F.A. Hayek, Capitalism and the Historians


I had intended on writing this for a long time now. F.A. Hayek’s 1954 work, Capitalism and the Historians, was divisive, and it has remained that way over the course of the last sixty years. To some degree, I hope to explain why this volume was so divisive, defend it against some of its unwarranted criticisms, and point to avenues for further historical development. This essay will cover Hayek’s introduction in full (pp. 3-29) from the volume he edited, Capitalism and the Historians, featuring essays by T.S. Ashton (2), Louis Hacker, W.K. Hutt, and Bertrand de Jouvenel. In addition, I will summarize and address some of the scholarly reviews of Capitalism and the Historians, as well as go through E.P. Thompson's well-know critique of the book. These summaries of reviews may be a little less interesting, so the reader wishing to stick to the most relevant sections may skip to section XIII after finishing with the section on Hayek.

F.A. Hayek, ed, Capitalism and the Historians (Chicago: University of Chicago Press, 1954).

Hayek begins by noting that our political views are perennially shaped by our view of history. History is inevitably colored by the fact that there have been varying interpretations on events, and it is from this rather than from our knowledge of the objective facts of history that our political proclivities are influenced. At times, our understandings can be at odd with the facts, preventing us from benefiting from the rich experiences of which the past affords us boundless examples. From this, Hayek concludes that the writers of history probably “exercise. . . .more immediate and extensive [public influence] that that of the political theorists who launch new ideas” (3-4). And even when the new ideas of political theorists influence the public, it is often through their interpretation of historical events, rather than abstract theory.

Contemporary intellectuals had been unable to appreciate this primarily because, during Hayek’s time, historians purported to be value-free scientists of history, capable of eradicating any vestiges of bias or prejudice. This was of course nonsense, as even the choice of which facts are important will always require theory to sort through the infinite variety of facts that exist. Furthermore, the historian needs to employ an understanding of causality, which also requires theory and an understanding of “the interconnection of social process” (5). Even the choice of topic itself is not a value-free decision, since individuals are choosing between an indefinite amount of alternative subjects to research--let alone the decision whether to research and write history at all--necessarily implying the historian sees his choice of subject-matter as worthwhile.

Hayek then mentions the significance of the whig theory of history--a theory that history, on the whole, tends to lead to progressive betterment and advancement in all aspects of human endeavor--and its positive impact it had on the recognition of the value of political liberty (6). While the whig theory concentrating on political history had faded and become much less fashionable, in favor of social and economic history, Hayek points out that this change has not led to any diminution in the significance of history on political views. In fact, socialist historians had picked up where the liberal historians left off, injecting their own interpretations into the historical discussion. Unfortunately, Hayek points out, these socialist historians, while purportedly writing about “facts which everybody knows,” were actually utilizing facts that “have long been proved not to have been facts at all.” The public devoured much of this socialist history in the early twentieth century, meaning the public had been hoodwinked for decades into believing in certain “facts” about history that were simply erroneous (7). Hayek says it “would require several books like [Capitalism and the Historians] to show how most of what is commonly believed. . . .is not history but political legend” (9).

Hayek then presents his thesis, namely that “There is, however, one supreme myth which more than any other has served to discredit the economic system to which we owe our present-day civilization and to the examination of which the present volume is devoted. It is the legend of the deterioration of the working classes in consequence of the rise of ‘capitalism.’” This myth says that any increased prosperity “which the competitive order has produced was purchased at the price of depressing the standard of life of the weakest elements of society” (10). While Hayek finds that recent economic historians such as J.H. Clapham or T.S. Ashton have refuted this theory of capitalist “catastrophe,” the public has not noticed this, and it is through this book that Hayek hoped to communicate to the public the refutation of the pessimistic version of the industrial revolution in Britain (10-11). It was primarily the work of Barbara and J.L. Hammond that created this belief among the public, even though they later would admit, in their revised 1947 edition of The Bleak Age, that

statisticians tell us that when they have put in order such data as they can find, they are satisfied that earnings increased and that most men and women were less poor when this discontent was loud and active than they were when the eighteenth century was beginning to grow old in a silence like that of autumn, The evidence, of course, is scanty, and its interpretation not too simple, but this general view is probably more or less correct (12).

Once the impression is already imposed on the mind, it is difficult to reverse such an impression. It certainly does not help that “the slow and irregular progress of the working class which we now know to have taken place is of course rather unsensational and uninteresting to the layman” (14).

Hayek, in discussing the origins of the rise of modern industry, puts some weight on the limitations on government that the Glorious Revolution precipitated in the seventeenth century. In addition, Hayek points out it wasn’t as if capitalism sprang into being in the late eighteenth century, de novo; it was a more extended process of the expansion of economic freedom.

He then goes on to explain the role of machinery, which gave peasants an incentive to accumulate the capital equipment necessary to allow greater proportions of the next generation to survive. Before this, when there was a limited amount of arable land and manual tools were needed to survive, few people were able to employ additional workers profitably enough in a time when “the advantage of employing additional hands was limited mainly to the instances where the division of the tasks increased the efficiency of the work of the owner of the tools”--not enough to create a substantial return on investment (15-16).* It was only then that the population could increase substantially past the Malthusian trap that awaited civilization for all of human history before this time. Hence, Hayek concludes that it was capitalism that created this working class, in that it permitted these additional people to survive, rather than “degraded” people from a higher condition to a lower one (16):

In so far as it is true that the growth of capital made the appearance of the proletariat possible, it was in the sense that it raised the productivity of labor so that much larger numbers of those who had not been equipped by their parents with the necessary tools were enabled to maintain themselves by their labor alone (16).

Ironically, it was this capital that allowed these members of the proletariat to survive in the first place that the proletariat would later claim they had a “right [to] a share in its ownership.” Thus, without intending to do so, these capitalists, in pursuing their own self-interest, advanced the interests of the vast majority of the proletariat (16-17).

How was it, then, that the working classes would suddenly become conscious of the facts of their poverty, if it were not the result of a deterioration in their living standards? The answer, as Hayek points out, is that it was the “increase in wealth and well-being which. . . . raised standards and aspirations” (18):

What for ages had seemed a natural and inevitable situation, or even as an improvement upon the past, came to be regarded as incongruous with the opportunities which the new age appeared to offer. Economic suffering both became more conspicuous and seemed less justified, because general wealth was increasing faster than ever before (18).

Ultimately, Hayek is saying that there needn’t be an actual increase in misery for people to become more agitated about their poverty, despite what many socialist historians would have us believe. Indeed, the fact that so many people chose to move from their picturesque country cottages to the cheap houses of city industrial workers meant that they considered this situation an improvement. Even the sanitary problems that are so often attributed to the rise of the factory seemed to be improving during that time (18-19).

Hayek shrewdly notes that the main opposition to the factory and industrialism were actually the landowning class, who were natural opponents of a system that competed with them for laborers and sought to sway public opinion against their competitors in order to hold onto the political privileges they had accumulated over the ages (19).

The early generations of economic historians had often been socialists looking to history for political propaganda, so it was no surprise that when they went looking through history for the harm capitalism would inevitably cause to the working classes, they found it (21-22). Additionally, Hayek connects these writers, such as Werner Sombart, to the German Historical School, who had been opponents of the theoretical approach of classical economics and many of whom were socialists. He believes that in the academic environment dominated by the historical schools, there was great pressure to conform to the opinion that capitalism was exploitative, lest they be labeled “apologists” for the capitalist system and the bourgeoisie (22-23). Hayek returns here to the historicist idea that the historian was supposed to look at the facts “without any theoretical conceptions” in order to let the facts speak for themselves. To show the problems with this approach, Hayek gives the example of the introduction of machinery reducing the demand for labor. Once we actually go through the theory, we will quickly realize the fallacy; but if we only look through the historical record, we can easily find facts that will conform to this erroneous theory, or any number of other alternatives (24).

Certainly, however, some people did not prosper during the industrial revolution, but this isn’t a bad thing in every case. For instance,  “There were, no doubt, many people whose privileged position, whose power to secure a comfortable income by preventing others from doing better what they were being paid for, was destroyed by the advance of freedom of enterprise” (25). That we need not shed a tear over such a thing is too obvious to warrant elucidation. And yet

The recognition that the working class as a whole benefited from the rise of modern industry is of course entirely compatible with the fact that some individuals or groups in this as well as other classes may for a time have suffered from its results. The new order meant an increased rapidity of change, and the quick increase of wealth was largely the result of the increased speed of adaptation to change which made it possible (27).

Skilled workers, for instance, to the extent that they did not embrace these changes and develop their human capital parallel to the developing economy, probably lost out during the industrial revolution. But it was, of course, their choice to do this. For some, this choice meant seeking protection against competition in order that need not develop new skills; we needn’t feel bad for those who chose to use the political means to wealth accumulation rather than the economic means.

Still, capitalism could not do everything for all people at once; capitalism, after all, is a profit and loss system. To suppose that any system could meet such a criteria is utopian, and hardly a failure of capitalism. Finally, Hayek points out that although machinery and a comparatively freer economy may have allowed the economy to prosper, there were still pre-, anti-, or non-capitalistic elements in society that prevented the capitalist system from operating as smoothly as it could have (28). It was during this time, of course, that the immensely costly Napoleonic Wars ravaged Europe and left Britain in severe debt; and the prevalence of state-granted monopolies had not been completely eradicated either.

*In his copy of Capitalism and the Historians, Rothbard underlined this section and stressed its importance.

Scholarly Reception

Scholarly receptions of Capitalism and the Historians have ranged from strong praise by those in laissez faire liberal community, to mild and scattered praise, to scholarly criticism, dismissiveness, and even hostility. I examine these below.


Arthur Schlesinger, Jr., Review of Capitalism and the Historians, edited by F.A. Hayek, Annals of the American Academy of Political and Social Science 293 (May 1954): 177-178.

Arthur Schlesinger, Jr., the noted liberal historian, wrote that the thesis of Capitalism and the Historians was that “historians, American and British, have been engaged, if not in a calculated conspiracy against the capitalist system, at least in a spontaneous attack on it.” Already, in the opening sentence, we see Schlesinger painting Hayek and compatriots as a cadre of conspiracy theorists, rather than serious academics. “Capitalism and the Historians,says Schlesinger, “is apparently prepared to stand or fall on the case it can bring against the historical profession in terms of this ‘supreme myth’”; that is, the myth that capitalism caused the deterioration of the working classes.

Schlesinger, knowingly or not, slightly mischaracterizes Hayek’s thesis. Schlesinger makes it appear as though Hayek is saying that professional historians still were writing books about how capitalism caused the deterioration of the standard of living of the working classes. That was not what he was saying. In fact, Hayek pointed to early historians--as I have pointed out above--that used their histories as a chance to forward socialist propaganda, and then to the Hammonds in the first decades of the twentieth century who influenced the general public into adopting the pessimist view. Hayek then says that subsequent economic historians disproved the Hammond's’ thesis, and that even the Hammonds relented on characterizing the industrial revolution in this way. His point was that despite this, the public still clings to the pessimistic view. He also points to non-historian academic who wrote for public audiences that also still propagated this view, but this was only part of his main thrust. Hence, when Schlesinger proceeded to assert that “Professor Hayek and his colleagues have no serious case to bring at all,” and asks “What British or American historian, for example, has argued that living standards for the working class have failed to rise under capitalism?”--responding that Hayek could point to not a single historian--he had missed the point of Hayek’s argument and was instead striking down a straw-man. Furthermore, I find no basis for Schlesinger’s assertion that “Professor Hayek shifts his ground to denounce historians for suggesting that the immediate impact of industrialism might have been to depress living conditions,” and then saying that T.S. Ashton deserts him on this point (perhaps I missed it).

Writing on Ashton, Schlesinger’s point that the immediate effects of industrialism were complicated, and that Ashton  admittedly was guessing when he concluded that more people benefited from industrialism than not, is well-taken--Ashton did of course say this, and the historical evidence throughout is difficult to navigate.

