The Centrality of Purpose in Economic Theory
Human action is purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego's meaningful response to stimuli and to the conditions of its environment, is a person's conscious adjustment to the state of the universe that determines his life. Such paraphrases may clarify the definition given and prevent possible misinterpretations. But the definition itself is adequate and does not need complement of commentary.
He built an entire system of economic theory on this simple premise.
I read Human Action over 50 years ago. I have read it more than once. I keep going back to it to make certain that I have my economic categories coherent.
Last week it came to me once again that I had failed to implement this initial paragraph correctly into my book, Christian Economics: Teacher's Edition. So, I went back and added a chapter: "Purpose Precedes Planning." That, in turn, forced me to restructure my book, The Covenantal Structure of Christian Economics (2014).
If I had paid closer attention to Mises back in the summer of 1963, I might not have made this mistake. It never hurts to go back and re-read classics.
Why is the issue of purpose so important? Mises did not say this explicitly, although I think he would have agreed with it. Ownership conveys legal responsibility. There is no escape from this. The state may attempt to thwart this principle by interfering with the market process, but this intervention will produce unintended consequences that are almost always negative. The state does not pay any attention to these consequences. It does not accept responsibility for having created these negative side effects. Remember, there is no such thing as a side effect. There are only effects. The ones we don't like, we call side effects.
I argue that ownership not only conveys legal responsibility, it creates moral responsibility. Mises did not talk about moral responsibility. He wanted his economic system to be value-free. Mine is not.
Because ownership conveys responsibility, there is no way that we can avoid responsibility when we make decisions. The decisions about what we're going to next with our property precede any plans that we formulate to implement these decisions.
Why was this concept so important for me? For that matter, why is it so important for economic theory? Because I hold this presupposition: an individual is not an automaton in an autonomous universe. He has to take responsible action. God holds him responsible. In contrast, modern science sees man as a product of impersonal forces. Mises understood the error here, which is why he distinguished economics from physics. Individuals make decisions. These decisions make impossible the degree of predictability that a physicist or a chemist has in a laboratory experiment. There are partially predictable patterns in human action, but there is no scientific predictability. Mises hammered on this throughout his career.
Modern classroom economic theory is moving in the direction of physics. It is heavily based on mathematical formulas. But to the extent that the formulas apply in the real world, which fortunately they don't, men would be nothing more than the equivalent of chemical reactions. They would lose their liberty. They would also lose their responsibility. This is why the economists' formulas and equations do not apply to the real world. There is no escape from personal responsibility. The more wealth a man has, the more responsible he is.
Mises went to the heart of the matter with his book title. Human action was what he was writing about throughout his intellectual career.
RESPONSIBLE HUMAN ACTION
Here is a philosophical and moral question: "Are our decisions programmed by our environment?" This includes our economic environment. This includes our choices, which are based on prices and our hopes for future profits. Are we driven, in the way that a molecule is driven, by the price system? No. Molecules are not responsible. But modern economic theory treats men as if they were automatic decision-making machines. To the extent that men are rational and better informed, economists teach, they become more predictable. Problem: if they are predictable, they lose their freedom. Someone will figure out ways to control them, whether from Madison Avenue or inside the Washington Beltway -- or both.
Here is the central philosophical issue of our era. If men were really completely rational in this conceptual framework, they would become completely predictable. This is the implication of neoclassical economic theory. It is one of the reasons why I reject it. It is one of the reasons why Mises rejected it.
Because I had not placed purpose at the very beginning of my book, unlike Mises, I made a conceptual error. I placed planning at the top of the list. Planning should not be at the top of the list. Purpose should be at the top of the list. Mises understood this. I think he understood this more clearly than any other economist before him. I think he understood better than any other contemporary economist.
Mises discussed economic planning in great detail. He discussed individual planning. He opposed the concept of central economic planning by the state. He did so because he said that it is inherently irrational: no rational pricing. The most important thing he ever wrote was his 1920 essay, "Economic Calculation in the Socialist Commonwealth." It was the most important thing conceptually, and was also the most important in terms of its influence. It converted Hayek and dozens of other young socialists in the 1920's from socialism to free market economics. Its serves as an early tombstone for communism in China and the Soviet Union.
Mises did not place planning at the beginning of economic decision-making. He placed purpose at the beginning. He also placed it at the beginning of economic logic conceptually. He could not have been clearer.
Mainstream economics, including the free market varieties, does not begin with purpose. It begins with rational calculation of economic alternatives. In other words, it begins with the question of resource allocation. "Should I buy this or that? Should I get this piece of capital equipment or that piece? Should I pay this much interest to borrow money or not?" These are allocation decisions.
