Mises: His Importance and Relevance - By Art Carden

Posted by ProjectC 
By Art Carden
December 11, 2009

This article is based on my notes from Jorg-Guido Hülsmann's Mises University lecture "The Life and Work of Ludwig von Mises," delivered at the Ludwig von Mises Institute on July 26, 2009. You can also listen to a ten-lecture series on Mises here. Professor Hülsmann was kind enough to give me permission to write this article even though it is explicitly derived from his lecture.

Ludwig von Mises died in 1973. His most important book is 60 years old. So how is he relevant? Why should we read his work? What can we learn by studying his life? In light of the current recession, the intellectual history of the last two centuries, and what we know about the prerequisites for growth and prosperity, we can learn much by reading and studying Mises.

A recent symposium in the Freeman marked the sixtieth anniversary of Human Action. Mises embodied the virtues of a scholar, a creator, and a hero, to borrow the title of Murray Rothbard's biography of his mentor.(pdf) He was an example of scholarly virtue, courage, and commitment to truth in the face of incredible opposition. His success as a vocational economist is embodied in the legacy he leaves through his writing and through his influence on generations of scholars like Fritz Machlup, F.A. Hayek, and Murray Rothbard. His influence is also expressed through Mises Institutes around the world and in academic programs at George Mason University, Universidad Rey Juan Carlos, Universidad Francisco Marroquin, Hillsdale College, Grove City College, Loyola University-New Orleans, and other institutions. Mises never got the academic post he deserved in the United States, and he spent his American years as a visiting professor at New York University, but he was offered positions at UCLA and the University of Rochester in addition to being named a distinguished fellow of the American Economic Association.

An event early in Mises's life illustrates the importance of ideas and of keeping ideas alive. His life changed in 1902 when he first read Carl Menger's Principles of Economics. Menger left the University of Vienna before Mises was able to take one of his courses, but Mises saw in Principles of Economics a clearly defined alternative to what was then being promulgated by the German Historical School. Menger's system revealed to Mises a realistic view of the world as it is, with clearly defined laws of action that applied to all social phenomena. Mises could not take a course from Menger, but he was able to attend Eugen von Böhm-Bawerk's seminar at Vienna (where he was a classmate of Joseph Schumpeter and the socialist Otto Bauer).

After some time working in a very prestigious job for the Austrian government, Mises discovered that he was poorly suited for life as a bureaucrat. After spending some time with a law firm and learning (again) that this was not his calling, he joined the Lower Austria Chamber of Commerce. This started a career that spanned 25 years. As a member of the Chamber, Mises could comment on policy issues by speaking directly to members of Parliament and by writing for scholarly and popular outlets.

World War I interrupted Mises's career with the Chamber and almost cut his life short. He joined the army as a lieutenant but rose to captain quickly and moved onto the front lines. His colleagues felt that this was a great risk and thought he was more valuable helping run things from behind the lines. After the war, Austria-Hungary was broken up into Yugoslavia, Hungary, Austria, and Czechoslovakia. Parts of the empire were added to Poland and Italy.

Mises had a profound influence on policy from his position as an "extraordinary" — i.e., adjunct — professor at the University of Vienna. Through his theoretical, popular, and policy writings, he helped save Austria from a Bolshevik takeover and from the kind of hyperinflation that occurred in Germany in 1923. He was offered a position with the Kredit-Anstalt, which was one of the world's great banks, in the 1920s, but he refused on the grounds that the world was on the verge of a great crisis to which he did not want to lend his good name.

In 1934, Mises took advantage of the opportunity to take an early retirement from the Chamber of Commerce and moved to the Graduate Institute for International Studies in Geneva. The Institute had offered him a one-year position, but he stayed in Geneva for six years. While in residence in Vienna, he wrote Nationalokonomie, which was the German-language predecessor to Human Action.

In Professor Hülsmann's Mises University lecture, he notes that these were probably Mises's happiest years. Unfortunately, these happy years were interrupted by World War II. France was overrun by the Germans and then the Italians; Switzerland was encircled by the Germans and the Italians; life became unpleasant for enemies of the Nazi regime — and Mises was certainly one of its enemies. Mises was fortunate to evade the Nazis long enough to secure passage to the United States. Millions of others were not so lucky.

He was granted research fellowships from the Rockefeller Foundation and the National Association of Manufacturers, and he later found himself with a visiting appointment at NYU. During this time he began his association with the Foundation for Economic Education, and he published the first edition of his magnum opus, Human Action, in 1949. Human Action provided an intellectual foundation for further work by other scholars. Murray Rothbard, for example, would write Man, Economy, and State and Power and Market based on Human Action. Together, these texts provided the starting point, and the internal coherence, for the late-20th-century Austrian paradigm.

Why were Mises's contributions significant? To really know, we have to go back to the Classical economists, the mercantilists, and the first two generations of Austrian economists (Menger and Böhm-Bawerk). In 1776, Adam Smith published his systematic treatise An Inquiry into the Nature and Causes of the Wealth of Nations, which synthesized a number of existing ideas and refuted many popular mercantilist doctrines. Mercantilism seeks to restrict imports and encourage exports through tariffs, subsidies, and monopoly.

Smith argued (quite effectively and correctly) that this was wrong: for Smith, the wealth of nations had nothing to do with the level of spending or with the money supply. The real causes of economic growth were capital accumulation and the division of labor. Smith argued that under the "obvious and simple system of natural liberty," capital would be allocated to the lines of employment in which it would be most profitable. Mercantilism necessarily meant an impoverished economy.

Most scholars would be content to make one lasting contribution. Mises made three. The first was his business-cycle theory, which appeared in his 1912 book, The Theory of Money and Credit — published when he was 31, I might add — which completed parts of the research program started by Adam Smith and integrated value theory and monetary theory.

When governments print money, they fool investors and drive down interest rates. An interest rate that would otherwise tell investors about consumers' time preferences will, after credit expansion, yield incorrect information. This means that people start too many projects relative to the number of projects that can be completed. We learn of our error when we start running out of real resources and when prices adjust to reflect this reality.

His second important contribution was his demonstration that there can be no such thing as "rational economic calculation" if resources are not privately owned. In other words, there can be no such thing as rational, meaningful economic calculation under socialism, as he demonstrated in his 1922 book, Socialism.

Profitability is the criterion by which projects are evaluated in the market economy. This presupposes prices for inputs and outputs, which in turn presupposes private property and exchange. Socialism is defined by the common ownership of the means of production, which means that we cannot have exchange, prices, or rational economic calculation. Since there are no prices, profits cannot be calculated. Therefore, projects cannot be evaluated.

Third, Mises developed a new epistemology of economics and the social sciences. The Marxists and socialists, for example, argued that all economics is ideology. Mises argued that economic science is a priori: it deals with a level of reality that is inaccessible to the senses. Choice is an example: we know it is there, but we cannot observe it — it precedes action. This was a claim developed in detail in his 1933 book, Epistemological Problems of Economics, his 1949 book, Human Action, his 1957 book, Theory and History, and his 1962 book, The Ultimate Foundation of Economic Science.

Ludwig von Mises was, first and foremost, an economist and social scientist who built an entire intellectual system from a very simple principle: man acts. By our nature, we do some things and forego others. This principle is at the base of the Misesian approach to economics. Mises was much more than a scholar. He was also an example of someone who fearlessly pursued truth even in the face of incredible opposition. It was through his courage that the Last Knight of Liberalism set an example for all to follow.