The Meaning of Ludwig von Mises

0:00Yeah, this talk will be on the meaning of Mises, meaning what did he accomplish, what sort of a person was he, and I guess the meaning of his life. First of all, I guess I shouldn't, usually when I start off talking about Austrian economics, my first statement, I really don't have to make it as a company, I'll make it anyway. Mainly that has really nothing to do with Austria. I'm not an expert on the economics of Austria, I know nothing about their banking system or what's going on there. So it's called the Austrian School because it began in Austria and began at the University of Vienna and emanated from there. So we're now at the point where for a long time there were no Austrians in Austria, so to speak, and there are some I think now more or less fellow travelers at least.

0:48So schools of thought are labeled by places where they originated and incubated and so forth. The Austrian School was started in the 1870s with Carl Menger, as most people know here. And it was built on a completely different tradition from the dominant British tradition, which most people are familiar with, Smith-Ricardo Classical School tradition. The focus of the British tradition was always on aggregates groups and other fallacious insights. The classes, the focus of the Continental School thought, starting with the scholastics and working on the Spanish scholastics and then France and Italy for centuries was with the individual, starting with the individual.

1:41And that tradition was more or less swamped in the Smith-Ricardo dominance. It turns out now, by the way, it wasn't really swamped until John Stuart Mill re-established record on 1848. And so that, with Mill's tremendous influence in English and British economics, there were other, any other schools of thought were sort of swallowed up. The classical school, of course I'm going over this very quickly, the classical school, for example, claim the value is determined by cost of production, so inherently in the product. And by doing this, of course, they could not, they had to leave out explanations of the values of goods which are not reproducible, such as Rembrandt paintings.

2:30In other words, Rembrandt embodied a certain number of labor hours. We don't really know how many labor hours embodied in Rembrandt's paintings. That's it. So the value of a Rembrandt, obviously fluctuating over time, has very little to do with the number of labor hours put in by Rembrandt. So that sort of, the explanation of those sort of goods had to be left out. And the, I had to deal with, because they're reproducible. And the emphasis I'm convinced now on the, on the quantity of labor hours, labor theory of value, which of course is again a British product, Smith and Ricardo. But the emphasis on that, I think, is pretty well, this is fairly speculative, I think, pretty well established. It really comes in from Scottish Calvinism, in which Adam Smith was imbued.

3:18And the Calvinists being uniquely believing that the value of labor is not only necessary, but also a good in itself. And that, so the emphasis on labor as a good in itself seeps into the value theory. The, of course, we know about the value paradox, which Smith and Ricardo couldn't solve, namely, how come the diamond and, or diamonds or water on the one hand are, water, for example, is a very useful good, and yet is very cheap, those days was virtually free, and diamonds is a mere frippery, as a matter of fact, with Smith, he almost says the diamonds are useless, a good Calvinist physician, and yet, of course, are very expensive, And so here we have an alleged paradox that the use value of bread or water is much greater than the use value of diamonds and yet they're much cheaper on the market, therefore we can't explain it, therefore we have to toss out use value as any kind of explanation of economic prices.

4:20Oddly enough, Smith solved the very same paradox that he couldn't solve in the Wealth of Nations. He solved 20 years earlier in his lectures and a pretty good explanation, The usual explanation taken from scholastics to the Scottish Enlightenment. And it's still not quite comprehensible why he didn't include this in Wealth of the Nation, why he suddenly, he couldn't solve it by the time of Wealth of the Nation. It couldn't be the lectures were a previous publication. He couldn't say, I refer you back to my previous book, because the lectures weren't published until the 20th century. So, at any rate, in addition, another problem of classical economics was the emphasis on aggregates. Ricardo's major worry, his major problem was how are classes of income, how income is distributed between various classes, between workers, capitalists and landlords.

5:09And so the focus then was who gets what share of the pie and of course it's very easy from that to arrive at a class struggle view of the economy. And whatever one group doesn't get, the only one group gets more, the other group automatically has to get less. So this, I think, led fairly quickly to both Marx and Henry George, both wings of Ricardians, and both, I think, pretty good Ricardians, if you start with that kind of assumption. In other words, if you're interested in any sense in justice and you're a Ricardian, you might wind up pretty quickly as either a Georgist or a Marxist or both. And along with that comes the split between production and distribution. Somehow production is, the laws of production are out here, laws of distribution are out there, they're not really in contact, and therefore you can muck around with the production, the distribution and non-influence production.

5:58And finally, well there's a couple more problems of classical school, I don't want to spend too much time on it. One is the emphasis almost completely on long run equilibrium, which is really a tendency and yet is elevated to an existing, always existing force. In long run equilibrium is perfect certainty since there's ever any change, there's obviously going to be certainty. Perfect competition, perfect knowledge of the present and future, no profits and losses and so forth and so on. So the emphasis gets to be mostly on that and still is, even today. And finally, the severe split between the macro and the microspheres, which of course we're all too familiar with now, is the money sphere, where things are going on with money and general prices, as the microsphere, where there's supply and demand, and never the twain meets, the two hermetically sealed divisions of life.

6:50And if those of you have taken a micro course, you learn about supply and demand, all these good things, it makes a fair amount of sense, and then you get to macro, all of a sudden, all these things drop out and you're dealing with statistics, with no connection really between the two of them, I think that starts with Ricardo's legacy. At any rate, the Austrian, starting in 1871, starting with Menger's Principle of Economics, begins the Austrian School, building on the Continental tradition, building on the French tradition, some German, and as in that tradition, a little bit related to J.B. Say also in France, basing their analysis on the individual, on methodological individualism, as Mises would call it.

