Ludwig von Mises

Jersey Cynic, writing at Big Brass Blog, requested my links to any previous writings I have done on Ludwig von Mises, this 29th day of September, 2006, being the 125th anniversary of his birth in a small city in what was then the Austro-Hungarian Empire. To the end of celebrating this anniversary of the birth of a famous economist—now more so than in his own time—I herewith set forth my first formal article on Ludwig von Mises and my thoughts about him.

I have made mention of von Mises in comments at The Dark Wraith Forums, but I have without attribute used his work and understanding of economics far more often than I could recount, for it is he and men of similar thinking who so greatly influenced me and generations of other students of economics in the United States and a few other parts of the Western world. He was an intellectual colossus of the discipline. The body of his work at once formalized and structured how we think about the world and how we rigorously analyze economic life. He did more than that, though: he conveyed to economists the sense that our understanding is far greater in scope than what most would imagine when thinking of the word "economics."

Ours is the study of praxæology, the study of human action: human action in consumption at the level of the individual and the household; human action in productive work, be it as labor or entrepreneur; human action in aggregates of pools of labor and bodies of industry; human action at the level of the great accumulations of individual consumers, firms, and other organizations that comprise the very economies of nation-states. Without a mind to sentiment, we can see why economic entities do what they do, and we can predict what they would do under circumstances brought to bear upon them. We need no crystal ball to conceive human reaction arising from circumstances, especially so long as we dismiss the notion that, because we are dealing with problems involving people's behaviors, our economic principles cannot unfold and reveal all.

Ludwig von Mises brought to the 20th Century the "Classical" school of economics that had been broadly and deeply outlined by the founders and early thinkers in the discipline, men like Adam Smith and David Ricardo. He reinforced the principles of economics with mathematical girders and rock-solid foundations. He gave us the clear, unapologetic view that economics spans the sciences, and in such scope it is none of them. Economics delves into the realm of social science, yet we have no concern for soft, unshaped theories twisted this way and that by the vicissitudes of that which is the fashion of the day. Economics is a mathematical science, yet our work is persistently dedicated to deriving that which is worthwhile to the world and not that which is merely the fleeting and arcane curiosity.

Ludwig von Mises made no bones about how we disdain the primitive notion that human action exists outside the scope of the scientific inquiry. From the Introduction to his 1949 tour de force, Human Action: A Treatise on Economics, I quote the almost disturbingly timely rejoinder to the critics of rigorous economics inquiry:

"The characteristic feature of this age of destructive wars and social disintegration is the revolt against economics. Thomas Carlyle branded economics a 'dismal science,' and Karl Marx stigmatized the economists as 'the sycophants of the bourgeoisie'. Quacks--praising their patent medicines and short cuts to an earthly paradise--take pleasure in scorning economics as 'orthodox' and 'reactionary'. Demagogues pride themselves on what they call their victories over economics. The 'practical' man boasts of his contempt for economics and his ignorance of the teachings of 'armchair' economists. The economic policies of the last decades have been the outcome of a mentality that scoffs at any variety of sound economic theory and glorifies the spurious doctrines of its detractors. What is called 'orthodox' economics is in most countries barred from the universities and is virtually unknown to the leading statesmen, politicians, and writers. The blame for the unsatisfactory state of economic affairs can certainly not be placed upon a science which both rulers and masses despise and ignore."

But make no mistake: Ludwig Von Mises, like many other economists both before and after him, was the victim of his own strait-jacket. He believed that, because he commanded the tools and methods of science, that which came from the invention of his own prejudices must, ipso facto, be positive economics, free then as it were of any assumptions that would render its results at best inapplicable to the real world and at worst destructive of human dignity and long-term benefit to economic success. The list of economists of this ilk is as long as the list of economists, themselves: from John Kenneth Galbraith to Milton Friedman, the ranks of practitioners of economic theory, analysis, and application are laden with men who allowed their own biases to infect their thinking; and to the extent that those biases drew them away from objectivism, they hurt their world when their advice was actually heeded. John Kenneth Galbraith believed that unions were a threat to the military-industrial complex that was pivotal to his model of rapid economic growth. Milton Friedman purports that "positive economics" must dismiss government intervention in things as basic as food and drug safety laws. Neither of these men, nor others like them, can be considered anything but shills of their own constituencies when their policy prescriptions are held up to the light of a more comprehensive consideration of the human condition.

That does not, however, serve in any way to repudiate the ideal to which von Mises aspired in himself, his life, or in most of his writings.

Human action is based upon rationality and marginalism. Ludwig Von Mises ensured that I shall make no apology for the iron-clad results that follow in unbearable legion from that. I wrote about rationality in Rationality, Incentives, and the Agency Dilemma: the economic "person" (be it an individual or a group acting to a common end) makes decisions rationally, and this means that greed will be the greatest and most animating force affecting behavior. I shall leave it to others to imagine that there is something else that solves the equation of how our species has managed to both survive magnificently yet be so unrepentantly awful in its ways despite having what now is called a sense of "morality."

