The Essential von Mises
In the world of politics and ideology, we
are often presented with but two alternatives, and then are
exhorted to make our choice within that loaded framework. In
the 1930s, we were told by the Left that we must choose between
Communism and Fascism: that these were the only alternatives
open to us. Now in the world of contemporary American economics,
we are supposed to choose between the free market
Monetarists and Keynesians; and we are supposed to attribute
great importance to the precise amount that the federal government
should expand the money supply or to the exact level of the
federal deficit.
Virtually forgotten is a third path, far
above the petty squabbles over the monetary/fiscal mix
of government policy. For almost no one considers a third alternative:
the eradication of any government influence or control whatsoever
over the supply of money, or indeed over any and all parts of
the economic system. Here is the neglected path of the GENUINE
free market: a path that has been blazed and fought for all
his life by one lone, embattled, distinguished, and dazzlingly
creative economist: Ludwig von Mises. It is no exaggeration
to say that if the world is ever to get out of its miasma of
statism or, indeed, if the economics profession is ever to return
to a sound and correct development of economic analysis, both
will have to abandon their contemporary bog and move to that
high ground that Ludwig von Mises has developed for us.
I. The Austrian School
Ludwig von Mises was born on September 29, 1881,
in the city of Lemberg, 2 then part of
the Austro-Hungarian Empire, where his father, Arthur Edler
von Mises, a distinguished construction engineer working for
the Austrian railroads, was stationed temporarily. Growing up
in Vienna, Mises entered the University of Vienna at the turn
of the century to study for his graduate degree in law and economics.
He died October 10, 1973, in New York City.
Mises was born and grew up during the high tide
of the great Austrian School of economics, and neither
Mises nor his vital contributions to economic thought can be
understood apart from the Austrian School tradition which he
studied and absorbed.
By the latter half of the nineteenth century,
it was clear that classical economics, which had
reached its apogee in England in the persons of David Ricardo
and John Stuart Mill, had foundered badly on the shoals of several
fundamental flaws. The critical flaw was that classical economics
had attempted to analyze the economy in terms of classes
rather than the actions of individuals. As a result, the classical
economists could not find the correct explanation of the underlying
forces determining the values and relative prices of goods and
services; nor could they analyze the action of consumers, the
crucial determinants of the activities of producers in the economy.
Looking at classes of goods, for example, the classical
economists could never resolve the paradox of value:
the fact that bread, while extremely useful and the staff
of life, had a low value on the market; whereas diamonds,
a luxury and hence a mere frippery in terms of human survival,
had a very high value on the market. If bread is clearly more
useful than diamonds, then why is bread rated so much more cheaply
on the market?
Despairing at explaining this paradox, the classical
economists unfortunately decided that values were fundamentally
split: that bread, though higher in use value than
diamonds, was for some reason lower in exchange value.
It was out of this split that later generations of writers denounced
the market economy as tragically misdirecting resources into
production for profit as opposed to the far more
beneficial production for use.
Failing to analyze the actions of consumers,
the economists earlier than the Austrians could not arrive at
a satisfactory explanation of what it was that determined prices
on the market. Groping for a solution, they unfortunately concluded
(a) that value was something inherent in commodities; (b) that
value must have been conferred on these goods by the processes
of production; and (c) that the ultimate source of value was
production cost or even the quantity of labor hours
incurred in such production.
It was this Ricardian analysis that later gave
rise to Karl Marxs perfectly logical conclusion that since
all value was the product of the quantity of labor hours, then
all interest and profit obtained by capitalists and employers
must be surplus value unjustly extracted from the
true earnings of the working class.
Having thus given hostage to Marxism, the later
Ricardians attempted to reply that capital equipment was productive
and therefore reasonably earned its share in profits; but the
Marxians offered the rebuttal that capital too was embodied
or frozen labor, and that therefore wages should
have absorbed the entire proceeds from production.
The classical economists did not have a satisfactory
explanation or justification for profit. Again treating the
share of proceeds from production purely in terms of classes,
the Ricardians could only see a continuing class struggle
between wages, profits, and rents,
with workers, capitalists, and landlords eternally warring over
their respective shares. Thinking only in terms of aggregates,
the Ricardians tragically separated the questions of production
and distribution, with distribution a matter of
conflict between these combating classes. They were forced to
conclude that if wages went up, it could only be at the expense
of lower profits and rents, or vice versa. Again, the
Ricardians gave hostages to the Marxian system.
Looking at classes rather than individuals,
then, the classical economists not only had to abandon any analysis
of consumption and were misled in explaining value and price;
they could not even approach an explanation of the pricing of
individual factors of production: of specific units of labor,
land, or capital goods. As the nineteenth century passed its
mid-mark, the deficiencies of Ricardian economics became even
more glaring. Economics itself had come to a dead end.
It has often happened in the history of human
invention that similar discoveries are made at the same time
purely independently by people widely separated in space and
condition. The solution of the aforementioned paradoxes appeared,
purely independently and in different forms, in the same year,
1871: by William Stanley Jevons in England; by Leon Walras in
Lausanne, Switzerland; and by Carl Menger in Vienna. In that
year, modern, or neo-classical, economics was born.
Jevons solution and his new economic vision was fragmented
and incomplete; furthermore, he had to battle against the enormous
prestige that Ricardian economics had accumulated in the tight
intellectual world of England. As a result, Jevons had little
influence and attracted few followers. Walras system also
had little influence at the time; as we shall see in what follows,
it was unfortunately reborn in later years to form the basis
of the fallacies of current micro-economics. By
far the outstanding vision and solution of the three neo-classicists
was that of Carl Menger, 3 professor
of economics at the University of Vienna. It was Menger who
founded the Austrian School.
Mengers pioneering work bore full fruition
in the great systematic work of his brilliant student, and his
successor at the University of Vienna, Eugen von Böhm-Bawerk.
It was Böhm-Bawerks monumental work, written largely during
the 1880s, and culminating in his three-volume Capital and
Interest, 4 that formed the mature
product of the Austrian School. There were other great and creative
economists who contributed to the Austrian school during the
last two decades of the nineteenth century; but Böhm-Bawerk
towered above them all.
The Austrian solutions to the dilemmas of economics,
both by Menger and by Böhm-Bawerk, were far more comprehensive
than by the Ricardians, because the Austrian solutions were
rooted in a completely contrasting epistemology. The Austrians
unerringly centered their analysis on the individual,
on the acting individual as he makes his choices on the basis
of his preferences and values in the real world. Starting from
the individual, the Austrians were able to ground their analysis
of economic activity and production in the values and desires
of the individual consumers. Each consumer operated
from his own chosen scale of preferences and values; and it
was these values that interacted and combined to form the consumer
demands which form the basis and the direction for all productive
activity. Grounding their analysis in the individual as he faces
the real world, the Austrians saw that productive activity was
based on the expectations of serving the demands of consumers.
Hence, it became clear to the Austrians that
no productive activity, whether of labor or of any productive
factors, could confer value upon goods or services. Value consisted
in the subjective valuations of the individual consumers. In
short, I could spend thirty years of labor time and other resources
working on the perfection of a giant steam-powered tricycle.