7:41Each individual's actions and how you build up the individual actions into a general analysis. From that, you can see fairly readily the purpose of production is consumption. Consumption is the end result, the end goal of action in the market. And also the value of products, whether they be Rembrandts or steel bars or automobiles or bubble gum, The value of all products are conferred upon the product by consumers, by consumer valuation. By choices of consumers, they're not inherent in the product. There's no thing in there which has 20 utils. I can work for many years on some product and come up with something to the result.

8:26So the various individuals, various consumers on the market, with their value scales, with their subjective valuations, Confer, they're the only ones that confer value upon any product. And since, and this relates to the value paradox, since things are valued on the market in specific units. In other words, we don't value all the bread on the world on the market. We value, you know, one people we, I'd be willing to pay or all of us be willing to pay for the entire bread in the universe. But this, it's not just, it's not a real world option. And so, since all action on the market deals with units, units of labor, units of goods, units of a pretty of each margin, marginal utility of the product determines the value on the market. Of course, the value of paradox is then solved, the diamond bread, diamond order paradox.

9:15Namely, if the Angel Gabriel came down tomorrow, let's say Angel Gabriel interrupted all television sets tomorrow. He said, people of Earth listen, that sort of thing. And said, you are now confronted with a choice. Mankind is confronted with a choice now from now on. Either all the bread in the world forever and ever. You have to give up one of the two. All bread in the world forever and ever. All diamonds in the world forever and ever. If we're all confronted with that sort of choice, we probably choose bread. However, we're not confronted with that choice. So in the real world, since there's not more loaves of bread around, and there are carats of diamonds, since the supply is so much greater, the value of each unit of bread is much lower. So, as I say, this is really solved by the scholastics in Italy and Spain, and without the marginal emphasis, but almost everything else was contained in their solution.

10:10Again, with methodological individualism, you solve the distribution question. Instead of worrying about labor as a whole, and profits, or capitalists as a whole, and landlords as a whole, how much are they getting? You talk about each individual unit. And then the problem is solved and it turns out that the tendency is for each unit of every factor to get its marginal value product. And so the marginal productivity theory of the Austrian School then comes in to undercut more or less phony problems, which other schools have been engaged in. So there's no split between production and distribution. What you get on the market, what your wage rate or your price of your capital good or whatever, or your rent of your machine or rent of your land is determined by the product, marginal value of productivity, how much other people think it's worth on the market, how much its purchasers think it's worth, and that's determined by how much they think they'll get from the product, from the factor.

11:09So each factor then tends to get its marginal product. Again, von Boehm-Bawerk, Menger's great pupil, Eugen von Boehm-Bawerk, solved the interest problem, which had not been really solved until then. There were certain hints of a solution for that, but not really copper riveted until Boehm-Bawerk. The poor scholastics couldn't figure out what justifies a pure loan, a pure riskless loan, more or less riskless loans. And they could understand risk, they understood profit and risk, they understood opportunity cost. They couldn't figure out why people should get an interest on a pure loan. If I loan you $100 for a year, why should I get $10 back in addition to the $100? What's the justification? They couldn't figure it out, therefore they said it must be sin.

11:55And this attribution of sin to interest poisoned the whole scholastic economics from then on because then they had to, as realistic people, very, very shrewd capitalists or analysts of the market, they realized if they outlaw an interest, the whole economy is going down the drain. They have to find all sorts of ways of getting around opportunity costs, profit foregone, that sort of thing. But they never really solve this riskless interest question. And von Boehm-Bawerk comes up with a solution, this is a time preference. This is the fact that people prefer, as this really gets back again to individual on the market, individuals in the world, everybody prefers achieving their wants earlier than later. And since you prefer getting what you want earlier than later, this means that a present good is always worth more than a future good. and this premium is then worked out on the marketplace and the premium is the rate of interest.

12:44That is the basic interest rate. So this is the this is a great solution. It's also solved the Marxian problem. How come capital earns an extra profit, an extra interest rate above the cost of the capital and that's the answer. And Boehm-Bawerk works this out through the capital structure also integrates time as a capital theory of capital. We still haven't got back to Boehm-Bawerk yet by the way. I mean, this might seem like old hat, old conflicts of the 1870s. Modern economic theory still considers capital as a homogeneous lump. And that's it, you add capital in some sort of homogeneous way to the other factors. Capital takes time and therefore it's a structure, it's a lattice work. And this, of course, is, as I say, spelled out by Boehm-Bawerk, and the knowledge has been lost. This, by the way, is an important point, I think, in the history of thought in general, History of Economic Thought, or Philosophic Thought, or even maybe even the hard sciences.

13:37Namely, knowledge gets lost, because we tend to think of the history of science as one great march onward and upward into the light, so that everybody at any given point of time, let's say 1920, knows much more than anybody, knows everything everybody, the guy in 1910 did, plus more, plus 10 years more of great progress. It really doesn't work that way, and often we We lose knowledge, so the fellow in 1920 knows less than the guy in 1910. And similarly, we've lost a lot of knowledge, so that the current textbook does not incorporate all the knowledge of the past, throwing out all the chaff. Sometimes the baby gets thrown out with a bathwater. And similarly, one of the things, of course, is capital theory got really thrown out. And most economics still thinks of capital as one big homogeneous lump, and not as a lattice work, as a structure, a time structure.

