Mises As We Knew Him

Mises Daily by Friedrich A. Hayek

[This "Introduction" by F.A. Hayek was written for the German-language edition of Mises's Notes and Recollections (Erinnerungen von Ludwig von Mises [Stuttgart: Gustav Fischer, 1978]). It was translated into English by Hans-Hermann Hoppe and published in the Austrian Economics Newsletter (Fall 1988): 1–3. It now appears in Memoirs by Ludwig von Mises.]

Although without a doubt one of the most important economists of his generation, in a certain sense Ludwig von Mises remained an outsider in the academic world until the end of his unusually long scholarly career — certainly within the German-speaking world — but also during the last third of his life, when in the United States he raised a larger circle of students. Before this, his strong immediate influence had essentially been restricted to his Viennese Privatseminar, whose members for the most part only became attracted to him once they had completed their original studies.

If it would not have unduly delayed the publication of these memoirs, found among his papers, I would have welcomed the opportunity of analyzing the reasons for this curious neglect of one of the most original thinkers of our time in the field of economics and social philosophy. But, in part, the fragmentary autobiography he left provides in itself the answer. The reasons why he never acquired a chair at a German-speaking university during the 1920s or before 1933, while numerous and often indisputably highly unimportant persons did, were certainly personal. His appointment would have been beneficial for every university. Yet the instinctive feeling of the professors that he would not quite fit into their circle was not entirely wrong.

Even though his subject-knowledge surpassed that of most occupants of professorial chairs, he was nonetheless never a real specialist. When, in the realm of the social sciences, I look for similar figures in the history of thought, I do not find them among the professors, not even in Adam Smith; instead, he must be compared to thinkers like Voltaire or Montesquieu, Tocqueville and John Stuart Mill. This is an impression that has by no means been reached only in retrospect. But when more than fifty years ago I tried to explain Mises's position in pretty much the same words to Wesley Clair Mitchell in New York, I only encountered — perhaps understandably — a politely ironic skepticism.

"Mises must be compared to thinkers like Voltaire or Montesquieu, Tocqueville and John Stuart Mill."

Essential to his work is a global interpretation of social development. In contrast to the few comparable contemporaries such as Max Weber, with whom he was connected by a rare mutual respect, in this Mises had the advantage of a genuine knowledge of economic theory.

The following memoirs say much more about his development, position, and views than I know or could tell. I can only attempt here to supplement or confirm information regarding the ten years of his time in Vienna (1921–1931) during which I was closely associated with him. I came to him rather characteristically not as a student, but as a fresh doctor of law and a civil servant, subordinate to him, at one of those special institutions that had been created to execute the provisions of the peace treaty of St. Germain.

The letter of recommendation by my university teacher Friedrich von Wieser, who described me as a highly promising young economist, was met by Mises with a smile and the remark that he had never seen me in his lectures.

However, when he found my interest confirmed and my knowledge satisfactory, he helped me in every regard and contributed much to make my lengthier visit to the United States possible (before the time of the Rockefeller fellowship) to which I owe a great deal. But although I saw him during the first years daily in an official capacity, I had no idea that he was preparing his great book, Socialism, which upon its publication in 1922 influenced me decisively.

Only after I returned from America in the summer of 1924 was I admitted to that circle, which had been in existence for some time, and through which Mises's scholarly work in Vienna mainly exerted its influence. This "Mises Seminar," as we all called the biweekly nightly discussions in his office, is described in detail in his memoirs. Mises though does not mention the hardly less important regular continuations of the official discussions that lasted long into the night at a Viennese coffeehouse. As he correctly describes, these were not instructional meetings, but discussions presided over by an older friend whose views were by no means shared by all members. Strictly speaking, only Fritz Machlup was originally Mises's student.

As regards the others, of the regular members, only Richard Strigl, Gottfried Haberler, Oskar Morgenstern, Lene Lieser, and Martha Stefanie Braun were specialists in economics. Ewald Schams and Leo Schönfeld, who belonged to the same highly gifted but early deceased intermediate generation as Richard Strigl, were, to my knowledge, never regular participants in the Mises Seminar. But sociologists like Alfred Schütz, philosophers like Felix Kaufmann, and historians like Friedrich Engel-Janosi were equally active in the discussions, which frequently dealt with the problems of the methods of the social sciences, but rarely with special problems of economic theory (except those of the subjective theory of value). Questions of economic policy, however, were discussed often, and always from the perspective of the influence of different social philosophies upon it.

