Ludwig von Mises: Thoughts and Memories

Ludwig von Mises:

Thoughts and Memories

A generation of students at New York University’s graduate business school who took the economics courses of Ludwig von Mises remember a gentle, diminutive, soft-spoken, white-haired, European scholar—with a mind like a steel trap.

Mises, who celebrated his 90th birthday on September 29, 1971, is an uncompromising ratio-nalist and one of the world’s great thinkers. He has built his philosophical edifi ce on freedom and free enterprise and on reason and individuality. He starts with the premise that the concept of economic man is pure fi ction—that man is a whole being with his thought and action tightly

This essay was fi rst published in Toward Liberty (Menlo Park, Calif.: Institute for Humane Studies, 1971), pp. 268–73. Note: All page references to Human Actionare to the Scholar’s Edition (Auburn, Ala.: Ludwig von Mises Institute, [1988] 2008).

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6 Mises in America integrated into cause and effect. All this is sub-sumed under the title of his 900-page magnum opus, Human Action, fi rst published in 1949.

Mises, a total anti-totalitarian and Distinguished Fellow of the American Economic Association, was a professor of political economy at New York University for a quarter-century, retir-ing in 1969. Before that he had a professorship at the Graduate Institute of International Studies in Geneva. And before Geneva he had long been a professor at the University of Vienna—a professorship which the Nazis’ Anschluss takeover of Austria, understandably, terminated. Among his students in Vienna were Gottfried Haberler, Friedrich Hayek, and Fritz Machlup. Professors Haberler of Harvard and Machlup of Princ-eton have each been presidents of the American Economic Association; Hayek is an economic scholar of world renown.

Starting right after World War II, Mises gave three courses at NYU: “Socialism and the Profi t System,” “Government Control and the Profi t System,” and “Seminar in Economic Theory.” In each course he carefully established the primacy of freedom in the marketplace. He stated that the unhampered pricing mechanism, ever pulling supply and demand toward equilibrium but never quite reaching it, is the key to resource optimiza-tion and, indirectly, to a free and creative society.

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Mises believes in choice. He believes that choosing determines all human decisions and hence the entire sphere of human action—a sphere he designates as “praxeology.” He holds that the types of national economies prevailing across the world and throughout history have been simply the outcome of various means intellectually, if not always appropriately, chosen to achieve certain ends. His litmus test is the extent of the market; accordingly, he distinguishes broadly among three types of economies: capitalism, socialism and the so-called middle way—government intervention in the marketplace.

Mises believes in government but limited, noninterventionist government. He wrote in Human Action:

The issue is not automatism versus con-scious action; it is autonomous action of each individual versus the exclusive action of the government. It is freedom vs. gov-ernment omnipotence. (p. 726)

He believes that while the vast majority of men generally concur on ends, men very fre-quently differ on governmental means—sometimes with cataclysmic results, as in the various applications of extreme socialism in fascism and communism, or of extreme interventionism in other types of economies, “mixed” or socialist. 8 Mises in America

Mises reasons that regardless of the type of economy the tough, universal economic problem for the individual in both his personal and political capacities is ever to reconcile ends and choose among means, rationally and effectively. Free, i.e., non-coerced, individual choice is the key to personal and societal development if not survival, he argues, and intellectual freedom and development are keys to effective choices. He declared: “Man has only one tool to fi ght error—reason.”

Mises, well aware of the unlearned lessons of history, thus sees something of an either-or human destiny. While man could destroy himself and civilization, he could also ascend to undreamed-of cultural, intellectual and technological heights. In any event, thought would be decisive. Mises believes in the free market of ideas as well as of goods and services—in the potential of the human intellect.

The nature of this leader of the Austrian School of economics can be seen in an incident during a conference of the Mont Pèlerin Society, an international group of scholars dedicated to the principles of a free society, meeting in Seelis-burg, Switzerland in 1949. Mises expressed fear that some of the members were themselves becoming inadvertently infected by the virus of intervention—minimum wages, social insurance, contra-cyclical fi scal policy, etc.

“But what would you do,” it was put to him, “if you were in the position of our French colleague, Ludwig von Mises: Thoughts and Memories 9

Jacques Rueff?” who was present and at the time responsible for the fi scal administration of Monaco. “Suppose there were widespread unemployment and hence famine and revo-lutionary discontent in the principality. Would you advise the government to limit its activities to police action for the maintenance of order and the protection of private property?”

Mises was intransigent. He responded: “If the policies of nonintervention prevailed—free trade, freely fl uctuating wage rates, no form of social insurance, etc.—there would be no acute unemployment. Private charity would suffi ce to prevent the absolute destitution of the very restricted hard core of unemployables.”

The failure of socialism, according to Mises, lay in its inherent inability to attain sound “economic calculation.” He argued in his 1922 work, Socialism, published fi ve years after the Bolshevik Revolution that shook the world, that Marxist economics lacked an effective means for “economic calculation”—i.e., an adequate substitute for the critical resource-allocation function of the market pricing mechanism. Thus socialism is inherently self-condemned to ineffi ciency, unable to expe-ditiously register supply and demand forces and consumer preferences in the marketplace.