"Marginalism" means that the human action is based upon the last or the expectation of the very next event, not upon the average or the past or the first or even the best. Whether we choose to consume another drink is based upon the pleasure we anticipate that we shall receive from the next glass based upon what we experienced with the very last glass; and the firm will produce another unit of output based upon how the cost of the next unit will be configured against the revenue obtained from that unit: if the cost of producing the next unit exceeds the revenue gained from it, that unit will not be produced because it would erode the total profit of the enterprise; but if, on the other hand, the revenue to be gained from making another unit is greater than the cost that will come from it, that unit will surely be produced, for its production will add to total profit.

Ludwig von Mises ensured that these pivotal, deep understandings were with us as the 20th Century brought forth great change and, therefore, great challenges to economics as a useful tool of modernity. For example, he applied the principles to design a complete, comprehensive theory of money and interest rates, a theory that was certainly not overturned by his contemporary, John Maynard Keynes, whose The General Theory of Employment, Interest and Money was most decidedly no repudiation of Von Mises' monumental theory that touched in some parts upon the same and similar subject matter. Ludwig von Mises's general theory of money, itself, later came to be a focused school of thought called "monetarism," and one of its chief proponents would achieve fame and a Nobel Prize perhaps in part on the misguided notion that he, and not Ludwig von Mises, comprehensively set forth the theory. (It should be noted, in fact, that even as far back as Ricardo, writing in the early years of the 19th Century, fully grasped the relationship between oversupply of money and inflation, however).

Even though supporters of von Mises in his own time saw his model and the Keynesian framework as diametrically opposed with respect to prescriptive policy action, later analysis would come to see that the models were little more than short-term versus long-term descriptions of the same process. Keynes was bluntly and unapologetically interested in the short-term amelioration of a debilitating recession dragging down the economy of the United States, while von Mises, being a Classical economist, was interested only in maintaining and encouraging long-term economic growth.

In the Keynesian framework, short-term aggregate supply (the supply of all goods and services produced by an economy) is somewhat reactive to the aggregate price level, and this is due in large part to the fact that the wage rate for labor does not respond instantly to general price increases, which means that additional real productivity can be extracted from labor in the presence of increases in the amount of money, even when that extra money being printed is not backed by real growth of the economy. In this short-term economic world of "sticky wages," aggregate demand stimulus through over-printing money can actually produce real growth of the economy.

The Classical school, considering only the long-run, had since the time of David Ricardo (and most definitely by the 1850s with a British school of economic thought) seen the aggregate supply curve as perfectly insensitive to aggregate price increases; in other words, the production side of an economy simply will not deliver more goods and services to a market merely because of inflation pressures. The reason rising aggregage prices alone cannot spur real increases in the level of goods and service delivered to the market is that factor prices (labor, land, physical capital, and entrepreneurial risk-taking) will invariably and more or less instantly absorb any oversupply of money by rising in response to the "phony" extra money being printed to just to get people to buy more goods. If extra money being printed does not reflect genuine, real value added to an economy, it simply cannot cause anything buy inflation. Hence, to Classical economists, trying to stimulate an economy through aggregate demand management inevitably fails because the consumers of an economy want more goods and services merely because they have more money, but that new money is not backed by new, real value, so the stimulus of the over-printed money causes no aggregate output increase, but does cause aggregate prices to jump by just about exactly the amount of the monetary overhang.

The reader must understand that economics is not the study of intentions; rather, it is the study of capabilities and incentives under constraints. The "desirable" means nothing to human action when compared to the "desired." As an economist, I do not care what people want to do; I do not care what people say they will do; I do not care what people stand for. All I care about is what people actually do; and what people do is rational, bounded as it must be by the constraints of available information, time, money, and access to resources. This applies equally to individuals, to households, to businesses, to entities bound in contract or other agreement to common goal, to private institutions, and to nation-states in their aggregate expressions of governments.

This way of seeing the world quite often seems brutish. A Classical economist would, for example, flatly declare that all unemployment is voluntary. Any person can find work. It might be menial, degrading, miserable, and altogether awful, but it is there if a person wants it. If someone wants better than is available, then the person should find it; but in such a search, the person cannot presume that his valuation of the marginal product of his labor is the only determinant of the wage he will be paid. In fact, the tides of labor markets are every bit as cruel as those faced by the entrepreneurs who ultimately bring together the factors of production, including labor. Markets determine prices. More difficult for labor is that, not only do forces far greater than the individual guide the prevailing wage rates, but it is demand for the final products that governs the "derived demand" for the factors of production. Unemployment is the luxury of trading off what would otherwise be earned at labor, and no rational person long suffering unemployment at an anticipated or hoped-for level of compensation can avoid the perhaps deeply troubling, eventual realization that he or she will never again make what was once earned, but that he or she will at the same time never again eat without accepting the new, prevailing labor market conditions.