All this seemed to be the rare mental distraction of a man, who, during the day, was fully occupied with urgent political and economic problems, and who was better informed about daily politics, modern history, and general ideological developments than most others. What he was working on, even I, who officially saw him almost daily during those years, did not know; he never spoke about it. We could even less imagine when he would actually write his works. I knew only from his secretary that from time to time he had a manuscript typed from his distinctively clear handwriting. But many of his works only existed in handwriting until publication, and an important article was considered lost for a long time, until it finally resurfaced among the papers of a journal editor. No one knew anything regarding his private work methods until his marriage. He did not speak about his literary activity until he had completed a work. Though he knew that I was most willing to occasionally help him, he only asked me once to look up a quote for his work and this was after I mentioned that I wanted to consult a work on the canonists in the library. He never had, at least in Vienna, a scholarly assistant.

"A Jewish intellectual who justified capitalism appeared to most as some sort of monstrosity, something unnatural…"

The problems with which he concerned himself were mostly problems for which he considered the prevailing opinion false. The reader of the following book might gain the impression that he was prejudiced against the German social sciences as such. This was definitely not the case, even though in the course of time he developed a certain understandable irritation. But he valued the great early German theoreticians like Thünen, Hermann, Mangoldt or Gossen more highly than most of his colleagues, and knew them better. Also, among his contemporaries he valued a few similarly isolated figures such as Dietzel, Pohle, Adolf Weber and Passow, as well as the sociologist Leopold von Wiese and, above all, Max Weber.

With Weber a close scholarly relationship had been formed during Weber's short teaching activity in Vienna, in the spring of 1918, which could have meant a great deal if Weber had not died so soon.

But in general, there can be no doubt that he had nothing but contempt for the majority of the professors who, occupying the chairs of the German universities, pretended to teach theoretical economics. Mises does not exaggerate in his description of the teachings of economics as espoused by the historical school. Just how far the level of theoretical thinking in Germany had sunk is indicated by the fact that it needed the simplifications and coarseness of the — herein certainly meritorious — Swede Gustav Cassel in order to again find an audience for theory in Germany. Notwithstanding his exquisite politeness in society and his generally great self-control (he could also occasionally explode), Mises was not the man to successfully hide his contempt.

This drove him to increased isolation among professional economists generally as well as among those Viennese circles with which he had scholarly and professional contacts. He became estranged from his cohorts and fellow students when he turned away from the advancing ideas of social policy. Twenty-five years later I could still feel the emotion and anger his seemingly sudden break had caused — when he had turned away from the dominating ideals of the academic youth of the first few years of the century — when his fellow student F.X. Weiss (the editor of the shorter writings of Böhm-Bawerk) told me about the event with unconcealed indignation, obviously in order to prevent me from a similar betrayal of "social" values and an all-too-great sympathy for an "outlived" liberalism.

If Carl Menger had not aged relatively early and Böhm-Bawerk had not died so young, Mises probably would have found support among them. But the only survivor of the older Austrian School was my revered teacher Friedrich von Wieser, and he was more a Fabian — proud, as he believed, to have provided a scientific justification for progressive income taxation with his development of the theory of marginal utility.

"The problems with which he concerned himself were mostly problems for which he considered the prevailing opinion false."

Mises's return to classical liberalism was not only a reaction to a dominating trend. He completely lacked the adaptability of his brilliant seminar fellow Josef Schumpeter, who always quickly accommodated current intellectual fashions, as well as Schumpeter's joy in "épater le bourgeois" [shocking the middle classes]. In fact, it appeared to me as if these two most important representatives of the third generation of leading Austrian economists (one can hardly consider Schumpeter a member of the "Austrian School" in the narrower sense despite all mutual intellectual respect) each got on the other's nerves.

