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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 Marx’s 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.”

Menger’s 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-Bawerk’s 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 quantity—the larger the number of units—of 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 productivity—and hence its price—tend 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 someone’s 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 product—the automobile or bread or washing machine—is 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 people’s 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 one’s cash balance (in one’s 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 everyone’s 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.

Inflation—an expansion of the money supply—Mises 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 today’s names for money: dollar, pound, franc, and so on, originated as names of units of weight of gold or silver. Even in today’s 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 government’s 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 man’s 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 phenomenon—the 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 demonstrated—in the most literal sense of the word—that those institutions, while claiming to contribute to man’s 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 article11 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’ insights—although 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 consciousness—of 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-Bawerk’s 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. Fetter’s 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 Fetter’s forgotten accomplishment, showed still further that time preference was a necessary praxeological category of human action, and integrated Fetter’s 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 government’s 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, Hayek’s 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 Hayek’s 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: “Don’t 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.


1Publishers Note:
In this essay by Murray N. Rothbard, one of Mises’ students and followers, presents a lucid and moving portrayal of Mises’ life and teachings. Mises’ views are placed in the setting of the Austrian School of economics, which Mises adopted, developed and transformed to found his own school of thought. Mises’ contributions are examined as they developed in his own life. Rothbard’s essay is the best brief summary available of the great economist’s life and work.

This essay originally appeared in 1973 as a “Bramble Minibook,” Oakley R. Bramble, Publisher, Lansing, MI 48904.

2Now L’vov in the Russian Ukraine, about 350 miles east (and slightly north) of Vienna, Austria.

3See Menger’s Principles of Economics: new edition proposed by Institute for Humane Studies, Menlo Park, CA 94025. (1950 English edition by The Free Press, Glencoe, IL is out-of-print.) Translated and edited by James Dingwall and Bert F. Hoselitz from the 1871 German edition, Grundsätze der Volkswirtschaftslehre.

See also Menger’s Problems of Economics and Sociology, University of Illinois Press, Urbana, IL, 1963. Translated by Francis J. Nock from the 1883 German edition, Untersuchungen über die Methode der Socialwissenschaften und der Politischen Oekonomie insbesondere.

4See Eugen von Böhm-Bawerk’s three-volume Capital and Interest: Volume I, History and Critique of Interest Theories; Volume II, Positive Theory of Capital; Volume III, Further Essays on Capital and Interest. (First complete English translation of Third-Fourth German edition by George D. Huncke and Hans F. Sennholz; Libertarian Press, Grove City, PA 16127, U.S.A., 1959. German title for this opus was, Kapital und Kapitalzins, and appeard in these editions: First edition for Volume I in 1884, II in 1889. Second edition: I, 1900; II, 1902. Third edition, and completely revised: I,1914; Part of II & III,1909; balance of II & III, 1912. Fourth (posthumous) edition: I, II, III—1921.)

Paperback Extracts:
Chapter 12 of Volume I, “The Exploitation Theory of Socialism Communism.” Libertarian Press, 1975.

Parts A & B of Volume II, “Value and Price.” Libertarian Press, 1973.

5See Eugen von Böhm-Bawerk, Essay V, “The Ultimate Standard of Value” in Shorter Classics of Böhm-Bawerk, Libertarian Press, Grove City, PA 16127, U.S.A., 1962.

6See Eugen von Böhm-Bawerk, Volume II, Positive Theory of Capital, pages 1–118, in the three-volume Capital and Interest, Libertarian Press, Grove City, PA 16127, U.S.A., 1959.

7Ludwig von Mises, The Theory of Money and Credit, translated by H. E. Batson in 1934; reprinted in 1953, enlarged with an essay on “Monetary Reconstruction,” Yale University Press, New Haven, CT; out of print. Reprinted in 1971 by the Foundation for Economic Education, Inc., Irvington-on-Hudson, NY. Reprinted in 1981 by Liberty Press/Liberty Classics, Indianapolis, IN 46250, with Introduction by Murray N. Rothbard.

8English translation of Bettina Bien Greaves (edited by Percy L. Greaves, Jr.), “Monetary Stabilization and Cyclical Policy” in von Mises, On the Manipulation of Money and Credit (Free Market Books, Dobbs Ferry, NY, 1978), pages 57–171.

