A Copernican Shift

0:00Good morning and welcome to our fifth lecture in the seminar dealing with the lifetimes and work of Ludwig von Mises. This morning we are dealing with Mises' socialist calculation argument in a chapter that I call the Copernican shift. It's a reference to the complete reorientation in scientific thinking that arrived with Copernicus. As you know, Copernicus was said to be, actually he was not, he was said to be the first scientist who conceived that actually the Earth was turning around the Sun, whereas all previous people, scholars had believed, according to this account, that it was the other way around, that the Sun was turning around the Earth.

0:47Now, it's a little bit the same thing here, because Mises completely reshaped the debate about socialism And before Mises it was commonly taken for granted that socialism could work and could by and large use the same techniques of management and economic organization as capitalist economies And Mises fundamentally put this contention into question and he showed that it was not true So it's not true that we can use the same techniques and organizational procedures in the two systems. So we have here Copernican shift, and I deal with this Copernican shift in two chapters of the Mises biography.

1:34The first one concerning the publication of the paper in which Mises put forward this socialist calculation argument, a 1920 paper with the title Economic Calculation in the Socialist Commonwealth and then I have another chapter dealing with the Treaties on Socialism that he published two years later in 1922 a book with the title Die Gemeindwirtschaft, the Commonwealth, translated in English as Socialism and it is a true Treatise on Socialism. Now, since our time is limited, I'll focus heavily on this first publication, the paper, the 1920 paper, and give some intellectual background.

2:19So, we'll talk about the emergence of the paper, what were the predecessors, what was the intellectual context, Then how Mises' arguments triumphed, and they had an immediate and very strong impact on economic thought in those days. And then also explain why their impact was finally also limited, even though it was a firestorm created at the publication. The longer term impact only arised as from the 1940s when Mises could present a full picture of a socialist calculation argument. And then at the end of my talk I'll briefly, we'll see how much time will be left, I'll briefly come to talk about his treatise on socialism and point out the main contributions that he makes in this book.

3:131919, we have said the socialists suddenly were in power. Their success was somewhat mitigated from the February elections in Austria, but in other countries they had a very sweeping success. There were in fact communist dictatorships in Hungary and Bavaria and these lasted several months throughout 1919. So until roughly speaking the summer of 1919, anything seemed to go, anything was possible in central Europe. The central powers had been shaken, were bankrupt, out of funds, demoralized. The economic and political establishment was driven out of power and the socialists were in place and they could have, if they had the determination to do it, established a socialist political regime.

4:17Now yesterday we've seen that in the case of the Vienna socialists they didn't do it because they finally came to be convinced by Mises' argument This is why Mises' argument that this would be a very short-lived experience in the winter of 1918-1919 because they could not overcome the problem of food supplies, which would have lasted only eight days. But this, of course, would not have been a decisive consideration in the longer run. You wait for the spring, you wait for the summer, the harvest comes in and so on, you'll be sure to survive for a couple of weeks and even months if necessary, will be able possibly to set up your socialist experiment. So, why didn't they do it? And the answer is that they were intellectually completely unprepared.

5:05And this is something that Mises first underscored, but he was not the only one. Later historians, be they sympathetic to Mises' cause or be they socialists, underlined exactly the same point. The socialist leadership of those days was intellectually unprepared for the challenges it was now facing because the great question was, okay, not only how do you socialize? Well, this might be simply a matter of the will and a technical question. You just abolish private property in the means of production. You say now the government is the representative of the nation as a whole, The nation as a whole or society as a whole is from now on the only owner of all factors of production, of all production sides and so on.

5:52That's one thing, but then the question is how do you manage actually the socialist economy? How do you run it? According to what are your criteria to make production decisions, that is setting up new plans for example or shutting down old plans, extending production to its extent and so on. Why this unpreparedness? Why did the socialists not care to address in previous writings, in previous reflections, this rather obvious question? The answer is that Karl Marx himself had shut down any discussion of this question as unscientific.

6:39You have to remember that Karl Marx proposed a thesis that socialism was not a question of the will, the advent of socialism was a matter of natural law. Marx thought that he had understood the laws according to which which the social world transformed itself in the course of time, the historical laws of change of human society, and according to these laws it was a matter of necessity that one day or another socialism would just arrive. And since this was completely independent of the human will, well it was just completely unnecessary and even small-minded to raise the question, how this would work, well, it would simply be there at some point and then, well, people would know how to run it.

7:30Okay, and the most plausible scenario that he gave was, of course, that, well, you have an increasing concentration of production, monopolization tendency in capitalism, creation of ever greater monopolies, until at the very end, you just have one monopoly, One firm running the entire country, and then you just topple the management of this firm by the government, representative of the proletariat, and you just do what they always did before. You just go on pushing on the same buttons and so on. That was about the most plausible scenario that Marx would offer. Now, whatever the legitimacy or pertinence of this point of view, in any case it was not at all the situation that the socialists in Central Europe confronted in 1919.

8:21There was no one big monopoly running all the country. There were still lots of firms, there was still a market economy, despite the centralizing tendency of the boy economy. Decision making was to a very large extent still decentralized, and whatever the pertinence of the Marxian precept might have been, well, it could not be directly applied. And the socialists did not have an answer either. Otto Bauer did not have an answer, Max Adler did not have an answer, and Karl Kautsky, the number one theoretician and prime authority in all questions Marxist, In this context, in the fall of 1919, Mises writes his paper on the problem of economic calculation, which was meant to be a part of his new treatise on socialism.

9:26He must have started working on this directly after the publication of the previous book in which he analyzed the causes of World War I and the further consequences of the book with the title Nation, State and Economy. I have in the Mises biography a chapter dedicated to this book. I completely neglected it in the seminar. Well, simply we cannot do everything. So there is, after all, a reason for those of you who find this stuff interesting to buy the book and read the chapter. So in any case, I might say that in this book he anticipates several of his main thesis that he develops more fully throughout the 1920s, but we'll leave it at that.

