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Mises as a Social Rationalist
Joseph Salerno
Reason and origin of society
Reason precedes action. Reason developed to cope in world of scarcity
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knowledge = fruit of thought + basis for action
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- society = concerted action = cooperation = thus outcome of conscious purposeful behavior & result of will and thus has to be constantly renewed.
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Society comes about cuz of (1) division of labor being more productive (Polanyi puzzle, Ricardo) because inborn inequality of men and geographical locations) & (2) people recognizing this fact
Society is thus spiritual (will-based) and teleological (goal-based)
Ricardo’s comparative advantage is but a formal inference from the law of association. The result is a progressive extension of the division of labor ( = subjective) and intensification (varied goals = objective)
Rationalistic basis of rules of conduct and social institutions
Social institutions and customs are thus the product of will and reason in attaining individual goals. Compliance is not seen as sacrifice but as best way to achieve goals.
Mises is not a naïve rationalist ‘construction and development of society and legal order was done by men who were always completely aware of their motives, aims and how to pursue them/law sprang into existence full-grown from a set of explicit pre-societal contracts’ but Mises characterizes law as a ‘settlement, as an end to strife which emerges naturally from the process of social evolution and spreading awareness of higher productivity of peaceful integration into social division of labor.’ The development of law and society was part rational and part evolutionary through rationality at every step as well as the general insight that division of labor is beneficial.
Law, private property, marriage etc. were all beneficial in battle against scarcity and people recognized this.
People affirm the benefits of such institutions every day by their actions.
The inner culture dies when the outer culture (division of labor) dies (Polanyi: basis for science etc. is division of labor)
The individual is born into a world pf social conventions that both constrain his choices and make them possible. The division of labor turns ‘independent individual’ into dependent social being. The former is a fiction anyway since man is dependent on language which in turn is only possible in society. Language is a tool for reason and so society and human develop together.
Economic calculation, society and the market
The market is the foremost social body and it arose through evolutionary but rational (through human action and thus reason) processes. The market is driven through actions, especially in the forms of subjective valuations and choices which give rise to exchanges.
Price structures are the result of such individual evaluative actions and they are social in the sense that they represent more than individual contribiutions. A price is never an isolated object cuz it has its place in an integrated system, a complex of interrelationships among prices which is the composite effect of human relations. So prices are the result of the individual actions of thousands, or millions or billions of people but they appear to the individual as given.
Through human action in the market people then determine (1) the price structure of the market, (2) the allocation of the factors of production, and (3) the determinants of the share of each individual.
The market then gives rise not just to the price structure, but to the social structure, the purposeful (not ‘spontaneous) voluntary choices (not ‘coercive’) of people to integrate themselves into the social order.
The intellectual basis for actors on the market to decide their best means to their chosen ends is monetary calculation, and so society depends on this possibility of calculation.
Calculation, which requires a common medium of exchange (money), is absolutely necessary for an actor to determine the moist advantageous allocation of scarce resources in a world in which resources are neither purely nonspecific nor absolutely specific to a wide variety of possible production processes. Without calculation actors would be unable to evaluate/estimate the possible outcomes of their actions, to compare the various means with each other and with the various ends.
Because the market and thus society are impossible without calculable action any systematic discussion of the market economy must be preceded by a discussion of the problem of calculation. The latter must even be presupposed in conceptualizing the workings of other sorts of “economies”.
Use of Calculation versus Use of Knowledge: the Social Function of Prices
In Mises’s view then human society is a profoundly rational phenomenon, a product of the capacity of the human intellect to conceive cardinal numbers and manipulate them in arithmetic operations. To assert therefore that the primary function of the market’s price system is to effectuate “the use of knowledge in society” Hayek, Walras) is to seriously misconceive of the nature of the social problem, which is foremost one of calculating the outcome of purposive action undertaken within the framework of the division of labor. Prices render possible the very existence of social production processes.
Mises critiques Walrasian view that prices substitute for economic data/entrepreneurial understanding and appraisement of future variations of these data. Instead if replacing or substituting for it, the price system facilitates, makes easier, the use of entrepreneurial understanding and appraisement:
prices on market are historical facts expressive of past state. à prices can never serve as unambiguous guide to production which is always aimed at state in the future. If future and past were the same then prices were not needed. Prices aim exactly to deal with change. Past prices are not causally linked to emergence of future prices[1] so no knowledge relevant to the drafting of present production plans can be embodied within them. This is the neglected negative implication of Mises’s regression theorem. The past prices are but the starting point of deliberations re the future.