If, however, on offering this product no consumers can be found
to purchase this tricycle, it is economically valueless, regardless
of the misdirected effort that I had expended upon it. Value
is consumer valuations, and the relative prices of goods and
services are determined by the extent and intensity of consumer
valuations and desires for these products. 5
Looking clearly at the individual rather than
at broad classes, the Austrians could easily resolve
the value paradox that had stumped classicists.
For no individual on the market is ever faced with the choice
between bread as a class and diamonds
as a class. The Austrians had shown that the greater the quantitythe
larger the number of unitsof a good that anyone possesses,
the less he will value any given unit. The man stumbling
through the desert, devoid of water, will place an extremely
high value of utility on a cup of water: whereas
the same man in urban Vienna or New York, with water plentiful
around him, will place a very low valuation or utility
on any given cup. Hence the price he will pay for a
cup of water in the desert will be enormously greater than in
New York City. In short, the acting individual is faced with,
and chooses in terms of, specific units, or margins;
and the Austrian finding was termed the law of diminishing
marginal utility. The reason that bread is
so much cheaper than diamonds is that the number
of loaves of bread available is enormously greater than the
number of carats of diamonds: hence the value, and the price,
of each loaf will be far less than the value and price
of each carat. There is no contradiction between use
value and exchanged value; given the abundance
of loaves available, each loaf is less useful
than each carat of diamond to the individual.
The same concentration on the actions of the
individual, and hence on marginal analysis, also
solved the problem of the distribution of income
on the market. The Austrians demonstrated that each unit of
a factor of production, whether of different types of labor,
of land, or of capital equipment is priced on the free market
on the basis of its marginal productivity: in short,
on how much that unit actually contributes to the value of the
final product purchased by the consumers. The greater the supply,
the quantity of units of any given factor, the less will its
marginal productivityand hence its pricetend to
be; and the lower its supply, the higher will tend to be its
price. Thus, the Austrians showed that there was no senseless
and arbitrary class struggle or conflict between the different
classes of factors; instead, each type of factor contributes
harmoniously to the final product, directed to satisfying the
most intense desires of the consumers in the most efficient
manner (i.e., in the manner least costly of resources). Each
unit of each factor then earns its marginal product, its own
particular contribution to the productive result. In fact, if
there was any conflict of interests, it was not between types
of factors, between land, labor, and capital; it was between
competing suppliers of the same factor. If, for example,
someone found a new supply of copper ore, the increased supply
would drive down the price of copper; this could only work to
the benefit and the earnings of the consumers and of the cooperating
labor and capital factors. The only unhappiness might be among
existing copper-mine owners who found the price declining for
their own product.
The Austrians thus showed that on the free market
there is no separation whatever between production
and distribution. The value and demand of consumers
determine the final prices of the consumer goods, the goods
purchased by consumers, which set the direction for productive
activity, and in turn determine the prices of the cooperating
units of factors: the individual wage rates, rents, and prices
of capital equipment. The distribution of income
was simply the consequence of the price of each factor. Hence,
if the price of copper is 20 cents per pound, and a copper owner
sells 100,000 pounds of copper, the owner will receive $20,000
in distribution; if someones wage is $4 an
hour, and he works 40 hours a week, he will receive $160 per
week, and so on.
What of profits and the problem of frozen
labor (so-called labor embodied in machinery)? Again working
from analysis of the individual, Böhm-Bawerk saw that it was
a basic law of human action that each person wishes to achieve
his desires, his goals, as quickly as possible. Hence, each
person will prefer goods and services in the present to waiting
for these goods for a length of time in the future. A bird already
in the hand will always be worth more to him than a bird still
in the bush. It is because of this basic primordial fact of
time preference that people do not invest all their
income in capital equipment so as to increase the amount of
goods that will be produced in the future. For they must first
attend to consuming goods now. But each person, in different
conditions and cultures, has a different rate of time
preference, of preferring goods now to goods later. The higher
their rate of time preference, the greater the proportion of
their income they will consume now; the lower the rate,
the more they will save and invest in future production. It
is solely the fact of time preference that results in interest
and profit; and it is the degree and intensity of time preferences
that will determine how high the rate of interest and profit
will be.
Take, for example, the rate of interest on a
loan. The scholastic philosophers of the Catholic Church, in
the Middle Ages and in the early modern period, were in their
way excellent economists and analyzers of the market; but one
thing they could never explain or justify was the simple charging
of interest on a loan. They could understand gaining profits
for risky investments; but they had learned from Aristotle with
improper connotations that money itself was barren and unproductive.
Therefore, how could pure interest on a loan (assuming no risk
of default) be justified? Not being able to find the answer,
the church and the scholastics discredited their approach in
the eyes of the worldly men by condemning as sinful usury
any interest on a loan. It was Böhm-Bawerk who finally found
the answer in the concept of time preference. For when a creditor
lends $100 to a debtor, in exchange for receiving $106 a year
from now, the two men are not exchanging the same things. The
creditor is giving the debtor $100 as a present good,
money that the debtor can use at any time in the present. But
the debtor is giving the creditor in exchange, not money, but
an IOU, the prospect of receiving money one-year-from-now.
In short, the creditor is giving the debtor a present
good, while the debtor is only giving the creditor a future
good, money which the creditor will have to wait a year
before he can make use of it. And since the universal tact of
time preference makes present goods worth more than future goods,
the creditor will have to charge, and the debtor will be willing
to pay, a premium for the present good. That premium is the
rate of interest. How large that premium will be will depend
on the overall rates of time preference of everyone in the market.
This is not all: for Böhm-Bawerk went on to
show how time preference determined the rate of business profit
in the same way: in fact that the normal rate of
business profit is the rate of interest. For when labor
or land is employed in the process of production, the crucial
fact is that they do not have to wait, as they would in the
absence of capitalist employers, for their money until the product
is produced and sold to the consumers. If there were no capitalist
employers, then laborers and landowners would have to toil for
months and years without pay, until the final productthe
automobile or bread or washing machineis sold to the consumers.
But capitalists perform the great service of saving up money
from their income ahead of time and then paying laborers and
landowners now, while they are working; the capitalists
then perform the function of waiting until the final product
is sold to the consumers and then receiving their money. It
is for this difference between the present good
and a future good that the laborers and landowners
are more than willing to pay the capitalists their
profit or interest. The capitalists, in short, are in the position
of creditors who save and pay out present money,
and then wait for their eventual return; the laborers and landowners
are, in a sense, debtors whose services will only
bear fruit after a certain date in the future. Again, the normal
rate of business profit will be determined by the height of
the various rates of time preference.
Böhm Bawerk also put this another way: capital
goods are not simply frozen labor; they are also
frozen time (and land); and it is in the crucial element
of time and time preference that the explanation for profit
and interest can be found. He also enormously advanced the economic
analysis of capital; for in contrast not only to Ricardians
but to most economists of the present day, he saw that capital
is not simply a homogeneous blob, 6 or
a given quantity. Capital is a structure, an intricate lattice-work
that has a time-dimension; and economic growth and increasing
productivity come from adding not simply to the quantity of
capital but to its time-structure, to building longer
and longer processes of production. The lower peoples
rate of time preference, the more they are willing to sacrifice
consumption now on behalf of saving and investing in these longer
processes that will yield a significantly greater return of
consumer goods at some date in the future.