10:16So he publishes this book in the summer of 1919 and supposedly he must have started working on his treatise on socialism immediately thereafter. And the way he does this was work in the evening and night hours. He is after all a full-time day job at the Chamber of Commerce, teaching a seminar, his various obligations as a member of the government. and so the only time left to write any such thing is in the evening hours. So now we can in retrospect say, well, thanks be to God that Mises was not married and had children and so on because this would not have left him any time to do it. So he returns home and well, he's still full of energy and sets out to write.

11:05Think and write, well, whatever, four, five, six hours sometimes into the night and then finally creates a treatise of some 500 pages in the course of two years.

11:22He had a good incentive to hurry up with this work because there was another slight chance that he might obtain a chair of economics at the University of Vienna and the University of Vienna, because Friedrich von Wieser was up to retirement, he was up to retire in 1922, so if Mises by then could have published a third book, a major book, this might have greatly increased his chances, and in fact he managed to publish this book just at the time when Wieser retired and there was therefore this opening, but it didn't help him, he was another person who got the job, who had not published even a single book at this time, Well, this might be injustice, but that's how things are still today.

12:09So in a nation state and economy, Mises had laid the groundwork in a way for the argument that he would now develop more fully. First of all, he had discussed the traditional argument brought up against socialist experiments, Supplements, namely that it would greatly diminish the incentives for people to work and if you are paid according to your needs, everybody should work according to his abilities and be paid according to his needs and of course the incentive to work is not very great because you are paid according to your needs. The needs remain whether you have worked hard or whether you have been sloppy.

13:00Now the socialist responded to this, that in a socialist society things would be completely different. Incentives would no longer be what they were before. Suddenly there would be a joy of work. Work would no longer be a nuisance, no longer be bearing on the workers, but would be joyful, because now finally they would not work for somebody else, for the evil capitalist, but for themselves. They are all co-owners and now they enjoy exploiting the full potential of their work. Now, Mises retorted to this rather dryly that if ever there was such a society in which people had a very strong collective identity and were ready to sacrifice themselves for the common cause, this was Germany under Bismarck.

13:53and now Mises observed, well even in Germany it did not work and he had the fresh experience of the war years and in fact if you, I encourage those of you who are interested in these things to read good accounts, detailed accounts of the German war economy in World War I in World War I and it was great effort, goodwill on the side of the overwhelming majority of the population to support the government in its activities. Just to give you one example, the Germans contributed voluntarily and speedily to a gold collection to prop up the gold reserves of the central bank.

14:39Okay, so whereas in all other kind of, typically when you create a paper money which was done in Germany at the beginning of the war to finance the war, you thought well all people hold back with their gold, they hoard their gold coins because they know well the gold coins will now only be worth the same thing as the devalued paper. In Germany it was the opposite that happened, the people now readily delivered their gold to the central bank and this was not compulsory, was just a voluntary collection and people did this. There was some imposition of this legal obligation to surrender one's gold, but only at the very end of the war, 1917-1918. So in the first two or three years of the war, the people were happy to give their gold to the government.

15:28So you have, in a way from a psychological point of view, You have the ideal population that apparently epitomizes the socialist ideal man as a collectivist mind. And now Mises says, even with these people, unheard of phenomenon in the history of mankind, it did not work. They just ran down the economy, or as I've quoted him yesterday, they organized defeat. Then second, he brought up a very different consideration and it is this consideration that he would fully now develop in his new paper. So in Nation, State and Economy, he pointed out that monetary calculation also, as he said, value calculation has a very important role to play in allocating factors of production, that is allocating capital goods.

16:22or still, in other words, in organizing production. This problem, Mises pointed out, did not exist in a static society. That is, in a society in which all things would simply repeat themselves from one day to another. It's always the same routine that's going on. Here you would not need necessarily something like value calculation because you would simply repeat what you did the day before. But things are very different once you have a dynamic economy, that is an economy that is subject to change. Here, factors of production are used up, they are destroyed in the process of production, and the new production processes that you launch are not necessarily repetitions of what you did in the past, it's sometimes something new.

17:11So how do you know which production processes are more important than others? We still have the problem of scarcity. We still need to decide out of the uncountable production possibilities, the uncountable production projects, that we could realize which are the ones that are here and now the most important ones. How do we know? And here it says, well, value calculus comes into play. It delivers us a criterion to decide which production projects are more important than other ones. So we have an ordinal ranking of production projects and we can cut short within the constraints of our budget. We realize only the most important ones.

17:57Now he presented his new paper in early January 1920 in a talk at the Nationalökonomische Gesellschaft, the economics club that he himself had set up already before the war which now involved no longer the students that they were before but established scholars. And here, he first stressed this point again, economic calculus is vital for factor allocation. And there, by and large, there was no disagreement between him and his audience. Well, who was the audience? His friends, as I said, well, it was not only friends, not only buddies, but good acquaintances, people who would respect one another. And they were either interventionist or outright socialist.

18:48So, by and large, that was the audience. It was next to him, no classical liberal in this club. Now, but then Mises made two, proposed two central points. First, you know, argued that socialist societies cannot rely on economic calculation in the same way as capital societies can do this. Why is this so? The calculus that we perform or that a businessman performs relies on money prices. And what he essentially does is to compare the spending streams, that is the selling receipts that he obtains for his products to the cost expenditure that he makes on factors of production.

19:50Let's say he has two investment projects, the first one he obtains $120,000 and he spends $100,000 In the other one he obtains $130,000 and he will have to spend $100,000. So the first one he obtains then 20% return on investment and in the second one 30%. So he has a criterion to compare these two action alternatives. So that's the essence of the economic calculation. But obviously it relies on previously existing money prices, strictly speaking not previously existing but potentially existing money prices because your comparison is run in terms of money prices. This is what makes heterogeneous goods comparable.

20:42The products resulting from the first production process may be milk and the products resulting from the second production process may be a concerto. These products are physically heterogeneous, you cannot compare them. The factors of production needed for the two of them are different too. In order to produce milk you need among other things cows or maybe goats. And in order to produce a concerto you need musicians, so training for musicians also. Instruments, that's not the same thing as cows, so you have heterogeneous, physically heterogeneous economic goods. You cannot compare them in terms of a common unit in a water economy, but you can compare them in terms of money prices.

