by Gene Berkman 1995
(This article is available in pamphlet format from Renaissance Bookservice, P.O. Box 2451, Riverside, CA 92516: $1.50 postpaid)
Ludwig von Mises was born in 1881, in Lemberg and grew up as a subject of the Austro-Hungarian Empire. He died in New York City in October of 1973; he was 92. During a long and productive life, he contributed more than anyone, before or since, to the development of that body of theory and analysis which has come to be known as Austrian Economics.
The Austrian School, also known as Austrian Neo-Classical Economics, was founded by Carl Menger, who lived from 1840 to 1921. In 1871 Menger published a basic text on the principles of economics, titled "Grundsaetze der Volkswirschaftlehre," which has been published in English as "Principles of Economics." (1)
Alongside Carl Menger in the early development of Austrian economics was Eugen von Bohm-Bawerk, who lived from 1851 to 1914. Bohm-Bawerk served as Austrian Minister of Finance. In addition to his major work Kapital und Kapitalzins, published in English as "Capital and Interest," (2) Bohm-Bawerk wrote several shorter essays critiquing Marxist economics. Most notable in this regard was his essay, which has been published in English as "The Exploitation Theory." (3)
Ludwig von Mises studied economics under Eugen von Bohm-Bawerk. Others who studied under Bohm-Bawerk included Josef Schumpeter, Otto Bauer, and Nikolai Bukharin. Schumpeter became a free market economist and author of several books; Otto Bauer became a major leader of Austria's Socialist Party; and Nikolai Bukharin became a major Bolshevik leader, holding numerous positions in the Russian Communist Party and the Communist International, until his liquidation by Stalin in 1938.
Ludwig von Mises was therefore in the second generation of Austrian School economists. While best known for the many books he authored, Mises had an active life as teacher and consultant in Austria, and later as a teacher in Switzerland and the United States. In the period after World War 1, he served until 1934 as Professor of Economics at the University of Vienna; Economic Advisor of the Austrian Chamber of Commerce; and acting Vice-President of the Austrian Institute for Business Cycle Research.
After the National Socialists took power in Germany in 1933, Ludwig and his
wife Margit decided to leave Austria; they knew that the pan-Germanic ideology
of the Nazis would result in Germany annexing Austria. As an outspoken opponent
of nationalism and socialism, Ludwig von Mises knew he would be in real trouble
after the Nazis took over Austria; in addition, while he was not religious,
Mises was ethnically a jew.
So, from 1934 to 1940, Ludwig von Mises was Professor of International Economic Relations at the Graduate Institute of International Studies in Geneva, Switzerland. In 1940, very much in fear that the Nazis would conquer all of Europe and then invade Switzerland, Ludwig and Margit moved to the United States. From 1945 to 1969, Ludwig von Mises was Visiting Professor at the Graduate School of Business Administration at New York University.
We do not have time this evening to list even a fraction of the books or articles written by Mises in his lifelong battle with statism. His earliest major work was "The Theory of Money and Credit," (4) first published in German in 1912, and first published in English translation in 1934. His analysis of the role of gold and silver money as a medium enabling numerous people to engage in numerous indirect exchanges was not an isolated view in 1912, when most countries adhered to a gold standard.
In 1940, Mises wrote his magnum opus,"Nationaloekonomie: Theorie des Handelns und Wirtschaften," covering the range of economics, from subjective value theory to the institutionalized social cooperation of the free market economy. After moving to the United States, Mises rewrote this book in English, from his notes and outline, and published it in 1949 as "Human Action:A Treatise on Economics."
"The Theory of Money and Credit" and "Human Action" stand out as the two major contributions to positive economic theory. Tonight, I would like to deal primarily with what is, in more than one way, the critical part of the work of von Mises - his critiques of socialism, interventionism and Fascism.
In 1922, Gustav Fischer Verlag in Jena, in eastern Germany, published "Die Gemeinwirschaft:Untersuchungen uber den Sozialismus." A literal translation would be :"Social Economy:Inquiries concerning Socialism." The same book would ultimately be translated into English, by Jacques Kahane and published, by Jonathan Cape in London as "Socialism:An Economic and Sociological Analysis." I will refer to this book by its English name, even when the context would suggest otherwise.
