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The "Other" Ludwig von Mises: Economic-Policy Advocate in an Interventionist World

Mises Daily: Friday, March 26, 2010 by

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Ludwig von Mises

Ludwig von Mises was quite possibly the most uncompromising, consistent, and principled defender of classical liberalism and the free-market economy in the 20th century.

His great works on The Theory of Money and Credit, Socialism, Liberalism, Critique of Interventionism, Epistemological Problems of Economics, Bureaucracy, Human Action, Theory and History, and Ultimate Foundation of Economic Science, for example, show him to be that unique, grand theorist dealing with the sweeping issues and problems of the human condition: the general logic and structure of human action and choice; the nature of different economic institutional orders — capitalism, socialism, and interventionism; the workings of the competitive market process and the role of the entrepreneur; the importance of the monetary order for economic calculation and market coordination; and the interconnections between time, money, production, and the occurrence of the business cycle.[1]

This is certainly the side of Mises's thought and writings that often carries a timeless quality with continuing relevance and application, because it deals with the general and universal aspects of man, mind, markets, and society. But we should also remember that Ludwig von Mises did not make his living as a grand economic theorist or social philosopher for most of the years before he came to the United States as a refugee from war-ravaged Europe in 1940.

For almost a quarter of a century, from 1909 to 1934 (except during the First World War), Mises worked as an economic-policy analyst and advisor to the Vienna Chamber of Commerce. From the ages of 28 to 53 (when he moved to Geneva, Switzerland to accept his first full-time academic position, at the Graduate Institute of International Studies) he spent his working day as a "policy wonk." And I mean a "policy wonk" — someone immersed in the factual details and economic policy specifics of, first, the old Austro-Hungarian Empire and, then, the Austrian Republic between the two World Wars. His statistical knowledge of "the facts" relating to Austrian fiscal policy, regulatory legislation, and monetary institutions and policy was precise and minute.

This became very clear to me while I worked through those "lost papers" of Ludwig von Mises that were recovered by my wife and myself from a formerly secret KGB archive in Moscow in 1996.[2] Indeed, it helped me to better understand that much of Mises's conception of the general economic order, its workings and requirements, and the institutional and policy "rules" that would help establish and maintain freedom and prosperity did not arise from a pure, a priori, deductive spinning out of implications from the "action axiom."

They are, in many cases, the general theoretical insights and conclusions, and the social-institutional and economic-policy "wisdoms" derived from living through, acting within, and the lessons learned from those momentous and often catastrophic events that shook Europe in the first half of the 20th century. And they were amplified due to the particular everyday reality of Austrian political and economic life that Mises experienced and worked within during this time.

An appreciation of this aspect of Ludwig von Mises's life and thinking comes out when reading through Mises's policy writings from this period. Liberty Fund of Indianapolis has been publishing a three-volume series under the general title, Selected Writings of Ludwig von Mises, for which I have served as the editor. The volumes contain many of Mises's articles, essays, and Vienna-chamber memoranda and speeches on these themes from this time.

They have been appearing in reverse chronological order. Thus, the last of the three volumes, which should appear in print in the very near future, is actually volume 1. It deals with Monetary, Fiscal and Economic Policy Problems Before, During, and After the Great War, and includes many of Mises's earliest writings as an economist. Here Mises analyzes issues surrounding the politics of establishing the gold standard in Austria-Hungary in the early 1890s; legal gold redemption by the Austro-Hungarian Bank in the decade before the First World War; the growing fiscal imbalances developing in the old Habsburg Empire due to the patterns of government spending and taxing policies in the first decade of the 20th century; and the reasons behind the economic crisis that hit Austria-Hungary in the years immediately before the start of the Great War.

Here, too, we see Mises analyzing during the war the motives behind German and Austro-Hungarian trade policy; the impact and significance of emigration from the Austrian Empire; the effects from the monetary inflation used to fund the government's war expenditures; and the pros and cons of financing those war expenditures through taxation versus borrowing by the issuance of war bonds.