21:31Now, why is such a thing not possible in the case of a socialist economy? Well, because in a socialist economy you have by definition only one owner of all means of production. All factors of production are owned by the government or by society if you wish. But if there is just one owner, then there can be no exchange. There can be no exchange. There cannot be exchange against one another. And if there is no exchange, then obviously there is no money price. So in such an economy, only consumer goods could, at the very best, have money prices, but not factors of production. As a consequence, you cannot compare the prices for consumer goods with the prices of factors of production because the latter do not exist.

22:23And as a consequence you can also not compare the profitabilities of different investment projects. So the thesis holds, in a socialist society one cannot rely on price accounting as one can in a capitalist society. Now comes thesis number two, and Mises says, well, and there is by the way no other way to perform economic calculation. You cannot perform economic calculation in terms of labor units, for example, because, well, first of all, there are other factors of production besides labor. And second, labor is heterogeneous too. You cannot compare the precious work of Richard Perry with the meager services of Matthew Mackay.

23:14It's not obvious how you could compare them, it's not the same thing. So we don't have an homogeneous unity, you cannot perform an economic calculus. Okay, so now Mises has proposed a fundamental challenge to all those who want to run, want to manage a socialist society. If his argument holds true, then we have a fundamental problem here that has nothing to do with any psychological disposition or incentive problem as it had been traditionally stressed by the 19th century classical liberals. Still it would hold true that people have incentive problems, or maybe they have not, or maybe it's in fact true that there would be a new socialist man, But even if there were a new socialist man full of the best will and ready to sacrifice himself entirely to the common cause, even if he were imbued with the Holy Ghost and were angel-like, moving through the economy, he could not calculate.

24:20So we have the fundamental criterion that is taken by both socialist and economist to be the embodiment of economic rationality does not exist in a socialist society. What was the intellectual context of this argument? What Mises' thesis amounts to is in fact a refoundation of the theory of production along completely new lines. If Mises is right, then at the center of the economic theory of production, how things are being produced, is the theory of economic calculation. And in fact, that's exactly what he will explain in Mordita in the 1940s when he publishes his treatises of economics.

25:12Both national economy and the English language successor, Human Action, have the same structure. Mises first deals with human action in a world without market prices. First, human action even outside of society, isolated human action, then human action in society but not yet with market prices. And then comes a third part in the book in which it deals with the theory of economic calculation. And only once we have dealt with economic calculation can we meaningfully talk about the market economy. Because the distinguishing characteristic of a market economy is the possibility to calculate. and then you can go on and discuss other forms of social cooperation like interventionism and socialism.

26:04But doing so, this new approach to the theory of production fundamentally contradicted the prevailing wisdom at the time which was embodied in John Stuart Mill's dogma that production and distribution were two completely disjointed economic problems. The distinction between production, distribution and consumption goes back to Jean-Baptiste Say, I suggest this division, but Say had not necessarily believed that you could separate these things for pedagogical exposition.

26:51That does not mean that they are completely disjointed phenomena. That's what Mill claimed. Mill said, in fact, we have here separate problems. I will quote for you from John Stuart Mill. He says, It is evident that of the two great departments of political economy, the production of wealth and its distribution, the consideration of value has to do with the latter alone. It is only with distribution. And with that only so far as competition and not usage or custom is the distributing agency. The conditions and laws of production would be the same as they are if the arrangements of society did not depend on exchange or did not admit of it.

27:43So, value theory, price theory also, concerns only distribution within a market economy. does not even concern distribution in a socialist economy or whatever other economy there might be and it has nothing at all to do with production. Production is a purely technological problem that would therefore be addressed in exactly the same way in a market economy as in any other type of economy. Now this was also the prevailing wisdom in Austria, in particular in the work of Frederic von Wieser, about whom we have already talked and who will still occupy his IAS tomorrow.

28:31Only Wieser was original in that he turned Mill's scheme upside down. These are agreed with Mill that the two realms of production and distribution were completely separate, but he argued that value theory concerned production, and that in fact it was a universal theory concerning production in any type of social organization, socialism and capitalism. Whereas distribution had nothing to do with value whatsoever, distribution could occur according to virtually any criterion, exchange of property rights in a market economy but also subsidies being paid out of a common purse in a socialist economy and so on.

29:19So, value theory is a truly universal theory of production and it is truly in terms of value that the economic calculus is being performed, not necessarily in terms of money. Money is just one particular case. Money accounting, money price accounting is just one particular case of value calculus. Now this prevailing wisdom had come under attack from the young Russian Marxists by the name of Nikolai Bukharin. Bukharin later on became the chief economist in the Soviet Union and he was in the early 1900s a member of Boehm-Bawerk seminar.

30:10He wanted to inform himself first hand about the doctrines of the Austrian School. And Bukharin then published a book in which he criticized the Austrian Value Theory. And the title of the book is, I believe, the economic theory of the leisure class. The economic theory of the leisure class, that's the English title. Here, Bukharian argued that value theory is not universal. As a matter of fact, it is not universal because the market prices being paid in a capitalist economy did not just depend on available quantities and human needs.

31:03They also depended on lots of contingent factors such as property rights and so on. So this value theory and obviously production did depend on the prices as they existed on the market because the prices would determine which products are profitable and which are not. Now, Mises' position created a new synthesis that included parts of the Bukharian critique, but reformulated it from the point of view of his insights about economic calculation. We can summarize Mises' position in three points. First, calculation is indeed historically contingent.

31:52So on this point he sides with Bukharin. It's true that value theory, at least in the formal, let's say the economic calculation, Economic calculation is not something that can be universally applied to all forms of social organization, but is constrained by the presence of a system of private property rights and factors of production. Only in such a system can we perform economic calculation. And of course, such systems do not exist at all times in all places, they only exist at certain times. In certain places, they are historically contingent as the cultural factors that come into play that make for the presence of these conditions. Second, and contrary to Bukharin, this does not play out against capitalism, but it plays out against socialism and the socialist theories.

