The Last Knight of Liberalism

Chapter 10. A Copernican Shift

1 Eduard März, “Die Bauer-Mises-Schumpeter-Kontroverse,” Wirtschaftspolitische Blätter 28, no. 4 (1981): 66f.

2 Benjamin E. Lippincott, “Introduction,” On the Economic Theory of Socialism B.E. Lippincott, ed. (New York: McGraw-Hill, 1964), p. 4.

3 See Walther Rathenau, Zur Kritik der Zeit (Berlin: Gustav Fischer, 1912); idem, Deutschlands Rohstoffversorgung (Berlin: Gustav Fischer, 1916); idem, Probleme der Friedenswirtschaft (Berlin: Gustav Fischer, 1917); idem, Von kommenden Dingen (Berlin: Gustav Fischer, 1917); idem, Die neue Wirtschaft (Berlin: Gustav Fischer, 1918); idem, Die neue Gesellschaft (Berlin: Gustav Fischer, 1919); idem, Der neue Staat (Berlin: Gustav Fischer, 1919); idem, Autonome Wirtschaft (Jena: Diederichs, 1919). This enormous literary output could not fail to provoke various critical reactions. See for example Walter Lambach, Diktator Rathenau (Hamburg: Deutschnationale Verlagsanstalt, 1918); Theodor Fritsch, Anti-Rathenau, 2nd ed. (Leipzig: Hammer, 1919). On Rathenau’s impact on Hayek see Hans Jörg Hennecke, Friedrich August von Hayek (Düsseldorf: Wirtschaft und Finanzen, 2000), pp. 40f.

4 See Friedrich Bendixen, Sozialismus und Volkswirtschaft in der Kriegsverfassung (Berlin: Guttentag, 1916); Richard Riedl, Die Aufgaben der Übergangswirtschaft (Vienna: Veröffentlichungen des Generalkommissariates für die Kriegs- und Übergangswirtschaft No. 1, 1917); Karl Pribram, Die Grundgedanken der Wirtschaftspolitik der Zukunft (Graz: Leuschner & Lubensky, 1918); Rudolf Wissel, Die Planwirtschaft (Hamburg: Auer, 1920); idem, Praktische Wirtschaftspolitik (Berlin: Verlag Gesellschaft und Erziehung, 1919). Wissel was a minister of the German government. Among the few critical voices were Andreas Voigt, Kriegssozialismus und Friedenssozialismus (Leipzig: Scholl, 1916); and Julius Meinl, Zwang oder Freiheit? (Vienna: Manz, 1918).

5 See Otto Neurath, Durch die Kriegswirtschaft zur Naturalwirtschaft (Munich: Callwey, 1919); idem, Die Sozialisierung Sachsens (Chemnitz: Verlag des Arbeiter- und Soldatenrates, 1919); Otto Neurath and Wolfgang Schuh-mann, Können wir heute sozialisieren? Eine Darstetiung der sozialistischen Lebensordnung und ihres Werdens (Leipzig: Klinkhardt, 1919).

6 Otto Bauer, Der Weg zum Sozialismus (Vienna: Verlag der Wiener Volksbuchhandlung, 1919).

7 This point has been underlined by socialist historian Eduard März. See März, “Die Bauer-Mises-Schumpeter-Kontroverse,” p. 70.

8 “Die Wirtschaftsrechnung im sozialistischen Gemeinwesen.” See Mises to Lederer, November 14, 1919; in Mises Archive 73: 56f.

9 Mises, Nation, Staat und Wirtschaft (Vienna & Leipzig: Manz, 1919), p. 130; translated by Leland B. Yeager as Nation, State, and Economy (New York: New York University Press, 1983), pp. 159f.

10 Mises, Nation, State, and Economy, p. 160; Nation, Staat und Wirtschaft, pp. 130–31. Mises went on to stress the subjective element in this process:

Accounting is not perfect. The exactness of its numbers, which strongly impresses the uninitiated, is only apparent. The evaluation of goods and claims that it must work with is always based on estimates resting on the interpretation of more or less uncertain elements.

