Volume 6, Number 4
Federal Reserve Bank of Dallas
Ludwig von Mises
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This Economic Insights features
one of the free economy’s most famous intellectual
warriors, Ludwig von Mises. Working from within
the Austrian paradigm, in 1912 Mises became
the first to apply marginal utility theory
to money itself, in The Theory of Money
and Credit, his first major work. He triggered
one of economics’ most contentious and enlightening
debates a few years later with his claim that
central planning, regardless of its undesirability
on other grounds, was impossible to implement
successfully. Holding to this claim and being
an uncompromising proponent of classical liberalism
impaired Mises’ academic reputation for the
remainder of his life. Yet he never stopped
working, and he produced some of the century’s
most controversial and brilliant books, among
them Theory and History, Socialism, Omnipotent
Government, Bureaucracy, Planning for Freedom,
Liberalism, Epistemological Problems of Economics,
Planned Chaos and his greatest achievement, Human
Action.
We often hear the resigned
cry that one person can’t change the world.
But many individuals have done so, and Ludwig
von Mises’ life stands as one more example
of what a determined, committed individual
can do to change history’s course.
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Bob McTeer
President and Chief Executive Officer
Federal Reserve Bank of Dallas |
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Ludwig von Mises
Ludwig Elder von Mises’ life was testament
to the saying that one man with courage makes a majority.
Mises was born in 1881 in Lemberg,
Austria-Hungary. He enrolled in the University of Vienna
in 1900 and received his doctorate
in law and economics in 1906. A student of Eugen von Böhm-Bawerk—himself
an admirer of Carl Menger, father of the Austrian school
of economics—Mises became one of the university’s most prominent
figures. After graduating, Mises worked for the Vienna Chamber
of Commerce as an economist and economic advisor to the Austrian
government.
In 1926 he founded the first
entity dedicated solely to the study of macroeconomic fluctuations,
the Austrian Institute
for Trade Cycle Research.[1] While pursuing this interest,
he taught an economic theory course at the University of
Vienna without pay and ran a semimonthly seminar at the chamber
offices that drew some of the most notable names in economics
and the social sciences, including F. A. Hayek, Gottfried
Haberler, Wilhelm Röpke, Alfred Shutz, Erich Voegelin,
Paul Rosenstein-Rodan, Fritz Machlup, Oskar Morgenstern and
Lionel Robbins.
Between his departure from Vienna
in 1934 and his decision to go to America after the Germans
breached the Maginot Line
in June 1940, Mises taught in Geneva at the Graduate Institute
of International Studies. He flourished in the Swiss city
and was very reluctant to leave, especially as his English
was much weaker than his French. But the fall of France,
the antipathy of the Nazi government—which blacklisted him—and
his wife Margit’s pleadings made his departure a near certainty.
Since the early 1930s, Mises had warned those close to him
of impending political disaster in Austria and urged them
to emigrate. American economist Benjamin Anderson, then with
Chase Manhattan Bank, supported the couple’s bid for nonquota
visas, which allowed them immediate entry into the United
States, provided they could get there. It proved to be a
difficult, harrowing journey, but when it ended, Mises at
last stood on American soil.[2]
The early years in his new country
were not easy ones for Mises. He had abandoned his research
notes and library, as
well as a well-paid position in Geneva, for uncertain circumstances
in the New York of 1940. Although Mises had a temporary appointment
as lecturer and research associate professor at the University
of California–Berkeley, he remained in New York because
he thought it the country’s cultural center. As Mises never
did hold a full-time teaching position at any American university,
this decision had large consequences for his career and,
therefore, for his prestige in U.S. academic circles. It
also meant years of frugality and dissaving for him and his
wife.
The Rockefeller Foundation, through the National Bureau
of Economic Research, provided some support in the form of
a once-renewed, two-year research grant that ended in early
1945, just as Mises began his long association with the Graduate
School of Administration at New York University. He was hired
to teach a one-semester course but remained as a visiting
professor until his retirement in 1969. In 1948 he began
his famous Thursday evening seminar. He also formed a relationship
with the Foundation for Economic Education, writing for its
publication The Freeman and conducting seminars.