32:50Precisely because economic calculation is historically contingent, it means that an efficient social organization depends on these contingent factors. It depends on the presence of private property rights for means of production. We cannot have economic calculation where these conditions are lacking. Third, Milt's dogma is wrong. Milt's doctrine of the separation between distribution and production is wrong. It's precisely because production decisions depend on market prices and because therefore production is higher in a capitalist society in a socialist society than it could be in a socialist society, that also distribution will be different, will necessarily be affected.

33:43And the distribution in turn cannot fail to affect production, because depending on the distribution of income, people will spend their income on different items, is they will affect the market prices differently.

34:04Mises' thesis, Mises' socialist calculation argument, relied quite essentially on a certain vision, a certain clarification of value theory as he had proposed it in his theory of money and credit. Now, this is somewhat surprising because this was supposed to be a book dealing with money and banking and Mises also deals there with value theory. Now, how is this? Well, recall what I told you yesterday. Mises himself tells us in his autobiographical notes and recollections The book was conceived to be already a treatise of the monetary economy, presupposing a detailed analysis of a non-monetary economy or a barter economy.

35:00From the outset he planned a treatise of economics, but he didn't have the time to do this, therefore he concentrated only on the monetary aspect. But still he did very briefly, very concisely in the first part of the book what was meant to be dealt with more fully if he had had the time to do it. So among other things he dealt with value theory. Why did he deal with value theory? Well, because he was not happy with the present state of value theory at the time. He could no longer fully endorse the value theory as it had been proposed by Menger and Boehm-Bawerk. So what was the crucial point?

35:46The crucial point of departure was that Mises conceived of value as a comparative phenomenon. phenomena. It's a relation if you wish. This point was present in Carl Menger's analysis of value and of marginal value in particular, but not in Carl Menger's definition of value. Carl Menger defined value somewhat in deviation from his actual analysis of value. In Menger's analysis of value, value was conceived to be a substance. The precise nature of which was not clarified. Now, Mises in The Theory of Money and Credit tells us that value is not a substance but a relationship.

36:34It concerns the relation of priority between different choice alternatives. So, value is ordinal, it is relative, a relation, it is not a quantity. Mises had emphasized these heterodox observations and then went on to define value as being inextricably bound up to human choices. Now comes a quote from The Theory of Money and Credit. Every economic transaction presupposes a comparison of values, but the necessity for such a comparison, as well as the possibility of it is due only to the circumstance that the person concerned has to choose between several commodities.

37:21That is, now value is bound up with choices. It does not mean that value is a matter of choice. We can by our choice determine what the objective value of things is, but value can only be defined in the context of a choice. With these lines, Mises sets the Austrian theory of value on a completely new trajectory. Carl Menger had resolutely rejected the notion that the phenomenon of value could somehow depend on human choices. He believed that any reference to free will in this context, quote, would deny economics altogether the status of an exact science, unquote. So for Menger, as soon as we bring human choice in, we are in the realm of arbitrariness.

38:11It can no longer be an exact law. Law for Menger was something, social law had to be something independent of choice. He therefore stressed the will-independent factors determining the pricing process. Market prices, according to Menger, resulted ultimately from individual needs that had to be satisfied with scarce means. He realized that human beings had to have, quote, knowledge of this causal connection, unquote, between means and ends. But he paid scant attention to the subjective factor. In Menger's account, the theory of value and prices was a subdivision of some sort of a platonic theory of goods.

38:58With Mises, it became part of a reality-based theory of human action. Now, as you can imagine, you have a young writer making these points without any in-depth discussion, just stating these points in a book supposed to be dealing with money and banking. Okay, and imagine what the impact of these observations had been on the profession at the time or those interested in economics. Well, those who respected Mises certainly respected also this point and paid attention to it, but for most people this must have been the idiosyncrasies of a young economist aiming to be original.

39:54So they were not common knowledge at the time he wrote his paper on economic calculation in the socialist economy. But in fact his argument quite substantively relied on this thesis which he had developed or which he had stated in The Theory of Money and Credit. Now this explains why the impact of his new argument proved to be limited before the war. I'll come back to talk about this later. But now let's first talk about the triumph of his thesis. Because Mises' thesis had a huge impact, especially once he had presented it, he had presented this paper within his general treatise on socialism, which was published in 1922.

40:42In fact, Mises was independently confirmed by three sources and unexpected sources. was not part of his professional network as we might say today. The first confirmation came from Max Weber, who was a great authority in social science in the Germanys in those days, that is in the world in those days. Here we have a photo of Max Weber as a young man, still in the 19th century, Max Weber had died at a relatively early age in 1922, and in the year of his death, presumably, his friends published his magnum opus, with the title economy and society, so Wirtschaft und Gesellschaft.

41:37And here Weber made exactly the same point about the impossibility of socialist calculation that Mises had made in his 1920 paper. And in fact his book, Economy and Society, quoted Mises' paper saying that in the meantime, So, apparently Weber had independently arrived at this conclusion. There are, however, reasons to question this. It's the following. Mises knew Weber, so they had met one another in the summer semester of 1918, when Weber had come to Vienna and gave various lectures at the University.

42:25and in the course of his sojourn in Vienna he met with Mises and they in fact befriended one another and so we must assume that they discussed various points of common interest, among them value theory. And so at least it's conceivable that Mises brought up his observations already on this occasion and then Weber simply added one point to another and came up with very similar conclusions. And this scenario is plausible for another reason, namely the following. In one of his lectures in 1918, Weber talked about the socialist state or the socialist economy.

43:11This lecture was later on published. It's a 50 or 60 page lecture. and here he talks about various aspects of the problematic nature of a socialist economy but not about this one. So by then Weber for one either neglected this point which is implausible or more plausibly he was just ignorant of this aspect. So we can plausibly argue that probably Mises had an influence on Weber on this occasion. But anyway, what was important for the success of Mises' argument in the early 1920s was that Weber made exactly the same point.

