Mises in 1919

0:00Mises in 1919, 1919 was a catastrophic year, not only for Austria, but for many countries in Europe, but for Austria in particular. Austria had just been through four years of a devastating war, and then at the end of this war, in October 1918, November 1918, most provinces of the country seceded for various reasons that we do not need to consider tonight. But the result was that what we today call Austria, the little country essentially spread out on the eastern part of the Alps, was suddenly all that was left of the former Austria-Hungary. And the Austrians at the time did not perceive themselves as Austrians, because Austria was commonly traditionally the name that referred to the territorial possessions of the Habsburg family in the eastern part of the former Roman Empire, the Holy Roman Empire of the German Nation, so Austria, the Eastern Empire.

1:07So they called their country German Austria, Deutsch Österreich, which already expressed a lack of identity. And this country was so suddenly left by former provinces, the provinces from which before they received footstuff and various raw materials. Now the new governments of the Sicilian countries had no more urgent business than to impose restrictions on foreign trade. trade. Okay, so for various reasons that some of which Professor Murphy discussed this afternoon. So they had been fallen prey to various errors but it was not only erroneous but especially they were often inspired by feelings of revenge and resentment against the Austrians and so blocked exports to what is today The result was, of course, a catastrophic year of 1919. The winter of 1918-19 brought deprivation, famines in Austria, and it brought, of course, the rise of socialist regimes in all of Central Europe. The communists had won power in Russia in 1917, and now at the end of World War I, In 1991, socialist governments came to power in almost all countries of Central Europe.

2:35So the socialists ruled democratically in Germany and in Austria, and they ruled dictatorially in Hungary and Bavaria. This was the situation in 1919. In Austria, the democratically ruling socialists established a commission for the socialization of the economy, more precisely for the nationalization of the economy, its foremost activist, the party leader Otto Bauer, published a book with the title The Road to Socialism in early 1919. So we can imagine that Frederic von Hayek reacted some 25 years later when he wrote The Road to Serfdom. The Road to Socialism is not a nice road, it's a road to serfdom.

3:24Socialism went in hand with inflation, with huge unemployment in Austria, and with the rebellion of the provinces, social disintegration. This was the context in which Mises wrote, thought, spoke and acted. And what we'll deal with today is therefore, well, what precisely he did and what I'll try to show to you is that Mises in many ways was, well, as usual, a role model, a very inspiring man who, by whatever he did, was truly a model. So we'll first go through his analysis of the situation as it prevailed in 1919. How did we come to this mess?

4:14And what are the causes, what were the consequences, and then finally we'll talk a little bit about the actions, what Mises actually did apart from analyzing the situation. The analysis that Mises proposed of the mass in which Austria found itself in 1919, can be essentially derived from his book, Nation, State and Economy, that was published, well, in German in that year, 1919, in the summer of 1919, and which was translated and published in 1983 with a translation from Professor Leland Jäger by New York University and which was just this year republished by Liberty Fund. The book had the working title, Imperialism. Okay, so it's a nice connection with our conference this weekend.

5:02And well, there's a reason why Mises eventually changed the title, now we'll come to talk about this. but what is important of course is that he well how does he define imperialism he doesn't give an explicit definition but it is clear that he means by the opposite of liberty okay it's the suppression or the coercion of foreign political groups that are weaker than our national government so it's a coercion of weaker groups by stronger groups and in particular the case of Weaker Foreign Groups So this offers me a nice opportunity to thank Professor Reiko for his great service in clarifying the meaning of the Statue of Liberty in New York.

5:50Madame Liberty holds, in fact, a torch. It's not a flamethrower. And unfortunately, it's necessary to stress this again today, because I wonder how many Iraqis and other Afghans or other nationals would have this spontaneously, this interpretation. Okay, so what does Mises do in his book? Well, yes, the book has three chapters. In the first one, he offers a very original analysis of the rise, development, origin, development, and decline of nations with the help of what economists call methodological individualism.

6:36And he analyzes the impact of government interventionism on the flourishment of nations, and he shows, well, there's not a positive impact. The second chapter deals with war socialism, in particular the theoretical analysis of what had been going on from 1914 to 1918. And in the third chapter he deals with the history and the politics of the social democratic parties, in particular in Austria but also in Germany. Mises analyzes the situation under five titles. First of all, he explains that imperialism is a reaction to classical liberalism. Then he goes on to stress the first casualty of imperialism. Then he stresses that there is an interdependence, in fact, between foreign government interventionism, so imperialism, and domestic coercion.

