Mind the Theory

Mises Daily:
Monday, August 13, 2012
by Thorsten Polleit

I.

The saying that things may work nicely in theory, but do not necessarily work in practice is well known.[1]
It is typically meant to disparage the importance of theory, suggesting
it would be too far removed from practical matters to help in solving
the issue at hand.

The Prussian philosopher Immanuel Kant (1724–1804), in his 1793 essay
"On the Popular Judgment: 'This May Be True in Theory, But It Does Not
Apply in Practice,'" responded to such criticism; in fact, he responded
with his essay to criticism leveled against his ethical theory by the philosopher Christian Garve (1742–1798).

Therein, Kant made the point that theory provides "principles of a
fairly general nature," or general rules. However, theory does not tell
man how to apply it, says Kant. For this, the act of judgment is
required:

For a concept of the understanding, which contains the general rule,
must be supplemented by an act of judgment whereby the practitioner
distinguishes instances where the rule applies from those where it does
not.[2]

The Prussian philosopher effectively called for respecting the role theory has for acting man:

No one can pretend to be practically versed in a branch of knowledge
and yet treat theory with scorn, without exposing the fact that he is an
ignoramus in his subject.[3]

In this methodological work Ludwig von Mises (1881–1973) emphasized
the importance of theory for acting man at the most fundamental level,
noting that theory and human action are in fact inseparable. Mises writes,

Action is preceded by thinking. Thinking is to deliberate beforehand
over future action and to reflect afterwards upon past action. Thinking
and acting are inseparable. Every action is always based on a definite
idea about causal relations. He who thinks a causal relation thinks a
theorem. Action without thinking, practice without theory are
unimaginable. The reasoning may be faulty and the theory incorrect; but
thinking and theorizing are not lacking in any action. On the other hand
thinking is always thinking of a potential action. Even he who thinks
of a pure theory assumes that the theory is correct, i.e., that action
complying with its content would result in an effect to be expected from
its teachings. It is of no relevance for logic whether such action is
feasible or not.

With theory being inseparable from human action, the crucial question is this: What is the correct theory?
For obvious reason, acting man will be interested in correct theory:
"No matter how one looks at it, there is no way in which a false theory
can serve a man or a class or the whole of mankind better than a correct
theory."[4]

II.

In today's mainstream economics the truth value of a theory is
typically tested along the lines of an "if-then hypothesis." For
instance, economists test whether a rise in the money supply leads to
higher prices, or whether a rise in the money supply causes rising prices — or whether the reverse holds true.

Such a procedure is typical of positivism-empiricism-falsificationism
— a methodological approach in economics that must not only be rejected
as intellectual confusion;[5] it can also be criticized as being prone to demagogic abuse.

For if one holds the view that nothing can be known (for sure)
without testing it (which, by the way, is a contradiction in itself, but
this finding shall not be of no further concern here), one must try it
to find out.

Once a theory sounds good, or benevolent, enough — such as the theory
that a rise in the money supply brings prosperity for all, or the
theory that government deficit spending creates new jobs — people will
love to see it put into practice.

What is more, under the reign of positivism-empiricism-falsification
there is even an economic incentive for spreading theories just for the
sake of their political efficacy — even if these theories are false:
those who provide credible scientific legitimization to actions pursued
by government can typically expect high rewards.

To provide a metaphorical illustration, to make robbery socially
accepted, the robber will be willing to share some of his loot with
those helping to make his crime acceptable from the viewpoint of his
victims.

When it comes to benevolent-sounding economic theories, consider the following examples:

• 
  

  The state is indispensable for peace and prosperity; without the
  state, social chaos, relentless aggression, and misery would result.[6]

  
  
• 
  

  Money production must be monopolized by the state, for there is no other way to obtain reliable money.

  
  
• 
  

  Commodity money (gold and silver) is better replaced by fiat money,
  as only fiat money allows for an adequate increase in the money supply —
  which, in turn, is necessary for output and employment growth.

  
  
• 
  

  Capitalism exploits the working class and leads to widespread
  poverty, war, and imperialism; socialism will maintain peace and raise
  the standards of living for all.

  
  
• 
  

  Democracy (majority voting) is the form of political organization
  respecting individual freedom and property rights, necessary for
  peaceful cooperation and prosperity.

  
  

These examples may suffice to make the point: once theories are
considered to be benevolent theories, they can be expected to be put
into action; the more benevolent the theory is, the more likely social
experimentation gets under way.

However, engaging in social experimentation for alleged truth-finding
purposes comes at a high price — at times at a prohibitively high
price, as the experimentation with socialism in many countries has made
all too clear.

III.

In the field of economics, however, it is possible to decide whether
or not theories are correct without having to take recourse to
experimenting and testing.

Mises reconstructed the science of economics as the logic of human action, which he termed praxeology.
As a priori theory, praxeology allows deducing irrefutable — or
apodictic — truths from the irrefutably true axiom of human action.

In Mises's words,

Praxeology is a theoretical and systematic, not a historical,
science. Its scope is human action as such, irrespective of all
environmental, accidental, and individual circumstances of the concrete
acts. Its cognition is purely formal and general without reference to
the material content and the particular features of the actual case. It
aims at knowledge valid for all instances in which the conditions
exactly correspond to those implied in its assumptions and inferences.
Its statements and propositions are not derived from experience. They
are, like those of logic and mathematics, a priori. They are not subject
to verification or falsification on the ground of experience and facts.

Praxeology provides a methodology that allows separating correct
economic theories from false economic theories on a priori grounds —
that is, without having to engage in social experimentation.

In view of the illustrations given above (without developing the
argument at length), we know for sure that the state is not the solution
but the root cause of the most severe social conflicts.

From praxeology we also know with certainty that money is a
free-market phenomenon; that commodity money, the logical choice of free
market action, is sound money; and that the state monopolization of
money production brings unsound money.

We also know for sure that an increase in the money supply doesn't
make an economy richer; it merely benefits the early receivers of the
new money (who are those issuing it) at the expense of those receiving
the new money late or not at all.

It can also be deduced from praxeology that socialism leads to great
misery, as it is a form of social organization that cannot work; it is
bound to fail, and capitalism is the only economically viable form of
societal organization.

Finally, it can be shown on the basis of praxeology that democracy is
actually — and this may be surprising to the many — incompatible with
preserving individual freedom and property rights and thus peaceful
cooperation and prosperity.

The power of unmasking and demystifying false economic theories on a
priori grounds, that is without having to engage in social
experimentation, is certainly one of the most fascinating aspects of the
Misesian-oriented Austrian School of economics.

In his introduction to Critique of Pure Reason (1787),
Kant title chapter 3, "Philosophy stands in need of a Science which
shall Determine the Possibility, Principles, and Extent of Human
Knowledge 'a priori.'" For the science of economics, Mises has done just
that.

Thorsten Polleit is chief economist of the precious-metals firm Degussa
Goldhandel GmbH.
He is also an honorary professor at the Frankfurt School of Finance
& Management.
He is an adjunct scholar of the Ludwig von Mises Institute and was
awarded the 2012 O.P. Alford III Prize in Libertarian Scholarship.

Copyright © 2012 by the Ludwig von Mises Institute. Permission to
reprint in whole or in part is hereby granted, provided full credit is
given.

A lot of people could stand to learn from this... though so few are teachable. imho