Free Market Defense
Ludwig von Mises: Defender of the Free
Market
Ludwig von Misis thoughts on human
behavior, socialism, and money and credit
have had a major impact on economic
thought. He championed true free markets and
is seen as a defender of
liberty. Former President of the United States Ronald
Reagan said "Ludwig
von Mises was one of the greatest economic thinkers in the
history of Western
Civilization. Through his seminal works, he rekindled the
flames of liberty.
As a wise and kindly mentor, he encourages all who sought to
understand the
meaning of freedom. We owe him an incalculable debt"(Mises
Institute).
The remainder of this paper will outline the life of Ludwig von
Mises.
This will be accomplished by describing the social, political, technical,
and
economic environment that influenced his ideas. A description of his
major
ideas in economic thought will be presented. Next, the people and ideas
that
influenced his approach to economics will be addressed. Finally, the
paper will
conclude with an assessment of Ludwig von Mises contributions to
economic
thought. Overview of the Life of Ludwig von Mises Ludwig von Misis
was born on
September 29, 1881 in Lemberg, Austria. He attended a private
elementary school,
the public Akademishe Gymnasium in Vienna from1892 to
1900. In 1900 Mises
entered the University of Vienna. On February 20,1906 he
received a Dr. Jur
degree, a Doctor of both Canon and Roman Laws, from the
University of Vienna.
When Mises attended the University, it had no
separate economics department; the
only way to study economics was through
law (Mises Institute). From 1907 to 1914
Mises was employed as an advisor
to the Austrian Chamber of Commerce. His first
major thesis, the Theory of
Money and Credit was published in 1912. In 1913
Mises was awarded the
position of Privatdozent (unsalaried lecturer) at the
University of
Vienna (Mises Institute). Mises’ academic pursuits were
interrupted from 1914
to 1918 due to World War I. After World War I Mises
returned to the
University of Vienna and his position at the Austrian Chamber
of
Commerce. His next major thesis, Socialism, came in 1922. In 1934
Mises accepted
a position as Professor of International Economic Relations at
the Graduate
Institute of International Studies, in Geneva, Switzerland.
Even though he bad
left Vienna to accept this position in Switzerland, Mises
did work for the
Austrian Chamber of Commerce on a part-time basis until
Hitler's annexation of
Austria in March 1938 (Mises Institute). On July
6, 1938 Ludwig von Mises
married Margit Sereny in Geneva. Ludwig von Mises
immigrated to the United
States in 1940 arriving in New York on August 2.
In the United States Mises
taught as a Visiting Professor at the University
of New York from 1945 to 1969.
He also traveled to Central and South
America giving lectures from 1942 to 1959.
In 1949 Mises published his
crowning achievement Human Action. This treatise
summarized his thoughts on
economics. Through out the rest of his life Mises
received several
distinguished awards. On October 10, 1973 Ludwig von Mises
passed away at St.
Vincent Hospital in New York City. Factors Influencing Ludwig
von Mises Ideas
The major influence on Ludwig von Mises ideas was the Austrian
school of
economic thought. The political and economic events that influenced
Mises
included two world wars and an extended worldwide depression. In
the
political turmoil after World War I, the main theoretician of the now
socialist
Austrian government was Marxist Otto Bauer. Mises had
befriended Bauer during
his school years and the two often discussed
economics and politics. Mises
explained economics to him night after night,
eventually convincing him to back
away from Bolshevik-style policies (Mises
Institute). His actions kept Austria
from following to the hyperinflation
that the Germans experienced. The
prevailing political climate during this
time was Socialism. Mises strongly
opposed Socialism and its prevalence
inspired him to write his next great work
Socialism. The Great depression
brought about the rise of Keynesian Economics.
Mainstream economics
embraced Keynesian economics and as a result Mises theory
of money and credit
was pushed into the background as the cause for business
cycles. Political
activity in Europe, specifically Hitler’s aggression, drove
Mises from
his homeland and then Europe just before World War II. Mises
continued to
lecture widely in the United States, Europe and Latin America. He
served as
economic advisor to the Foundation for Economic Education (FEE) from
its
founding in 1946 until his death. He was appointed a Visiting Professor
at
New York University Graduate School of Business Administration in 1945
and
served there until 1969 (FEE). In his life time Mises witnessed the
completion
of the industrial revolution in the western world as well as the
pervasion of
government intervention into the free market through fiscal
policy, based on
Keynesian Economics, and through the
institutionalization of central banking.