Oddly, Schlesinger then accuses Hayek of “fiery dogmatism”--perhaps I need to refresh my memory and read it over a second time in the course of a single day, but fiery is not a word that fits the rhetoric of “Professor Hayek.” Schlesinger’s subsequent assertion, “that most British and American historians have been deeply and uncritically devoted to the capitalist system” seems debatable, at the least, given the gradual penetration of socialist and communist academics into the profession over the decades prior to Hayek’s volume. In a further attempt to belittle the work of the writers, he says that “all the contributors to this queer volume seem to be driven by some curious sense of persecution” by socialists, with Ashton feeling persecuted by “the students at the London School of Economics, who do seem to turn in monumentally silly exam papers,” and “Professor W.S. Hutt, by those incurable sentimentalists who question the virtue of child labor and a fourteen-hour day.” He concludes by comparing the book to a “witch hunt” or McCarthyism and calling it “anti-intellectualism.” Of course, one might wonder what constitutes intellectualism if Schlesinger spent the course of a two page review making only a single substantial point on Ashton, and used the rest of the review to belittle the authors and the significance of their work.


W.T. Easterbrook, Review of Capitalism and the Historians, edited by F.A. Hayek, The American Economic Review 44, no. 4 (September 1954): 658-660.

William T. Easterbrook, an economist from the University of Toronto and a specialist in Canadian economic history, writes that Capitalism and the Historians was designed as a corrective against the predominantly “socialist interpretation of economic history which has dominated much of our political thinking for the past two or three generations.”

Easterbrook describes Ashton’s essay “The Treatment of Capitalism by Historians” as the most scholarly contribution, pointing out how “The preoccupation of historians with social grievances rather than with the actual course of economic change has been productive of a one-sided picture of the consequences of industrialism,” ignoring effects such as the Napoleonic Wars, among other things, that cannot be attributed to capitalism. Considered in combination with Hayek’s introduction, Easterbrook finds a strong statement of the anti-capitalistic bias, which he thinks do not fit with the rest of the essays, which are more confusing than helpful. He criticizes L.M. Hacker’s “The Anticapitalist Bias of American Historians” as “a rather rambling defense of nineteenth-century achievements” devoid of “economic sophistication,” with a crude equation of capitalism with Republicanism and risk-taking. And, while praising Bertrand de Jouvenal’s prose, Easterbrook considers de Jouvenal’s essay as a marginal contribution due to an overly broad inclusiveness in his characterizations of anti-capitalist intellectuals. The final two reprinted essays by Ashton and Hutt he says add little to the argument that there is an anti-capitalist bias among historians.

In his concluding paragraph, Easterbrook makes a nice point when he says that the conflation of capitalism, industrialism, and the factory system leads to murky thinking, and leaves us unclear what intellectuals are really criticizing or praising when they use these terms interchangeably. His concluding sentence suggests that “the most useful and enduring contribution of Capitalism and the Historians lies in the distinction drawn in its pages between the evidence of history and the beliefs by which we live, beliefs which suggest that for better or worse the nineteenth century is still very much with us.” Overall, it seems to be a favorable review of the works in the volume, but that the works themselves don’t fit around the central thesis expressed in Hayek’s introduction.


Eric E. Lampard, Review of Capitalism and the Historians, edited by F.A. Hayek, The American Historical Review 60, no. 1 (October 1954): 64-65.

Eric E. Lampard, a historian from the University of Pennsylvania, characterizes Hayek’s thesis that there is “a ‘Gresham’s law of history’ whereby the false account forces out the true and proceeds to use this metaphor to identify intellectuals as the counterfeiters and “Manchesterism” as the purportedly sound currency being coined by Hayek. This analogy to a Gresham's law of history is hyperbolic--maybe it was self-consciously so--since Hayek in no way suggests that it is always the worst historical interpretations get on top.

Lampard begins with the positives, saying that the authors “complain justifiably” of the “political folklore” that the Industrial Revolution was disastrous for the working classes, and that “the demonology of the Left omits so much that is vital in the story of capitalism and distorts the motives of so many who participated in its growth, that it proves a wholly unreliable guide to the study of economic change.”

However, he thinks that the authors are instead substituting a “demonology of the Right” for that of the Left, insofar as all critics of the industrial era tend to be lumped together under the common banner of “anticapitalism” or “socialism.” The Hammonds in particular, he notes, did not criticize capitalism for its economic consequences but for its spiritual consequences. According to Lampard, what is needed is a balanced approach to the history of the industrial revolution, not an unabashedly “rightist” one. I tend to agree it was no balanced in the way many of these authors wanted it to be, but we need to recognize that this was outside of the scope of the questions Hayek and the other authors sought to answer.


T.H. Minshall, Review of Capitalism and the Historians, edited by F.A. Hayek, International Affairs 31, no. 2 (Apr., 1955): 221.

T.H. Minshall’s very brief review overall praises Capitalism and the Historians for pointing out the uncritical acceptance of the Webbs and Hammond’s work and the authors’ distinction between evils that “occurred apart from the Industrial Revolution,” calling it an “interesting” volume, and in particular praising the chapters of Hayek, Ashton, and de Jouvenal.


H. Scott Gordon, Review of Capitalism and the Historians, edited by F.A. Hayek, The Canadian Journal of Economics and Political Science 21, no. 2 (May 1955): 271-273.

H. Scott Gordon criticizes Hayek’s introductory essay that gives the impression “that the evidence concerning standards of living is so overwhelmingly clear that only incompetence or malice can account for its distortion by historians,” when in fact, according to Hutt and Ashton, the statistical evidence can at best lead us to “cautious conclusions.” Indeed, he says Hutt relies on a theoretical argument rather than statistics. According to Hutt, “The salient fact, and one which most writers fail to stress, is that in so far as the work people then had a 'choice of alternative benefits,' they chose the conditions which the reformers condemned.” I’d argue that this is an extremely strong theoretical point, even though Gordon considers is “not a very conclusive proposition” because of its reliance on the voluntariness of the choice itself.

Gordon does sympathize with the notion “that urban poverty was overstressed and exaggerated by many popular writers of the time, and by later historians who used these writings as source material.” Yet, he generally criticizes Hayek for his claims of socialist conspiracy, as well as his tracing of the influence of the German Historical School, to the exclusion of the connections between Ricardo, Marx, and the Fabians. I generally agree; although the German Historical School and its influence are important, especially to Austrian economics, the views of Marx and his later disciples seem more pertinent to the creation of these myths.

Gordon goes on to describe the odd currents of thought permeating Hacker’s piece, which finds that “those historians who seek inspiration in Jefferson and Jeffersonianism are anticapitalist” (Hacker); “the socialists were those who saw virtues in weak government” (Gordon); “the historians sympathetic to Jackson are also anticapitalists” (Hacker); socialism changed in favor of big government by the New Deal; all coalescing around the idea that American historians had been biased in favor of the common man and thus were socialists.

Gordon praises de Jouvenal’s piece for profound insights, including “the natural hostility of the intellectual to the business man,” but that other sweeping statements he makes are loaded and of questionable veracity.

Gordon, like Lampard, thinks that for whatever contributions this volume may have to the “sociology of knowledge,” it risks substituting its own biases in the place of the Left’s; as such, “The condemnation which this book will undoubtedly receive is, I think, deserved.”


Allan Birch, Review of Capitalism and the Historians, edited by F.A. Hayek, The Australian Quarterly 27, no. 1 (March 1955): 121-123.

Allan Birch points out that much of the errors of early historians of the industrial revolution stemmed from their misappropriation of sources, such as taking the parliamentary enquiries as a true and unbiased account of the factory system. One of the major points of the volume, Birch notes, is that it tackles “the intellectual's attitude to the economic events of the last couple of centuries.” He finds this “prospect of intellectuals studying their own position in the world could be vastly amusing.” Ultimately, Birch concludes that “anyone who is concerned with political problems and who does not think that the deeds of the British captains of industry were the blackest pieces of villainy that darkened the last century would find something of interest here.”


J.D. Chambers, Review of Capitalism and the Historians, edited by F.A. Hayek, Economica 23, New ser., no. 92 (November 1956): 380-81.

J.D. Chambers, unlike the other reviewers, points out that each of the authors of the volume has a different attitude “in accordance with the different intellectual traditions which they represent.” de Jouvenal, for example, postulates that the intellectuals’ attitudes toward capitalism stem from “the malaise. . . .of the intellectual in an industrial society”; Hayek, Chambers says, blames Marx at the root of the anticapitalist bias; Hacker claims American historians made “value judgments about industrial society without examining the stubborn economic facts on which [they] rested”; Hutt and Ashton simply think historians have misused sources and were ignorant of the causal relationships of economics. On the whole Chambers seems to have an, at least, marginally positive view of the volume, but seems to suspect the book will be considered by most “as no more than a contribution to the polemics of the pessimistic and optimistic schools of historians of the Industrial Revolution.”


Charles Wilson, Review of Capitalism and the Historians, edited by F.A. Hayek, The Economic History Review, New ser. 8, no. 3 (1956): 469.

Charles Wilson, of Jesus College in Cambridge, begins by succinctly laying out some of the positive contributions of the authors and supports Hayek et al’s contention that the history that permeates the public mind is essentially “the orthodoxy of nineteenth-century social and economic history.” Wilson believes that bad history can account for most of the errors in historical narrative propounded by early social and economic historians, rather than a resort to common sense instead of theoretical presuppositions in the organization and interpretation of historical facts. Overall, Wilson finds that “The task the contributors set themselves is an important one,” namely the correction of the errors of bad history pertaining to the industrial revolution--a task which he thinks needs to continued.


Asa Briggs, Review of Capitalism and the Historians, edited by F.A. Hayek, The Journal of Economic History 14, No. 3 (Summer, 1954), pp. 290-291.

Asa Briggs, of Worcester College, starts of by calling the book “Patchy in style and in substance,” and asserting that the idea that there is still a “legend of the deterioration of the position of the working classes in consequence of the rise of capitalism” has been dispensed with by serious historians. Nevertheless, he recognizes that the ideas of writers like Engels are still taught in many schools. However, like both Gordon and Lampard, thinks that “The danger of this book is that it gets rid of one myth only to substitute another of a more fashionable kind.” As such, “At times it presents such a one-sided case that many irritated readers will still prefer the more familiar outlines of the old story.”

Moving on to the essays themselves, he generally agrees with what Hayek has to say, but says that “by saying it in the way he says it, Mr. Hayek gets very near to minimizing the social strains and stresses of early industrialism. Certainly he makes no attempt to understand them.” Discussing Ashton, he finds much of value but still thinks that “it is possible to agree with most that he asserts and still feel that J. L. and B. Hammond had much of value to say which he ignores.” Hutt’s article he condemns, calling it a “highly polemical” article “which should not have been reprinted in its 1926 form without revision.” Lastly, he writes that Bertrand de Jouvenal’s article was “by far the most stimulating in the book” because of the way in which he demystifies the underlying reasons for the intellectuals’ aversion to capitalism, as well as why intellectual’s were in error in analyzing the misery of the working classes:

He suggests that many writers on the economic and social history of early industrialism have taken for granted that a sharp increase in the social awareness of and indignation about misery is a true index of increased misery, and have given little thought to the possibility that the increase might have been a function of new facilities of expression, growing philanthropic sensitivity, and a new sense of the human power to change thing.


Rondo E. Cameron, Review of Capitalism and the Historians, edited by F.A. Hayek, Southern Economic Journal 21, No. 1 (July 1954): 96-98.

Rondo E. Cameron, of the University of Wisconsin, finds that the book often plays fast and loose with its assertions and accusations, such as Hayek’s derogation of Guido de Ruggiero and Elie Halevy, both "supposedly liberal historian[s]." Ashton’s section he finds much more mild and precise, but still insufficient to prove “the existence of either conspiracy or bias on the part of historians generally.” Louis Hacker’s essay he demolishes as “shoddy,” declaring that all American historians were anticapitalists who bias stems from “their espousal of Jeffersonian as posed to Hamiltonian ideas.” As Cameron goes on to point out, any expositor of laissez faire liberalism would find this statement distressing, given that Hamilton was the epitome of crony capitalism, special interest favoritism, and mercantilism, which “demonstrate his intellectual confusion.” de Jouvenal’s essay he finds stimulating--and the idea that the intellectual is “antagonistic to capitalism because his own product, when subjected to market forces, languishes unsold and unsalable on the shelves” is “arresting”--but does not actually prove that intellectuals suffer from an anticapitalist bias.