14:25okay at any rate the and this by the way and also again in Austrian economics this is I think through true in general is that equilibrium is a tendency and not another custom reality so the world the market is always moving toward equilibrium never quite gets there because the data keeps changing so even though in the long run profits and losses disappear since change is always taking place the long run never ever quite gets quite gets reached I like to think of as Because the economy, I like to think of the economy as a dog chasing a mechanical rabbit. And the rabbit always changes direction and the dog keeps, you know, changing direction trying to follow it. It never eats the rabbit. So equilibrium becomes an important tool of analysis, a tendency, but not an actual living situation.

15:11Therefore, you always have entrepreneurial profits and losses, for example. Since it, once again, modern economics can't really handle a question of entrepreneurship, profits and losses. Profits and Loss, you can look through textbooks and microeconomics, never see the word profit very rarely in there because it all disappears because everything is always automatically in general equilibrium, everything is a static state. At any rate, so in the Austrian approach, you toss all that out, you start with the real world, you analyze the individual acting in the real world, and therefore since the real world is a world of uncertainty, you're constantly in a situation and action takes place through time, So therefore, you always have profits and losses. You can understand the entrepreneur, the capitalist entrepreneur's income as a two-part income. One, rate of time preference rate of lending or spending money now and then waiting for the return, return on time preference or return on waiting, whichever you want to put it.

16:08And two, profits and losses for successful entrepreneurship. For being a good entrepreneur, you get profits. For being a lousy entrepreneur, you suffer losses. All right, so then, and I must, I would also mention Frank Fetter, one of my favorite economists who worked out a whole time preference theory and time market theory in great detail from 1900 to 1913, period, building for some von Boehm-Bawerk and purifying von Boehm-Bawerk's doctrine. All right, this brings us to Mises, my topic today. Can you put some water in here? Okay. Thank you, sorry. Okay. Mises was a brilliant young student in Boehm-Bawerk's famous seminar. Menger had dropped out of teaching by this time. Mises was a student of von Boehm-Bawerk's famous seminar at the University of Vienna.

17:18And the Austrians already arrived at the correct theory of value distribution and so forth and so on and handling of equilibrium entrepreneurship. They had not yet, however, gotten into macro. They hadn't gotten into the theory of money. They hadn't healed the micro-macro split. And so in his first work, his great first work, and Mises' great first work in economics, The Theory of Money and Credit, came out in 1912. I'm leaving out his untranslated theory of history of feudalism in Austria, which is a serfdom, a doctoral dissertation on the emancipation of the serfs in Austria which I have not read, has not been translated, not read, but I don't think it's really economics, as far as I can understand. Anyway, his first great work was The Theory of Money and Credit, 1912, in which he healed the micro-macros, but he integrated the theory of utility and theory of value, the theory of marginal utility into explaining money and prices of money.

18:09It was a magnificent achievement. It was not, of course, hailed as first spot. It became quite very popular on the continent. He told me that the other people in von Boehm-Bawerk somehow, including von Boehm-Bawerk, rejected as being too radical. Radical in the sense, of course, being an innovative change. And violating whatever the basic split of micro and macro. They wouldn't put in those terms then. And so he explained the value of money as a purchasing power of money, as just like all other goods determined by supply and demand, it's a great achievement. This had been done by scholastics again, he's really going back probably unknowingly and building it and getting first much more detail. Scholastics were mostly interested in philosophy and not in economics.

18:57So, and he showed that just as with any other product, when the supply of something increases, it lowers its value, its marginal unit, marginal utility. So, when the supply of money increases, it lowers the value of the money unit and purchasing power terms, and vice versa. An increase in demand for money raises its value, and demand for money is the demand to hold money in cash balances. So, right away, we anticipate Robertson, I think, much better than Robertson. Robertson, again, being much more aggregative, and Mises always, always focusing on the individual and building up from there, very much like Cantillon, and much, not much, building on Cantillon's analysis in the early 18th century. So, and again, using the Riccardian insight, which I think was an important insight, unlike the one difference between goods and money and other goods, the one big difference is, it's the same in the sense that the values were determined the same way by supply and demand.

19:52The difference is you don't need more money. In other words, if you have a greater supply of goods, it's socially useful, so to speak. Other things being equal, an increase in supply of consumer goods benefits people, and an increase in supply of capital goods benefits people because you increase consumer goods later on. So, with regular goods and services, an increase in supply is beneficial. Increase in supply of money, however, is not socially beneficial, it's pointless, because all it does is dilute the value, the effectiveness of each dollar, each money unit. It means it's worth less in purchasing power. So once money gets established on the market as a commodity, gets established as money, you don't need any more of it. Any supply is optimal. So this, of course, tosses out all the inflationist arguments we've heard for centuries and for school or hearing, need money, need more money when the population grows, need more money because the world is more complex, need more money because there's more oil around, whatever the arguments are, all this is all nonsense from Misesian perspective.

20:55So more money inflates and lowers the value of each unit, okay, that's another thing he points out, Mises does, says that money does not act on the famous Friedman-Helicopter effect manner. There's no split between micro and macro. So that when the supply of money increases, money can never be neutral to the market. Even though it's not socially beneficial, increase in supply, it messes things up. It doesn't just increase the price level as most economists would now say. Increase in money supply increases the price level, yes indeed, but it also does other things. It also messes up the production structure. It messes up the relationship between capital goods and consumer goods. that creates malinvestments, Mises would put it, thereby setting the stage for inevitable recession. Recession then functions as a way of liquidating, a painful but necessary way of liquidating, the unsound investments of the inflationary boom period.