7:31Fourth, he goes on to highlight the intricate relationship that exists between imperialism and inflation. And finally, he offers some practical conclusions for public policy, how to deal with this situation. Okay, so first, and that is his most important point, he stresses that imperialism was a reaction to classical liberalism. The classical liberal program can be summarized under two headings. First of all, reduction of all obstructions to private property, abolition of all restraints on private property. The second point is self-determination for all national groups.

8:16Now, in practice this meant then, the classical liberals meant by this, the establishment of a democratic regime. And the question was then, how do we define a nation? What is the nation that should decide about its own fate in the way of, by democratic means? And commonly, nation was defined as a language community. This was least problematic in the case of the Western nations such as France and England or also the United States which shared a common language. It was somewhat problematic in the case of the states of Central Europe and Eastern Europe which harbored different language communities. So what Mises then pointed out is that in this case because we had mixed populations, mixed nations in fact in Central and Eastern Europe, in Europe, the application of the classical liberal program led to very different results than it led in the West.

9:19Because we had mixed populations, it now meant that the program of democracy meant that the majority nation, so the conditionals of which were the numerical majority, could rule over the numerically inferior other nations, other language communities. Now, in the case of Germany and Austria, this led to the following conflict of interest for the ruling nations, which were the Germans, so German language communities. They had in the entire state, they had the power in their hands, but if they were now to set out to apply the classical liberal program of self-determination on a local level, that would have implied that their co-nationals in the East would have lost the power of self-determination.

10:12So they would have come under the rule of other nations. So here we have then a particular situation that did not exist in the West. And as a consequence of this conflict, Mises explained, the Germans and the Austrians turned imperialist. So faced with the choice of either abandoning their co-nationals to rule of other nations or ruling centrally over these other nations, although they prefer the latter alternative. But he also points out in this book, Nation, State and Economy, that the same was later applied also on an international level after the western allies won World War I. They created the Treaty of the League of Versailles and they imposed certain peace conditions on Austria and Germany in the and the Treaties of Versailles and of Saint-Germain, the case of Austria, Saint-Germain.

11:07And here is how Mises interpreted this. He said, well, clearly the principle of national self-determination is no longer admitted. It is squarely contradicted by the conditions of these peace treaties. So I quote him here from the book. He says, The chief point remains that nations are being punished and that the four feature theory comes to life again. If one admits exceptions to the right of self-determination of nations, to the disadvantage of evil nations, as today we would say rogue nations, one has overturned the first principle of the free community of nations. So Mises' analysis seems to apply to the particular case, or he formulated it in the light of consideration to the special case of language communities, but there are of course more general relations that we can derive from his analysis.

12:10What he stresses is the relationship between the greater mobility that has been created by the classical liberal program. If you abolish restraints on private property rights, you will allow people to move from one place to another freely. And you will also allow to move up the social ladder. So whenever this mobility sets in, spatial mobility and social mobility, local power balances invariably shift. Okay, that's the necessary consequence. And here we have then the problem. Formally dominant political constituencies then can become minorities. And the problem emerges again and again. How do we react face to this situation? Do we now start to coerce the majority, keep them under our thumb?

13:02Or do we permit the transition of power to the new groups? A second point that can be generalized from Mises' analysis is that national frontiers are secondary. So the imperialist relation between politically stronger groups and politically weaker groups can obtain even within a nation-state, even within the political frontiers of a nation. Then Mises goes on to point out, secondly, what is the first casualty of imperialism? Well, it's that the commitment to liberty declines. And here again, I can refer to what Professor Reiko said an hour ago about William Graham Sumner and his essay on the conquest of the United States by Spain, which also applies in this case.

13:51And Mises again, without quoting Sumner, whom we probably hadn't read at the time, comes essentially to share the same point. I quote him. To fight imperialism, the peaceful must employ all its means. If they then triumph in the struggle, they may indeed have crushed their opponent. Yet, they themselves have been conquered by his methods and his way of thinking. They then do not lay down their weapons again. They themselves remain imperialists. And the application was of course that he had in mind was the League of Nations. Western allies had prevailed in the military conflict over the Central Powers, but the spirit of the Central Powers had conquered these Western Nations.

14:38And the concrete proof of this, the manifestation was the peace dictates of Versailles and Saint-Germain. Mises was directly concerned by this. He was in fact at the time a consultant of the trade department in the Austrian Foreign Ministry. The third point that Mises stresses is the interdependence between foreign and domestic coercion. War, the attempt to overthrow foreign power, served as a pretext for domestic coercion as well.