Ultimately, Cameron thinks that the book makes important points, but the conspiratorial aspect of the book will not solve the problems they identify, calling it “Academic McCarthyism.”


M. David Morris, Review of Capitalism and the Historians, edited by F.A. Hayek, The Accounting Review 29, no. 4 (October 1954): 706-708.

M. David Morris writes that the Hammonds in the early decades of the twentieth century wrote brilliant studies on the dismal view of the social effects of the industrial revolution. Morris states the thesis of the work that the pessimistic historical bias was largely the work of poor historical scholarship, the attribution of progress to government intervention, and a profoundly socialist bias. He says Hacker challenges the idea that there was a socialist bias among American histories, and that it was instead their populist/egalitarian bias, including a levelling, anti-monopolistic tendency of the Jeffersonians that led them to pessimism--pointing out, again, that such a view tends to be at odds with what Hayek and the other contributors would tend to think. de Jouvenal as well, he says, doesn’t think that it is a socialist bias, but rather than natural juxtaposition and opposition of the intellectual to wealthy businessmen whose success they essentially resent and of which they are envious.

In concluding, Morris finds that Hayek and his other contributors “leave the lay reader with a false sense of proportion,” only focusing on the positive effects of the industrial revolution to the exclusion of those who did suffer, whose suffering “cannot be dismissed as cavalierly as Hayek does.” In addition, he finds that the work of Ashton has limited applicability given the data of which it relies in is sparse and thus can only lead us to provisional conclusions. Ultimately, Morris believes that the work of the historian is finding a balanced approach in between the extremes, and not having such strong ideological blinders that we only focus on one category of evidence that supports our predispositions.


Oscar Handlin, “Review: Capitalism, Power, and the Historians: An Essay Review,” The New England Quarterly 28, no. 1 (March 1955): 99-107.

In a more extended essay review, Oscar Handlin, reviewing both Capitalism and the Historians and Study in Power. John D. Rockefeller Industrialist and Philanthropist by Allan Nevins, immediately calls out Capitalism and the Historians as a “disgraceful performance.” Needless to say, Handlin apparently took offense to the volume. As a whole, he says the work has “an essentially misleading character,” and its conspiratorial thesis has “not a shred of substance to it.” The final two scholarly essays reprinted in the volume are totally irrelevant to this thesis, so Handlin ignores them. Like Schlesinger, Handlin takes Hayek to task for his lack of citation of historians propagating this myth: “It may be significant that he does not quote a single historian who maintains the position he claims all historians held. There are occasional references to philosophers, political theorists, and journalists; but professional historians are only three times referred to.”

Ashton’s essay hardly supports the claim either, as undergraduate students hardly qualify as academic historians--even if Ashton does make “some useful points about the rise in level of general income.” Same for de Jouvenal, who he says we probably shouldn’t have expected to provide any evidence because he “sneers at ‘scientific education’ from page to page.” Handlin finds more substance in Hacker’s essay, pointing out that Hacker was once a Marxist (one has to wonder if Handlin, an American historian, only finds substance in Hacker’s essay on American historians because he doesn’t know anything other than the sentiments of the Americanists). Nonetheless, he criticizes Hacker heavily for his both ignorance of and wanton misstatement of the facts, and his odd belief in the anti-capitalism of Jefferson’s historian defends--especially when he says Hacker explicitly referred to the Jeffersonian-Jacksonians as an “agrarian slave-capitalist group.”

Handlin also calls it a “vicious little book” with “irresponsible and false assertions,” believing the book will have no significance, except to undermine “the study of ‘capitalism’ itself” by shrouding “the much more vital issues of the means by which ‘capitalism’ transformed the economy, the forms it took, and its effects upon the whole society.“ As he moves on to discussing Alan Nevins’ work, which he says is much more meticulous in its use of sources, although an apologia for John D. Rockefeller, calls Hayek et al’s essays “sins.”

* * * * * * * * * * * * * * * * * * * * * * *

One of the common criticisms out of these reviews was that for all of Hayek’s blustering that historians have been so influential in constructing the pessimistic view and persisting in pushing this view on the public, the works Hayek cited were either decades or longer old (Hammonds, Sidney and Beatrice Webb, Karl Marx, Werner Sombart) and either popular works or works by non-historians (Bertrand Russell, Frederick Watkins).

Another common criticism was that Hayek's thesis came close to suggesting a conspiracy on the part of many historians to put forward propaganda under the guise of historical fact.

A third common criticism is the lack of balance apparent in the presentation of the book, either making it appear that the case for optimism is stronger than the evidence warrants or simply not confronting the situation of those who did not benefit from the industrial revolution.

The last common criticism, and one that I think correct, is the general criticism of Hacker's essay on American historians and capitalism. The claim that Alexander Hamilton--whose views today are regarded by most classical liberals as crony capitalist and mercantilist--is the real patron saint of American laissez faire capitalism, rather than Thomas Jefferson, is not a pill today's classical liberals can swallow. It would seem that Hacker fell into the common misreading of Jefferson that was prevalent up until recently, namely that Jefferson's agrarianism and critique of "capitalists" and banking was indicative of his backward anti-capitalism, which has increasingly been rejected in recent years. In general, Hacker's work seems at odds with liberalism and laissez faire capitalism, and is not a particularly strong or enlightening essay.

The Making of the English Working Class

E.P. Thompson, The Making of the English Working Class (New York: Vintage Books, 1966).

With the whole of the academic reviews exhausted, I will move on to one of the most significant criticisms of Capitalism and the Historians penned by E.P. Thompson in his The Making of the English Working Class, first published in 1963. Thompson’s critique of Hayek primarily was focused in Part II, Chapter Six of his work titled “Exploitation.” with some criticism put forward in Chapter Ten “Standards and Experiences.”

The first thing we’ll notice is that, despite the admonitions of many reviewers that no respectable historian believed that the industrial revolution made everything worse for the masses, many historians in the sixties would come to question the optimistic view and ultimately take a negative view of the industrial revolution. We’ll also notice that this movement was led by the ideological descendants of those whom Hayek had said a decade earlier led the way in propagating myths about the industrial revolution, that is, socialists. This time, it was Marxist academics E.P. Thompson and E.J. Hobsbawm that led the way in countering the more optimistic claims of the economic historians of the 1930’s, 40’s and 50’s.

In the beginning of Chapter Six, Thompson establishes that many contemporaries during the industrial revolution “observed the same equation: steam power and the cotton-mill=new working class,” and characterizes this new form of production as “more or less compulsory [emphasis added]” (190-191). The “scale and intensity” of popular agitation during the period against the machinery and the factory confirmed for many historians that the change being wrought was “catastrophic.” “And when this popular agitation is recalled alongside the dramatic pace of change in the cotton industry, it is natural to assume a direct causal relationship” (191-192). Corresponding to this idea of catastrophic change was the image of the “dark, Satanic mill” that was burned upon the mind of the public, which Hayek alluded to in his work.

Thompson describes how many accounts of factory conditions center around the cotton mill. While the cotton mill was “the pace-making industry of the Industrial Revolution,” the cotton industry worker and his experience was not typical of the “average working man” (192-193). Even further, to consider the factory hand as the center of the labour movement was equally problematic, since Jacobins were more likely to be artisans, while Luddites were more likely to be skilled craftsmen in small workshops (193).

Unlike Ashton, who found the outstanding feature of the industrial revolution to be the growth in the population, E.P. Thompson sees the formation of the working class, its growth in class consciousness, and its “corresponding forms of political and industrial organization" as the greatest social features of the industrial revolution (194). To his credit, Thompson does not consider these people as passive individuals being imposed upon by the industrial revolution, but actors that made their own history.

The Classical view presented by Arnold Toynbee, the Hammonds, the Webbs, that the industrial revolution was one of catastrophe--”exploitation,” "cut-throat competition,” "acute class conflict and class oppression”--was gradually being replaced by a new liberal orthodoxy, where all the elements of the classical writers’ narratives were turned on their heads (195). Thompson asserts that this new orthodoxy predominantly gained traction in the historical profession essentially as a running critique against the mistakes and moralising of J.L. and Barbara Hammond in the first decades of the twentieth century. Unfortunately, says Thompson, these liberal historians “too often exhibit a moral complacency, a narrowness of reference, and an insufficient familiarity with the actual movements of the working people of the time” to give a true account of the social history of the working classes. Indeed, says Thompson, the great advantage of the Hammonds is “that they displayed throughout their narrative an understanding of the political context within which the Industrial Revolution took place” (196).

It is here that we see a crucial distinction between Capitalism and the Historians and The Making of the English Working Class. According to Thompson, “there are three. . . .great influences simultaneously at work. There is the tremendous increase in population. . . .There is the Industrial Revolution, in its technological aspects. And there is the political counter-revolution, from 1792-1832 [emphasis original]” (197). Thompson distinguishes between the increase in population and the industrial revolution, rather than arranging them in a causal relationship; that is, Thompson does not, as Hayek did, consider that the increase in population was made possible by the industrial revolution. He considers them as separate phenomena, and places the political counter-revolution on at least an equal plane as the other two factors in their influence on the period.

He then describes “the abrogation or repeal of 'paternalist' legislation covering apprenticeship, wage­-regulation, or conditions in industry” as “political and social apartheid [emphasis original]” (198). Under this “apartheid,” there was “more intensive or more transparent forms of economic exploitation. More intensive in agriculture and in the old domestic industries: more transparent in the new factories and perhaps in mining” (198). Such exploitation as they were subjected to was “intolerable.” In addition, “Relations between employer and labourer were becoming both harsher and less personal” (199). Thompson cites favorably “A Journeyman Cotton Spinner” who claimed that all around Manchester for miles, there was a conspiracy of all employers against the laborer (200). “[O]ld paternalism was set aside” for the depersonalized exploitation of the capitalist system (204). Capitalism was a system

fostering some sorts of expropriation (rent, interest, and profit) and outlawing others (theft, feudal dues), legitimising some types of conflict (competition, armed warfare) and inhibiting others (trades unionism, bread riots, popular political organisation)-a structure which may appear, in the eyes of the future, to be both barbarous and ephemeral (205).

This was the catastrophic nature of industrial capitalism to Thompson, a feeling shared by the great variety of “socialists” Hayek blamed for propagating myths about the industrial revolution.

Thompson begins his assault upon the way economic history has been done (albeit implicitly) when he suggests that “Certainly there were market fluctuations, bad harvests, and the rest; but the experience of intensified exploitation was constant, whereas these other causes of hardship were variable” (207). Apparently, that which is variable can be discounted? Next, he quotes Clapham’s refutation of “The legend that everything was getting worse for the working man,” in order to point out, as Clapham agreed, “that statistics of material well-being can never a people’s happiness,” and that even if we can criticize the view that everything was getting worse, it does not mean the reverse was true (208). He says that both Ashton and Hobsbawm essentially agreed that the standard of living “of the majority was bad in 1790: it remained bad in 1830”; “This does not look very much like a 'success story'; in half a century of the fullest development of industrialism, the standard-of-living still remained-for very large but indeterminate groups--at the point of subsistence” (208-209).

Here, we see Thompson begin his assault on Capitalism and the Historians. He proclaims that “Since this group of international specialists [the Mont Pelerin society members who wrote the book] regarded "a free society" as by definition a capitalist society, the effects of such an admixture of economic theory and special pleading were deplorable; and not least in the work of one of the contributors, Professor Ashton, whose cautious findings of 1949 are now transmuted-without further evidence-into the flat statement that ‘generally it is now agreed that for the majority the gain in real wages was substantial’” (210). Thus, Thompson’s criticism is not quite the same as that which most of the reviewers of the book raised; it was not a criticism of the theory that there was a socialist orthodoxy of historians currently propagating myths about the industrial revolution. Rather, Thompson undertook to criticize the overwhelmingly positive, propagandistic spin the volume gives to the industrial revolution and its impact on the working classes, which generally went unaddressed in the reviews--other than those mentioning Capitalism's one-sided account.

Essentially, Thompson thinks the numbers of the optimist economic historians don’t add up; and, furthermore, he thinks that the quantitative method of economic history obscures as much as it illuminates the condition of the working classes. Thompson points out that while there are some “data amenable to statistical measurement,” there are other qualitative aspects that cannot adequately be accounted for with scientific measurement (210-211):

Where statistical evidence is appropriate to the first, we must rely largely upon "literary evidence" as to the second. A major source of confusion arises from the drawing of conclusions as to one from evidence appropriate only to the other. It is at times as if statisticians have been arguing : "the indices reveal an increased per capita consumption of tea, sugar, meat and soap, therefore the working class was happier", while social historians have replied : "the literary sources show that people were unhappy, therefore their standard-of-living must have deteriorated" (211).

