Mises, Action and Uncertainty

If we want a spectacular example of why Mises was a third-rate thinker, we need look no further than this:

“The uncertainty of the future is already implied in the very notion of action. That man acts and that the future is uncertain are by no means two independent matters. They are only two different modes of establishing one thing.

We may assume that the outcome of all events and changes is uniquely determined by eternal unchangeable laws governing becoming and development in the whole universe. We may consider the necessary connection and interdependence of all phenomena, i.e., their causal concatenation, as the fundamental and ultimate fact. We may entirely discard the notion of undetermined chance. But however that may be, or appear to the mind of a perfect intelligence, the fact remains that to acting man the future is hidden. If man knew the future, he would not have to choose and would not act. He would be like an automaton, reacting to stimuli without any will of his own. Some philosophers are prepared to explode the notion of man’s will as an illusion and self-deception because man must unwittingly behave according to the inevitable laws of causality. They may be right or wrong from the point of view of the prime mover or the cause of itself. However, from the human point of view action is the ultimate thing. We do not assert that man is ‘free’ in choosing and acting. We merely establish the fact that he chooses and acts and that we are at a loss to use the methods of the natural sciences for answering the question why he acts this way and not otherwise.

Natural science does not render the future predictable. It makes it possible to foretell the results to be obtained by definite actions. But it leaves unpredictable two spheres: that of insufficiently known natural phenomena and that of human acts of choice. Our ignorance with regard to these two spheres taints all human actions with uncertainty. Apodictic certainty is only within the orbit of the deductive system of aprioristic theory. The most that can be attained with regard to reality is probability.” (Mises 2008: 205).

The words in yellow are a gross non sequitur.

It is untrue that, if a human being knew the future perfectly, then he would not act. On the contrary, a simple thought experiment suffices to show how absurd this idea is.

Imagine you knew the future without any uncertainty, that is, a perfect knowledge of the future and perfect knowledge of the consequences of your acts. Would you suddenly cease acting?

Of course not. Unless you want to die, you would continue eating. You would know what foods pleased you best and would never have the misfortunate to eat some spoilt food which would make you sick.

Furthermore, you could, for example, make all the money you ever dreamt of by betting at horse races, playing the lotto, or gambling at a casino, and win precisely because you would know what actions to take in order to win a fortune. You would, moreover, never have any serious accident because you could foresee all consequences of all actions.

Endless examples quickly multiply for why we would continue to act even if we knew the future.

And Mises is also wrong to think the reality of uncertainty is deduced from the action axiom.

How could Mises know that there are no human beings who have perfect knowledge of the future to begin with?

You cannot know this a priori. The statement

(1) no human being now or in the past has or has had a perfect knowledge of the future

is a synthetic a posteriori statement. We can establish it as true to a high degree of probability, but only with empirical evidence and inductive arguments.

For example, we have no recorded example of a human being who could predict perfectly all things in the future. Instances where people claim to know the future (as in astrology, magic or clairvoyance) are unconvincing. Frequently such people are wrong, can be shown to be charlatans, or their “predictions” when apparently true are neither impressive nor out of the ordinary in that they can be shown to be lucky guesses or deductions based on evidence they already have (think of a clever palm reader who simply guesses things about people on the basis of observation and probability).

We know from empirical investigation of human beings that they have experience of the present and memories of the past, but no memories of the future. And there is no scientific evidence that dreams, for example, foretell the future.

Modern science and biology make it extremely unlikely that any human being could know the future, and no possible scientific explanation for how this could be possible has ever been proposed.

All in all, the weight of evidence can be used to construct a set of inductive arguments to the effect that it is highly probable that proposition (1) is true.

But Mises’s action axiom cannot establish its truth. Indeed, the very idea that “all human action by non-mentally-ill human beings aims at ends and is, in this sense, purposeful” can only be proved by empirical evidence and inductive argument too.

Why? Because Mises cannot even establish a clear definition and criteria for

(1) what constitutes a non-mentally-ill human being, or

(2) what constitutes conscious and voluntary human action in the first place

without recourse to a vast amount of empirical scientific evidence about human behaviour, via medicine, psychology and biology.

BIBLIOGRAPHY
Mises, L. von. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Mises Institute, Auburn, Ala.

Mises on Marginal Cost: A Critique

Mises discusses marginal cost and prices here:

“The planning entrepreneur is always faced with the question: To what extent will the anticipated prices of the products exceed the anticipated costs? If the entrepreneur is still free with regard to the project in question, because he has not yet made any inconvertible investments for its realization, it is average costs that count for him. But if he has already a vested interest in the line of business concerned, he sees things from the angle of additional costs to be expended. He who already owns a not fully utilized production aggregate does not take into account average cost of production but marginal cost. Without regard to the amount already expended for inconvertible investments he is merely interested in the question whether or not the proceeds from the sale of an additional quantity of products will exceed the additional cost incurred by their production. Even if the whole amount invested in the inconvertible production facilities must be wiped off as a loss, he goes on producing provided he expects a reasonable surplus of proceeds over current costs.” (Mises 2008: 340).

According to Mises, an established firm – and let us be generous here and assume that Mises is thinking of your average firm or of firms in general – that has already paid out sunk costs and continues to incur overhead (or fixed) costs is unconcerned with recovering these overhead/fixed costs. Instead, the firms are concerned with marginal cost, not average total costs.

And what, you might ask, is the evidence for this? Mises provides none (apart from the implied belief that he can know it a priori by praxeology), and the empirical evidence from the real world could not be clearer: Mises is wrong, and badly wrong.