In today's world, Mises and his students are regarded as the representatives of the Austrian School, and justifiably so, although he only represents one of the branches into which Menger's theories had already been divided by his students, and the close personal friendship between Eugen von Böhm-Bawerk and Friedrich von Wieser. I only admit this with some hesitation, because I expected much of the tradition of Wieser, which his successor Hans Mayer attempted to advance. But these expectations have not yet become fulfilled, even though those stimuli may perhaps still prove more fruitful than they have been so far. Today's active "Austrian School," almost exclusively in the United States, is at base a Misesian school that goes back to Böhm-Bawerk, while the man in whom Wieser had set such great hopes and who had succeeded him in his chair never really fulfilled the promise.

Because he never occupied a regular chair in his field in the German-speaking world, and had to devote most of his time to other-than-scholarly activities until his late fifties, Mises remained an outsider in academia. Other reasons contributed to isolating him in his position in public life and as a representative of a great social-philosophical project.

A Jewish intellectual who advocated socialist ideas had his respected place in the Vienna of the first third of this century, a place that was accorded to him as a matter of course. Likewise, the Jewish banker or businessman who (bad enough!) defended capitalism had his rights. But a Jewish intellectual who justified capitalism appeared to most as some sort of monstrosity, something unnatural, which could not be categorized and with which one did not know how to deal.

His undisputed subject-knowledge was impressive, and one could not avoid consulting him in critical economic situations, but rarely was his advice understood and followed. Mostly he was regarded as somewhat of an eccentric whose "old-fashioned" ideas were impracticable "today."

That he himself had constructed, in long years of hard work, his own social philosophy was only known by very few and perhaps could not be understood by distant observers until 1940, when in his Nationalökonomie he presented for the first time his system of ideas in its entirety. But by this time he could no longer reach readers in Germany and Austria. Apart from the small circle of young theoreticians who met at his office, and some highly gifted friends in the business world who were similarly concerned about the future and who are mentioned in the following, he only encountered genuine understanding among occasional foreign visitors like the Frankfurt banker Albert Hahn, whose work in monetary theory he smiled at, however, as a vain sin of youth.

Yet he did not always make it easy for them. The arguments by which he supported his unpopular views were not always completely conclusive, even though some reflection could have shown that he was right. But when he was convinced of his conclusions and had presented them in clear and plain language — a gift that he possessed to a high degree — he believed that this would also have to convince others and only prejudice and stubbornness prevented them from understanding. For too long he had lacked the opportunity of discussing problems with intellectual equals who shared his basic moral convictions in order to see how even small differences in one's implicit assumptions can lead to different results. This manifested itself in a certain impatience that was easily suspected of being an unwillingness to understand, whereas an honest misunderstanding of his arguments was the case.

I must admit that I myself often initially did not think his arguments to be completely convincing and only slowly learned that he was mostly right and that, after some reflection, a justification could be found that he had not made explicit. And today, considering the kind of battle that he had to lead, I also understand that he was driven to certain exaggerations, like that of the a priori character of economic theory, where I could not follow him.

For Mises's friends of his later years, after his marriage and the success of his American activity had softened him, the sharp outbursts in the following memoirs, written at the time of his greatest bitterness and hopelessness, might come as a shock. But the Mises who speaks from the following pages is without question the Mises we knew from the Vienna of the twenties; of course without the tactful reservation that he invariably displayed in oral expression; but the honest and open expression of what he felt and thought. To a certain extent this may explain his neglect, even though it does not excuse it. We, who knew him better, were at times outraged, of course, that he did not get a chair, yet we were not really surprised. He had too much to criticize about the representatives of the profession into which he was seeking entrance to appear acceptable to them. And he fought against an intellectual wave which is now subsiding, not least because of his efforts, but which was much too powerful then for one individual to successfully resist.

That they had one of the great thinkers of our time in their midst, the Viennese have never understood.

What Would Mises Say?

by Joseph Keckeissen

Far from being prosperous, our America is now being buffeted by the worst financial tsunami in generations. All of us want to know what happened. What really caused this unbelievable turbulence?

To answer this, why not turn to the teachings of my late professor, Ludwig von Mises, the greatest economic analyst of the past century?

