Today is his 130th anniversary. And to cellebrate it, I am reproducing Murray Rothbard’s essay (published by the Mises Institute):
Ludwig von Mises: Scholar, Creator, Hero
The purpose of this essay is to discuss and celebrate the life and work of one of the great creative minds of our century. Ludwig von Mises was born on September 29, 1881, in the city of Lemberg (now Lvov), in Galicia, in the Austro-Hungarian Empire. His father, Arthur Edler von Mises, a Viennese construction engineer working for the Austrian railroads, was stationed in Lemberg at the time. Ludwig’s mother, Adele Landau, also came from a prominent family in Vienna: her uncle, Dr. Joachim Landau, was a deputy from the Liberal Party in the Austrian Parliament.
The Young Scholar
Though the pre-eminent theorist of our time, Mises’s interest, as a teenager, centered in history, particularly economic and administrative history. But even while still in high school, he reacted against the relativism and historicism rampant in the German-speaking countries, dominated by the Historical School. In his early historical work, he was frustrated to find historical studies virtually consisting of paraphrases from official government reports. Instead, he yearned to write genuine economic history. He early disliked the State orientation of historical studies. Thus, in his memoirs, Mises writes:
It was my intense interest in historical knowledge that enabled me to perceive readily the inadequacy of German historicism. It did not deal with scientific problems, but with the glorification and justification of Prussian policies and Prussian authoritarian government. The German universities were state institutions and the instructors were civil servants. The professors were aware of this civil-service status, that is, they saw themselves as servants of the Prussian king.
Ludwig von Mises entered the University of Vienna at the turn of the twentieth century and his major professor was the economic historian Karl Grünberg, a member of the German Historical School and a statist who was interested in labor history, agricultural history, and Marxism. Grünberg was a follower of the German economic historian Georg Friedrich Knapp, the author of the major work claiming that money was in its origin and its essence a pure creature of the State. At his center for economic history at the University of Strasbourg, Knapp was having his students work on the liberation of the peasantry from serfdom in the various German provinces. Hoping to create a similar center at Vienna, Professor Grünberg set his students to do research on the elimination of serfdom in the various parts of Austria. Young Ludwig Mises was assigned the task of studying the disappearance of serfdom in his native Galicia. Mises later lamented that his book on this subject, published in 1902, was, because of the Knapp-Grünberg methodology “more a history of government measures than economic history.” The same problems beset his second historical work published three years later, a study of early child labor laws in Austria, which proved to be “not much better.”
Despite his chafing at the statism and Prussianism of the Historical School, Mises had not yet discovered economic theory, the Austrian School, and the economic liberalism of the free market. In his early years at the university, he was a left-liberal and interventionist, although he quickly rejected Marxism. He joined the university-affiliated Association for Education in the Social Sciences, and plunged into applied economic reform. In his third year at the university Mises did research on housing conditions under Professor Eugen von Philippovich, and the following semester, for a seminar on Criminal Law, did research on changes in the law on domestic servants. From his detailed studies, Mises began to realize that reform laws only succeeded in being counterproductive, and that all improvements in the condition of the workers had come about through the operations of capitalism.
Around Christmas 1903 Mises discovered the Austrian school of economics by reading Carl Menger’s great Principles of Economics, and thus began to see that there was a world of positive economic theory and free-market liberalism that complemented his empirical discoveries on the weaknesses of interventionist reform.
On the publication of his two books in economic history and on the receipt of his doctorate in 1906, Mises ran into a problem that would plague him the rest of his life: the refusal of academia to grant him a full-time, paid position. It boggles the mind what this extraordinarily productive and creative man was able to accomplish in economic theory and philosophy when down to his mid-50s, his full-time energies were devoted to applied political-economic work. Until middle-age, in short, he could only pursue economic theory and write his extraordinary and influential books and articles, as an overtime leisure activity. What could he have done, and what would the world have gained, if he had enjoyed the leisure that most academics fritter away? As it is, Mises writes that his plans for extensive research in economic and social history were thwarted for lack of available time. He states wistfully that “I never found opportunity to do this work. After completing my university education, I never again had the time for work in archives and libraries.”
Mises’s doctorate was in the Faculty of Laws at the University and so for several years after 1906 he clerked at a series of civil, commercial, and criminal courts, and became an associate at a law firm. In addition, preparing himself for a teaching career, Mises began to teach economics, constitutional law, and administration to the senior class of the Vienna Commercial Academy for Women, a position which he held until the completion of his first great book in 1912. For the most part, however, he plunged into applied economic work. One job, beginning in 1909, was as an economist at the Central Association for Housing Reform. Mises became the Association’s expert on real estate taxation, discovering that the abysmal housing conditions in Austria were brought about by high tax rates on corporations and capital gains. Mises advocated lowering these taxes, particularly the high taxes on real estate, which, he pointed out, would not so much reduce rents as it would raise the market value of real estate and thereby stimulate housing investment. Mises was successful in pushing through a substantial reduction in housing taxes. He continued at this post until 1914, when the war brought housing construction to an end.
Mises’s major post, from 1909 until he left Austria twenty-five years later, was a full-time job as economist at the Vienna Chamber of Commerce. In Austria the Chambers of Commerce were akin to “economic parliaments,” created by the government, with delegates elected by businessmen and financed by taxation. The Chambers were formed to give economic advice to the government, and the center of power was its General Assembly, consisting of delegates from the various local and provincial Chambers, and with the committees of that Assembly. The experts advising the Chambers and the General Assembly were gathered in the offices of the secretaries to the various Chambers. By the turn of the twentieth century, economists working in the secretary’s office of the Vienna Chamber (the preeminent of the various Chambers) had become important economic advisers to the government. By the end of World War I, Mises, operating from his quasi-independent position at the Chamber, became the principal economic adviser to the government, and, as we shall see below, won a number of battles on behalf of free markets and sound money.
The Theory of Money and Credit
In 1903, the influential monetary economist Karl Helfferich, in his work on Money, laid down a challenge to the Austrian School. He pointed out correctly that the great Austrians, Menger, Böhm-Bawerk, and their followers, despite their prowess in analyzing the market and the value of goods and services (what we would now call “micro-economics”), had not managed to solve the problem of money. Marginal utility theory had not been extended to the value of money, which had continued, as under the English classical economists, to be kept in a “macro” box strictly separate from utility, value, and relative prices. Even the best monetary analysis, as in Ricardo, the Currency School, and Irving Fisher in the United States, had been developed in terms of “price levels,” “velocities,” and other aggregates completely ungrounded in any micro analysis of the actions of individuals.
In particular, the extension of Austrian analysis to money faced a seemingly insuperable obstacle, the “problem of the Austrian circle.” The problem was this: for directly consumable goods the utility and therefore the demand for a product can be arrived at clearly. The consumer sees the product, evaluates it, and ranks it on his value scale. These utilities to consumers interact to form a market demand. Market supply is determined by the expected demand, and the two interact to determine market price. But a particular problem is posed by the utility of, and the demand for, money. For money is demanded on the market, and held in one’s cash balance, not for its own sake but solely for present or future purchases of other goods. The distinctive nature of money is that it is not consumed, but only used as a medium of exchange to facilitate exchanges on the market. Money, therefore, is only demanded on the market because it has a pre-existing purchasing-power, or value or price on the market. For all consumer goods and services, therefore, value and demand logically precede and determine price. But the value of money, while determined by demand, also precedes it; in fact, a demand for money presupposes that money already has a value and price. A causal explanation of the value of money seems to founder in unavoidable circular reasoning.
In 1906, his doctorate out of the way, Mises determined to take up the Helfferich challenge, apply marginal utility theory to money, and solve the problem of the Austrian circle. He devoted a great deal of effort to both empirical and theoretical studies of monetary problems. The first fruits of this study were three scholarly articles, two in German journals and one in the EnglishEconomic Journal in 1908–09, on foreign exchange controls and the gold standard in Austria-Hungary. In the course of writing these articles, Mises became convinced that, contrary to prevailing opinion, monetary inflation was the cause of balance of payments deficits instead of the other way round, and that bank credit should not be “elastic” to fulfill the alleged needs of trade.
Mises came to a decision, which he pursued for the rest of his career in Austria, not to reveal such corruption on the part of his enemies, and to confine himself to rebutting fallacious doctrine without revealing their sources. But in taking this noble and self-abnegating position, by acting as if his opponents were all worthy men and objective scholars, it might be argued that Mises was legitimating them and granting them far higher stature in the public debate than they deserved. Perhaps, if the public had been informed of the corruption that almost always accompanies government intervention, the activities of the statists and inflationists might have been desanctified, and Mises’s heroic and lifelong struggle against statism might have been more successful. In short, perhaps a one-two punch was needed: refuting the economic fallacies of Mises’s statist enemies, and also showing the public their self-interested stake in government privilege.
His preliminary research out of the way, Mises embarked, in 1909, on his first monumental work, published in 1912 as Theorie des Geldes and der Umlaufsmittel (The Theory of Money and Credit). It was a remarkable achievement, because for the first time, the micro/macro split that had begun in English classical economics with Ricardo was now healed. At long last, economics was whole, an integral science based on a logical, step-by-step analysis of individual human action. Money was fully integrated into an analysis of individual action and of the market economy.
