Ludwig Von Mises, Economic Insights, Volume 6, Number 4 Dallas Fed
Economic Insights
FEDERAL RESERVE BANK OF DALLAS VOLUME 6, NUMBER 4
Ludwig von Mises
This Economic Insights features one of
Ludwig Elder von Mises’ life was
Fritz Machlup, Oskar Morgenstern and
testament to the saying that one man
Lionel Robbins.
the free economy’s most famous intellectual
with courage makes a majority.
Between his departure from Vienna
warriors, Ludwig von Mises. Working from
Mises was born in 1881 in
in 1934 and his decision to go to America
Lemberg, Austria-Hungary. He enrolled
after the Germans breached the Maginot
within the Austrian paradigm, in 1912 Mises
in the University of Vienna in 1900 and
Line in June 1940, Mises taught in
became the first to apply marginal utility theory
received his doctorate in law and eco-
Geneva at the Graduate Institute of Inter-
nomics in 1906. A student of Eugen von
national Studies. He flourished in the
to money itself, in The Theory of Money and
Böhm-Bawerk — himself an admirer of
Swiss city and was very reluctant to
Credit, his first major work. He triggered one of
Carl Menger, father of the Austrian school
leave, especially as his English was much
of economics — Mises became one of
weaker than his French. But the fall of
economics’ most contentious and enlightening
the university’s most prominent figures.
France, the antipathy of the Nazi gov-
debates a few years later with his claim that cen-
After graduating, Mises worked for the
ernment — which blacklisted him — and
Vienna Chamber of Commerce as an
his wife Margit’s pleadings made his
tral planning, regardless of its undesirability on
economist and economic advisor to the
departure a near certainty. Since the
other grounds, was impossible to implement suc-
Austrian government.
early 1930s, Mises had warned those
In 1926 he founded the first entity
close to him of impending political dis-
cessfully. Holding to this claim and being an
dedicated solely to the study of macro-
aster in Austria and urged them to emi-
uncompromising proponent of classical liberal-
economic fluctuations, the Austrian Insti-
grate. American economist Benjamin
tute for Trade Cycle Research.1 While
Anderson, then with Chase Manhattan
ism impaired Mises’ academic reputation for the
pursuing this interest, he taught an eco-
Bank, supported the couple’s bid for
remainder of his life. Yet he never stopped work-
nomic theory course at the University
nonquota visas, which allowed them
of Vienna without pay and ran a semi-
immediate entry into the United States,
ing, and he produced some of the century’s most
monthly seminar at the chamber offices
provided they could get there. It
controversial and brilliant books, among them
that drew some of the most notable
proved to be a difficult, harrowing jour-
names in economics and the social sci-
ney, but when it ended, Mises at last
Theory and History, Socialism, Omnipotent
ences, including F. A. Hayek, Gottfried
stood on American soil.2
Government, Bureaucracy, Planning for Free-
Haberler, Wilhelm Röpke, Alfred Shutz,
The early years in his new country
Erich Voegelin, Paul Rosenstein-Rodan,
were not easy ones for Mises. He had
dom, Liberalism, Epistemological Problems of
Economics, Planned Chaos and his greatest
The Problem of Socialist Economic Calculation
achievement, Human Action.
The problem of economic calculation is the fundamental problem of Socialism. That for decades
We often hear the resigned cry that one
people could write and talk about Socialism without touching this problem only shows how devastat-
ing were the effects of the Marxian prohibition on scientific scrutiny of the nature and working of a
person can’t change the world. But many indi-
socialist economy.
viduals have done so, and Ludwig von Mises’ life
To prove that economic calculation would be impossible in the socialist community is to prove
also that Socialism is impracticable. Everything brought forward in favour of Socialism during the last
stands as one more example of what a deter-
hundred years, in thousands of writings and speeches, all the blood which has been spilt by the sup-
mined, committed individual can do to change
porters of Socialism, cannot make Socialism workable. The masses may long for it ever so ardently,
innumerable revolutions and wars may be fought for it, still it will never be realized. Every attempt to
history’s course.
carry it out will lead to syndicalism or, by some other route, to chaos, which will quickly dissolve the
society, based upon the division of labour, into tiny autarkous groups.