In the early 1920s, Mises predicted that the newly organized Soviet Union had set up an unviable economic system that would not be able to survive. Mises based his death verdict (made in his book, Socialism, shortly after the Russian Revolution) on the principle that a society cannot rely on political committees to set market prices as the commissars were trying to do; only the freely demonstrated choices of the market can produce functioning prices. All artificial prices are unworkable; they cannot tell the central planners which goods are expensive and which are cheap, so it would be impossible for them to organize production in an efficient way.

Without real prices, there could be no economization. Mises was derided for this analysis, even to the end of his life. But Mises was right, and history has approved his verdict, although he passed away without receiving due accolades. Even posthumously — when the Russian monster collapsed in 1989 — recognition of his genius was scant.

For this reason I consider myself justified in naming him as the greatest analyst ever.

A Flood of New Money

Although Mises is no longer with us to comment on our present debacle, we know which economic principles (truths) he relied on, and it is certainly apropos to raise the question, what would Mises say about the present crisis?

The scene is muddied by so many diverse factors — the low and then high rates of interest, the proliferation of mortgages that could never be paid off, the delirious purchase of those leveraged investments by the banking system, the overzealous federal promotion of home ownership and bailouts — but his reply would be clear as day.

The true cause of the economic instability is what he labeled inflationism.

By this he meant the unlimited creation of new money on the part of governments — fiat money without any backing whatsoever. The modern conviction is that our economic system is inherently unstable and that banking authorities must continually create more and more money out of nothing in order to maintain a prosperous economy. And this is certainly what our present monetary chiefs have been doing — to the extent of magically producing 9 trillion newly hatched dollars since the crisis began, with no end in sight!

They have made the world awash with liquidity. This is a violation of the basic principle that Mises held to be indispensable for a sound monetary system: you must never increase the existing amount of money.

The prevailing quantity of money is uniquely adjusted to the actual availability of goods and services. Augmenting or reducing the number of dollars in circulation only creates distortions in the economy. It causes prices and costs to rise, destroys the meaning of the accounting ledgers, creates all sorts of bubbles in the prices of stocks and of housing, and (even now) of government bonds. It turns new "investments" into nothing but the destruction of capital.

Inflationism, Mises held, has always been the worst of all social evils. This fact has gone unnoticed by historians, who dedicate their studies to rulers and wars and discoveries, but have never realized the impoverishing effects of debasing money (in the metallic period) or, similarly, of multiplying the monetary units (in our international financial system), causing each unit to lose its prior value.

It is the avalanche of new dollars (in some years growing by as much as ten percent, and now, with the new recovery packages, at an exponential rate yet to be determined) that has produced and sustains without remedy the mess that we are in. Were it not for this flood of new money, the prices of housing could never have risen to unsustainable heights, the securitized mortgages would not have multiplied, and our financial institutions would not have been gluttonously attracted to them. It was the unlimited creation of new cash that was the cause of all these disasters, and it provided both governments and institutions the temptation to distort and disrupt reality.

But what is astounding is that the remedy proposed by our ignorant politicians is the flush of unbounded new liquidity that they are creating for renewing reserves, multiplying bailouts, sustaining the overpriced mortgages, and on and on. This excess has been pushed by two presidents and almost unanimously promoted by a Democratic congress. Liquidity was the cause of the crisis, and now excess liquidity is presented as its solution! For this reason the crisis cannot possibly end in the short run. The remedy proposed is worsening things all over, and assures us that we will never get back to a sound and prosperous economy as long as we defy monetary sobriety.

The very life of our dollar is at stake. That would be Mises's message today. The quantity of money must never be increased.

The Interest Rate: Breaking the Levees

Another fundamental cause of all this mischief, Mises would instruct us, is the reckless rollercoaster tampering with the rate of interest — made low in the 1990s, raised five times in 2000, lowered down nearly to zero with 12 reductions in 2001, and held there until the fear of inflation raised it in 2004. Our monetary gatekeepers consider the interest rate a tool (or better, a toy) at their disposal, to be raised whenever there is fear of impending price rises (what they commonly mislabel as inflation) and to be lowered when there is danger of recession.

