Episode #129: Memorable Mentors: Ludwig von Mises

Ludwig von Mises, economist, author, and one of the founders of the “neo-Austrian school” of economics.

Mises told his future wife: “If you want a rich man, don’t marry me. I am not interested in earning money. I am writing about money, but will never have much of my own.”

Our show was a discussion of the eBook, The Essential Ludwig von Mises, published by the Foundation for Economic Education, available for free.

Biography

At last, economics was whole, an integrated body of analysis grounded on individual action; there would have to be no split between money and relative prices, between micro and macro. –Murray Rothbard

Ludwig von Mises (1881-1973), born in Lemberg, 350 miles east of Vienna (today, part of Ukraine).

The oldest of three sons, from a prestigious Jewish family. His father was a construction engineer, who was titled “von” for his work on the Austrian railroads—similar to “sir” in Great Britain, but the title is inherited by all male, and unmarried female, descendants.

Carl Menger, one of the discoverers of the subjective theory of value

Carl Menger, one of the discoverers of the subjective theory of value

Mises entered University of Vienna turn of century, where he read Carl Menger, one of the creators of the subjective theory of value. In 1906, age 25, he graduated with a doctorate of laws, and became the chief economist at the Vienna Chamber of Commerce.

In 1912, published The Theory of Money and Credit, which challenged Irving Fisher’s quantity theory of money.

He finally got a teaching job, but only part time. He failed to be appointed for three reasons: 1) he was Jewish; 2) he was a staunch advocate of laissez-faire; and 3) he was personally dogmatic and intransigent. He was a private man, a confirmed bachelor for many decades, who finally married at age 57.

His younger brother, Richard, earned a PhD in mathematics, who became an aircraft designer. Mises always worried he’d be outdone by him.

Both brothers fought for Austria in the Great War, Mises being an artillery officer at the Eastern front who was decorated for bravery three times.

In 1934 he left Vienna to teach at the University of Geneva. In 1938, Nazis stormed Mises  Vienna apartment and confiscated his writings, 38 cases in call.

In the 1990s, Richard Ebeling of Hillsdale College discovered them stored in KGB files in Moscow, over 10,000 pages. What Irony! One of the foremost intellectual opponent of socialism in the 20th century, had his papers in the tender care of the Communist Party of the Soviet Union!

Ebeling has written Austrian Economics and Public Policy, among other works, which describe the contents of some of these papers. Mises personal library is located at Hillsdale College in Michigan

Mises emigrated to New York City in August 1940 (brother Richard was at Harvard). He never got a full-time teaching position, so his salary was subsidized by friends and foundations.

Brother Richard was a member of the  “Vienna Circle,” which included members such as Ludwig Wittgenstein and Karl Popper. They favored logical positivism, using empirical evidence to test theories.

Mises rejected this approach, preferring to rely on pure deductive reasoning instead.

Murray Rothbard once asked Mises what he thought of Richard’s book, Positivism: “I disagreed with that book, from the first sentence until the last.”

Peter Drucker, who knew Mises in his youth in Vienna and in New York, said of Mises: “He was the most depressing person I ever saw.” Murray

Rothbard disagreed, said Mises was a “joy and an inspiration.” Mises’ wife, Margit, said: “He wasn’t gentle. He had a will of iron, his mind a steel blade, and he could be unbelievably stubborn.

At a Mont Pelerin Society (founded by Friedrich Hayek in 1947) meeting in 1953 Milton Friedman chaired a session on income distribution. During the discussion, Mises stood up, announced “You’re all a bunch of socialists” and stomped out of room.

During his time at the Vienna Chamber of Commerce, he did support use of “limited trade retaliation” against countries that raised import taxes, to nudge them back to free trade.

In the early 1920s, Austria resorted to hyperinflation, like Germany. Hayek recalled his salary was 5,000 kronen/month in October 1921, then raised to 15,000/month in November and to 1 million/month by July 1922.

The League of Nations sent a commission to Vienna, along with some Austrian government officials, who paid a visit to Mises, asking for his advice on stopping the hyperinflation. “Meet me at 12:00 midnight at this building and I’ll tell you.”

“Hear that noise? Turn it off!” The Building was the government printing office. They did, and inflation ended.

Mises was Hayek’s teacher, and Eugen Bohm-Bawerk  was Mises’ teacher.

Mises and Hayek forecasted the Great Depression, Mises being the originator of the Austrian theory of money and business cycles. He thought unemployment was a pricing problem, not a demand-management problem, and felt Keynesian was nothing but special-interest group politicking. Hayek advanced Mises’ theory of business cycles, winning a Nobel Prize in 1974.

Mises died in New York City on October 10, 1973, age 92.

The Foundation for Economic Education ebook: The Essential Ludwig von Mises, contains five chapters, which we discussed.