Following this up, he says

It is quite possible for statistical averages and human experiences to run in opposite directions. A per capita increase in quantitative factors may take place at the same time as a great qualitative disturbance in people's way of life, traditional relationships, and sanctions. People may consume more goods and become less happy or less free at the same time (211).

Indeed, these are powerful points. A great error in constructing economic theory, for example, comes from using empirical data, rather than a priori laws deduced from the concept of human action, which cannot be measured; by way of analogy, the historian may be making a great error when he constructs his historical narrative using only that data which can be measured. However, Thompson offers an inadequate solution to the epistemological problem he raises. Thompson’s solution is simply to overwhelm the reader with a deluge of qualitative “facts”--consisting of statements by workers, social reformers, parliamentary inquiries, and other contemporary sources--in order to measure the degree of happiness or misery of the working classes brought on by the industrial revolution. Even if we accept Thompson's criticism, namely that economic statistics cannot measure worker happiness, the economic statistics may still be more accurate in measuring what they are supposed to measure. That is, economic statistics may be (and probably are) much closer approximations to standards of living than Thompson’s deluge of qualitative data is to measuring happiness.

While it is not my purpose to get into Thompson’s overall criticism of the quantitative data, I will conclude by discussing some of Thompson’s critique of W.K. Hutt’s article in Capitalism and the Historians, since it is not a quantitatively oriented article. Thompson says that “there was a drastic increase in the intensity of exploitation of child labour between 1780 and 1840, and every historian acquainted with the sources knows that this is so” (331). It is not so, however, if we reject Marx’s labor theory of value, upon which his theory of exploitation depends, and if the children were old enough to decide for themselves to work. If so, and if parents forced their children to work, why is capitalism to blame for parental decision-making? If so, and if it were parish administrators who collected vagabond children and forced them to work, why again is capitalism to blame for the actions of the state?

Moving on, we see Thompson say that "’optimists' have, since the time of the Hammonds, surrounded the question with so many qualifications that one might almost suspect a conspiracy to explain child labour away” by pointing out that children had to work at a young age before industrialism, the evidence of increasing exploitation was primarily propaganda, among other qualifications (332). In fact, Thompson accepts the general tenor of many of these qualification, yet he says that factory work “By contemporary standards. . . .was arduous, even brutal,” giving a rich description of the kinds of working conditions the children faced (333). He describes Hutt’s article as a “slight, scarcely documented, and often directly misleading article” whose criticisms had been answered long ago, during the time of the industrial revolution itself (336). Even if the Sadler Committee, for example, was rigged to sustain the conclusion that workers were being exploited by managers and capitalists, Thompson says that “it does not follow that the evidence before Sadler's Committee can therefore be assumed to be untrue. In fact, anyone who reads the bulk of the evidence will find that it has an authenticity which compels belief” (337). Furthermore, Thompson criticizes Hutt for concluding from the existence of conflicting evidence that we must therefore side with the employers against their employees, as both Hutt and Neil Smelser do by pointing to the equally partisan Factory Commission of 1833. Buttressing his claims against marginalizing child labor, Thompson says

Even if we leave the stories of sadistic overlookers aside there was then commenced a day, for multitudes of children ' which did not end until seven or eight o'clock; and in the last hours of which children were crying or falling asleep on their feet, their hands bleeding from the friction of the yarn in "piecing", even their parents cuffing them to keep them awake, while the overlookers patrolled with the strap. In the country mills dependent upon water-power, night work or days of fourteen and sixteen hours were common when they were "thronged". If Professor Hutt does not regard this as "systematic cruelty", humane mill-owners like [John] Fielden' and [John] Wood were in no doubt (338).

Of course, the suggestion that Hutt would not regard continued aggression against children as “systematic cruelty” is rather silly; the only pertinent questions of dispute between Hutt and Thompson would be how extensive was aggression and force against children in the factory system, and whether children themselves choosing to work could ever entail exploitation. Additionally, there could be dispute between them as to whether it would be beneficial to eliminate the option of children from poor families--possibly to prevent starvation--to choose factory work, through state legislation. Alas, these questions remained largely unanswered by Thompson. Or, he presupposed favorable circumstances in answering these questions; e.g., Thompson assumed the veracity of the Marxist theory of exploitation, so he could essentially presuppose the existence of child exploitation before even examining the facts.


In conclusion, I believe there needs to be a Capitalism and the Historians of the twenty-first century: an updating, expanding, and, at times, correcting of the scholarship and again answering the questions raised by Hayek in his introduction: "What were the facts? How did the historians present them? and Why?" (29) I would add, "How can we best go about understanding the industrial revolution?" and "How does Austrian economics and praxeology inform this understanding?"

There needs to be both a sturdier empirical grounding of the historical argument against pessimism, as well a concrete methodological and epistemological grounding of the historical work on the industrial revolution. I believe this grounding can be found in the discipline of praxeology, particularly in the concept of revealed preference and the verstehen.


There is undoubtedly much more praise and criticism for Capitalism and the Historians scattered throughout the scholarly literature. This chronicle was not intended to be comprehensive, except in regard to the scholarly reviews available through Jstor. If there are additional reviews out there, or other mentions of Capitalism and the Historians in the scholarly literature, I'd be happy to hear about them. (principialibertatis@gmail.com) 

Hayek, The Road to Serfdom

F.A. Hayek, The Road to Serfdom (New York: Routledge, 2001).

I have decided to write some additional material on Hayek, tangentially related to Hayek’s discussion of the knowledge problem and its relationship to central planning. Below, I will go through Chapters 4 and 5 in Hayek’s most famous work, The Road to Serfdom.

Chapter 4: The “Inevitability” of Planning

The idea that central planning is inevitable, or the conclusion of an inexorable course of events--as advanced by many socialist writers---is little more than propaganda; this idea is rather “the product of opinions fostered and propagated for half a century till they have come to dominate all our policy” (45-46).

The first reason advanced for the inevitability of planning is the economies of scale large firms enjoy over small firms, meaning that we are left with a choice between a market monopoly or planning; competition is no longer a choice (45-47). Unfortunately for socialists, this is at odds with the facts. As firms become larger, they may enjoy some economies of scale in production; however, a larger firm means a greater demand for management to coordinate the production process, but who do not add to productivity itself per se. This means there is a level of optimum efficiency such that growth past this optimum point may lead to diseconomies of scale. In fact, monopolies have generally arisen not through market competition, but through public policy and government grants (47-48). It is only through the protection of the state that a firm could secure a permanent monopoly. In Germany, for example, we can see how “there the suppression of competition was a matter of deliberate policy, that it was undertaken in the service of the ideal which we now call planning” (50).

Another way that technology is supposedly causing the inevitability of planning is the ways in which it has brought about changes in modern society that cannot adequately be solved, but for central planning (50-51). While Hayek (unfortunately) gives some ground to this criticism, he nevertheless points out that

Far from being appropriate only to comparatively simple conditions, it is the very complexity of the division of labour under modern conditions which makes competition the only method by which such co-ordination can be adequately brought about. There would be no difficulty about efficient control or planning were conditions so simple that a single person or board could effectively survey all the relevant facts. It is only as the factors which have to be taken into account become so numerous that it is impossible to gain a synoptic view of them, that decentralisation becomes imperative (51).

The advantage of the market is that it has a price system that “automatically records all the relevant effects of individual actions, and whose indications are at the same time the resultant of, and the guide for, all the individual decisions,” enabling entrepreneurs to “adjust their activities to those of their fellows” as long as competition, rather than state control, is permitted to function (51-52).

A third way in which planning is said to be inevitable is that because technology stimulates competition so greatly, there must be protection against ruinous competition that prevents the use of these new technologies (52-53). Of course, Hayek responds that if it were really true that the technology is useful and efficient, there’s no reason to think it would not stand up to intense competition (53). In fact, in intense competition, a small edge can make a big difference. At best, it may be that we have to choose between using compulsion to gain some benefit from universal adoption of a particular technology and a delay in adoption or non-universal adoption through voluntary choice. At worst, we invoke special pleading and lock-in inferior technologies, in essence making it harder to act on and benefit from new knowledge in the future because of the lack of variety promulgated by compulsion (54).

Hayek points out that we often find some of the most advanced technical experts of the field in the ranks of the planners because

there is little question that almost everyone of the technical ideals of our experts could be realised within a comparatively short time if to achieve them were made the sole aim of humanity. . . .It is the frustration of his ambitions in his own field which makes the specialist revolt against the existing order. . . .Everyone of the many things which, considered in isolation, it would be possible to achieve in a planned society, creates enthusiasts for planning who feel confident that they will be able to instil into the directors of such a society their sense of the value of the particular objective; and the hopes of some of them would undoubtedly be fulfilled, since a planned society would certainly further some objectives more than is the case at present (55).

However, we can see that it substitutes the judgment and preferences of a comparatively small number of individuals for the judgments of the vast array of judgments and preferences that market actors communicate through their decisions, when they buy particular goods and services or invest in particular avenues of production or research. Such a substitution is at best arbitrary and at worst deleterious, as these various experts compete over resources politically, which in turn entrusts the decisions of the distribution and allocation of resources in an even smaller number of hands. The technical expert cannot know whether he’s misdirecting resources into his area of speciality, which he undoubtedly is going to consider as much more value than any other avenue of research or production. As Hayek notes “we all think that our personal order of values is not merely personal, but that in a free discussion among rational people we would convince the others that ours is the right one,” yet to use compulsion to make everyone abide by the judgment of a single individual, or small cadre, rather than the judgments of millions, can lead to costly errors (57). And it is this illusion that the specialist will be able to convince the planner or other specialists of the importance of his personal specialty that impels them to the central planning boards:

The movement for planning owes its present strength largely to the fact that, while planning is in the main still an ambition, it unites almost all the single-minded idealists, all the men and women who have devoted their lives to a single task. The hopes they place in planning, however, are not the result of a comprehensive view of society, but rather of a very limited view, and often the result of a great exaggeration of the importance of the ends they place foremost (57).

While these specialists are extremely valuable when acting within their proper sphere in the marketplace, innovating and producing goods valuable to consumers, they become detrimental when acting in these positions of power--not only because they subsume part or all of their roles within their specialty to their official role, but because their unchecked zeal and single-mindedness toward their special interest goals tend to be intolerant of individual choice and decentralized planning (57-58).


Chapter 5: Planning and Democracy

Hayek identifies the single common feature underlying all socialist systems as the conscious direction of the economy toward a single social goal (59). The main basis for the socialist critique of capitalism has been the lack of this conscious direction toward one overriding goal, instead opting for the anarchy of the market and its transitory coordination. Socialism, then, is a totalitarian creed because conscious direction toward a single aim cannot permit individual actors to pursue their own ends that may conflict with the social goal. Conceiving of a single societal end such as the collective good is an error, Hayek says, because

It cannot be adequately expressed as a single end, but only as a hierarchy of ends, a comprehensive scale of values in which every need of every person is given its place. To direct all our activities according to a single plan presupposes that every one of our needs is given its rank in an order of values which must be complete enough to make it possible to decide between all the different courses between which the planner has to choose (60).

And this is emphatically not the case. It is also problematic because in order to conceive of a single social end, we also have to conceive of a single ethical code governing all situations and proscribing the proper course of action given the social goal (61). Since it is not their own ethical code, any questions they have can only be answered in reference to this external code, with their own ethical presumptions being practically useless in any given situation. If individuals are free to pursue their own ends, such a unitary ethical code is unnecessary; all that is needed is enough commonality to allow voluntary interaction and peaceful exchange to take place with regularity.

