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My Contributions to Economic Theory

October 19, 2005Ludwig von Mises

[Address delivered before the Economics Faculty of New York University at the Faculty Club on November 20, 1940, a few months after Dr. and Mrs. Ludwig von Mises arrived in New Jersey on August 2, 1940, as refugees from war-torn Europe. Reprinted in Planning for Freedom.]

Your kind invitation to address you on my contributions to economic theory honors me greatly. It is not an easy task. Looking back on my work, I realize very well that the share of one individual in the total achievements of an epoch is small indeed, that he is indebted not only to his predecessors and teachers, but to all his colleagues and no less to his pupils.

I know how much I owe to the economists of this country in particular since the time, many years ago, when my teacher Böhm-Bawerk directed my attention to the study of the works of John Bates Clark, Frank A. Fetter, and other American scholars. And during all my activities, the recognition of my contributions by American economists encouraged me. Nor can I forget that, when still a student at the University of Vienna, I published a monograph on the development of Austrian Labour Legislation, an American economist was the first who showed an interest in it. And later the first scholar who appreciated my The Theory of Money and Credit was again an American, my distinguished friend, Professor B. M. Anderson, in his book, The Value of Money, published in 1917.


When I first began to study the problems of monetary theory there was a general belief, namely, that modern marginal utility economics was unable to deal with monetary theory in a satisfactory way. Helfferich was the most outspoken of those who held this opinion. In his Treatise on Money he tried to establish that marginal utility analysis must necessarily fail in its attempts to build up a theory of money.

This challenge provided me with the incentive to use the methods of modern marginal utility economics in the study of monetary problems. To do so I had to use an approach radically different from that of the mathematical economists who try to establish the formulas of the so- called equation of exchange.


In dealing with such an equation the mathematical economist assumes that something (obviously, one of the elements of the equation) changes and that corresponding changes in the other values must follow. These elements of the equation are not items in the individual's economy, but categories of the whole economic system, and consequently the changes do not occur with individuals but with the whole system, with the Volkswirtschaft as a whole. This way of reasoning is eminently unrealistic and differs radically from the procedure of modern catallactics.1 It is a return to the manner of reasoning which doomed to frustration the work of the older Classical economists. Monetary problems are economic problems and have to be dealt with in the same way as all other economic problems. The monetary economist does not have to deal with universal entities like volume of trade meaning total volume of trade, or quantity of money meaning all the money current in the whole economic system. Still less can he make use of the nebulous metaphor "velocity of circulation." He has to realize that the demand for money arises from the preferences of individuals within a market society. Because everybody wishes to have a certain amount of cash, sometimes more, sometimes less, there is a demand for money. Money is never simply in the economic system, money is never simply circulating. All the money available is always in the cash-holdings of somebody. Every piece of money may one day — sometimes more often, sometimes more seldom — pass from one man's cash-holding to another man's. But at every moment it is owned by somebody and is a part of somebody's cash-holdings. The decisions of individuals regarding the magnitude of their cash-holding, their choices between the disutility of holding more cash and its advantages constitute the ultimate factor in the formation of purchasing power.

Changes in the supply of money or in the demand for it can never occur for all individuals at the same time and to the same extent and they, therefore, never affect their judgments of value and their behavior as buyers and sellers to the same degree. Therefore the changes in prices do not affect all commodities at the same time and to the same degree. The over-simple formula both of the primitive quantity theory and of contemporary mathematical economists according to which prices, that is, all prices, rise or fall in the proportion of the increase or decrease in the quantity of money, is absolutely wrong.

We have to study monetary changes as changes which occur first for some groups of individuals only and slowly spread over the whole economic system to the extent that the additional demand of those first benefited reaches other classes of individuals. Only in this way can we obtain a realistic insight into the social consequences of monetary changes.


Taking this as my point of departure I developed a general theory of money and credit and tried to explain the business cycle as a credit phenomenon. This theory, which is today styled the monetary theory or sometimes the Austrian theory of the trade cycle, led me to make some criticism of the continental, especially of the German, credit system. Readers were at first more interested in my pessimistic judgment of the trends of German Central Bank policy and my pessimistic forecast which nobody believed in 1912 until a few years later things turned out much worse even than I had predicted. It is the fate of the economist that people are more interested in his conclusions than in his explanations, and that they are reluctant to abandon a policy whose undesired but inevitable results the economist has demonstrated.


From my studies of monetary and credit problems, which later stimulated me to found the Austrian Institute of Business Cycle Research, I came to the study of the problem of economic calculation within a socialist community. In my essay on economic calculation in a socialist world, first published in 1920, and then later in my book on Socialism, I have proved that an economic system, where there is no private ownership of the means of production, could not find any criterion for determining the values of the factors of production and therefore could not calculate. Since I first touched upon this point, many dozens of books and many hundreds of articles published in different languages have dealt with the problem; this discussion has left my thesis unshattered. The treatment of the problems connected with planning, of course total planning and socialization, has been given a completely new direction by the indication of this as the crucial point.


