The Last Knight of Liberalism

Chapter 17. A Treatise on Economics

1 Mises to François Perroux, letter dated September 28, 1946; Grove City Archive: Perroux file.

2Human Action: A Treatise on Economics (New Haven, Conn.: Yale University Press, 1949; Scholar’s edition [Auburn, Ala.: Ludwig von Mises Institute, 1998]), and Nationalökonomie (Geneva: Editions Union, 1940) are virtually identical in general architecture. There are a few substantive differences between the two books, but these differences pale in comparison to the differences that separate both of them from all similar works. In the present chapter, we will therefore quote Human Action wherever possible. In Human Action, Mises placed a greater emphasis on refuting positivism, whereas in Nationalökonomie he had refuted in particular Spann and Marx. Moreover, in Human Action he added a chapter on general probability theory, and he expanded the “conclusion” of Nationalökonomie into a comprehensive seventh part of Human Action that dealt with the social and cultural significance of praxeology. He had planned an American edition early on and had anticipated modifications of his text to accommodate the particular background of his American readers. See Mises to Machlup, letters dated December 18, 1938, June 15, 1939, and January 30, 1940; Hoover Institution: Machlup-Mises correspondence file.

3 Mises to Ernest Anthony, letter dated June 19, 1953; Grove City Archive: Anthony file.

4 Mises to Ballvé, letter dated May 13, 1957; Grove City Archive: Ballvé files.

5 This emphasis demonstrates in turn the crucial importance of Grundprobleme for the development of Nationalökonomie.

6 A fine point to notice: the treatment of epistemology came after the definition of action, because science and epistemology are themselves instances of action. Another fine point: In Human Action, Mises adopts the pragmatist definition of truth (“that which works in practice”) and maintains this definition throughout all later writings.

7 Carl Menger, Grundsätze der Volkswirtschaftslehre (Vienna: Braumüller, 1871), p. vii.

8 Mises, Nationalökonomie, chap. 5, sect. I.

9 In Socialism: An Economic and Sociological Analysis (Indianapolis: Liberty Fund, 1981), the theory was presented not in the first part, which dealt with fundamentals, but in one of the subsequent parts that dealt with particular problems of socialist orders.

10 Haberler to Davidson, letter dated January 23, 1945; Yale University Press Archive.

11 Murray Rothbard later argued that as a consequence of the mere fact that people rank their choice alternatives, it follows that demand curves must slope downward to the right. See Murray N. Rothbard, Man, Economy, and State, 3rd ed. (Auburn, Ala.: Ludwig von Mises Institute, 1993), chap. 2. Mises made no such inference. He was skeptical about the use of graphical methods in exact analysis (he did accept them as pedagogical devices).

12 Mises, Human Action, p. 270.

13 Ibid., p. 324.

14 Ibid., pp. 328f.

15 Mises would later discuss the irrelevance of homo oeconomicus for modern economics in Human Action, pp. 62ff. He concluded that “theorems concerning commodity prices, wage rates, and interest rates refer to all these phenomena without any regard to the motives causing people to buy or to sell or to abstain from buying or selling” (p. 64).

16 Ibid., p. 325.

17 Ibid., pp. 245ff.

18 Ibid., p. 647, for example.

19 Ibid., p.146.

20 Ibid., p. 147. A few years later, Joseph Schumpeter pointed out that the social analysis of the classical economists had its roots in medieval scholasticism. Saint Thomas Aquinas and his followers had pioneered methodological individualism and utilitarian justifications of social institutions. By contrast, divine law and omnipotent government were protestant inventions. See Joseph A. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), part 2, chap. 2, pp. 91–93.

21 Ibid., p. 145.

22 Ibid., p. 145.

23 Ibid., p. 147.

24 “The market is a democracy where every penny gives a right of vote.” Frank A. Fetter, The Principles of Economics (New York: The Century Co., 1905), p. 395. A few pages later he states: “So each is measuring the services of all others, and all are valuing each. It is the democracy of valuation” (p. 410).

25 Joseph A. Schumpeter, Theorie der wirtschaftlichen Entwicklung (Munich: Duncker & Humblot, 1911).

26 In Human Action, he called it the “evenly rotating economy,” pp. 246–47.

27 Mises to an unknown correspondent, letter dated November 24, 1930; Mises Archive 66: 14.

28 He started lecturing on capital and related problems in the winter semester of 1936–1937. See Mises to Machlup, letter dated February 15, 1937; Hoover Institution: Machlup-Mises correspondence file. By then, Mises must have made his mind up about these questions.

29 Menger, Grundsätze, pp. 133ff.

30 Eugen von Böhm-Bawerk, Capital and Interest (South Holland, Ill.: Libertarian Press, 1959), p. 265: emphasis in the original. See also Böhm-Bawerk, Positive Theorie des Kapitals (Innsbruck, 1889), p. 327, and Böhm-Bawerk, Capital and Interest, p. 259.

31See Frank A. Fetter, Economic Principles, 2 vols. (New York: The Century Co., 1915); idem, Capital, Interest, and Rent, Murray N. Rothbard, ed. (Kansas City: Sheed Andrews and McMeel, 1977).

