Ludwig von Mises: Thoughts and Memories
by William H. Peterson
A generation of students at New York University's graduate business school who took the economics courses of Ludwig von Mises remember a gentle, diminutive soft spoken, white-haired European scholar- with a mind like a steel trap.
Mises, who celebrated his 90th birthday on September 29, 1971, is an uncompromising rationalist and one of the world's great thinkers. He has built his philosophical edifice on freedom and free enterprise and on reason and individuality. He starts with the premise that the concept of economic man is pure fiction - that man is a whole being with his thought and action tightly integrated into cause and effect. All this is subsumed under the title of his 900-page magnum opus, Human Action, first published in 1949.
Mises, a total anti-totalitarian and Distinguished Fellow of the American Economic Association, was a professor of political economy at New York University for a quarter- century, retiring in 1969. Before that he had a professorship at the Graduate Institute of International Studies in Geneva. And before Geneva he had long been a professor at the University of Vienna - a professorship which the Nazis' "Anschluss" take-over of Austria, understandably, terminated. Among his students in Vienna were Gottfried Haberler, Friedrich Hayek and Fritz Machlup. Professors Haberler of Harvard and Machlup of Princeton each have been president of the American Economic Association; Hayek is an economic scholar of world renown.
Starting right after World War II, Mises gave three courses at NYU: Socialism and the Profit System, Government Control and the Profit System, and Seminar in Economic Theory. In each course he carefully established the primacy of freedom in the marketplace. He stated that the unhampered pricing mechanism, ever pulling supply and demand toward equilibrium but never quite reaching it, is the key to resource optimization and, indirectly, to a free and creative society.
Mises believes in choice. He believes that choosing determines all human decisions and hence the entire sphere of human action - a sphere he designates as "praxeology. " He holds that the types of national economies prevailing across the world and throughout history have been simply the outcome of various means intellectually, if not always appropriately, chosen to achieve certain ends. His litmus test is the extent of the market; accordingly, he distinguishes broadly among three types of economies: capitalism, socialism and the so- called middle way - government intervention in the marketplace.
Mises believes in government but limited, noninterventionistic government. He wrote: "In stark reality, peaceful social cooperation is impossible if no provision is made for violent prevention and suppression of antisocial action on the part of refractory individuals and groups of individuals. " He believes that while the vast majority of men generally concurs on ends, men very frequently differ on governmental means - sometimes with cataclysmic results, as in the various applications of extreme socialism in fascism and communism or of extreme interventionism in other types of economies, "mixed" or socialist.
Mises reasons that regardless of the type of economy the tough universal economic problem for the individual in both his personal and political capacities is ever to reconcile ends and choose among means, rationally and effectively. Free, i.e. , noncoerced, individual choice is the key to personal and societal development if not survival, he argues, and intellectual freedom and development are keys to effective choices. He declared: "Man has only one tool to fight error--reason. "
Mises, well aware of the unlearned lessons of history, thus sees something of an either-or human destiny. While man could destroy himself and civilization, he could also ascend undreamed-of cultural, intellectual and technological heights. In any event, thought would be decisive. Mises believes in the free market of ideas as well as of goods and services - in the potential of the human intellect.
The nature of this leader of the Austrian School of Economics can be seen in an incident during a conference of the Mont Pelerin Society, an international group of scholars dedicated to the principles of a free society, meeting in Seelisburg, Switzerland in the 1950's. Mises expressed fear that some of the members were themselves becoming inadvertently infected by the virus of intervention - minimum wages, social insurance, contracyclical fiscal policy, etc.
"But what would you do, " it was put to him, "if you were in the position of our French colleague, Jacques Rueff, " who was present and at the time responsible for the fiscal administration of Monaco. "Suppose there were widespread unemployment and hence famine and revolutionary discontent in the principality. Would you advise the government to limit its activities to police action for the maintenance of order and the protection of private property?"
Mises was intransigent. He responded: "If the policies of nonintervention prevailed--free trade, freely fluctuating wage rates, no form of social insurance, etc. - there would be no acute unemployment. Private charity would suffice to prevent the absolute destitution of the very restricted hard core of unemployables. "
The failure of socialism, according to Mises, lay in its inherent inability to attain sound "economic calculation. " He argued in his 1922 work, Socialism, published five years after the Bolshevik Revolution that shook the world, that Marxist economics lacked an effective means for "economic calculation" - i. e. , an adequate substitute for the critical resource - allocation function of the market pricing mechanism. Thus is Socialism inherently self-condemned to inefficiency, unable to expeditiously register supply and demand forces and consumer preferences in the marketplace.