After the war, Mises explained the distorting effects from the new Austrian government's control and rationing of foreign exchange for imports and exports; the impact on the Austrian foreign exchange rate due to monetary expansion to finance the government's huge deficit spending; a specific policy agenda to bring the country's financial house back into order, and the need for cooperation from both businesses and labor unions if this was to be achieved without Austria's currency collapsing into a hyperinflation; the claims that holders of bank notes of the old Austro-Hungarian Bank could make on the new Austrian National Bank in the postwar period; Austria's fiscal problems in the period after the end of the inflation; and the lessons for banking reform after the collapse of several banks in 1931.

(An appendix to the volume includes a talk that Mises delivered at his famous private seminar in the spring of 1934 on the methodology of the social sciences shortly before he moved to Geneva, Switzerland; and the curriculum vitae that his great-grandfather, Mayer Rachmiel Mises, prepared for the Habsburg Emperor in 1881 as part of his ennoblement that gave him and his heirs the hereditary title of "Edler von.")

It is in the second volume of the Selected Writings (2002), Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, that the reader will find a large collection of Mises's many articles and policy pieces from the 1920s and 1930s dealing with the Great Austrian Inflation, fiscal and regulatory mismanagement by the government, and the negative effects of numerous forms of government intervention and controls before and during the Great Depression; the volume also includes his critiques of socialist central planning and his defense of praxeology, the science of human action.

The third volume of the Selected Writings (2000) focuses on Mises's writings mostly from the first half of the 1940s on the theme of The Political Economy of International Reform and Reconstruction. In the midst of the Second World War, Mises lectured and wrote on the pressing issues of how Europe, small nations, and underdeveloped countries could recover from war and poverty and start on the path to economic renewal and prosperity.

Each volume begins with an introduction in which I try to explain the historical context of the period in which Mises wrote the pieces included in that particular volume. I have also tried to assist the reader with annotated footnotes explaining some of the ideas, persons, events, and geographical locations to which Mises refers in the texts.

What comes out from reading Mises's policy writings from this period of his European career is that if you had asked him a fiscal, or monetary, or regulatory-policy question in the context of his role as analyst at the Chamber of Commerce, he would not have said, and did not simply say, "laissez-faire" — abolish the central bank, deregulate the economy, and eliminate taxes.

In the give-and-take of everyday Austrian politics and policy decision-making, Mises accepts that there are certain institutional "givens" that must be taken for granted, and in the context of which policy options and decisions must be worked out.

Though he never expresses it explicitly, Mises seemed to usually think with three policy "horizons" in his mind.

The first, and the more distant, horizon, concerned the most optimal institutional and policy arrangements in society for the fostering of the classical-liberal ideal of freedom and prosperity, based on the knowledge that he thought sound economic theory could provide. This is captured most frequently in the books and articles he was writing outside of his narrow role as Vienna Chamber of Commerce economist, such as The Theory of Money and Credit (1912; revised ed., 1924); Socialism (1922, revised ed., 1932); Liberalism (1927); Monetary Stabilization and Cyclical Policy (1928); Critique of Interventionism (1929); and Causes of the Economic Crisis (1931).

The second horizon was closer to the actual circumstances of the present, but focused on the intermediary goals that would be leading in the direction of that more distant, "optimal" horizon. For example, the need for ending a paper money inflation and reestablishing a gold-based monetary system for general economic stability, without which the market order and economic calculation cannot properly function. Or the need to shift Austrian fiscal policy in a direction that would reduce the burden and incidence of the tax structure to end capital consumption and instead foster private-sector investment and capital formation.

I should mention that as a policy analyst thinking in terms of a classical-liberal normative framework, Mises does not advocate "tax neutrality" — that is, a low tax structure that would fund those minimal, limited-government functions, but would not attempt, outside of this, to "influence" the behavior or choices of the market participants. He believes that such a low tax system should be structured in such a way that it does foster and generate incentives for investment and capital formation. The tax structure, in his view, should be designed to stimulate production, not current consumption.

And the third horizon in the context of which Mises analyzes and proposes economic policies, is the current situation and the immediate future. In other words, how do you design the concrete bylaws and rules for a central bank to prevent it from following an inflationary monetary policy, including the transition to and implementation of specie redemption, and the policy tools it should then use to maintain the exchange rate and convertibility?

"What comes out from reading Mises's policy writings is that if you had asked him a fiscal, or monetary, or regulatory-policy question, he would not have said, and did not simply say, 'laissez-faire' — abolish the central bank, deregulate the economy, and eliminate taxes."