Another fortuitous relationship
for Mises was the friendship of Henry Hazlitt.[3] Hazlitt
saw to it that Mises’ works
were reviewed in major national media and promoted him among
those in a position to help support Mises’ research and writing
over the next three decades.
During this time—between 1944 and 1960—Mises
wrote prolifically, finishing several books, among them Omnipotent Government,
Bureaucracy, Theory and History and his masterpiece, Human
Action: A Treatise on Economics.[4] Although often difficult
for those without formal training in economics to fully comprehend,
these books have been in print continuously and sold well.
Mises’ influence has grown with every person who has discovered
and read him.
His NYU seminars were the other
main avenue by which Mises helped shape political and economic
events. Many of the influential
and talented individuals who gathered for the weekly seminars
became university professors themselves, further spreading
the core ideas of Austrian economic theory. Throughout this
period, however, Mises remained an outcast professionally,
and unlike colleagues such as Hayek, he never secured a conventional
full-time teaching position despite his reputation, knowledge
and publication record.[5] This was due, said his critics,
to his "intransigence," a word used as a synonym
for Mises’ inability to compromise with the socialist, proplanning
policies that dominated domestic economic agendas in most
nations after World War II.[6]
And there was, for prospective
employers and his political opponents, even more. In 1920
Mises wrote the article that
triggered the so-called socialist calculation debate, in
which he (and later, other Austrian theorists—notably Hayek)
claimed socialism was doomed because of its inability to
rationally allocate resources. This made him well-known not
only as an opponent of planning in all its rhetorical forms
but also as the person who first questioned its very possibility.[7]
This was a large ideological
load to carry between 1945 and 1970, a period characterized
by a growing enthusiasm
for government intervention and central economic fine-tuning.
Mises and the small group around him stood mostly alone in
their advocacy of laissez-faire and disavowal of government
attempts to manipulate free market outcomes, whether for
purely economic reasons or to meet the growing demand for "social
justice." But Mises never wavered in his conviction
that only free markets could help people achieve prosperity
and dignity.
The disintegration of the Soviet
Union, and the sea change toward global capitalism that
caused it, bore out Mises’ prediction
that socialism could not work. He adhered to that belief
in the face of claims by most economists that he was wrong,
that he had lost the intellectual debate on this point to
Oscar Lange and that not only could socialism work but it
might even outperform market-based economies.[8] It is unfortunate
that Nobel awards in economics can only be given to the living,
for Mises’ analysis of the inevitable, long-run failing of
collectivist schemes stands empirically verified as one of
the greatest achievements in economic theory.
Mises died in October 1973 in
New York City. His legacy—in
the form of voluminous writing on many important subjects,
rich in theoretical innovation and wrinkles from his fertile
mind—continues to attract new adherents, both to Austrian
economics and to the profession of economics more generally.
An institute at Auburn University that bears his name continues
to spread his ideas and make many of his writings publicly
available. In 1974 his favorite student—F. A. Hayek—won a
joint Nobel Prize in economics for monetary theory work clearly
based on Mises’ insights in The Theory of Money and Credit and
his formation of Austrian business cycle theory.
Mises has been dead for three decades, but his intellectual
influence still surrounds us and always will.
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Robert L. Formaini
Senior Economist |
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| Notes
- Mises (1969a) calls the entity he founded
the Austrian Institute for Trade Cycle Research.
But he later (Mises 1978, 76) calls it the
Austrian Institute for Business Cycle Research,
as does Rothbard (1987), and both use the 1926
founding date. Margit von Mises (1976) supplies
yet another name and a different founding date—Austrian
Institute for Business Research and 1927.
- Margit von Mises (1976, chap. 4).
- Readers may wish to consult Formaini (vol.
6).
- Until a badly handled reprinting of Human
Action in 1963, Mises had an ongoing relationship
with Yale University Press, which brought out Omnipotent
Government and Bureaucracy in 1944 and
reprinted Socialism (1951), The
Theory of Money and Credit (1953) and Theory
and History (1957).