In his forward to the current Liberty Classics edition, Friederich Hayek says:"When 'Socialism' first appeared in 1922, its impact was profound. It gradually but fundamentally altered the outlook of many of the young idealists returning to their university studies after World War I. I know, for I was one of them.
"We felt that the civilization in which we had grown up had collapsed. We were determined to build a better world, and it was this desire to reconstruct society that led many of us to the study of economics. Socialism promised to fulfill our hopes for a more rational, more just world. And then came this book. Our hopes were dashed.'Socialism' told us that we had been looking for improvement in the wrong direction." (5)
Economics is the study of the rational allocation of scarce resources. Mises, in his book "Socialism" made the argument that a socialist state would not have the necessary information to calculate the best use of the resources at its disposal. Since the point of socialism is to abolish the market economy, the directors of the socialist state, in planning production, would not have information concerning the relative market values of different consumer goods, or of the inputs needed to produce consumer goods. There would be no way to ensure that the resources available to the state would be employed in their highest valued use.
This is not a mere question of mechanical efficiency or inefficiency. It is curious, but at the beginning of this century, the Socialists thought that by post, telegraph and railroad, the bureaucrats in the capital cities would be able to get all the information needed to centrally plan entire national economies. After 1917, the Communists who took power in Russia attempted to implement centrally planned socialism on this basis.
Now what does it mean to centrally plan an entire national economy? It means an army of bureaucrats collecting information and making millions of decisions concerning quantities of consumers goods to be produced,and quantities of resources to be used in this production. It means deciding on the construction of factories; the production orders to be filled by such factories; and the allocation of raw materials and intermediate goods to thousands of factories and workshops.
In order to assure the production of the most valuable goods for their subjects, the directors of the socialist state would have to anticipate the desires and needs of these subjects acting as consumers. In order to determine production orders, the bureaucrats would need to know comparative values and costs for many different inputs. In a free market society, the relative values of various consumer products, as well as raw materials and intermediate goods are reflected in prices determined by competitive bidding among buyers and sellers.
In a socialist society, the state would own all the factories and all the mines, so there would not be competitive bidding for raw materials. The bureaucrats with power to allocate raw materials and final products would be guessing at the value of both inputs and outputs. This is the essence of the argument which Mises set out, and which constitutes his original contribution to the "socialist calculation debate."
Ludwig von Mises defines socialism as "the socialization of the means of production with its corollary, the centralized control of the whole of production by one social or, more accurately, state organ." (6)
Later, he notes that: "The Socialist Community is a great authoritarian association in which orders are issued and obeyed. This is what is implied by the words 'planned economy' and the 'abolition of the anarchy of production.' The inner structure of a socialist community is best understood if we compare it with the inner structure of an army...As in an army, so under Socialism, everything depends on the orders of the supreme authority. Everyone has a place to which he is appointed. Everyone has to remain in his place until he is moved to another.
It follows that men become pawns of official action." (7)
Such was the society that the Communists imposed on Russia. In the West, the Socialist Parties had to seek the support of voters, and necessarily moved away from advocacy of complete state management of the economy. In the period leading up to the first world war, and on into the 1920's, the Socialist Parties in most countries promoted a variety of measures aimed at regulating private enterprise; nationalization was recommended only in a few industries. The goal was to reform capitalist society without losing the services of the capitalists. Ludwig von Mises termed the proposed policies as interventionism.
Through the 1920's, Mises wrote a number of essays in opposition to interventionist economic policies. These were collected into a book in 1929 published as "Kritik des Interventionismus." An English translation, titled "A Critique of Interventionism," was published in 1977.
In his essay on 'Interventionism,' Mises defines his subject:
"Interventionism seeks to retain private property in the means of production, but authoritative commands, especially prohibitions, are to restrict the actions of private owners." (8)
He further notes that interventionism "does not seek to abolish private property in production; it merely wants to limit it. On the one hand, it considers unlimited private property harmful to society, and on the other hand, it deems the public property order unrealizable completely, at least for the present. Therefore, it seeks to create a third order:a social system that occupies the center between the private property order and the public property order." (9)
Not that interventionism is a modern invention:
"The champions of this private property order, which is guided, regulated, and controlled by the state and other social organizations, are making demands that have always been made by political leaders and masses of people. When economics was yet unknown, and man was unaware that goods prices cannot be 'set' arbitrarily but are narrowly determined by the market situation, government commands sought to regulate economic life." (10)
In 1926, as he wrote his initial essay on 'Interventionism' the democratic socialists in western Europe had abandoned the immediate realization of a completely nationalized economy. At the same time, the Communists in Russia were implementing a New Economic Policy in which private enterprises coexisted with state factories. And likewise, the dissident socialist faction that had taken power in Italy, the Fascists, implemented a program in which enterprises remained under private ownership, but the state planned and coordinated the national economy through industrial syndicates.