11 It later turned out that Mises had an important predecessor in Nicolas G. Pierson, the eminent Dutch economist who was also minister of finance and governor of the Dutch central bank. In an exchange with Austro-Marxist Karl Kautsky, Pierson had argued that any economic system would have to solve the problem of value determination, and that the socialists would have to demonstrate how this determination could be achieved without a system of market prices. See Nicolas Pierson, “The Problem of Value in the Socialist Community,” F.A. Hayek, ed., Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism (London: Routledge and Kegan Paul, 1935), pp. 41–85. Pierson’s original 1902 essay was written in Dutch and therefore did not reach a wider public in Germany and Austria. It was translated into German and English only after Mises’s essay had started the debate independently.

12 Mises to Emil Lederer, letter dated January 14, 1920, in Mises Archive 73: 52ff. Mises’s comparison in the last sentence refers to a debate initiated by Böhm-Bawerk, who had subjected Marx’s theory of the average rate of profit to scathing and devastating criticism.

13 Mark Blaug, Economic Theory in Retrospect, 5th ed. (Cambridge: Cambridge University Press, 1997), p. 557.

14 He did not attend the January 1920 meeting of the Nationalökonomie Gesellschaft, but sent Mises his typewritten comments in an undated letter. See Mises Archive 73: 60ff., which is a typewritten reproduction of 73: 49ff.

15 Lederer claimed that a future socialist economic calculation:

would be essentially different from capitalistic calculation in that many moments would be included in the calculation, some would be lacking, and some would be evaluated differently; this all points to another kind of system, but a system, nevertheless. It is at that point within a system where universal factors are found that operative methods of calculation for the system originate. (Ibid.)

16 Mises to Lederer, letter dated January 14, 1920; Mises Archive 73: 54.

17 John Stuart Mill, Principles of Political Economy (London: Routledge, 1891), bk. 3, chap. 1, p. 298.

18 See Carl Menger, Grundsätze der Volkswirtschaftslehre (Vienna: Braumüller, 1871), p. 124. Among the predecessors of his imputation (order-of-goods) theory, see Johann F.E. Lotz, Revision der Grund-Begriffe der National-Wirthschaftslehre (Koburg and Leipzig: Sinner, 1811), vol. 1, p. 108; Johann A. Oberndorfer, System der Nationalökonomie (Landshut: Krüll, 1822), p. 307; F.B.W. Hermann, Staatswirthschaftliche Untersuchungen, 1st ed. (Munich: Fleischmann, 1832), p. 65. Notice however that Menger had no predecessor for his solution of the problem of joint production. See Yukihiro Ikeda, Die Entstehungsgeschichte der “Grundsätze” Carl Mengers (St. Katharinen: Scripta Mercaturae Verlag, 1997).

19 See Friedrich von Wieser, Der natürliche Werth (Vienna: Hölder-Pichler-Tempsky, 1889), chap. 3, pp. 67ff.

20 Consider the number one German economics textbook of Menger’s day, Karl Heinrich Rau, Grundsätze der Volkswirtschaftslehre, 7th ed. (Leipzig and Heidelberg, 1863), p. 166: “Nobody freely and deliberately enters into a losing deal; that is, a deal in which the exchanged value is of a lesser nature than that which was surrendered.”

21 He himself recognized this stipulation as a fiction, and he justified the use of fictions as a necessary device of scientific analysis. In fact, as significant as the political implications of Wieser’s natural-value theory are in their own right, it is equally important to stress the impact of Wieser’s methodology on the wider profession. Mathematical economists had made no secret of the fact that their reasoning relied on fictions, even though they believed that the error introduced by unrealistic stipulations was negligible in most cases. In contrast, verbal economists like Menger stressed the necessity for science to describe reality. They were reluctant to use mathematical tools precisely because they saw no way to reconcile the use of such tools with their quest for realism. Wieser broke with this tradition by consciously insisting on the legitimacy of “deductions from fiction.” See Wieser, Der natürliche Werth, part 2.

22 For an enlightening analysis of the shortcomings of Wieser’s value theory, see Samuel Bostaph, “Wieser on Economic Calculation under Socialism,” Quarterly Journal of Austrian Economics 6, no. 2 (2003); idem, “Friedrich von Wieser’s Theory of Socialism: A Magnificent Failure,” Politická ekonomie 53, no. 6 (2005).