By basing his analysis on individual action, Mises was able to show the deep fallacies of the orthodox mechanistic Anglo-American quantity theory and of Irving Fisher’s “equation of exchange.” An increase in the quantity of money does not mechanically yield a proportional increase in a non-existent “price level,” without affecting relative utilities or prices. Instead, an increase lowers the purchasing power of the money unit, but does so by inevitably changingrelative incomes and prices. Micro and macro are inextricably commingled. Hence, by focusing on individual action, on choice and demand for money, Mises not only was able to integrate the theory of money with the Austrian theory of value and price; he transformed monetary theory from an unrealistic and distorted concentration on mechanistic relations between aggregates, to one consistent with the theory of individual choice.
Moreover, Mises revived the critical monetary insight of Ricardo and the British Currency School of the first half of the nineteenth century: that while money is a commodity subject to the supply-and-demand determination of value of any other commodity, it differs in one crucial aspect. Other things being equal, an increase in the supply of consumer goods confers a social benefit by raising living standards. But money, in contrast, has only one function: to exchange, now or at some time in the future, for capital or consumer goods. Money is not eaten or used as are consumer goods, nor used up in production as are capital goods. An increase in the quantity of money only serves to dilute the exchange effectiveness of each franc or dollar; it confers no social benefit whatever. In fact, the reason why the government and its controlled banking system tend to keep inflating the money supply, is precisely because the increase is not granted to everyone equally. Instead, the nodal point of initial increase is the government itself and its central bank; other early receivers of the new money are favored new borrowers from the banks, contractors to the government, and government bureaucrats themselves. These early receivers of the new money, Mises pointed out, benefit at the expense of those down the line of the chain, or ripple effect, who get the new money last, or of people on fixed incomes who never receive the new influx of money. In a profound sense, then, monetary inflation is a hidden form of taxation or redistribution of wealth, to the government and its favored groups and from the rest of the population. Mises’s conclusion, then, is that, once there is enough of a supply of a commodity to be established on the market as money, there is no need ever to increase the supply of money. This means that any supply of money whatever is “optimal”; and every change in the supply of money stimulated by government can only be pernicious.
In the course of refuting the Fisherine notion of money as some sort of “measure of value,” Mises made an important contribution to utility theory in general, a contribution that corrected an important flaw in the Austrian utility analysis of Menger and Böhm-Bawerk. Although the older Austrians did not stress this flaw as much as Jevons or Walras, there were indications that they believed utility to be measurable, and that there is sense in talking of a “total utility” of the supply of a good that would be an integral of its “marginal utilities.”
If the Cuhel-Mises insight had been absorbed into the mainstream of utility theory, economics would have been spared, on the one hand, the tossing out of marginal utility altogether in the late 1930s as hopelessly cardinal, in favor of indifference curves and marginal rates of substitution; and, on the other, the current absurd micro-textbook discussions of “utils,” nonexistent entities subject to measurement and mathematical manipulation.
What of the famous problem of the Austrian circle? Mises solved that in one of his most important, and yet most neglected, contributions to economics: the Regression Theorem. Mises built on Menger’s logical-historical account of the origin of money out of barter, and demonstrated logically that money can only originate in that way. In doing so, he solved the problem of the circular explanation of the utility of money. Specifically, the problem of the circle is that, at any given time, say DayN, the value (purchasing-power) of money on that Day is determined by two entities: the Supply of MoneyN and the Demand for MoneyN — which itself depends on a pre-existing Purchasing Power on DayN-1. Mises broke out of this circle precisely by understanding and grasping the time dimension of the problem. For the circle on any given day is broken by the fact that the Demand for Money on that day is dependent on a previous day’s purchasing power, and hence on a previous day’s demand for money. But haven’t we broken out of the circle only to land ourselves in an infinite regress backwards in time, with each day’s purchasing power resting on today’s demand for money, in turn dependent on the previous day’s purchasing power, in turn determined by the previous day’s demand, etc.? It is no help to escape circular reasoning only to land in a regress of causes that can never be closed.
But the brilliance of Mises’s solution is that the logical regress backward in time is not infinite: it closes precisely at the point in time when money is a useful non-monetary commodity in a system of barter. In short, say that Day1 is the first moment that a commodity is used as a medium of indirect exchange (to simplify: as a “money”), while the previous Day0 is the last day that commodity, say gold, was used only as a direct good in a system of barter. In that case, the causal chain of any day’s value of money, say DayN, goes back logically in time, to Day1, and then goes back to Day0. In short, the demand for gold on Day1 depends on the purchasing power of gold on Day0. But then the regress backward stops, since the Demand for Gold on Day0 consists only of its direct value in consumption, and hence does not include a historical component, i.e., the existence of prices for gold on the previous day, Day–1.
In addition to closing the determinants of the value or purchasing power of money and thereby solving the Austrian circle, Mises’s demonstration showed that, unlike other goods, the determinants of the value of money include an important historical dimension. The Regression Theorem also shows that money, in any society, can only become established by a market process emerging from barter. Money cannot be established by a social contract, by government imposition, or by artificial schemes proposed by economists. Money can only emerge, “organically” so to speak, out of the market.
Comprehension of Mises’s Regression Theorem would spare us numerous impossible schemes, some proffered by Austrians or quasi-Austrians, to create new moneys or currency units out of thin air: such as F.A. Hayek’s proposed “ducat,” or plans to separate units of account from media of exchange.
Not wishing to trust government to enforce 100% reserves, however, Mises advocated totally free banking as a means of approaching that ideal. Money and Credit demonstrated that the major force coordinating and promoting bank credit inflation was each nation’s central bank, which centralized reserves, bailed out banks in trouble, and made sure that all banks inflated together. Eight years before C.A. Phillips’s famous demonstration, Money and Credit showed that an individual bank enjoyed very little room to expand credit.
But this is not all. For Mises began, on the foundations of his theory of money and banking, to develop what was to become his famous theory of the business cycle — the only such theory integrated with general micro-economics and built on the foundations of the analysis of individual action. These rudiments were further developed in the second edition of Money and Credit in 1924.
In the first place, Mises was brilliantly able to identify the process as essentially the same: (a) one bank’s expanding credit, soon leading to a contraction and demand for redemption; and (b) all banks in the nation, guided by a central bank, expanding money and credit together and thereby gaining more time for a Hume-Ricardo specie-flow price mechanism to develop. Thus credit and the money supply expand, incomes and prices rise, gold flows out of the country (i.e., a balance of payments deficit), and a resulting collapse of credit and the banks, force a contraction of money and prices, and a reverse specie flow into the county. Not only did Mises see that these two processes were basically the same; he was also the first to see that here was a rudimentary model of a boom-bust cycle, created and driven by monetary factors, specifically expansion and later contraction of “created” bank credit.
During the 1920s, Mises formulated his business cycle theory out of three pre-existing elements: the Currency School boom-bust model of the business cycle; the Swedish “Austrian” Knut Wicksell’s differentiation between the “natural” and the bank interest rates; and Böhm-Bawerkian capital and interest theory. Mises’s remarkable integration of these previously totally separate analyses showed that inflationary or created bank credit, by pumping in more money into the economy and by lowering interest rates on business loans below the free market, time preference level, inevitably caused an excess of malinvestments in capital goods industries remote from the consumer. The longer the boom of inflationary bank credit continues, the greater the scope of malinvestments in capital goods, and the greater the need for liquidation of these unsound investments. When the credit expansion stops, reverses, or even significantly slows down, the malinvestments are revealed. Mises demonstrated that the recession, far from being a strange, unexplainable aberration to be combated, is really a necessary process by which the market economy liquidates the unsound investments of the boom, and returns to the right consumption/investment proportions to satisfy consumers in the most efficient way.
Thus, in contrast to interventionists and statists who believe that the government must intervene to combat the recession process caused by the inner workings of free-market capitalism, Mises demonstrated precisely the opposite: that the government must keep its hands off the recession, so that the recession process can quickly eliminate the distortions imposed by the government-created inflationary boom.
Despite these dazzling contributions of The Theory of Money and Credit, Mises felt frustrated. He had carved out a theory of money and credit, and, for the first time, integrated it into general economic theory. He saw, also, that the general theory itself needed revising, and he originally intended to set forth a revised theory of direct exchange and relative price, along with his new theory of money. He also wished to present a thorough-going critique of the newly fashionable mathematical method in economics. But he had to shelve his grand plan for an integrated positive theory and a critique of mathematical economics, because he rightly believed that a world war would soon break out. As Mises wrote, in the midst of the next tragic world war,
If I could have worked quietly and taken my time, I would have begun with a theory of direct exchange in the first volume; and then I could proceed to the theory of indirect exchange. But I actually began with indirect exchange, because I believed that I did not have much time; I knew that we were on the eve of a great war and I wanted to complete my book before the war’s outbreak.
The Reception of Mises and of Money and Credit
The Theory of Money and Credit did not attain anything like the reception it deserved. The Schmollerite Historical School–dominated German economics profession gave the book, as to be expected, very short shrift. Even the Austrians turned a deaf ear to Mises’s brilliant innovations. By this time, Mises had been for years a devoted member of Eugen von Böhm-Bawerk’s famous seminar at the University of Vienna. After the publication of Money and Credit, the Böhm-Bawerk seminar spent two full semesters discussing Mises’s work. The consensus rejected Mises’s contributions totally. Böhm-Bawerk admitted that Mises’s logic, and his step-by-step process analysis, was correct. Böhm therefore did not deny that a change in the money supply would not simply increase all prices equi-proportionally. On the contrary, money could never be “neutral” to the price system, and any change of the supply of money is bound to alter relative prices and incomes. Böhm conceded these points, but then betrayed the essence of Austrian methodology by claiming that all this could be blithely ignored as “friction.” As Mises put it,
According to him [Böhm], the old doctrine was correct “in principle” and maintains its full significance for an analysis aimed at “purely economic action.” In real life there is resistance and friction which cause the result to deviate from that arrived at theoretically. I tried in vain to convince Böhm-Bawerk of the inadmissability of the use of metaphors borrowed from mechanics.