Some years later, Oskar Lange, then of the University of California and later chief economic planner of Poland's Politburo, recognized the challenge of the Mises critique on socialist economic calculation. So he in turn challenged the socialists to somehow devise an allocative system to duplicate the efficiency of market allocation. He even proposed a statue in honor of Mises to acknowledge the invaluable service the leader of the Austrian School had presumably rendered to the cause of socialism in directing attention to this as yet unsolved question in socialist theory. However, notwithstanding some slight shifts of the Polish, Soviet and other Eastern European countries toward freer economics, a statue of Mises has yet to be erected in Warsaw's main square.
But probably to Mises the more immediate economic threat to the West is not so much external communism as internal interventionism - government ever undermining if not outrightly supplanting the marketplace. Interventionism from public power production to farm price supports, from pushing minimum wages up to forcing interest rates down, from vigorously expanding credit to contracting, however inadvertently, capital formation. Citing German interventionist experience of the 1920's climaxing in the Hitlerian regime and British interventionism of the post-World War 11 era culminating in devaluations and economic decline, he holds such so-called middle-of-the-road policies sooner or later lead to some form of collectivism, whether of the socialist, fascist or communist mold.
He maintains economic interventionism necessarily produces friction whether at home or, as in the cases of foreign aid and international commodity agreements, abroad. What otherwise would be simply the voluntary action of private citizens in the marketplace becomes coercive and politicized intervention when transferred to the public sector. Such intervention breeds more intervention. Animosity and strain if not outright violence become inevitable. Property and contract are weakened, militancy and revolution are strengthened.
In time, inevitable internal conflicts could be "externalized" into warfare. Mises wrote: "In the long run, war and the preservation of the market economy are incompatible. Capitalism is essentially a scheme for peaceful nations....To defeat the aggressors is not enough to make peace durable. The main thing is to discard the ideology that generates war. "
But what if a peaceful nation is nonetheless plunged into inflation-inducing war ? Surely then it should clamp on wage- price and other production-allocating controls. No, says this adamant champion of the unhampered market economy; if interventionism is foolish in peacetime, it is doubly foolish in wartime when the nation's very survival is at stake. All the government has to do is to raise all the funds needed for the conduct of the war by taxing the citizens and by borrowing exclusively from them - not from the central or commercial banks. Because the money supply would not then be swollen and everybody would have to cut back his consumption drastically, inflation would not be a great problem. Public consumption, through a greatly augmented inflow of tax revenues and borrowed funds, would advance while private consumption would fall. The upshot would be the absence of inflation.
By the same token, Mises has no stomach for the idea that a nation could simply deficit-spend its way to prosperity, as advocated by many of Keynes' followers. He holds such economic thinking is fallaciously based on governmental "contracyclical policy. " This policy calls for budget surpluses in good times and budget deficits in bad times so as to maintain "effective demand" and hence "full employment. "
But Mises regards the "G" in Keynes' "full employment" formula of Y = C + I + G; (National Income = Consumption Spending + Investment Spending + Government Spending) as about the most unstable, politics-ridden and unscientific balancing wheel that the economic managers could employ. For one thing, the formula ignores the political propensity to spend, good times or bad. And for another, it ignores market- sensitive cost-price relationships and especially the proclivity of trade unions and minimum wages to price labor out of markets - i.e., into unemployment.
Thus he holds Keynesian theory in practice proceeds through fits of fiscal and monetary expansion and leads to inflation, controls, and ultimately stagnation. Further, "G" so used, generally means the secular swelling of the public sector and shrinking of the private sector - a trend that spells trouble for human liberty. In a way, he anticipated and re- butted the Keynesian thesis a quarter-century ahead of Keynes in his 1912 work, The Theory of Money and Credit, in which Mises contended that uneconomic wages and forced-draft credit expansion and not capitalism per se carried the seeds of boom and bust.
To be sure, many economists and businessmen have long felt that Mises is entirely too adamant, too unyielding. If that is a fault, he is certainly guilty. But Ludwig von Mises, the antithesis of sycophancy and expediency, the intellectual descendant of the Renaissance, believes in anything but moving with what he regards as the errors of the times. He has long sought the eternal verities. He believes in the dignity of the individual, in the sovereignty of the consumer, in the limitation of the state. He opposes the planned society, what- ever its manifestation. He holds that a free society and a free market are inseparable. He glories in the potential of reason and man. In sum, he stands for principle in the finest tradition of Western Civilization. And from that rock of principle, during a long and fruitful life, this titan of our time has never budged.
William Peterson taught with Ludwig von Mises at New York University and is currently an adjunct scholar with the Mises Institute. This essay was first published in Toward Liberty (Menlo Park, CA: Institute of Humane Studies, 1971, pp. 268 to 273)