On the Right, as understood in Continental Europe, the nationalist parties advocated state intervention to protect traditional society against the international capitalists. As far as Mises could see, interventionism was the common program of all political parties throughout Europe.
The bulk of the text of Mises "Critique of Interventionism" is an analysis of the demands for and effects of price controls.
In "Human Action," published in English in 1949, Mises deals with another aspect of interventionism - Prohibition:
"Governments which are eager to keep up the outward appearance of freedom even when curtailing freedom disguise their direct interference with consumption under the cloak of interference with business. The aim of American prohibition was to prevent the individual residents of the country from drinking alcoholic beverages. But the law hypocritically did not make drinking as such illegal...It merely prohibited the manufacture, the sale and the transportation of intoxicating liquors, the business transactions which precede the act of drinking. The idea was that people indulge in the vice of drinking only because unscrupulous businessmen prevail upon them. It was, however, manifest that the objective of prohibition was to encroach upon the individuals' freedom to spend their dollars and to enjoy their lives according to their own fashion." (11)
Okay, anybody can see alcohol prohibition was a disaster. But later on the same page, Mises takes on Drug Prohibition:
"...Opium and morphine are certainly dangerous, habit- forming drugs. But once the principle is admitted that it is the duty of government to protect the individual against his own foolishness, no serious objections can be advanced against further encroachments. A good case could be made out in favor of the prohibition of alcohol and nicotine. And why limit the government's benevolent providence to the protection of the individual's body only? Is not the harm a man can inflict on his mind and soul even more disastrous than any bodily evils? Why not prevent him from reading bad books and seeing bad plays, from looking at bad paintings and statues and from hearing bad music? The mischief done by bad ideologies, surely, is much more pernicious, both for the individual and for the whole society, than that done by narcotic drugs." (12)
Ironically, at the time "The Critique of Interventionism" was published,in 1929, Josef Stalin was consolidating his power in Russia, and liquidating the New Economic Policy. Stalin centralized total power over all farms, factories and stores in the hands of the Soviet State, and imposed a regime of police terror from which Russia is only now starting to escape.
At the same time, from a different direction a movement was arising which would impose total socialism on Germany in the name of racial destiny. This was the National Socialist Party led by Adolf Hitler. It was the rise of the Nazi Party to power in Germany that led Mises to leave Austria and, ultimately, end up in America. In January of 1944, Yale University Press published a historical analysis of the Nazi rise to power of the: "Omnipotent Government:The Rise of the Total State and Total War."
"Omnipotent Government" was the first book Ludwig von Mises wrote in English, and it appeared in the same year of publication as two other books analysing the rise of Fascism and National Socialism:"The Road to Serfdom," by Friederich Hayek, (13) and "As We Go Marching" by John T Flynn. (14) All three books are useful in understanding the Fascist phenomenon. Ludwig von Mises, with his grounding in Central European history, provides a study of German National Socialism that builds on his earlier analyses of socialism and interventionism.
The policy of the Nazi State had in common with interventionism the practice of retaining the forms of private property, while granting to government ever greater power not merely to regulate, but to direct the activities of nominally private enterprises. The Nazis went beyond the more moderate interventionists in giving the state virtually unlimited power to direct economic enterprises, consistent with the totalitarian power the Third Reich exercised over politics, culture and communications. National Socialism was socialism, not interventionism. Mises states the situation:
"The German pattern differs from the Russian one in that it (seemingly and nominally) maintains private ownership of the means of production and keeps the appearance of ordinary prices. There are, however, no longer entrepreneurs but only shop managers (Betriebsfuhrer)...The government tells the shop managers what and how to produce, at what prices and from whom to buy, at what prices and to whom to sell. The government decrees to whom and under what terms the capitalists must entrust their funds and where and at what wages laborers must work...all the prices, wages and interest rates are fixed by the central authority...The government, not the consumers, directs production. This is socialism in the outward guise of capitalism." (15)
Mises shows that the German pattern of socialism was not invented by the Nazis, but was consistent with the policy of war socialism carried out by the German government during World War I. Mises describes the situation:
"The first world war brought about a trend toward war socialism. One branch of business after the other was centralized,i.e., forcibly placed under the management of a committee whose members - the entrepreneurs of the branch concerned - were nothing but an advisory board of the government's commissary.Thus the government obtained full control of all vital branches of business." (16)
Of course war socialism combined with defeat in the war made a mess of German society and the German economy. The ironic result was that the Social Democrats opposed the continuation of the economic planning apparatus which implemented war socialism.