— Bob McTeer
The discovery of this fact is clearly most inconvenient for the socialist parties, and socialists of
President
all kinds have poured out attempts to refute my arguments and to invent a system of economic cal-
Federal Reserve Bank of Dallas
culation for Socialism. They have not been successful.s
— Socialism, 135.
abandoned his research notes and
Praxeology Versus
library, as well as a well-paid position
The Origins of
Positivistic Method in
in Geneva, for uncertain circumstances
Socialist Ideology
in the New York of 1940. Although Mises
Social Science
had a temporary appointment as lecturer
The truth is that the concept of socialism
…Behaviorism and positivism want to apply
and research associate professor at the
did not originate from the “proletarian mind.”
the methods of the empirical natural sciences
University of California–Berkeley, he re-
No proletarian or son of a proletarian con-
to the reality of human action. They interpret it
tributed any substantial idea to the socialist
mained in New York because he thought
as a response to stimuli. But these stimuli
ideology. The intellectual fathers of socialism
it the country’s cultural center. As Mises
themselves are not open to description by the
were members of the intelligentsia, scions of
never did hold a full-time teaching posi-
methods of the natural sciences. Every
the “bourgeoisie.” Marx himself was the son
tion at any American university, this de-
attempt to describe them must refer to the
of a well-to-do lawyer. He attended a German
cision had large consequences for his
meaning which acting men attach to them. We
Gymnasium, the school all Marxians and other
may call the offering of a commodity for sale a
career and, therefore, for his prestige in
socialists denounce as the main offshoot of
“stimulus.” But what is essential in such an
U.S. academic circles. It also meant years
the bourgeois system of education, and his
offer and distinguishes it from other offers
of frugality and dissaving for him and
family supported him through all the years of
cannot be described without entering into the
his wife.
his studies; he did not work his way through
meaning which the acting parties attribute to
The Rockefeller Foundation, through
the university. He married the daughter of a
the situation. No dialectical artifice can spirit
the National Bureau of Economic Re-
member of the German nobility; his brother-in-
away the fact that man is driven by the aim to
law was Prussian minister of the interior and
search, provided some support in the
attain certain ends. It is this purposeful behav-
as such head of the Prussian police….
form of a once-renewed, two-year re-
ior — viz., action — that is the subject matter
Friedrich Engels was the son of a wealthy
search grant that ended in early 1945,
of our science. We cannot approach our sub-
manufacturer….
just as Mises began his long association
ject if we disregard the meaning which acting
The workers were never enthusiastic
with the Graduate School of Admini-
man attaches to the situation, i.e., the given
about socialism. They supported the union
state of affairs, and to his own behavior with
stration at New York University. He was
movement whose striving after higher wages
regard to this situation.
hired to teach a one-semester course
Marx despised as useless. They asked for all
It is not appropriate for the physicist to
but remained as a visiting professor
those measures of government interference
search for final causes because there is no
until his retirement in 1969. In 1948 he
with business which Marx branded petty-
indication that events which are the subject
began his famous Thursday evening
bourgeois nonsense. They opposed techno-
matter of physics are to be interpreted as the
seminar. He also formed a relationship
logical improvement, in earlier days by
outcome of actions of a being, aiming at ends
destroying new machines, later by union pres-
with the Foundation for Economic Edu-
in a human way. Nor is it appropriate for the
sure and compulsion in favor of feather-bed-
cation, writing for its publication The
praxeologist to disregard the operation of the
ding. Syndicalism — appropriation of the
Freeman and conducting seminars.
acting being’s volition and intention; they are
enterprises by the workers employed in
Another fortuitous relationship for
undoubtedly given facts. If he were to disre-
them — is a program that the workers devel-
Mises was the friendship of Henry Hazlitt.3
gard it, he would cease to study human action.
oped spontaneously. But socialism was
Very often — but not always — the events con-
Hazlitt saw to it that Mises’ works were
brought to the masses by intellectuals of bour-
cerned can be investigated both from the point
reviewed in major national media and
geois background. Dining and wining together
of view of praxeology and from the natural sci-
promoted him among those in a posi-
in the luxurious London homes and country
ences. But he who deals with the discharging
tion to help support Mises’ research and
seats of late Victorian “society,” ladies and
of a firearm from the physical and chemical
writing over the next three decades.