- Formaini (vol. 4).
- Rueff (1956). When he wasn’t being labeled "intransigent" for
his political support for free trade, Mises
was called other things for his belief in a
priori reasoning during the heyday of
the positivist–empiricist trend in economics.
For one example, see Blaug (1980, 93).
- Mises (1975).
- For an example of a prosocialist theoretical
refutation of Mises’ antiplanning claim, see Schumpeter
(1976, 172–73).
References
Blaug, Mark (1980), The Methodology of Economics,
or, How Economists Explain (Cambridge:
Cambridge University Press).
Formaini, Robert
L. (vol. 4), "Hayek: Social
Theorist of the Century," Federal Reserve
Bank of Dallas Economic Insights, No.
1.
——— (vol. 6), "Henry
Hazlitt: Journalist Advocate of Free Enterprise," Federal
Reserve Bank of Dallas Economic Insights,
No. 1.
Mises, Ludwig von (1963), Human Action:
A Treatise on Economics, 3rd rev. ed.
(Chicago: Henry Regnery).
——— (1969a), The Historical
Setting of the Austrian School of Economics (New
Rochelle, N.Y.: Arlington House).
——— (1969b), Socialism:
An Economic and Sociological Analysis (London:
Jonathan Cape).
——— (1969c), Theory
and History: An Interpretation of Social and
Economic Evolution (New
Rochelle, N.Y.: Arlington House).
——— (1975), "Economic
Calculation in the Socialist Commonwealth," in Collectivist
Economic Planning: Critical Studies on the Possibilities
of Socialism, ed. F. A. Hayek (Clifton,
N.J.: Augustus Kelley), 87–132.
——— (1978), Notes and
Recollections (Spring
Mills, Pa.: Libertarian Press).
——— (1985), Liberalism (Irvington-on-Hudson,
N.Y.: Foundation for Economic Education). Online
at www.mises.org.
Mises, Margit von (1976), My Years with
Ludwig von Mises (New Rochelle, N.Y.:
Arlington House).
Rothbard, Murray
(1987), "Mises, Ludwig
Elder von (1881–1973)," in The
New Palgrave: A Dictionary of Economics,
vol. 3, ed. John Eatwell, Murray Milgate and
Peter Newman (New York: Stockton Press), 479–80.
Rueff, Jacques (1956), "The Intransigence
of Ludwig von Mises," in On Freedom
and Free Enterprise, ed. Mary Sennholz (Princeton,
N.J.: D. van Nostrand), 13–16.
Schumpeter, Joseph A. (1976), Capitalism,
Socialism, and Democracy (New York: Harper
Torchbooks).
Suggested Reading
Several Mises books can be downloaded from www.mises.org. |
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The Problem of
Socialist Economic Calculation
The problem of economic calculation is the fundamental
problem of Socialism. That for decades people
could write and talk about Socialism without
touching this problem only shows how devastating
were the effects of the Marxian prohibition on
scientific scrutiny of the nature and working
of a socialist economy.
To prove that economic calculation would be
impossible in the socialist community is to prove
also that Socialism is impracticable. Everything
brought forward in favour of Socialism during
the last hundred years, in thousands of writings
and speeches, all the blood which has been spilt
by the supporters of Socialism, cannot make Socialism
workable. The masses may long for it ever so
ardently, innumerable revolutions and wars may
be fought for it, still it will never be realized.
Every attempt to carry it out will lead to syndicalism
or, by some other route, to chaos, which will
quickly dissolve the society, based upon the
division of labour, into tiny autarkous groups.
The discovery of this fact is clearly most inconvenient
for the socialist parties, and socialists of
all kinds have poured out attempts to refute
my arguments and to invent a system of economic
calculation for Socialism. They have not been
successful.
