principles] and the novelty of its method of approach, but also pointed out as opposed to Menger that the economically relevant relationship between commodities and wants was not that of cause and effect but one of means and end. (Hayek at p.22, fn.2)

Thus, Hayek like Schumpeter draws a clear contrast between the Aristotelianism of Menger and the clearly Neo-Kantian and Machian orientation of the Austrian School from Mises onwards. This vital distinction wholly eludes Peter Klein in his introduction to the Principles where he confuses these two very different approaches:

Economics, for Menger, is the study of purposeful human choice, the relationship between means and ends [m.e.]. “All things are subject to the law of cause and effect,” he begins his treatise. “This great principle knows no exception.”2 Jevons and Walras rejected cause and effect in favor of simultaneous determination, the technique of modeling complex relations as systems of simultaneous equations in which no variable “causes” another. Theirs has become the standard approach in contemporary economics, accepted by nearly all economists but the followers of Carl Menger, (Intro. to Menger’s Principles, at p.8):

Here Klein mistakenly conflates what he intended to distinguish – that is, Menger’s cause-and-effect approach against the mathematical approach of neoclassical analysis. The mathematical approach of Jevons and Walras is based more on a neo-Kantian formalism of equivalence or indifference, so that actual use values and quantities are irrelevant, only ratios of exchange measurable ultimately by a numeraire are possible. All exchange ratios or “prices” are relative and can be fixed only at equilibrium, which is not a point in time but a pure mathematical entity. Menger instead was clearly of the view that economics was not merely a “tool” of analysis but actually an “empirical-realistic” science:

41 Economics has to investigate not only the general nature of those phenomena of human economy which are of "economic" nature, as for example, market price, rates of exchange and stock market quotations, currency, bank notes, commercial crises, etc. It also has to investigate the nature of the singular phenomena of human economy, e.g., the nature of the needs of the individual, the nature of goods, the nature of barter, indeed, even the nature of those phenomena which, being of purely subjective nature, simply appear in the individual, e.g., use value in its subjective form. How could economics draw exclusively on history? To conceive of history as an exclusive empirical basis of the social sciences is a glaring error….(Investigations, p.118)

Classical economics abstracts from use values by restricting their “supply” to what is pro-duced so that only the partial allocation of the total Value (the quantity of labour) to individual items is measured. This supply is taken to be an exogenous amount dependent of the available quantity of “labour” and its productivity in various processes of production. This allocation is then called “exchange value” and the question of use value is eliminated. Except that the substance and the measure are fused and confused as “labour” rather than distinguished as living labour and labour-power respectively so that the intensity of labour (the temporal intensity of labour, Marx’s socially necessary labour time, which is not “necessary” at all – it is simply violence) is left to one side. This mistaken identification by the Classical economists of the substance and measure of value in “labour” is the reason why “labour” and “Value” become metaphysical entities for the Neoclassics.

Menger’s astute criticism of the Classical Labour Theory of Value (in the Principles, Appendices C and D on the “nature” and the “measure of value”, respectively) is precisely that “labour” cannot be at once the content or substance of Value, its “nature”, and also its measure, just as a metre is not space and a second is not time – something that nearly every physicist (cf. Stephen Hawking) fails to understand! This objection formed the entire basis of Marx’s critique of political economy as the metaphysics of labour – the distinction between concrete or living labour (Arbeit) and its abstract or crystallised form as imposed by capitalists, that is to say, labour-power (Arbeits-kraft). (On Marx’s discovery of the Doppelcharakter of labour in capitalism, the fundamental work is M. Tronti, Operai e Capitale.) Marx’s critique clearly did not intend labour value to be an absolute but rather a relative quantity in that “socially necessary labour time” can refer to the labour time made “socially necessary” through the political violence of capitalists. Bohm-Bawerk’s critique of Marx will move from this “quantitative” – hence “essentialist” and objectivist – misunderstanding of Marx’s critique of Value, which Menger was the first to eschew despite his Aristotelian straying.

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