“[I]t would be impossible for any mind to comprehend the infinite variety of different needs of different people which compete for the available resources and to attach a definite weight to each” (62), Hayek says. The advantage of individualism is that

It does not assume, as is often asserted, that man is egoistic or selfish, or ought to be. It merely starts from the indisputable fact that the limits of our powers of imagination make it impossible to include in our scale of values more than a sector of the needs of the whole society, and that, since, strictly speaking, scales of value can exist only in individual minds, nothing but partial scales of values exist, scales which are inevitably different and often inconsistent with each other. From this the individualist concludes that the individuals should be allowed, within defined limits, to follow their own values and preferences rather than somebody else's, that within these spheres the individual's system of ends should be supreme and not subject to any dictation by others (63).

And it is through the commonality of ends among individuals--or at least the commonality of wishing to pursue definite courses of action--that social cooperation is made possible and desirable. Individuals may combine in pursuit of a variety of ends, using common courses of actions as a means to achieving these disparate purposes. This commonality, then, is not unlimited in scope, but it does not have to be. The problem with the state is that it uses force to pursue ends that are common to some, but uncommon to others. Namely, it suppresses and subordinates the ends of some individuals to the ends of others--usually through majoritarian rule--promoting social conflict. Unless we believe in the unlikely proposition that men pretty much agree on everything, expanding the scope of state action necessarily shrinks the sphere of individual autonomy and increasingly substitutes common action into areas of widespread disagreement among the population (64).

Even if people can generally agree that the state should be directed toward a single social end using the mechanism of central planning, it is less likely that they will be able to agree in the particulars, i.e., what features will actually promote the common good: “The effect of the people agreeing that there must be central planning, without agreeing on the ends, will be rather as if a group of people were to commit themselves to take a journey together without agreeing where they want to go: with the result that they may all have to make a journey which most of them do not want at all” (65), leaving most people unhappy. A system in which planners are tasked not “to act where they can agree, but to produce agreement on everything,” is one that is doomed to failure. If, in fact, for central planning to be successful, it requires a coherent economic plan from start to finish, it presents insurmountable obstacles in a democratic state. It is unlikely that a single plan will be presented to and accepted by a democratic majority with no changes; “Nor can a coherent plan be achieved by breaking it up into parts and voting on particular issues” (67), because doing so will lose the coherence of the plan and dissipate its effectiveness, as some parts of the plan begin contradicting or undermining other parts. Hence, in practice, the planning will be delegated to a body of experts (68).

Hayek concludes by recognizing that democracy is a means and not an end; what should be focused on is the goals we hope to achieve through democracy, not democracy as such.

There is no justification for the belief that so long as power is conferred by democratic procedure, it cannot be arbitrary; the contrast suggested by this statement is altogether false: it is not the source but the limitation of power which prevents it from being arbitrary. Democratic control may prevent power from becoming arbitrary, but it does not do so by its mere existence. If democracy resolves on a task which necessarily involves the use of power which cannot be guided by fixed rules, it must become arbitrary power (74).


F.A. Hayek, Three Essays on Knowledge

For this post, I will be addressing three essays by Friedrich Hayek on knowledge, listed below. Since they naturally relate to each other, it seems like distilling these three essays into one post on knowledge would be extremely useful.

Friedrich Hayek, “Economics and Knowledge” Economica 4, no. 13 (new ser., February 1937): 33-54. [Also, a Presidential address delivered before the London Economics club, November 10, 1936.]

This first essay addresses the role of individual knowledge in economics. He begins by noting that the relevance of knowledge to foresight began being discussed more broadly in and after the work of Frank H. Knight on risk. Hayek said that it is only through proper assumptions concerning foresight that we can answer many important questions, including the equilibrium rate of interest (33-34). It is here that he made his famous admonition that “before we can explain why people commit mistakes, we must first explain why they should ever be right” (34).

Hayek writes that in applying a priori tautologies to society, we begin seeing the problem of foresight and knowledge take shape--and we see the beginnings of the failure of equilibrium analysis (34-35). He stresses the importance of what he calls the Pure Logic of Choice in economic reasoning, whose truths can only be tested according to “internal consistency” (35)-- what we would today call the praxeological method.

Discussing the concept of equilibrium, Hayek says that “Actions of a person can be said to be in equilibrium in so far as they can be understood as part of one plan,” and equilibrium concerns “relations between actions” (36). The equilibrium construct depends on the data, or facts of the world, being given, i.e., known by the actor. Thus, anything disrupting the plan or altering the facts of the world disrupts the equilibrium that had existed when the plans were made and the individual had perfect information. Once the unfolding facts of the world no longer line up with the actor’s anticipations, we are out of equilibrium. Since actions must necessarily take place in time, any equilibrium construct that neglects time (as many did) is utterly unconnected to the real world (36-37).

As we begin moving away from explaining individual actors with equilibrium analysis, we begin experiencing problems. There are certain conditions that must be met for equilibrium to occurs between multiple people:

[I]n order that all these plans can be carried out, it is necessary for them to be based on the expectation of the same set of external events, since, if different people were to base their plans on conflicting expectations, no set of external events could make the execution of all these plans possible. And, secondly, in a society based on exchange their plans will to a considerable extent refer to actions which require corresponding actions on the part of other individuals. 'This means that the plans of different individuals must in a special sense be compatible if it is to be even conceivable that they will be able to carry all of them out.' Or, to put the same thing in different words, since some of the " data " on which any one person will base his plans will be the expectation that other people will act in a particular way, it is essential for the compatibility of the different plans that the plans of the one contain exactly those actions which form the data for the plans of the other (37-38).

Hayek points out that this problem is “solved” by mainstream economists making demand curves “given,” but because each actor’s “decisions are the other person’s data,” it doesn’t answer how this relationship really works (38).

In section IV, Hayek points out the problem of given data, noting that it has often been unclear what it even meant to have given data; was the data “given to the observing economist, or to the persons whose actions he wants to explain”? (39). Nevertheless, we still have to answer what it could mean for a society to be in equilibrium. One option could be that society is in equilibrium as long as there exists a “mutual compatibility of intentions” such that events could bring about a realization of all plans, with no disappointments (39-40). And if there are not mutually compatible intentions, “We have a situation where a revision of the plans on the part of at least some people is inevitable” (40). It might also be that equilibrium concerns whether the data and expectations possessed by each individual align with the objective data, meaning that we would only know whether society was in equilibrium ex post by whether plans were upset. However, we would only be able to determine if there was a change in the objective data if we first had a mutual harmony of interests and then still found plans disappointed (40).

As a result, Hayek concludes that equilibrium only means a mutual compatibility of plans, and continues to exist  “so long as the external data correspond to the common expectations of all the members of society”; in other words, equilibrium exists so long as market participants have correct foresight (41). As long as the activities of housebuilders correspond to the expectations of future home-buyers, for example, such that “preparations for the production (and acquisition) of the same amount of houses” correspond, there is equilibrium. If this harmony is disrupted by an exogenous change, such as the destruction of building materials that leads to a shortage in house production, future equilibrium is disrupted (42). It is when “different plans were from the beginning incompatible, [that] it is inevitable that somebody’s plans will be upset and have to be altered” (42-43).

It is reasonable to assume that the correspondence of individual, subjective plans with the objective facts probably comes about “due to the experience of the same objective facts,” but equilibrium analysis does not account for how this correspondence comes about--instead, it is simply assumed (43). The “fictitious state of equilibrium” only justifies its applicability to the real world through the economists’ empirical proposition that in the real world a tendency towards equilibrium exists; but, yet again, we fail to find under what conditions and through what processes this tendency is cultivated (43-44).

The problem with the equilibrium analysis is that it assumes a perfect market, or one in which every actor is “strictly omniscient, [or they] are at least supposed to know automatically all that is relevant for their decisions” (45). Yet, if this tendency toward equilibrium does exist, it must at least be demonstrable that people acquire all the relevant knowledge they need to exercise accurate foresight, even if the demonstration is only hypothetical in character. Hayek then points out that whatever hypotheses we might advance here, they are not the self-evident, a priori truths from which we deduce the Pure Logic of Choice that is applicable universally, across space and time (45-46).

The first condition equilibrium theorists advance to prove the tendency towards equilibrium is that there is a “constancy of the data.” However, Hayek advances two reasons why this is not sufficient. First, taken to its extreme, constancy of the data would mean no changes whatever--the cessation of all action, that is, purposeful behavior--which divorces it from the real world. Or, it simply means “that there must be some discernible regularity in the world which makes it possible to predict events correctly,”  but this still leaves open why  it would be likely or probable that people have correct foresight; regularity alone is insufficient (47-48).

What is more important to Hayek is to ask “how much knowledge and what sort of knowledge the different individuals must possess in order that we may be able to speak of equilibrium”? (48). This “relevant knowledge”--rather than perfect information--is important because if the individual possessed different knowledge, he might have acted differently. This raises the problem of the Division of Knowledge, or “how the spontaneous interaction of a number of people, each possessing only bits of knowledge, brings about a state of affairs in which prices correspond to costs. . . .which could be brought about by deliberate direction only by somebody who possessed the combined knowledge of all those individuals” (49). Knowledge of prices, Hayek says, isn’t enough. We need to figure out how “the knowledge of the basic fact of how the different commodities can be obtained and used, and under what conditions they are obtained or used” (50).

When individuals may change their plans due to changing tastes or the collection of new facts, severing the equilibrium connections, we find that new facts can become known in one of two ways. The first way is through accident, whereby the individual learns of new facts outside of the consequence of the pursuance of his plan, and the second way is that in pursuance of his plan, it is inevitable that he or she will “find that the facts are different from what he expected” (51). The conclusion Hayek reaches is that “it is only relative to the knowledge which a person is bound to acquire in the course of the carrying out of his original plan and its successive alterations that an equilibrium is likely to be reached” (52), but that this equilibrium is not a utopian ideal position as the equilibrium construct is usually construed.

F.A. Hayek, “The Use of Knowledge in Society,” American Economic Review 35, no. 4 (September 1945): 519-530.

The knowledge problem which society faces has nothing to do with the set of equilibrium conditions that are given, i.e., assumed in equilibrium analysis. In equilibrium analysis, “the best use of the available means is implicit in our assumptions” (519). In the real world, not so:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess (519).

The problem is how to integrate all these dispersed bits of knowledge such that resources can be efficiently applied as means to achieve the subjectively valued ends of market actors--ends and valuations that only the individual actor can know. If we want to solve the economic problem of society, we need to divorce ourselves from erroneous habits of method that lead us even to misinterpret the problem itself (520).

Planning, according to Hayek, is “the complex of interrelated decisions about the allocation of our available resources” (520). In all cooperative societies where we find economic activity, we will find planning--and we will find that the planner needs to utilize exogenous knowledge not given to the planner. The better the means of communicating this dispersed information, the better the chance we have “of designing an efficient economic system.” The question then becomes whether planning should be centralized among a single individual or small group, or decentralized with planning “divided among many individuals”  in order to utilize this dispersed knowledge (520-521); it is a question of central planning or competition. To answer this question, we have to examine “whether we are more likely to succeed in putting at the disposal of a single central authority all the knowledge which ought to be used but which is initially dispersed among many different individuals, or in conveying to the individuals such additional knowledge as they need in order to enable them to fit their plans in with those of others” (521).

The reason why many people today think that planning should be in the hands of experts comes from the prominence of scientific knowledge. Hayek points out that even if we can expect to find reliable knowledge ably commanded in the hands of suitably chosen experts, the question then becomes one of the method of choosing suitable experts (522). In general, we can expect different kinds of knowledge to be put to their best uses by different sorts of organization, processes, and individuals--there is no single optimal process of which we know. Nevertheless, “scientific knowledge is not the sum of all knowledge”; there is still the critical and unique knowledge of time and place that each individual possesses, “but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation” (522-523). As proof of this, Hayek asks us to consider just how much more we learn in practice, putting our theoretical knowledge into actual use--things which could not be adequately conveyed in a classroom or through training. For example, we need to consider

the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others (522).

Could these individuals have been taught these things purely through training, i.e., through the conveyance of knowledge from an “expert” to someone unaccustomed to the industry or field? The person who regards those individuals who secure an advantage through this kind of practical knowledge as “dishonest” because all this knowledge is “given” in the model, or because it is felt that all information “should be readily at the command of everybody,” is failing to truly grasp the economic problem of how to make the best use of the available, dispersed knowledge. They instead engage in a nirvana fallacy by comparing the real world of imperfect or asymmetric information to a utopian ideal of perfect information, which tells us nothing about the economic problem itself (522).

