14. Booms

0:00Chapter 14 – Booms The year 1923 witnessed a political paradigm shift in Austria and Germany. Previously socialism had been an almost non-debatable ideal and inflation an uncontested means of economic policy. After 1923, most Central European intellectuals were disillusioned with the former and outright opposed to the latter. Many debates had not only shifted topics, they had changed orientation. This is one of the central findings of Irma La Gorgos' comprehensive study of research subjects and methodological orientations of three representative social science organizations of the time – the Verein für Sozialpolitik, the Deutsche Gesellschaft für Soziologie, and the Cologne Forschungsinstitut für Sozialwissenschaften. More and more economists and other social Social scientists recognized that the use of government to improve social affairs was problematic. A young generation arose that learned to think more critically than their elders who had government interventionism and socialist schemes. This burgeoning, anti-statist movement was still a minority when it crumbled under the assent of Hitler in early 1933, but to the very end it had been a vigorous and growing movement, and there was no doubt

1:21and its protagonist was Ludwig von Mises. One observer who met him first as a young man in 1928 would later recall. What Edwin Canaan has been for England, Frank H. Knight for the USA and Luigi Naudi for Italy, Ludwig von Mises was, for the German-speaking world, Austria, Germany and Switzerland, the initiator of a renaissance of liberalism and the market Economy. This leadership in policy debate was based on similar leadership in the field of positive analysis as can be inferred from a 1925 festschrift for Luiu Brentano that set out to portray the state of the art in economics after the First World War. Here Mises figures among the thirteen most cited authors, along with Boehm-Bawerk, Brentano, The year 1926 brought another improvement in Mises' good fortune. He started cooperating with the Rockefeller Foundation and established an Austrian Institute for Business Cycle Research, which allowed his young political allies, most notably Friedrich Hayek, to earn a living in economic research. In the following years Mises also became involved with various European

2:39and European Free Trade Organisations and used the International Chamber of Commerce as a platform for networking and for promoting classical liberal policies. But because none of his major writings had been translated into French or English, his primary influence remained limited to Germany and Austria. What could be called the first Mises revolution took place between 1929 and 1932, during which time he became a board member of the and the Reine für Sozialpolitik. His works were discussed in all major economic textbooks, and more and more young economists were pursuing Misesian themes in their research. It was also in these years that Mises completed his system of thought, at least in broad strokes, with a series of path-breaking essays on value theory and on the epistemology of economics.

3:28Had it not been for the rise of Hitler, this quiet revolution would have had a significant 1926 journeys The 1926 Congress of the International Chamber of Commerce took place in the United States, and Mises made his way across the Atlantic for the first time. He left by way of London, where he met Canaan and Robbins at a critical in the history of LSE's economics department. Lionel Robbins had returned to LSE from Oxford the previous fall, and his continued interest in Austrian economics, and in Mises's work in particular, would become highly important in the coming years. Edwin Canaan, however, offered less promising news. He was about to retire, and LSE's management planned to hire the Harvard professor Alan Young as his successor. Young was known as a die-hard positivist, and he was expected to make the economics department a centre for the transformation of economic science into applied mathematics. This had been a long-standing plan of the socialist founders of the school and of the New York-based Laura Spellman Memorial, which

4:46donated large sums to LSE for research on the natural basis of economics. The founders of LSE were Sidney and Beatrice Webb. The Laura Spellman Memorial was named after the wife of John D. Rockefeller and later absorbed into the Rockefeller Foundation. In 1923 to 1924, LSM donated almost $100,000 to LSE. In 1926 it gave another $500,000 for research on the natural basis of economics and $175,000 for other projects. The idea that economics could be turned into applied mathematics or applied biology is is a good illustration of Cain's famous dictum that each generation labours under the ideas of some defunct economist. William Stanley Jevons and his followers such as Edgeworth had been very influential within British academia in pressing the case for mathematics in economic science. The great champion of the case for biology was Alfred Marshall. The mecca of the economist lies in economic biology rather than in economic dynamics. Principles of economic and Introductory, Volume 8th Edition, Keynes knew what he was talking about. Mises must have seen

6:01dark clouds over London as he sailed through New York. Eventually, however, two events slowed the pace of LSE's transformation, Young's unexpected death in 1929 and Lionel Robin's conversion to Austrian economics. Mises remained in the States for about two months. He had a mailbox with the at the Laura Spellman Rockefeller Memorial in New York City. Besides his participation in the ICC meeting, he made various public appearances, which at least, in part, had the purpose of attracting US investors to Austria. By the time of Mises's visit, Austria was enjoying a good press in the United States, thanks to the public relations effort by Mises and others. He must have noticed with satisfaction that the US Department of Commerce circulated reports stating that Austria, during 1925, maintained in general the advance The advance made in 1924 and in several respects made considerable progress, especially in fiscal, currency and credit matters, according to the annual report of the Board of Directors of the Austrian National Bank. In New York City he also met the leadership of the Rockefeller

7:04Foundation and seems to have made an excellent impression. The timing could not have been better for shortly after Mises' return to Vienna, Friedrich von Wieser died and Mises Mises became the foundation's main contact among Vienna's economists. After the death of Boehm-Bawerk and Mises, Mises was manifestly the leader of the school. He later recalled that the Rockefeller Foundation had taken an interest in my teachings and research work. The local coordinator for the Rockefeller Foundation in Vienna was British-born Alfred Francis Pribram, not related to Carl and Ewald Primam. In Austria, Mises had a decisive influence On the selection of the future Rockefeller fellows, when he moved to Geneva, the Foundation paid his salary at the Graduate Institute for International Studies, and when he eventually moved to the United States, the Foundation provided again the lion's share of his income during the first four years. The acquaintances he made in New York had made his trip a splendid success, but the reactions of academic audiences must have been disappointing. In American

8:10Studies, there was a marked lack of interest in theoretical work and exaggerated hopes for empirical research particularly in statistical studies. Mises had already noticed in meetings of the International Chamber of Commerce an ever greater number of American representatives championing interventionist views. His stay in the United States confirmed his impression that Americans were abandoning liberalism. Back in Vienna he summarised his impressions in several lectures, in particular in a talk on changes in American economic policy, which he delivered in November 1926 before a relatively small circle of top Austrian entrepreneurs in the Industrieller Klub. In December he lectured to a large audience on the less sensitive topic of America and the reconstruction of the European economy. This lecture was delivered to the German Hauptverband der Industrie in Czechoslovakia.

9:04On the ship back to Europe, Mises read the proof pages of his Sozialliberalismus and was already planning his longer work on interventionism, which he eventually delivered at an October conference in Rotterdam. He probably also delivered a version of this paper in the fall of the same year in a two-hour lecture on government and the national economy. He gave the talk at a summer university designed for American students visiting Vienna, Internationale Hochschulkurse. Before leaving for the Netherlands, however, he attended two conferences, John Maynard Keynes's lecture at the University of Berlin and the 1926 plenary meeting of the Verein für Sozialpolitik in Vienna. Mises travelled to Berlin sometime in early September 1926.