15:26And the result was, in the Great War, what was called war socialism. At the beginning, war socialism was not, during the first two years it did not exist, but starting in 1916, early 1916, the government financed part of its activities with the printing press, now tried to avoid the inevitable consequence of using inflation for war finance, namely rising prices, and so it established a regime of price controls. And as we know from the economic analysis of price controls, once you start with controlling one price, you cannot stop there, okay? You need to go on. Because if you control just one price, then, well, you create trouble for those companies who have to sell at this price.

16:14Some of these companies will become unprofitable, so they need to go out of business. So there's now the temptation for the government to repair its first intervention by establishing a price control also on the buying prices of these companies and so on. And that was exactly how things went on during the First World War. And after a few months, virtually the entire economy was covered by a system of price controls. And it now became necessary to establish some mechanism for the central direction of the economic process. That is for the centrally directed decision making process that allocates the different resources, workers, raw materials and so on to the different branches of industry.

17:02And again, that was exactly what happened. and this new centralized economic dictatorship was concentrated on the German side. So the Germans under General Ludendorff in particular organized war socialism for both Germany and Austria. Now as Mises points out, again, the justification of this is the war and we need to fight the foreign enemy as a consequence we now really we can no longer leave business to private entrepreneurs we now must become finally serious because before we could let them let the entrepreneurs play a little bit market and so on but now we have no more time for these games we need to really create an efficient economic regime so we need to create or Socialism.

17:58And Mises then showed that this whole analysis was fallacious. The war was a false pretext for creating coercion at home, for creating a socialism at home. The crucial question is, is a socialistic economic regime more likely to serve the ends of the war that is overthrowing the enemy than a free market? And here, Mises answers, well, that is not the case. Even if you have a war abroad, and if you have the application of violence to wrestle down an enemy, precisely then, you need to have an economy that adjusts as flexibly and therefore also as quickly as possible to the changing conditions as they evolved during the war.

18:48And the only economic system that can do this, The economic system that can do this in the most flexible and quick way is the market economy. So precisely in the war, precisely when you are in a great emergency situation, you cannot let the government hamper production. Precisely then you need to free the market, you need to have a free market economy. So Mises created what we might call the discipline of war economics, with a completely free market approach which inspired in the interwar period many young economists such as Lionel Robbins in England and also in Germany a few authors the names of whom do not tell you anything but for example Georg Holzbauer and others.

19:39Stefan Posoni who later emigrated to the United States and which therefore so rethought Fourth, Mises analyzed the intricate relationship between war and inflation. The fundamental point is, well, war does not pay. Or we might say in more general terms, coercion does not pay. I admit this is an a priori statement, but it is a true a priori statement. The simple fact is, if it did pay, it would not be necessary to coerce people. It's very simple. If it does pay, why not go on and just make contracts?

20:27Why force people if your activity is profitable? So the fact that you have to resort to violence is always a proof that your activity, whatever its justification, is certainly not profitable. So how do you finance an activity that is not profitable? Well, government can resort to taxation. If the governments of Europe during the Great War had resorted exclusively to taxation, the war would have ended pretty soon. would have ended in 1916 at latest, because if people really have to pay out of their own pockets all the expenses of the government, they're pretty quickly fed up with this whole enterprise. And so what governments did then was to have recourse to public debt, which already extends the margin of operation, and they had recourse to the printing press, that is to inflation.

21:25So governments, in order to finance their expenditure, had the central bank print additional banknotes, which they then used to pay for their expenses. And after the war, this policy was then continued by the socialists. They too pursued a policy, while it was not tapping on other people's heads, but it was a social policy, what they called social policy, Social Policy, which was not profitable by definition. It's not profitable to pay handouts to unemployed people. It's not profitable to buy agricultural products at higher than world market prices from farmers and to sell them at lower than world market prices to the urban population. But that's precisely what the Austrian government did. It announces Social policy, unemployment relief, food policy prices, it meant imposing maximum work hours, so at a time when the Austrian economy precisely would have needed as much work as possible to adjust to the new conditions, the new peace conditions, the government hampered the labor market and imposed a maximum work time on each worker.

22:43So the consequence was then unemployment and it was misery in Austria. And because all of this was financed out of the printing press, well it also meant increasingly rising prices. And this rise in prices was only hampered by the regime of price controls that was still in place. So it showed only for a while in the declining exchange rate of the Austrian currency of the Kroner. And we know what a regime of inflation ultimately must lead to, well because the money loses its purchasing power more and more, well finally people will start abandoning this currency, so it leads to social disintegration. People will no longer obey the commands of the government, they will go their own way.