21:44So what Mises was getting at, without even realizing it in Money and Credit, was getting at a theory of the business cycle, which he then develops in the 1920s. So I'll get to that in just a second. Another point that Mises does, he reestablished the so-called currency principle, which at least on the continent had died out, and the fact that the increase in money supply causes deficits in balance of payments, causes inflation, etc. and brings back the idea of the beneficial aspect of the 100% gold banking, 100% reserve banking. Many of this gets picked up later by other economists without referring to Mises or sort of botching things up along the way.

22:29He also showed something which is very important, which many Austrians still don't understand today, to this day. Again, I'm talking about the loss of knowledge or whatever, or not gaining knowledge in this case. Money comes out of the market. This is the Menger analysis. analysis, money arises as a marketable commodity on the border, and Mises is adding the fact it has to arise out of border. In other words, a money commodity has to originate as a valuable commodity in non-monetary terms. In other words, it has to be valuable before it gets to be money. Otherwise, nobody would originally buy it. So it has to be as gold or as cowry shells or something. So salt, I mean, it's been dozens of monies, and it all originated does not, money cannot originate either as a social, either as a social contract, everybody gets together, you know, two thousand people get together, okay, let's make such-and-such money, does not originate that way, cannot, cannot originate by state fiat,

23:25has to originate as a useful marketable commodity. If you go back and read some of the grand old, wonderful old money and banking textbooks back in the gold standard period, the first chapter always deals with that. Why is such-and-such chosen money? They don't talk about Mises regression theorem, but it shows it has to arise this way, but they say, well, Because this commodity, like gold and silver, was rare and valuable and stable and easily recognizable and affordable and carry around when the government is trying to find you. You can sneak out of the country with your pockets full of it, things like that. All the valuable aspects of the money commodity, this is why the market chose it. So we still have people, even Austrians right now, still fooling around the idea, what money can we create without recognizing the fact that money has to begin as a valuable, commodity of some sort has to begin as a valuable on the market can't be newly

24:16created. Also Mises showed as an almost in passing a very important part of Theory of Money, this is all Theory of Money and Credit, that he showed that marginal utility cannot be measured. He was the first person really to point that out following Franz Schuyl, a great Czech economist and ____ student. Marginal utility has to be ordinal, it cannot be measurable. You can't use the concept of measurement for a subject internal subjective phenomena psychic phenomenon and of course if utility can't be measured we then find out later Austrian the course can't be measured either since costs are subject as Austrian should say this anyway and therefore you can't use cost-benefit analysis for social projects you can't say you can't it's not really legitimate say the government should build that dam or shouldn't build that dam because you add up all the costs and add up all the benefits you find out the benefits slightly exceed the course or vice versa.

25:11Nobody knows what the benefits are, no one knows what the costs are, since they're all internally subjective to each person. As I say, the business cycle theory, Mises, really starts in theory, money and credit. Okay, then he develops that in the 1920s to get to the business cycle theory a little bit further. Really begins with two questions, which any business cycle theory should answer. One is, how come there's a cluster of unsound forecast? Businessmen are good forecasters. I would not go so far as the rational expectations people to say businessmen always forecast everything correctly. They know the future with deep insight like some kind of clairvoyant. But they're pretty good. I mean, they're in business because there have been good forecasters in the past. Therefore, they're generally pretty darn good in the present. How come they all made this big mistake? In other words, how come at certain crisis periods, 1929 obviously, you know, previous periods, how come they suddenly turn out to be lousy forecasters?

26:04They've bid up costs way beyond their selling prices they can get for their product. Well, that's an important question. It's usually not even asked by most business cycle theorists. And secondly, well, how come capital goods always fluctuate more than consumer goods? In other words, in every business cycle, capital goods rise, capital goods prices rise faster, they boom more than consumer goods, and they collapse much more during the Depression. For example, in the 1929 Depression, capital goods, there was much greater boom in capital goods than consumer goods, and then comes the big crash, capital goods prices and employment fell tremendously and consumer goods prices, you know, just by a slight amount. So those are the two questions which Mises really begins with and then he formulates his great business cycle theory on the basis of several, integrating several insights, the currency school insight.

26:52For example, he's the only one who's ever said that Mises, that the Ricardian, the famous Ricardian theory of, or human Ricardian theory of international monetary relations, is really a business cycle theory, in addition to being an international money theory. What it's saying is, the banks increase money supply in one country, therefore prices go up, therefore gold flows out, and therefore there's a deficit balance of payments, gold flows out and therefore the banks have to contract and causes a recession. This is a simple but important model of a business cycle, a boom bust situation. So Mises begins with that, he also integrates that with VIXEL's National Interest Rate and Loan Interest Rate Theory plus von Boehm-Bawerk's Theory of Capital Structure and winds up with this great business cycle theory, which should be, again, to sum up very quickly, is that the banks increase the supply of money and credit.

27:45They do it by usually by lending money to businessmen. This causes businessmen to, it lowers the rate of interest below the free market rate, the rate of which voluntary savings, so to speak, would have the effect of the market. In other words, below the time preference rate. It then, business now then led to expand investment beyond what they would, and capital goods beyond what they would ordinarily. This creates a malinvestment of capital, overinvestment of capital goods, underinvestment of consumer goods. That's the first one Harbert went and messed up on. Overinvestment of capital goods, underinvestment of consumer goods. In other words, messing up the production structure. And then, when the interest, when the money supply stops expanding, Bingo, this is revealed and the forecasting turns out to be particularly bad in the capital goods industry.