gentlemen in fashionable evening clothes con-
point of view is not a praxeologist. He neglects
During this time — between 1944
cocted schemes for converting the British pro-
the very problems which the science of pur-
letarians to the socialist creed.s
and 1960 — Mises wrote prolifically, fin-
poseful human behavior aims to clarify….
ishing several books, among them Omnip-
The postulates of positivism and kindred
— Theory and History, 121 –2.
otent Government, Bureaucracy, Theory
schools of metaphysics are therefore illusory.
and History and his masterpiece, Human
It is impossible to reform the sciences of
Action: A Treatise on Economics.4 Al-
human action according to the pattern of
Many of the influential and talented
physics and the other natural sciences. There
though often difficult for those without
individuals who gathered for the weekly
is no means to establish an a posteriori theory
formal training in economics to fully com-
seminars became university professors
of human conduct and social events. History
prehend, these books have been in print
themselves, further spreading the core
can neither prove nor disprove any general
continuously and sold well. Mises’
ideas of Austrian economic theory.
statement in the manner in which the natural
influence has grown with every person
Throughout this period, however,
sciences accept or reject a hypothesis on the
who has discovered and read him.
Mises remained an outcast profession-
ground of laboratory experiments.s
His NYU seminars were the other
ally, and unlike colleagues such as
main avenue by which Mises helped
Hayek, he never secured a conventional
— Human Action, 26 – 7, 31.
shape political and economic events.
full-time teaching position despite his
reputation, knowledge and publication
subjects, rich in theoretical innovation
Notes
record.5 This was due, said his critics, to
and wrinkles from his fertile mind—con-
1
Mises (1969a) calls the entity he founded the
his “intransigence,” a word used as a
tinues to attract new adherents, both to
Austrian Institute for Trade Cycle Research.
synonym for Mises’ inability to com-
Austrian economics and to the profes-
But he later (Mises 1978, 76) calls it the
promise with the socialist, proplanning
sion of economics more generally. An in-
Austrian Institute for Business Cycle Research,
policies that dominated domestic eco-
stitute at Auburn University that bears
as does Rothbard (1987), and both use the
nomic agendas in most nations after
his name continues to spread his ideas
1926 founding date. Margit von Mises (1976)
World War II.6
and make many of his writings publicly
supplies yet another name and a different
And there was, for prospective em-
available. In 1974 his favorite student—
founding date — Austrian Institute for Business
ployers and his political opponents, even
F. A. Hayek — won a joint Nobel Prize
Research and 1927.
more. In 1920 Mises wrote the article that
in economics for monetary theory work
2
Margit von Mises (1976, chap. 4).
triggered the so-called socialist calcula-
clearly based on Mises’ insights in The
3
Readers may wish to consult Formaini (vol. 6).
tion debate, in which he (and later, other
Theory of Money and Credit and his for-
4
Until a badly handled reprinting of Human
Austrian theorists — notably Hayek)
mation of Austrian business cycle theory.
Action in 1963, Mises had an ongoing relation-
claimed socialism was doomed because
Mises has been dead for three
ship with Yale University Press, which
of its inability to rationally allocate re-
decades, but his intellectual influence
brought out Omnipotent Government and
sources. This made him well-known not
still surrounds us and always will.s
Bureaucracy in 1944 and reprinted Socialism
only as an opponent of planning in all its
(1951), The Theory of Money and Credit
— Robert L. Formaini
rhetorical forms but also as the person
(1953) and Theory and History (1957).
Senior Economist
who first questioned its very possibility.7
This was a large ideological load to
carry between 1945 and 1970, a period
Foreseeing California’s Energy Crisis in 1927
characterized by a growing enthusiasm
…To be sure, it is conceded [by prosocialist intellectuals] that socialism, the communal ownership of
for government intervention and central
the means of production, is altogether, or at least for the present, impracticable. But, on the other
economic fine-tuning. Mises and the small
hand, it is asserted that unhampered private ownership of the means of production is also an evil.
group around him stood mostly alone in
Thus people want to create a third way, a form of society standing midway between private owner-
their advocacy of laissez-faire and disa-
ship…and communal ownership…. Private property will be permitted to exist, but the ways in which
vowal of government attempts to manip-
the means of production are employed by the entrepreneurs, capitalists, and landowners will be reg-
ulate free market outcomes, whether for
ulated, guided, and controlled by authoritarian decrees and prohibitions....
purely economic reasons or to meet the
…The crucial acts of intervention with which we have to deal aim at fixing the prices of goods and
growing demand for “social justice.” But
services at a height different from what the unhampered market would have determined….