9:49Keynes's lecture was based on his book, The End of Laissez-Faire, which had been published two months earlier. In the mid-1920s, Keynes already enjoyed an excellent reputation in Money. He had been among the first Western intellectuals to criticise the Treaty of Versailles, which in his view was a manifesto of short-sighted vengefulness. He also thought it was impossible to implement in practice. Thereafter his writings were eagerly translated into German, and several German economists attended his courses in Cambridge. Mises later recalled that Keynes was himself influenced by the Cateda Socialist, who he eventually outdeared in many points. his new book would endear Keynes even more to the German public, especially to his German colleagues who had cultivated a tradition of criticising what they believed to be the many shortcomings of liberty.

10:41To what extent Keynes was welcomed with open arms can be gathered from Friedrich von Mises' endorsement in his very last work of Keynes' proposals for replacing the gold exchange standard by fiat paper money. An economist with the broad vision and scientific acuity of Keynes could raise the question of whether it would be possible to replace the gold standard altogether with another system that would allow for stable exchange rates at lower costs. The end of laissez-faire reads like a parody of anti-liberalism. For example, Keynes listed several features of real-world economies that did not fit the model of perfect competition and then went on to claim that these were problems for laissez-faire rather than for and the perfect competition concept itself. These complications arise according to Keynes, 1. when the efficient units of production are large relative to the units of consumption, 2. when overhead costs or joint costs are present, 3. when internal economies tend to the aggregation of production, 4. when the time required for adjustments is long, 5. when ignorance prevails over knowledge, and

11:492006, when monopolies and combinations interfere with equality in bargaining. Anticipating the views he would expound in more detail ten years later in his general theory, he argued that many of the greatest evils of our time are the fruit of risk, uncertainty and ignorance. As if these would be banished by socialism or interventionism, Keynes did not seem to realise how absurd this diagnosis of contemporary social problems was. To cope with the universal problems of human existence, Keynes advocated the following policies. 1. Deliberate control of the currency and of credit by a central institution. 2. Collection and dissemination, on a great scale, of data relating to the business situation, including full publicity by law, if necessary, of all business facts which it is useful to know.

12:393. Complete control of savings and investment. And 4. Control of the population. Mises' last point required, according to Keynes, that the government try to control both the number and the quality of its population, much as a breeder controls livestock. Mises was thoroughly unimpressed by Keynes' case against laissez-faire. As he later wrote in a review of the event, the intellectual significance of Keynes' book was negligible. Its author had merely restated arguments that had been advanced and refuted many times in in the past. What made Keynes important were his personality and the prestige he enjoyed from his status at the University of Cambridge. This prestige had been further enhanced by his critique of the Treaty of Versailles, which had gained him an international reputation as an impartial observer. When Mises returned to Vienna, Richard Schöller caused a scandal at the Viraille in Fürsotelpolitik through his account of the cause for growing unemployment in Germany and Austria. Mises was probably in attendance, but it is possible that he

13:42was among those Austrian gentlemen who reportedly did not attend the sessions they were supposed to attend to the great dismay of the Varhain secretary, Franz Böser. He argued that the permanent unemployment resulted from the consolidation of political power for both labour unions and entrepreneurs. Organised labour and organised capital had eclipsed the self-healing processes Statements of Markets which Involved Falling Prices and Wages Rates These statements offended many of the assembled economists, but it was no longer taboo to bring them up. Theverein moved slowly, but it was moving in the direction of the free market radicals. This intellectual change was reflected in the improved social standing of former outcasts such as Mises, even left-wingers such as the young Adolf Löw in Kiel now maintain friendly the relations with the Vienna champion of laissez-faire.

14:37Immediately after the 1926 Verein für Sozialpolitik meeting in Vienna, Mises recommended Konrad Zweig to Adolf Löw for a position in Kiel. Zweig was just about to receive his doctorate. Mises knew him from his university seminar. Löw eventually hired Zweig, emphasizing the angenehmen Beziehungen, pleasant relationship he had established with Mises. for Business Cycle Research. One thing that impressed Mises on his 1926 trip to America was the empirical research on business cycles conducted at Harvard University. More precisely, he was impressed by the commercial success of the monthly reports. The price of an annual subscription was on the order of one hundred dollars, a small fortune at the time. One hundred dollars could buy roughly Many years later, a member of the sales team that marketed these reports, Frederic Neumeyer, would become a devoted Misesian and set up the Libertarian Press, a publishing house to disseminate Mises' writings. Mises did not meet Neumeyer in 1926, but his trip to Harvard provided the inspiration to establish a similar institute in Austria. His idea was

15:55was to use the money generated through the sales of reports to fund young libertarian intellectuals with little chance of obtaining one of the rare positions at public universities. Vienna enjoyed a living scientific tradition and still attracted great numbers of excellent students, but the Austrian government's financial calamities after the First World War made it impossible to exploit this potential. Whatever private means had once been available had been eaten up by the inflation of the early 1920s. The result was a shortage of research positions. The selection of candidates and the funding of research projects were increasingly a function of party allegiance. The universities were politicised in general, but particularly so in the social sciences. In this context, the establishment of private research institutions that financed themselves by the sale of products rather than by state Funds offered an attractive alternative. Mises have thoroughly prepared the project, studying the operation and organisation of comparable foreign institutes and consulted with experts throughout the world. In fact, he was not the first to think along these lines. The

17:04League of Nations had for some years encouraged the creation of business cycle institutes in the United States and in Europe. The study of business cycles was, at the time, one of the most fashionable topics, and one that seemed to be relevant for international economic Cooperation, the League's initiative could rely on funding by the Rockefeller Foundation. After Harvard 1919, the NBER established by Mitchell in 1921 and London 1922, the wave had spread to Germany with establishments in Berlin, Hamburg, Kiel and Essen, all in 1925. In the same year, a group of businessmen and academics had set up a private Konjunktur Kasselschaft as a department of the Frankfurt Chamber of Commerce, which in turn was affiliated with the Frankfurt Stock Exchange. The director of this society was Eugen Altschul, who personally trained young economists in statistics and other methods used in Anglo-Saxon-style business cycle research. Similarly, another group of young men, around Paul Lazarsfeld, would establish a private institute of consumer research in Vienna a few years later, with Mises on its

18:13Board In the fall of 1926, Mises coordinated the final preparations for the establishment of the Österreichisches Konjunkturforschungsinstitut, the Austrian Institute for Business Cycle Research, hereafter Institut. From a legal point of view, the Institut was set up as a private association and publicly registered on December 2, 1926. The composition of the board, the Kuratorium, reflected Mises's connections, as well as the need to involve, at least nominally, all major stakeholders. Mises found academic frontmen in Hans Mayer and Karl Pribram, obtained funds from his friends in the Vienna community of bankers and industrialists such as Victor Gretz, Helene Liese and Gustav Weiss-Wellenstein, received support from Kammer colleagues such as Otto Geiringer and Emil Peerls, as well as from the Kammer itself, which provided and office space. Other board seats were occupied by representatives of public administrations, such as the Chamber of Labour, the Nationalbank and the Federal Railways. Chairman of the board was Richard Reich. Mises himself was one of the two vice-chairmen, but he was in fact the main force behind the new organisation. The Institut had an executive committee cheered

19:33by a comer representative, but its daily operations were in the hands of an executive with the title of director. Mises made sure that Hayek would be appointed to this position. At first his most important duty was to ensure the publication of the Institute's main product, the monthly reports on Austrian business conditions, which he fashioned after the three-curve barometer of the Harvard Committee of Economic Research. Hayek himself wrote the first, very lengthy Institute, which contained a detailed description of the definitions and quantitative methodologies used in the Institute's research activities. Over the years he relied more and more on contributions from others. By April 1931 the monthly reports of the Institute had a circulation of 500 copies. In the fall of that year Hayek left Vienna to become a professor of economics in London, and Morgenstern assumed leadership of the Institut.

