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A Prophet Without Honor in His Own Land

August 28, 2009

Tags BiographiesWar and Foreign PolicyHistory of the Austrian School of EconomicsPraxeology

The year was 1921. It was near midnight. Economist Ludwig von Mises was guiding some visitors through Vienna's dimly lit inner city. The city was asleep. All was quiet except for the sound of the men's muted conversation and the clop of their footsteps on the cobblestone streets. The men had just come from an economic conference where they had been discussing the disastrous effects of inflation.

 

Prices were rising rapidly in most of the countries of post — World War I Europe. Germany and Austria, especially, were facing hyperinflation. In Austria, the economy was in the doldrums. Large numbers of industrial firms were idle throughout the land, while others were working only part-time.

As the men approached the center of the city, the still of the night was broken by "the heavy drone of the Austro-Hungarian Bank's printing presses." Their Viennese host, Mises, explained that those presses "were running incessantly day and night, to produce new banknotes." Throughout the land, only the printing presses making banknotes were operating at full speed. "Let us hope," Mises told his guests, "that industry in Germany and Austria will once more regain its prewar volume and that war- and inflation-related industries, devoted specifically to the printing of notes, will give way to more useful activities."

Mises had been concerned about inflation even as a young man. After receiving his doctorate in 1906, he wrote a number of serious studies on money and banking. Former Austrian Minister of Finance Ernst von Plener, a leading economist, called Mises to his office one day to discuss one of Mises's papers. "I don't know why a young man like you is interested in inflation," Plener said. "True, inflation was a serious problem in the past. But," he went on, "all the civilized countries in the world are now on the gold standard. Can you imagine England, France, or Germany going off the gold standard?"

Ludwig, then only 26 years old, of medium height, serious, prim and proper, with a military bearing, was respectful. But he begged to differ. "I see a movement in those countries," Mises said, "that can't be called anything but 'inflationist.' The books of their economists express enthusiasm for inflation, even for unlimited inflation. Sooner or later, the ideas of those inflationist economists will influence public opinion. And that must lead to inflationist government policies. " Mises's anticipation was borne out during World War I when England, France, and Germany all went off the gold standard.

Mises served in the Austro-Hungarian cavalry on the eastern (Russian) front in World War I. When he returned to Vienna, he found that inflation had compounded the destitution of the people. Men and women who had worked and saved for decades discovered that the value of their pensions was evaporating; the savings of a lifetime could pay for only a few streetcar rides. Merchants could not replace inventories with the receipts from their sales. A shoe dealer, for instance, with an inventory of 10,000 pairs of shoes in 1914, saw his assets dwindle each year as the cost of shoes went up with the inflation; finally, his receipts from a year's sales could pay for only one pair of shoelaces.

"Men and women who had worked and saved for decades discovered that the value of their pensions was evaporating." 

One Austrian émigré, who went to the United States before 1900 and became wealthy, bequeathed his fortune to establish an educational institution for orphans in Austria. Under Austrian law, the dollars had to be invested in Austrian government bonds until arrangements for the institution could be made. World War I intervened. By the end of the war, inflation had made the government bonds worthless, and nothing was left for the orphans.

Mises realized that inflation hurt some people at the expense of others. Those who were industrious, conscientious, and responsible, who worked hard and saved, were "losers," as the inflation eroded their savings. Those who borrowed to live beyond their means and spent lavishly were "winners," as they were able to repay their creditors with worthless paper money.

In 1922 Ignaz Seipel became Chancellor of Austria. Dr. Seipel, a Roman Catholic priest, honest and conscientious but naive about finance, was not the usual politician. Mises, by then a government adviser, and Wilhelm Rosenberg, a lawyer friend who was an expert in financial questions, convinced Seipel that for the good of the people, the printing of superfluous banknotes should be stopped.

"Mises realized that inflation hurt some people at the expense of others." 

Then Mises realized Seipel expected that halting the inflation would bring prosperity right away. Mises didn't want to deceive Seipel. "Stopping the inflation will bring economic improvement in time," Mises told him. "But not immediately.… Its first effect will be to cause a 'stabilization crisis,' that will bring about serious, though short-run, economic hardship." Mises went on to explain why:

The people have come to expect ever-rising prices. They have adjusted to the inflation so far as they were able. Halting the flow of banknotes will come as a shock. Those who have anticipated further inflation will find their plans frustrated. Thus, the immediate effect of stopping the inflation will not be to benefit you and your political party. I [dare] say you will have serious difficulties.