44:01was not just this young economist from Vienna, well at the time he was already 41 years old, but it was the great authority of the historical school, Max Weber. Mises was also confirmed, although this did not pertain, this did not have an impact on the German debate, by a Russian economist of the name of Boris Brutskos. Boris Brutskos also was more or less directly influenced by Mises in the following way. When Mises published his book Socialism, three Russian Marxists responded with critical reviews to this book in a Russian paper, in Russian.

44:54So Mises wasn't aware of these publications. And then Brotskos saw these and then went on to defend Mises' thesis. So Brotskos hadn't read socialism at the time, he just read the critiques of Mises' argument in socialism. And he would then more fully develop the argument which was not present in the critiques that had been published by these Russian Marxists. So we come then to a second important confirmation of Mises thesis, and this was a rather unexpected one, namely a practical one, in the form of the new economic policy introduced by Lenin in Soviet Russia as from about the same time, 1922.

45:44Okay, so Lenin first had pursued a radical program of socialization, abolishment of private property in the means of production, and then in the early 1920s he completely changed orientation and he reintroduced private property, in particular for agricultural production but also for various other things. So what could be more striking than this practical empirical confirmation of the thesis that Mises had made on rather theoretical grounds? But then third and most importantly came a confirmation from a theoretician, let's say from a scholar in a completely unsuspected camp Camp, namely from Heinrich Herkner, H-E-R-K-N-E-R, the successor to Gustav Schmoller. Gustav Schmoller had died in 1917 and Herkner was his successor, both to his chair at the University of Berlin, but also as a president of the Verein für Sozialpolitik, the Association for Social Policy. So Herkner in 1922 at the 50th anniversary meeting of the Association for Social Policy pointed out that there were exaggerations in the belief in statism, that the young economists no longer knew the case for free trade, that

47:19They were ignorant of theoretical economics and all this was bad. And he went on to praise a new literature that had emerged and that seemed to furnish a promising new point of departure.

47:37I will quote what he said about this new literature. Here is what he said. He urged his colleagues to thoroughly examine the ideas of these new theoretical economists, stating, We encounter by far the most important performance of this line of research in the brilliantly written and inspired work by the Vienna economist Ludwig Mises, Die Gemeinswirtschaft, With full command of the most recent scientific achievements and partly on the basis of new points of view, the author quite devastatingly criticizes all variants of socialism and everything that he considers to be socialism.

48:27Now this took Mises' book from the limited exposure of the ivory tower and made it infamous throughout the socialist movement. The unheard of concessions and even praise for one of the hated theorists caused outrage in the labor unions and angry reassessments of Hergner's position in official socialist circles. Yet Hergner's authority also forced the German mainstream economists to re-evaluate their cherished scientific and political tenets. The influential Heinrich Pech recognized Mises as the head of a new Manchesterism. He explained, because of his clever and original critique of socialism, Mises has met with regard and approval even among those authors who, in distinct contrast to him, advocate the legal protection of children and women and compulsory workers insurance.

49:31So, this was a sweeping success and Mises was suddenly in the limelight of the attention and as I will argue more fully this afternoon, we have here the beginning of a first Mises revolution. The Mises Revolution and economic thought limited in those days to the German speaking world. And this strong impact that Mises would have would make itself felt at an accelerating rate in the late 1920s and early 1930s. And it was stopped only by the ascension of Hitler to power.

50:19From then on, of course, Mises was on the blacklist of wanted men and his works were on the blacklist of the books to be taken out of libraries and so on. So this stopped it and that's how things would remain until a second Mises Revolution would set in in the 1950s, subject of our last talks on Friday. Now, but even in the 1920s, this Mises revolution was incomplete. He had proposed at the heart of his new approach was the distinction between value and price. Of course, that's the traditional Austrian distinction that Menger had made, that Boehm-Bawerk had made. But Mises now set out to emphasize the implications of this distinction for economic calculation.

51:13And the important phrase here is he set out to because it was not yet clear in the early 1920s. It was clear in the 1940s, so I'll quote for you so that we have a standard of reference. I'll quote for you what he said in 1949 in Human Action. He said the following, One can add up prices expressed in terms of money, but not scales of preference, that is, value scales. One cannot divide values or single out quotas of them. A value judgment never consists in anything other than preferring A to B.

52:03There's nothing to be added up, to be subtracted, to be multiplied with, because it's a relationship, it's a preference relationship. You can add up, subtract, multiply only extended units such as money prices. So Mises went on. The process of value imputation does not result in derivation of the value of the single productive agents from the value of their joint product. It does not bring about results which could serve as elements of economic calculation. It is only the market that, in establishing prices for each factor of production, creates the conditions required for economic calculation.

52:49Economic calculation always deals with prices, never with values. Okay, so we retain this last sentence. Economic calculation always deals with prices, never with values. This sentence sums it all up, but that's 1949, and we find a similar sentence in this 1940 German predecessor. But in 1920 and 1922, he did not put matters that clearly. So in these early works, he even uses formulas such as value calculation and calculation of value.

53:34Now that's very confusing, because readers must have inferred from this that he was in fundamental agreement with Wieser's position. There is such a thing as a universal value theory that applies to all production processes and so on. It's clear why his thesis could not have the smashing impact that it would have much later once it had been formulated clearly. So Mises' impact in the 1920s and 1930s was limited because he himself was not quite clear on these issues. It had a very thorough impact only as from the 1950s because by then he had formulated his mature expositions of the theory.

54:19Now, let's come to talk a little bit about his treatise on socialism, a book with the English title socialism, which had a great impact on the rising generation of economists. of Economies. You can read various luminaries of the post-World War II classical liberal movement, the Renaissance, who said that the book had a decisive impact on their intellectual development. This is of course most notably the case of Friedrich August von Hayek, about whom we will talk this afternoon, but also William Röpke, Lionel Robbins, Fritz Machlop, various others.