20:32In addition to the monthly reports, the Institut had the mission of organizing meetings and lectures and to act as a focal point for further research in theoretical economics. Thanks to funding from the Rockefeller Foundation, it also published a series of monographs on problems of business cycle theory that became the most visible outlet for the work of the The Rockweller Foundation provided funding from 1929 to 1938. The first seven volumes in this series have passed the test of time, and are today classics of Austrian economics. F. A. Hayek's Geldtheorie und Konjunkturtheorie, 1929, Fritz Machlubs Börsenkredit, Industriekredit und Kapitalbildung, 1931, Hayek's Preise und Produktion, 1933, Erich Schiff's Kapitalbildung und Kapitalaufzehrung im Konjunkturverlauf, 1933, Oskar Morgensterns Grenzen der Wirtschaftspolitik, 1934, Machlubsführer durch die Krisenpolitik, 1934, and Richard Striegers Kapital und Produktion, 1934. After Mises' departure from Vienna in 1934, Morgenstern, who in 1931 had succeeded Hayek as the Director of the Institute, began to publish works with a markedly less Austrian orientation.

21:58Ragnar Nurx's Internationale Kapitalbewegungen, 1935, Gerhard Tintnes' Die Preise im Konjunkturverlauf, 1935, and Abraham Walz's Berechnung und Ausschaltung von Saisonschrankungen, 1936. Apart from these series of monographs, the most important outlet for theoretical research was the Zeitschrift für nationale Ökonomie established in 1930, 1930, which under the editorship of Hans Meyer featured many pioneering articles on the role of time in economics, on equilibrium analysis, on capital theory and on business cycle theory. It was the only institution that Mises ever established, and it turned out to be a great success. Mises set it up as a private association which secured a maximum of political independence.

22:51Many years later, the then director of the Institut acknowledged that the private character of his institution was the basis for the constructive role it played in Austrian politics. He also mentioned that in difficult times he found inspiration and encouragement in reading Mises' inaugural speech, in which he had made the case for independence. Austrian Politics and the Onset of the Gold Exchange Standard The establishment of the Institut and the beginning of Mises' liaison with the Rockefeller Foundation coincided with the fundamental change of the business environment in Austria. The Geneva Protocols of October 1922 and the simultaneous currency reform had eliminated the government's financial disasters that came at the price of Austria's sovereignty.

23:45and continued but at a much lower pace, while unemployment soared from 94,000 in 1922 to 150,000 in 1925. Red Vienna and other socialist municipalities grew larger with the help of foreign loans. Business expanded too, especially because the financial and industrial community in Vienna had successfully renewed its pre-war ties with other regions of the former Austro-Hungarian Empire, the wounds the war had left in the social fabric of Central Europe seemed to be healing. The quiet growth began to leave its mark on Austrian psychology. Many now believed that the country was destined to act as an intermediary between East and West. Optimism and wishful thinking combined in extrapolating the debt-financed expansion into an indefinite future. These These fantasies were crushed by the establishment of the gold exchange standard in 1925. The new monetary system stimulated the international division of labour and brought greater growth to all participating countries, but it also exposed mercilessly the limits of their interventionist governments. Mises later summarised the experience of the second half of the 1920s in a report

25:06to the Austrian government that he co-authored at the government's behest in 1930. International competition drove down prices and while the consumers rejoiced, firms found it nearly impossible to cut costs accordingly because of labour union power and entrenched economic regulations. The inflation of the early 1920s reduced the harm done by labour unions and regulations because rising costs were paired with rising prices. But with the return to To an international gold standard in 1925, sales prices stabilised and even decreased while there was still no downward flexibility on the cost of labour. Doing business in Austria became even more difficult and discouraging. Industrial firms found it harder to raise new funds through equity capital or bonds. Labour unions, local politicians and newspapers The bankers began pressuring the banks to fill the gap. They had to fulfill an economic duty of bailing out the threatened firms during bad times, according to Rudolf Sieghart, die letzten Jahrzehnte einer Großmacht. Sieghart went on, later the same circles reproached the directors of the bank, he means the large and influential Bodenkreditanstalt, which

26:24he directed in those years, with having too generously complied with the credit wishes of these same industries. This was the context in which Mises wrote and spoke during the second half of the 1920s on monetary problems and public finance. Shortly after the creation of the Institut, he gave a widely publicised public address on the consequences of Austria's interventionist policies. He delivered the address to the plenary meeting of the Niederösterreichischen in Gewerbeverein, Commercial Association of Lower Austria, Mises argued that after a year of doing business under the gold standard, the time had come for a sober analysis of the impact of Austrian economic policies. The effects of inflation on business accounting had been exhausted, and the new gold-denominated balance sheets provided a more realistic picture of the state of the economy. The past policies had not merely taxed the income streams of Prior to 1925, tax laws and other regulations prohibited Austrian firms from calculating capital consumption in terms of gold prices. The legally permissible balance sheets therefore

27:39presented an unrealistically optimistic picture of the firms. Mises demanded an intermediate reduction of taxes and of the company's contributions to the government's social insurance schemes. He also called for the privatisation of public firms such as postal savings offices, railroads, postal and telegram services, forestry and coal and steel firms, arguing that their deficits amounted to more than 170 million shillings, which is more than the Federal Government's 1927 budget deficit of 135 million shillings. Also, because of the rent control laws, the The local state and federal governments, which already in 1914 owned more than half of all urban rental housing, significantly reduced their income. This calamity, Mises argued, was the inevitable result of two entirely incorrect principles of public finance, that one, public expenditure comes first, and public income follows public expenditure, and two, The privatisation of capital and private enterprise does not affect the broad masses of the people.