23 And, we might add, it was a truly “scientific” theory because it did not commit the academic economist to any particular political program—just as Maxwell’s equations did not commit a physicist to any political party. Wieser fervently denounced the intimate relationship between the various schools of economic thought and the political agendas they were backing up, criticizing these schools for not pursuing “pure knowledge,” that is, for Wieser, knowledge untainted by political implications. In contrast, his approach covered “a certain most inner domain of economic truths—truths relating to elements that remain common to all social organizations.” Clearly, this guaranteed political impartiality and therefore, in his view, scientific objectivity. See Friedrich von Wieser, “Karl Menger,” Neue österreichische Biographie: 1815–1918 (Vienna, 1923), vol. 1, pp. 91f.

24 The best illustration is the fact that Max Weber invited him to write a general treatise on economics for the prestigious Grundriss der Sozialökonomik series, which was supposed to portray the present state of the social sciences. Wieser thus wrote his Theorie der gesellschaftlichen Wirtschaft (Tübingen: Mohr, 1914). The work was first published in 1914 and remained the main work of reference in German-language economics until the early 1930s (a second edition appeared in 1924).

25 Works on the technical problems of imputation theory abounded from the 1890s and proliferated until the 1930s, without leading to any solution. See for example, Leo Schönfeld-Illy, Wirtschaftsrechnung (reprint; Munich: Philosophia, 1924); Wilhelm Vleugels, Die Lösungen des wirtschaftlichen Zurechnungsproblems bei Böhm-Bawerk und Wieser (Halle: Niemeyer, 1930).

26 Nikolai Bukharin, Economic Theory of the Leisure Class (New York: Monthly Review Press, 1972), p. 9.

27 Ibid., p. 51.

28 Ibid., p. 53.

29 See Georg Simmel, Philosophie des Geldes (Frankfurt a.M.: Suhrkamp, [1901] 1991), p. 35; Joseph A. Schumpeter, Wesen und Hauptinhalt der theoretischen Nationalökonomie (Munich and Leipzig: Duncker & Humblot, 1908), p. 50.

30 Carl Menger, Principles of Economics (New York: New York University Press, 1981), p. 115. Menger also defined value as “a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well being. Hence value does not exist outside the consciousness of men” (ibid., p. 121).

31 See chapter 4—“Fin de siècle Economic Science.”

32 Mises, Theory of Money and Credit (Indianapolis: Liberty Fund, 1980), pp. 51f.

33 Menger, Grundsätze der Volkswirtschaftslehre, p. viii; Principles of Economics (New York: New York University Press, 1976), p. 48. He went on:

Whether and under what conditions a thing is useful to me, whether and under what conditions it is a good, whether and under what conditions it is an economic good, whether and under what conditions it possesses value for me and how large the measure of this value is for me, whether and under what conditions an economic exchange of goods will take place between two economizing individuals, and the limits within which a price can be established if an exchange does occur—these and many other matters are fully as independent of my will as any law of chemistry is of the will of the practicing chemist.

34 The posthumous second edition of his Principles (1923) reinforced the stress on the objective factors of the pricing process. Among other things, Menger here distinguishes between “imaginary” and “real” human wants. See our discussion in chapter 14.

35 Mises, Theory of Money and Credit, pp. 52f.

36 See Mises Archive 55: 2ff. He had published parts of it beforehand: the chapter on economic calculation. He also tried to publish chapter 3 (“The Social Order and the Political Constitution”) in a festschrift for Max Weber. But this project did not materialize because Socialism appeared before the other book. See the April 1922 letter from Karl Geibel of Duncker & Humblot to Mises in Mises Archive 55: 6.

37 This fact is revealing as to Mises’s priorities and his sense for business.

38 Mises received 19,200 marks for the book in July 1922. See Mises Archive 75: 27ff. This was the equivalent of $38.92. A few months later, by October 1922, the mark still in precipitous decline, the dollar equivalent of Mises’s honorarium shrank to $6.04. We may suppose, however, that Mises was quick to exchange his marks against kronen, which had a stable dollar exchange rate.

39 See Ludwig Pohle, Die gegenwärtige Krisis in der deutschen Volkswirtschaftslehre (Leipzig: Deichert, 1911), p. 6.

40 See Max Weber, Economy and Society: An Outline of Interpretive Sociology, Guenther Roth and Claus Wittich, eds. (Berkeley: University of California Press, 1978), vol. I, pp. 100–03. The following quotes are taken from this passage, in particular, from pages 102f. In the German original see Max Weber, Wirtschaft und Gesellschaft, 3rd ed. (Tübingen: Mohr, 1947), vol. 1, chap. 2, § 12, pp. 53–58.