II. Mises and Austrian
Economics: The Theory of Money and Credit
The young Ludwig von Mises came to the University
of Vienna in 1900, acquiring his doctorate in law and economics
in 1906. He soon established himself as one of the most brilliant
pupils in the continuing seminar of Eugen von Böhm-Bawerk. Steeped
in the Austrian approach, however, Mises came to realize that
Böhm-Bawerk and the older Austrians had not gone far enough:
that they had not pushed their analysis as far as it could go
and that consequently important lacunae still remained
in Austrian School economics. This is the way, of course, in
any scientific discipline: advances come as students and disciples
stand on the shoulders of their great master. All too often,
however, the masters repudiate or fail to see the value of the
advances of their successors.
In particular, the major lacuna perceived
by Mises was the analysis of money. It is true that
the Austrians had solved the analysis of relative prices, for
consumer goods as well as for all the factors of production.
But money, from the time of the classical economists, had always
been in a separate box, not subjected to the analysis covering
the rest of the economic system. For both the older Austrians
and for the other neo-classicists in Europe and America, this
disjunction continued, and money and the price level
were increasingly being analyzed totally apart from the rest
of the market economy. We are now reaping the unfortunate fruits
of this grievous split in the current disjunction between micro
and macro economics. Micro-economics
is at least roughly grounded on the actions of individual consumers
and producers; but when economists come to money, we are suddenly
plunged into a never-never land of unreal aggregates: of money,
price levels, national product, and
spending. Cut off from a firm basis in individual action, macro-economics
has leaped from one tissue of fallacies to the next. In Mises
day in the first decades of the twentieth century, this misguided
separation was already developing apace in the work of the American,
Irving Fisher, who built elaborate theories of price levels
and velocities with no grounding in individual action
and with no attempt to integrate these theories into the sound
body of neo-classical micro analysis.
Ludwig von Mises set out to repair this split,
and to ground the economics of money and its purchasing power
(miscalled the price level) on the Austrian analysis
of the individual and the market economy: to arrive at a great
integrated economics that will explain all parts of the economic
system. Mises attained this monumental achievement in his first
great work: The Theory of Money and Credit7
(Theorie des Geldes und der Umlaufsmittel, 1912). This
was a dazzling achievement of creative insight worthy of Böhm-Bawerk
himself. At last, economics was whole, an integrated body of
analysis grounded on individual action; there would have to
be no split between money and relative prices, between micro
and macro. The mechanistic Fisherine view of automatic relations
between the quantity of money and the price level, of velocities
of circulation and equations of exchange was
explicitly demolished by Mises on behalf of an integrated application
of the marginal utility theory to the supply and demand for
money itself.
Specifically, Mises showed that, just as the
price of any other good was determined by its quantity available
and the intensity of consumer demands for that good (based on
its marginal utility to the consumers), so the price
or purchasing power of the money-unit is determined on the market
in the very same way. In the case of money, its demand is a
demand for holding in ones cash balance (in ones
wallet or in the bank so as to spend it sooner or later on useful
goods and services). The marginal utility of the money unit
(the dollar, franc, or gold-ounce) determines the intensity
of the demand for cash balances; and the interaction between
the quantity of money available and the demand for it determines
the price of the dollar (i.e., how much of other
goods the dollar can buy in exchange). Mises agreed with the
classical quantity theory that an increase in the
supply of dollars or gold ounces will lead to a fall in its
value or price (i.e., a rise in the prices of other
goods and services); but he enormously refined this crude approach
and integrated it with general economic analysis. For one thing,
he showed that this movement is scarcely proportional; an increase
in the supply of money will tend to lower its value, but how
much it does, or even if it does at all, depends on what happens
to the marginal utility of money and hence the demand of the
public to keep its money in cash balances. Furthermore, Mises
showed that the quantity of money does not increase
in a lump sum: the increase is injected at one point in the
economic system and prices will only rise as the new money spreads
in ripples throughout the economy. If the government prints
new money and spends it, say, on paper clips, what happens is
not a simple increase in the price level,
as non-Austrian economists would say; what happens is that first
the incomes of paperclip producers and prices of paper clips
increase, and then the prices of the suppliers of the paper
clip industry, and so on. So that an increase in the supply
of money changes relative prices at least temporarily, and may
result in a permanent change in relative incomes as well.
Mises was also able to show that an early and
long forgotten insight of Ricardo and his immediate followers
was eminently correct: that, apart from the industrial or consumption
uses of gold, an increase in the supply of money confers no
social benefit whatsoever. For in contrast to such factors of
production as land, labor and capital, the increase of which
will bring about greater production and a higher standard of
living, an increase in the supply of money can only dilute its
purchasing power; it will not increase production. If everyones
supply of money in his wallet or bank account were magically
tripled overnight, society would not improve. But Mises showed
that the great attraction of inflation (an increase
in the quantity of money) is precisely that not everyone
gets the new money at once and in the same degree; instead the
government and its favored recipients of purchases or subsidies
are the first to receive the new money. Their income
increases before many prices have gone up; while those unfortunate
members of society who receive the new money at the end of the
chain (or, as pensioners, receive none of the new money at all)
lose because the price of the things they buy go up before they
can enjoy an increased income. In short, the attraction of inflation
is that the government and other groups in the economy can silently
but effectively benefit at the expense of groups of the population
lacking political power.
Inflationan expansion of the money supplyMises
showed, is a process of taxation and redistribution of wealth.
In a developing free-market economy unhampered by government-induced
increases in the money supply, prices will generally fall
as the supply of goods and services expands. And falling prices
and costs were indeed the welcome hallmark of industrial expansion
during most of the nineteenth century.
In applying marginal utility to money, Mises
had to overcome the problem which most economists saw as insuperable:
the so-called Austrian circle. Economists could
see how the prices of eggs or horses or bread could be determined
by the respective marginal utilities of these items; but, unlike
these goods which are demanded in order to be consumed,
money is demanded and kept in cash balances in order to be spent
on goods. No one, therefore, can demand money (and have a marginal
utility for it) unless it already was in existence,
commanding a price and purchasing power on the market. But how
then can we fully explain the price of money in terms of its
marginal utility if money has to have a pre-existing value in
order to be demanded in the first place? In his Regression
theorem, Mises overcame the Austrian circle
in one of his most important theoretical achievements; for he
showed that logically one can push back this time component
in the demand for money until the ancient day when
the money commodity was not money but a useful barter commodity
in its own right; in short, until the day when the money-commodity
(e.g., gold or silver) was demanded solely for its qualities
as a consumable and directly usable commodity. Not only did
Mises thus complete the logical explanation of the price or
purchasing power of money, but his findings had other important
implications as well. For it meant that money could only
originate in one way: on the free market, and out of the direct
demand in that market, for a useful commodity. And this meant
that money could not have originated either by the
government proclaiming something as money or by some son of
one-shot social contract; it could only have developed out a
generally useful and valuable commodity. Carl Menger had previously
shown that money was likely to emerge in this way; but is was
Mises who established the absolute necessity of this market
origin of money.
But this had still further implications. For
it meant, in contrast to the views of most economists then and
now, that money is not simply arbitrary units or
pieces of paper as defined by the government: dollars,
pounds, francs, etc. Money must
have originated as a useful commodity: as gold, silver, or whatever.