Mises notes that:
"The Marxians of the Weimar Republic not only did not further the trend toward socialization;they tolerated the virtual abandonment of the most effective socialization measures inaugurated by the imperial government." (17)
In the Weimar Republic, as in the German Empire, the right-wing Nationalists and the Catholic politicians of the Centre Party promoted national economic planning, along with business/ government partnership in the steel industry, ship building and other industries with military significance.
Mises shows that government intervention in economic affairs in Germany and elsewhere led to protectionist restrictions on international trade. The common result of interventionist policies is to increase the costs of production, making the products of the nation's industry less competitive with foreign products. As each country implements or expands regulation of business, it simultaneously moves to protect domestic industry from competition by imports.
Free Trade, as proposed by classical liberals, makes nationality unimportant in matters of economic activity. Constitutional government is a limitation on the power and importance of the nation-state. In a free society, nationality is largely a cultural matter.
By contrast, interventionism and socialism elevate the nation-state to new heights of power and significance. In Germany, racial nationalism led to a total state. Mises outlines the development of German Nationalism, militarism and anti-Semitism, which grew alongside state intervention in the economy.
"Omnipotent Government" was published in 1944. Nazi Germany was a hot topic. Partly financed with a grant from the Rockefeller Foundation, this book was clearly intended as war propaganda.
Near the end of the book, Mises lays out The Alternative:
"The reality of Nazism faces everybody else with an alternative:
They must smash Nazism or renounce their self-determination,i.e., their freedom and their very existence as human beings...The Nazis will not abandon their plans for world hegemony...Nothing can stop these wars but the decisive victory or the decisive defeat of Nazism." (18)
But "Omnipotent Government" was unusual war propaganda, for the constantly repeated message that the Allies, indeed all nations, share the principles which brought the Nazis to power in Germany.
In the second paragraph of the introduction, Mises states:
"The distinctive mark of Nazism is not socialism or totalitarianism or nationalism. In all nations today the "progressives" are eager to substitute socialism for capitalism. While fighting the German aggressors Great Britain and the United States are, step by step, adopting the German pattern of socialism. Public opinion in both countries is fully convinced that government all-round control of business is inevitable in time of war, and many eminent politicians and millions of voters are firmly resolved to keep socialism after the war as a permanent new social order." (19)
He goes on to point out that terror and dictatorship are features that Nazi Germany shares with Soviet Russia."The Road to Serfdom" by Hayek, and "As We Go Marching" by John T Flynn both stress a similar message, that statism and militarism are pushing Britain and America in the same direction that ended in Fascism in Germany and Italy.
Ludwig von Mises spent much if not most of his time speaking and writing in opposition to the statist trends that engulfed the world during his life-time. The same statist philosophies and movements are very much alive today, even if humbled by their manifest failure in practice to deliver prosperity and happiness.
In his opposition to statism, Mises was inspired by a vision of personal liberty, free trade and international peace, which he set forth in his 1927 book, "Liberalismus." This book is currently available in English as "Liberalism:in the Classical Tradition."
Liberalism, as Mises uses the term, refers to a philosophy of individual liberty. This is the original meaning of the term Liberalism, which has in America come to stand for a variety of social democratic and welfare state viewpoints. In 1962, when the first English edition of this book came out, the publisher attractively renamed it "The Free and Prosperous Commonwealth."
The book "Liberalism" deals with the range of economic, political and international issues as they stood in Central Europe in 1927. Out of this range of issues, let's just pick a couple to delineate classical liberalism from social democratic liberalism and conservatism. Let's pick public education, and freedom of movement.