In the 1970s, Murray Rothbard once criticized Milton Friedman for advocating "indexation" of prices and wages as a method to reduce some of the negative effects from an ongoing inflation.[3] But in 1922, during the worsening Great Austrian Inflation, Mises actually proposed "indexation" of wages and prices, as well as government revenues and expenditures to reduce deficit fiscal pressures, maintain real standards of living for many in the society, and eliminate some of the inflationary distortions on economic calculation — as a part of a specific policy agenda to bring the inflation to an end. And he explained how the indexation should be implemented and linked to the international value of gold.

Likewise, Mises did not just say, "Cut bureaucracy and its spider's web of regulatory controls." He first explains what was inefficient and unnecessary in the three-tiered Austrian bureaucratic system of federal, provincial, and municipal regulators and taxing authorities. Then he explains what specific reforms should be introduced, how they could be "experimented" with in some of the smaller regions of Austria to see how they worked before extending them to the rest of the country, and how best to overcome the resistance of those in the bureaucracy fearful of losing their jobs.[4]

In designing a new fiscal order for Austria, Mises proposed eliminating all income taxes and many — but not all — corporate and business taxes. But how, then, do you finance the costs of government? He presents an agenda for implementing indirect taxes on a wide variety of consumption items, and especially what today would be called "sin taxes" and "luxury taxes." Government welfare-state expenditures were not going to just disappear. So, employers would be taxed to cover existing social-insurance expenditures. But overall, his fiscal policy plan for a reconstructed and reformed Austria was all meant to foster capital formation through predominately consumption taxation to cover government expenditures.[5]

And in a lengthy monograph that he wrote during the Second World War devoted to economic reform in an underdeveloped country like Mexico, he took as "given" that the politics of Mexican society was not ready to fully privatize, say, the national railway system or the oil industry. So as a "second best," Mises proposed transforming the railway system into a government-owned but privately managed corporation with strict rules and procedures to assure it was run in a relatively "business-like" manner with the least likelihood of political interference. He even supported limited and temporary subsidies to assist poor Mexican farmers to establish themselves as more-successful private enterprisers.

And on tariffs, he did not propose immediate abolition of trade barriers in Mexico. He accepted that there were many industries that had grown up behind the tariff walls, and that they would resist immediate repeal of trade protectionism. So, instead, he advocated "incrementalism," i.e., a gradual reduction of the tariff barriers over several years.[6]

He even supports the use of limited "trade retaliation" against countries that have raised their import taxes against the goods of one's own nation; this was meant as a means of nudging that trading partner back to a freer trade policy.

To give one more indication of Mises's thinking on specific policy alternatives and choices, there is a passage in Human Action in which he says, rather cryptically in passing, that there may be good reasons under certain circumstances to fund some government spending through short-term borrowing.[7] One only understands what he meant by this by reading a lecture he delivered in 1916 on the problem of funding the costs of the government's war expenses.

In this lecture, which is included in the forthcoming volume 1 of the Selected Writings of Ludwig von Mises, he praises the military successes of the Austrian army and the industriousness of Austrian businessmen in providing the manufactured goods required to fight the war. Mises reminds his listeners that borrowing does not enable the current generation to shift any part of the costs of a war to a future generation. Current consumption could only come out of current production, and this applied no less to consumption of finished goods designed for and used in war. Whether the war was financed by taxes or borrowing, the citizenry paid for it today by foregoing all that could have been produced and used if not for the war.

Then he explains to his audience what today often is referred to as the Ricardian equivalence theorem, named after the early 19th century British economist, David Ricardo. In his 1820 essay on the "Funding System," Ricardo argued that all that the borrowing option entailed was a decision whether to be taxed more in the present or more in the future, since all that was borrowed now would have to be paid back plus interest at a later date through future taxes; therefore in terms of their financial burden the two funding methods can be shown to be equivalent, under specified conditions. Ricardo, however, also pointed out that due to people's perceptions and evaluations of costs in the present versus the future, they were rarely equivalent in their minds.[8]

But Mises raised a different point in favor of certain benefits to debt financing for the government's war expenditures. Many who would not have the liquid assets to pay lump-sum wartime taxes would either have to sell off less liquid properties to pay their tax obligation, or would have to borrow the required sum to pay the tax. In the first case, a sizeable number of citizens might have to liquidate properties more or less all at the same time to improve their cash positions, which would put exceptional downward pressure on the market prices of those assets. This would impose a financial loss on those forced to sell these properties and assets to the benefit of those who were able to buy them at prices that would not have been so abnormally low if not for the war and the need for ready cash to pay the tax obligation.

