Articles of Interest
The Why of Human Action
[Found among the papers of Bettina Bien Greaves and reprinted from Plain Talk (1949), Editor's comment: Those millions of illiterate and semi-literate armed men now in action from the borders of the Yellow Sea to the mountains of Greece have been set in motion by a ponderous and little-read study of economics — Das Kapital — written nearly a century ago by a German scholar named Karl Marx. Today when Marxist theory has half of the world in an iron grip and the other half is lost in an intellectual wilderness, the publication of Ludwig von Mises' life-work, Human Action — a thousand-page treatise on economics — may well prove a history-making event in reversing the Marxist tide.
As a contemporary critic of state socialism, Professor von Mises has no peer. Famous as the head of the so-called Austrian school of economics, of which Hayek is perhaps his best-known pupil, and noted as the author of Omnipotent Government and Bureaucracy, Mises long ago predicted the rise of the police state wherever statism triumphed.
Dr. von Mises taught at the University of Vienna for a quarter of a century. A refugee from Hitler's National Socialism, he now makes his home in the United States. Anticipating the appearance of his monumental study, we asked him to write for us his own explanation of the mainspring of Human Action.]
Economics versus Pseudo-Economics
There are no ivory towers to house economists. Whether he likes it or not, the economist is always dragged into the turmoil of the arena in which nations, parties and pressure groups are battling. Nothing absorbs the minds of our contempornries more intensely than the pros and cons of economic doctrines. Economic issues engross the attention of modern writers and artists more than any other problem. Philosophers and theologians deal today more often with economic themes than with those topics which were once considered as the proper field of philosophical and theological studies. What divides mankind into two hostile camps, whose violent clash may destroy civilization, is antagonistic ideas with regard to the economic interpretation of human life and action.
Politicians proclaim their utter contempt for what they label as "mere theory." They pretend that their own approach to economic problems is purely practical and free from any dogmatic prepossessions. They fail to realize that their policies are determined by definite assumptions about causal relations, i.e., that they are based on definite theories. Acting man, in choosing certain means for the attainment of ends aimed at, is necessarily always guided by "mere theory"; there is no practice without an underlying doctrine. In denying this truth, the politician tries in vain to withdraw the faulty, self-contradictory and a hundred-times refuted misapprehensions directing his conduct of affairs from the criticism of the economists.
The social function of economic science consists precisely in developing sound economic theories and in exploding the fallacies of vicious reasoning. In the pursuit of this task the economist incurs the deadly enmity of all mountebanks and charlatans whose shortcuts to an earthly paradise he debunks. The less these quacks are able to advance plausible objections to an economist's argument, the more furiously do they insult him.
Sound Money versus lnflationism and Expansionism
At the beginning of our century the governments of the civilized nations were committed either to the so-called classical gold standard or to the gold exchange standard. Their conduct of monetary and credit policies was, to be sure, not free from mistakes, and they indulged in a certain amount of credit expansion. But they were, when compared with conditions after 1914, moderate in their expansionist ventures and spurned the fantastic projects of the so-called monetary cranks who advocated boundless inflation and credit expansion as the patent medicine for all economic ills.
Yet this rejection of the plans which aimed at making people prosperous through increasing the quantity of money and fiduciary media was not founded upon a satisfactory cognition of the inevitable and undesired consequences of such a policy. The governments were disinclined to deviate from traditional standards of monetary management because with the older statesmen the memory of the troubles engendered by earlier inflations had not yet been obliterated and some vestiges of the prestige of the classical economists still prevailed. Professors and bankers loathed the writings of Ernest Solvay, Silvio Gesell and a host of other expansionists. But hardly anybody knew why these authors were wrong and how to refute them. In fact the doctrines generally accepted by the treasuries, the central banks, the financial press and the universities did not differ essentially from the ideas advanced by the cranks. These champions of a sweeping social reform to be accomplished by monetary measures only drew from the official doctrine its ultimate logical consequences. It was to be expected that in a coming emergency, such as a great war or revolution, those in office would turn away from their cautious reserve and that orgies of inflation and credit expansion would be rife.
Such was the state of monetary and credit theory when I published my Theory of Money and Credit.1 I tried to construct a theory entirely based upon the modern subjectivist methods of dealing with economic issues, the marginal utility concept. I demonstrated that what at that time was called inflation and is today passionately praised under the labels of deficit spending and pump-priming can never make a nation more prosperous. It may bring about a shift of income and wealth from some groups of the population to other groups, but it invariably tends to impair the prosperity of the whole nation. I pointed out that interest, i.e., the higher valuation of present goods as against future goods, is an ineluctable category of human conduct which does not depend on the particular structure of society's economic organization and cannot be abolished by any statutes or reforms. The endeavors to keep the rate of interest below the height it would attain on a market not sabotaged by credit expansion are in the long run doomed to failure. In the short run they result in an artificial boom which inevitably ends in a crash and slump. The recurrence of periods of economic depression is not a phenomenon inherent in the very course of affairs under laissez-faire capitalism. It is, on the contrary, the outcome of the reiterated attempts to "improve" the operation of capitalism by "cheap money" and credit expansion. If one wants to avert depressions, one must abstain from any tampering with the rate of interest. I thus elaborated the theory which supporters and critics of my ideas very soon began to call the "Austrian theory of the trade cycle."
As I had expected, my theses were furiously vilified by the apologists of the official doctrine. Especially abusive was the response on the part of the German professors, this self-styled "intellectual bodyguard of the House of Hohenzollern." In exemplifying one of my points, I had resorted to the hypothetical assumption that the purchasing power of the German mark might drop to a millionth fraction of its previous equivalent. "What a muddle-headed man who — if only hypothetically — dares to introduce such a fantastic assumption!" shouted one of the reviewers. But a few years later the purchasing power of the mark was down to one-billionth of its prewar amount!
