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Last Knight Live Blog 23 - Kraus

January 18, 2008

As economic crisis deepened and the social situation and civil order in Austria deteriorated accordingly, Mises was happy to receive an invitation from Geneva-based Graduate Institute of International Studies to become a visiting professor of international economic relationships. The Institute Mises was to join was established to produce a next generation of bureaucrats equipped with necessary scientific knowledge to run administrational affairs of politically increasingly integrated world order. Geneva hosted a number of major international organizations and was very much in need of expert knowledge.

Where did Mises fit in that institution and how lived during his Geneva years is the subject of chapter 16.

Being one of world's foremost monetary theorists, his formal responsibilities were confined to a two-hour seminar on International Finance and one-hour course on "The International Aspects of Monetary Policy". Otherwise he enjoyed unrestrained academic freedom, a salary to live on very comfortably, and plenty of time to write a general treatise on economic science, to which Prof. Hülsmann devoted the whole next chapter.

Despite his titanic efforts to strengthen the case for capitalism, it was impossible possible to stem the tide of collectivism and interventionism just by his own efforts. Amidst the most severe economic depression in the history of capitalism, the intellectual case for free markets and liberalism had become increasingly unfashionable and harder to defend. The degree of difficulties and challenges that Mises faced in the thirties can be glimpsed from the diminishing number of serious intellectual allies in the common fight for capitalism and liberalism.

To be able to stand alone and withstand the enormous pressure to give in and conform to the prevalent opinion, nothing short of stalwart convictions in the correctness of the fundamental insight that a capitalist economic order is to the material benefit of all was required. Later in the book, Prof. Hülsmann likened Mises's unbending character to that of Howard Roark in Ayn Rand's novel The Fountainhead.

The character of Howard Roark stands for integrity, the courage to follow the dictates of one's own intellect, the unshakable confidence in and reliance on one's ability to judge the facts of reality rationally without paying any attention to views of the majority regardless of how fashionable they may be. Furthermore, integrity and the love for truth are ideals to strive for but they are also ultimately practical, i.e. rational, guides to action.

As we learn in greater details from the chapter, the cases of Mises's allies Fritz Machlup and Lionel Robbins resembled - to various degrees, to be sure - more the character of Peter Keating: the arch-compromiser and second-hander whose actions were sensitive to and followed blindly the immediate and prevalent fashion trends of his contemporaries. On the other hand, it was particularly Friedrich von Hayek who despite obvious theoretical disagreements with his mentor remained true to fundamental principles of liberalism. Certainly on that count, he deserves our utmost admiration and respect. There is also a lesson to learn from these cases. One does not abandon fundamental convictions simply because of one or two finer theoretical difficulties and embrace a blatantly irrational theory such as Keynesianism instead.

Nevertheless, we should never underestimate the importance of a correct theory and mercilessly point out any logical contradictions and/or inconsistencies in the writings of most important defenders of capitalism. Having said that, I think Prof. Hülsmann once again scored a number of major points against Hayek's analysis of economic calculation under socialism. Again, the problem is that Hayek, through his Wieserian/Walrasian lenses, could not help but argue that while economic calculation under socialism was solvable in principle, i.e. in theory, it was impossible to implement it in the praxis (see the quote in the footnote 42 on p. 703 of The Last Knight).

The most pernicious element in this point of view is the notion that what is true in theory must not necessarily be true in the practice. In other words, it is an instant where thinking looses the anchor to the facts of reality. Consciousness then becomes not a tool to comprehend the reality but a means of creating another, often viewed as a "higher" or superior, form of reality which is often elevated as a standard against which to evaluate facts and conditions of the real world. This is how, for example, the neoclassical theory of pure and perfect competition, with its assumptions of perfect knowledge, instantaneously clearing markets etc., is presented. Even though such competition is purely a construct of arbitrary assumptions, it is used as benchmark to evaluate the degree of "purity" of the real world competition, most notably in the field of industrial organization.

Please take a note also of the important discussion in connection with neo-liberal ideas mainly in the section Walter Lippmann Colloquium. The colloquium comprised representatives of different "liberalisms" to discuss the true meaning and goals of liberalism from the point of view of a proper balance between economic freedom and the "need" to improve market outcomes by means of government intervention. Largely because of Mises's devastating case against the pure form of socialist central planning, everybody was convinced that to maintain the already attained and enlarge the degree of division of labor a price system is indispensable after all. But only few were prepared to uphold a total separation of state from economics. The idea that it might be possible and under certain circumstances even desirable to supplement the price mechanism with appropriate laws and institutions to construct a more just, free and productive society, has gained in prominence between the two world wars and stands behind of what has become to be known as the Third Way in economics and politics.

The theoretical framework for the new ideal was provided, as Prof. Hülsmann quite correctly points out, by the "theories of public goods and the Chicago (Coasean) theory of law and economics" that use neoclassical partial-equilibrium microeconomic analysis of choice and incentives to answer the question: what combination of property rights is most compatible with the underlying preferences and incentives patterns of agents to yield the most efficient outcome. I think that the distinctive characteristic of this approach is not the issue of direct or indirect meddling with prices, as Prof. Hülsmann seems to argue, but its inability to provide an integrated picture of economic life. The apparatus of the neoclassical partial-equilibrium analysis is ultimately to blame, not the recognition of the fact that "framework of the market" matters.

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