—Socialism, 135. |
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Praxeology Versus
Positivistic Method in Social Science
…Behaviorism and positivism want to apply the
methods of the empirical natural sciences to
the reality of human action. They interpret it
as a response to stimuli. But these stimuli themselves
are not open to description by the methods of
the natural sciences. Every attempt to describe
them must refer to the meaning which acting men
attach to them. We may call the offering of a
commodity for sale a "stimulus." But
what is essential in such an offer and distinguishes
it from other offers cannot be described without
entering into the meaning which the acting parties
attribute to the situation. No dialectical artifice
can spirit away the fact that man is driven by
the aim to attain certain ends. It is this purposeful
behavior—viz., action—that is the subject matter
of our science. We cannot approach our subject
if we disregard the meaning which acting man
attaches to the situation, i.e., the given state
of affairs, and to his own behavior with regard
to this situation.
It is not appropriate
for the physicist to search for final causes
because there is no indication
that events which are the subject matter of physics
are to be interpreted as the outcome of actions
of a being, aiming at ends in a human way. Nor
is it appropriate for the praxeologist to disregard
the operation of the acting being’s volition
and intention; they are undoubtedly given facts.
If he were to disregard it, he would cease to
study human action. Very often—but not always—the
events concerned can be investigated both from
the point of view of praxeology and from the
natural sciences. But he who deals with the discharging
of a firearm from the physical and chemical point
of view is not a praxeologist. He neglects the
very problems which the science of purposeful
human behavior aims to clarify….
The postulates of positivism and kindred schools
of metaphysics are therefore illusory. It is
impossible to reform the sciences of human action
according to the pattern of physics and the other
natural sciences. There is no means to establish
an a posteriori theory of human conduct and social
events. History can neither prove nor disprove
any general statement in the manner in which
the natural sciences accept or reject a hypothesis
on the ground of laboratory experiments.
—Human Action,
26–7, 31. |
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The Origins of
Socialist Ideology
The truth is that
the concept of socialism did not originate
from the "proletarian
mind." No proletarian or son of a proletarian
contributed any substantial idea to the socialist
ideology. The intellectual fathers of socialism
were members of the intelligentsia, scions
of the "bourgeoisie." Marx himself
was the son of a well-to-do lawyer. He attended
a German Gymnasium, the school all Marxians
and other socialists denounce as the main offshoot
of the bourgeois system of education, and his
family supported him through all the years
of his studies; he did not work his way through
the university. He married the daughter of
a member of the German nobility; his brother-in-law
was Prussian minister of the interior and as
such head of the Prussian police…. Friedrich
Engels was the son of a wealthy manufacturer….
The workers were
never enthusiastic about socialism. They
supported the union movement
whose striving after higher wages Marx despised
as useless. They asked for all those measures
of government interference with business which
Marx branded petty-bourgeois nonsense. They
opposed technological improvement, in earlier
days by destroying new machines, later by union
pressure and compulsion in favor of feather-bedding.
Syndicalism—appropriation of the enterprises
by the workers employed in them—is a program
that the workers developed spontaneously. But
socialism was brought to the masses by intellectuals
of bourgeois background. Dining and wining
together in the luxurious London homes and
country seats of late Victorian "society," ladies
and gentlemen in fashionable evening clothes
concocted schemes for converting the British
proletarians to the socialist creed.
—Theory and History,
121–2. |
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Foreseeing California’s
Energy Crisis in 1927
…To be sure, it is conceded [by prosocialist
intellectuals] that socialism, the communal
ownership of the means of production, is altogether,
or at least for the present, impracticable.
But, on the other hand, it is asserted that
unhampered private ownership of the means of
production is also an evil. Thus people want
to create a third way, a form of society standing
midway between private ownership…and communal
ownership…. Private property will be permitted
to exist, but the ways in which the means of
production are employed by the entrepreneurs,
capitalists, and landowners will be regulated,
guided, and controlled by authoritarian decrees
and prohibitions....
…The crucial acts of intervention with which
we have to deal aim at fixing the prices of
goods and services at a height different from
what the unhampered market would have determined….