32 Böhm-Bawerk, Positive Theorie des Kapitals (Jena: Gustav Fischer, 1921), pp. 328ff.

33 Mises, Nationalökonomie, pp. 439ff.; Human Action, pp. 485ff. Mises also criticized Böhm-Bawerk for having failed to develop a truly praxeological theory of the period of production.

34 Böhm-Bawerk, Positive Theorie des Kapitals, p. 327.

35 Neither did Irving Fisher and Frank Fetter think this was the case; they even argued that time preference could be negative. See Irving Fisher, The Rate of Interest (New York: Macmillan), p. 184; and Frank A. Fetter, “Interest, Theories: Old and New,” American Economic Review (1914): 238f.; idem Economic Principles, 2 vols. (New York: The Century Co., 1915), p. 237.

36 Mises to Robert Fleming, letter dated May 13, 1969; Grove City Archive: “F” file.

37 Mises, Nationalökonomie, pp. 443f. Here he quoted Fetter, Principles of Economics, p. 144, and Franz Cuhel, Zur Lehre von den Bedürfnissen (Innsbruck: Wagner, 1907), p. 304. For an earlier statement of this argument, see Mises, Grundprobleme (Jena: Gustav Fischer, 1933), pp. 23f.

38 Mises, Nationalökonomie, p. 446; Human Action, p. 483.

39 Mises, Nationalökonomie, p. 502.

40 Ibid., pp. 502–10. Mises stresses that the boom is not a phase of “overinvestment,” but of misallocation. There is too much consumption and too much investment at the same time.

41 See in particular Fred Taylor, “The Guidance of Production in a Socialist State,” American Economic Review 19 (1929); Carl Landauer, Planwirtschaft und Verkehrswirtschaft (Leipzig: Duncker & Humblot, 1931); H.D. Dickinson, “Price Formation in a Socialist Community,” Economic Journal 43 (1933); A.P. Lerner, “Economic Theory and Socialist Economy,” Review of Economic Studies 2 (1934); Oskar Lange, “On the Economic Theory of Socialism,” Review of Economic Studies 4, no. 1 (October 1936); idem, “The Computer and the Market,” Review of Economic Studies 4, no. 1 (October 1936); idem, Price Flexibility and Employment (Bloomington, Ind.: Principia Press, 1944).

42 Oskar Lange in On the Economic Theory of Socialism, B.E. Lippincott, ed. (New York: McGraw-Hill, 1964), p. 57.

43 See in particular the various editions of the most important Western textbook of the postwar years, Paul Samuelson’s Economics (New York: McGraw-Hill, 1948). Up to the very last edition that appeared before the collapse of the Soviet empire, Samuelson stated: “The Soviet economy is proof that, contrary to what many sceptics had earlier believed, the socialist command economy can function and even thrive” (Economics, 13th ed., 1989, p. 837). A good study of this issue is in Mark Skousen, “The Perseverance of Paul Samuelson’s Economics,” Journal of Economic Perspectives 11, no. 2 (Spring 1997): 137–52.

44 In actual practice, market socialism had never played a big role in the Eastern Bloc. Some intellectuals were allowed to discuss the calculation problem and the market-socialist solution; see in particular Wlodzimierz Brus, Funktionsprobleme der sozialistischen Wirtschaft (Frankfurt a.M.: Suhrkamp, [1961] 1971). But in practice there was central planning, not any form of competitive pricing. Significantly, in the early 1960s, the Soviet professor Yevsey G. Liberman received worldwide attention with his proposals to steer production with the help of price incentives. For a concise presentation see Alec Nove, “The Liberman Proposals,” Journal of Soviet and East European Studies 47 (April 1963): 112–18. Needless to say, Liberman did not address, much less solve, the problems Mises had pointed out in 1922. Mises himself commented on this newest fad of economic planning in his “Observations on the Russian Reform Movement,” The Freeman 16, no. 5 (May 1966): 23–29.

45 Mises, Nationalökonomie, pp. 639f.

46 Ibid., p. 645.

47 Mises, Erinnerungen (Stuttgart: Gustav Fischer Verlag, 1978), p. 74; Notes and Recollections (Spring Mills, Penn.: Libertarian Press, 1978), p. 112.

48 Mises to Hans Hellwig, letter dated April 10, 1958; Grove City Archive: Hellwig file.

49 Mises, Nationalökonomie, pp. 361–65; Human Action, pp. 395–402.

50 This was the view he championed, at least in one crucial passage, in Theory of Money and Credit (London: Jonathan Cape, 1934; Indianapolis: Liberty Fund, 1980). See our discussion in chapter 6.

51 His later theory was already present in the first edition of his Theory of Money and Credit, but it was presented side by side with other statements taking the opposite point of view. Mises developed the cash-balance approach to the demand for money starting from Menger’s article “Geld,” Handwörterbuch der Staatswissenschaften, 1st to 3rd eds. (Jena: Gustav Fischer, 1891–1909), chap. 14. One possible source of Mises’s second thoughts on this question was a short book that Edwin Cannan had published at the end of World War I. See Edwin Cannan, Money: Its Connexion with Rising and Falling Prices (London: King & Son, 1918). In his 1942 lectures in Mexico City, Mises stressed that the individual demand for money was in fact identical with the individual’s cash holdings and referred the audience to p. 83 of Cannan’s book. See the lecture notes in Grove City Archive: Mexico 1942 files.