As mean-spirited as that sounds, the Classical economist untempered by patience might very well lash out at a critic with something like this: "Should you not like the cruelty of the market, then join Karl Marx and his economics 'revolution'. Cry! Cry for the right of the worker not to be exploited! Maybe you can find a woman, as Herr Marx did, so devoted, so utterly in your thrall, that she will for decades work herself like a rude animal with no sense of her own pain for the bread on your table that you may sit in the warmth of a library day in and day out to contemplate the innumerable outrages of capitalism and the best distortions of history to validate your world-view."

I am by my training a Classical economist. It is only by great and sustained effort that I may see the economic world more evenly and bring convergence to the schools of thought to form a comprehensive scope of suitable view. I train my students first as Classical economists, too, and then bring to bear the apparent disputes that, in the end, they can share with me such a broadly reasonable and soundly based understanding. That does not mean I am interested in finding some mythical "center" or fantasy of "moderate" course, not for myself, and most certainly not for my students. Economics has carried me no place near "truth"; but by the discipline of the Classical school and the demand upon myself to bring to it that which is offered in Keynesian economics, I do know the way; and so, too, will my students, admittedly at the risk that some—maybe many—will stop when they have heard what they want to hear and will no more be a part of the difficult, demanding, and complicated journey from ignorant conviction to thoughtful uncertainty.

The term "positive economics" means the study of "what is," while the term "normative economics" refers to the study of "what should be." Ludwig von Mises, for all of the power he put into our hands to study what is, in the end made himself our role model for misrepresenting to both ourselves and to those who seek our counsel the extent to which we allow the normative to be carried on the steel wings of our powerful tools. I fight within myself the urge to pose as objective economic analysis that which is far from it; and to the extent that I eschew the words and results that always come out the way my compatriots want, I am subject to criticism: on the Left, there is a suspicion that I'm really a Right-winger in cloak; and there is no doubt that on the Right, I am viewed in my objective analyses as some traitorous and biased "Liberal."

I am close to von Mises in a compelling way, I must admit. Academia is a mean-spirited little world all its own, and von Mises suffered its peculiar excesses of ostracism. I know well the viciousness. To believe that academia has even a modicum of purity in nurturing and promoting freedom of thought is naïve. In a world turning to a new century polarized by Fascists and Communists, von Mises could find no academic institution in Europe or, later, in the United States that would suffer the radicalism of his scientific approach to economics, this despite the obvious success of his theory in modeling the macroeconomic dynamics of Austria in his early years. His lot was so grim that New York University, where he would finally secure a teaching position and stay until the age of 88, would never grant him more than Visiting Professor status and would insist that he be paid by funds from Right-wing organizations. Academia has changed only for the worse since then: he was afforded a decent living; now, academia's institutionalized rules ensure that the scholar and teacher unacceptable to professorial and administrative sensibilities teaches at length in the most difficult of situations and quite literally lives in poverty his entire, pathetic life.

It is the culmination of Classical economics: the value of marginal productivity, be it that of the great Ludwig von Mises or the lowly trash like me, gets what it deserves.

But stand we must on principle. While I want neither camp to think that I am somehow either the "sycophant" of Marx's condemnation or the sycophant Marx, himself, wanted for his groveling believers, my greatest hope is that I do not end my life as Ludwig von Mises did, having written my towering and greatest work, only to have it rendered utterly worthless as he did in one stunning sentence. Remember that quote above?—the roar against the craven critics of our science? This is the very next sentence:

It must be emphasized that the destiny of modern civilization as developed by the white peoples in the last two hundred years is inseparably linked with the fate of economic science. This civilization was able to spring into existence because the peoples were dominated by ideas which were the application of the teachings of economics to the problems of economic policy. It will and must perish if the nations continue to pursue the course which they entered upon under the spell of doctrines rejecting economic thinking.

This man who preened himself on the objectivism so critical to the claim of economics as science, this man who would pose in righteous indignation to condemn both collectivism and statism as destructive, subjective monstrosities was, himself, infused of the idea that it is the 'white peoples' and 'their' civilization that hold undeniable claim to all that is good and right about modernity and some 'destiny' we have, presumably to bring the savage world and its savages their senses by our obviously superior, enlightened understanding and ways.

So, in conclusion, I ask that I be forgiven for my direct address to the good professor on this, the 125th anniversary of his birth.

Herr von Mises, go to Hell.

Oh, that's right: you were an economist. You already did.



The Dark Wraith has spoken.