With Böhm-Bawerk and his fellow Austrians uncomprehendingly rejecting Mises’s “praxeological” as opposed to positivist approach (that is, his realization that every step of deductive theory has to be true in order to avoid injecting ineradicable error and falsehood into the theory), and spurning his integrating of monetary into general theory, disdained by Schmollerites and positivists alike, Ludwig von Mises set out uncomplainingly on the lonely path of carving out a new “neo-Austrian” school of economic thought.
Agree with him or not, Ludwig von Mises was clearly a major innovative economist, surely worthy of an academic post at the University of Vienna. True, that as a result of Money and Credit, Mises was appointed in 1913 to a post as professor at the University. But it was only to the unpaid, if prestigious, post of privatdozent. While Mises gave lectures and a highly successful weekly seminar at the University for the next two decades, he never achieved a paid university post, and therefore had to continue full-time as economist for the Chamber of Commerce, and as the major economic adviser to the country. He still did not have the leisure to pursue unimpeded his brilliantly creative work in economic theory.
Mises’s career, along with many others, was interrupted for the four years of World War I. After three years at the front as an artillery officer, Mises spent the last year of the war in the economics division of the War Department, where he was able to write journal articles on foreign trade, and in opposition to inflation, and to publish Nation, Staat und Wirtschaft(Nation, State, and Economy, 1919) on behalf of ethnic and cultural freedom for all minorities.
The question of academic posts was then faced fully after the end of the war. The University of Vienna conferred three paid professorships in economics: before the war, they were filled by Böhm-Bawerk, his brother-in-law Friedrich von Wieser, and Eugen von Philippovich. Böhm died tragically shortly after the outbreak of the war, Philippovich retired before the war, and Wieser followed soon after the war was over. The first vacancy went to Mises’s old teacher Carl Grünberg, but Grünberg went off to a chair at Frankfort in the early 1920s. This left three vacancies at Vienna, and it was generally assumed that Mises would get one of them. Certainly by any academic standards, he richly deserved it.
But Mises was never chosen for a paid academic post; indeed he was passed over four times. Instead, the two theoretical chairs went (a) to Othmar Spann, a German-trained Austrian organicist sociologist, barely cognizant of economics, who was to become one of Austria’s most prominent fascist theoreticians, and (b) to Hans Mayer, Wieser’s handpicked successor, who, despite his contributions to Austrian utility theory, was scarcely in the same league as Mises. Mayer, furthermore, strongly disapproved of Mises’s laissez-faire liberal conclusions. The University of Vienna professoriate, before the war the envy of Europe, began to take on the dimensions of a zoo, as Spann and Mayer intrigued against each other, and against Mises, who as a privatdozent, was low man on the academic totem pole. Mayer would openly humiliate Spann to students, and systematically slam the door in Spann’s face if they were both entering a room. Spann, for his part, increasingly anti-Semitic in a developing anti-Semitic milieu, denounced appointments of Jewish academics in secret faculty meetings, and also castigated Mayer for backing such appointments. Mayer, on the other hand, managed to adapt easily to the Nazi assumption of power in Austria in 1938, leading the faculty in ostentatious devotion to the Nazi cause. Mayer, in fact, informed the Nazis that Spann was insufficiently pro-Nazi, and Spann was arrested and tortured by the Nazis in consequence.
In this fetid atmosphere, it is no wonder that Mises reports that Spann and Mayer discriminated against his students, who were forced to audit Mises’s seminar without registering, and “also made it very difficult for those doctoral candidates in the social sciences who wanted to write their theses with me; and those who sought to qualify for a university lectureship had to be careful not to be known as my students.” Students who registered for Mises’s seminar without registering for the seminar of one of his rivals, were not allowed to use the economics department library; but Mises triumphantly notes that his own library at the Chamber of Commerce was “incomparably better” than that of the economics department, so this restriction, at least, caused his students no hardship.
After interviewing Mises’s friends and former students, Earlene Craver indicates that Mises was not appointed to a professorial chair because he had three strikes against him: (1) he was an unreconstructed laissez-faire liberal in a world of opinion that was rapidly being captured by socialism of either the Marxian left or of the corporatist-fascist right; (2) he was Jewish, in a country that was becoming increasingly anti-Semitic; (3) he was personally intransigent and unwilling ever to compromise his principles. Mises’s former students F.A. Hayek and Fritz Machlup concluded that “Mises’s accomplishments were such that two of these defects might have been overlooked — but never three.”
But there is, I believe, another important reason for this shameful treatment that Craver does not mention and that Mises hints at in his memoir, although perhaps without seeing the significance. Unlike their successful enemies, such as Schmoller and Lujo Brentano, and even Wieser, neither Menger nor Böhm-Bawerk saw the academic arena as a political battlefield to be conquered. Hence, in contrast to their opponents, they refused to promote their own disciples or followers, or to block the appointment of their enemies. In fact, Böhm-Bawerk leaned even further backward to urge the appointments of sworn enemies of himself and of the Austrian School. This curious form of self-abnegation helped to torpedo Mises’s or any similar academic appointment. Menger and Böhm apparently insisted on the naïve view that truth will always win out, unaided, not realizing that this is hardly the way truth ever wins out in the academic or any other arena. Truth must be promoted, organized, and fought for as against error. Even if we can hold the faith that truth, unaided by strategy or tactics, will win out in the long run, it is unfortunately an excruciatingly long run in which all too many of us — certainly including Mises — will be dead. Yet, Menger adopted the ruinous strategic view that “there is only one sure method for the final victory of a scientific idea, by letting every contrary proposition run a free and full course.”” name=”_ftnref19>” href=”http://mises.org/daily/5697/Ludwig-von-Mises-Scholar-Creator-Hero#_ftn19″>
Mises in the 1920s: Economic Adviser to the Government
As soon as he returned from war service, Mises resumed his unpaid teaching duties at the university, adding an economics seminar in 1918. Mises writes that he only continued working at the Chamber because a paid university post was closed to him. Despite the fact that “I [did not] aspire to a position in government service,” his teaching duties and the leisure hours he devoted to creative scholarship, Mises performed his numerous tasks as economics official with great thoroughness, energy and dispatch. After the war, in addition to his Chamber of Commerce post, Mises was employed as the head of a temporary postwar government office dealing with the prewar debt. Young F.A. Hayek, though he had been in Mises’s class at the university first got to know him as Mises’s subordinate in the debt office. Hayek writes that “there I came to know him mainly as a tremendously efficient executive, the kind of man who, as was said of John Stuart Mill, because he does a normal day’s work in two hours always has a clear desk and time to talk about anything. I came to know him as one of the best educated and informed men I had ever known….”
Many years later, Mises related to me, with typical charm and gentle wit, a story of the time when he was appointed by the Austrian government as its representative for trade talks with the short-lived postwar Bolshevik Bela Kun government of Hungary. Karl Polanyi, later to be a well-known leftwing economic historian in the United States was the Kun government representative. “Polanyi and I both knew that the Kun government would fall shortly,” Mises told me with a twinkle, “and so we both made sure to drag out the ‘negotiations’ so that Polanyi could remain comfortably in Vienna. We had many delightful walks in Vienna until the Kun government met its inevitable end.”
Hungary was not the only government to go Bolshevik temporarily in the tragic and chaotic aftermath of World War I. Amidst the turmoil of defeat, many countries of central and eastern Europe were inspired and tempted to follow the example of the Bolshevik Revolution in Russia. Parts of Germany went Bolshevik for a time, and Germany only escaped this fate because of the turn to the Right of the Social Democratic Party, previously committed to a Marxist revolution. It was similarly touch and go in the new, truncated little country of Austria, still suffering from the Allied food blockade during the tragic winter of 1918–19. The Marxist Social Democratic party, led by the brilliant “Austro-Marxist” theoretician Otto Bauer, headed the Austrian government. In a profound sense, the fate of Austria rested with Otto Bauer.
Bauer, son of a wealthy North Bohemian manufacturer, was converted to Marxism by his high school teacher, and dedicated his life to never flagging in zeal for the radical Marxist cause. He was determined never to abandon that cause to any form of revisionism or opportunism as so many Marxists had done in the past (and would continue to do in the future). Bauer enlisted in Böhm-Bawerk’s great seminar determined to use the knowledge he would gain to write the definitive Marxian refutation of Böhm’s famous demolition of the Marxian labor theory of value. In the course of the seminar, Bauer and Mises became close friends. Bauer eventually abandoned the attempt, virtually admitting to Mises that the labor theory of value was indeed untenable.
Now, with Bauer planning to take Austria into the Bolshevik camp, Mises, as economic adviser to the government, and above all as a citizen of his county and as a champion of freedom, talked night after night, and at great length with Bauer and his equally devoted Marxian wife Helene Gumplowicz. Mises pointed out that with Austria drastically short of food, a Bolshevik regime in Vienna would inevitably find its food supply cut off by the Allies, and in the ensuing starvation such a regime could not last more than a couple of weeks. Finally, the Bauers were reluctantly persuaded of this incontrovertible fact, and did what they had sworn never to do: turn rightward and betray the Bolshevik cause.