Hayek next addressed the idea that the economic problem has become less important in modern times, that, “with the elaborate apparatus of modern production, economic decisions are required only at long intervals, as when a new factory is to be erected or a new process to be introduced” (523). If this were true, would we see so many managers in competitive industries spending great quantities of expense and effort to keep costs down? If it was so easy to turn a profit, why aren’t these critiquing individuals investing in the productive process to accumulate sure returns? Turning a profit and producing a product that consumers value is not a mere technical problem, but an economic one. The “reason why economists are increasingly apt to forget about the constant small changes which make up the whole economic picture,” Hayek points out, “is probably their growing preoccupation with statistical aggregates, which show a very much greater stability than the movements of the detail” (523-524). These aggregates hide all the businesses who fail each year, and all the fluctuations individual businesses face for year to year between profits, losses, and breaking even. Track individual firms across these same years and you will find a much different, and less stable, picture. These sorts of aggregates, also, are exactly the kind of thing that would not convey the tacit knowledge of individuals in possession of the unique knowledge of time and place, because these aggregates abstract away from this particular information:

It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place, and that the central planner will have to find some way or other in which the decisions depending on them can be left to the "man on the spot” (524).

Therefore, because

the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders (524).

Yet, these decentralized individuals also need a way of integrating their own “intimate knowledge of the facts” with “the whole pattern of changes in the larger economic system,” otherwise his forecasts and thus his decisions will be at odds with these larger distributed changes, causing his plans to fail (524-525). The information that will be important to him is quantitative, more so than qualitative, in order to make his decisions fit into the broader world. That is, he need not know why particular changes are occurring, only the magnitude and direction of these changes: “It is always a question of the relative importance of the particular things with which he is concerned, and the causes which alter their relative importance are of no interest to him beyond the effect on those concrete things of his own environment” (525).

It is through the price system that this problem heads toward a solution, of which the central planner does not have the advantage of utilizing, meaning he will be at a decisive disadvantage in planning compared to the decentralized actor. A central planner, even if they could be in possession of all knowledge, would in addition have to “go explicitly through all the relations between ends and means which might possibly be affected” every time a change occurs, which is beyond the ability of the single mind to calculate. The price system tells individuals when they need to economize particular resources due to the relative price of that resource, even to the point of substitution if the resource becomes dear enough, and his use of the resource is of less value to him than to some other producer (526).

While the price mechanism does not yield perfect adaptations to change, it still does a wondrous job of allowing individuals to successfully act on the basis of extremely limited knowledge, while distilling and communicating a vast expanse of knowledge into simple indices.

The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly (527).

It is a marvel, Hayek says, because the price mechanism guides people into successful actions and gives individual actors’ decisions “significance far beyond their immediate aim,” yet few people marvel at it because it was not consciously designed by an individual mind and those who utilize the knowledge conveyed by the price system often do not fully understand it (527). Hayek approaches the end of his essay with a plea:

[T]hose who clamor for "conscious direction". . . .should remember this: The problem is precisely how to extend the span of our utilization of resources beyond the span of the control of any one mind; and, therefore, how to dispense with the need of conscious control and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do (527).

It is much more “rational” to try and squeeze as much benefit out of the system that allows us to act on limited knowledge than to hope in vain that a single mind will be collect all knowledge in the world, examine every possible relation between means and ends on the basis of that knowledge, and then be able to consciously direct all of humanity according to a single plan. Quoting Alfred Whitehead, Hayek says that "It is a profoundly erroneous truism, repeated by all copy-books and by eminent people when they are making speeches, that we should cultivate the habit of thinking what we are doing. The precise opposite is the case. Civilization advances by extending the number of important operations which we can perform without thinking about them” (528).

It is an “unavoidable” fact that man has imperfect knowledge, and “ Any approach, such as that of much of mathematical economics with its simultaneous equations, which in effect starts from the assumption that people's knowledge corresponds with the objective facts of the situation, systematically leaves out what is our main task to explain” (530).

F.A. Hayek, “The Pretence of Knowledge,” Speech for The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1974 (December 11, 1974).

In 1974, Friedrich Hayek received The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, sharing the award with Gunnar Myrdal.

In his speech, Hayek blames the then-impending threat of accelerating inflation on the policies recommended by economists. The more closely these economists have imitated the methods of the physical sciences, Hayek says, the greater the propensity for failure in policy recommendations. These economists had adopted a scientistic attitude, whereby economists have uncritically emulated adopted the methods of the physical sciences in economics, producing grave errors in economic policy.

Hayek blames the mistaken monetary and financial policy on the belief that “there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services,” leading to the corresponding “belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level”; in essence, the blame lies on Keynesianism.

One of the reasons why the scientific method works for the sciences is because it can be “generally assumed. . . .that any important factor which determines the observed events will itself be directly observable and measurable, [while] in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process. . . .will hardly ever be fully known or measurable.” Not only this, but in the social sciences, what is treated as important “happens to be accessible to measurement,” to the neglect of the unmeasurable, but possibly more important causal factors. Too often the social scientists are dismissive of anything that is qualitative and incapable of measurement, suggesting that only that which is measurable could be a causal factor: “It can hardly be denied that such a demand quite arbitrarily limits the facts which are to be admitted as possible causes of the events which occur in the real world,” yet those who use this method “happily proceed on the fiction that the factors which they can measure are the only ones that are relevant.” From this, we may find that “there may thus well exist better ‘scientific’ evidence for a false theory, which will be accepted because it is more ‘scientific’, than for a valid explanation, which is rejected because there is no sufficient quantitative evidence for it.”

We must consider “that the social sciences, like much of biology but unlike most fields of the physical sciences, have to deal with structures of essential complexity, i.e. with structures whose characteristic properties can be exhibited only by models made up of relatively large numbers of variables.” In addition, the social sciences have to deal with “phenomena of organized complexity,” which means that

the character of the structures showing it depends not only on the properties of the individual elements of which they are composed, and the relative frequency with which they occur, but also on the manner in which the individual elements are connected with each other. In the explanation of the working of such structures we can for this reason not replace the information about the individual elements by statistical information, but require full information about each element if from our theory we are to derive specific predictions about individual events.”

In examining the price system, for example, not only can we not know all the facts of the world and their frequency of occurring, we “cannot know at which particular structure of prices and wages demand would everywhere equal supply, we also cannot measure the deviations from that order.” It has been useful to apply mathematics to economics in determining the characteristics of general economic patterns, he says, but the search for “the determination and prediction of the numerical values of those magnitudes....has led to a vain search for quantitative or numerical constants.” Equilibrium theory was never meant “to arrive at a numerical calculation of prices,” and its search has probably yielded no “significant contributions to our theoretical understanding” of the market.

While the kinds of theories Hayek favors are “somewhat limited content because it allows us to make only very general predictions of the kind of events which we must expect in a given situation,” they have not experienced the monumental policy failures the reliance on the more “scientific” theories have precipitated. “I confess that I prefer true but imperfect knowledge,” says Hayek “even if it leaves much indetermined and unpredictable, to a pretence of exact knowledge that is likely to be false,” and a pretence that leads to “grave consequences.” The increase of aggregate demand to counter unemployment, for example, has been a cause of the persistence of the business cycle due to the misallocation of resources it drives, as resources are poured into lines of production that will fail once this artificial demand is halted and the misallocation is revealed.

Hayek concludes by restating his argument and explaining the dangers of acting as if we could transcend the insurmountable obstacles to applying scientism to the social sciences. “The chief point we must remember is that the great and rapid advance of the physical sciences took place in fields where it proved that explanation and prediction could be based on laws which accounted for the observed phenomena as functions of comparatively few variables - either particular facts or relative frequencies of events.” In “essentially complex phenomena,” however, “we must refer to a large number of particular facts; and to derive a prediction from it, or to test it, we have to ascertain all these particular facts [emphasis added,]” and the difficulty “consists in the ascertainment of the particular facts.”

Hayek then gives an example of a ball game, where if we knew everything about the individual players, and every other particular fact affecting the outcome of the game, we could probably predict its outcome. Yet, we cannot know all of these particular facts. But, “If we know the rules of the different games we shall, in watching one, very soon know which game is being played and what kinds of actions we can expect and what kind not. But our capacity to predict will be confined to such general characteristics of the events to be expected and not include the capacity of predicting particular individual events.”

To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. In the physical sciences there may be little objection to trying to do the impossible; one might even feel that one ought not to discourage the over-confident because their experiments may after all produce some new insights. But in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority. Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims. . . .The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men's fatal striving to control society - a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.

Frédéric Bastiat, The Law (Part II)

  Frédéric Bastiat (  June 30, 1801 – December 24, 1850). At the time when  The Law  was written, Bastiat knew he was dying of tuberculosis. Within a year, he was dead.

Frédéric Bastiat (June 30, 1801 – December 24, 1850). At the time when The Law was written, Bastiat knew he was dying of tuberculosis. Within a year, he was dead.

Frederic Bastiat, The Law (Irvington-on-Hudson: Foundation for Economic Education, 1994).

[Part I here] In some cases, these intellectuals, such as Robespierre, have advocated dictatorship in order to achieve these ends, of bending society into a particular moral view, although most have favored “an indirect approach to despotism,” which involved gaining control of the mechanisms of state power and making laws (41-43). Ultimately underlying these approaches to freedom is the idea that we not only need to be free from restraint, but also be equipped with the means necessary to do whatever we wish. However

once it is agreed that a person, to be truly free, must have the power to use and develop his faculties, then it follows that every person has a claim on society for such education as will permit him to develop himself. It also follows that every person has a claim on society for tools of production, without which human activity cannot be fully effective. Now by what action can society give to every person the necessary education and the necessary tools of production, if not by the action of the state? (45)

Hence the inherent danger of defining freedom as the power to do what one wishes, for if it is the state that gives these means to individuals in society, it must have first taken them away from others in society.

Summing up his description of the view of socialists, he says

The strange phenomenon of our times — one which will probably astound our descendants — is the doctrine based on this triple hypothesis: the total inertness of mankind, the omnipotence of the law, and the infallibility of the legislator. These three ideas form the sacred symbol of those who proclaim themselves totally democratic.

The advocates of this doctrine also profess to be social. So far as they are democratic, they place unlimited faith in mankind. But so far as they are social, they regard mankind as little better than mud(45-46).

In this respect, they are certainly contradicting themselves. It cannot both be that every individual ought to have a say in making the laws while ascribing degeneracy to the general character of mankind, unless we assume that degeneracy is the proper qualification for making laws--although, given the behavior of politicians throughout history, that might not be very far from the truth.

If we accept the assumption that people do really have such degenerative tendencies, then the idea of a legislator promoting freedom seems contradictory. If competition ruins economies and produces monopolies which harms the consumer, why should there be economic freedom, including freedom to labor and exchange? Why should there be freedom to pursue an education, freedom of speech, or freedom of conscience if the people are inclined to adopt and favor dangerous ideas? Very rapidly, we will find that all liberties are dangerous under a socialist mindset. Therefore, all liberty must be extinguished in favor of absolutist, paternalist control. “If people are as incapable, as immoral, and as ignorant as the politicians indicate, then why is the right of these same people to vote defended with such passionate insistence?” (48)

Bastiat identifies a fallacy in the socialist reasoning, what we might call the Superman Fallacy, namely

If the natural tendencies of mankind are so bad that it is not safe to permit people to be free, how is it that the tendencies of these organizers are always good? Do not the legislators and their appointed agents also belong to the human race? Or do they believe that they themselves are made of a finer clay than the rest of mankind?....Apparently, then, the legislators and the organizers have received from Heaven an intelligence and virtue that place them beyond and above mankind (48).

Such a view ultimately renders the bulk of humanity as the sheep to the intellectual’s shepherd.

Next, Bastiat defines economics as the science of determining whether the interests of human beings are harmonious or antagonistic,” which he says “must be known before a science of politics can be formulated to determine the proper functions of government” (51-52). When politics becomes concerned with more than preventing injustice, and instead becomes “religious, fraternal, equalizing, philanthropic, industrial, literary, or artistic,” (53) we will find that the law becomes “the battlefield of all kinds of wild fantasies and unbridled greed” (54). Bastiat, very astutely, points out that a government only concerned with suppressing injustice would never have to face uprisings, revolutions, and other movements that blame the government for particular sufferings of the people. This is because the people would recognize that their sufferings are only those that are “inseparable” from the human condition:

Have the people ever been known to rise against the Court of Appeals, or mob a Justice of the Peace, in order to get higher wages, free credit, tools of production, favorable tariffs, or government-created jobs? Everyone knows perfectly well that such matters are not within the jurisdiction of the Court of Appeals or a Justice of the Peace. And if government were limited to its proper functions, everyone would soon learn that these matters are not within the jurisdiction of the law itself (54).

