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Though he synthesized many pre-existing ideas, Sigmund Freud is rightly considered the founding father of psychoanalysis. The outlines of what is now recognized as psychoanalysis were in place by 1895, but Freud continually elaborated on them right up to his death in London in 1939. What was so revolutionary, and remains so controversial, about Freud's invention was its impact on Enlightenment conceptions of truth and thus of the nature of lying and deception. However, this impact is often measured by the very philosophical notion of truth that Freud displaced, thereby obscuring the roots of his psychoanalytic theory in his clinical practice.

Studies on Hysteria, which Freud co-wrote with fellow psychiatrist Josef Breuer, was published in 1895. In this work Freud was already seeking truth in unusual places. Whereas the philosophical tradition founded by Aristotle sought truth in the form of syllogistic propositions (statements such as “All men are mortal, Greeks are men, therefore Greeks are mortal”), and whereas subsequent philosophies of language tended to measure truth by the speaker's alleged intention, Freud's saw truth as hidden in speech rather than expressed by it and thus as intrinsically connected to deception. Studies in Hysteria viewed pathological symptoms as conveying, in a distorted form, a truth largely excluded from the hysteric's conscious speech. Moreover, as he developed a theory of sexual repression to explain these patient's symptoms, Freud came to view the hysteric's speech as akin to a lie that deceived the patient about the underlying (sexual) truth of his or her suffering.

The now famous “talking cure” allowed this lie to be unfolded through so-called free association: the unhindered production of speech on the part of the patient without regard for meaning or narrative. Yet it also allowed the psychoanalyst to interpret the resulting speech's hidden truth. Thanks to the theory of repression, this led to a situation similar to the one William Shakespeare intimates when, in Hamlet, he has Queen Gertrude say, “the lady doth protest too much, methinks.” In other words, from a psychoanalytic perspective vehement denial can be evidence of resistance and therefore a displaced indication of the existence of what is denied. Conversely, even a heartfelt truth-claim can operate as a defensive concealment of its opposite. In this sense, lying and deception were not the same after the Freudian revolution.

The Interpretation of Dreams (1899) develops a structural model of the psyche that clarifies why earnest conviction cannot be the measure of the truth-content of a patient's speech. Psychoanalytic truth is located not at the level of intention, in what Freud calls the “conscious” system, but in an entirely different region where the “speech” of a dream, but also speech in general, escapes the conscious control of the ego. This is clearest in the example of parapraxes, such as the famous “Freudian slip.” This is when a verbal mistake is said to reveal an unconscious motivation of which the speaker is completely unaware.

By the time Freud had published The Psychopathology of Everyday Life (1901), in which he analyzed, among other things, memory and forgetting, he was able to group very diverse phenomena—from neurotic symptoms to dreams, from slips of the tongue to witticisms—under the same heading of “compromise formations.” In other words, these were all hybrid formations halfway between lies (egoic repression) and truths (the libidinal instincts of the unconscious). To a trained psychoanalyst then, these diverse phenomena could be interpreted to lay bare their latent truth.

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