Reviled as traitors by radical Marxists from then on, the Bauers turned in fury against the man they held responsible for their action: Ludwig von Mises. Bauer tried to get Mises removed from his university post, and from then on they never spoke to each other again. Interestingly, Mises claims credit for preventing the Bolshevik takeover singlehandedly; he had no help in his dedicated opposition from conservative parties, the Catholic Church, or from business or managerial groups. Mises recalls bitterly that:
Everyone was so convinced of the inevitability of the coming of Bolshevism that they were intent merely on securing for themselves a favorable position in the new order. The Catholic Church and its followers, the Christian Social Party, were ready to welcome Bolshevism with the same ardor that archbishops and bishops twenty years later welcomed Nazism. Bank directors and big industrialists hoped to earn a good living as “managers” under Bolshevism.
If Mises succeeded in stopping Bolshevism in Austria, his second great task as government economic adviser was only partially successful: combating the post-war bank credit inflation. Armed with his great insight and expertise into money and banking, Mises was unusually well-equipped for going against the tide of history and stopping the modern rage for inflation and cheap money, an urge given full rein by the abandonment of the gold standard by all the warring European countries during World War I.
In the thankless task of opposing cheap money and inflation, and calling for a balanced budget and a cessation of all increases of bank notes, Mises was aided by his friend Wilhelm Rosenberg, a former student of Carl Menger and a noted attorney and financial expert. It was because of Mises and Rosenberg that Austria did not go the whole way of the disastrous runaway inflation that would ravage Germany in 1923. Yet Mises and Rosenberg only succeeded in slowing down and delaying the effects of inflation rather than eliminating it. Due to their heroic efforts, the Austrian crown was stabilized in 1922 at the enormously depreciated — but not yet runaway — rate of 14,400 paper crowns to one gold crown. Yet, Mises writes, their “victory came too late,” The destructive consequences of inflation continued, capital was consumed by inflation and welfare state programs, and the banking collapse finally arrived in 1931, postponed by Mises’s efforts for ten years.
Under these crippling pressures, it was no wonder that Wilhelm Rosenberg, despairing of the situation, was driven to death; Mises, however, fought on bravely and it must have been almost a relief to him when the Austrian banks met their inevitable doom in l931.
Mises’s words apply every bit as much to his fight against inflation as they explicitly do to his long, losing struggle against the eventual Nazi takeover of Austria:
For sixteen years I fought a battle in the Chamber in which I won nothing more than a mere delay of the catastrophe. I made heavy personal sacrifices although I always foresaw that success would be denied me. But I do not regret that I attempted the impossible. I could not act otherwise. I fought because I could do no other.
Mises was often accused of being intransigent and uncompromising. In a moving passage in his memoirs, Mises looked back on his career as government adviser and reproached himself for the opposite error — of compromising too much:
Occasionally I was reproached because I made my point too bluntly and intransigently, and I was told that I could have achieved more if I had shown more willingness to compromise…. I felt the criticism was unjustified; I could be effective only if I presented the situation truthfully as I saw it. As I look back today at my activity with the Chamber I regret only my willingness to compromise, not my intransigence. I was always ready to yield in unimportant matters if I could save other more important issues. Occasionally I even made intellectual compromises by signing reports which included statements that did not represent my position. This was the only possible way to gain acceptance by the General Assembly of the Chamber or approval by the public of matters I considered important.
Mises in the 1920s: Scholar and Creator
The Bolshevik Revolution, as well as the growth of corporatist sentiment during and after World War I, transformed socialism from a utopian vision and goal into a spreading reality. Before Mises turned his great searchlight of a mind on the problem, criticisms of socialism had been strictly moral or political, stressing its use of massive coercion. Or, if economic, they had focused on the grave disincentive effects of communal or collective ownership (often expressed in the gibe, “Under socialism, who will take out the garbage?”). But Mises, addressing the problem in a paper delivered to theNationalökonomisch Gesellschaft (Economic Society) in 1919, came up with the most devastating possible demolition: the impossibility of economic calculation under socialism. Mises’s paper was published the following year as “Die Wirtschaftsrechnung im sozialistischen Gemeinwesen” (“Economic Calculation in the Socialist Commonwealth”), in the Archiv für Sozialwissenschaft und Sozialpolitik. It was a veritable shock to thoughtful socialists, for it demonstrated that, since the socialist planning board would be shorn of a genuine price system for the means of production, the planners would be unable to rationally calculate the costs, the profitability, or the productivity of these resources, and hence would be unable to allocate resources rationally in a modern complex economy. The stunning impact of Mises’s argument came from its demolishing socialism on its own terms. A crucial objective of socialism was for central planners to allocate resources to fulfill the planners’ goals. But Mises showed that, even if we set aside the vexed question of whether the planners’ goals coincide with the public good, socialism would not permit the planners to achieve their own goals rationally, let alone those of consumers or of the public interest. For rational planning and allocation of resources require the ability to engage in economic calculation, and such calculation in turn requires resource prices to be set in free markets where titles of ownership are exchanged by owners of private property. But since the very hallmark of socialism is government or collective ownership (or, at the very least, control) of all nonhuman means of production — land and capital — this means that socialism will not be able to calculate or rationally plan a modern economic system.
Mises’s profound article had a blockbuster impact on European socialists, particularly in German-speaking countries, over the next two decades, as one socialist after another tried to solve the Mises problem. By the late 1930s, the socialists were confident that they had solved it by using mathematical economics, wildly unrealistic neoclassical perfect competition and general equilibrium assumptions, and — particularly in the schemes of Oskar Lange and Abba P. Lerner — by the central planning board’s ordering the various managers of socialist forms to “play at” markets and market prices. Mises expanded his arguments in journal articles and in his comprehensive critique, Die Gemeinwirtschaft (Socialism) in 1922. His seminal article was finally translated into English in 1935, and his Socialism a year later, and F.A. Hayek also weighed in with elaboration and development. Finally, Mises gave the final rebuttal to the socialists in his monumental Human Action in 1949.
While the official textbook line by the 1940s — when socialism had triumphed among intellectuals — decreed that Lange and Lerner had solved the crucial question posed by Mises, Mises and the free market have had the last laugh. It is now generally acknowledged, especially in Communist countries, that Mises and Hayek were right, and that the enormous defects of socialist planning in practice have confirmed their views. In virtually every Communist country there is a rapid movement toward free markets, and even of the reconstitution of a stock market, a market in titles to private ownership. In the meantime, socialist intellectuals in the West, more removed from harsh socialist reality, slough off the problem by repudiating the very goal of rational allocation and calculation altogether, and by speaking of instinct and irrationality being the nub and glory of socialism.
They [the socialists] failed to see the very first challenge: How can economic action that always consists of preferring and setting aside, that is, of making unequal valuations, be transformed into equal valuations, by the use of equations? Thus the advocates of socialism came up with the absurd recommendation of substituting equations of mathematical catallactics, depicting an image from which human action is eliminated, for the monetary calculation in the market economy.
Mises’s book Socialism had an enormous influence during the 1920s and 1930s, not only in raising profound questions of socialists, but also in converting countless young socialist intellectuals to the cause of freedom and free markets. Brilliant young socialists Friedrich A. Hayek, Wilhelm Röpke in Germany, and Lionel Robbins in England, were among the many converted by Socialism, and who became for many years followers and disciples of Mises as well.
During the 1920s, Mises also continued to develop the business cycle theory that had emerged out of his integration of money into general microeconomics in Money and Credit. In journal articles and books, Mises expanded his theory, warned against the inflationary credit policy of that era, and engaged in a scintillating critique of the proto-monetarist stabilization views of that favorite economist of the New Era of the 1920s, Irving Fisher. Fisher and his disciples insisted that all was well during the 1920s because, for example, the price level in the United States remained constant. To Mises the important point was masked by level prices caused by increases in productivity: that the inflationary credit was creating unsound booms in capital investment and in the markets for titles to capital — stock markets and real estate. Mises’s warnings of financial collapse and depression were remembered after 1929, although they were generally scorned at the time.
But Mises knew from his study into socialism that a socialist system was “impossible” for the modern world: that is, it was lacking the price system necessary to economic calculation, and therefore for running a modern industrial economy. But if interventionism is unstable, and socialism is impossible, then the only logical economic policy for a modern industrial system was laissez-faire liberalism. Mises therefore took the rather vague commitment to the market economy of his Austrian predecessors and hammered it into a logical, consistent, and uncompromising adherence to laissez-faire. In keeping with this insight, Mises published his comprehensive work, Liberalismus, on “classical,” or laissez-faire, liberalism, in 1927.
Thus, while Mises had not yet completed his comprehensive treatise on economics, he had, by the end of the 1920s, hammered out the complete, thoroughgoing political-economy part of his developing grand system. Laissez-faire, interventionism, and socialism were now compared and contrasted in detail, and a passionate commitment made by Mises to laissez-faire. Strengthening that commitment was an insight he had already set forth in Socialism: that the division of labor, and its concomitants, private property and freedom of exchange, were absolutely basic to civilization and to society itself. What Mises was consistently advocating, and what his opponents of other schools of political economy were undermining, were the very conditions necessary to the maintenance of civilization and of an economy that sustains modern high levels of population.