In his section titled “Justice Means Equal Rights,” Bastiat points out that rights must be considered equal and universal for all. If rights are not equal, it means the law grants the power to some to make laws for the many. But, as Bastiat points out

By what right does the law force me to conform to the social plans of [any one individual]? If the law has a moral right to do this, why does it not, then, force these gentlemen to submit to my plans? Is it logical to suppose that nature has not given me sufficient imagination to dream up a utopia also? Should the law choose one fantasy among many, and put the organized force of government at its service only? (55)

    Many attest to the idea that without using the law to promote positive goals, virtues or morality, private individuals will not pursue these ends, practice these virtues, and abide by this morality voluntarily. Bastiat responds:

Do those worshippers of government believe that free persons will cease to act? Does it follow that if we receive no energy from the law, we shall receive no energy at all? Does it follow that if the law is restricted to the function of protecting the free use of our faculties, we will be unable to use our faculties? Suppose that the law does not force us to follow certain forms of religion, or systems of association, or methods of education, or regulations of labor, or regulations of trade, or plans for charity; does it then follow that we shall eagerly plunge into atheism, hermitary, ignorance, misery, and greed? (55)

So what is the solution to the problem of how to increase individual well-being, promote social cooperation, develop individual faculties, and prevent injustice? “The solution to the problems of human relationships is to be found in liberty”:

Away, then, with quacks and organizers! A way with their rings, chains, hooks, and pincers! Away with their artificial systems! Away with the whims of governmental administrators, their socialized projects, their centralization, their tariffs, their government schools, their state religions, their free credit, their bank monopolies, their regulations, their restrictions, their equalization by taxation, and their pious moralizations!

And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty (58).


Frédéric Bastiat, The Law (Part I)

Frédéric Bastiat, The Law (Irvington-on-Hudson: Foundation for Economic Education, 1994).

Bastiat begins by explaining the origins of our rights, finding that they are God-given and concern the right to life, liberty, and property. Since men have the natural right to defend their life and liberty, they therefore have the right to organize collectively in order to achieve this purpose more effectively. Law, in Bastiat’s formulation, is thus “the collective organization of the individual right to lawful defense” (2). This collective force cannot transcend the mission it was created for: “Since no individual acting separately can lawfully use force to destroy the rights of others, does it not logically follow that the same principle also applies to the common force that is nothing more than the organization combination of the individual forces?” If this collective force began making rules and regulations concerning for what peaceful uses individuals can use their lawfully owned property, it would be overstepping its mission and acting unjustly. Yet, according to Bastiat, men try to substitute plunder for labor in order to “live and prosper at the expense of others” when plundering becomes less costly than labor (4-5). “This fatal desire has its origin in the very nature of man--in that primitive, universal, and insuppressible instinct that impels him to satisfy his desires with the least possible pain” (5).

Once the law becomes perverted to destroy independence, liberty, and property, society inevitably rebels against oppression and plunder, or is corrupted into sharing in the spoils. “Until that happens, the few practice plunder upon the many. . . .But then, participation in the making of law becomes universal. And then, men seek to balance their conflicting interests by universal plunder. Instead of rooting out the injustices found in society, they make these injustices general” (6). The perversion then forces them to choose between morality and injustice, a choice that will either curb his moral sensibilities or curb his respect for the law (7). And when law and morality are divorced, it engenders the individual to question whence the legitimacy of the law springs, for it is no longer immediately evident why such rules are valid when they conflict with the individual’s basic moral premises. State functionaries are then induced to imagine ingenious narratives; for the immaculate conception of the state, for positivism--the law is just because it is the law--or for the convenient lie that the law springs from the people, and it was the people themselves who authorized the law, even though no such consent has ever occurred.

Another effect identified by Bastiat is that this perversion enlarges the political sphere--shrinking individual autonomy--and thus aggrandizing the significance of politics (8). Politics would essentially be nonexistent if government only had the power to protect life, liberty and property, rather than to plunder, for where there is nothing to gain by politics very few will waste their time engaging in it. In addition, Bastiat distinguishes between legal and illegal plunder. Illegal plunder, such as bare theft, is only a small problem to the free society because it is not systematically organized and bears no stamp of legitimacy. However, plunder organized and sanctioned by the State--legal plunder--threatens society itself by creating antagonistic interests each of whom fight for a greater share of the treasure in a zero-sum game. It institutionalizes plunder and creates vested interests who benefit from it and stand to lose a great deal if and when it ceases to exist (10-13). The easiest way to define legal plunder, says Bastiat, is to “See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime” (13).

Bastiat finds the most popular fallacy of his times--”socialism”--to be that

It is not considered sufficient that the law should be just; it must be philanthropic. Nor is it sufficient that the law should guarantee to every citizen the free and inoffensive use of his faculties for physical, intellectual, and moral self-improvement. Instead, it is demanded that the law should directly extend welfare, education, and morality through the nation (16).

The problem is that in moving beyond protecting “mere” freedom through the law, we begin destroying freedom because each of these things we would hope to provide necessarily diminish the sphere of voluntary action and restrict freedom.

He defines plunder as the forced or fraudulent transfer of property from one individual to another (17). The problem of legal plunder separates the receiver of the benefits of plunder from the individuals who commit the plunder, which is very dangerous. This distancing was the same tactic used in many twentieth century acts of genocide to distance the perpetrator from the genocidal act and his victim, allowing an unprecedented scale of horrors. Bastiat identifies three systems of plunder, namely protectionism, socialism, and communism, all of which derive from the same underlying principle of plunder but have different gradations.

It is important to remember that force is only applicable and legitimate under certain circumstances, so insofar as the law is the organized use of force, to use the law to organize labor, education, religion, or other objects would destroy justice.

When law and force keep a person within the bounds of justice, they impose nothing but a mere negation. They oblige him only to abstain from harming others. They violate neither his personality, his liberty, nor his property. They safeguard all of these. They are defensive; they defend equally the rights of all (19). 

In acting positively on people, the law imposes rather than defends.

The idea that the law and charity could be compatible is inconceivable, admonishes Bastiat, for each dollar in possession of the treasury to dole out for “charity” has been taken from someone else--this is the very definition of plunder (21). It is no more charity to use the law to organize education or religion than to organize oppression. Bastiat notes that this view has been branded individualism by its opponents, no doubt to give the impression that those who oppose the organization of these needful enterprises by force are actually against fraternity, cooperation, brotherhood, charity, association etc. Yet, Bastiat points out that

we repudiate only forced organization, not natural organization. We repudiate the forms of association that are forced upon us, not free association. We repudiate forced fraternity, not true fraternity. We repudiate the artificial unity that does nothing more than deprive persons of individual responsibility (22).

In making making this charge, the socialist

confuses the distinction between government and society. As a result of this, every time we object to a thing being done by government, the socialists conclude that we object to its being done at all. We disapprove of state education. Then the socialists say that we are opposed to any education. We object to a state religion. Then the socialists say that we want no religion at all. We object to a state-enforced equality. Then they say that we are against equality. And so on, and so on. It is as if the socialists were to accuse us of not wanting persons to eat because we do not want the state to raise grain (22). 

In thinking this, Bastiat says socialist writers are under the impression that individuals “are susceptible to being shaped — by the will and hand of another person — into an infinite variety of forms, more or less symmetrical, artistic, and perfected” and that it is they, the socialist intellectual, who must do the shaping (23). Bastiat believes that socialists see mankind as possessed by inclinations to do wrong, or to do the opposite of what safety, productivity, and morality require of them. They also see, however, that some people, such as themselves, are not possessed with this disability, and it is people like themselves who ought to legislate “in order to substitute their own inclinations for those of the human race” through the use of force (25).

Montesquieu had thought that the laws ought to level incomes enough that the wealthy had to continue to labor in order to continue accumulating wealth. This view of democracy and the need for equality was pervasive among many scholars and laymen alike. However Bastiat points out that absolute equality, or even a high degree of relative equality, may be detrimental. Even if such equality could be achieved through the law, it still constitutes plunder; and the means to achieving such equality in practice would be “frightful” (30-32).

Next, Bastiat examines what Rousseau had to say on the subject. Since Rousseau thought the enlightened prince was rare, it must be that the enlightened legislator, by whom the Prince’s actions are guided, is even more rare. Under these conditions, we should expect that a legislator, choosing to direct the efforts of government after a particular object, may make mistakes in choosing the object of government desired by the people or conducive to their well-being. This will have severe consequences in the form of unanticipated effects and greater popular agitation (32-35).

The chief error of socialist writers was to assume the desirability of the structures of past societies such that they should be presently implemented: They did not understand that knowledge appears and grows with the passage of time; and that in proportion to this growth of knowledge, might takes the side of right, and society regains possession of itself” (39) And it is the desire of intellectuals “to set themselves above mankind in order to arrange, organize, and regulate it according to their fancy” that has led to the destruction of liberty wherever this tendency is found.


Murray N. Rothbard, "Individualism and the Philosophy of the Social Sciences," Part II

 [Page from the Introduction, written by F.A. Hayek.] This copy was purchased used from the Mises Institute. As you can see, it contains a humorous comment in the margins; who wrote this is unknown.

[Page from the Introduction, written by F.A. Hayek.] This copy was purchased used from the Mises Institute. As you can see, it contains a humorous comment in the margins; who wrote this is unknown.

Part II: Praxeology as the Method of the Social Sciences

1. The Praxeological Method

Rothbard begins by noting the mathematical turn in the economics profession, which he considers a lamentable development:

Let the nonspecialist in economics pick up a journal article or monograph today and contrast it with one of a generation ago, and the first thing that will strike him is the incomprehensibility of the modern product. The older work was written in ordinary language and. . . .was comprehensible to the layman” (31).

While this mathematical development has occurred throughout the social sciences, economics--ostensibly concerned with measurable quantities--adopted and embraced the development rapidly. The adoption of mathematical formalism in economics coincides with the sweeping of the profession by positivism, no doubt provoked by envy among the social sciences of the success physics has had in explaining the universe through resort to the scientific method. Rothbard describes the scientific method as follows:

  1. Observation of regular phenomena

  2. Construction of hypothetical generalizations

  3. Deduction of testable hypotheses out of the generalizations

  4. Adoption of phenomena that survive tests of falsifiability, and gradually replacing older theories with “new explanations covering a still wider range of phenomena” (32).

It is important that the third step involve controlled experiments to isolate the variable to be tested and allow for it to be repeatedly replicated. Rothbard importantly notes that in the positivistic method, we proceed from that which is known with certainty--the empirical regularities--ip through even wider and more tentative hypotheses” (32). This method lies in stark contrast to the praxeological method exposited by Ludwig von Mises in Human Action: A Treatise on Economics. In praxeology, the economist begins in a more advantageous position than the physicist: “He beings, not with detailed, quantitative, empirical regularities, but with broad empirical generalizations. . . .[which] he knows with certainty” resulting from the individual’s existence, from his vantage point as a conscious, acting human being. And from these broad empirical generalizations, the praxeologist can deduce a series of apodictically certain propositions about human action as such. Human beings “do not simply ‘move,’ as do unmotivated atoms or molecules; they act” using means to achieve their ends, ends which are ranked ordinally according to the individual's relative valuation at any particular point in time and space (35).

The problem with applying positivism from the social sciences can be summed up in the inability of the social scientist to conduct a controlled experiment, and the inability of positivism to distinguish between competing claims to explanation of particular historical episodes. Rothbard gives the example of the Great Depression:

Keynesian economists hold that depressions can be cured by massive doses of deficit spending by the government. The United States government engaged in large-scale deficit-spending to combat the depression in the late 1930s, but to no avail. The anti-Keynesians charge that this failure proves the incorrectness of Keynesian theory; the Keynesians reply that the doses were simply not massive enough, and that far greater deficits would have turned the tide (34).