Evidence from numerous surveys shows that mark-up prices are the largest form of pricing in real world capitalist economies, and often not just the largest form of pricing but the majority of prices (anywhere from 50% to 70% of prices).

Mark-up pricing businesses use total average unit costs to calculate prices, not marginal cost. In fact, “marginal cost” is a concept some business people have difficulty even understanding (Blinder et al. 1998: 216–218, 102: “marginal cost” is “not a natural mental construct for most executives”; Fabiani et al. 2006: 16; Ólafsson et al. 2011: 12, n. 8).

Most businesses do not use marginal cost in calculating prices, but instead use full costs (that is, total average costs) (Hall and Hitch 1939: 18; Govindarajan and Anthony 1986: 31; Drury et al. 1993; Shim and Sudit 1995: 37; Maher et al. 2004: 225).

For example, Govindarajan and Anthony (1986: 31) and Shim and Sudit (1995: 37) found that from the 1980s to the 1990s full cost pricing accounted for roughly 70% to 85% of US industrial prices.

Furthermore, Blinder et al. (1998: 105, 302) also found that many firms have fixed costs that can be very high relative to variable costs, and as much as 40% of total costs on average.

If most firms were to actually behave in the way Mises imagines – producing in a way where price will be above marginal cost but ignoring average cost – then they would simply go bankrupt.

And, while neoclassical economists have tried (albeit lamely) to explain the widespread existence of mark-up pricing, and do at least acknowledge the empirical evidence contrary to their original theory (indeed the debate goes back to the 1940s and 1950s, as in, e.g., Robinson 1950; Machlup 1946; and Heflebower 1955), by contrast Austrian economists like Mises never even progressed that far.*

Note
* This is surely true, unless one wants to regard Fritz Machlup as an Austrian in the late 1940s, but there seems widespread agreement that, like Schumpeter, he had essentially converted to neoclassical theory by then (Vaughn 1994: 36):

“The entire fourth generation of Austrian economists—brilliant young men like Hayek, Machlup, Haberler, Morgenstern, and Rosenstein-Rodan—were thus shaped by the Wieserian mold before they set off on their own intellectual paths. Largely ignorant of Menger’s Principles (out of print since the 1880s), they were trained in the spirit of the neoclassical synthesis. As a result of these circumstances, there was strictly speaking no fourth generation of ‘Austrian’ economists in the Mengerian sense. All the young men who are commonly held to be fourth-generation members were in fact lost to the neoclassical school—with the possible exception of Hayek, who decades later rediscovered some Mengerian themes in his work on the Counterrevolution of Science (1954)” (Hülsmann 2007: 160–161).

BIBLIOGRAPHY
Al-Najjar, Nabil, Baliga, Sandeep and David Besanko. 2008. “Market Forces meet Behavioral Biases: Cost Misallocation and Irrational Pricing,” The RAND Journal of Economics 39.1: 214–237.

Balakrishnan, R. and K. Sivaramakrishnan. 2002. “A Critical Overview of the use of Full-Cost Data for Planning and Pricing,” Journal of Management Accounting Research 14: 3–31.

Blinder, A. S. et al. (eds.). 1998. Asking about Prices: A New Approach to Understanding Price Stickiness. Russell Sage Foundation, New York.

Drury, C., Braund, S., Osborne. P. and M. Tayles. 1993. “A Survey of Management Accounting Practices in UK Manufacturing Companies,” ACCA, London.

Fabiani, S., M. Druant, I. Hernando, C. Kwapil, B. Landau, C. Loupias, F. Martins, T. Mathä, R. Sabbatini, H. Stahl and A. Stokman. 2006. “What Firms’ Surveys tell us about Price-Setting Behavior in the Euro Area,” International Journal of Central Banking 2.3: 3–47.

Govindarajan, V. and R. Anthony. 1986. “How Firms use Cost Data in Price Decisions,” Management Accounting 65: 30–34.

Hall, R. L. and C. J. Hitch. 1939. “Price Theory and Business Behaviour,” Oxford Economic Papers 2: 12–45.

Heflebower, R. F. 1955. “Full Costs, Cost Changes, and Prices,” in Business Concentration and Price Policy. Princeton University Press, Princeton. 361–392.

Horngren, C, Foster, G., and S. Datar. 2000. Cost Accounting (9th edn.). Prentice Hall, Upper Saddle River, NJ.

Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism. Ludwig von Mises Institute, Auburn, Ala.

Machlup, F. 1946. “Marginal Analysis and Empirical Research,” American Economic Review 36: 519–554.

Maher, M., Stickney, C, and R. L. Weil. 2006. Managerial Accounting (10th edn.). South-Western, Mason, OH.

Mises, L. von. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.

Murphy, Robert P. and Amadeus Gabriel. 2008. Study Guide to Human Action. A Treatise on Economics: Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.

Ólafsson, Thorvardur Tjörvi, Pétursdóttir, Ásgerdur, and Karen Á. Vignisdóttir. 2011. “Price Setting in Turbulent Times: Survey Evidence from Icelandic Firms,” Working Paper Central Bank of Iceland
www.sedlabanki.is/lisalib/getfile.aspx?itemid=8891‎

Robinson, A. 1950. “The Pricing of Manufactured Products,” Economic Journal 60: 771–780.

Shim, Eunsup, and Ephraim Sudit. 1995. “How Manufacturers Price Products,” Management Accounting 76.8: 37–39.

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition. Cambridge University Press, Cambridge and New York.