Secondly, to the extent that some citizens would need to borrow to cover their wartime tax payments, the private individual's creditworthiness undoubtedly would be much lower than that of the government's. As a consequence, the rates of interest these private individual's would have to pay would be noticeably higher than the rate at which the government could finance its borrowing. Thus, the interest burden from government borrowing that would have to be paid for out of future taxes would be less for the citizenry than the financial cost from them having to borrow the money in the present to cover all the costs of war through current taxation. Hence, it was both patriotic and cost-efficient, Mises said to those listening to his lecture, to buy war bonds in support of the war effort.

Thus, we find Ludwig von Mises explaining why, given the reality of government spending, under certain circumstances government deficit spending may be more desirable (from the taxpayers' perspective) than a fully tax-funded balanced budget!

I have summarized and analyzed many of Mises's policy views and prescriptions during this period from before the First World War through the interwar period of the 1920s and 1930s, and into the years of the Second World War in several of the chapters in my recently published book, Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition (Routledge, 2010).[9]

In earning a living at the Vienna Chamber of Commerce in the Austria of his time, Mises could not simply propose and advocate a desired vision of what he considered to be the free and prosperous classical-liberal society of tomorrow. Given the ideologies and politics guiding, and the economic policies being implemented by, the Austrian government in the first four decades of the 20th century, Mises had to articulate detailed and specific alternative policy prescriptions that he surely first had to win support for within the Vienna Chamber of Commerce, and then make the case for in the wider arena of Austrian public opinion and policy decision making.

Even as that uncompromising and principled proponent of individual liberty and the free market, Mises was called upon in his role as policy analyst and advocate to sometimes devise "second-" and "third-best" policy proposals in an imperfect world dominated by collectivist and interventionist ideas and practices.

Separate from the "pros" and "cons" of each of the actual and specific monetary, fiscal, and regulatory policy changes and reforms that he presented during those years, what stands out most clearly is the guiding idea that implicitly runs through all of them. This guiding idea was Mises's attempt to think about and construct them in a way that if implemented and successful would move the society away from the abyss of socialist and interventionist destruction, and back in the direction of a freer and a more prosperous classical-liberal society.

That Mises was not able to fully succeed in his attempts to do this in the Austria of his time was not his fault. As he explains in his Memoirs, written shortly after he arrived in the United States, he tried to be the liberal "conscience" of his country.[10] He did help to prevent Austria moving in a totally socialist direction in the years immediately after the First World War, and he did assist in ending Austria's Great Inflation in 1922–1923.

But the tide of nationalist, socialist, and racialist collectivism was too powerful in those years to reverse its course.[11] As Mises mournfully says in his Memories, the final destroyer of interwar Austria came from outside in the form of the Nazi annexation of the country into Hitler's Greater German Reich in March of 1938.[12]

So what can we learn from Mises's extensive and detailed policy analyses on a wide variety of issues from those earlier decades of the 20th century? I would suggest that, first of all, we can gain an insight into the interaction between "theory" and "practice" at work in the mind of Ludwig von Mises. We can get a better understanding of how theory guided him to in thinking about and devising policy proposals, and how the practical policy affairs of everyday Austrian life during this time clearly challenged Mises's own thinking about the nature and working of the market order and the effects when the state throws sand in the machine through its various forms of interventionism and government planning.

Selected Writings of Ludwig von Mises, vol. 2: Between the Two World Wars
Edited by Richard M. Ebeling

And, second of all, for those who have sometimes asked, "Well, but how do you apply Austrian Economics to the 'real world' of public policy?" here is the answer by the economist who has been considered the most original, thoroughgoing, and uncompromising member of the Austrian School over the last one hundred years! His policy analyses provide us with warning signs and guideposts to assist us in thinking about and designing better policies for our own time.

