6. Treatise on Money

MISES'S GREATEST LIFETIME ACHIEVEMENT was to build an allencompassing systematic theory of human action, which he first presented in Nationalökonomie (1940) and Human Action (1949). His system was the result of two large research projects, overlapping in time, the first one concerning economic science as such, while the second dealt with the epistemological and methodological foundations of this science. He published his reflections on epistemology and methodology in the period from 1929 to 1962.¹ His great economic research project extended from 1912 to 1940. It started with a treatise on money, in which Mises unfolds an original theme that he later expands, systematizes, and eventually brings full circle in Nationalökonomie.

The great original theme of his economic writings concerned the integration of the theory of money and banking into the framework of the Mengerian theory of value and prices. Mises dealt with it in his first treatise, Theory of Money and Credit, which had earned him the coveted license to teach at Austrian universities. Carl Menger too had obtained a Habilitation for an original theory of money, which he had published as chapter 8 of Principles. Mises thus continued a Mengerian tradition by grounding his academic reputation on monetary analysis. He did not submit only one chapter, though, but a complete treatise.

In his theory of money, Carl Menger had been mainly concerned with explaining the origin of money as a social institution. He stressed that money did not come into being like Athena from the brow of Zeus, but developed step by step out of a non-monetary commodity.² However, Menger had not applied his marginal-value theory to money itself. The reader of Principles could get the distinct impression that value theory only applied to consumers' goods and factors of production, and that money was not subject to the same rules.

What then is the relationship between marginal value and money? This was the question at the heart of The Theory of Money and Credit. Mises answered it in the second—the central—part of the book and thereby brought the Austrian theory of value and prices full circle. Money was no longer a special case, but could be fully accounted for by the new marginal-value theory.

In his treatise, Mises went as far as he could to integrate the theory of money and banking into the general theory of value and prices. From the outset he was aware that his exposition would be inadequate. He later explained:

The greatest difficulty I faced in the preparation of the book was the fact that I meant to give special attention to merely a limited part of the total scope of economic problems. But economics necessarily must be a complete and united whole. In economics there can be no specialization. To deal with a part one must do so on the foundation of a theory that comprises all the problems. But I could not use any of the existing theories. The systems of Menger and Böhm-Bawerk were no longer wholly satisfactory to me. I was ready to proceed further on the road these old masters had discovered. But I could not use their treatment of those problems with which monetary theory must begin.

According to prevailing opinion at that time, the theory of money could be clearly separated from the total structure of economic problems—it did not, in fact, even belong with economics; in a certain respect it was an independent discipline. In accordance with this opinion, the universities in Anglo-Saxon countries had created special professorships for currency and banking. It was my intention to reveal this position as erroneous and restore the theory of money to its appropriate position as an integral part of the science of economics.

If I could have worked quietly and taken my time, I would have begun with a theory of direct exchange in the first volume; and then I could proceed to the theory of indirect exchange. But I actually began with indirect exchange, because I believed that I did not have much time; I knew that we were on the eve of a great war and I wanted to complete my book before the war's outbreak. I thus decided that in a few points only I would go beyond the narrow field of strictly monetary theory, and would postpone my preparation of a more complete work.³

Unfortunately, his forecast proved to be right, and for many years, the war and its aftermath prevented him from systematically elaborating his more general ideas in print. But these ideas, nurtured through the war experience, came to light more powerfully in an essay on the problems of economic calculation in socialist regimes, which Mises published in 1920 in Max Weber's Archiv für Sozialwissenschaft und Sozialpolitik, arguably the most avant-garde German social-science journal of the day. Here he expanded on the difference between valuation and money-based economic calculations—a difference he had stressed, but not elaborated upon, in Theory of Money and Credit. Mises observed that economic calculation consists of the computation of market prices, prices that can only emerge in the interaction of privateproperty owners. Since an extended division of labor is possible only because decisions can be based on economic calculus, it follows that socialist societies—which by definition have no private property in the means of production and thus no market prices for them—could not possibly enjoy an extended division of labor. Socialism, insofar as it was considered to be a system of rational division of labor, did not and could not ever exist.

In the manner of Böhm-Bawerk, Mises had derived crucial political insights from seemingly arcane theoretical distinctions. He followed his calculation piece with a comprehensive treatise on socialism (1922); again thoughts he had kept to himself and developed over many years burst forth in the span of a few months.

In Nationalökonomie (1940) and Human Action (1949) he finally gave a presentation of the whole body of economic science in light of the difference between valuation and calculation.

My Nationalökonomie finally afforded me the opportunity to present the problems of economic calculation in their full significance.... Thus I accomplished the project that had presented itself to me thirty-five years earlier.⁴