It is not that the Fed really raises or lowers interest rates or tampers with the scale of risk that the different levels of interest rate reflect. It has no power or means to do that. What the Fed does is to set a "target" rate for the securest type of loans (those from one bank to another), and then adjust the creation of new money to secure this goal. When the Fed wants to expand or restrain economic activity, more or less new money is created, respectively. But there is always new money in the works.

Interest is commonly considered something like a monetary faucet to be opened wide to pump the economy and to be shut off when prices get out of hand. But interest is not a monetary toy, as Mises has told us. It is not a price that can be adjusted at will. Rather, interest is meant to be a measure of the real savings accumulated at any one moment in the economy. Interest is high when the economy embarks on a spending spree and savings are reduced (as has been the case in recent years). Interest is low when consumption is reduced and savings are being generated to fuel new investment. The interest rate is like a semaphore, telling the investor whether to promote more current consumer goods as people are spending more and the interest rate is high, or, when the interest rate is low, to transfer resources to new investments that will develop more and better products for future, not present, consumption.

Thus the interest rate is not monetary but temporal: a ratio representing the tradeoff between current and future consumption.

This Misesian idea is entirely alien to the would-be managers of the American economy. The Fed was holding rates as near to zero as it could while America was on a spending spree — with negative savings to boot — when it should have let the market raise them to new heights. This gave our entrepreneurs a false green light to pursue investments in multiple new projects like home building, generous mortgage lending, securitized packages, and whatnot.

The true rate of interest is the levee that holds back unsound investments. The levee was broken and the hurricane of inflated money washed out the economy.

The wild consumption and even wilder investment (well leveraged with debt) surpassed the ability of our limited resources to satisfy this hyperdemand, and thus made inevitable the rise in prices. This rise then burdened all the new investments with higher operating costs that became so unmanageable that firms began to fail, the hallmark of a recession. There was no more economizing. We were trying to do everything at once, spending beyond our means, without the accumulated savings required to safely finance all this activity.

"Liquidity was the cause of the crisis, and now excess liquidity is presented as its solution!"

Now, with the recession in full swing, we should be tightening our belts and reducing our expenditures. But what are our leaders doing? Reducing interest rates again as close to zero as they can, and washing us with money in order to "stimulate" everything in sight.

The sky is, once again, the projected limit. We must resurrect the economy — with yet more reckless buying and investing.

The worst thing that the Fed does is to distort the vital semaphore of the economy, making it red when it should show green and vice versa. The near-zero rate will be fatal to any possible chance of an early recovery. It should be high until the rate of savings justifies a lower rate.

We can thank the good Lord that the country, on its own — and not due to the master plans of Washington — has begun to buy less and save more. This new source of savings will tend to offset the annulment of the interest rate. But it won't be enough to hold back the continuous reflooding of the economy with unbacked fiat dollars. No relief is in sight, as Mises would tell us.

Can't Someone Do Something!

The authorities, however, insist that it is their solemn duty to ward off all this downturn negativity. They must reduce the threat of unemployment and ward off the effects of home foreclosures. Through bailouts, they must rescue once-prestigious beacons of capitalist enterprise and repurchase all the overbloated securities. All of this, of course, demands the creation of trillions and more — infinite new money and infinite new debt.

We have an activist government: nothing passive can be tolerated. Don't stand there, they are all saying. Do something! We are told on all sides that the government and the central bank must act immediately and forcibly. And it could be that the trillions in proposed remedies might not be sufficient to force an upturn in the economy. We must do something drastic. The response must be unprecedentedly virile. Both our presidents have been buttressed by the nearly unanimous verdict of the Democratic portion of the Congress, by all of the Nobel-winning supereconomists, and by a united press. In unison, they all are insisting that we can't be timid; we must act boldly. All our reserves must be committed at once. No experiment must be left untried.

Socialism

What would our mentor, Mises, the lone voice predicting the fall of the Soviet economy, tell us now? He warned us not to augment the supply of money and not to tamper with the rate of interest. Here again, we find him, almost alone in the world, although many new and saner voices are day-by-day echoing Mises.

