Winter 2001; Volume 7, Number 4
The Student and His Professor
Ludwig von Mises: The Man and His Economics by Israel M. Kirzner (ISI Books, 2001, xv + 226 pgs.)
Professor Kirzner’s outstanding book "aims to present, in briefest outline . . . the story of Mises in his role of economist" (p. xi, emphasis removed). In this task, it is eminently successful. But Kirzner achieves much more than this. Owing to his profound grasp of Austrian economics, he clarifies Mises’s views in a number of important areas.
As everyone knows, for example, Mises regarded the German Historical School of Schmoller and Wagner with unremitting hostility. But our author raises, and then dissolves, a paradox about Mises’s opposition. "What rendered the controversy between the Historical School and the Austrian School particularly fascinating, perhaps, was the circumstance that both schools appreciated the subjective dimension of social phenomena. It was of course Menger, who, in almost revolutionary fashion, stood classical economics on its head by insisting on the subjective character of economic phenomena and the primacy of individual choice. But the German Historical School, too, recognized that social phenomena cannot be understood apart from human motives and interests" (p. 76). Given this agreement on this fundamental issue, why was Mises so opposed to the historicists?
For Mises, subjectivism was not enough. Economics claims to discover laws that hold universally, and this the Historical School denied. "From Mises’s perspective, the propensity of the German Historical School to deny the universality of the conclusions of economic theory led the school to deny the essential contributions of economics" (p. 77).
Kirzner’s argument may be extended to the hermeneutical school of Austrians that many years ago generated considerable sound and fury, now somewhat abated. (I hasten to add that Kirzner bears no responsibility for where I take his argument.) The hermeneuticians, like both Mises and the Historical School, stressed the need in economics to grasp the meaning of human action. But they sought philosophical support for their stress on meaning in the convoluted prose of Hans Gadamer, and in doing so they fell into a trap.
The nature of the snare is adumbrated in the title of Gadamer’s principal book, Truth and Method. Gadamer ardently defends the importance of meaning in understanding human action: from the Austrian perspective, so far, so good. But he contrasts meaning with scientific knowledge that endeavors to find universal rules. Hence his book’s title; the truth of understanding opposes the method of the sciences. An "Austrian" economics that relies on Gadamer cannot adequately show how we can discover economic laws. It thus falls in danger of transformation into its opposite, historicism.
For Mises, opposition to the Historical School was much more than a recondite philosophical dispute. Schmoller and his colleagues not only thought universal economic laws impossible; they had a very practical reason for refusing to recognize their existence. Such laws threatened the statist policies that the group favored. If, for example, economics shows that price controls cannot achieve the goals their proponents intend, do we not have an excellent argument against instituting them? But that, for the "socialists of the chair" would never do. Far better to close one’s eyes to the relevant economic law.
As Kirzner makes clear, Mises thought the policies of the Historical School disastrous. "Mises also traced the cataclysmic twentieth-century events for which Marxism and Nazism have been responsible to the teachings of the German Historical School. He reports that Menger had . . . foreseen that the policies pursued by the European powers would ‘lead to a horrible war that will end with gruesome revolutions, with the extinction of European culture and the destruction of prosperity of all nations’(p. 160)
Mises, Kirzner tells us, early established his reputation as a monetary theorist; and the errors and bad policies of the Historical School in financial matters naturally occupied his attention. In particular, he directed a withering polemic against the "state theory of money" devised by Georg Friedrich Knapp, a member of the Historical School. In Knapp’s view, the "institution of money was essentially an invention of the state; and it is the state which determines which commodity is to serve as money" (p. 134).
This of course flew in the face of Mises’s contention than money, no less than other economic phenomena, falls within the scope of economic law. Further, Knapp’s theory played into the hands of supporters of inflation, who denied the connection between increases in the supply of money and rising prices.
Mises’s defense of monetary theory against Knapp formed part of a larger assault on the policies of the Historical School. His principal line of attack has already been mentioned; but I have so far omitted a vital part of Mises’s argument. As suggested above, Mises thought that interventionist measures, such as price control, favored by the Historical School would fail to achieve their goals. But what would happen when the interventionists grasped this failure?