In a famous little book that has had enormous impact, Mises's disciple Lionel Robbins in 1932 placed the allocation question at the beginning of economic logic. The book is The Nature and Significance of Economic Science. He wrote:
The economist studies the disposal of scarce means. He is interested in the way different degrees of scarcity of different goods give rise to different ratios of valuation between them, and he is interested in the way in which changes in conditions of scarcity, whether coming from changes in ends or changes in means—from the demand side or the supply side—affect these ratios. Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses (p. 15).
Mises understood that the allocation decision only comes after somebody has made up his mind about what he wants to do.
Robbins would not have denied this, but he did not make it central to his analysis. Modern economists have increasingly ignored purpose as shaping economic theory. They are only interested in the pure logic of choice in a world increasingly defined in terms of perfect knowledge, i.e., the world of equilibrium. I have discussed this issue here: "Entrepreneurship vs. Equilibrium."
The issue of purpose is the issue of responsibility. It is the issue of what you want to do with your life, or the next 10 years, or the next five minutes. But it is part of the conceptual and moral whole. It is part of the system of decision-making that is not based on how to do things right. It is based on the question of how to do the right thing.
Economic theory today is dominated by the question of how to do things right. That is not the central question of our lives. The central question of our lives is how to do the right thing. We struggle to make these decisions, day by day and moment by moment. Only after we have decided what we ought to do, can we start thinking about how we ought to do it. That's when economic planning begins.
As you may have figured out by now, I use what I call the five-point biblical covenant model to structure my thinking in virtually everything I write. In theology, it goes like this: God, man, law, sanctions, and time. In social theory, it goes like this: sovereignty, authority, law, sanctions, and time. In economic theory, it goes like this: ownership, stewardship, law, sanctions, and time.
My conceptual error was this: I placed planning at the top. That is the equivalent of sovereignty. I associated planning with the sovereignty of God. For God, it is. For man, it isn't. Mises did not use biblical theology to structure his thinking, but he understood one of its implications. Planning is a matter of stewardship. Responsibility is a matter of delegated ownership. As owners, we are responsible to God, to other people, and to ourselves. Other people? Yes. Any business owner who ignores his customers will suffer losses. In other words, we decide what to do; then we decide how to do it. Planning is an aspect of the second decision.
PURPOSE AND THE USP
Let me give an example from business. It is popular these days for a business to establish a mission statement. I think this is an excellent idea. In marketing terms, this is called the unique selling proposition, or USP. Going back to the remarkable little book by Rosser Reeves, Reality in Advertising (1961), advertisers have known how important it is to develop a USP for the business. Then managers have to stick to the USP for everything the business does. This includes all of the advertising.
The USP is the equivalent of purpose. It precedes everything the business does. Anyway, it should precede it. It should structure everything about the business. It should make operations consistent. Everything in the business should refer back to the USP.
The USP precedes the issue of planning. Only when you have a USP clear, should you begin to look for another project. Only when you have applied the USP in this branch of the business should you launch a new campaign. There has to be consistency. Reeves was clear about this, and he created some of the most successful advertising in the history of television by means of this principle. He was the man who created this slogan: "melts in your mouth, not in your hand." I don't know how many billions of dollars that was worth the Mars candy company, but it was worth plenty.
Individuals should have mission statements. Individuals should have USP's for their lives.
GOAL-SETTING
We hear a lot about goal-setting these days. Goal-setting is one of the crucial techniques for personal success in life. Goal-setting is an application of a mission statement. The mission statement is the big principle. Individual goals are the applications in specific cases. Only after you get these goals set in your mind should your planning begin: the resource-allocation decision.
This is screamingly obvious, isn't it? Except it isn't. How early in life do we figure this out? A lot of people never figure it out. By a lot, I mean a couple of billion. Maybe more.
We spend our lives trying to figure out how to do things right. We don't spend enough time on thinking about the right things to do. That is the tough question. Planning is the easy part. Figuring out what it is that we ought to do before we adopt a plan is the hard part. That is why we don't like to do it. It is too painful.
Mises had it right. He had it right earlier than anybody else. He followed through on it more consistently than anybody else. Human action begins with purpose. If we start our economic analysis with anything else, our economic analysis is going to have flaws.
I start with God's purpose. Then I extend it to God's planning. I start with Genesis 1. Mises did not do this. That is the big difference between my economic theory and Mises's economic theory. But when we come to individual decision-making, Mises knew where to begin: with purpose.
Here is my recommendation. Spend more time on thinking about doing the right thing than thinking about doing things right.