His resounding reply: do nothing. Tell the government to stay out of the picture and let the chips fall where they may. Let the folks in the market take care of restoring the economy. That means no more fiat money, much higher interest rates, no more bailouts, rescues, bolstering of prices, purchasing or creating make-work. Do nothing. Period.

When economic affairs are left to the judgment of the ordinary participants in the economy, things tend rapidly to straighten themselves out.

We saw this in a striking manner when the American people, confronted with an unprecedented rise in the price of gasoline, merely decided, spontaneously, to park their cars; the price of fuel quickly fell to seemingly bargain prices. When Lehman Brothers failed last September, the government abstained from interfering, and foreign companies rapidly bought up what was good in Lehman's assets. There are millions of good thinkers in the market, and there will always be someone there to save the day.

Does it make sense to bail out companies that have wantonly invested in overpriced and overextended mortgages? Their leaders have wasted the scarce capital entrusted to them. Leveraging their mortgage purchases with substantial increments of colossal corporate debt; they have betrayed not only their stockholders but also the entire economy, the rest of us, who had entrusted them with the creation of enriching and safe investment projects. These traitors must not be artificially propped up, forgiven, and even rewarded. Bankruptcy is the only sensible route to oust them. It will force down the prices of their remaining good assets, and new entrepreneurs will promptly appear to buy them up at bargain prices and get the companies going again at modest cost.

Of course, there will always be unavoidable suffering involved, especially on the part of the employees who must temporarily be displaced, but the pains will be minimized by the rapid resolution of the problem through the forces of the market.

Then why should anyone be buying up all the overbloated assets at their bubble values? That is ridiculous. It only serves to perpetuate the phoniness of a phony economy. All prices must be allowed to sink, as rapidly as economic gravity can suck them down, to the value that the market would normally assign them. We can't have a livable economy with houses that cost hundreds of thousands of dollars. Who would be able to afford them? Only reasonable prices can survive in the market.

Moreover, it is inherently unjust to create liquidity to rescue those who have behaved with total disdain for prudence, those who issued or contracted mortgages without healthy foresight, those who overextended their credit to buy all sorts of surplus stuff. They are the very ones who have contributed to the general malaise. If some credit agencies are failing, let them go bankrupt. Other entrepreneurs would get together the new capital needed to replace them. This would promote greater prudence in the future.

The opponents of the market deride this solution, saying that it smacks of laissez-faire. But was it not the exaggerated intromission of both the central bank and the Congress in promoting liquidity, massive home ownership, unrestrained interest rates, etc., that got us here in the first place? Prosperity will never come from experiments that violate common sense, experience, and the norms of sound economic theory, especially when such experiments are wilder than ever before. On the contrary, if we follow the Misesian wisdom and the government not be allowed to upset the applecart, the market will shortly make the crisis fade away. Otherwise, who knows how long it will take for prosperity to return?

Human Action at Sixty

by Richard M. Ebeling

In September of 2009, it will be sixty years since the appearance of Ludwig von Mises's Human Action, a Treatise on Economics, one of the truly great "classics" of modern economics. Often a "classic" means a famous book considered to have made important contributions to a discipline that is reverentially referred to but is rarely ever read. In economics, Adam Smith's Wealth of Nations is the typical example of such a work. Every economist has heard of the "invisible hand" and the notion of self-interest furthering the public interest through the incentive mechanism of the market, but probably few economists nowadays have actually read more than a handful of snippets and brief passages from Smith's treatise.

However, Human Action uniquely stands out as a classic in the literature of economics. Not only among Austrian economists but also for a growing number of other people, Mises's brilliant treatise continues to be read and taken seriously as a cornerstone for understanding the nature of the free society and the workings of the market economy.

It has taken on even more significance in these early years of the 21st century precisely because of the economic crisis through which the world is presently passing. It rings just as relevant today as when it was published six decades ago because the issues that Mises dealt with in Human Action and in many of his other works still dominate the public-policy discourses of our own time.

A central concept through much of the book is Mises's insistence on the essential importance of economic calculation. In the early decades of the 20th century, socialists of almost all stripes were certain that the institutions of the market economy could be done away with — either through peaceful means or violent revolution — and replaced with direct government ownership or control of the means of production with no loss in economic productivity or efficiency.