Mises never wavered in his conviction
…If a lower [than free market] price is decreed by government, the proceeds will fall short of the
costs. Merchants and manufacturers will, therefore, unless the shortage of the goods involved would
that only free markets could help peo-
cause them to deteriorate rapidly in value, withhold their merchandise from the market in the hope of
ple achieve prosperity and dignity.
more favorable times, perhaps in the expectation that the government order will soon be rescinded. If
The disintegration of the Soviet
the authorities do not want the goods concerned to disappear altogether from the market as a result
Union, and the sea change toward global
of their interference, they cannot limit themselves to fixing the price; they must at the same time also
capitalism that caused it, bore out Mises’
decree that all stocks on hand be sold at the prescribed price.
prediction that socialism could not work.
But even this does not suffice. At the price determined on the unhampered market, demand and
He adhered to that belief in the face of
supply would have coincided. Now, because the price was fixed lower by government decree, the
claims by most economists that he was
demand has increased while the supply has remained unchanged. The stocks on hand are not suffi-
wrong, that he had lost the intellectual
cient to satisfy fully all who are prepared to pay the prescribed price. A part of the demand will remain
debate on this point to Oscar Lange
unsatisfied….If the government wishes to avoid this consequence of its intervention, which runs
and that not only could socialism work
counter to its intentions, it must add rationing to price control and compulsory sale: a governmental
regulation must determine how much of a commodity may be supplied to each individual applicant at
but it might even outperform market-
the prescribed price.
based economies.8 It is unfortunate that
But once the supplies already on hand at the moment of the government’s intervention are
Nobel awards in economics can only
exhausted, an incomparably more difficult problem arises. Since production is no longer profitable if
be given to the living, for Mises’ analy-
the goods are to be sold at the price fixed by the government, it will be reduced or entirely suspended.
sis of the inevitable, long-run failing of
If the government wishes to have production continue, it must compel the manufacturers to produce,
collectivist schemes stands empirically
and, to this end, it must also fix the prices of raw materials and half-finished goods and the wages of
verified as one of the greatest achieve-
labor….
ments in economic theory.
If the Government will not set this right again by desisting, from its interference, i.e., by rescind-
Mises died in October 1973 in New
ing the price controls, then it must follow up the first step with others….Either capitalism or social-
York City. His legacy — in the form of
ism: there exists no middle way.s
voluminous writing on many important
— Liberalism, chapter 2, section 5.
5
Formaini (vol. 4).
The Importance of Clear Terminology for Clear Thinking
6
Rueff (1956). When he wasn’t being
labeled “intransigent” for his political support
Government is an apparatus of compulsion and coercion. It has the power to obtain obedience
for free trade, Mises was called other things
by force. The political sovereign, be it an autocrat or the people as represented by its mandataries, has
for his belief in a priori reasoning during the
power to crush rebellions as long as his ideological might subsists.
heyday of the positivist – empiricist trend in
The position which entrepreneurs and capitalists occupy in the market economy is of a different
economics. For one example, see Blaug
character. A “chocolate king” has no power over the consumers, his patrons. He does not rule the con-
(1980, 93).
sumers, he serves them.... He loses his “kingdom” if the consumers prefer to spend their pennies else-
7
Mises (1975).
where. Nor does he “rule” his workers. He hires their services by paying them precisely that amount
8
For an example of a prosocialist theoretical
which the consumers are ready to restore to him in buying the product. Still less do the capitalists and
entrepreneurs exercise political control. The civilized nations of Europe and America were long con-
refutation of Mises’ antiplanning claim, see
trolled by governments which did not considerably hinder the operation of the market economy. Today
Schumpeter (1976, 172 – 73).
these countries too are dominated by parties which are hostile to capitalism and believe that every
harm inflicted upon capitalists and entrepreneurs is extremely beneficial to the people.