9He received small fees directly from students.

10Jacques Rueff, “The Intransigence of Ludwig von Mises,” in On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises; Mary Sennholz, editor (D. Van Nostrand, Inc., Princeton, NJ, 1956), pages 15–16.

11Archiv für Sozialwissenschaft und Sozialpolitik, 47:86–121, 1920–1921. English translation by S. Adler (pages 87–130) in Collectivist Economic Planning: Critical Studies of the Possibilities of Socialism; edited by F. A. Hayek; G. Routledge & Sons, Ltd., London, 1935.

12Ludwig von Mises, Socialism: An Economic and Sociological Analysis (German editions, 1922, 1932; English translation by J. Kahane, 1936; edition enlarged with an Epilogue, Planned Chaos, 1951); Jonathan Cape, London, 1969. Reprinted in 1981 by Liberty Press/Liberty Classics, Indianapolis, IN 46250.

13Ludwig von Mises, A Critique of Interventionism, English translation by Hans F. Sennholz (Arlington House, New Rochelle, NY, 1977). Original German edition in 1976 by Wissenschaftliche Buchgesellschaft, Darmstadt, Germany, with a Forward by F. A. Hayek.

14English translation by Ralph Raico (edited by Arthur Goddard): 1978 edition, Liberalism: A Socio-Economic Exposition (Sheed Andrews and McMeel, Inc., Mission, KS); 1962 edition, The Free and Prosperous Commonwealth (D. Van Nostrand Company. Inc., Princeton, NJ), out-of-print.

15Ludwig von Mises, Epistemological Problems of Economics; translated by George Reisman; D. Van Nostrand Co., Inc., Princeton, NJ, 1960; out-of-print.

16Ludwig von Mises, Theory and History: An Interpretation of Social and Economic Evolution; Arlington House, New Rochelle, NY, 1969, 1976, 1978. Reprinted in 1985 by the Ludwig von Mises Institute, Auburn University, AL.

17Ludwig von Mises, The Ultimate Foundation of Economic Science: An Essay on Method, D. Van Nostrand Co., Inc., Princeton, NJ, 1962; out of print. Second edition in 1978 by Sheed Andrews & McMeel, Inc., Mission, KS 66202.

18Ludwig von Mises, Human Action: A Treatise on Economics, 1949, 1963; third edition, revised, by Henry Regnery Company, Chicago, 1966, 907 pages.

19Translation by Bettina Bien Greaves, “The Causes of the Economic Crises,” in Ludwig von Mises, On the Manipulation of Money and Credit, Free Market Books, Dobbs Ferry, NY, 1978.

20This is still one of the best brief introductions to the Misesian analysis of the cycle. See Gottfried von Haberler, “Money and the Business Cycle,” in The Austrian Theory of the Trade Cycle and Other Essays (New York: Center for Libertarian Studies, September 1978), pages 7–20.

21See Ludwig von Mises, Notes and Recollections, Libertarian Press, Grove City, PA 16127, U.S.A., 1978.

22Ludwig von Mises, Omnipotent Governent: The Rise of the Total State and Total War (1944). Libertarian Press, Grove City, PA 16127, 1985.

23Ludwig von Mises, Bureaucracy (1944). Libertarian Press, Grove City, PA 16127, 1983.

24For a philosophical interpretation of the widespread rejection and neglect of Ludwig von Mises, see Murray N. Rothbard, “'Ludwig von Mises and the Paradigm for Our Age.” Modern Age (Fall, 1971), pp. 370–79.

25Ludwig von Mises, The Free and Prosperous Commonwealth: An Exposition of the Ideas of Classical Liberalism; translated by Ralph Raico, (D. Van Nostrand Company, Inc., Princeton, NJ, 1962), pages vi–vii.

New edition in 1978 by Sheed Andrews and McMeel, Inc., Mission, KS 66202 with title change: Liberalism, A Socio-Economic Exposition, pages xiv–xv.

26Jacques Rueff, “The Intransigence of Ludwig von Mises,” in On Freedom and Free Enterprise, edited by Mary Sennholz (D. Van Nostrand Company, Inc., Princeton, NJ, 1956), page 16.

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