28:32In other words, bankruptcies and unemployment in capital goods industries, so that labor, land and capital can shift back to consumer goods where they originally were in the first place. This is the, in other words, the inflationary credit requires a recession once the inflationary credit gets underway. One question about this, which Mises asked in Human Action, he says, well, how come... This seems like a very short process. I mean, you expand credit, you cause overinflation of wages and capital good industries. Workers then spend the money and then the whole thing is too little savings to buy the new investments. Why doesn't the capital good, why doesn't the boom last only by a couple of months? Why does it last many several years? And the reason is, as Mises points out, is that the banks keep expanding credit to be one step ahead of retribution.

29:18In other words, in this case, it's constantly expanding credit so that businesses don't have a liquidity shortage, so that they can keep refinancing their capital and keep expanding, thereby being one step ahead of recession. As soon as then the expansion of credit significantly slows down or stops, the whole thing then, recession comes on like a thunder and clap. This question we would ask now, I guess, is with the National Expectations people, how come businessmen don't realize this and stop doing it? In other words, why don't they study Austrian economics, understand that inflationary boom causes over-investment, therefore not over-invest. And the answer is, it doesn't work that simply. And the answer is, it's not irrational to over-invest so long as the boom continues.

30:05I know a case, for example, of a lovable, one of the first Austrian businessmen, converse to Austrian theory, Bill Mullendor on the early days of libertarian movement, free market movement in the 1940s. He was the president of Southern California Edison Company, some Commonwealth Edison, I think it's called. And he takes this to heart, he says, don't expand, he tells businessmen this in 1946, Don't expand because it's going to be a recession, it's inevitable. And the old thing is a crackpot, and of course they do expand. The thing is, he lost money, that's sort of, he lost money for Southern Commonwealth, I'll assume, with this kind of policy, because even though he's right in the long run, in the meantime, it's rational to keep expanding. In other words, what the businessman has to do is to try to figure out how long will this thing continue, this boom. And if the boom will continue for 20 years, you have to keep expanding for 20 years. You can't fight the thing on your own, so to speak.

30:50So this is why it's not irrational to over-invest. It's rational overvests, so long as the government and the banking system keeps creating the boom, the inflationary, excuse me, boom. And then you try to, the ex-forecasting has a question, not of GMP models or econometric models, trying to figure out what the jerks in government are going to do. That's the real point. The, okay, the, I think that's enough of the business cycle theory. Mises developed and taught his views in his private seminar at the Department of Commerce. He never had a government job. He was beat out as a government job at the University of Vienna. He didn't get the top post there, the chair at the University of Vienna. So he had a Privat Dotsent post, which is an unpaid teaching post.

31:38However, that's pretty prestigious in Europe. It's not very prestigious here. So he's a pre-vot dot set in Vienna, and he has a regular job as a Department of Commerce in Austria. And he has private seminar in his office of the Department of Commerce in Vienna, where all these people, all the big shots came, all the brilliant young intellectuals and economists in Europe, attended the seminar and more or less converted, at least semi-converted. I just list a few of them. Of course, Hayek, we know, Fritz Machlub, Haberler, Lord Robbins, Erich Voigelin, the famous political theorist, Alfred Schutz, future Prime Minister of Gates School, Labour Party Prime Minister of England. And he wrote a Misesian-type article in the early 30s, I think it was, and perhaps it kept him going all the way to the socialist doctrine.

32:26At any rate, one thing that Mises did, by the way, I think should be pointed out, he did not, as some younger Austrians do now, did not artificially separate theory from practice. In other words, he did not say, if you're an economist and a scholar, you can't have anything to do with politics. It's somehow evil to have any public policy connection. He's almost single-handedly, I would say he's virtually single-handedly, stopped the Austrian inflation in the 1920s from becoming hyperinflation. He was very concerned, of course, it would go to the Austrian crown, I guess it is, it would go the way of the German mark. And by constant pressure on the Austrian government, he prevented that, He managed to get a currency reform and prevented them from having all that hyperinflation. And his very sweet moving notes and recollections, which he wrote on fleeing the Nazis in 1940, his autobiographical note, he says maybe he shouldn't have done it.

33:18Maybe it would have been better to have him out of inflation. But anyway, I think it's pretty clear that all of his life Mises did not fail to pursue the truth in whichever way or wherever it led. And he warned, by the way, of the Great Depression. He said there will be a Great Depression when this inflationary boom stops. In doing that, he set himself against the dominant American doctrine, which is Irving Fisher, the pre-Freedmanite, professor at Yale, who claimed everything was going great because the Fed was keeping the price level constant. If the price level is constant, there's no inflationary problem to worry about. And Mises kept saying it's not true because if you have any kind of inflationary bank credit, price level is not the key thing. The problem is that production is being distorted relative to its free market position and interest rates are distorted.

34:08So with Mises' production turning out to be correct, at least in that sense, people got more interested in Misesian doctrine after the crash in 1929. In the meantime, during the 1920s, a very productive decade for Mises, there's of and, of course, the rise of socialism and the Bolshevik revolution in Europe. And Mises, shortly after World War I, made a decisive contribution to the whole socialism debate. Now, everybody realized, even socialists, I think, realized, and have always realized, there's a big incentive problem under socialism. An incentive problem has often been summed up as, who will take out the garbage in a socialist society? Everybody's equal, everybody is free to labor, everybody gets equal income. Who's going to take out the garbage? Or, who's going to develop Siberia?