It is a sad fact that people are reluctant to learn either from theory or from experience. Neither the disasters manifestly brought about by the deficit spending and low-interest-rate policies nor the confirmation of my theories by such eminent thinkers as Frederick van Hayek, Henry Hazlitt and the late Benjamin M. Anderson have up to now been able to put an end to the popularity of the fiat money frenzy. The monetary and credit policies of all nations are headed for a new catastrophe, probably more disastrous than any of the older slumps.
The Economic Theory of Socialism
Sixty years ago Sidney Webb boasted that the economic history of the century is an almost continuous record of the progress of socialism. A few years later an eminent British statesman, Sir William Harcourt, asserted: "We are all Socialists now." There could not be any doubt that all nations pursued policies which were bound to result finally in the establishment of all-round planning exclusively by the government, i.e., socialism or communism.
Yet nobody ventured to analyze the economic problems of a socialist system. Karl Marx had outlawed such studies as merely "utopian" and "unscientific." As he saw it, the mythical productive forces which inevitably determine the course of history and direct the conduct of men" independently of their wills" will in due time arrange everything in the best possible way; it would be a vain presumption of mortal men to arrogate to themselves a judgment in these matters. This Marxian taboo was strictly observed. Hosts of pseudo-economists and pseudo-experts dealt with alleged shortcomings of capitalism and praised the blessings of government control of all human activities; but hardly anybody had the intellectual honesty to investigate the economic problems of socialism.
To put an end to this intolerable state of affairs I published several essays and finally my book on Socialism.2 The main result of my studies was the proof that a socialist commonwealth would not be in a position to apply economic calculation. When socialism is limited to one or to a few countries only, the Socialists can still resort to economic calculation on the basis of prices determined on the markets of non-socialist countries. But once all countries adopt socialism, there is no longer any market for the factors of production, they are no longer sold and bought and no prices are determined for them.
This means that it becomes impossible for a socialist management to reduce the various factors of production to a common denominator and thereby to resort to calculation in planning future action and in appraising the result of past action. Such a socialist management would simply not know whether or not what it plans and executes is the most appropriate procedure to attain the ends sought. It would operate in the dark. It would squander scarce factors of production, both material and human (labor). The paradox of planning is precisely that it abolishes the conditions required for rational action based on weighing of cost (input) and result (output). What is advocated as conscious planning is in fact the elimination of conscious purposive action.
The Socialist and Communist authors could not help admitting that my demonstration was irrefutable. To save face they radically reversed their argument. Until 1920, the year in which I first published my thesis, all Socialists had declared that the essence of socialism is the elimination of the market and of market prices. All the blessings which they expected from the realization of socialism were described as the result of this abolition of the price system. But now they are anxious to show that markets and market prices can be preserved even under socialism. They are drafting spurious and self-contradictory schemes of a socialism in which people "play" market in the way children play war or railroad. They do not comprehend in what respect such childish play differs from the real thing it tries to imitate.
The Middle Way
Many politicians and authors believe that they could avoid the necessity of choosing between capitalism (laissez-faire) and socialism ( communism, planning). They recommend a third solution which — as they say — is as far from capitalism as it is from socialism. In imperial Germany this third system was called Sozialpolitik; in the United States it is known as the New Deal. Economists prefer the term used by the French, interventionism. The idea is that private ownership of the means of production should not be entirely abolished; but the government should "improve" and correct the operation of the market in interfering — by means of orders and prohibitions, of the power to tax and of subsidies — with the operations of the capitalists and entrepreneurs.
I tried to show that interventionism cannot work as a permanent system of society's economic organization. The various measures recommended must necessarily bring about results which — from the point of view of their own advocates and the governments resorting to them — are more unsatisfactory than the previous state of affairs which they were designed to alter. If the government neither acquiesces in this outcome nor derives from it the conclusion that it is advisable to abstain from all such measures, it is forced to supplement its first steps by more and more interference until it has abolished private control of the means of production entirely and thus established socialism. The conduct of economic affairs, i.e., the determination for what purposes the factors of production should be employed, can ultimately be directed either by buying and abstention from buying on the part of consumers or by government decrees. There is no middle way. Control is indivisible.
It is interventionism that produces all those evils for which a misguided public opinion indicts laissez-faire capitalism. As has been pointed out above, the endeavors to lower the rate of interest by means of credit expansion generate the recurrence of depression. The attempts to raise wage rates above the height they would attain in an unhampered market result in prolonged mass unemployment. "Soak-the-rich" taxation results in capital consumption. The joint outcome of all interventionist measures is general impoverishment. It is a misnomer to call the interventionist state the welfare state. What it ultimately achieves is not improving but lowering the common man's standard of living. The unprecedented economic development of the United States and the high standard of living of its population were achievements of the free enterprise system.
The Interconnectedness of All Economic Phenomena
Economics does not allow of any breaking up into special branches. It invariably deals with the interconnectedness of all phenomena of acting and economizing. All economic facts condition one another mutually. Each of the various economic problems must be dealt with in the frame of a comprehensive system assigning its due place and weight to every aspect of human wants and desires. All monographs remain fragmentary if not integrated into a systematic treatment of the whole body of social and economic relations.
To provide such a comprehensive analysis is the task of my book Human Action, a Treatise on Economics. It is the consummation of lifelong studies and investigations, the precipitate of half a century of experience. I saw the forces operating which could not but annihilate the high civilization and prosperity of Europe. What I aimed at in writing my book was to contribute my share to the endeavors of our most eminent contemporaries to prevent this country from following the path which leads to the abyss.
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
Cite This Article
Mises, Ludwig von, "The Why of Human Action," Plain Talk 3, no. 12 (September 1949): 6–10.