…If a lower [than
free market] price is decreed by government,
the proceeds will fall short
of the costs. Merchants and manufacturers will,
therefore, unless the shortage of the goods
involved would cause them to deteriorate rapidly
in value, withhold their merchandise from the
market in the hope of more favorable times,
perhaps in the expectation that the government
order will soon be rescinded. If the authorities
do not want the goods concerned to disappear
altogether from the market as a result of their
interference, they cannot limit themselves
to fixing the price; they must at the same
time also decree that all stocks on hand be
sold at the prescribed price.
But even this does
not suffice. At the price determined on the
unhampered market, demand
and supply would have coincided. Now, because
the price was fixed lower by government decree,
the demand has increased while the supply has
remained unchanged. The stocks on hand are
not sufficient to satisfy fully all who are
prepared to pay the prescribed price. A part
of the demand will remain unsatisfied….If the
government wishes to avoid this consequence
of its intervention, which runs counter to
its intentions, it must add rationing to price
control and compulsory sale: a governmental
regulation must determine how much of a commodity
may be supplied to each individual applicant
at the prescribed price.
But once the supplies
already on hand at the moment of the government’s intervention are
exhausted, an incomparably more difficult problem
arises. Since production is no longer profitable
if the goods are to be sold at the price fixed
by the government, it will be reduced or entirely
suspended. If the government wishes to have
production continue, it must compel the manufacturers
to produce, and, to this end, it must also
fix the prices of raw materials and half-finished
goods and the wages of labor….
If the Government
will not set this right again by desisting,
from its interference,
i.e., by rescinding the price controls, then
it must follow up the first step with others….Either
capitalism or socialism: there exists no middle
way.
—Liberalism, chapter 2, section 5. |
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The Importance
of Clear Terminology for Clear Thinking
Government is an apparatus of compulsion and
coercion. It has the power to obtain obedience
by force. The political sovereign, be it an
autocrat or the people as represented by its
mandataries, has power to crush rebellions
as long as his ideological might subsists.
The position which
entrepreneurs and capitalists occupy in the
market economy is of a different
character. A "chocolate king" has
no power over the consumers, his patrons. He
does not rule the consumers, he serves them....
He loses his "kingdom" if the consumers
prefer to spend their pennies elsewhere. Nor
does he "rule" his workers. He hires
their services by paying them precisely that
amount which the consumers are ready to restore
to him in buying the product. Still less do
the capitalists and entrepreneurs exercise
political control. The civilized nations of
Europe and America were long controlled by
governments which did not considerably hinder
the operation of the market economy. Today
these countries too are dominated by parties
which are hostile to capitalism and believe
that every harm inflicted upon capitalists
and entrepreneurs is extremely beneficial to
the people.
In an unhampered
market economy the capitalists and entrepreneurs
cannot expect an advantage
from bribing officeholders and politicians.
On the other hand, the officeholders and politicians
are not in a position to blackmail businessmen
and to extort graft from them. In an interventionist
country powerful pressure groups are intent
upon securing for their members privileges
at the expense of weaker groups and individuals.
Then the businessmen may deem it expedient
to protect themselves against discriminatory
acts on the part of the executive officers
and the legislature by bribery; once used to
such methods, they may try to employ them in
order to secure privileges for themselves….
[T]he fact that businessmen bribe politicians
and officeholders and are blackmailed by such
people does not indicate that they are supreme
and rule the countries. It is those ruled—and
not the rulers—who bribe and are paying tribute….
[The businessmen] venture to preserve the free
enterprise system and to defend themselves
against discrimination by legitimate democratic
methods. They form trade associations and try
to influence public opinion. The results of
these endeavors have been rather poor…. The
best that they have been able to achieve is
to delay for a while some especially obnoxious
measures.
Demagogues misrepresent
this state of affairs in the crassest way.
They tell us that these
associations of bankers and manufacturers are
the true rulers of their countries and that
the whole apparatus of what they call "plutodemocratic" government
is dominated by them. A simple enumeration
of the laws passed in the last decades by any
country’s legislature is enough to explode
such legends.
—Human Action,
272–73. |
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| About Economic
Insights
Economic Insights
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