Mises's landmark contribution was to demonstrate that only with market-based prices expressed through a medium of exchange could rational decision making be undertaken for the use and application of the myriad means of production to assure the effective satisfaction of the multitudes of competing consumer demands in society.

"Monetary calculation is the guiding star of action under a system of division of labor," Mises declared in Human Action. "It is the compass of the man embarking on production."[1] The significance of the competitive process, as Mises had expressed it in his earlier volume Liberalism, is that it facilitates "the intellectual division of labor that consists in the cooperation of all entrepreneurs, landowners, and workers as producers and consumers in the formation of market prices. But without it, rationality, i.e., the possibility of economic calculation, is unthinkable."[2]

Such rationality in the use of means to satisfy ends is impossible in a comprehensive system of socialist central planning. How, Mises asked, will the socialist planners know the best uses for which the factors of production under their central control should be applied without such market-generated money prices? Without private ownership of the means of production, there would be nothing (legally) to buy and sell. Without the ability to buy and sell, there would be no bids and offers, and therefore no haggling over terms of trade among competing buyers and sellers. Without the haggling of market competition there would, of course, be no agreed-upon terms of exchange. Without agreed-upon terms of exchange, there are no actual market prices. And without such market prices, how will the central planners know the opportunity costs and therefore the most highly valued uses for which those resources could or should be applied? With the abolition of private property, and therefore market exchange and prices, the central planners would lack the necessary institutional and informational tools to determine what to produce and how, in order to minimize waste and inefficiency.

Therefore, Mises declared in 1931,

From the standpoint of both politics and history, this proof [of the "impossibility" of socialist planning] is certainly the most important discovery by economic theory … It alone will enable future historians to understand how it came about that the victory of the socialist movement did not lead to the creation of the socialist order of society.[3]

At the same time, Mises demonstrated the inherent inconsistencies in any system of piecemeal political intervention in the market economy. Price controls and production restrictions on entrepreneurial decision making bring about distortions and imbalances in the relationships of supply and demand, as well as constraints on the most efficient use of resources in the service of consumers. The political intervener is left with the choice of either introducing new controls and regulations in an attempt to compensate for the distortions and imbalances the prior interventions have caused, or repealing the interventionist controls and regulations already in place and allowing the market once again to be free and competitive. The path of one set of piecemeal interventions followed by another entails a logic in the growth of government that eventually would result in the entire economy coming under state management. Hence, interventionism consistently applied could lead to socialism on an incremental basis.[4]

The most pernicious form of government intervention, in Mises's view, was political control and manipulation of the monetary system. Contrary to both the Marxists and the Keynesians, Mises did not consider the fluctuations experienced over the business cycle to be an inherent and inescapable part of the free-market economy. Waves of inflations and depressions were the product of political intervention in money and banking. And this included the Great Depression of the 1930s, Mises argued.

Under various political and ideological pressures, governments had monopolized control over the monetary system. They used the ability to create money out of thin air through the printing press or on the ledger books of the banks to finance government deficits and to artificially lower interest rates to stimulate unsustainable investment booms. Such monetary expansions always tended to distort market prices resulting in misdirections of resources, including labor, and malinvestments of capital. The inflationary upswing that is caused by an artificial expansion of money and bank credit sets the stage for an eventual economic downturn. By distorting the rate of interest — the market price for borrowing and lending — the monetary authority throws savings and investment out of balance, with the need for an inevitable correction.