1. Liberty and Property

A lecture to the 9th Meeting of the Mont Pelerin Society, October 1958

The Greeks and Romans thought freedom was only for the elite. Pre-capitalistic system was based on military conquest and opposed to innovation.

The characteristic feature of capitalism: principle of marketing, to satisfy the needs of the masses.

“If any of the socialists chiefs had tried to earn his living by selling hot dogs, he would have learned something about the sovereignty of the customers.”

“Government is a necessary institution, the means to make the social system of cooperation work smoothly…Government is not a necessary evil; it is not an evil, but a means, the only means available to make peaceful human coexistence possible. But it’s the opposite of liberty. It is beating, imprisoning, hanging.”

2. Profit and Loss

Mont Pelerin Society, September 1951

Bureaucratic management is the only alternative where there’s no profit and loss. Capital does not beget profit, as Marx thought.

It’s the entrepreneurial decision—mental acts, a product of the mind, a spiritual and intellectual phenomenon.

Lenin believed that production could be easily accomplished, since it consists of simple operations.

Taxing profit is tantamount to taxing success of those best at serving the public.

One main function profits: shift capital to those who best deploy it to satisfy the public.

Why is anyone better to expropriate than anyone else? Why shouldn’t immigrant’s wealth be taken by residents of their native country?

There is no third system: the choice is between capitalism and socialism.

3. Planned Chaos

Socialism, 1947.

Statoltry: combines idolatry with the state.

No such thing as a scientific ought. Science is only competent to establish what is.

Opponents of capitalism argue it hass no plan? Sure it has plans, just not that of the state, but those of individuals pursuing happinesss.

Capitalism vs. socialism: it’s not a fight over distribution, but which system best serves human welfare.

Marx never distinguished between communism and socialism, nor did Lenin who used socialist in the name of the USSR. In 1928, Stalin, at the  Communism International, made a distinction between the two words.

Ending: “What’s needed to stop the trend towards socialism and despotism is common sense and moral courage.”

4. Middle-of-the Road Policy Leads to Socialism

The so-called third way between capitalism and socialism is known asinterventionism, such as price controls, minimum wages, the National Industrial Recovery Act of 1933 (part of FDR’s New Deal), etc.

Mises labeled this third way nothing but “socialism by installments.”

5. The Place of Economics in Learning

Human Action, 4th ed, 1949

Cancer research can help fight disease, but business cycle research cannot stop recessions or depressions.

Economics is abstract reasoning, it can never be experimental and empirical.

There’s no such thing as labor economics, agriculture economics, etc. The same is true of ethics. There’s only one coherent body of economics.

Present-day universities are by and large “nurseries of socialism.”

Economics too important to be left to specialists.

Mises’ Magnum Opus

Human Action, published in 1947, was the culmination of Mises work.

Human Action is to capitalists what Das Kapital is to Marxists.

What’s it about: “Everything!”

Economist Gary North has posited a “fat-book” theory: Producing a revolution requires a fat book. Examples:

  • Adam Smith, The Wealth of Nations (1,097 pages)
  • Karl Marx, Das Kapital (2,846 pages)
  • Joseph Schumpeter (1,260 pages)
  • Murray Rothbard, Man, Economy and State (987 pages)
  • Milton Friedman, Monetary History of USA (860 pages)
  • Deirdre McCloskey, Bourgeois trilogy (2,000+ pages)
  • Mises, Human Action (907)
  • Baker, The Professionals Guide to Value Pricing

Mark Skousen says this is nothing but the Labor theory of value, since the Communist Manifesto was only 62 pages, and probably the second most influential book in history, next to the bible. The Four Gospels of the Bible are only 177 pages.

Mises built his system of economic though on logic and self-evident assumptions, similar to geometry. He rejected econometrics and mathematics in economics, believing there was no such thing as quantitative economics:

If a statistician determines that a rise of 10 per cent in the supply of potatoes in Atlantis at a definite time was followed by a fall of 8 per cent in the price, he does not establish anything about what happened or may happen with a change in the supply of potatoes in another country or at another time. He has not “measured” the “elasticity of demand” of potatoes. He has established a unique and individual historical fact.

Mises was a dualist who divided nature into two components:

  1. Human beings, who think, adopt values, make choices, and learn (social sciences)
  2. Animals and things, mechanical and predictable (physical sciences)

Revolutions to produce new words, and Mises introduced a few.

Praxeology is the study of human action. Then economics was the study of praxeology under conditions of scarcity. As Mises explained:

The field of our science is human action, not the psychological events which result in an action. It is precisely this which distinguishes the general theory of human action, praxeology, from psychology.

Catallactics is a theory of the way the free market system reaches exchange ratios and prices. It aims to analyze all actions based on monetary calculation and trace the formation of prices back to the point where an agent makes his or her choices. It explains prices as they are, rather than as they "should" be.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.