References
In an unhampered market economy the capitalists and entrepreneurs cannot expect an advan-
Blaug, Mark (1980), The Methodology of
tage from bribing officeholders and politicians. On the other hand, the officeholders and politicians are
Economics, or, How Economists Explain
not in a position to blackmail businessmen and to extort graft from them. In an interventionist coun-
(Cambridge: Cambridge University Press).
try powerful pressure groups are intent upon securing for their members privileges at the expense of
weaker groups and individuals. Then the businessmen may deem it expedient to protect themselves
against discriminatory acts on the part of the executive officers and the legislature by bribery; once
Formaini, Robert L. (vol. 4), “Hayek: Social
used to such methods, they may try to employ them in order to secure privileges for themselves….
Theorist of the Century,” Federal Reserve Bank
[T]he fact that businessmen bribe politicians and officeholders and are blackmailed by such people
of Dallas Economic Insights, No. 1.
does not indicate that they are supreme and rule the countries. It is those ruled — and not the rulers —
who bribe and are paying tribute…. [The businessmen] venture to preserve the free enterprise sys-
——— (vol. 6), “Henry Hazlitt: Journalist
tem and to defend themselves against discrimination by legitimate democratic methods. They form
Advocate of Free Enterprise,” Federal Reserve
trade associations and try to influence public opinion. The results of these endeavors have been rather
Bank of Dallas Economic Insights, No. 1.
poor…. The best that they have been able to achieve is to delay for a while some especially obnox-
ious measures.
Mises, Ludwig von (1963), Human Action: A
Demagogues misrepresent this state of affairs in the crassest way. They tell us that these asso-
Treatise on Economics, 3rd rev. ed. (Chicago:
ciations of bankers and manufacturers are the true rulers of their countries and that the whole appa-
Henry Regnery).
ratus of what they call “plutodemocratic” government is dominated by them. A simple enumeration of
the laws passed in the last decades by any country’s legislature is enough to explode such legends.s
——— (1969a), The Historical Setting of the
— Human Action, 272 – 73.
Austrian School of Economics (New Rochelle,
N.Y.: Arlington House).
Mises, Margit von (1976), My Years with
Suggested Reading
——— (1969b), Socialism: An Economic and
Ludwig von Mises (New Rochelle, N.Y.:
Several Mises books can be downloaded from
Sociological Analysis (London: Jonathan
Arlington House).
www.mises.org.
Cape).
Rothbard, Murray (1987), “Mises, Ludwig
——— (1969c), Theory and History: An
Elder von (1881 –1973),” in The New Palgrave:
Interpretation of Social and Economic Evolution
A Dictionary of Economics, vol. 3, ed. John
(New Rochelle, N.Y.: Arlington House).
Eatwell, Murray Milgate and Peter Newman
(New York: Stockton Press), 479 – 80.
——— (1975), “Economic Calculation in the
Economic Insights is a publication of the
Socialist Commonwealth,” in Collectivist
Rueff, Jacques (1956), “The Intransigence of
Federal Reserve Bank of Dallas. The views
Economic Planning: Critical Studies on the
Ludwig von Mises,” in On Freedom and Free
expressed are those of the authors and should
Possibilities of Socialism, ed. F. A. Hayek
Enterprise, ed. Mary Sennholz (Princeton, N.J.:
not be attributed to the Federal Reserve System.
(Clifton, N.J.: Augustus Kelley), 87 – 132.
D. van Nostrand), 13 – 16.
Please address all correspondence to
Economic Insights
——— (1978), Notes and Recollections (Spring
Schumpeter, Joseph A. (1976), Capitalism,
Public Affairs Department
Mills, Pa.: Libertarian Press).
Socialism, and Democracy (New York: Harper
Federal Reserve Bank of Dallas
Torchbooks).
P.O. Box 655906
——— (1985), Liberalism (Irvington-on-
Dallas, TX 75265-5906
Hudson, N.Y.: Foundation for Economic
Visit our web site at www.dallasfed.org.
Education). Online at www.mises.org.