23:30This is also what the Austrian provinces in 1919 did. At some point they just stopped obeying the orders of the central government and then they applied their own home-grown socialistic schemes. Because they were very much inspired by the rhetoric, they eat the rich rhetoric of the Vienna socialists who ruled the country, but they say, okay, but the way you redistribute the resources, So the country was very much very quickly going to complete disintegration. How to repair the situation? What to do in such a case? Well, Mises offered a solution that will not surprise us today because we are already acquainted with his work.

24:21He said, well, the government needs to get out of the picture. It's the government who has created the situation, it's the government who has created class conflict between dominant and political inferior groups. It is the government that has created, started the war, that has continued the war, that has then extended the war onto the domestic economy. It was the government who has resulted to inflation to finance all of this. So we need to reduce the activity of government as far as possible. What does this mean, as far as possible? Now, here, Mises gives no absolute limit. That's a very intriguing aspect. In this 1919 book, it says, well, as far as possible, and there are some technological constraints.

25:12For example, if you want to have developed legal judicial system with courts of appeal and so on, This might not be financially possible for very small territories. So in such cases you might need to tie up with other territories. You cannot decrease the size of government further. But that was the only consideration at all that he gave. So by and large his recommendation was in line with what Murray Rothbard later called anarcho-capitalism. Reduce the size of government, if necessary or if wished, to zero. So this was his analysis and his recommendation. Apart from publishing this book, what else did he do?

25:59What was his action in 1919? We can highlight three different activities. First of all, he taught a seminar at the university, of the University and he created a private seminar apart from the group that he taught at the university. So we have the origin of his later famous private seminar in late 1919. It started in November 1919. Second, so apart from the general pedagogical effort forming a new intellectual elite, You also felt not too good to engage in direct one-to-one, one-on-one persuasion. And the most important case concerned is persuading Otto Bauer, the leader of the socialists in Vienna, of the Austro-Marxists, as they call themselves, not to introduce a communist regime in Austria.

26:57So when the socialists came to power, especially the young radicals wanted to go the full way. Why stop halfway? Socialism is the most effective system, communism is wonderful, so let's do it right now. And then Mises explained to Bauer what the inevitable consequences would be. Vienna at the time, precisely because Austria did not have the farming necessary to feed the population, was dependent on foreign imports. It had foodstuff available for nine days maximum, so any period beyond nine days would have to be financed by foreign food imports.

27:42Who would be ready to give them credits for this? Which foreign government would give a credit to a communist regime in Austria? Not the neighbors around it who before had furnished the foodstuff, not the Hungarians, not the Czechs, and the Western powers wouldn't give any credits either, had no interest in financing communism. So all that the system would have created was an economic and political collapse in record time and as a consequence complete social disintegration, bans roaming the streets of Vienna, violence and anarchy. and Bauer gave in, so Bauer heeded the voice of reason and well later he resented this very much, he could never forgive Mises that he had turned him before the radicals of his party into a moderate.

28:37Okay, he wanted to be a radical and yeah well he couldn't forgive Mises for this and then third, Mises did something quite extraordinary in preparing monetary reform in Austria For he had two different plans. One was the official plan that he advocated in two widely noticed publications at the time, in which he called for monetary union between Austria and Germany. And the second plan, and that is the fantastic thing, was expressed in a private confidential memorandum, which was addressed to the industrialists and bankers of Austria, and calling them to prepare a monetary reform which left the government completely out of the picture.

29:29So he said, forget about these guys, they are completely incapable of reforming anything, they cannot even reform themselves. So you need to do the job and you need to prepare for the emergency situation that will come if the government continues in its present policies. I need details and the steps that these people would have to take, take a credit from abroad, prepare a system of payments for the case of emergency. And, well, I would say that in all of these three actions, Mises is very much inspiring. It's exactly what we should do in our day as well. Fortunately, we are not yet in 1919, but we will get there one day, to our 1919, 2019, if we persist in our present policies, in our present orientation. And the only way to stand this tide as well, sound analysis, that's what we are here doing. Teaching, that's again what we are here doing at the Mises Institute. One-on-one persuasion if necessary, so if Paul Krugman wants to repent and show up, we'll take him here. And various others as well. So we are charitable, we would even take

30:46Mr. Bush. And then third also, we should always try to think outside of the box. And that's also what we are trying to do here at the Mises Institute. Think outside of the box and think unorthodoxly, preparing, if necessary, reform of the country without the government. Thank you very much.