28:49The proposal to privatise the deficit-prone public firms was a slap in the face of the statists in all parties. The main bastion of statism was Otto Bauer's socialist party, and one of their preferred means of political persuasion was the open threat of violent insurrection. A few months after Mises' talk, however, the credibility of those threats The socialists received a serious setback in a showdown between the socialists and the Vienna police. The event occurred in the wake of a questionable court decision that had, in the socialist view, been slanted in favour of a political right-winger. The socialists now called for a general strike and demonstrations on Friday, July 15, 1927. To the government, This was a thinly disguised attempt at its overthrow. In those days demonstrations were armed demonstrations as a matter of course. The Socialist Party had its own private army, the Republikanische Schutzbund or Republican Alliance for Mutual Protection. Established in 1924 it counted some 80,000 men in 1928. Similarly, on the other side of the political

30:03Spectrum, there was the Heimwehr, or Home Defence Movement, a private military organisation that had emerged shortly after 1918, and which later split into a patriotic Austrian and a National Socialist wing. In September 1933, the Austrian wing joined the new Vater Linde Schafront, or Patriotic Front. When the crowd gathered in front of the palace that hosted The Department of Justice Someone set the building on fire and the police stepped in immediately. In the resulting carnage, 90 demonstrators were killed even before the army arrived, Mises commented in a private letter to a former student in Paris. Friday's pooch has cleansed the atmosphere like a thunderstorm. The Social Democratic Party has used all means of power and yet lost the game. The street fight ended in complete Victory of the Police, all troops are loyal to the Government. The General Strike has collapsed and the leaders of the Social Democrats then had to counsel it. The threats by which the Social Democratic Party has up to now permanently tried to bully the Government

31:14and the public have proved to be far less dangerous than one had believed. The failure of the General Strike and the accompanying massacre also had an unexpected personal impact on Mises' Life as we will see at the end of the present chapter. Free Trade, Monetary Stabilisation and Cyclical Policy Mises was reluctant to become involved in any organised political campaign. In a November 1924 letter, he declined an honorary executive position in an Austrian free trade association, stating, As a matter of principle, I do not belong to any political or economic political This attitude changed over the next couple of years as he enjoyed the early successes of the European Free Trade Movement, but his original apprehensions proved correct and his involvement, while intense and high-profile, was also short-lived. Among his international associates in the movement he saw political maneuvering, nepotism and other forms of questionable Mises waited for the right opportunity to take his leave. The opportunity came when the International Committee of the Europäischer Zollverein, the European free trade organisation

32:35of which Mises had founded the Austrian chapter, campaigned against Austria's annexation to the German Reich, the Anschluss-Question. Neither Mises nor his Austrian colleagues could would afford to be associated with either side of the dispute, and when the committee ignored Mises' urging to withdraw from its campaign, Mises left the organisation in February of 1929. Disillusioned with the official free trade movement, Mises returned his focus to the battle of ideas. At the height of his involvement with the Europäische Zollverein, Mises had Rudd had written an update of his theory of money in light of more recent developments, to take account, in particular, of the workings of the gold exchange standard. In February 1928 he published a concise presentation of the main event in the Modern History of Money for a more general public. A few weeks after this publication, he was in the process of completing a monograph on monetary stabilisation and economic policy designed to combat business On March 17th, he offered the manuscript to Gustav Fischer. Mises emphasized that the

33:48time was right for such a book, both because of the increased general interest in business cycles and because the Verein für Sozialpolitik would deal with these problems at their annual meeting in the fall. Fischer was convinced. Geld für Stabilisierung und Konjunkturpolitik, Monetary Stabilisation and Cyclical Policy were sent to bookstores on May 22nd. Mises received a fee of 550 marks. Yet Fisher sent him a cheque from a German bank. Fisher sent 15 complimentary copies directly to their recipients and 15 complimentary and 10 more paid copies to Mises. In the book, Mises delivered a systematic critique of Irvin Fisher's views on monetary reform, which had gained great support in the world of academic economists.

34:36It had prompted men such as John Maynard Keynes and Gustav Kassel to endorse similar schemes. According to Fisher, the deficiency of commodity money such as gold and silver coins was that it did not provide the standard of constant purchasing power. As a consequence, long-term investment and contracts for deferred payments involved excessive risk. This proposed solution was to replace the gold standard with a currency of stable purchasing power as defined by a price index. Mises pointed out that stability of the purchasing power of money was not a requisite of capital-intensive production. Market participants could very well take account of expected changes in the purchasing power of money when they made any long-term investments or contracts. Moreover, because the purchasing power of money could could not be defined without arbitrary assumptions, Fischer's index number standard would not be different in essence from the prevailing commodity standard. In terms of an arbitrary index number it might be stable, but no price index could possibly represent the relevant purchases of all market participants. So any single index number would necessarily fail

35:52to stabilise purchasing power for many market participants. Fischer's scheme could not can't possibly establish money of stable value, but only a transfer of value other than that which would occur on the free market. The crucial issue from Mises' point of view was not value stability, but distribution. While it was certainly true that the gold standard did not produce stable purchasing power, its virtue was that its distribution effects were free from political interference. Any artificial currency, such as paper money, would constantly invite political manipulation and thus lead to a redistribution of resources based on political bargaining power rather than the will of the consumer.

36:38Frischat completely overlooked this problem. Like all those who endorsed price stabilisation, he focused exclusively on redistribution resulting from variations of the price level, but as Mises showed the problem was already addressed in the Market and Expressed as Price-Premiums in the Gross Interest Rate, but there was no such counterbalance for the redistribution that resulted from Cantillon effects, new money reaching different market participants at different times. Fischer's diagnosis did not cover this problem and his scheme for monetary reform ignored it. In the second part of the book, Mises presented a revised version of his business cycle theory. He introduced the distinction between two types of inflation, inflation of fiduciary media and inflation of money proper. Mises argued that the recurrence of the business cycle, its cyclical nature, resulted exclusively from the inflation of fiduciary media. Increases of the money supply were more or less one-time shots. They could entail malinvestment, but This was only one time for all. In contrast, there was a tendency to repeat experiments

37:52with fiduciary media, because businessmen and politicians believed that the issuance of additional fiduciary media was a suitable way to reduce interest rates. With this explanation Mises complemented his previous analysis of the business cycle which had focused on the process linking boom and burst, but which had not yet included an explanation of the Recurrence of Cycles. Mises also radicalised his praise for free banking in the second edition of his Treatise on Money. He had said that future money reformers would be well advised to reconsider the case for free banking. Now he added that, historically, fiduciary media have become a large-scale problem only because the state had gotten involved in banking.

38:39has privileged certain banks with a monopoly on note issuance. They also intervened to bail out these banks when the fractional reserve scheme collapsed in bank runs. As a consequence, the crises of fractional reserve banking had reached far greater proportions than they would have in a free market, and the cooperation between fractional reserve central banks, which had been reinforced in the wake of the 1922 January conference, and which had become Some standard practice under the gold exchange standard only further increased the dimensions of the problem. Free banking would have minimised these crises, but Mises did not believe that it was possible to overcome the political resistance against the establishment of this system. He hoped that monetary policymakers would be wiser in the future and heed the The Teachings of His Business Cycle Theory The New Theoreticians Mises' hope for a wiser future monetary policy did not seem quite as naïve at the time as it now seems in retrospect.