The original unit, the unit of account and exchange, was not
the franc or the mark but the gold gram
or the silver ounce. The monetary unit is, in essence, a unit
of weight of a specific valuable, market-produced commodity.
It is no wonder that in fact all of todays names for money:
dollar, pound, franc, and so on, originated as names of units
of weight of gold or silver. Even in todays monetary chaos,
the statute books of the United States still define the dollar
as one-thirty-fifth (now one-forty-second) of a gold ounce.
This analysis, combined with Mises demonstration
of the unmitigated social evils of the governments increase
of the supply of arbitrarily produced dollars and
francs, points the way for a total separation of
government from the monetary system. For it means that the essence
of money is a weight of gold or silver, and it means that it
is quite possible to return to a world when such weights will
once again be the unit of account and the medium of monetary
exchanges. A gold standard. far from being a barbarous fetish
or another arbitrary device of government, is seen able to provide
a money produced solely on the market and not subject to the
inherent inflationary and redistributive tendencies of coercive
government. A sound, non-governmental money would mean a world
where prices and costs would once more be falling in response
to increases in productivity.
These are scarcely the only achievements of
Mises monumental The Theory of Money and Credit.
For Mises also demonstrated the role of banking in the supply
of money, and showed that free banking, banking free from government
control and dictation, would result not in wildly inflationary
expansion of money, but in banks that would be forced by demands
for payment into a sound, non-inflationary policy of hard
money. Most economists have defended Central Banking (control
of banking by a governmental bank, as in the Federal Reserve
System) as necessary for the government to restrict
the inflationary tendencies of private banks. But Mises showed
that the role of central banks has been precisely the opposite:
to free the banks from the stringent free-market restrictions
on their activities, and to stimulate and propel them into inflationary
expansion of their loans and deposits. Central banking, as its
original proponents knew full well, is and always has been an
inflationary device to free the banks from market restraints.
Another important achievement of The Theory
of Money and Credit was in eradicating some non-individualist
anomalies that had crippled the Austrian concept of marginal
utility. For in contradiction to their own basic methodology
of concentrating on the real actions of the individual, the
Austrians had gone along with the Jevons-Walras versions of
marginal utility which had tried to make it a measurable mathematical
quantity. Even today, every economics textbook explains marginal
utility in terms of utils, of units which are supposedly
subject to addition, multiplication, and other mathematical
operations. If the student should feel that it makes little
sense to say that I place a value of 4 utils on that pound
of butter, that student would be absolutely correct. Building
on the insight of his fellow-student at the Böhm-Bawerk seminar,
the Czech, Franz Cuhel, Mises devastatingly refuted the idea
of marginal utility being in any sense measurable, and showed
that marginal utility is a strictly ordinal ranking, in which
the individual lists his values by preference ranks (I
prefer A to B, and B to C), without assuming any mythological
unit or quantity of utility.
If it makes no sense to say that an individual
can measure his own utility, then it makes even
less sense to try to compare utilities between people in society.
Yet statists and egalitarians have been trying to use utility
theory in this way throughout this century. If you can say that
each mans marginal utility of a dollar falls as he accumulates
more money, then cannot you say also that the government can
increase social utility, by taking a dollar away
from a rich man who values it little and giving it to a poor
man who will value it highly? Mises demonstration that
utilities cannot be measured completely eliminates the marginal
utility case for egalitarian policies by the State. And yet,
while economists generally pay lip-service to the idea that
utility cannot be compared between individuals, they presume
to go ahead and try to compare and sum up social benefits
and social costs.
III. Mises on the Business
Cycle
Included in The Theory of Money and Credit
were at least the rudiments of another magnificent accomplishment
of Ludwig von Mises: the long-sought explanation for that mysterious
and troubling economic phenomenonthe business cycle. Ever
since the development of industry and the advanced market economy
in the late eighteenth century, observers had noted that the
market economy is subject to a seemingly endless series of alternating
booms and busts, expansions, sometimes escalating into runaway
inflation or severe panics and depressions. Economists had attempted
many explanations, but even the best of them suffered from one
fundamental flaw: none of them attempted to integrate the explanation
of the business cycle with the general analysis of the economic
system, with the micro theory of prices and production.
In fact, it was difficult to do so, because general economic
analysis shows the market economy to be tending towards equilibrium,
with full employment, minimal errors of forecasting, etc. Whence,
then, the continuing series of booms or busts?
Ludwig von Mises saw that, since the market
economy could not itself lead to a continuing round of booms
and busts, the explanation must then lie outside the market:
in some external intervention. He built his great business cycle
theory on three previously unconnected elements.
1. One was the Ricardian demonstration of the
way in which government and the banking system habitually expand
money and credit, driving prices up (the boom) and causing an
outflow of gold and a subsequent contraction of money and prices
(the bust). Mises realized that this was an excellent preliminary
model, but that it did not explain how the production system
was deeply affected by the boom or why a depression should then
be made inevitable.
2. Another element was the Böhm-Bawerk analysis
of capital and the structure of production.
3. A third was the Swedish Austrian
Knut Wicksells' demonstration of the importance to the productive
system and the prices of a gap between the natural
rate of interest (the rate of interest without the interference
of bank credit expansion) and the rate as actually affected
by bank loans.
From these three important but scattered theories,
Mises constructed his great theory of the business cycle. Into
the smoothly functioning and harmonious market economy comes
the expansion of bank credit and bank money, encouraged and
promoted by the government and its central bank. As the banks
expand the supply of money (notes or deposits) and lend the
new money to business, they push the rate of interest below
the natural or time preference rate, i.e., the free-market
rate which reflects the voluntary proportions of consumption
and investment by the public. As the interest rate is artificially
lowered, the businesses take the new money and expand the structure
of production, adding to capital investment, especially in the
remote processes of production: in lengthy projects,
machinery, industrial raw materials, and so on. The new money
is used to bid up wages and other costs and to transfer resources
into these earlier or higher orders of investment.
Then, when the workers and other producers receive the new money,
their time preferences having remained unchanged, they spend
it in the old proportions. But this means that the public will
not be saving enough to purchase the new high-order investments,
and a collapse of those businesses and investments becomes inevitable.
The recession or depression is then seen as an inevitable re-adjustment
of the production system, by which the market liquidates the
unsound over-investments of the inflationary boom
and returns to the consumption/investment proportion preferred
by the consumers.
Mises thus for the first time integrated the
explanation of the business cycle with general micro-economic
analysis. The inflationary expansion of money by the governmentally
run banking system creates over-investment in the capital goods
industries and under-investment in consumer goods, and the recession
or depression is the necessary process by which
the market liquidates the distortions of the boom and returns
to the free-market system of production organized to serve the
consumers. Recovery arrives when this adjustment process is
completed.
The policy conclusions implied by the Misesian
theory are the diametric opposite of the current fashion, whether
Keynesian or post-Keynesian. If the
government and its banking system are inflating credit, the
Misesian prescription is (a) to stop inflating posthaste,
and (b) not to interfere with the recession-adjustment,
not prop up wage rates, prices, consumption or unsound
investments, so as to allow the necessary liquidating process
to do its work as quickly and smoothly as possible. The prescription
is precisely the same if the economy is already in a recession.