In his eloquent discussion of society and the division of labor, and in his Spencerian contrast of the industrial versus the militarist principle, Mises also builds on the crucial Austrian insight that both parties, the buyer and the seller, the employer and the worker, necessarily benefit from every act of exchange. Mises concludes that the adoption and the development of the division of labor rests on man’s reason and will, on his recognition of the mutual benefits of exchange. This emphasis on human reason and will, in the noblest traditions of rationalism, contrast sharply to the Hayekian or Scottish Enlightenment emphasis on society or the market as the product of some sort of tropism or instinct, e.g., Hayek’s emphasis on the tropistic, unwilled emergence of “spontaneous order,” or Adam Smith’s conjuring up of a spurious instinct, or “propensity to truck and barter,” as an explanation of exchange.
Indeed, seizing the occasion of writing a foreword to a reprint of Socialism published years after Mises’s death, F.A. Hayek significantly altered the unalloyed praise of the book that he had lavished at a tribute dinner to Mises over twenty years earlier. Now he severely criticized Mises’s reference in Socialism to “social cooperation (in particular, the market-economy) as an emanation of rationally recognized utility,” as an example of “extreme rationalism” and as factually incorrect. He went on to the insulting “explanation” that Mises had not been able to “escape from” such rationalism “as a child of his time” — a curious statement since Mises’s “time” was one of pervasive irrationalism. Hayek, in contrast, strongly asserts that “it certainly was not rational insight into its general benefits that led to the spreading of the market economy.” If not that, one wonders then how the market economy got established in the first place. For each individual exchange, no person would engage in it unless he knew consciously and “rationally” that he would benefit. And as for the market economy as a whole, Hayek who in his earlier writings had declared formally that ideas make history, fails to explain how the free market didcome about. Moreover, Hayek thereby ignores over two centuries of a classical liberal movement in Western Europe and the United States dedicated to freedom and free markets. In neglecting the fundamental point that all human actions are determined by the individuals’ values and ideas, a “praxeological” insight at the heart of Misesian thought, Hayek can only believe, without explicitly declaring it, that human beings are not conscious actors and choosers but only tropistic stimulus-and-response mechanisms.
A story Mises related to me about the logical positivists and their impact was characteristic of his wit and charm. He was walking around Vienna with his good friend, the German philosopher Max Scheler.
“What is there about the climate of this city,” Scheler waved around him, “that breeds so many blankety-blank logical positivists?”
“Well, Max,” Mises replied, in Vienna there are two million people, and there are only twelve logical positivists. So it couldn’t be the climate.”
The logical positivists presented their own grave challenge to economic theory, charging that economic law could only be established tentatively and hesitantly, and then only by “testing” the consequences of such laws by empirical (in practice, statistical) fact. Based on their own interpretation of the methods of the physical sciences, the positivists tried to hack away at methodologies they saw as “unscientific.”
The onslaughts of the institutionalists and especially the positivists on economic theory forced Mises to think deeply about the methodology of economics, and also on the basic epistemology of the sciences of human action. Thinking deeply about the subject, he arrived at the first philosophically self-conscious defense of the economic method used by the earlier Austrians and some of the classicists. Furthermore, he was able to demonstrate the truly “scientific” nature of this correct method, and to show that the developing positivist methodology of much neo-classical economics was itself profoundly mistaken and unscientific. In brief, Mises demonstrated that all knowledge of human action rests on methodological dualism, on a profound difference between the study of human beings on the one hand, and of stones, molecules, or atoms, on the other. The difference is that individual human beings are conscious, that they adopt values, and make choices — act — on the basis of trying to attain those values and goals. He pointed out that this axiom of action is self-evident, that is (a) evident to the self once pointed out, and (b) cannot be refuted without self-contradiction, that is without using the axiom in any attempt to refute it. Since the axiom of action is self-evidently true, any logical deductions or implications from that action must be absolutely, uncompromisingly, “apodictically,” true as well. Not only is this body of economic theory absolutely true, but therefore any talk of “testing” its truth is absurd and meaningless, since the axioms are self-evident and no “testing” could occur without employing the axiom. Moreover, no “testing” can take place since historical events are not, as are natural events in the laboratory, homogeneous, replicable, and controllable. Instead, all historical events are heterogeneous, not replicable, and the resultant of complex causes. The role of economic history, past and contemporary, then, is not to “test” theory but to illustrate theory in action and to use it to explain historical events.
Mises also saw that economic theory was the formal logic of the inescapable fact of human action, and that such theory was therefore not concerned with the content of such action, or with psychological explanations of values and motives. Economic theory was the implication of the formal fact of action. Hence, Mises, in later years, would name it “praxeology,” the logic of action.
In his critique of logical positivism, Mises saw that a philosophy that treated people as if they were stones and atoms, whose behavior could be predicted and determined according to quantitative laws, was particularly likely to lead to the viewpoint of social engineers, who deal with people as if they were inanimate physical objects. Indeed, positivist Otto Neurath was one of the leading socialist theorists in Central Europe. Mises wrote that this allegedly “scientific” approach would study the behavior of human beings according to methods Newtonian physics resorts to in the study of mass and motion. On the basis of this allegedly “positive” approach to the problems of mankind, they plan to develop “social engineering,” a new technique that would enable the “economic tsar” of the planned society of the future to deal with living men in the way technology enables the engineer to deal with inanimate materials.
Mises began publishing his series of epistemological articles in 1928, and then collected and published them in his seminal philosophical and methodological work, Grundprobleme der Nationalökonomie (Epistemological Problems of Economics) in 1933.
Mises in the 1920s: Teacher and Mentor
Since Mises was under severe restrictions in his teaching post at the University of Vienna, as noted above, his influence at university teaching was severely limited. While such outstanding Misesians of the 1920s as F.A. Hayek, Gottfried von Haberler, and Oskar Morgenstern studied under Mises at the university, Fritz Machlup was his only doctoral student. And Machlup was prevented from acquiring his habilitation degree, which would have permitted him to teach as aprivatdozent, by anti-Semitism among the economics professors.
Despite Mises’s reputation as an intransigent fighter for his beliefs, all participants testify that he conducted his private seminar as a discussion forum, with great respect for everyone’s views, and without trying to bludgeon the members into his own position. Thus, Dr. Paul N. Rosenstein-Rodan, a student of Hans Mayer and later to be an economist at the United Nations, wrote in reminiscence of Mises’s seminar:
…I was an enthusiastic admirer of Mises’ theory of money and very skeptical of his extreme [laissez-faire] liberalism. It was a proof of how elastic and tolerant (in spite of a contrary general opinion) Mises was that we maintained a very good relation in spite of my being “pink” or rather having a very Fabian outlook on life, which I did not change.
Mises himself wrote movingly of the seminar and the way he conducted it:
My main teaching effort was focused on my Privatseminar… In these meetings we informally discussed all important problems of economics, social philosophy, sociology, logic, and the epistemology of the sciences of human action. In this circle the younger [post-Böhm-Bawerk] Austrian School of Economics lived on, in this circle the Viennese culture produced one of its last blossoms. Here I was neither teacher nor director of seminar, I was merely primus inter pares [first among peers] who himself benefited more than he gave.
All who belonged to this circle came voluntarily, guided only by their thirst for knowledge. They came as pupils, but over the years became my friends….
We formed neither school, congregation, nor sect. We helped each other more through contradiction than agreement. But we agreed and were united on one endeavor: to further the sciences of human action. Each one went his own way, guided by his own law…. We never thought to publish a journal or a collection of essays. Each one worked by himself, as befits a thinker. And yet each one of us labored for the circle, seeking no compensation other than simple recognition, not the applause of his friends. There was greatness in this unpretentious exchange of ideas; in it we all found happiness and satisfaction.
The result of Mises’s method was that many of the seminar members became full Misesians, while the others were stamped, one way or the other, with at least a touch of Mises’s greatness. Even those Mises followers who later shifted to Keynesian and other anti-Misesian doctrines still retained a visible thread of Misesianism. Hence, for example, the Keynesianism of Machlup or Haberler was never quite as unrestrained as in other, more unalloyed disciples. Gerhard Tintner, a Mises seminar member, went on to become an eminent econometrician at Iowa State, but the first chapter of Tintner’s Econometrics took Mises-type reservations about econometrics far more seriously than did his colleagues in the econometric profession. Mises made a mark on all of his students that proved to be indelible. A partial list of Mises private seminar members, followed by their later affiliations and accomplishments, will serve to illustrate both the enormous distinction achieved by his students, and the Misesian stamp placed upon all of them:
Friedrich A. Hayek
Gottfried von Haberler
Paul N. Rosenstein-Rodan
Felix Kaufmann (author of The Methodology of the Social Sciences>
Alfred Schütz (sociologist, New School for Social Research)
Karl Bode (methodologist, Stanford University)
Alfred Stonier (methodologist, University College, London)
Erich Voegelin (political scientist, historian, Louisiana State University)
Richard von Strigl
Karl Menger (mathematician, son of founder of Austrian School, Carl Menger, University of Chicago)
Walter Fröhlich (Marquette University)
Gerhard Tintner (Iowa State University)
Herbert von Fürth
Members and participants from England and the United States included:
John V. Van Sickle (Rockefeller Foundation, later Wabash College)
Howard S. Ellis (Berkeley, author of German Monetary Theory)
Lionel Robbins (London School of Economics)
Hugh Gaitskell (British Labour Party)
Other participants who, it must be conceded, showed little influence of Mises in later life were the Swedish Keynesian Ragnar Nurkse (Columbia University) and Albert Gailord Hart (Columbia University).