 Omnipotent Government: The Rise of Total State and Total WarThe evil of corporativism: $11


From the comparative study of the essential features both of capitalist and socialist economy I came to the related problem of whether, apart from these two thinkable systems of social cooperation, i.e., private ownership of the means of production and public ownership, there is a third possible social system. Such a third solution, a system which its proponents claim is neither socialism nor capitalism, but midway between both and avoiding the disadvantages of each and retaining the advantages of both, has again and again been suggested. I tried to examine the economic implications of these systems of government interference and to demonstrate that they can never attain the ends which people wish to attain with them. I later broadened the field of my research in order to include the problems of the stato corporative, the panacea recommended by fascism.


Occupation with all these problems made necessary an approach to the question of the values and ends of human activity. The reproach of sociologists to the effect that economists deal only with an unrealistic "economic man" could no longer be endured. I tried to demonstrate that the economists were never so narrow as their critics believed. The prices whose formation we try to explain are a function of demand and it does not make any difference what kind of motives actuated those involved in the transaction. It is immaterial whether the motives of those who wish to buy are egoistic or altruistic, moral or immoral, patriotic or unpatriotic. Economics deals with the scarce means of attaining ends, irrespective of the quality of the ends. The ends are beyond the scope of rationality, but every action of a conscious being directed towards a specific goal is necessarily rational. It is futile to convict economics because it is rational and deals with rationality. Of course, science is always rational.

In my treatise on Economic Theory, published in the German2 language in Geneva a few months ago — English3 edition will be published in the near future [accomplished in 1949] — I have dealt not only with the economic problems of a market society but in the same way with the economics of all other thinkable types of social cooperation. I think that this is indispensable in a world where the fundamental principles of economic organization are at stake.


I try in my treatise to consider the concept of static equilibrium as instrumental only and to make use of this purely hypothetical abstraction only as a means of approaching an understanding of a continuously changing world. It is one of the shortcomings of many economic theorists that they have forgotten the purpose underlying the introduction of this hypothetical concept into our analysis. We cannot do without this notion of a world where there is no change; but we have to use it only for the purpose of studying changes and their consequences, that means for the study of risk and uncertainty and therefore of profits and losses.


The logical result of this view is the disintegration of some mythical interpretations of economic entities. The almost metaphysical use of terms like capital has to be avoided. There is in nature nothing which corresponds to the terms capital or income. There are different commodities, producers' goods, and consumers' goods; it is the intention of the individuals or of acting groups which makes some goods capital and others income. The maintenance of capital or the accumulation of new capital are always the outcome of a conscious action on the part of men who restrict their consumption to limits which do not reduce the value of the stock available. It is a mistake to assume the immutability of the capital stock as something natural which does not require special attention. In this respect I have to disagree with the opinions of one of the most eminent economists of our time; with Professor Knight of Chicago.


The weak point of the Böhm-Bawerkian theory [of Capital and Interest]is not, as Professor Knight believes, the useless introduction of the concept of the period of production. It is a more serious deficiency that Böhm-Bawerk reverts to the errors of the so-called productivity theory. Like Professor Fetter of Princeton I aimed at an elimination of this weakness by basing the explanation of interest on time preference only.

The touchstone of any economic theory is according to an oft-quoted dictum, the treatment of the trade cycle. I have tried not only to restate the monetary theory of the cycle but also to demonstrate that all other explanations cannot avoid using the main argument of this theory. Of course, the boom means an upward movement of prices or at least a compensation for tendencies working toward falling prices and to explain this requires the postulation of a rising supply of credit or money.


In every part of my treatise I try to take into account the relative weight to be assigned to different institutional factors and to different economic data. I further discuss the objections raised not only by different theoretical schools but also by those who deny the possibility of any economic science. The economist has to answer those who believe that there is no such thing as a universally valid science of society, who doubt the unity of human logic and experience and try to replace what they call international and, therefore, as they say, vain knowledge with doctrines which represent the peculiar point of view of their own class, nation or race. We do not have the right to let these pretensions pass unchallenged even if we have to assert truths which to us seem obvious. But it is sometimes necessary to repeat truths because we find repeated instances of the old errors.

  • 1.
    Catallactics is a name for the science of exchanges, the "branch of knowledge to investigate the market phenomena, that is, the determination of the mutual exchange ratios of the goods and services negotiated on markets, their origin in human action and their effects upon later action." Mises, Human Action, page 232.
  • 2.
    Nationalökonomie, Theorie des Handelns und Wirtschaftens, Editions Union, Geneva, Switzerland, May 1940, 772 pages.
  • 3.
    Nationalökonomie was superseded by Human Action which English edition first appeared in 1949, Yale University Press, New Haven. Connecticut, 927 pages. Mises' Foreword to the First Edition describes Human Action as follows: "The present volume is not a translation of this earlier book. Although the general structure has been little changed, all parts have been rewritten."

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