Ludwig von Misis: Money and
Credit, Socialism, and Human Action During his
lifetime of teaching and
writing Mises wrote 25 books and more than 250
scholarly articles (Mises
Institute). Percy Greaves gives a list of Mises more
prominent books in Mises
Made Easier, they include: Human Action (1st edition,
Yale, 1949; 2nd
revised edition, Yale, 1963; 3rd revised). edition, Regnery,
1966
Bureaucracy (Yale, 1944; Arlington House, 1969). Omnipotent Government
(Yale,
1944; Arlington House, 1969). Socialism (Yale, 1951; Jonathan
Cape,
1969). The Theory of Money and Credit (Yale, 1953; Foundation for
Economic
Education, 1971). The Anti-Capitalistic Mentality (Van Nostrand,
1956;
Libertarian Press, 1972). Theory and History (Yale, 1957; Arlington
House,
1969). Epistemological Problems of Economics (Van Nostrand, 1960).
The Free and
Prosperous Commonwealth (Van Nostrand, 1962). Planning for
Freedom (2nd edition,
Libertarian Press, 1962). The Ultimate Foundation
of Economic Science (Van
Nostrand, 1962.) The Historical Setting of the
Austrian School of Economics
(Arlington House, 1969). According to Allen
Dalton, Professor of Economics at
Boise State University, Mises major
contributions to economic thought appear in
his three books The Theory of
Money and Credit, Socialism, and Human Action. In
his first major work The
Theory of Money, Mises argued that just as the price of
any commodity is
determined by supply and demand, so is the purchasing power of
money, its
"price" (Mises Institute). Money, according to Mises, is
not a measurement of
prices: it is a medium whose exchange ratio varies in the
same way, although
as a rule not with the same speed and to the same extent, in
which the mutual
exchange ratios of the vendible commodities and services vary
(Koether).
Mises showed that prices can increase faster or slower than
the money supply,
the amount and speed of price increases depending on
people's desire to hold
cash. He also argued that because prices increase
only relative to one another,
monetary inflation has the effect of
redistributing wealth, from savers and
earners to banks and government and
its connected interest groups that receive
the counterfeit money first (Mises
Institute). Mises student, Murray Rothbard
summarized Mises ideas concerning
the effects of fractional reserve banking and
central banking in his article
The Case Against the Fed by stating that
counterfeiting (credit expansion) is
inflationary, redistributive, distorts the
economic system, and amounts to
stealthy and insidious robbery and expropriation
of all legitimate property
owners in society (Rothbard). The business cycles of
booms and busts that
monetary inflation causes are even more damaging to
society. When government
inflates, it lowers the interest rate below the proper
market level, which is
dependent on saving. The artificially low interest rate
misleads businesses
into making uneconomic speculative investments and creates
an inflationary
boom. When the credit expansion slows or stops, investment
errors are
revealed bankruptcies and unemployment result. Central banks like
the
Federal Reserve will ultimately create the business cycle. Mises
argued that
because money originated as a market commodity, not by government
edict or
social contract, it should be returned to the market. Banking should
be treated
as any other industry in a market economy, and be subject to
competition. The
currency should be tied to gold, its originating commodity,
through free
convertibility (Rothbard). Mises book Socialism predicted the
downfall of
communism and warned against socialist institutions in
government. He states
that socialism could not function in an industrial
economy because there would
be no market for the factors of production and
therefore no price system to
calculate profit and loss (Rothbard). Therefore
planning in a planned economy is
impossible due to the lack of economic
calculation. The result of planned
economies is no economy at all but rather
a system of "groping in the
dark"(Koether). Just as important, he showed that
mixed economics cannot
function efficiently either. Through taxes,
regulation, and spending, government
distorts the price system and the
allocation of resources to their most highly
valued uses (Rothbard). Evidence
of this pitfall is all around us and is
manifest in the downfall of Russia
and China’s moves toward capitalist
economics. Human Action is Ludwig von
Mises masterwork. Murray Rothbard
summarized the importance of Human Action
in his essay The Essential Ludwig von
Mises with the following
statements; "Human Action is IT; it is economics
whole, developed from sound
praxeological axioms, based squarely on analysis of
acting man, the purposive
individual as he acts in the real world. It is
economics developed as a
deductive discipline, spinning out of logical
implications of the existence
of human action. To the present writer, who had