34:55That's another interesting question. There's Siberia, right? Assuming it needs to be developed. It's off there and, you know, hell and gone somewhere. Who's going to schlep out there and build it up? So, the socialists answer this question, well, we will create a new socialist man. The people will be transformed by education or brainwashing, if you want to put it that way, to want to serve the collective in any way they want to. Okay, any way the collective wants, send me to Siberia. Yes, yes, right? or make, yes, I love the garbage if it's socialist garbage. So, and we know pretty well now that the social incentive problem has not been solved, won't be solved. But aside from what Mises did in his great article 1920, is that assuming, well, let's assume that the problem is solved. Let's assume everybody now loves the collective.

35:41Everybody's been successfully brainwashed. He doesn't use the term brainwashing, of course. Everybody wants to serve the collective. What are they going to do? How are they going to serve the collective? Mises' point was, even if you're solving a center problem, you can't solve a calculation problem, namely, nobody knows what to do. How many people are sent to Siberia? What should they do there? How many machines, how many mines should they build in there? How many people should be signed to garbage? How many people are road building? Who knows? There's no... without a price system, as Mises points out, without private ownership of the means of production, without, therefore, a real price system and resources, there's no way anybody can figure out what to do and who to do it, and what techniques to use or anything. We won't see without a rudder. And that was his great point as economic calculation under socialism mark on 1920, which he expanded in a famous book called Socialism, 1922.

36:34And socialists began, of course, to try to answer this. In those days, social was much more theoretically inclined than they are now. Now the, I don't think anyone wants to even consider this kind of, at least in the West, I think they do in the East, they're very worried about what to calculate. and so they said yes I will pretend there is a market it was a famous longer solution which I grew up on in Columbia longer solve all that because I just pretend there's a market and you try to make you make managers act as if they're profit-making or loss-making entrepreneurs which because Mises replied to that he really replied to that in his first article I'm concerned is that you can't really do that because you exist there's no private property you can't take entrepreneurial losses those there's no such thing as saying go No pretending that you're making losses or profits, you're not playing Monopoly game. This is the real world out there and there's a big difference.

37:20There's no way in which they can calculate, there's no real price system. And I think after all, it's interesting enough that communist countries have never installed a longer system either. They never even tried to do it. The thing which solves the problem in socialist countries is mostly the black market, which is rampant. And in some cases, like in Hungary and Yugoslavia, the black market is more or less taken over. They legalized it in the sense that they've given up. And one of my favorite anecdotes, and I started teaching Brooklyn Poly in 1966, 67. I taught comparative economic systems then. They didn't let me teach it after that. At any rate, I taught it one fall. I spent most of the time talking about how great the market is and how lousy government planning is. And finally, there was an exchange professor from Hungary, distinguished economic historian.

38:10I said, we're bringing him into the side of the other, you know, give the other case, the other side of the point, the other side of the view here, and he came in, and the kids that were pretty left-wing, they said, hey, this is great, now we've got the other side of the story. And he spent the whole time talking to the whole class, talking about how great the market is, how lousy planning is, and saying, Hungary isn't going far enough yet for the free market. They were left goggle-eyed, as you can imagine. All right, then the, I think now that's the sort of a standing joke in the economist circle is that if there are any kind of world congresses of economists, the communist country economists talk about how great the market is and the western economists talk about the rate the planning is. And I think western economists have sort of hived off on that, sloughed off on that to some extent in recent years.

38:53So in addition to this, Mises is doing all this in the 20s, working on his business cycle theory, he's working on his critique of socialism. In addition to that, he comes out with a critique of interventionism, showing that government interventionism doesn't work either. Price control doesn't work, creates shortages, taxes cripple saving and investment, protectionism is destructive and so forth and so on. Then he says, well, interventionism then is cumulative. In other words, it creates, the government intervenes in a problem and try to solve it. It doesn't solve it and instead it creates three or four more problems. Then it's confronted with this choice, either we repeal the first intervention and give up, always be spanned on to try to conquer these other three or four problems, which of course they always do, at least the socialism. And you wind up, since socialism can't calculate, you wind up in what you call an impossible situation.

39:40So, as a result, interventionism is unstable. It either leads back to laissez-faire or the free market or on to socialism. Since socialism can't calculate, you have to wind up with laissez-faire, as Mises' political conclusion. And Mises, of course, all during the 20th century and all during this time, growing statism and collectivism and protectionism and everything else, corporate liberalism, communism, socialism, fascism, all that, Mises stands all of his life as an uncompromising champion of laissez-faire liberalism. and heedless of the fact that everybody's, this whole zeitgeist is turning against them, isn't it? It's not heedless, attacking in any way, continuing on, regardless of any opposition. In addition to that, there's another problem for me, in addition to statism growing, communism, socialism, statism, protection, all that, corporate, corporatism, is also growing up, unsound methodologies are undercutting economics, all economics, all economic theory, Basically, two twin enemies, so to speak, institutionalism and positivism.

40:44Positivism, of course, has become dominant, at least until recent years. Positivism is a model treating economics like physics. All sciences of human action have to be, in order to be a science, have to be like physics, they have to be tested, they have to be mathematized, etc., etc. They have to be quantitative, they have to predict, and men are therefore treated as stones and atoms and predict their patterns and so forth and so on. So Mises rises up against this and says, this is incorrect, there's a fundamental radical difference between stones and atoms on the one hand and people on the other, namely, people make choices. People think, they've got consciousness and they act, they have purposes and goals and they act to try to achieve them. Atoms don't act, atoms don't make choices, atoms don't think, etc. This is a key point and of course, in setting himself on this path, Mises went against the dominant methodology of social sciences in the 20th century, increasingly dominant.