55:07So it's a very important book and a true treatise, Mises delivers a comprehensive systematic analysis of all aspects of socialism. He elaborated four general thesis. First, the promises of socialism were empty, because its program for a central direction of production was a theoretical and practical impossibility. So that's an elaboration of his 1920 paper. Second, there was no process of social evolution that necessarily led to socialist regimes. is something that he had not addressed in the 1920 paper, which confronted head on the Marxist thesis that there were laws of social evolution that by necessity of natural law led to a socialist state.

55:59So Mises explained that's not true either. Socialism might come, but it will not come by natural law. The future is open. Third, none of the major ethical justifications of socialism stood up to rational scrutiny. In this concern, in particular, the vindications of Christian socialism, a new intellectual movement that had arisen as from the middle of the 19th century. Fourth, the true character of socialism was not to improve the human condition, but to worsen it, because socialist policies destroy the capital base of society.

56:45So socialism is the same thing as destructionism. That's what it is. wartime socialism organized defeat, socialism in general destroys capital, therefore it destroys civilization. Now I'll present to you a short list of ten major points that he argues in socialism, ten original points. First, so I mean the four points that I presented before, these were the general parts of the theory, the general headings, the general four thesis, but there were ten original tenets or new ideas that Mises proposed in his argument.

57:38First, he explained that the benefits derived from means of production under capitalism do not accrue only to capitalists but to all members of society. That is the common presentation by socialist authors that private property in the means of production is beneficial only to the haves, not to the have-nots. is a misrepresentation of fact, because if you own a machine or a factory, well the fact is you cannot consume, you cannot eat or otherwise enjoy this machine or factory, you only benefit from it to the extent that you benefit from the products that are being made with these factors of production.

58:28Now the beneficiaries of these products are of course all members of society, It's not just those who own the factors of production, or quite to the contrary, we would have to say that especially in the case of mass production, we produce cars for example, it's not Henry Ford who was the main beneficiary of his product, it was all the consumers of cars, all the users of cars who were the beneficiaries, who then paid him in exchange. Second, Mises made a utilitarian case for democracy. He argued that one could not defend democracy in the light of moral considerations, For example, considerations that were based on natural law conceptions, because Mises did not believe that there could be signs of morals or signs of natural law.

59:33For him, these were just expressions of judgments of value, of personal preferences. There were no matters of fact to be established in these fields. Therefore, there could be no signs of natural law. There could be no signs of ethics. So, if ever there is to be made a case for democracy, it would have to be based on a consideration of fact. Now, Mises proposes the following argument. He says, well, it is in the common interest of all members of society that production be as efficient as possible. Now, one fundamental presupposition of production is that social relations are peaceful. You cannot very well cooperate with your neighbor if you are at the same time slapping yourself on your head or shooting yourself.

1:00:21That's not much of a cooperation. So the question is, how can we ensure that social relations remain peaceful? What are the main occasions for unpeaceful social relations? Well, there's crime, but as far as social organization is concerned, well, it concerns the choice of government, and the choice of a political system. People have different preferences. So how can we avoid that these different orientations or preferences lead to war, lead to conflict, lead to violent conflict? Well, here he says democracy comes into play. What democracy does is to assure a peaceful transition from one government to another and conceivably also from one political system to another.

1:01:11pacifies social relationships. Third, Mises proposed an original economic analysis of the family, the political economy of the family and it did so in order to counter the feminist claim that marriage was a vestige of power, a vestige of exploitation of females. There was an analogy between the argument of these radical feminists and the socialists that Mises perceived very clearly. The analogy is the following. Marx, for example, had praised capitalism as the system that unfettered the productive forces of society.

1:02:04But, said Marx, there is still a constraint in capitalism, namely private property. We can unfetter the productive forces even more if we get rid of private property. We can increase liberty and therefore also productivity even more by getting rid of this last vestige of domination. Now, the feminists argued by analogy. They said, well, the lot of females, of women has improved in the course of time, but there's still an ultimate barrier that still exists, that still hampers the full emancipation of women, which is marriage. Marriage enshrines male domination over females.

1:02:50And now Mises argues that that is not the case because women, after all, are free to choose whether they get married or not. Now it might be true that in marriage they cannot fully exploit their productive potentials and so on, but the question is why do they get married at all? And he says, well, there are positive reasons why females tend to get married. And that is Mises' argument, because they seek family life, they seek to be mothers, and they seek sexual union with men. Now, he might be wrong on this, that's not our subject.

1:03:35So the point is, he raises the fundamental fact, is that women are free to get married. Especially today, if we all know, clearly nowadays, women are free to get married, there is no obligation to get married, so why do they do this anyway? So there must be a reason, there must be some benefits that can be derived from marriage, and Mises simply points out, delivers an explanation of what these benefits might be. In any case, it's not true that we should come with the government, that is with the law, and prevent females from getting married as it was proposed by the feminists. There is no justification of this. Fourth, Mises points out several further implications of the socialist calculation problem.

1:04:26For example, the concentration of the ownership of means of production makes for tyranny, government tyranny within society necessarily leads to totalitarian government. And secondly, he also points out that the incentive problem that necessarily results from distribution according to one's needs, not only concerns labor, but it also concerns capital, because just as there is no longer an incentive to work, or a diminished incentive to work, there is now also a diminished incentive to save. In a capitalist society I have an incentive to save because I'm rewarded in the form of interest payments or possibly profit.

1:05:17In a socialist society this no longer exists. So why should I save? Why should I not consume all economic goods that I can control? But if this incentive exists then of course the capital base must shrink and as a consequence real wage rates must shrink as well. Fifth, Mises now discusses a second basic problem of any socialist economy that he holds to be at least as equally important as the socialist calculation problem. problem. And this problem is the problem of moral hazard. He does not use the word moral hazard, but he describes the phenomenon of irresponsibility or irresponsibleization that results from common property. So if each plant manager were no longer the owner of the plant that he manages, If there were no owner at all of the plans that are being managed, well then each manager would just go ahead and do what he wishes.