The number of devoted women members of the Mises seminar was remarkable for that era in Europe. Helene Lieser, later for many years Secretary of the International Economic Association in Paris, was the first woman to attain a doctorate in the social sciences in Austria. Ilse Mintz was the daughter of economist Richard Schüller, a student of Menger’s and permanent Undersecretary of Trade (later at the New School for Social Research.) Ilse Mintz later emigrated to America and worked at the National Bureau of Economic Research, and taught at Columbia University. Other leading women members were Marianne von Herzfeld and Martha Stephanie Braun (Browne), who later taught at Brooklyn College and New York University. Martha Browne, in reminiscing about Mises’s seminars, states that “Professor von Mises never restrained any participant in the choice of a topic he or she wanted to discuss.” She concluded that “I have lived in many cities and belonged to many organizations. I am sure there does not exist a second circle where the intensity, the interest and the intellectual standard of the discussions is as high as it was in the Mises Seminar.”
Not content with his own seminar, Mises single-handedly revived the Economic Society, a professional society of economists that he had helped found, along with Karl Pribram, in 1908, and which had fallen into disuse during the war. The Miseskreis formed the core of the group, which was much larger than the Mises seminar. Mises and his colleagues maneuvered to get rid of Othmar Spann, and, in order to insure Hans Mayer’s participation, Mayer was made President of the Society, while Mises, the driving force of the group, agreed to become Vice-President. The Society was dominated by Misesians, with Hayek becoming Secretary, Machlup Treasurer, with Morgenstern becoming Machlup’s successor as Treasurer. Richard Schüller was a distinguished member of the group, and Mises seminar member Karl Schlesinger, president of the National Bankers Association, secured the large conference room of the Bankers Association for the Society’s meetings. Many of the Society’s papers were published in Hans Mayer’s scholarly journal, the Zeitschrift fur Nationalökonomie.
By the mid-1920s, Mises made a considerable effort to find a job for F.A. Hayek. He tried to convince the Chamber of Commerce to create a research position in Mises’s office, which Hayek would have filled, but his attempt failed. After Hayek spent a year in the United States and returned singing the praises of empirical business cycle research, Mises founded the Institute for Business Cycle Research in January 1927, and installed Hayek as director in an office at the Chamber of Commerce. In 1930, the poorly funded Institute received a large infusion of funds from the Rockefeller Foundation, at the behest of former Mises seminar member John Van Sickle, who had become assistant director of the Foundation’s office in Paris. The increased funding enabled the Institute to hire Morgenstern and Haberler to assist Hayek, and, when Hayek left Austria for England in 1931, Morgenstern succeeded him as Director.
While most Viennese, including Mises’s friends and students, basked in the Pollyanna view that Nazism could never happen in Austria, Mises, in the early 1930s, foresaw disaster and urged his friends to emigrate as soon as possible. Machlup credits Mises’s advice for saving his life. With characteristic wit and insight, Mises pictured a likely scenario for his friends and himself in the New World: they would all, he prophesied, open a cafe and nightclub somewhere in Latin America. Mises would be the doorman, the formal and aloof Hayek the head waiter, the songster Felix Kaufmann would be the crooner, and the suave Machlup the club gigolo.
Robbins, furthermore, published some challenging Austrian articles on microeconomics and on population theory in the early 1930s. In 1932, moreover, he published a watered-down version of Misesian praxeology, On the Nature and Significance of Economic Science, which became the bible of methodology for economists until Milton Friedman’s unfortunate positivist manifesto was published in the early 1950s. In addition to these prodigious efforts, Robbins arranged for the translation and publication of Hayek’s two books on business cycle theory (Monetary Theory and the Trade Cycle, and Prices and Production), and finally arranged for the translation of Mises’s Theory of Money and Credit and Socialism.
But, then, just as it seemed that Austrian economics would conquer England (particularly as having predicted and offered an explanation of the Great Depression), Keynes’s General Theoryswept all before it, and by the late 1930s all of Hayek’s converts had shifted suddenly to Keynesianism, even though they were by then mature enough to know better. All the stalwarts, including Robbins, Hicks, Beveridge, and the rest, had shifted over, and by the end of the 1930s only Hayek was left untouched by the Keynesian storm. But it must have been a particularly bitter blow to Ludwig von Mises that such favorite students of his as Machlup and Haberler had become Keynesians, albeit relatively moderate ones.
In addition to his enormous influence upon thought in Austria, Mises also exerted considerable influence over economists in Germany. Georg Halm joined Mises in attacking the possibility of economic calculation under socialism. L. Albert Haln, a German banker and economist, had been a proto-Keynesian inflationist in the 1920s, but turned around to be a severe critic of Keynes in the 1930s. Other German economists strongly affected by Mises were Wilhelm Röpke, Alfred Müller-Armack, Goetz A. Briefs, an expert on labor unions, Walter Sulzbach, a critic of the Marxian concept of class, Alexander Rüstow, economic historian, Mortiz J. Bonn, and Ludwig Pohle. Luigi Einaudi of Italy, and monetary specialist Jacques Rueff in France were also friends of, and influenced by, von Mises.
Exile and the New World
More alert than any of his colleagues to the ever-encroaching Nazi threat in Austria, Mises accepted a chair in 1934 as professor of International Economic Relations at the Graduate Institute of International Studies at the University of Geneva. Since the initial contract at Geneva was only for one year, Mises retained a part-time post at the Chamber of Commerce, on one-third salary. Mises’s contract was to be renewed until he left Geneva in 1940. While it saddened him to leave his beloved Vienna, Mises was happy during his six years in Geneva. Established at his first (and last!) paid academic post, he was surrounded by such friends and likeminded colleagues as jurist and economist William E. Rappard, president of the Institute; Institute co-director Paul Mantoux, the eminent French economic historian; Mises’s boyhood friend, the distinguished jurist Hans Kelsen; Wilhelm Röpke, who had left Germany because of the Nazis; and French scholars Louis Rougier and Louis Baudin.
Mises’s lectures were in French, but he was fluent in French, and spoke it with no trace of an accent. Teaching only one weekly seminar on Saturday mornings, and divested of his political and administrative duties at the Chamber, Mises finally enjoyed the leisure to embark upon, and finish, his great masterpiece integrating micro- and macro-economics, the analysis of the market and of interventions into that market, all constructed on the praxeological method that he had set forth in the 1920s and early 1930s. This treatise was published as Nationalökonomie(Economics) in Geneva, in 1940.
Despite these favorable conditions, it took great courage for Mises to continue his work in the face of the tidal wave of Keynesian economics after 1937, and of the growth of socialist doctrines of left and right, as well as the onrush of Nazism and the imminence of a second horrible world war. In 1938, Mises was horrified to see the Nazi conquest of Austria, accompanied by the Nazi destruction of his personal library and papers, but he was cheered by being able to marry his fiancée, Margit Sereny, when she was able to flee to Geneva.
The onset of World War II put an enormous amount of pressure on the Miseses. In addition to depriving the Institute of its non-Swiss students, the war meant that refugees, such as Mises, were increasingly made to feel unwelcome in Switzerland. Finally, when the Germans conquered France in the spring of 1940, Ludwig, prodded by his wife, decided to leave a country now surrounded by the Axis powers and flee to the Mecca for the victims of tyranny, the United States.
Emigration to the United States was a particularly harrowing experience for Mises. Here he was, a man of nearly sixty, in contrast to his fluency in French only book-learned in English, fleeing from a lifetime in Europe, impoverished, with no prospect of a job in the United States, forced to dodge German troops as he and Margit made their way across France to Spain and finally Lisbon, where they embarked for the United States. His entire world, his hopes and dreams, were shattered, and he was forced to make a new life in a new country with an unfamiliar language. And to top it all, as he saw a world succumbing to war and statism, his great masterpiece, Nationalökonomie, published during wartime conditions, had sunk without a trace. World War II was no time to interest anyone in high theory. Moreover, the book was not allowed to reach the German-speaking countries which constituted its natural market, and its Swiss publishing firm failed during the war.
The Miseses arrived in New York City in August 1940. Lacking any prospect of employment, the couple lived off meager savings, moving repeatedly in and out of hotel rooms and furnished apartments. It was the lowest point of Mises’s life, and shortly after he landed he began writing a despairing, searing intellectual memoir which he finished in December, and which was translated and published after his death as Notes and Recollections (1978). A major theme in this poignant work is the pessimism and despair that so many classical liberals, friends and mentors of Mises, had suffered from the accelerating statism and destructive wars of the twentieth century. Menger, Böhm-Bawerk, Max Weber, Archduke Rudolf of Austria-Hungary, Mises’s friend and colleague Wilhelm Rosenberg — had all been broken in spirit or driven to death by the intensifying gloom of the politics of their time. Mises, throughout his life, resolved to meet these grave setbacks by fighting on, even though the battle might seem hopeless. In discussing how fellow classical liberals had succumbed to the despair of World War I, Mises then recounts his own response:
I thus had arrived at this hopeless pessimism that for a long time had burdened the best minds of Europe…. This pessimism had broken the strength of Carl Menger, and it overshadowed the life of Max Weber….
It is a matter of temperament how we shape our lives in the knowledge of an inescapable catastrophe. In high school I had chosen the verse by Virgil as my motto:Tu ne cede malis sed contra audentior ito (“Do not yield to the bad, but always oppose it with courage”). In the darkest hours of the war, I recalled this dictum. Again and again I faced situations from which rational deliberations could find no escape. But then something unexpected occurred that brought deliverance. I could not lose courage even now. I would do everything an economist could do. I would not tire in professing what I knew to be right.