the privilege of reading the
book on publication, it was an achievement that
changed the course of his
life and ideas. For here was a system of economic
thought that some of us had
dreamed of and never thought could be attained: an
economic science, whole
and rational, an economics that should have been but
never was. An economics
provided by Human Action" (Rothbard). The 900 page
treatise on economics
covers topics such as accounting, advertising, banking,
business cycles,
bureaucracy, capital, capitalism, charity, competition, debt,
devaluation,
economics, education, entreprenuership, equality, exchange rates,
gold
standard, government, history, human action, ideology,
individualism,
inflation, interest, intervention in markets by government,
foreign and domestic
investment, labor unions, laissez faire, land reform,
markets, mathematics,
money, monopoly, morality, mortality, praxeology,
prices, profits and loss,
public opinion, reason, religion, science, sex,
socialism, society, speculation,
statistics, tariffs, taxes, theory, time,
underdeveloped nations, unemployment,
value, wages and war (Koether). The
most important ideas derived from Human
Action change the very method
used to evaluate economics. Mises argues that
economics can not be viewed in
specialized terms but rather must be viewed as a
whole system. This method is
referred to as praxeology. Mises also argued
against the rising use of
mathematics in economics. He states that "the
fundamental deficiency implied
in every quantitative approach to economic
problems consists in the neglect
of the fact that there are no constant
relations between what are called
economic dimensions. There is neither
constancy nor continuity in the
valuations and in the formation of exchange
ratios between various
commodities" (Koether). In fact Mises referred to
mathematics in economics as
"worthless mental gymnastics" because they can
not and do not apply to real
economic problems. It does not help to think of
prices of production as the
intersect of two curves, but it does help to realize
that price is derived
through human action (Koether). Many other ideas are put
forth in Human
Action but these two are the most prevalent of those that have
not already
been discussed. The People and Ideas that Influenced Ludwig von
Mises.
The basis for all of Mises writings came from the founder of the
Austrian
School of economics, Carl Menger. Menger’s complete theory of
marginal utility
and its subjective reasoning that relied on theory. Mises
stated that Menger’s
views "made an economist" out of him because of its
methodology, which
stated that economics is the science of individual choice
(Mises Institute).
Eugen von Boehm-Bawerk, a student of Menger, taught a
young Mises from 1904 to
1914 at the University of Vienna. His views on
intervention of the government
and how it reacted to economic law greatly
influenced Mises thesis on socialism.
Boehm-Bawerk’s theory on interest
and capital and its time preference basis
formed the logic needed to argue
the viability of socialism (Spiegel). Mises
thoughts on the business cycle
were derived from Ricardian models, Boehm-Bawerk’s
theory on capital and the
factors of production, and Knut Wicksell’s ideas
regarding production and the
effects the difference between real and nominal
interest rates has on it. Max
Weber influenced Mises concerning economics as a
social science, but Menger
was probably the major influence here as well.
Assessment of Ludwig von
Mises Contributions to Economics The completeness of
Human Action is the
most impressive contribution that Ludwig von Mises gave to
economics. The
marriage of micro and macroeconomics was accomplished through
Mises
theory on money and credit. This was the first time that this had
been
accomplished. His argument presented in Socialism has been
historically
vindicated and supported by empirical facts. Mises undying views
on laissez
faire has been his sticking point with mainstream economics
(Spiegel). The
failure of the gold standard and the prevailing existence of
central banks are
testaments to this. The biggest triumph of Mises is the
methodology used to
study economics. He solidified Menger’s theoretical
approach to economic
problems.
Bibliography
Foundation for
Economic Education "Ludwig von Mises" [On-Line] Available
Internet
www.fee.org/about/misesbio.html Greaves, Percy L. "Mises Made
Easier,"
1974, Free Market Press Koether, George "The Wisdom of Ludwig von
Mises"
1981, The Freeman Ludwig von Mises Institute "Who is Ludwig von
Mises"
[On-Line] Available Internet www.mises.org/mises.asp Ludwig von Mises
Institute
"What is Austrian Economics" [On-Line] Available Internet
www.mises.org/austian.asp
Ludwig von Mises Institute "Why Austrian
Economics Matters" [On-Line]
Available Internet www.mises.org/why_ae.asp
Ludwig von Mises Institute "An
American Classical Liberalism" [On-Line]
Available Internet www.mises.org/classical.asp