Chapter 3 The Reception of Mises and ofMoney and Credit

The Theory of Money and Credit did not attain anything like the reception it deserved. The Schmollerite Historical School-dominated German economics profession gave the book, as to be expected, very short shrift. Even the Austrians turned a deaf ear to Mises’s brilliant innovations. By this time, Mises had been for years a devoted member of Eugen von Böhm-Bawerk’s famous seminar at the University of Vienna. After the publication of Money and Credit, the Böhm-Bawerk seminar spent two full semesters discussing Mises’s work. The consensus rejected Mises’s contributions totally. Böhm-Bawerk admitted that Mises’s logic, and his step-by-step process analysis, was correct. Böhm-Bawerk therefore did not deny that a change in the money supply would not simply increase all prices equi-proportionally. On the contrary, money could never be “neutral” to the price system, and any change of the supply of money is bound to alter relative prices and incomes. Böhm-Bawerk conceded these points, but then betrayed the essence of Austrian methodology by claiming that all this could be blithely ignored as “friction.” As Mises put it,

According to him [Böhm], the old doctrine was correct “in principle” and maintains its full significance for an analysis aimed at “purely economic action.” In real life there is resistance and friction which cause the result to deviate from that arrived at theoretically. I tried in vain to convince Böhm-Bawerk of the inadmissability of the use of metaphors borrowed from mechanics.¹³

With Böhm-Bawerk and his fellow Austrians uncomprehendingly rejecting Mises’s “praxeological” as opposed to positivist approach (that is, his realization that every step of deductive theory has to be true in order to avoid injecting ineradicable error and falsehood into the theory), and spurning his integrating of monetary into general theory, disdained by Schmollerites and positivists alike, Mises set out uncomplainingly on the lonely path of carving out a new “neo-Austrian” school of economic thought.

Agree with him or not, Ludwig von Mises was clearly a major innovative economist, surely worthy of an academic post at the University of Vienna. True, that as a result of Money and Credit, Mises was appointed in 1913 to a post as professor at the University. But it was only to the unpaid, if prestigious, post of privatdozent. While Mises gave lectures and a highly successful weekly seminar at the University for the next two decades, he never achieved a paid university post, and therefore had to continue full-time as economist for the Chamber of Commerce, and as the major economic adviser to the country. He still did not have the leisure to pursue unimpeded his brilliantly creative work in economic theory.

Mises’s career, along with many others, was interrupted for the four years of World War I. After three years at the front as an artillery officer, Mises spent the last year of the war in the economics division of the War Department, where he was able to write journal articles on foreign trade, and in opposition to inflation, and to publish Nation, Staat und Wirtschaft (Nation, State, and Economy, 1919) on behalf of ethnic and cultural freedom for all minorities.

The question of academic posts was then faced fully after the end of the war. The University of Vienna conferred three paid professorships in economics: before the war, they were filled by Böhm-Bawerk, his brother-in-law Friedrich von Wieser, and Eugen von Philippovich. Böhm-Bawerk died tragically shortly after the outbreak of the war, Philippovich retired before the war, and Wieser followed soon after the war was over. The first vacancy went to Mises’s old teacher Carl Grünberg, but Grünberg went off to a chair at Frankfort in the early 1920s. This left three vacancies at Vienna, and it was generally assumed that Mises would get one of them. Certainly by any academic standards, he richly deserved it.

Grünberg’s chair went to another historian, Count Ferdinand Degenfeld-Schönburg, a “complete nonentity” (Fritz Machlup), whose only qualifications for the position were his title of nobility and his “disfiguring war injuries.”¹⁴ But what of the other two posts, both slated for theorists, succeeding Wieser and Böhm-Bawerk? Despite his innovations not being accepted by orthodox Austrians, Mises was clearly the outstanding bearer of the great Austrian tradition. Known as an excellent teacher, his seminal journal article in 1920 on the impossibility of economic calculation under socialism was the most important theoretical critique ever leveled at socialism. Not only that: it was so recognized by socialists all over the Continent, who labored—unsuccessfully—for nearly two decades to try to refute Mises’s challenging criticism.

But Mises was never chosen for a paid academic post; indeed he was passed over four times. Instead, the two theoretical chairs went (a) to Othmar Spann, a German-trained Austrian organicist sociologist, barely cognizant of economics, who was to become one of Austria’s most prominent fascist theoreticians, and (b) to Hans Mayer, Wieser’s handpicked successor, who, despite his contributions to Austrian utility theory, was scarcely in the same league as Mises. Mayer, furthermore, strongly disapproved of Mises’s laissez-faire liberal conclusions. The University of Vienna professoriate, before the war the envy of Europe, began to take on the dimensions of a zoo, as Spann and Mayer intrigued against each other, and against Mises, who as a privatdozent, was low man on the academic totem pole. Mayer would openly humiliate Spann to students, and systematically slam the door in Spann’s face if they were both entering a room. Spann, for his part, increasingly anti-Semitic in a developing anti-Semitic milieu, denounced appointments of Jewish academics in secret faculty meetings, and also castigated Mayer for backing such appointments. Mayer, on the other hand, managed to adapt easily to the Nazi assumption of power in Austria in 1938; leading the faculty in ostentatious devotion to the Nazi cause. Mayer, in fact, informed the Nazis that Spann was insufficiently pro-Nazi, and Spann was arrested and tortured by the Nazis in consequence.¹⁵