39:46The year 1928 marked the high point of his influence on German monetary thought. The majority of the contributions to the meeting of the Vereinführung Sozialpolitik in Zürich elaborated on his writings. One of the many participants from Vienna later recalled. In their year 1928, almost all professors and other members held Mises in high esteem and admired him. The conference was attended by about 300 participants. Another sign of his influence was the international recognition he received on a May 1928 lecture tour in England. Mises visited England just when his new book on monetary stabilisation was about to come out. He had already written his lectures, which dealt with private property and socialism, and he offered the manuscript to the University of London Press for publication. The press eventually declined, saying the manuscript was not voluminous enough. Still, the 1928 lecture tour marked one of the high points of the golden age of the Vienna-London-Austrian axis. Mises later recalled that he had first joined the British Royal Economic Society in the 1920s because it did not yet promote

40:58at the time, Lionel Robbins and Sir William, now Lord Beverage, were dubbed Austrians by their critics because they agreed with me. He had also joined the American Economic Association for the same reason. A few months after Mises' lecture tour in England, the annual convention of the Vereinfelsultalpolitik was held in Zurich. The subject of the discussions, goals Rules and methods of business cycle research had been determined at the 1926 Vienna meeting. Already at that point it was clear that the second edition of Theory of Money and Credit had been received far more positively than the 1912 edition. General experience with wartime inflation and post-war hyperinflation had made the Misesian message that business cycles were the result of fiduciary credit more palatable to a broad public. In the following In the following years the popularity of the monetary theory of the trade cycle increased to such an extent that by 1933 Mises himself believed that it had become the dominant theory in Germany and Austria.

42:04In his 1922 Habilitation monograph on business cycles Wilhelm Röpke did not even mention Mises. Ten years later he had read the Austrians, see his Krise und Konjunktur. He at first met Mises in 1922 at the meeting of the Verein. In the early 1920s he worked in the German reparations office. It is likely that he often met Mises at international conferences dealing with war debt. The 1928 Zurich meeting was an important milestone in this progress. In preparation for the meeting, the Verein subcommittee on economic theory published a 370 page volume on business cycle theory, containing papers written predominantly Mises himself took an active part in the sessions and concluded with the statement that the present discussion was a proof of progress, even though no agreement had been reached and many problems still remained.

43:12Only 16 years earlier he had been the only German to develop the monetary theory of the trade cycle. He was proud that many of his ideas, rejected at the time, were now commonplace for the majority of economists. The progress was even more pronounced when the comparison was to the meeting of 1903, 25 years earlier, which was the only other time the Verein had even dealt with the problem of economic crisis. At the heart of the German language debate on Business Cycle Theory in the late 1920s? Was the question whether this theory was or could be part of Leon Walras's general equilibrium theory, or whether it required a different approach? Mises took no active part in this methodological debate. He later addressed the main issues when he set out to formulate his own equilibrium theory in the late 1930s.

44:05We will deal with his contribution in chapters 16 and 17. A few months later, Mises was one of six new members elected to the board of the Verein. Mises was elected in absentia at the meeting of the Reform Committee on March 6th and 7th, 1929. He received a report from one of his closest allies in those years, Georg Jan, a professor from Halle. Although he himself did not attach much importance to the event, symbolised better than anything else his professional standing in those days. Starting as an eccentric in 1912, Mises had become a respected academic leader. The Verein establishment may not have appreciated him, but it was realistic enough to recognise him as the representative of a growing movement among the members.

44:56More importantly, however, his rise epitomised the new respectability of theoretical research, which the Verein's founding generation had despised. The Theory of Value reconsidered. For Mises it was a sign of hope that a new generation of students had risen to fill the ranks of the theoreticians. The spell of the historical school was definitely broken. Another danger loomed on the horizon, bad theory. One important area where the danger was very real was value theory. While Menger had applied his exact method with great success in this field, Mises himself had refined Menger's analysis by stressing the relationship between value and choice.

45:42But these works had had virtually no impact on the younger generation. Many new theoreticians believed that economic theory applied only to those human actions that were guided by economic considerations, which made sense only if there were also non-economic considerations, which in turn seemed to presuppose that there were two types of values, economic and non-economic. This error was reinforced when in 1923 Carl Menger's Principles of Economics was published in a revised second edition. The book had been out of print for many years and Menger had never authorised a new printing. The revisions contained in the new edition had been found in manuscripts that Menger had left at the time of his death. Most important Menger had that introduced the distinction between real ones and imaginary ones, a distinction that seemed to confirm the notion that economic science dealt only with a specific type of value, namely with real values that could be used in economic calculations.

46:44Mises had been convinced, at least as early as Theory of Money and Credit, that the notion of value calculation was a chimera. The only economic calculation was calculation with and Money Prices, but in discussions of his socialist calculation argument, he must have seen how much he had underestimated the extent to which the notion of value calculation had taken hold of the minds of the rising generation. Because of ambiguities in the exposition of that argument, those who were not perfectly acquainted with Mises' views on value theory were unlikely to notice the foundational claim that there is no such thing as value calculus, only price calculus. These difficulties were barely visible in the early 1920s. When Mises first presented his case for the impossibility of socialist calculation at the Vienna Nationalökonomische Gesellschaft, he talked to a generation that had been raised in Boehm-Bawerk's seminar, but in the course of the next few years the The conditions for a genuine understanding of this case diminished rapidly because of

47:50two factors. One, the emphasis on value theory had always been a specialty of the Austrian School. Where Mengerian value theory was a theory of value judgements, Jevons and Maras had based their price theories on the concept of utility, which remained entirely in the realm of felt satisfactions. Walter Boehm-Bawerk's deaf value theory in Austria was completely dominated by Wieser, the least Mengerian of the Austrian economists. Two, in the German-speaking countries Gustav Kassel started promoting Wilfredo Pareto's idea that price theory could do without value theory. Ironically, Mises himself had indirectly revitalised the use of the Walrassian general equilibrium approach. His case against socialism had pushed socialist-minded economists into to the General Equilibrium Camp, which seemed their only escape from the problems of value theory and economic calculation. A case in point was his 1929 to 1930 correspondence with Leopold von Mises, sociologist at the University of Cologne. Mises argued that the Italian mathematical economist Enrico Barone had shown that general equilibrium models Examples of the economy could be used to solve the problem of economic calculation in socialist

49:11commonwealths. Mises replied that Barone's entire demonstration was based on the untenable assumption that the subjective values of different individuals could be reduced to a common denominator. The correspondence was a follow-up to personal discussions in Cologne. On Tuesday, December In 1923 to 1929, Mises had lectured in Cologne on economic interests and political parties. Rudolf Seifert, who was the head of the Department of Economics and Social Sciences, directed the lecture series Contemporary Political Theories and invited Mises to give one of the talks. At that point, Mises had already recognized that part of the problem was his own ambiguity in previous writings and he began correcting himself. Thus, in the second In an edition of Theory of Money and Credit 1924, he had de-psychologised his exposition of value theory, deleting the ominous sentence as a feeling value cannot be measured. It is however possible to compare it with other similar feelings, and replacing it with acts of valuation are not susceptible of any kind of measurement.

50:21In the original text we read, Als Gefühl ist der Wert jeder Messung unzugänglich. Vergleiche mit anderen gleichartigen Gefühlen sind möglich. Twelve years later he changed this to Der Wertungsakt ist jeder Messung unzugänglich. In the English edition, acts of valuation are not susceptible of any kind of measurement. Similarly speaking about his book Nation, Staat und Wirtschaft in the fall of 1925, Mises Mises said in a letter to Robbins that he would have to rewrite the book thoroughly for a new edition. Although this change did not affect his actual analysis of the problems of conceiving of value as a quantifiable entity, it marked a conscious transition from a psychological conception of value to one in which value was an act rather than a feeling. His next step was much bolder. For the first and only time, Mises published Mises published an article whose only purpose was to criticise his scientific forebears.