Some years later, Oskar Lange, then of the University of California and later chief economic planner of Poland’s Politburo, recognized the challenge of the Mises critique on socialist 10 Mises in America

economic calculation. So he in turn challenged the socialists to somehow devise an allocative system to duplicate the effi ciency of market allocation. He even proposed a statue in honor of Mises to acknowledge the invaluable service the leader of the Austrian School had presum-ably rendered to the cause of socialism in directing attention to this as yet unsolved question in socialist theory. However, notwithstanding some slight shifts of the Polish, Soviet, and other Eastern European countries toward freer economics, a statue of Mises has yet to be erected in War-saw’s main square.

But probably to Mises the more immediate economic threat to the West is not so much external communism as internal interventionism— government ever undermining, if not outrightly supplanting, the marketplace. Interventionism from public power production to farm price supports, from pushing minimum wages up to forcing interest rates down, from vigorously expand-ing credit to contracting, however inadvertently, capital formation. Citing German interventionist experience of the 1920s climaxing in the Hitlerian regime and British interventionism of the post-World War II era culminating in devaluations and economic decline, he holds such so-called middle-of-the-road policies that sooner or later lead to some form of collectivism, whether of the socialist, fascist, or communist mold.

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He maintains economic interventionism nec-essarily produces friction whether at home or, as in the cases of foreign aid and international commodity agreements, abroad. What otherwise would be simply the voluntary action of private citizens in the marketplace becomes coercive and politicized intervention when transferred to the public sector. Such intervention breeds more intervention. Animosity and strain, if not outright violence, become inevitable. Property and contract are weakened, militancy and revolution are strengthened.

In time, inevitable internal confl icts could be “externalized” into warfare. Mises holds in Human Action:

In the long run war and the preservation of the market economy are incompatible.

Capitalism is essentially a scheme for peaceful nations. . . . To defeat the aggres—sors is not enough to make peace durable.

The main thing is to discard the ideology that generates war. (pp. 824, 828)

But what if a peaceful nation is nonetheless plunged into infl ation-inducing war? Surely then it should clamp on wage-price and other production-allocating controls. No, says this adamant champion of the unhampered market economy; if interventionism is foolish in peacetime, it is doubly foolish in wartime when the nation’s very 12 Mises in America

survival is at stake. All the government has to do is to raise all the funds needed for the conduct of the war by taxing the citizens and by borrow-ing exclusively from them—not from the central or commercial banks. Because the money supply would not then be swollen and everybody would have to cut back his consumption drastically, infl a-tion would not be a great problem. Public consumption, through a greatly augmented infl ow of tax revenues and borrowed funds, would advance while private consumption would fall. The upshot would be the absence of infl ation.

By the same token, Mises has no stomach for the idea that a nation could simply defi cit-spend its way to prosperity, as advocated by many of Keynes’s followers. He holds that such economic thinking is fallaciously based on governmental “contra-cyclical policy.” This policy calls for bud-get surpluses in good times and budget defi cits in bad times so as to maintain “effective demand” and hence “full employment.”

But Mises regards the “G” in Keynes’s “full employment” formula of Y = C + I + G; (National Income = Consumption Spending + Investment Spending + Government Spending) as about the most unstable, politics-ridden, and unscientifi c balancing wheel that the economic managers could employ. For one thing, the formula ignores the political propensity to spend, good times or bad. And for another, it ignores market-sensitive cost-price relationships and especially the proclivity of Ludwig von Mises: Thoughts and Memories 13

trade unions and minimum wages to price labor out of markets—i.e., into unemployment.

Thus he holds Keynesian theory, in practice, proceeds through fi ts of fi scal and monetary expansion and leads to infl ation, controls, and ultimately stagnation. Further, “G,” so used, generally means the secular swelling of the pub-lic sector and shrinking of the private sector—a trend that spells trouble for human liberty. In a way, he anticipated and rebutted the Keynesian thesis a quarter-century ahead of Keynes in his 1912 work, The Theory of Money and Credit, in which he contended that uneconomic wages and forced-draft credit expansion, and not capitalism per se, carried the seeds of boom and bust.

To be sure, many economists and business-men have long felt that Mises is entirely too adamant, too unyielding. If that is a fault, he is certainly guilty. But Ludwig von Mises, the antithesis of sycophancy and expediency, the intellectual descendant of the Renaissance, believes in anything but moving with what he regards as the errors of the times. He has long sought the eter-nal verities. He believes in the dignity of the individual, in the sovereignty of the consumer, in the limitation of the state. He opposes the planned society, whatever its manifestation. He holds that a free society and a free market are inseparable. He glories in the potential of reason and man. In sum, he stands for principle in the fi nest tradition 14 Mises in America

of Western Civilization. And from that rock of principle, during a long and fruitful life, this titan of our time has never budged.