41:36And Mises says that economics is built up, economic theory is built up on the logical implication that people act and make choices. There are people and they have values and make choices. And so he then sets forth this methodology, which he later called praxeology, in his Grün Problematik der Nationalökonomie, Foundations of Economics, 1933, and continues to set forth the true relationship between theory and history in his great book, Theory and History, 1957, which I recommend everybody, which is almost un-footnoted even among modern Austrian economists. And pointing out exactly why there can be a theory, it has to be a theory, and that it's not based on mathematical atoms or whatever, it's based on the fact that people act.

42:24He turned to institutionalism, by the way, which seems to be rising up among some younger Austrians. in Austria, and he termed it anti-economics, and I think it's perfectly accurate. This, of course, goes back to the German Historical School doctrines of Gustav Schmoller on the University of Berlin. As if he hadn't accomplished enough, after having set forth the correct methodology of economics, praxeology, then decides he's going to create a doctrine based on this methodology. Too many methodologists spend their time just talking about methodology, what economics should or shouldn't be doing. He said, okay, I'll do it. I will not create an economic structure based on the correct methodology. And he did it in his great work, National Economy, 1940, which was published in Germany during World War II, and therefore was totally forgotten, and then was translated and expanded to Human Action, 1949, in the United States.

43:20The original version came out in Europe in 1940. In the meantime, while this is happening, Mises, his leading followers and his leading follower in business cycle theory and capital theory and socialism theory, F. A. Hayek, moves to London School of Economics in 1931, Mises Vienna comes to London. And one thing we have to realize about, if you don't know this by this time anyway, is even though everybody, every scholar has passed the PhD, a language test for a PhD in German and French, nobody really knows a foreign language, let's face it. and nobody reads foreign language. I would say nobody, but very few. And so very few people read the Mises or the other Austrians in German. Menger wasn't translated until after World War II, von Boehm-Bawerk was, luckily, and Mises wasn't until the mid-30s. So they didn't get read in England or the United States.

44:16And when Hayek comes to the London School of Economics and starts his lectures, it was a fantastic eye-opener to the English economists because they were confused. It was the Great Depression that hit, it was 1931. What's the explanation for it? And Hayek comes with a cap of the great business cycle theory of Mises, expands on it, and it immediately converts the whole gang. All the people which, very famous names in economics, Hicks, Kaldor, the Lerner, Beveridge, Sir William Beveridge, all these people became Austrians for about three or four glorious years. And started writing in the Austrian Hayekian Mises-Hayek tradition. When Keynes comes along, when Keynes' general theory comes along, and by the way, in those days, the United States, economics in the United States was sort of like a farm club of England.

45:02Marshall was the big dominant figure. American economics had more or less died out. There were no real theorists much during the whole interwar period. Economics was mostly institutionalists, therefore talking about how, I'll say, the market is, and more or less, that's about it. And so, there's very little economic thinking going on in the United States. and then when, so we sort of follow along tail after England and so when the Austrian, when the younger economists in England became Austrians, the American economists began to become Austrian. The first, the leading, well he wasn't, he didn't understand it very much, but leading semi-Austrian United States, none other than Alvin Hanson for about four glorious years, four or five glorious years, plus a few others. Theory about how theories get accepted and rejected in economics. There was no patient refutation of Austrianism by by the Keynesians, they didn't sit down in the journals and refute them, it's a lot of nonsense, it almost never happens that way anyway, it certainly did not happen with the Keynesians, it just was like a fantastic change of fashion, it's like rock succeeding swing, okay, that's it, and everybody starts talking about liquidity, preference, the consumption function, and the diagram of the Keynesian cross, and nobody refused the Austrian theory, we just forgot about it, like there's not any Orwellian memory hole, and most of the Hayekians converted to Keynesianism, and like Machlop and

46:18and most of all these, of course, Hicks and all these people, and Lerner and Englund, etc., of course, all converted. And even Mises' former students converted, at least partially so. Although if you look at Machlop and Haber on these people, even when they were Keynesians, they were more moderate than the other people. That's the best you can say for them, I think, in this epoch. And we wind up only with Hayek left after having converted most of the bright, young English economists. By the end of the 30s, only Hayek left as not a Keynesian. And again, Hayek unfortunately made a, in the midst now, he made a grave tactical error. When Keynes' Treatise on Money came out, which was supposed to be his great masterpiece in 1931, I guess, Hayek refuted it in a magnificent two-part, very long, two-part, devastating two-part journal article in Economica, which really wiped the floor with it. And Keynes then said, okay, it's back to the drawing board.

47:06And obviously, this thing doesn't work. So he comes back with the General Theory in 36 and Hayek thinks to himself, well, I could do the same thing with this thing. It's no better, probably worse than the use of money. Why waste my time on it, because Keynes will change his mind a couple of years anyway. That was, of course, famous last words, and the rest is history. So, in economic theory, then, we have a sweep of Keynesianism, washing out even memory of Austrian business cycle theory, much less, I say, not refuting, and simply wiping out the memory of it. And then Mises flees from the Nazis in 1940, and really sort of like a movie thing, where he's one step ahead of the Nazis he's coming to France, he escapes from, I forget what it was, Spain and Portugal, comes to New York in World War II. His life in ruins and he writes his marvelously moving notes and recollections in that period and he's writing the spear of the end of civilization.