Friedrich A. Hayek once remarked, when looking back at the events in Austria and Ludwig von Mises's place in the decades before the Second World War, "That they had one of the great thinkers in their midst the Viennese have never understood."[13] Mises's body of writings — on theory and policy — from this period enables us to appreciate what the Austrians, to their great misfortune, did not.

Notes

[1] For an overview of Mises's contributions to economic theory and political economy, see, Richard M. Ebeling, Austrian Economic and the Political Economy of Freedom (Northampton, MA: Edward Elgar, 2003), Ch. 3: "A Rational Economist in an Irrational Age: Ludwig von Mises," pp. 61–100; and, Richard M. Ebeling, Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition (London/New York: Routledge, 2010), Ch. 2: "Ludwig von Mises: Political Economist of Liberty," pp. 22–35. See, also, Murray N. Rothbard, Ludwig von Mises: Scholar, Creator, Hero (Auburn, AL: Ludwig von Mises Institute, 1988); Israel M. Kirzner, Ludwig von Mises (Wilmington, DE: ISI Books, 2001); and Jörg Guido Hülsmann, Mises: The Last Knight of Liberalism (Auburn, AL: Ludwig von Mises Institute, 2007).

[2] See, Richard M. Ebeling, "Mission to Moscow: The Mystery of the 'Lost Papers' of Ludwig von Mises," Notes from FEE (Irvington-on-Hudson, NY: Foundation for Economic Education, July 2004).Download PDF

[3] Murray N. Rothbard, "Milton Friedman Unraveled," Individualist, February 1971, pp. 3–7.

[4] Richard M. Ebeling, ed. Selected Writings of Ludwig von Mises, Vol. 2: Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression (Indianapolis, IN: Liberty Fund, 2002), Ch. 26: "Adjusting Public Expenditures to the Economy's Financial Capacity" [1930], pp. 241–250.

[5] Richard M. Ebeling, ed. Selected Writings of Ludwig von Mises, Vol. 3: The Political Economy of International Reform and Reconstruction (Indianapolis, IN: Liberty Fund, 2000): Ch. 8: "A Draft of Guidelines for the Reconstruction of Austria" [1940], pp. 133–168.

[6] Ibid., "Mexico's Economic Problems" [1943], pp. 203–254.

[7] Ludwig von Mises, Human Action, A Treatise on Economics (Irvington-on-Hudson, NY: Foundation for Economic Education, 4th revised ed., 1996) p. 227: "A good case can be made out for short-term government debts under special circumstances … Financing a war through loans does not shift the burden to the sons and grandsons. It is merely a method of distributing the burden among the citizens. If the whole expenditure had to be provided by taxes, only those who have liquid funds could be approached. The rest of the people would not contribute adequately. Short-term loans can be instrumental in removing such inequalities, as they allow for a fair assessment on the owners of fixed capital."

[8] David Ricardo, "Funding System" [1820] in Piero Sraffa, ed., The Works and Correspondence of David Ricardo, Vol. IV: Pamphlets and Papers, 1813–1823 (Cambridge: Cambridge University Press, 1951), pp. 149–200, especially, pp. 186–187.

[9] See, especially in Richard M. Ebeling, Political Economy, Public Policy, and Monetary Economics, Ch. 4: "Austria-Hungary's Economic Policies in the Twilight of the 'Liberal' Era: Ludwig von Mises' Writings on Monetary and Fiscal Policy Before World War I," pp. 57–87; Ch. 5: "The Economist as the Historian of Decline: Ludwig von Mises and Austria Between the Two World Wars," pp. 88–140; and, Ch. 6: "Planning for Freedom: Ludwig von Mises as Political Economist and Policy Analyst," pp. 141–202.

[10] Ludwig von Mises, Memoirs [1940] (Auburn, AL: Ludwig von Mises Institute, 2009), p. 60.

[11] See, Richard M. Ebeling, Political Economy, Public Policy, and Monetary Economics, Ch. 3: "Ludwig von Mises and the Vienna of His Time," pp. 36–56.

[12] Ibid., p. 75.

[13] Peter G. Klein, ed., The Collected Works of F. A. Hayek, Vol. 4: The Fortunes of Liberalism: Essays on Austrian Economics and the Ideal of Freedom (Chicago: University of Chicago Press, 1992), Ch. 4: "Ludwig von Mises (1881-1973)," p. 159.