Mises does not deal with all the abstract issues related to public education. He brings up the specific question of communities inhabited by people who speak a variety of languages. This was a common situation in Central Europe in the 1920's,in the successor states of the Austro-Hungarian Empire. During the period of Habsburg rule, individuals belonging to various ethnic groups moved about the empire in search of work. Germans, Hungarians, Czechs, Slovaks, Slovenes, Croats, Romanians, Poles and others settled in various locations which, after the collapse of the Empire, ended up in various nation-states - Hungary, Poland, Czechoslovakia, Yugoslavia, Romania all included large linguistic minorities throughout the 1920's and 1930's.
Mises points out that with compulsory, tax-funded education, the dominant elements in each local community would attempt to control the public schools to ensure dominance of their language. He called for an end to public schools, which would allow each cultural group to control their own private schools. This is an argument that the school voucher proponents might have used in Hispanic communities in last years special election.
The issue of Freedom of movement is particularly important.
Freedom of movement, considered from the viewpoint of economics, is a corollary of free trade. International free trade leads to a more comprehensive division of labor. Products can be made in the most favorable location, for distribution to consumers in any part of the world. To restrict free trade means that goods will be produced under less favorable conditions, just as long are they are produced within the same nation as the targeted customers.
Freedom of movement allows workers to move to areas with the most favorable conditions for production. Restricting freedom of movement means that some workers will have to work under less favorable conditions, because they are not allowed to immigrate to where they can find more productive work. At the same time, more favorable areas may face a labor shortage. As Mises notes:
"There cannot be the slightest doubt that migration barriers diminish the productivity of human labor." (20)
These lines were written in 1927. Since then, technology has vastly improved; large scale transportation facilitates large scale international trade. We are approaching the point where technology can make conditions for production anyplace in the world. The main limitation on the productivity of enterprises will be government regulation.
The real argument in favor of freedom of movement is philosophical:
"The liberal demands that every person have the right to live wherever he wants...It belongs to the very essence of a society based on private ownership of the means of production that every man may work and dispose of his earnings where he thinks best." (21)
Mises suggests that the pressure to restrict immigration comes initially from labor unions, whose members fear that competition from immigrant workers will depress wage rates. But he notes further that in modern times the expanded power of the state has caused most people to fear immigration - to fear being inundated by people of alien nationality:
"As long as the state is granted the vast powers which it has today and which public opinion considers to be its right, the thought of having to live in a state whose government is in the hands of a foreign nationality is positively terrifying. (22)
That is the legacy the modern state has left us - fear and terror from which we all too often seek shelter in still more state action.
But we have another, richer legacy to draw from. That is the legacy of study, analysis, critique - the rich legacy of opposition to statism bequeathed to us by Ludwig von Mises.
Our challenge is to build upon that legacy. We need a new generation of scholars, broadly educated in history and economics, who can take the message of personal liberty and free markets into the 21st Century.
1. "Principles of Economics" in print from Spring Mills,PA: Libertarian Press
2. "Capital and Interest" Spring Mills,PA:Libertarian Press
3. "The Exploitation Theory" Spring Mills,PA:Libertarian Press
4. "Theory of Money and Credit" Indianapolis,IN:LibertyClassics
5. "Socialism:An Economic and Sociological Analysis" translated by Jacques Kahane Indianapolis,IN:LibertyClassics 1981 from the foreword by F.A. Hayek, page xix
6. ibid,page 5
7. ibid,page 163
8. "A Critique of Interventionism" translated by Hans Sennholz New Rochelle,NY:Arlington House Publishers 1977 page 16-17.
9. ibid,page 16
10. ibid,page 16
11. "Human Action:A Treatise on Economics" Chicago,IL:Contemporary Books page 733
12. ibid,page 733-734
13. "The Road to Serfdom" Chicago,IL: University of Chicago Press
14. "As We Go Marching" New York, NY:Doubleday Out of Print
15. "Omnipotent Government:The Rise of the Total State and Total War" Spring Mills,PA: Libertarian Press page 56
16. ibid,page 203
17. ibid,page 205
18. ibid,page 237
19. ibid,page 1
20. "Liberalism:In the Classical Tradition" San Francisco: The Cobden Press 1985 page 139
21. ibid,page 137
22. ibid,page 141
(This article is available in pamphlet format from Renaissance Bookservice: P.O.Box 2451: Riverside:CA:92516: $1.50 postpaid)
This appeared on Antiwar.com in December 1995.