Entrepreneurial appraisement is enormously simplified when it may proceed by estimating the effects of anticipated variations of the data on a preexisting price structure, so that the entrepreneur does not have to mentally reconstruct out of nothing the price structure and pattern of resource allocation with every change in the market. He only has to make sense of how changes in the market will affect a pre-existing price structure.
Knowledge of past prices then is pretty darn important (though not strictly speaking necessary) but not sufficient for entrepreneurial activity: it needs to be complemented with qualitative entrepreneurial understanding and appraisal. Moreover, economic calculation is not in itself a means for acquiring knowledge, but the very prerequisite for rational action (means-ends) within the division of labor.
In my won words: although economic calculation is necessary for any division of labor to arise in the first place, for people to purposively integrate their means-ends actions in a wider social order, knowledge of past prices is not strictly speaking necessary to engage in economic calculation since there is no causal relation between past and future prices. The past prices do make economic calculation a hell of a lot easier because rather than having to mentally reconstruct the entire past constellation of prices one can ‘merely’ deal with the anticipated changes in circumstances and how these might affect the past prices.
The Problem of Socialism: Calculation or Knowledge?
In his discussion of the impossibility of socialism Mises explicitly assumes, for the sake of the argument, full knowledge on the side of the planners re technology, ends, resources etc., but he argues that even if this is the case socialism is still impossible because, in the absence of the division of labor under a system of private ownership of the means of production which alone make, planners cannot use economic calculation to see what the most efficient way is to use means to achieve their desired (and agreed upon) ends.[2]
Socialism then is not impossible because of any knowledge problem, but because it does not allow for economic calculation and as such it will result in utter chaos.
Moreover, Mises with his calculation-argument against socialism does not say that capitalism is better than socialism because of its dynamic-process-of-entrepreneurial-discovery nature. That point is part of cattalactics, whereas the point about economic calculation is prior to that in the sense that it is part of the general theory of praxeology.
Social Evolution as Ideological Struggle
Because people recognize then benefits and the intellectual and institutional preconditions of the social division of labor human action tends toward cooperation and association. But this is not guaranteed but has to be constantly reaffirmed in people’s actions. Society is then not a spontaneous or undersigned formation but rather a product of purposive human action.
This is not to say that that there aren’t some unintended and at times momentous consequences associated with deliberate yet decentralized choices to cooperate catallactically. No human could foresee the entire system to which the millions of purposive individual actions will give rise, nobody acts with that complete system in mind, but his actions do generate that system.
It is essential though that people have in mind the larger consequences of their actions because if they do not understand that acting in a non-violent and non-cooperative way will have such beneficial consequences in the long run they may start to act in violent or isolating ways and thereby erode the foundations of peaceful and prosperous society. Thus it is essential that people consciously have in their minds and subscribe to the ideology – the totality of our doctrines concerning individual conduct and social relations - of liberalism.
So Mises’s view can be seen as sort of a middle ground between the idea of spontaneous, unplanned order on the one hand and the utopian attempts to draft a complete plan of the social system. What people must have in mind is the benefits of the general system of liberalism and act in accordance with it, but the precise, practical, detailed form of the social system that will emerge on the basis of these principles (who will do what, who will get what, how much resources will be devoted to this, etc.) cannot be planned in advance. Both alternatives will result in chaos.
Human history then is the outcome of a conflict between ideologies, which are consciously formulated and adopted by reasoning human beings. “The flowering of human society depends on two factors: the intellectual power of outstanding men to conceive sound social and economic theories, and the ability of these or other men to make these ideologies palatable to the majority.”
[1] Except, as Mises shows in his regression theorem, re the exchange ration between money and other economic goods where the money’s past purchasing power does causally influence its future purchasing power.
[2] So what is the difference between these two situations: (1) perfect knowledge on part of planners and (2) perfect equilibrium, no changes in the future. In the latter according to Mises no prices are needed and the former will still result in chaos. Why? Well, because in the latter no new action in world of change is needed whereas in the former there is and therefore also economic calculation which is exactly impossible.
What is the difference between these two situations: (1) perfect knowledge on part of planners (2) obliteration of all past prices. Why does the latter pose no essential problem whereas the former does? Because in the latter a new process will begin in which entrepreneurs can use economic calculation whereas in the former they can’t. In the latter entrepreneurs don’t have to reconstruct past prices, but begin new process.