IV. Mises in the Inter-War
Period
The Theory of Money and Credit propelled
the young Ludwig von Mises into the front ranks of European
economists. The following year, 1913, he became professor of
economics at the University of Vienna; and throughout the 1920s
and early 1930s Mises seminar at Vienna became a beacon-light
for bright young economists throughout Europe. In 1928, Mises
published his developed business cycle theory, Geldwertstabilisierung
und Konjunkturpolitik8, and in
1926, he founded the prestigious Austrian Institute for Business
Cycle Research.
But despite the fame of the book and of his
seminar at the University of Vienna, the remarkable achievements
of Mises and the The Theory of Money and Credit were
never really acknowledged or accepted by the economics profession.
This rejection was signalized by the fact that at Vienna Mises
was always a privatdozent, i.e., his post at the University
was prestigious but unsalaried. 9 His
real income was earned as an economic adviser to the Austrian
Chamber of Commerce, a position that he held from 1909 until
he left Austria in 1934. The reasons for the general neglect
of the Misesian achievement were wrapped up in problems of translation,
or more deeply, in the course that the economics profession
began to take after World War I. In the insular world of English
and American scholarship, no work untranslated into English
has had much impact; and tragically, The Theory of Money
and Credit did not appear in English until 1934, when,
as we shall see, it came too late to catch hold. Germany had
never had a tradition of neo-classical economics: as for Austria
itself, the Austrian School had begun to decline, a decline
symbolized by the death of Böhm-Bawerk in 1914 and by the demise
of the inactive Menger shortly after the war (in 1920). The
orthodox Böhm-Bawerkians strongly resisted Mises advances
and his incorporation of money and business cycles into the
Austrian analysis. Hence it was necessary for Mises to create
anew his own neo-Austrian school of students and
followers.
Language was not the only problem in England
and the United States. Under the deadening and commanding influence
of the neo-Ricardian Alfred Marshall, England had never been
hospitable to Austrian thinking. And in the United States, where
Austrian ideas had taken firmer hold, the years after World
War I saw a grievous decline in the level of economic theorizing.
The two leading Austrian economists in the United
States, Herbert J. Davenport of Cornell University and Frank
A. Fetter of Princeton University, had both stopped contributing
to economic theory by the time of World War I. Into this theoretical
vacuum of the 1920s stepped two unsound and decidedly non-Austrian
economists, both of whom helped to form the Chicago School;
Irving Fisher of Yale University, with a mechanistic quantity
theory and an emphasis on the desirability of governmental manipulation
of money and credit to raise and stabilize the price level;
and Frank H. Knight of Chicago, with his stress on the desirability
of the never-never land of perfect competition and
his denial of the importance of time in the analysis of capital
or of time preference in determining the rate of interest.
Furthermore, the economic world as well as the
world of economics was becoming increasingly inhospitable to
the Misesian viewpoint. Mises wrote his great The Theory
of Money and Credit at a twilight time for the world of
relative laissez-faire and the gold standard that had prevailed
before World War I. Soon the war would usher in the economic
systems we are so familiar with today: a world of statism, government
planning, intervention, government fiat money, inflation and
hyperinflation, currency breakdowns, tariffs and exchange controls.
Ludwig von Mises reacted to the darkening economic
world around him with a lifetime of high courage and personal
integrity. Never would Ludwig von Mises bend to the winds of
change that he saw to be unfortunate and disastrous; neither
changes in political economy nor in the discipline of economics
could bring him to swerve a single iota from pursuing and propounding
the truth as he saw it. In a tribute to Mises, the French economist
and notable gold-standard advocate, Jacques Rueff, speaks of
Mises intransigence, and correctly writes:
With an indefatigable enthusiasm, and with courage
and faith undaunted, he (Mises) has never ceased to denounce
the fallacious reasons and untruths offered to justify most
of our new institutions. He has demonstratedin the most
literal sense of the wordthat those institutions, while
claiming to contribute to mans well-being, were the immediate
sources of hardship and suffering and, ultimately, the causes
of conflicts, war, and enslavement.
No consideration whatever can divert him in
the least from the straight steep path where his cold reason
guides him. In the irrationalism of our era he has remained
a person of pure reason.
Those who have heard him have often been astonished
at being led by the cogency of his reasoning to places whither
they, in their all too human timorousness, had never dared to
go. 10
V. Socialism and Economic
Calculation
Austrian economics had always implicitly favored
a free-market policy, but in the quiet and relatively free world
of the late nineteenth century, the Austrians had never bothered
to develop an explicit analysis of freedom or of government
intervention. In an environment of accelerating statism and
socialism, Ludwig von Mises, while continuing to develop his
business-cycle theory, turned his powerful attention to analyzing
the economics of government intervention and planning. His journal
article 11 of 1920, Economic Calculation
in the Socialist Commonwealth, was a blockbuster: demonstrating
for the first time that socialism was an unviable system for
an industrial economy; for Mises showed that a socialist economy,
totally deprived of a free-market price system, could not rationally
calculate costs or allocate factors of production efficiently
to their most needed tasks. Although again untranslated into
English until 1934, Mises demonstration had an enormous
impact on European socialists, who tried for decades to refute
Mises and to come up with workable models for socialist planning.
Mises incorporated his insights into a comprehensive critique
of socialism, Socialism12
(1922). By the time that Mises devastating critiques of
socialism were translated, the world of American economics was
told that the Polish socialist Oskar Lange had refuted
Mises, and the socialists rested without bothering to read Mises
own contribution. The increasing and acknowledged failures of
Communist economic planning in Russia and Eastern Europe in
these increasingly industrialized economies after World War
II provided a dramatic confirmation of Mises insightsalthough
Mises own demonstration is still conveniently forgotten.
If socialism cannot work, then neither can the
specific acts of government intervention into the market which
Mises dubbed interventionism. In a series of articles
during the 1920s, Mises criticized and disposed of a host of
statist economic measures, articles which were collected into
Kritik des Interventionismus13
(1929). If neither socialism nor interventionism were viable.
then we are left with laissez-faire liberalism,
or the free market economy, and Mises expanded on his analysis
of the merits of classical liberalism in his notable Liberalismus14
(1927). In Liberalismus, Mises showed the close interconnection
between international peace, civil liberties, and the free-market
economy.
VI. Mises on the Methodology
of Economics
The 1920s thus saw Ludwig von Mises become the
outstanding critic of statism and socialism and champion of
laissez-faire and the free-market economy. But this was still
not enough for his remarkably creative and fertile mind. For
Mises had seen that economic theory itself, even in its Austrian
form, had not been fully systematized nor had it completely
worked out its own methodological foundations. Furthermore,
he realized that economics was more and more coming under the
spell of new and unsound methodologies: in particular of institutionalism,
which basically denied economics altogether, and of positivism,
which increasingly and misleadingly attempted to construct economic
theory on the same basis as the physical sciences. The classicists
and the older Austrians had constructed economics on the proper
methodology; but their specific insights into methodology had
been often haphazard and unsystematic, and hence they had not
established a methodology explicit or self-conscious enough
to withstand the new onslaught of positivism or institutionalism.