The interventionists would then face a choice. They would either have to abandon their interference and return to the free market or attempt to remedy their failure through further intervention. Should they adopt the latter course, the new measures would fail in their turn, and the same choice would again arise. The continued choice of intervention would soon eventuate in full-blown socialism. According to Mises, this was precisely the course of events in Germany during World War I, when interventionist war-planning measures quickly led to total government control over the economy.
Mises saw the influence of this pattern of socialism in surprising places. Kirzner in this connection draws attention to Mises’s review of Hayek’s Constitution of Liberty. Though he found much in the book to praise, Mises "pulled no punches in expressing disagreement with Hayek’s treatment . . . of a number of features of the welfare state. ‘In fact,’ Mises wrote, ‘the Welfare State is merely a method for transforming the market economy step by step into socialism. . . . What emerges is the system of all-round planning, that is, socialism of the type which the German Hindenburg plan was aiming at in the first World War’ (p. 181, quoting Mises)
Economic law, then, rules out interventionism: but how are the laws relevant to it, as well as others, to be discovered? Mises had a famous and controversial answer. Economic laws are a priori true; that is to say, the laws can be known to be true just from a grasp of their meaning. Kirzner clarifies in an illuminating way Mises’s position on the a priori by a comparison with Hayek’s views on method.
Hayek, in Kirzner’s rendition, thought that a priori economics was confined to a "pure logic of choice." The logic in question concerned equilibrium states: the learning processes needed to approach such states could only be analyzed with the help of empirical information. Mises disagreed: "Mises really did believe that the same a priori insights which permit us to understand how individuals behave in market situations permit us also to understand—at least at the most general level—those powerful tendencies toward equilibration which markets generate" (p. 85).
Kirzner seems to me right as far as he goes, but I do not think he has fully penetrated to the essence of Hayek’s position. Hayek, in speaking of the pure logic of choice as consisting of "formal propositions," indicated that he accepted the views of the logical positivists and his friend Karl Popper about a priori truth. In the positivist view, all a priori truths are tautologies; they can teach us nothing new about the world. Mises dissented from this dogma, and here lies the nub of the dispute between him and Hayek.
Our author relies on a personal conversation with Mises to clarify his teacher’s view on a related matter. "This writer [Kirzner] once asked Mises how a person can know that human beings other than himself are indeed purposeful. . . . Mises’s answer surprised me greatly: it may perhaps soften the image of Mises as an extreme a priorist. Mises answered my query by saying, in effect, that we become aware of the existence of other human agents through observation" (p. 88).
Kirzner’s remarks are valuable, but I am surprised at his surprise. Why would he expect Mises to think otherwise? Mises thought that economics was an a priori science: he expressed no such view about epistemology. Was Kirzner likewise surprised that Mises did not advocate an a priori ethics?
Of course Mises did not confine his discussion of economics to questions of method, and much of Kirzner’s book is devoted to Mises’s views on prices, entrepreneurship, and capital. Rather than summarize Kirzner’s treatment of them, I propose in the space remaining to stress one topic where Kirzner strikes me as especially insightful.
In fact, his remarks on the topic in question are for me the best part of the book. Mises famously contended that time preference is always positive. People always prefer a good now to the same good in the future; in like fashion, they would rather have a good in the near future than the same good in the far future. But are there not exceptions? Critics often note that ice in winter is less valuable than ice in summer; is not a future good here preferred to a present one, if it is now winter?
Kirzner dissolves the puzzle with a brilliant insight: "For Mises, time preference refers not to dates, but to future distance from the moment of evaluation. Of course, the date at which ice is available . . . may affect its subjective evaluation. But for Mises, that kind of influence upon valuation is not what he understood by the notion of time preference. Time preference, for Mises, refers to the sense of futurity" (p. 159, emphasis in original). The higher value of ice in summer than in winter does not depend on the fact that it is not now summer.
Unusually for me, I was able to find only one serious disagreement with the author; and it does not concern a central issue. He remarks that Murray Rothbard "did not subscribe to Mises’ insistence on the need for (and possibility of) a sharp separation between the wertfrei propositions of economic science and the value-laden statements of political-philosophical discourse" (p. 217, n. 7). I do not think this an accurate account of Rothbard’s position. He, like Mises, thought that economics was value-free; he differs with Mises on whether ethics is objective. But in the present book, this is a point of minor importance. Professor Kirzner has written an indispensable work for all students of Austrian economics.