51:22He took issue with passages in Menger and Boehm-Bawerk that had given rise to objectivist interpretations of their value theories. Mises criticised the ethical connotations of Menger's concept of imaginary wants as unnecessary for the explanation of market prices. In the same vein he criticised Boehm-Bawerk's psychological distinction between economic and non-economic Mises stressed that the essence of the modern theory that Menger and Boehm-Bawerk had developed was to recognize that human behaviour results from choice, and that choice always concerns the relative importance of quantities at stake in the concrete choice in question – the marginal quantities. Psychology does not come into play here.

52:10For catallactics, the ultimate relevant cause of the exchange ratios of the market is the fact that the individual in the act of exchange prefers a definite quantity of good A to a definite quantity of good B. The reasons he may have for acting exactly thus and not otherwise are of absolutely no importance for the determination of a market price. Other disciplines such Why, then, did so many economists bring these considerations into play?

53:02Mises explained that this unfortunate habit was the result of an accident of the history of economic thought. The development of subjective value theory coincided with the development of a psychological law of the satiation of wants and of the decrease in the marginal utility of the unit in an increasing supply. Mises went on. All attention was turned to This piece, Remarks on the Fundamental Problem of the Subjective Theory of Value, was published published in February 1928, more than eight years after Mises' first exposition of the socialist calculation argument. It had its impact. The Verein für Sozialpolitik decided to discuss the problems of value theory at an annual convention. Mises and Arthur Spiethoff were appointed editors of a special volume on value theory to be published in preparation for these discussions, which were delayed several times, but eventually took place in In the fall of 1932 in Dresden, Mises wrote two entries for this volume, one giving an exposition of the development of the subjectivist theory of value, the other analyzing the psychological

54:32motivations of its critics. In the first piece, Mises gave a systematic exposition of the theory of value. In light of this account, he explained previous contributions to the theory of value. Again, he stressed the act of preferring, or human choice, as the basic Economic Element in Human Conduct. Mises on the development of this subjective theory of value epistemological problems of economics. All conscious conduct on the part of men involves preferring an A to a B. It is an act of choice between two alternative possibilities that offer themselves. Only these acts of choice, these inner decisions, that operate upon the external world, are our data. We comprehend their meaning by constructing the concept of Importance. If an individual prefers A to B, we say that at the moment of the act of choice, A appeared more important to him, more valuable, more desirable than B. But he also spelled out for the first time the implications of the difference between value and price. He now saw the wider theoretical significance of his socialist calculation

55:40article of 1920. It had been the first and decisive step toward the development of a a general theory of economic calculation, in light of which economics was only a sub-discipline of a more general theory of human action. In the 1920s, Mises called this discipline sociology, but he eventually came to call it praxeology, the logic of action. Where praxeology deals with the general principles behind all human action, economics deals more narrowly with the laws of human action in a system where the means of production are The characteristic feature of such a system is that it enables the profitability calculus to guide actions. Businessmen can contrast the money prices they expect to receive for a product with the expected money expenditure related to its production, and they can compare the expected profit from any investment to the profit expected from any available alternative.

56:40The selection of the projects that will secure the available resources and prevent the alternative The actual selection process merely can be based on the profitability calculus, but does not preclude other decisions. Nothing prevents a businessman from building a social hall for his friends, rather than a factory for his customers. Yet, the benefit of the money calculus remains even in this case, when it tells the businessman Man exactly what he is giving up for his personal consumption, satisfaction of providing unpaid catering for his friends. Without prices, he could not calculate the opportunity cost of his decision. In short, the money calculus of the businessman makes it possible for him to compare alternatives in common terms.

57:31Thus, he is in a position to pass summary judgments on states of affairs involving physically heterogeneous goods. It is not possible to say whether one million gallons of milk are somehow more or less than the one thousand cows that produce this milk, just as it is impossible to say whether a palace garden is more or less than the hundred gardeners who brought it into shape. The reason is that all these things are heterogeneous and therefore cannot be compared quantitatively. The problem of adding apples and oranges. For the same reason, it is also impossible To tell whether using the cows to produce the milk is more efficient than using the gardeners to bring the garden into shape, that once all these things are exchanged against money, we can make such quantitative comparisons, namely by comparing their money prices. Depending on what these prices are, we can say that the milk exchanges for more or less money than the cows, and that the garden exchanges for more or less money than the services of

58:33And depending on the ratios of selling and buying prices, the profitability, we can assert that our money is more or less efficiently used in producing milk than in producing a palace garden. One can now define income as proceeds minus costs, one can define savings as income minus consumption and one can give exact and meaningful definitions of capital, profit and loss, etc. When a calculation thus produces phenomena absent in other systems of social organisation, dealing with them is the task of economic science. Where praxeology deals with human choices' value judgements, the sub-discipline of economics deals with those value judgements that can be based on quantitative economic calculations.

59:22In contrast, other economists believed economic calculation was possible outside the framework of a market economy. They assumed that calculation in terms of market prices was only one form of economic calculation, more to the point they believed that it was possible in principle for the members of society to perform calculation in terms of utility which they assumed to be quantifiable. It followed that all elements of economic science, the science of calculated action, had the same general applicability as marginal value theory. Categories such Mises' 1931 essay on value theory highlighted the differences between the approach of the Austrians and that of the neoclassicals. The former is a truly general and realistic approach that applies to every single human action. It does not merely deal with rational choices In contrast, the emerging neoclassical analysis of a choice did not apply to all human behaviour but only to those actions that would be observed if the acting person strictly followed the results of a utility car-killers. From this point of view, therefore, economic science

1:00:43does not deal with human action per se, but only with one aspect of human action – right Action or Logical Action. This was the position espoused by Friedrich von Mises, who was also consistent enough to advocate, in one of his rare methodological statements, the use of idealising abstractions, such as homo economicus. It was also the stance of Wilfredo Pareto, according to whom the theoretical social sciences deal mainly with logical actions, rather than Pareto is a subjectivist only in the sense that he recognizes the subjective character of the goals of human action, which is why he strictly distinguishes between objective utility and subjective over-limity. Yet Pareto's subjectivism stops short when it comes to dealing with the means of action because here he professes to consider only the case of logical action. And although he placed a little less emphasis than Wieser on the central idea of Utility Calculus, Pareto was quite explicit in stating that market prices are just helpful auxiliary valuables to solve the fundamental economic equations. These equations are the

1:01:58same in each economic system. They do not depend on the political organization of society and their ultimate elements are individual tastes and obstacles, costs. Market prices for factors of production could be dispensed with because the general equilibrium equations would produce any prices needed as accounting devices for the central planning agency. Even if the socialist state abolished all right of exchange and prohibited all buying and selling, prices would not disappear on that account. They would remain, at the very least, as an accounting device in connection with the distribution of goods and their transformation. The use of prices is the simplest and easiest means for solving the equations of equilibrium If one insisted on not using them, he would probably end up by using them under another name and there would then be only a change of language and not of things.