Mises proceeded to forge a philosophical groundwork
and methodology for economics, thereby fulfilling and systematizing
the methods of the Austrian School. These were first developed
in his Grundprobleme der NationalYkonomie (1933) (translated
much later, in 1960, as Epistemological Problems of Economics15).
After World War II, when institutionalism had faded away, and
positivism had unfortunately totally captured the economics
profession, Mises further developed his methodology and refuted
positivism in his Theory and History16
(1957), and The Ultimate Foundation of Economic Science17
(1962). Mises set himself in particular against the positivist
method, which sees men in the manner of physics, as stones or
atoms. To the positivist, the function of economic theory is
to observe quantitative, statistical regularities of human behavior,
and then to think up laws which could then be used to predict
and be tested by further statistical evidence. The
positivist method is of course uniquely suited to the idea of
economies being governed and planned by social engineers,
who treat men as if they were inanimate physical objects. As
Mises writes in the preface of Epistemological Problems,
this scientific approach would
. . . study the behavior of the human beings
according to the methods Newtonian physics resorts to in the
study of mass and motion. On the basis of this allegedly positive
approach to the problems of mankind, they plan to develop social
engineering, a new technique that would enable the economic
tsar of the planned society of the future to deal with
living men in the way technology enables the engineer to deal
with inanimate materials. (Page v.)
Mises developed his contrasting methodology,
which he called praxeology, or the general theory
of human action, out of two sources: (1) the deductive, logical,
individualistic analysis of the classical and Austrian economists;
and (2) the philosophy of history of the Southwest German
School at the turn of the twentieth century, notably Rickert,
Dilthey, Windelband, and Mises' friend, Max Weber. Essentially
Misesian praxeology rests its foundation on acting man:
on the individual human being not as a stone or atom that moves
in accordance with quantitatively determined physical laws,
but who has internal purposes, goals or ends which he tries
to achieve, and ideas about how to go about achieving them.
In short, Mises, in contrast to the positivists, affirms the
primary fact of human consciousnessof the mind of man
which adopts goals and attempts to achieve them in action. The
existence of such action is discovered by introspection as well
as by seeing human beings in their activity. Since men use their
free will to act in the world, their resulting behavior can
never be codified into quantitative historical laws.
Hence it is vain and misleading for economists to try to arrive
at predictable statistical laws and correlations for human activity.
Each event, each act, in human history is different and unique,
the result of freely acting and interacting persons; hence,
there can be no statistical predictions or tests
of economic theories.
If praxeology shows that human actions cannot
be pigeonholed into quantitative laws, how then can there be
a scientific economics? Mises answers that economic science,
as a science of human action, must be and is very different
from the positivist model of physics. For, as the classical
and Austrian economists showed, economics can begin by grounding
itself on a very few broadly true and evident axioms, axioms
arrived at by introspection into the very nature and essence
of human action. From these axioms, we can derive their logical
implications as the truths of economics. For example, the fundamental
axiom of the existence of human action itself: that individuals
have goals, act to attain them, act necessarily through time,
adopt ordinary scales of preference, and so on.
Although untranslated until well after World
War II, Mises ideas on methodology were brought to the
English speaking world in highly diluted form by his student
and follower at the time, the young English economist, Lionel
Robbins. Robbins Essay on the Nature and Significance
of Economic Science (1932) in which the author acknowledges
his especial indebtedness to Mises, was acknowledged
for many years in England and the United States as the outstanding
work on the methodology of economics. But Robbins stress
on the essence of economics as the study of the allocation of
scarce means to alternative ends, was a highly simplified and
watered-down form of praxeology. It lacked all of Mises
deep insight into the nature of the deductive method, and to
the differences between economic theory and the nature of human
history. As a result, and with Mises own work in the field
untranslated, Robbins work was scarcely sufficient to
stem the growing tide of positivism.
VII. Human Action
It was all well and good to formulate the correct
methodology for economic science; it was another thing, and
a far more formidable task, to actually construct economics,
the entire body of economic analysis, upon that foundation and
using that method. It would normally be considered impossible
to expect one man to accomplish both tasks: to work out the
methodology and then to develop the entire system of economics
on those foundations. In view of Mises long record of
work and accomplishments, it would be incredible to expect Mises
himself to perform this extremely difficult and arduous task.
And yet, Ludwig von Mises, isolated and alone, deserted by virtually
all of his own followers, in exile in Geneva from fascist Austria,
amidst a world and a profession that had deserted all of his
ideas, methods and principles, did it. In 1940, he published
his crowning and monumental achievement, Nationaliökonomie,
a work, however which was instantly forgotten amid the concerns
of war-torn Europe. Fortunately, Nationalökonomie was
expanded and transformed into English in 1949 as Human Action. 18
That Mises could contract Human Action at all is a
remarkable accomplishment; that he could do it under such drastically
unfavorable circumstances makes his achievement all the more
inspiring and breathtaking.
Human Action is IT; it is economics
whole, developed from sound praxeological axioms, based squarely
on analysis of acting man, the purposive individual as he acts
in the real world. It is economics developed as a deductive
discipline, spinning out of logical implications of the existence
of human action. To the present writer, who had the privilege
of reading the book on publication, it was an achievement that
changed the course of his life and ideas. For here was a system
of economic thought that some of us had dreamed of and never
thought could be attained: an economic science, whole and rational,
an economics that should have been but never was. An economics
provided by Human Action.
The magnitude of Mises achievement may
also be gleaned from the fact that not only was Human Action
the first general treatise on economics in the Austrian tradition
since World War I; it was the such general treatise in any
tradition. For after World War I, economics became increasingly
fragmented, broken into bits and pieces of unintegrated analysis;
and since the pre-war writings of such outstanding men as Fetter,
Clark, Taussig and Böhm-Bawerk, economists had ceased to present
their discipline as a coherent, deductive integrated whole.
The only writers who nowadays try to present an overall picture
of the field are the authors of elementary textbooks: which
only reveal by their lack of coherence the unfortunate state
that economics has reached. But now Human Action pointed
the way out of that bog of incoherence.
There is little more to be said about Human
Action, except to point out a few of the many detailed
contributions within this great corpus of economics.
Despite Böhm-Bawerks discovery and emphasis upon time
preference as the basis for interest, he himself had not completely
constructed his theories on that groundwork, and had left the
preference problem muddled. Frank A. Fetter had improved and
refined the theory, and had established the pure time-preference
explanation of interest in his notable but neglected writings
in the first two decades of the twentieth century. Fetters
vision of the economic system was essentially that consumer
utilities and demands set consumer goods prices, that
individual factors earn their marginal productivity, and then
that all of these returns are discounted by the rate of interest
or time preference, with the creditor or capitalist earning
the discount. Mises resurrected Fetters forgotten accomplishment,
showed still further that time preference was a necessary praxeological
category of human action, and integrated Fetters theory
of interest with the Böhm-Bawerkian theory of capital, and with
his own business-cycle theory.