1:06:30He would not bear the negative consequences, there is only a very small part of the negative consequences that would result from that choices. So the only way to prevent this, as Mises points out, is to impose a systematic set of rules on all those who make management decisions. They must be prevented from being irresponsible. Their actions must be channeled into certain lines that are conceived to be less hurtful to the common interest. In other words, socialism, common property, necessarily leads to bureaucracy. It almost forces the government to follow up the creation of common property, the abolishment of private property rights, to follow up on this with the creation of large bureaucracies.

1:07:26and the creation of large bureaucracies. Economic management can no longer be free and responsible. It must be unresponsible and therefore constrained by rules. So we have here a theory of bureaucracy, an economic theory of bureaucracy. Sixth, Mises delivers an in-depth critique of John Stuart Mill's analysis of wages. We already talked about John Stuart Mill, the gentleman in his old age.

1:08:16Ah, a little bit better, but not really. Anyway, so Stuart Mill, the most famous representative of classical liberalism in the 19th century, And well today it is generally acknowledged that Mill also paved the way to socialism on theoretical grounds. But Mises was one of the first who pointed this out. Mises was one of the first who led the reaction. It was a critical revision of Mill's doctrines. And one of these doctrines, well we already mentioned the dogma that production and distribution are separate realms.

1:09:06But there was also another unnecessary concession that Mises, that Mill had made to socialist theoreticians, namely the concession that wages being paid on the market do not necessarily correspond to the productivity of the employees. So Mises explains that this thesis is unwarranted because there can be weight classes for different weight earners that they would always have an incentive to work as hard as possible to get promoted to the higher paying class.

1:09:59So it was not the case, as Mill has argued, that similar incentive problems would exist in capitalism as they exist in socialism, because people would be paid just according to a formula that was fixed before, according to the time they work, But not necessarily according to the amount of work that they get done within the time for which they are paid. So Mises argues that there are different pay classes and you have an incentive to be promoted to the next pay class in which you receive a higher payment. Seventh, Mises argues that there is an economic incentive for society to emerge.

1:10:47So he proposes a theory of the emergence of society and at the heart of this theory is a law that David Ricardo had developed or discovered in the early 19th century and which was later called the Law of Comparative Costs. So Ricardo had explained why is there trade between nations of unequal abilities, unequal resources. So he took the example of one country that was superior to another country in all respects. It could produce all things more efficiently than the other country. And then he explained that still in this case there would be trade. because to the extent that the superior country was not equally superior in all respects, but that it would be much more superior in certain production processes than it was in other production processes.

1:11:47Then still there would be a scope for a fruitful division of labor. The implication is that we never have to fear, and that's the implication that Ricardo drew. We never have to fear superior nations, as I always explain to my students in France who might be frightened through the press, we get inundated by Chinese goods and very soon we won't do anything at all anymore, there won't be any more labor and we'll all be on the streets and playing with Chinese dolls and so on. Now that's not the case, it's actually quite great for us that the Chinese are so productive are so productive and they are doing all these things that we had to spend our time producing in the past, so now we simply do other things. There are certain things that even the Chinese don't have time to do and we should do these things and use our special conditions as they prevail, our knowledge and our geographical conditions and so on.

1:12:46That's the common task. If you don't want to do this, well, you're simply lazy. You're just not a born entrepreneur. That's not a reason to step into the way of entrepreneurs who want to do this. Okay. Now, so Mises, what Mises did was to point out that this law actually holds true not only to exchanges between countries, but to exchanges between any two individuals. Now before him there were other economists who had pointed out the same thing, most notably Wilfredo Pareto and Edgworth. Pareto Etchworth and Seligman in the United States. So all three of them had realized that Ricardo's argument holds true, in fact, for any exchange.

1:13:38But none of them had, as Mises did, drawn the general inference that what we have here then is an economic theory of socialization. An economic theory that explains why people do cooperate. It's the last building block in this theory that explains to us what are the economic incentives that bring people together, that incite people to cooperate. Even if they would be indifferent to one another for other reasons or even hate themselves, for other reasons we have here an economic factor that explains why they would still cooperate or at least have an incentive to cooperate. So we have here a general law of association, that's how he called it, a law of association. The eighth original contribution that Mises made in his argument was to develop a systematic and encompassing theory of monopoly.

1:14:33And we don't have the time now to present this, but I'll just point it out, Mises' analysis was painstaking and original He argued in particular that there was no tendency, empirically it was not the fact that there was a tendency for industrial production to become monopolized. And the only meaningful sense in which we can speak of monopoly is a situation in which it would be worthwhile for the producer to cut back production because he could receive still a higher income. Notably that's the case if the demand curve has a certain slope that is sufficiently steep.

1:15:22If you cut back production, then the price will sufficiently increase, so that what you lose in volume, you gain in price. So you can increase your revenue beyond what you would otherwise have obtained, which implies that there is some sort of a perverse incentive, according to Mises, for the producer in this case to cut back production, whereas the general tendency in the market economy, in a competitive market process is for everybody to increase production, to maximize its productive efforts. Now, Mises' analysis is very subtle, because he realizes he doesn't fall into the trap into which virtually all modern textbooks fall.

1:16:12I mean, they make the same argument. They say, okay, now this proves, therefore, that we have an overall reduction of production. Mises does not say this, he says, okay, the fact that this entrepreneur will now cut back production implies that factors of production are liberated for other production processes. He doesn't hire as many workers as he would otherwise have hired, he doesn't work himself as much as he would otherwise have done, he doesn't use as much capital as he would otherwise have used, all while increasing his revenue, but that only means that these workers and this capital is now available for other production processes. So what we lose in this market, in which the demand curve has a certain shape, we gain necessarily in other markets.

1:16:59So from a physical point of view, I cannot say whether there is an overall increase or diminishment of production. But Mises then says, there is still a welfare reduction because without this demand curve, the production would have been increased in this first industry. and only in this sense there is an overall diminution of welfare. That's a point that I will point out here and you can read this in detail in the biography because it's generally overlooked.