It was at that point, Mises went on, that he decided to write the book on socialism which he had contemplated before the outbreak of World War I.
Every other terrible situation faced by Mises in his life was met by the same magnificent courage: in the battle against inflation, the struggle against the Nazis, the flight during World War II. In every case, no matter how desperate the circumstance, Ludwig von Mises carried the fight forward, and deepened and expanded his great contributions to economics and to all the disciplines of human action.
Life began to improve for Mises when his old connection with John Van Sickle and the Rockefeller Foundation led to a small annual grant via the National Bureau of Economic Research, a grant which began in January 1941 and was renewed though 1944. From these grants emerged two important works, the first books of Mises written in English, both published by the Yale University Press in 1944. One was Omnipotent Government: The Rise of the Total State and Total War. The dominant interpretation of Nazism in that era was the Marxist view of Columbia University Professor and German refugee Franz Neumann: that Nazism was the last desperate gasp of German big business, anxious to crush the rising power of the proletariat. That view, now thoroughly discredited, was first challenged by Omnipotent Government, which pointed out the statism and totalitarianism that underlay all forms of left-wing and right-wing collectivism. The other Mises book, Bureaucracy, was a marvelous little classic, which delineated, as never before, the necessary differences between profit-seeking enterprise, the bureaucratic operation of nonprofit organizations, and the far worse bureaucracy of government.
Yale University Press published Mises’s first English works in the teeth of an overwhelming dedication to socialism and statism by the major book publishers of that era. The press was secured for publishing Mises by his first new friend in the United States, the prominent economic journalist, Henry Hazlitt, then the lucid editorial writer and economist for the New York Times. Hazlitt had admired Mises since he had glowingly reviewed the English edition ofSocialism in the Times in 1938. Hazlitt met Mises shortly after his arrival in the United States, and he soon became a close friend and disciple, writing prolifically and creatively on Austrian economics and tirelessly advancing the cause of Mises the person as well as the scholar.
In early 1943, after Mises had completed the manuscript of Omnipotent Government, Hazlitt steered it to the libertarian-minded editor at Yale University Press, Eugene Davidson, who was enthusiastic about the book. From then on through the 1950s, the prestigious Yale Press served as the publisher of all of Mises’s work, both new and reprint. In fact, it was Davidson who suggested, in early 1944, that Mises write a short book on bureaucracy, and Mises completed the manuscript by June of that year.
Through Hazlitt’s good offices, Mises published nine articles for the New York Times, on world economic problems, during 1942 and 1943. This spread Mises’s ideas in the United States, and in January 1943, led Noel Sargent, secretary of the National Association of Manufacturers — an organization then devoted to laissez-faire — to invite Mises to join the Economic Principles Commission of the NAM. Mises served on the NAM Commission from 1943 to 1954, and was hence able to meet many of the leading industrialists devoted to a free market economy.
But it remains an ineradicable blot on the record of American academia that Mises was never able to find a paid, full-time post in any American university. It is truly shameful that at a time when every third-rate Marxoid refugee was able to find a prestigious berth in academia, that one of the great minds of the twentieth century could not find an academic post. Mises’s widow Margit, in her moving memoir about life with Lu, records their happiness and her gratitude that the New York University Graduate School of Business Administration, in 1945, appointed Mises as Visiting Professor teaching one course a term. Mises was delighted to be back at university teaching; but the present writer cannot be nearly as enthusiastic about a part-time post paying the pittance of $2,000 a year. Mises’s course was, at first, on “Statism and the Profit Motive,” and it later changed to one on “Socialism.” This part-time teaching post was renewed until 1949.
Harold Luhnow, of the William Volker Fund, took up the crusade of finding Mises a suitable full-time academic post. Since obtaining a paid position seemed out of the question, the Volker Fund was prepared to pay Mises’s entire salary. Even under these subsidized conditions, however, the task was difficult, and finally New York University Graduate School of Business agreed to accept Mises as a permanent “Visiting Professor,” teaching, once again, his beloved graduate seminar on economic theory. Mises began teaching his seminar every Thursday night in 1949, and continued to teach the seminar until he retired, still spry and active twenty years later, at the age of 87, the oldest active professor in America.
Even under these favorable financial conditions, NYU’s support for Mises was grudging, and only came about because advertising executive and NYU alumnus Lawrence Fertig, an economic journalist and close friend of Mises and Hazlitt, exerted considerable influence at the university. Fertig, in fact, became a member of the NYU Board of Trustees in 1952. Even so, and even though Mises was allowed to supervise doctoral dissertations, he still carried the stigma of “Visiting Professor.” More important, after Dean G. Rowland Collins, an admirer of Mises, retired, succeeding Deans did their best to undercut student registration in Mises’s courses, claiming that he was a reactionary and Neanderthal, and that his economics was merely a “religion.”
It must have been galling to Mises that, in contrast to his shabby treatment at the hands of American academia, favorite former students who had abandoned Misesian doctrines for Keynesianism, but whose only real contributions to economics had come as Misesians, received high and prestigious academic posts. Thus Gottfried Haberler was ensconced as full professor at Harvard, and Fritz Machlup went to John Hopkins and later to Princeton. Oskar Morgenstern, too, landed at Princeton. All of these high academic positions were, of course, paid for by the university.
For the present writer, who was privileged to join the Mises seminar in its first session in 1949, the experience at the seminar was inspiring and exhilarating. The same was true of fellow students who were not registered at NYU, but audited the seminar regularly for years, and consisted of libertarian and free-market scholars and businessmen in the New York area. Due to the special arrangements of the seminar, the university agreed to allow Misesians to audit the course. But even though Mises had a small number of excellent graduate students who did their doctorates under him — notably Israel M. Kirzner, still teaching at NYU — the bulk of the regular students were uncomprehending business students, who took the course for an easy A. The proportion of libertarians and budding Austrians to the class total ranged, I would estimate, from about one-third to one-half.
Mises did his best to replicate the conditions of his great Vienna Privatseminar including repairing after the end of the formal session at 9:30 PM to Childs’ Restaurant to continue informal and animated discussions. Mises was infinitely patient and kind with even the most dimwitted of us, constantly tossing out research projects to inspire us, and always encouraging the shiest and most awestruck to speak. With a characteristic twinkle in his eye, Mises would assure them: “Don’t be afraid to speak up. Remember, whatever you say about the subject and however wrong it might be, the same thing has already been said by some eminent economist.”
However wonderful the seminar experience for knowledgeable students, I found it heartbreaking that Mises should be reduced to these frowzy circumstances. Poor Mises: there was scarcely a Hayek or a Machlup or a Schütz among these accounting and finance majors, and Childs’ Restaurant was no Viennese cafe. But one incident corrected some of this view. One day, Mises was invited to speak before the graduate economic students and faculty at Columbia University, a department then rated among the top three economics departments in the country. Typical of the questions after his talk was this: “Professor Mises, you say you are in favor of repealing measures of government intervention. But doesn’t such repeal itself constitute an act of intervention?” To this inane question, Mises gave a perceptive and telling reply: “Well, in the same way, you could say that a physician who rushes to the side of a man hit by a truck, is ‘intervening’ with the man in the same way as the truck.” Afterwards, I asked Professor Mises how he liked the experience. “Eh,” he replied, “I like my students [at NYU] better.” After that, I realized that perhaps Mises’s teaching at NYU was truly worthwhile, even from his point of view.
As early as 1942, Mises, dismayed but undaunted by the sad fate of Nationalökonomie, began work on an English-language version of the book. The new book was not simply an English translation of Nationalökonomie. It was revised, better written and greatly expanded, so much so as to be virtually a new book. It was the great work of Mises’s life. Under the care and aegis of Eugene Davidson, the Yale University Press published the new treatise in 1949 as Human Action: a Treatise on Economics.
Happily, the opening of Mises’s seminar coincided with the publication of Human Action, which came out on September 14, 1949. Human Action is it: Mises’s greatest achievement and one of the finest products of the human mind in our century. It is economics made whole, based on the methodology of praxeology that Mises himself had developed, and grounded in the ineluctable and fundamental axiom that human beings exist, and that they act in the world, using means to try to achieve their most valued goals. Mises constructs the entire edifice of correct economic theory as the logical implications of the primordial fact of individual human action. It was a remarkable achievement, and provided a way out for the discipline of economics, which had fragmented into uncoordinated and clashing sub-specialties. It is remarkable that Human Action was the first integrated treatise on economics since Taussig and Fetter had written theirs before World War I. In addition to providing this comprehensive and integrated economic theory, Human Action defended sound, Austrian economics against all its methodological opponents, against historicists, positivists, and neo-classical practitioners of mathematical economics and econometrics. He also updated his critique of socialism and interventionism.
In addition, Mises provided important theoretical corrections of his predecessors. Thus, he incorporated the American Austrian Frank Fetter’s pure time preference theory of interest into economics, at long last rectifying Böhm-Bawerk’s muddying of the waters by bringing back the fallacious productivity theory of interest after he had disposed of it in the first volume of hisCapital and Interest.
It is another blot on American academia that I had gone through all the doctoral courses at Columbia University without once discovering that there was such a thing as an Austrian school, let alone that Ludwig von Mises was its foremost living champion. I was scarcely familiar with Mises’s name, outside of the usual distorted story of the socialist calculation debate, and was therefore surprised to learn in the spring of 1949 that Mises was going to begin a regular seminar at NYU. I was also told that Mises was going to publish a magnum opus in the fall. “Oh,” I asked, “what’s the book about?” “About everything,” they replied.