Mises also provided a much-needed methodological
critique of the currently fashionable mathematical and statistical
method in economics, a system derived from the Swiss neo-classicist,
Leon Walras, and a methodology that has all but crowded out
language or verbal logic from economic theory. Continuing in
the explicitly anti-mathematical tradition of the classical
economists and of the Austrians (many of whom were thoroughly
trained in mathematics), Mises pointed out that mathematical
equations are only useful in describing the timeless, static,
never-never land of general equilibrium. Once a
person departs from that Nirvana, and analyzes individuals acting
in the real world, a world of time and of expectations, of hopes
and errors, then mathematics becomes not only useless but highly
misleading. He showed that the very use of mathematics in economics
is part of the positivist error that treats men as stones, and
therefore believes that, as in physics, human actions can somehow
be charted with the mathematical precision of plotting the path
of a missile in flight. Furthermore, since individual actors
can only see and estimate in terms of substantive differences,
the use of differential calculus, with its assumption of infinitely
small quantitative changes, is singularly inappropriate to a
science of human action.
The use of mathematical functions
also implies that all events in the market are mutually
determined; for in mathematics if x is a function
of y, then y is in the same sense a function
of x. This sort of mutual determination
methodology may be perfectly legitimate in the field of physics,
where there is no uniquely causal agent at work. But in the
sphere of human action, there is a causal agent, a
single cause: the purposive action of the individual
man. Austrian economics shows, therefore, that the cause flows,
for example, from consumer demand to the pricing
factors of production, and in no sense the other way around.
The equally fashionable econometric
method, which attempts to integrate statistical events and mathematics
is doubly fallacious; for any use of statistics to arrive at
predictable laws assumes that in the analysis of individual
action as in physics one can discover confirmable constants,
invariable quantitative laws. And yet, as Mises emphasized,
no one has ever discovered a single quantitative constant in
human behavior, and no one is ever likely to, given the freedom
of will inherent in every individual. From this fallacy also
comes the current mania for scientific economic
forecasting, and Mises trenchantly shows the fundamental fallacy
of this age-old but incurably vain aspiration. The sorry record
of econometric forecasting in the past few years, despite the
use of high-speed computers and supposedly sophisticated econometric
models, is but another confirmation of one of the
host of insights that Ludwig von Mises has provided.
Tragically, with the inter-war period, only
one aspect of Misesian economics, apart from a bit of his methodology,
filtered into the English-speaking world. On the basis of his
business-cycle theory, Mises had predicted a depression at a
time when, in the New Era of the 1920s most economists,
including Irving Fisher, were proclaiming a future of indefinite
prosperity insured by the manipulations of governments
central banks. When the Great Depression struck, lively interest
began to be shown, especially in England, in Mises theory
of the business cycle. This interest was further sparked by
the migration to the London School of Economics of Mises
outstanding follower, Friedrich A. von Hayek, whose own development
of Mises business-cycle theory was quickly translated
into English in the early 1930s. During this period, Hayeks
seminar at the London School developed many Austrian-cycle theorists,
including John R. Hicks, Abba P. Lerner, Ludwig M. Lachmann,
and Nicholas Kaldor; and such English followers of Mises as
Lionel Robbins and Frederic Benham published Misesian explanations
of the Great Depression in England. The works of Mises
Austrian students, such as Fritz Machlup and Gottfried von Haberler,
began to be translated, and Robbins supervised the translation,
at long last, of Mises The Theory of Money and Credit
in 1934. In 1931, Mises published his analysis of the depression
in the recently translated Die Ursachen der Wirtschaftskrise. 19
It looked very much in the first half of the 1930s as if the
Misesian business-cycle theory would sweep the day, and if that
were so, then the rest of Misesian economics could not be far
behind.
America was slower in picking up Austrian theory,
but the enormous influence of English economics in the United
States insured that Mises cycle theory would spread to
this country as well. Gottfried von Haberler delivered the first
summary in the United States of the Mises-Hayek cycle theory; 20
and soon the rising economist Alvin Hansen veered toward the
adoption of the Austrian doctrine. Outside cycle theory, the
Austrian theory of capital and interest was resurrected in a
notable series of articles in American journals by Hayek, Machlup,
and the young economist, Kenneth Boulding.
It seemed increasingly that Austrian economics
would be the wave of the future, and that Ludwig von Mises would
at last achieve the recognition that he had so long deserved
and never attained. But, on the point of victory, tragedy intervened
in the form of the famous Keynesian Revolution. With the publication
of his General Theory of Employment, Interest, and Money
(1936), John Maynard Keynes tangled and inchoate new justification
and rationalization of inflation and government deficits swept
the economic world like a prairie fire. Until Keynes, economics
had provided an unpopular bulwark against inflation and deficit
spending; but now with Keynes, and armed with his cloudy obscure,
and quasi-mathematical jargon, economists could rush into a
popular and profitable coalition with politicians and governments
anxious to expand their influence and power. Keynesian economics
was beautifully tailored to be the intellectual armor for the
modern Welfare State, for interventionism and statism on a vast
and mighty scale.
As so often happens in the history of social
science, the Keynesians did not bother to refute Misesian theory;
the latter was simply forgotten, swept away in the onrush of
the well-named Keynesian Revolution. Mises cycle theory,
as well as the rest of Austrian economics, was simply poured
down the Orwellian memory hole, lost to economists
and to the world from that point on. Probably the single most
tragic aspect of this massive forgetting was the desertion of
Mises most able followers: the rush to Keynesianism not
only by Hayeks English students, of Hansen who soon became
the leading American Keynesian, but of the Austrians who knew
better, and who rapidly left Austria to assume high academic
posts in the United States and to constitute the moderate wing
of Keynesian economics. After the glittering promise of the
1920s and 1930s, only Hayek and the lesser-known Lachmann remained
true and unsullied. It was amidst this isolation, this crumbling
of his deservedly high hopes that Ludwig von Mises labored to
complete the great structure of Human Action.
VIII. Mises in America
Persecuted in his native Austria, Ludwig von
Mises was one of many notable European exiles. Going first to
Geneva, Mises taught there at the Graduate Institute of International
Studies from 1934 to 1940; it was in Geneva that he married
the lovely Margit Sereny-Herzfeld in 1938. In 1940, Mises came
to the United States. 21 But while innumerable
socialist and communist European exiles were welcomed in the
academic world of the United States, and while his own former
followers were granted high academic posts, Mises himself was
neglected and forgotten. An unquenchable and uncompromising
adherence to individualism, in economic method as well as political
philosophy, barred him from that same academy which prides itself
on an untrammeled search for truth. Yet living on
small foundation grants in New York City, Mises was able to
publish in 1944 two notable works, written in English: Omnipotent
Government22 and Bureaucracy23.
Omnipotent Government showed that the Nazi regime was
not, in the fashionable Marxist analysis, the highest
stage of capitalism, but was instead a form of totalitarism
socialism. Bureaucracy provided a vitally important
analysis of the critical difference between profit management
and bureaucratic management, and showed that the grave inefficiencies
of bureaucracy were inherent and inescapable in any government
activity.
It was an unforgivable and shameful blot on
American academia that Ludwig von Mises never found a paid,
full-time university post. From 1945 on, Mises was simply a
Visiting Professor at the Graduate School of Business Administration
at New York University. Amid these conditions, often treated
as a second-class citizen by the university authorities, remote
from prestigious academic centers, and surrounded largely by
time-serving uncomprehending majors in accounting or business
finance, Ludwig von Mises resumed his once-famous weekly seminars.