1:02:57Mises recognized that his Austrian value theory could explain every single instance of conscious behavior, whether calculated or not, thus generalizing the theory of homo economicus into a theory of homo agens. In contrast, other economists and sociologists believed that while it was true that marginal utility theory could explain only calculated, logical, rational behaviour, it was still a general theory of human action, because utility is a pervasive factor determining all human action. For the neoclassicals, economics was still the theory of homo economicus. had already been in the hands of the classical economists, but its protagonist was no longer confined to the market, homo economicus now lived everywhere. To the present day this has remained a dividing line between the Misesians and a distinguished group of thinkers in the Viserian-Paretian lineage, in particular Gary Becker and the movement he has inspired. It also accounts for the fact that Misesians markedly deviate from the present day mainstream when it comes to explaining phenomena such as growth, monopoly, welfare, the relationship

1:04:10between law and economics, money, conflict, etc. The problems of value theory and economic calculation are far more important than the single chapter they might get in some textbooks, if they are covered at all. In the late 1920s, Mises showed that these problems were at the very heart of the social sciences. In the 1940s, he would present the theory of economic calculation as one of the main building blocks of his general theory of human action. To add a new epistemology of the social sciences, Mises' reflections on the scientific and political significance of value theory were part of a more general effort on his part to pull together the different strands of his previous works to discuss their implications and to fill in the gaps.

1:05:00One area in which the case for liberty and private property had been less than airtight was epistemology. The famous Mittenstein between Menger and Schmoller had not produced the necessary clarification. The crucial question was whether there was such a thing as a theoretical social science, or whether the scientific rhetoric of the economists was just hot air. In previous works Mises had argued along the lines of Walter Badgett that a social theory is necessary to interpret the wealth of data presented by observation. Therefore the social analyst first needed a theory, and only as a second step could he approach the object of his inquiry. He also criticised the empiricists who thought they could explain the observable real world without relying on theory. In 1926 these statements were made only for the record.

1:05:54With the benefit of hindsight, however, we know that they heralded the beginning of a research programme that Mises pursued for the next 35 years. He discovered that the most underdeveloped area of the social sciences was epistemology, the meta-theory explaining how these sciences relate to reality. His very first contribution to this field was an essay on the relationship between sociology and history. Mises here stated that the Metoden Wilhelm Stein of the 1880s and 1890s had banished the teaching of economics from the universities of the German Reich, but that it had not clarified the central question of whether there was such a thing as social theory that could claim the status of a science.

1:06:40Meanwhile however, great progress had been achieved on a different front. The works of Wilhelm Windelband, Heinrich Rieckert, Max Weber and Henri Bergson had clarified the The Epistemological Nature of Historical Research Mises praised in particular the South-West German School of New Criticism for developing the concept of understanding the specific tool of the science of history. The works of these scholars had yielded two important insights. First, the application of the methodology of the natural sciences to human action did not exhaust the task of the historian. The genuine purpose of historical research was to explain concrete human behaviour in the unique circumstances influencing this behaviour. Second, historical research could not do without theoretical tools. There was no such thing as historical analysis untainted by theoretical interpretation. For example, the mere classification of observed phenomena such as he was a king, or she is my neighbour, or they were Germans, involved more than a description of naked facts. The very words used in the description were in fact theoretical

1:07:51Theoretical Tools Max Weber had set out to develop an epistemology to characterise the logical character of the theoretical tools needed in the science of history, arguing that they were ideal types. Building on these insights, Mises set out to explain that sociology, the term he used as shorthand for the theoretical science of social phenomena, was one of the theoretical tools needed in historiography. The essay Mises' sociology and history would be the last time Mises would use the term in this sense. He had used it in the first edition of Gemeinwirtschaft. Much of his long essay was devoted to a critical discussion of Max Weber's approach. Mises emphasised Weber's merits as a logician of historical research, but also stressed that even though Weber held a chair of economic science, he could not be considered an economist. In Mises' view, Weber was simply unacquainted with economic theory. He acquired his reputation as a theoretician because he cultivated a new, very general form of historiography, which Mises proposed to call universal history. The investigations collected in Weber's posthumously published

1:09:01major work, Wirtschaft und Gesellschaft, belong to the best that German scientific literature of the last decades has produced. Yet in their most important parts they are not sociological Universal Theory in our sense, nor are the history and the customary meaning of the term. History deals with one town, or with German towns, or with European towns in the Middle Ages. Until Weber's time, it knew nothing like the brilliant chapter in his book that deals simply with the town in general, a universal theory of town settlement for all times and among all peoples, the ideal type of the town in itself. Brilliant though Weber's achievement was, it had nothing to do with universally valid sciences such as economics. The point was that ideal times, such as the Universal Town, were fictitious. They did not fit all or even any observed phenomena they were designed to describe. Weber had used the expression ideal in the same sense as Friedrich von Mises as a fictitious assumption. These fictions Mises vitiated the scientific and political conclusions derived from their use. Propositions

1:10:12involving them must be similarly deficient. Economic laws, in contrast, concerned universally existing causal relationships inherent in human action. In every single instance in which the cause was given, it produced the effect according to the law. Mises explained, The laws of sociology are neither ideal types nor averages. Rather, they are the expression of what is to be singled out, of the fullness and diversity of phenomena from the point of view of the science that aims at the cognition of what is essential and necessary in every single instance of human action. Sociological concepts are not derived through one-sided intensification of one or several aspects and through integration into an imminently Mises argued that the subject matter of both historical and theoretical social analysis Mises' Human Action The salient point was that not all observable human behaviours count as action. Rather, human action is a particular sub-class of behaviour. It is behaviour determined by conscious decision-making, that is, behaviour constrained by scarcity. Only as far as scarcity does

1:11:48exist does action take place. As far as it is lacking, action is also lacking. Once one has realised this, one also implicitly realises that every action involves choice among various possibilities. All action is economising with the means available for the realisation of attainable ends. The fundamental law of action is the economic principle. Every action is under its sway. He who wants to deny the possibility of economic science must begin by calling into question the universal validity of the economic principle, that is, But the necessity to economise is characteristic of all action by its very nature, but only one who has completely misunderstood the principle can do this.

1:12:34But what was the epistemological status of the universally valid theory of human action? In his 1929 essay, Mises had touched on this question only when he observed that economic theory was rationalistic in the sense that it makes use of the methods of reason ratio, And he further characterised these methods of reason as discursive reasoning and scientific reasoning. Only four years later he would make his famous statement that the theoretical social sciences were a prioristic disciplines whose validity does not depend on the evidence of the senses. The 1929 article on sociology and history contained already in news the The argument by which Mises would refute the claim of extreme historicism that there is no such thing as a generally valid social theory because the structure of the human mind was in a state of constant flux. He demonstrated that the empirical evidence offered to substantiate this claim failed to do so. Moreover, he argued that the historicist claim was self-contradictory.

1:13:40What the proponents of historicism fail to see is that even propositions like the theorems The theories of classical economics possessed relative truth for the age in which they were constructed can be enunciated only if one has already adopted a super-temporal universally valid theory. Mises also addressed the opposite error of assuming social theory could have exactly the same logical character as the theories of the natural sciences. While it is true that human action is strictly determined by external factors, the knowledge that they they are so determined is not sufficient to construct mathematical models of human behaviour. One would also have to know how these factors affect human choice, and no such knowledge was available, Mises argued. However, we do not know how these external factors are transformed within the human mind to produce thoughts and volitions directed and operating upon the outer world. We are able to ascertain this only post-factum, but in no way can we We deduce it in advance from a known regularity formulated as a law.