41 See Otto Neurath, Bayrische Sozialisierungserfahrungen (Vienna: Neue Erde, 1920); idem, “Vollsozialisierung: Von der nächsten und übernächsten Zukunft,” Deutsche Gemeinwirtschaft 15 (1920). In the spring of 1919, Neurath was a member of a short-lived revolutionary Bavarian government in Munich, acting as director of the Zentralwirtschaftsamt (Office of the Centrally Planned Economy). After the suppression of the revolution, Max Weber defended him in court. See Allan Mitchell, Revolution in Bavaria, 1918–1919: The Eisner Regime and the Soviet Republic (Princeton, N.J.: Princeton University Press, 1965), pp. 293ff.

42 Weber died on June 14, 1920 and thus might have read Mises’s Archiv paper, which had come out in February or March of that year. The editors of Economy and Society referred to Mises’s work at the end of the chapter on “calculation in kind,” stating: “During the printing of this work an essay by Ludwig von Mises dealing with these problems came out” (ibid., p. 107).

43 See Max Weber, Der Sozialismus (Vienna: Phöbus, 1918).

44 Heinrich Herkner, “Die Zukunft der Sozialpolitik,” Jubiläumstagung des Vereins für Sozialpolitik in Eisenach 1922 (Munich and Leipzig: Duncker & Humblot, 1923), p. 95.

45 Heinrich Herkner, “Sozialpolitische Wandlungen in der wissenschaftlichen Nationalökonomie,” Der Arbeitgeber 13, no. 3 (1923): 35.

46 See Franz Boese, Geschichte des Vereins für Sozialpolitikx (Berlin: Duncker & Humblot, 1939), p. 181.

47 Heinrich Pesch, Lehrbuch der Nationalökonomie 5 (Freiburg i.Br.: Herder, 1923), p. ix. Pesch was the leading champion of “solidarism”—a version of socialism that Mises had criticised in his book.

48 See Mises, A Critique of Interventionism (New Rochelle, N.Y.: Arlington House, 1977), p. 101.

49 See Mises Archive 75: 50.

50 Mises, Theory and History (New Haven, Conn.: Yale University Press, 1957), p. 65.

51 Mises, Human Action, Scholar’s edition (Auburn, Ala.: Ludwig von Mises Institute, 1998), p. 332; emphasis added. A few years later, he wrote:

Value is not intrinsic. It is not in things and conditions but in the valuing subject. It is impossible to ascribe value to one thing or state of affairs only. Valuation invariably compares one thing or condition with another thing or condition. It grades various states of the external world. It contrasts one thing or state, whether real or imagined, with another thing or state, whether real or imagined, and arranges both in a scale of what the author of the judgment likes better and what less. (Mises, Theory and History, p. 23)

52 In the first edition of his treatise on money, he had written: “As a feeling, value cannot be measured; it is [however] possible to compare it with other, similar feelings” (Theorie des Geldes und der Umlaufsmittel, 1st ed. [Munich and Leipzig: Duncker & Humblot, 1912], p. 16). Significantly, in the second edition of 1924, Mises adopted a non-psychological theory of value, conceiving of value as an act rather than a feeling. He deleted the above sentence from his book and replaced it with the following: “Acts of valuation are not susceptible of any kind of measurement” (Theory of Money and Credit, p. 52).

53 Mises, Socialism: An Economic and Sociological Analysis (Indianapolis: Liberty Fund, 1981), p. 203.

54 Carl Landauer, “Übersicht über die neuesten Publikationen Deutschlands und des Auslands,” Jahrbücher für Nationalökonomie und Statistik 121, no. 2 (1923). Copy in Mises Archive 42: 4.

55 Joseph T. Salerno, “Mises and Hayek Dehomogenized,” Review of Austrian Economics 6, no. 2 (1993); Hans-Hermann Hoppe, “Socialism: A Property or Knowledge Problem?” Review of Austrian Economics 9, no. 1 (1996); Jörg Guido Hülsmann, “Knowledge, Judgment, and the Use of Property,” Review of Austrian Economics 10, no. 1 (1997).