Tragically, in this sort of post, Mises could not hope to turn
out a host of influential young academic economists; he could
not hope to replicate the scintillating success of his seminars
at Vienna.
Despite these sad and unfortunate conditions,
Ludwig von Mises conducted his seminar proudly and without complaint.
Those of us who came to know Mises in his New York University
period never once heard a word of bitterness or resentment pass
from his lips. In his unfailingly gentle and kindly way, Mises
worked to encourage and stimulate any possible spark of productivity
in his students. Every week a stream of suggested research projects
would pour from him. Every lecture of Mises was a carefully
crafted jewel, rich in insights, presenting outlines of his
entire economic vision. To those students who sat silent and
overawed, Mises would say, with the characteristic humorous
twinkle in his eye: Dont be afraid to speak up.
Remember, whatever you say about the subject and however fallacious
it might be, the same thing has already been said by some eminent
economist.
Despite the cul de sac in which Mises
was placed, a tiny handful of graduates did emerge from the
seminar to carry on the Austrian tradition; and, moreover, the
seminar served as a beacon for non-registered students throughout
the New York City area who flocked every week to attend Mises
seminar. Not the least of its delights was the post-seminar
adjournment to a local restaurant, in at least a pale reflection
of the days when the famous Mises-kreis [Mises circle]
used to hold forth in a Vienna cafe. Mises would pour forth
an endless stream of fascinating anecdotes and insights, and
we well knew that in those anecdotes and in the very aura and
person of Ludwig von Mises we were all seeing an embodiment
of the Old Vienna of a far nobler and more charming day. Those
of us privileged to attend his seminar at New York University
could well understand how Mises was a great teacher
as well as a great economist.
Despite his situation then, Mises was able to
serve as a lonely beacon-light of freedom, of laissez-faire
and Austrian economics, in an inhospitable world. As we have
seen, Mises remarkable productivity continued unflagged
in the New World. And fortunately, there were enough well-wishers
to translate Mises classic works and to publish his continuing
output. Ludwig von Mises was the focal center of the libertarian
movement of the post-war period in the United States: a guide
and an eternal inspiration to us all. Despite the neglect of
academia, Mises publications are virtually all in print
today, kept there by a growing number of students and followers.
And even in the resistant ranks of academic economists, the
last few years have seen a growing number of graduate students
and young professors who have embraced the Austrian and Misesian
tradition.
Not only in the United States; for it is not
well enough known that, through his students and colleagues,
Ludwig von Mises played a leading role in the post-World-War
II swing back from collectivism and toward at least a partially
free-market economy in Western Europe. In West Germany Mises
student of Vienna days, Wilhelm Röpke, was the major intellectual
impetus in the turn from collectivism to a relatively free-market
economy. In Italy, President Luigi Einaudi, a veteran colleague
of Mises in free-market economics, played a leading role in
pushing the country away from full-fledged socialism after the
war. And Mises follower, Jacques Rueff, was the major
economic advisor to General DeGaulle in battling valiantly and
virtually single-handedly for a return to the gold standard.
It is a final tribute to the unquenchable spirit
of Ludwig von Mises that he continued to conduct his seminar
at New York University every week, without pause, until the
spring of 1969, when he retired as undoubtedly the oldest active
professor in the United States, spry and energetic at the age
of 87.
IX. The Way Out; Hope
for the Future
There are increasingly hopeful signs that the
virtually life-long isolation of the ideas and contributions
of Ludwig von Mises is rapidly coming to an end. For in recent
years the inner contradictions and the disastrous consequences
of the wrong turn in social science and in politics have become
increasingly evident. 24 In Eastern
Europe, the acknowledged inability of Communist governments
to plan their economies has led to an increasing movement in
the direction of a free market. In the United States and the
Western world, the Keynesian and inflationist nostrums are revealing
their essential bankruptcy. The post-Keynesian United
States government struggles helplessly to control a seemingly
permanent inflation which persists even during recessions, thereby
flouting the conventional economic wisdom. The breakdown of
Keynesian policies, coupled with the evident flaws in Keynesian
theory, is causing an expanding restlessness with the entire
Keynesian framework. The glaring wastes of government spending
and bureaucratic rule are casting an ever harsher light on Keynes
famous dictum that it does not matter whether the government
spends resources on productive assets or on pyramids. The helpless
breakdown of the international monetary order causes the post-Keynesian
governments of the world to veer from one crises to another
between unsatisfactory solutions: floating exchange
rates for fiat moneys, or fixed exchange rates propped up by
exchange controls that cripple foreign trade and investment.
The crisis of Keynesianism must be seen within
the broader framework of a crisis of statism and interventionism,
in thought and in action. In the United States, modern statist
liberalism has shown itself unable to cope with
the crisis it has created: with the conflicts of national military
blocs, the financing, content, personnel, and structure of the
public schools, with the crunch between permanent inflation
and the growing public resistance to crippling confiscatory
taxes. Both the welfare and the warfare of the modern Welfare-Warfare
State are being increasingly challenged. In the sphere of theory,
there is growing rebellion against the idea that an elite of
scientific technocrats must rule us as raw material
for their social engineering. And the idea that the government
can and must force-feed the undeveloped and the advanced countries
into artificial economic growth is also coming under
accelerated attack.
Everywhere, in short, in all spheres of thought
and action, the modern statism that Ludwig von Mises has combated
all his life is coming under the swelling drum-fire of criticism
and disillusion. Men are no longer willing to submit meekly
to the decrees and dictates of their self-proclaimed sovereign
rulers. But the problem is that the world cannot battle its
way out of the statist miasma until it can find a viable and
coherent alternative. What we have not yet fully realized is
that Ludwig von Mises offers that alternative: that he offers
the Way Out of the crises and dilemmas that have stricken the
modern world. For his entire life, he has predicted and shown
the reasons for our current disillusion and has hammered out
the constructive alternative path for us to follow. It is no
wonder that, in the 92nd year of his remarkable life, more and
more people were discovering and embracing that path.
In the preface (1962) to the English translation
of his The Free and Prosperous Commonwealth, Mises
wrote:
When, thirty-five years ago, I tried to give
a summary of the ideas and principles of that social philosophy
that was once known under the name of liberalism, I did not
indulge in the vain hope that my account would prevent the impending
catastrophe to which the policies adopted by the European nations
were manifestly leading. All I wanted to achieve was to offer
to the small minority of thoughtful people an opportunity to
learn something about the aims of classical liberalism and thus
to pave the way for a resurrection of the spirit of freedom
AFTER the coming debacle. 25
In his tribute to Mises, Jacques Rueff declared:
. . . Ludwig von Mises has safeguarded the foundations
of a rational economic science . . . By his teachings he has
sown the seeds of a regeneration which will bear fruit as soon
as men once more begin to prefer theories that are true to theories
that are pleasing. When that day comes, all economists will
recognize that Ludwig von Mises merits their admiration and
gratitude. 26
The signs are multiplying that the debacle and
breakdown of statism is indeed leading to that regeneration,
and that the thoughtful minority that Mises hoped to reach is
growing apace. If we should truly be on the threshold of a resurrection
of the spirit of freedom, then the rebirth will be the crowning
monument to the life and the thought of a noble and magnificent
man.
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