1:14:46A year earlier in Geltwirtstabrision und Konjunkturpolitik, Mises still maintained more empiricist notions about the epistemology of economics. Although he emphasized that some sort of theory was necessary to interpret observed fact, he at one point went so far as to assert that the The Harvard Business Barometer delivered a statistical verification of the circulation credit theory. It was therefore necessary for the social scientist to take concrete human action as the starting point of his analysis, as an ultimate given. He could not hope to determine human behaviour with any degree of quantitative exactitude. The propositions of the economist were qualitatively exact. In this argument, Mises drew on his previous Mathematics has a significance in the natural sciences altogether different from what it has in sociology and economics. This is because physics is able to discover empirically constant relationships which it describes in its equations. The scientific technology based on physics is thereby rendered capable of solving given problems with quantitative definiteness. The The engineer is able to calculate how a bridge must be constructed in order to bear a given

1:16:04load. These constant relationships cannot be demonstrated in economics. The quantity theory of money, for example, shows that, Ceteris paribus, an increase in the quantity of money leads to a decrease in the purchasing power of the monetary unit, but the doubling of the quantity of money does not bring about a 50% decline in its purchasing power. The relationship between the quantity of money and its purchasing power is not constant. It is a mistake to think that, from statistical investigations concerning the relationship of the supply of and the demand for definite commodities, quantitative conclusions can be drawn that would be applicable to the future configuration of this relationship. Whatever can be established in this way has only historical significance, whereas the The ascertainment of the specific gravity of different substances, for example, has universal validity.

1:16:57A Private Boom Bust Mises had been surprised and delighted by the failure of the general strike on July 15, 1927. What did not surprise him was the massacre that took place when the masses rallied in the streets of Vienna. One of his first thoughts This was to alert Margit Zirini of the danger, under no circumstances, should she let the children out. Margit was away during the day, however, and Mises left detailed instructions with the housekeeper. When Margit returned in the late afternoon she was deeply touched to learn how much Mises cared about her and her children. She had held him in great esteem, but in no way reciprocated the attentiveness he had bestowed on her during the two years since they had first met in Kaufmann's apartment. Red roses and expensive perfume could not conquer her heart. She just could not understand this man.

1:17:53In the first years of our relationship, Lew was almost an enigma to me. I never had seen such modesty in a man before. He knew his value, but he never boasted. I think it was the extreme honesty in Lew's feelings that attracted me so strongly to him. These feelings was so overpowering that he, who wrote thousands of pages about economics and money, could not find the words to talk about himself and explain his feeling. Fortunately actions sometimes speak for themselves. On that day, July 1927, for the first time Margit felt something like love for him and grew more open to his advances. It was the beginning of a short-lived boom in their friendship which, less than two months later, ended in In a resounding crash. That night Mises visited Margit to see if everything was in order.

1:18:45Telephone lines were down, and he had been unable to call her. He took her for a walk on the Ringstrasse where the turmoil of the day could still be felt. Only men were out. She did not see another woman. At the end of their excursion, he proposed to go dancing. When she said yes, he knew it indicated progress. Some days later he held her hand for the first time in a dance club, and on the following weekend he kissed her for the first time in a dark corner of the Prater, Vienna Central Park, like a couple of high school kids, as she would later recall. When she had to leave for Hamburg a few days later he told her that he would ask her to marry him, but that he first had to make up his mind to be a stepfather to her children. They parted with plans to to meet in Brechtesgaden, a resort town in the Bavarian Alps at the end of August. On

1:19:39August 25th, she took the train from Munich to Brechtesgaden and was happily surprised when Mises suddenly entered the train at one of the intermediate stations. They took adjacent hotel rooms in Brechtesgaden. Concerned about appearances, Mises presented Margit as his sister. They enjoyed a wonderful training period for marriage, as he would say. They They talked about the problems facing their potential union. She could not fulfil his wish to have a child together. She would have to become Jewish again to appease his mother. His mother would have to be kept out of all marriage preparations because she might jeopardise everything as she had done on an earlier occasion. We are still paraphrasing Margit von Mises's rather vague record of the events. From the phrase she would have to become Jewish again, one must infer that she had been Jewish before for Getting Married to Ferdinand Zirny, a Protestant. The phrase training period for marriage is liable to several plausible interpretations and has probably been selected for precisely

1:20:40this reason. On Sunday, September 4, they returned to Vienna when events took a fateful turn. Mises had fallen ill without noticing at first. He met her for supper on the following Tuesday, and on Wednesday he saw her again, shaken by fever and a severe headache. Given In these circumstances he would not talk about marriage. He had to have a clear head to make the most important declaration of his life, yet Margit felt she had already been waiting for quite a while and was growing impatient. She told him she would not wait a single day more and pressed him for a decision. He later wrote her of the event, Today or never, I will not allow you to postpone the decision by even a couple of hours. No loving woman talks that way. A single warm word from you would have made me happy, would have bound me to you forever. But you said no such word. You did not meet me as a loving woman but as a cold adversary. It was the greatest disappointment of my life.

1:21:46I had hoped to find love and goodness in you, and I found heartness, uncompromising heartness. I had already overcome all prior apprehensions which I have not hidden from you, because I thought true love was stronger than the difficulties that stood in the way of our union. Mises wrote this letter at the behest of Professor Adler, Margit's doctor, who had It seemed to be the end. They departed under the mutual declaration that the problems in their relationship were irreconcilable. She even returned the love letters he had written to her in Hamburg. The next morning Margit felt remorse and wrote to him, but he remained She continued to write every day without response, and a few days later finally got him on the phone. Mises reiterated what he had said on the preceding Wednesday. It was over forever.

1:22:53Not much later he must have discovered the true cause of his fever, a rare condition known as acute surgical abdomen, and checked into the hospital for surgery. On September 16th he was still in the hospital. Margit had stopped writing him, but she sought news of the state of his health from his second cousin, Streisur, the doctor of her late husband. She even prayed to God for his recovery, admitting later that she had always thought of herself as an atheist, but this emergency had revealed otherwise. Eventually she started writing him again. When he did not reply she begged Professor Adler, her physician, to ask Mises Mises to write and explain in full the reasons for his obstinacy. With this request coming from a colleague as a quasi-official request, Mises felt he had to comply. He wrote a strongly worded and unflattering letter and emphasised that he would have preferred to spare the embarrassment of reading his account.

1:23:53Margit sent the letter back, saying it was unworthy of him. At some point in late 1927 Until 1928, he started calling her again. He would not speak. He just let her answer the phone and listened to her voice, sometimes twice a day. And then one day he showed up again at her apartment, without any explanation, and they continued their relationship where they had left off in September 1927. She still waited for him to propose, but he was still are all unable to make this step. Later she wrote, Before we married, this love must have been a very distressing factor in his life, so upsetting that he knew he could fight a battle in Carpathian Alps, but could never win the battle against himself.

1:24:46Eventually she could not bear it any more. She left Vienna and went to London for work as a translator. She would return to Vienna only after she had met him again on the Thames.