1:17:47He later said in correspondence the following. I deal with the extension of production that eventually must result from the liberation of nonspecific factors of production, formally bound up in the production of the monopoly good. I explain that this extension of production can only concern less important goods, of course, from the point of view of the consumers. of the Consumers. They are less important because they would not have been produced and consumed if the more pressing demands for a larger quantity of the monopolized commodity could have been satisfied. And then he goes on to say, there is no proof for the welfare reducing effect of monopoly prices other than the one I propose.

1:18:34Now, I tell you, nobody apart from Austrians in current day literature understands this point. Nobody understands this point. And that's not to say that Mises is right on this, but he has pushed his argument, the reasoning, his analysis to such a nuance that is unrivaled even today. does not say that he is right on this, it is a completely different question. And in particular his American disciple Murray Rothbard has later on systematically revised Mises' theory of monopoly prices and criticized this position. Okay, then we have two last contributions, oh well, let's say just one last contribution, namely that which he discusses the compatibility of Christian ethics with the market.

1:19:32And here I will simply point out that Mises in his original 1922 treatise is very skeptical in this respect. He denies in fact outright that Christ's teaching can be reconciled with the market economy. Now this of course raises a puzzle. If this is in fact the case, then how come that capitalism arose in Christian Occident? If these things are really incompatible, how is it possible? This is a mystery. And Mises answers the following, he says, well, that was the consequence not of Christ's teaching, not of the Gospel itself, but of the Church, of the Catholic Church, who had intermediated these and diminished these teachings where necessary.

1:20:36So the culture, cultivating force, driving force in the development of Western capitalism was the Catholic Church, not the Gospel of Christ. On Christ himself, so he says the following, the evidence leads to the negation of the question asked above, whether it might not be possible to reconcile Christianity with a free social order based on private ownership and the means of production. A living Christianity cannot exist side by side with and within capitalism. Ten years later, however, Mises had changed his mind.

1:21:23For those of you who only read English, well, that's the version that you read in the English edition of Socialism. Here we have the revised position. In the second edition of Socialism, which appeared in 1932, he added two paragraphs that gave a much milder and reconciling tone to the conclusion. Mises now claimed that Christianity and liberalism might not be quite as antagonistic as he at first assumed. They could flourish together provided there was a new synthesis. There might be an alternative. No one can foresee with certainty how church and Christianity may change in the future. Papacy and Catholicism now face problems incomparably more difficult than all those they have had to solve for over a thousand years.

1:22:16The worldwide universal church is threatened in its very being by chauvinist nationalism. By refinement of political art it has succeeded in maintaining the principle of Catholicism throughout all the turmoil of national wars, but it must realize more clearly every day that its continuance is incompatible with nationalist ideas. Unless it is prepared to succumb and make way for national churches, it must drive out nationalism by an ideology which makes it possible for nations to live and work together in peace. But in doing so, the Church would find itself inevitably committed to liberalism. No other doctrine would serve.

1:23:05If the Roman Church is to find any way out of the crisis into which nationalism has broadened, then it must be thoroughly transformed. It may be that this transformation and reformation will lead to its unconditional acceptance of the indispensability of private ownership and the means of production. At present, it is still far from this, as witnessed the recent encyclical, and the Medical Quadragesimo Anno, which was published in 1931. I do not know what changed his mind. It is possible Mises had second thoughts on Christianity and liberalism as a consequence of his activity as a counselor to the Austrian Chancellor, Monseigneur Ignat Seipel, who was a Catholic priest and politician, who according to many Catholic witnesses had a saintly character.

1:23:56Mises also came to realize that other scholars worked to bridge the gap that he saw between capitalism and Catholicism. Thus, he would eventually characterize the influential Jesuit, Oswald von Nell Breuning, as, quote, one of the few German economists who in the interwar period advocated economic freedom, unquote. We'll leave it here and I give you five minutes for questions.

1:24:26You said that in the later edition of Boehm-Bawerk he makes the point that economic calculation always deals with prices, not value. Why is it such an important point? Well, because value obviously exists in any economic system. Value as defined by Menger and clarified by Mises concerns the preference relationship that exists between different choice alternatives. I'm giving this talk now which means I prefer this activity giving the talk to various other things that I could have done. Same thing holds true for you. So this exists under any economic system.

1:25:13So if there were no difference between value and price, then Visa would be right and production could be ordered according to value calculus. But precisely because there is this difference and value is just a preference relationship, nothing extended that can be added up. You have to rely for calculation on prices and prices only exist when there is private property in economic goods. I suppose it's unfortunate that Mises didn't make more of the connection between liberal Christianity and socialism as an explanation for its driving force. There seems to be a leap of faith that would explain how socialism might work, whereas he doesn't really want the basis of reason and logic.

1:26:12I do understand the question. I'm fascinated with the idea that religion is what gives a lot of impetus to socialism, and I guess I'm wondering if it's not unfortunate that Mises didn't sort of lay a little more of a socialism and that religion in the doorstep.

1:26:45did in the book, and in fact those passages that I read to you in which he indicts the Gospel of Christ for incompatibility with capitalism, that remains in all later editions. He doesn't take this out. So it remains there, but he only adds something. He says, well, but maybe it's not quite as bad as that. Things could change if the following happens.

1:27:30Actually, I added Brutschko, so we have four confirmations. Max Weber, Brutschko, Lenin and Heinrich Hörkner. ______? Yeah, yeah, yeah. ______? No, it was not. Rouskos was a minor figure in Russia. Especially after he was expelled for his articles. ______? Hans Maier. Maier was one of those experts in maneuvering the hallways of power, and he was the beloved disciple of the great Friedrich.

1:28:20We got the job. Yesterday somebody came to me and said, well, that's so unjust that Mises didn't get a professorship. I said, yeah, well, that's not strictly speaking true. We always have to consider, this was not Harvard. It was the Harvard Department of Economics today. There are 30 or 50 economists, probably 20 or 25 full professors I don't even know. In those days, there were three positions at the University of Vienna. and Mises was very smart and of course we think that he was the best but I mean there are a few other very smart people around so it's by no means scandalous that he didn't get the job. Well thank you for your attention, see you soon.