How can the positivist distinguish meaningfully between these competing theories, each of which seem to fit the data?

Praxeology distinguishes itself from some other social sciences in its focus on the formal fact of human action, whereas ethics, technology, and psychology focus on the substantive content of values and actions (37). It is through the mental experiment, the praxeological analog to the controlled physical experiment, that the social scientist holds constant variables in his mind in order to find, using deductive logic, the relationship between supply and demand of a good, for example. In so doing, “economics arrives at ceteris paribus laws: Given the supply, the price will change in the same direction as demand; given the demand, price will change in opposite direction from supply” (38). At this point, Rothbard found it useful to interject the point that the laws of praxeology, and thus economics, are qualitative and not quantitative; while we can express that given the supply, the price will change in the same direction as demand, we cannot foresee the quantitative, empirical relations, i.e., we cannot say in any particular instance if demand increases by x, the price must increase by some determined quantity or proportion (39).

Next Rothbard delves into this qualitative-quantitative dichotomy between the social sciences and the physical sciences, again pointing to the primordial fact of individual consciousness and purposeful behavior as the difference between rocks and human beings that explains why we require a different method to study human action. In practice, if we were trying to determine what factors account for the change in supply and demand of a particular good, we would find innumerable factors, each of which “is subject to continuing and unpredictable change” (39). Thus we can see why “Even if one mammoth equation could be discovered to ‘explain’ [the price of a particular good over a span of time]. . . .there is no guarantee, and not even the likelihood, that the equation would have anything to do with the next month’s price” (39). Beating the empiricists at their own game, Rothbard finds that econometricians have had an abysmal record at forecasting future economic phenomena, and have likewise failed “to find one single quantitative constant in human affairs” (39).

Rothbard then grounds the method of praxeology firmly in the soil of the natural sciences, noting that each science does not seek to predict the future, but to explain what would happen under specified conditions. Furthermore, he criticizes the positivists for treating historical events as homogenous to other events and thus predictable, whereas the praxeologist recognizes that “each historical event is the highly complex result of a large number of causal forces and, further, that it is unique and cannot be considered homogenous to any other event” (42); hence, the praxeologist rules out the possibility of historical “laws” of human action distinct from the laws of the purely natural, mechanistic world.

The work of the historian, consisting largely of verstehen, or a common-sense specific understanding, is, however, capable of applying both the physical sciences and those sciences related to the content of human action and choice to the causal understanding of past events. “The economic historian combines all of his scientific knowledge with his understanding of motives and choices to attempt to explain the complex historical phenomena” of prices throughout history, for example. This work is more of an art than a science, however, because “While historians may well agree on the enumeration of all the relevant causal factors in the problem, they will differ on the weight to be attached to each factor”; therefore, economic historians “can come to qualitative but not quantitative agreement” (42-43).

2. The Praxeological Tradition

In this section, Rothbard outlines the great economists whose work was in the praxeological tradition of deduced economic law. First, there is French political economist Jean-Baptiste Say, who found that economics had at its foundation a few fundamental principles--derived from general facts--from which numerous other corollaries could be drawn (45-46). Say disputed  the utility of statistics without political economy, for a set of facts is meaningless without sound reasoning attached to them that reveals their implications (47). Say also recognized the qualitative-quantitative distinction, coming down in favor of the qualitative method for political economy. Because man’s values were “subject to the influence of the faculties, the wants and the desires of mankind, they are not susceptible of any rigorous appreciation, and cannot therefore furnish any data for absolute calculations” (47).

Rothbard then moves on to John E. Cairnes, a nineteenth century political economist concerned with methodology, who wrote that in the physical sciences, “mankind have no direct knowledge of ultimate physical principles,” while in economics “The economist starts with a knowledge of ultimate causes,” paralleling the point made by Rothbard about the relative advantage of the praxeologist, who is “in the know” and realizes the basic truth that mankind exists, has consciousness, and acts, compared to the physicist, who is relegated merely to observing complex external phenomena that he has no special insight into (49). Cairnes also had an aversion to the idea that individual value was capable of objective measurement, which he found impossible to determine precisely (50). Nassau Senior, a relative contemporary of Cairnes, believed in the a priori truth that man is never completely satisfied, given that he acts, and continually seeks to remove felt uneasiness and increase his satisfaction (50). Senior also believed that some economic propositions were self-evident truths and that economics was a mental science where the controlled experiment takes place in the mind (51). He then connects the Austrian school of Carl Menger, Eugen von Bohm-Bawerk and Ludwig von Mises to praxeology, and their differences with the Lausanne school started by Leon Walras, who independently discovered marginal utility around the same time as Menger, but who saw utility, or value, as something measurable and calculable, rather than as an ordinal relationship (51-54). Rothbard concludes the section by parsing through the debate at the turn of the twentieth century between Benedetto Croce and Vilfredo Pareto. The debate centered around how to appropriately study economics, with Croce asserting “that the true data of economics are not ‘physical things and objects, but actions,’” while Pareto believed that the concept of value was incomprehensible, and that “the equations of pure economics establish relations between quantities of things, hence objective relations, and not relations between more or less precise concepts of our minds” (54-55).

3. Methodological Individualism

In his final section, Rothbard sets out the principle of methodological individualism, which says that only individuals act, hence collectives do not act, except insofar as they can be reduced to the actions of discrete individuals (57). Collectives do not have an independent existence, although the minds of individuals may attach special significance to the collective organization. The notion of collective “action” is itself a mechanism by which individual actors are absolved of personal responsibility for their actions, while those who were not responsible for particular actions are held responsible when “society” is blamed for anti-social behavior, Rothbard says. Bringing the discussion full circle, he notes that the treatment of society as a “biological organism,” for instance “overlook[s] or even negate[s] individual will and consciousness in social and economic affairs,” tending towards a deterministic view as society is analogized to an organism devoid of consciousness and thus purely physical and capable of prediction. For Rothbard, methodological individualism is the only valid way to study human action; once we realize the truth of the action axiom, all else follows.

Murray N. Rothbard, “Individualism and the Philosophy of the Social Sciences," Part I

Individualism and the Philosophy of the Social Sciences


Murray N. Rothbard, “Individualism and the Philosophy of the Social Sciences,” Cato Paper no. 4 (1979): 1-61 (with a foreword by Friedrich A. Hayek).

Part 1: The Mantle of Science (originally appeared in Scientism and Values edited by Helmut Schoeck)

1. Introduction

Murray Rothbard’s essay, “Individualism and the Philosophy of the Social Sciences,” published as a pamphlet by the Cato Institute in 1979, attempted to dispel the scientism that had taken over the study of the social sciences by the mid-twentieth century. “Scientism,” Rothbard said “is the profoundly unscientific attempt to transfer uncritically the methodology of the physical sciences to the study of human action” (3). The problem with scientism is that only human beings act, choosing their courses of action, whereas “stones, molecules, planets cannot choose their courses.” Human beings have free will and consciousness, and to ignore this fact in studying human action is a grave error. It is through reason that man purposefully applies means to achieve his ends, finding what ends and means to embrace as he moves through the course of his life. He lists praxeology, technology, psychology, and ethics as beyond the scope of scientism, for they all coalesce around the primordial fact of human free will and consciousness (4).

2. The Problem of Free Will

Rothbard goes on to attack crude, dogmatic determinism, finding that “each human being knows universally from introspection that he chooses” (5). Each thing is determined in the sense that “every existing thing must have a specific existence. Having a specific existence, it must have certain definite, definable, delimitable attributes, i.e., every thing must have a specific nature” that each thing cannot transcend: “the actions of every being are caused by, determined by, its nature” (5). Man’s nature, particularly, is characterized by consciousness and the mind determines his actions.

Given that the philosophy of determinism contradicts man’s most basic impressions of his free will, without strong evidence to contradict this obvious fact, Rothbard said the determinists should at least “keep quiet until they can offer their determinations--including, of course, their advance determinations of each of our reactions to their determining theory” (6). In addition, he finds determinism self-contradictory, for any individual who advances the proposition of determination must believe that each individual’s mind is not free to accept or reject the theory of determinism--or any other theory, for that matter--and so “it is absurd for X to try to convince Y or anyone else of the truth of determinism” (6). Even further, Rothbard attacks determinism since the claim of determinists that they could one day foretell the future actions of every individual is itself determined, along with their own judgments about the truth of determinism (7).

He then dissipates the notion that man is not free because he is bound to obey natural laws by pointing out this blurs the distinction between freedom and power: “It is clearly absurd to employ as a definition of “freedom” the power of an entity to perform an impossible action, to violate its nature” (8). Society is not the determinant of what ideas an individual accepts, either, because individuals can respond differently to the same stimuli, that is, one individual can hear, say, determinism being espoused and accept it, while another can reject it, proving that the individual chooses and exercises his free will. Men are always free to think about a proposition before accepting it, and rethink it later in life, regardless of their circumstances or the society in which they find themselves. Furthermore, this reveals that the popular notion that things are culturally determined, or determined by institutions, is a poor explanation for historical phenomena, since it is men themselves who create culture and institutions (9). Despite the insistence by many “that all of life is multicausal and interdependent,” Rothbard says “we are confronted with the fact that there can logically be only one ultimate sovereign over a man’s actions: either his own free will or some cause outside that will” (10).

“A self-evident axiom. . . .will be a proposition that cannot be contradicted without employing the axiom itself in the attempt (10),” and, as should be evident by the preceding discussion, “consciousness is not only evident to all of us through direct introspection, but is also a fundamental axiom, for the very act of doubting consciousness must itself be performed by a consciousness” (10).

3. The False Mechanical Analogies of Scientism

First, Rothbard effectively combats the analogy that machines think--what he calls “servomechanism”--by pointing out that “What is overlooked here is that machines, no matter how complex, are simply devices made by man to serve man's purposes and goals; their actions are preset by their creators, and the machines can never act in any other way” (11). He goes on to attack “the mathematical method,” which he terms “an illegitimate transfer from physics.” It is illegitimate as applied to human behavior because mathematical function implies the possibility of determining what is held constant and what is variable, not to mention that there are quantities with discreet units that are capable of measurement, which man’s free will eliminates from possibility (13). The idea of equilibrium states, as well, is wholly inapplicable to the social sciences, where equilibrium never exists, and even to posit its possibility leads to dangerous policy conclusions, if we judge real institutions according to some utopian equilibrium state, namely, the nirvana fallacy (13-14).

4. The False Organismic Analogies of Scientism

When social scientists adopt views that imply society is akin to an organism, such as the idea that culture determines individual action, it often leads social theorists to hold the “goals” of the social entity above those of individuals, its constituent members (15). The idea that the market is “impersonal,” similarly implies that the market is a conscious entity capable of being personal or impersonal, rather than that some particular individuals are interacting in such ways that he considers impersonal (16). Rothbard gives numerous other examples of organismic analogies that signify the decay of the social sciences into a mystical worship of the fictitious collective, which at best are bound to mislead, if not cause errors to be committed by the social scientists, as well as the general public who are subjected to continual bombardment by these metaphors (17).

5. Axioms and Deductions

Rothbard sets out his definition of praxeology, namely the science of human action, concerned with studying “the universal formal fact that all men use means for chosen ends, without investigating the processes of the concrete choices or the justification for them” (19), and deducing from this a whole body of a priori theory applicable to human action as such. The study of human action, unlike the physical sciences, “begin[s] with the primary axioms” and then “build[s] upon them by logical deduction,” whereas we are stuck measuring external phenomena and generalizing from these phenomena to create testable hypotheses. We cannot conduct controlled experiments in the social sciences, for we cannot hold constant individual ideas and valuations which are “continually subject to change,” not even to mention the difficulty of holding any other factors constant (20).

6. Science and Values: Arbitrary Ethics

In this section, Rothbard criticizes the idea that there can truly be a value free social science, or Wertfreiheit, as long as these individuals accept popular values prima facie: “A man who knowingly advises a criminal gang on the best means of safe-cracking is thereby implicitly endorsing the end: safe-cracking. . . .The economist who advises the Federal Reserve System how most expeditiously to manage the economy is thereby endorsing the existence of the system and its aim of stabilization” (24). Most of the supposedly value-free social scientists have pretended to abide by Wertfreiheit but instead acquiesced in the values of those whom they are advising, as we can see above.