Seipel interrupted. "But you say this is necessary — that this is the moral thing to do. If so, it doesn't matter. The party must do not only what is popular in the short run; it must also do what is best for the country." Thanks to Seipel, inflation was then brought to a halt in Austria in the fall of 1922, a year before Germany's catastrophic post — World War I inflation came to an end. And, in spite of the opposition of socialist opponents, Monsignor Seipel and his party won their next (October 1923) election.

Mises's Attack on Communism

Mises's first serious attack on communism, or socialism as it was often called, was in a 1920 article. Then two years later, Mises shocked his contemporaries with a book Socialism, in which he explained that if the Communists did away with private property, they would be unable to calculate and thus unable to plan production. In a Communist society, he said, in which all property was communally owned, the planners would have to rely on soldiers and hangmen to enforce their edicts.

Without private property, there would be no private owners bidding for goods and services, and no exchanges among real owners. Without private owners, each guided by the desire for profits and the fear of losses, there would be no market prices to indicate what people wanted and how much they were willing to pay for it. Without market prices, there would be no competition and no profit-and-loss system. And without a profit-and-loss system, there would be no network of interrelated, consumer-directed, independent producers. Without private property, competition, market prices, and a profit-and-loss system, the planners would not know what to produce, how much to produce, or how to produce it.

Except as the planners could observe and copy production in non-socialist lands, they would find themselves "floundering in the ocean of possible and conceivable economic combinations without the compass of economic calculation." Thus a Communist society would be rife with economic waste, malinvestment, production bottlenecks, surpluses of some things, and shortages of others. Certainly it would be no utopia.

When Socialism appeared in 1922, prosocialist, post–World War I Europe was not ready to accept Mises's rigorous critique of Communism and all varieties of socialism. The book was criticized severely, not only by socialist polemicists but also by learned professors. For decades, apologists for Communism energetically defended the USSR and its economic system, arguing that the nation, supposedly a Communist society, obviously maintained itself and functioned well. In 1957, the Swedish sociologist (and future Nobel laureate) Gunnar Myrdal ridiculed Mises, saying that the very type of economic planning Mises had said was "impossible" was actually being carried out in almost all underdeveloped countries and "often with the competent guidance of economists."

"A Communist society would be rife with economic waste, malinvestment, production bottlenecks, surpluses of some things, and shortages of others." 

For decades, the USSR stumbled along. Its edicts were enforced, as Mises had predicted, by soldiers and hangmen, and the system was only maintained with the assistance of massive subsidies from abroad. For 72 years from the Revolution of 1917, the USSR's people endured economic shortages and bottlenecks, tolerated shoddy merchandise, and suffered deprivation. For 72 years the Soviets struggled to copy foreign production processes and foreign prices. Then finally the coup de grace. In 1989, the Communist regimes of Eastern Europe and the USSR collapsed. Widespread economic waste and continuing malinvestment throughout those 72 years in the USSR and its satellite nations were their undoing — eloquent testimony to the truth of Mises's 1920 thesis. In spite of the thousands of words devoted to trying to refute Mises, the USSR's central planners had really not been able to calculate after all. Mises had been right.

When, in 1989, Mises's 98-year-old widow learned that the Berlin Wall had been knocked down and the Communist regimes of Eastern Europe and the USSR had been toppled, she wished her husband had lived to see that day. "But," she said, "he had known that one day Communism would come tumbling down."

The Rise of Nazism

Mises was a Jew in a society that was becoming increasingly anti-Semitic. As an economist who understood the principles of human action, he saw the handwriting on the wall as early as 1927. He realized that the interventionist policies that several European governments were following would bring disaster to the Continent and its inhabitants. Mises foresaw the end of freedom in Central Europe. But the world didn't listen to his warnings.

Adolf Hitler had been a failure in his native Austria. He had fought with the Germans during World War I and had then stayed on in Germany. Not long after the War, Hitler gained control of the German Workers' Party and transformed it into the anti-Semitic National Socialist German Workers' Party. By the 1930s, Hitler's movement was gaining adherents in large numbers in Germany.

Mises was at a garden tea party in September 1932, at a meeting of the Society for Social Policy (Verein für Sozialpolitik), in Bad Kissingen, Germany, when he suddenly asked those assembled, "Do you realize that we are gathered together for the last time? Hitler's rise to power will put an end to such meetings as this." At first the members of Mises's audience were aghast at his remark. Then they laughed! Mises continued: "Hitler will be in office in 12 months."