Human Action was indeed about everything. The book was a revelation to those of us drenched in modern economics; it solved all problems and inconsistencies that I had sensed in economic theory, and it provided an entirely new and superb structure of correct economic methodology and theory. Furthermore, it provided eager libertarians with a policy of uncompromising laissez-faire; in contrast to all other free-market economists of that day or later, there were no escape hatches, no giving the case away with “of course, the government must break up monopolies,” or “of course, the government must provide and regulate the money supply.” In all matters, from theoretical to political, Mises was the soul of rigor and consistency. Never would Mises compromise his principles, never would he bow the knee to a quest for respectability or social or political favor. As a scholar, as an economist, and as a person, Ludwig von Mises was a joy and an inspiration, an exemplar for us all.
Human Action was and continues to be a remarkable publishing phenomenon. The book to this day is a best seller for the press, so much so that the publisher refuses to put it into paperback. This is truly noteworthy for a massive and intellectually difficult work such as Human Action. Astonishingly, the book was made an alternate selection of the Book-of-the-Month Club, and it has been published in Spanish, French, Italian, Chinese, and Japanese editions. Thus, throughHuman Action Mises was able to forge an Austrian and laissez-faire movement of national and even international scope.
Remarkably too, the Misesian movement forged by Human Action was multi-class: it ranged from scholars to students to businessmen, ministers, journalists, and housewives. Mises himself always placed great importance on outreach to businessmen and the general public. At one time, there were plans afoot for a graduate school, entitled the American School of Economics, to be financed by J. Howard Pew with Mises as president. Some of us younger Misesian scholars were on the Board of Trustees. Mises emphasized that, as was common in Europe, the faculty of the school should give periodic lectures to the general public, so that sound economic education would not be confined to professional scholars. Unfortunately, plans for the school eventually fell through.
Yale University Press was so impressed with the popularity as well as the quality of Mises’s book that it served for the next decade as the publisher of his work. The press published a new, expanded edition of Socialism in 1951, and a similarly expanded edition of The Theory of Money and Credit in 1953. Remarkably, too, Mises did not rest on his laurels after the publication ofHuman Action. His essay on “Profit and Loss” is perhaps the best discussion ever written of the function of the entrepreneur and of the profit-and-loss system of the market. In 1957, the press published Mises’s last great work, the profound Theory and History, his philosophical masterpiece that explains the true relation between praxeology, or economic theory, and human history, and engages in a critique of Marxism, historicism, and various forms of scientism.Theory and History was, understandably, Mises’s favorite next to Human Action. However, after the departure in 1959 of Eugene Davidson to be founding editor of the conservative quarterly Modern Age, Yale University Press no longer served as a friendly home for Mises’s works. In its final years the publishing program of the William Volker Fund took up the slack, and provided the world with an English edition of Liberalismus (as The Free and Prosperous Commonwealth), and of Grundprobleme der Nationalökonomie (as Epistemological Problems of Economics), both published in 1962. Also, in the same last year of Volker Fund existence, the Fund published Mises’s final book, The Ultimate Foundation of Economic Science: An Essay on Method, a critique of logical positivism in economics.
After failing for the last two years of his life, the great and noble Ludwig von Mises, one of the giants of our century, died on October 10, 1973, at the age of 92. It is ironic that the following year, Friedrich A. Hayek received the Nobel Prize in Economics, not for his later philosophical meanderings and lucubrations, but precisely and explicitly for the work he did, in the 1920s and 1930s, as an ardent Misesian, in elaborating Mises’s theory of business cycles. Ironic because if anyone deserved the Nobel Prize more than Hayek, it was clearly his mentor, Ludwig von Mises. Those of us given to cynical speculation might judge that the Nobel Prize Committee of Sweden deliberately held off the award until Mises’s death, for otherwise they would have had to give the award to someone they considered impossibly dogmatic and reactionary.
The Nobel Prize to Hayek, combined with the growing Misesian movement of the preceding fifteen years, sparked a veritable “takeoff” stage for a revival of Austrian economics. For one thing, the general run of economists, virtually obsessed with the Nobel Prize, and never having heard of Hayek, felt obliged to investigate what this person may have done. Hayek’s was also the first Nobel to break the logjam of giving the award only to mathematicians and Keynesians; since then, numerous free-market economists have obtained the award.
Since 1974, the revival of Austrian economics and of interest in Mises and his ideas has accelerated greatly. Scorned for the last four decades of Mises’s life, Austrian economics in general, and Mises in particular, are now generally considered, at the very least, a worthy ingredient amidst the current potpourri and confusion of economic thought and opinion. The academic climate is surely very different now, and infinitely better, than it was in the dark days that Mises could not find a suitable academic post.
For a few years after 1974, a revival of Austrian economics flourished, and there were notable conferences and published volumes each year. But then the tide seemed to turn, and by the late 1970s centers and institutes previously devoted to the resurgence of Misesian economics began to lose interest. The conferences and books slowed down, in quantity and in quality, and we began to hear once again the old canards: that Mises was too “extreme” and too “dogmatic,” and that it would be impossible to continue as a Misesian and gain “respectability” in the world, to achieve political influence, or, in the case of young academics, to acquire their tenure. Former Misesians began to pursue strange gods, to find great merit in such creeds that Mises detested as the German Historical School, institutionalism, nihilism, and even to prate about a “synthesis” with Marxism. Worse yet, some of these younger Austrians were actually trying to imply that Mises himself, a man who dedicated his entire life to the truth, would actually have blessed such abhorrent maneuverings.
Coda: Mises the Man
Who was Mises the Man? Since his death, some of his most beloved students of the 1920s, particularly F.A. Hayek, have disseminated the view that Mises was “difficult,” “stern,” “severe,” not personally close to his students, and even “personally obnoxious.” These strictures were either given to interviewers, or inserted as barbs in the midst of an effusion of praise for Mises. But is this the sort of teacher who all of his life had gathered around him enthusiastic admirers and followers? Certainly, I can testify that all his American followers were steeped, not only in admiration for the greatness and rigor of his intellect and creative powers, and for his indomitable courage, but also in love with the sweetness of his soul. And if it is to be thought that somehow his personality had been harsher in the 1920s, what kind of an aloof or impersonal mentor would induce a man like Felix Kaufmann to compose songs in honor of Mises’s seminar?
Not only were we American students deeply stirred by Mises the man, but we all realized that in Mises we were seeing the last trailing clouds of glory of the culture of pre-World War I Old Vienna, a far finer civilization than we will know again. William E. Rappard, a man of Mises’s own age, caught this spirit very well in his tribute to Mises in the Festschrift prepared in 1956. Rappard wrote of Mises that, in the Geneva years,
I very often, and I am afraid, very indiscreetly, enjoyed his company. All those who have ever had a like privilege realize that he is not only one of the keenest analytical minds among contemporary economists, but that he also has at his disposal a store of historical culture, the treasures of which are animated and illuminated by a form of humanity and Austrian wit rarely to be found today on the surface of this globe. In fact, I sometimes wonder, not without fear, whether our generation is not the last to be blessed with what seems to have been a monopoly of pre-war Vienna.
But the finest words of appreciation of Mises the man were delivered in the course of a perceptive and elegantly written tribute to Mises’s ideas by his long-time admirer Professor Ralph Raico:
For over sixty years he was at war with the spirit of the age, and with every one of the advancing, victorious, or merely modish political schools, left and right.
Decade after decade he fought militarism, protectionism, inflationism, every variety of socialism, and every policy of the interventionist state, and through most of that time he stood alone, or close to it. The totality and enduring intensity of Mises’s battle could only be fueled from a profound inner sense of the truth and supreme value of the ideas for which he was struggling. This — as well as his temperament, one supposes — helped produce a definite “arrogance” in his tone (or “apodictic” quality, as some of us in the Mises seminar fondly called it, using one of his own favorite words), which was the last thing academic left-liberals and social democrats could accept in a defender of a view they considered only marginally worthy of toleration to begin with….
And Professor Raico concludes with this marvelous and discerning passage:
No appreciation of Mises would be complete without saying something, however inadequate, about the man and the individual. Mises’s immense scholarship, bringing to mind other German-speaking scholars, like Max Weber and Joseph Schumpeter, who seemed to work on the principle that someday all encyclopedias might very well vanish from the shelves; the Cartesian clarity of his presentations in class (it takes a master to present a complex subject simply); his respect for the life of reason, evident in every gesture and glance; his courtesy and kindliness and understanding, even to beginners; his real wit, of the sort proverbially bred in the great cities, akin to that of Berliners, or Parisians and New Yorkers, only Viennese and softer — let me just say that to have, at an early point, come to know the great Mises tends to create in one’s mind life-long standards of what an ideal intellectual should be. These are standards to which other scholars whom one encounters will never be equal, and judged by which the ordinary run of university professor — at Chicago, Princeton, or Harvard — is simply a joke (but it would be unfair to judge them by such a measure; here we are talking about two entirely different sorts of human beings).
When Mises died, and I was preparing an obituary, Professor Raico kindly sent me a deeply moving passage from Adonais, Shelley’s great eulogy to Keats, that, as usual for Raico, struck just the right note in a final assessment of Mises:
For such as he can lend — they borrow not
Glory from those who made the world their prey:
And he is gathered to the kings of thought
Who waged contention with their time’s decay,
Murray N. Rothbard (1926–1995) was dean of the Austrian School. He was an economist, economic historian, and libertarian political philosopher.