In this fetid atmosphere, it is no wonder that Mises reports that Spann and Mayer discriminated against his students, who were forced to audit Mises’s seminar without registering, and “also made it very difficult for those doctoral candidates in the social sciences who wanted to write their theses with me; and those who sought to qualify for a university lectureship had to be careful not to be known as my students.” Students who registered for Mises’s seminar without registering for the seminar of one of his rivals, were not allowed to use the economics department library; but Mises triumphantly notes that his own library at the Chamber of Commerce was “incomparably better” than that of the economics department, so this restriction, at least, caused his students no hardship.¹⁶

After interviewing Mises’s friends and former students, Earlene Craver indicates that Mises was not appointed to a professorial chair because he had three strikes against him: (1) he was an unreconstructed laissez-faire liberal in a world of opinion that was rapidly being captured by socialism of either the Marxian left or of the corporatist-fascist right; (2) he was Jewish, in a country that was becoming increasingly anti-Semitic;¹⁷ (3) he was personally intransigent and unwilling ever to compromise his principles. Mises’s former students F.A. Hayek and Fritz Machlup concluded that “Mises’s accomplishments were such that two of these defects might have been overlooked—but never three.”¹⁸

But there is, I believe, another important reason for this shameful treatment that Craver does not mention and that Mises hints at in his memoir, although perhaps without seeing the significance. Unlike their successful enemies, such as Schmoller and Lujo Brentano, and even Wieser, neither Menger nor Böhm-Bawerk saw the academic arena as a political battlefield to be conquered. Hence, in contrast to their opponents, they refused to promote their own disciples or followers, or to block the appointment of their enemies. In fact, Böhm-Bawerk leaned even further backward to urge the appointments of sworn enemies of himself and of the Austrian School. This curious form of self-abnegation helped to torpedo Mises’s or any similar academic appointment. Menger and Böhm-Bawerk apparently insisted on the naïve view that truth will always win out, unaided, not realizing that this is hardly the way truth ever wins out in the academic, or any other, arena. Truth must be promoted, organized, and fought for as against error. Even if we can hold the faith that truth, unaided by strategy or tactics, will win out in the long run, it is unfortunately an excruciatingly long run in which all too many of us—certainly including Mises—will be dead. Yet, Menger adopted the ruinous strategic view that “there is only one sure method for the final victory of a scientific idea, by letting every contrary proposition run a free and full course.”¹⁹

While Mises’s ideas and reputation, if not his academic post, as well as his writings, enjoyed a growing influence in Austria and the rest of Europe in the 1920s, his influence in the English-speaking world was greatly limited by the fact that Money and Credit was not translated until 1934. The American economist Benjamin M. Anderson, Jr., in his The Value of Money (1917) was the first English-speaking writer to appreciate Mises’s work, and the remainder of his Anglo-American influence had to wait for the early 1930s. Money and Credit could have been far more influential had it not received a belittling and totally uncomprehending review from the brilliant young economist John Maynard Keynes, then an editor of the leading British scholarly economic periodical, the Economic Journal. Keynes wrote that the book had “considerable merit,” that it was “enlightened in the highest degree possible” (whatever that may mean), that the author was “widely read,” but that in the end Keynes was disappointed because it was not “constructive” or “original.” Now whatever may be thought about The Theory of Money and Credit, it was highly constructive and systematic, and almost blazingly original, and so Keynes’s reaction is puzzling indeed. The puzzle was cleared up, however, a decade and a half later, when, in his Treatise on Money, Keynes wrote that “In German, I can only clearly understand what I already know—so that new ideas are apt to be veiled from me by the difficulties of the language.” The breathtaking arrogance, the sheer gall of reviewing a book in a language in which he could not grasp new ideas, and then denouncing the book for containing nothing new was all too characteristic of Keynes.²⁰

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¹³ Mises, Notes, p. 59.

¹⁴ Craver, “Emigration,” p. 2.

¹⁵ After World War II, Mayer was to continue his career of unprincipled opportunism. When the Russians occupied Vienna, they were understandably out to get Mayer, but he pulled out his Communist Party card and assured the Russians that he had long agitated on their behalf. When the Allies replaced the Russians, Mayer was ready with his Social Democrat party card and again escaped unscathed.

¹⁶ Mises, Notes, p. 95.

¹⁷ Karl Popper remembers of Vienna in the 1920s that “It became impossible for anyone of Jewish origin to become a University teacher.” Fritz Machlup, a distinguished Student and disciple of Mises, who was Jewish, was prevented from receiving his habilitation degree, the equivalent of the second half of a doctorate, which was needed to permit one to teach at the University of Vienna as a privatdozent. This contrasted to the receipt of their habilitations by the three other leading students of Mises, who were not Jewish, Hayek, Haberler and Morgenstern.
Machlup recalls that the backing of one of the three full professors was needed to bring one’s habilitation to a vote. Mayer opposed him because of his all-consuming jealousy of Mises and of Mises’s protégés. Spann and Degenfeld-Schönburg refused to vote for Machlup out of anti-Semitic principle. Craver, “Emigration,” pp. 23–24.

¹⁸ Craver, “Emigration,” p. 5.

¹⁹ Mises, Notes, p. 38.

²⁰ Keynes’s review is in Economic Journal 24, pp. 417–19. His damaging admission is in his A Treatise on Money (London, 1930), I, p. 199, n. 2. Hayek’s account of this study characteristically misses the arrogance and gall, and treats the episode as merely a learning defect, concluding that “the world might have been saved much suffering if Lord Keynes’s German had been a little better.” The trouble with Keynes was hardly confined to his defective knowledge of German! Hayek, “Tribute to Ludwig von Mises,” in Mises, My Years, p. 219.