The others present thought that unlikely. "But even so," they asked, "even if Hitler does come to power, why shouldn't the Society meet again?" Hitler, Mises said, wouldn't tolerate gatherings of intellectuals who might someday become his opponents.

Hitler came to power in Germany in March 1933, about six months after the Society's September meeting. As Mises had anticipated, the Society did not meet again until after the end of World War II.

Mises served for many years in the Austrian government's chamber of commerce as economic adviser to the national parliament. He was a part-time, unsalaried lecturer at the University of Vienna, receiving as pay only the fees of students. In 1927 he established the Austrian Institute for Business Cycle Research. By dint of his prodigious output — books, articles, and lectures — Mises acquired a reputation in Europe as a serious scholar, and he earned some international recognition.

Mises also conducted a private seminar in Vienna for young PhDs who were interested in economics. Mises and his seminar students did serious work, but they also joked, dined together, and sang lighthearted songs about economics, composed by one of their number, Felix Kaufmann.

Standing at the window of his office one day, Mises mused aloud to one of his young economist friends, Fritz Machlup. "Maybe our civilization will end, maybe grass will grow on the Ringstrasse," referring to Vienna's wide street which had been built on the site of the medieval fortifications that circled the inner city. "Maybe we will all have to leave Austria. But where shall we go and what can we do? For what jobs are we qualified?"

Mises speculated that he and his friends might wind up in a Latin American country and he considered the kind of work each might do. "You, Fritz," he said, "being friendly and sociable, might become a dancer in a night club, giving young ladies and old a good time." Mises suggested various roles his other friends might fill in that night club, as actors, singers, waiters, hostesses, and bartenders. When Mises considered his own talents, he said, "Unfortunately, I am no good as a dancer or singer, and I don't think I would be a good waiter. I will have to be the doorman standing in a uniform in front of the place."

Mises's Viennese friends heeded his warning and were able to leave Austria before the Anschluss in 1938, when Hitler's forces marched into Vienna. Most came to the United States and in time found positions, not as waiters and bartenders, but as professors at prestigious colleges and universities.

An Economist in Exile

Mises himself, foreseeing the threat of Hitler's totalitarian regime, left Vienna in 1934 to take a position at the Graduate Institute for International Studies in Geneva, Switzerland. He retained his old apartment in Vienna and his professional ties with the Institute for Business Cycle Research and the Chamber of Commerce.

Ludwig, a very private person, seldom talked about his personal affairs. His friends and colleagues in Vienna considered him a confirmed bachelor. Yet in the 1930s he was quietly courting a glamorous former actress, Grete (or Margit) Herzfeld Sereny. A widow, she was struggling to raise two young children alone. Mises visited Vienna in February 1938 to make arrangements for their marriage.

When Hitler's forces invaded Austria that March, confusion reigned. Margit, in Vienna, managed to telegraph Ludwig, by then back in Geneva, "no need to come. " She and her daughter, Gitta (Margit's son was already out of the country, studying in England), finally succeeded in obtaining the necessary papers and railroad tickets, left Austria and traveled to Switzerland, where Margit and Ludwig were quietly married. Mises's apartment in Vienna was ransacked, and his books and other property were destroyed by Austrian Nazis soon after March 1938, when Hitler took over Austria.

Professor and Mrs. Mises spent their first few years together in Switzerland, enjoying the intellectual life of Geneva. However, when the Germans conquered France and entered Paris, they decided it was time to leave Switzerland and go to the United States. They fled by bus with other refugees across southern France. It was a harrowing trip. The driver was frequently forced to change his route to avoid running into German soldiers. Turned back at the small town of Cerberes on the Spanish border because their visas were no longer valid, Mises was able, by taking a four a.m. train for Toulouse, to get new visas. The next day the bus with its passengers crossed into Spain. The refugees then took a train to Barcelona, a plane to Lisbon, and from there finally, after a 13-day wait, a ship to the United States.

The Miseses arrived in New York in August 1940. At 59, Ludwig had to start over in a new land, writing, lecturing, and teaching to a new audience in a new language. During his years in the United States, he taught at the New York University Graduate School of Business Administration, and wrote many important books. Although his books were often criticized severely when they appeared, his analyses of market operations, money, inflation, government intervention, and Communism, all firmly based on human action principles, live on and are gaining increasingly serious attention from scholars. Mises may very well prove to be, as one admirer described him, "the greatest economist of the century — the next century."

 


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