47:59And he also says there, I think, as I remember it, that Menger withdrew from economics and Boehm-Bawerk he claims committed suicide because of World War I, because of the onset of World War I, the wreckage of the Great Civilization. So he comes here, a panelist, in his 60s by this time, writing in a new language, in a world where he couldn't get an academic post. Neither could Hayek in the United States either. And he would have a situation where every Marxist and semi-Marxist refugee coming from Europe is immediately hailed, the red carpet is rolled out, gets top positions in academic posts in the United States. And Mises gets, he's being supported by the William Volker Fund at that time which was a small, unknown, but glorious little conservative libertarian institution, defunct for various obscure reasons.

48:49And they finally get him in a university post. The only thing they can get him is NYU Graduate School Business Administration, a non-paid post. In other words, a salary would have to come from outside forces, namely the Fee and Volker Fund, later Fee and other consortium of businessmen. The same thing happened in Chicago. With Hayek, they were able to get him a post at the University of Chicago, slightly higher in the academic rank than NYU School of Business. However, again, they wouldn't pay Hayek. First of all, the economics department in Chicago rejected him. And he got a post in a new department in Chicago called the Committee on Social Thought. Is that still in existence? Yeah, kind of. And it's an interdisciplinary committee on social thought. But his salary was paid for by the William Volcker Fund again and then by consortium. Neither Mises nor Hayek ever got any paid post in the United States, which is, I'm absolute disgraced, I can't conceive anything more monstrous, blonde academia than this, right?

49:43The so-called devotion academic freedom and all the rest of the garbage, it gets right down to it, this is what happened. So in this situation, Mises never complained, I have the joy of being in this seminar for about ten years in NYU, never complained, always very cheerful, he was surrounded by by students who are a bunch of clucks, let's put it frankly, most of them. They were mostly there because they knew he was an easy A. He didn't understand anything about American marketing grading system. What's A? What's B? He said, give us A, as a professor, that sort of thing. And except for the fact that there were some people who had read about Mises and sort of were drawn to him, and one of the conditions of his getting a post there

50:57He's very shy, he's a great professor, he's a young clux here, well we know, so when he would have an hour lecture and then he would open a question, nobody would want to say anything. He said, look, don't be afraid to speak up, he said, because whatever you say, whatever it is, however idiotic it is, some eminent economist has already said it. Of course it was true. So he managed to recreate the atmosphere of the Mises Christ, the famous circle of great young economists in the 1920s in Vienna. And then Human Action, he comes out with Human Action in 1949 as his great crowning achievement. He was up at Fee at the time and I was up at Fee and I asked, well, they said Mises is coming out with a book.

51:42I didn't know Mises at the time. They said he's coming out with a new book. This is 449. You know, I said, what's it about? He said, everything. And sure enough, that's what it was. I just want to tell a couple of great stories. He was a great source of anecdotes about living in pre-World War I Vienna, which must have been magnificent, marvelous, except for the lack of air conditioning. It must have been perfect. And he talked about these, he told these great anecdotes. For example, he told an anecdote of, just to tell you two of them. And one is this, when the Bolshevik government of Belakun took over in Hungary in 1919 for six short, unglorious months, I think it was about six months, Karl Polanyi, the famous economic historian, later to get a big post to Columbia, should I add, paid post.

52:29Karl Polanyi was the Belakun government's negotiator for trade agreement with Austria, and Mises was the negotiator for Austria. And they walk along Vienna, he said, both of us knew that the government's not going to last more than a couple of months, so Polanyi wanted to stay in Vienna, they didn't want to go back to Budapest, the horror in Budapest, they just sort of, you know, they walk around the streets of Vienna talking about what's life in general and whatever, and it was very pleasant, sure enough they waited out before the bellicose government and Polanyi's hive was saved. Another charming story, I think more in apposite to Mises' general doctrine is, he's walking along the streets of Vienna, do a lot of walking, even I walk in Vienna, which is, I hardly walk anywhere. It was a marvelous city to walk in. And walking along the streets of Vienna, he's with his friend Max Schaehler, who's a big shot German idealist economist.

53:18And Schaehler, denouncing logical positivism, which then of course is big in Vienna, started in Vienna, and Schaehler says, Tell me, Lou, what is there in the climate of Vienna? What is there in this place that breeds these logical positivists? What's there in the climate? And Mises took a little shrug. He says, After all, Max, Vienna is a city of about three million people, I guess something like that, three million people. And only, there's less than 12 logical positives, so it can't be the climate.

53:47So, in this situation where the trend of the times was against them politically, methodologically, economically, he never gave up. Constantly great fighting spirit and doing all a great sense of charm and even sweetness. Never made any personal attacks, as I know of, against anybody. and continued on with this marvelous, tremendous productivity until he, virtually until he died at the age of 92 in 1973. In 1974, the year after he died, Hayek got the Nobel Prize in economics. It was a fantastic thunderclap in the economics profession. Who's this guy got the Nobel Prize? Who is he? And in order to find out who he was, some of them had to go back and read something that seemed to have sparked an Austrian Renaissance in the economics profession.

54:38And he got it, by the way, not for his later work, Hayek, but for his, specifically for his Misesian business cycle and capital theory in the 1920s and early 30s, and mid-30s. And since then, there's been an Austrian revival, and it's unfortunate he didn't live to see it. The, well, yes, I guess that's really all I have to say. I think that's, I think that's, it's a marvelous comment. He's a marvelous person in every way, both as an achiever in economics and thought in general and as a person as an exemplar for anybody following after him. And I think there's still a tremendous outpouring of affection for Mises among all ranks of life in the United States, even in this time.

55:25He's marvelous. Thank you.