The "depression" or "recession" phase of the business cycle occurs when the monetary authority either slows downs or stops any further increases in the money supply. The imbalances and distortions become visible, with some investment projects having to be written down or written off as losses, with reallocations of labor and other resources to alternative, more profitable employments, and sometimes significant adjustments and declines in wages and prices to bring supply and demand back into proper order.[5]

The Keynesian revolution of the 1930s, which then dominated economic-policy discussions for decades following the Second World War, was based on a fundamental misconception of how the market economy worked. What Keynes called "aggregate demand failures" (to explain the reason for high and prolonged unemployment) distracted attention from the real source of less-than-full employment: the failure of producers and workers on the "supply side" of the market to price their products and labor services at levels that potential demanders would be willing to pay. Unemployment and idle resources were a pricing problem, not a demand-management problem. Mises considered Keynesian economics basically to be nothing more than a rationale for special-interest groups, such as trade unions, who didn't want to adapt to the reality of supply and demand, and what the market viewed as their real worth.[6]

Thus Mises's conclusion from his analysis of socialism and interventionism, including monetary manipulation, was that there is no alternative to a thoroughgoing, unhampered, free-market economy — and one that included a market-based monetary system such as the gold standard.[7] Both socialism and interventionism are, respectively, unworkable and unstable substitutes for capitalism. The classical liberal defends private property and the free-market economy, he insisted, precisely because it is the only system of social cooperation that provides wide latitude for freedom and personal choice to all members of society, while generating the institutional means for coordinating the actions of billions of people in the most economically rational manner.

The apparent "triumph" of capitalism over collectivism, following the demise of the Soviet bloc in the 1990s, was mostly an illusion. Governments in the Western world did not reduce their size or intrusiveness in the economic affairs of their citizens. The interventionist welfare state has remained alive and well.[8]

But the heart of the interventionist system is government control of the monetary system — indeed, it has remained an untouched system of monetary central planning through the institution of central banking. During the Second World War, the German free-market economist Gustav Stolper, then in exile in America from war-torn Europe, pointed out that,

Hardly ever do the advocates of free capitalism realize how utterly their ideal was frustrated at the moment the state assumed control of the monetary system…. A "free" capitalism with government responsibility for money and credit has lost its innocence. From that point on it is no longer a matter of principle but one of expediency how far one wishes or permits governmental interference to go. Money control is the supreme and most comprehensive of all government controls short of expropriation.

Stolper went on to say,

there is today only one prominent liberal theorist consistent enough to advocate free, uncontrolled competition among the banks in the creation of money. Mises, whose intellectual influence on modern neo-liberalism was very strong, has hardly made one proselyte for that extreme conclusion.[9]

Fortunately, over the last thirty years, Mises's analysis and defense of gold-backed, private competitive banking in place of government-monopoly central banking has finally begun to win over a growing number of Austrian and other advocates.

Monetary manipulation by central banks inserts one of the most disruptive distortions into the process of economic calculation. Interest rates — which are meant to inform market participants about the availability of savings relative to the demands for investment expenditures, and which facilitate the intertemporal coordination of resource use over periods of time relative to the demands of income earners for consumption in the present versus the future — send out misinformation to both producers and consumers under the pressure of monetary expansion.

In the wake of Federal Reserve monetary mischief, once again, over the last several years, the imbalances and distortions generated by monetary policies have resulted in the current economic crisis. And now, in the face of the inescapable need for the rebalancing and recoordination of misdirected resources and malinvested capital, the "ghost of Keynes past" has been resurrected.

The focus on aggregate output and employment declines over the last year, which is guiding government policy, hides from view the underlying microeconomic relations that are at the core of the market process. How can the multitudes of market participants discern where and to what extent market errors have been made under the pressure of past monetary and interest-rate manipulations if the price system is not permitted to perform its job of telling the truth about the reality of supply and demand? That is, the degree to which resources have been misallocated and wrongly priced during the boom. Or the extent to which men, material, and savings-backed financial funds must realign themselves to restore a properly understood full-employment economy that has market-based sustainability.

"Contrary to both the Marxists and the Keynesians, Mises did not consider the fluctuations experienced over the business cycle to be an inherent and inescapable part of the free-market economy."

How can people know what to do and where to do it in the social system of division of labor if the crucial tool of economic calculation is undermined by government bailouts, subsidies, price floors, capital-market interventions, and the continuing monetary manipulation that threatens further misdirections of capital and labor, and runs the danger of serious price inflation in the months and years ahead?

In the present economic crisis, the argument is constantly made that many banks are too big to fail, that depositors need to have their various types of bank accounts protected and guaranteed, and that the repercussions of allowing the financial markets to adjust to the postboom reality would be too harsh. Mises responded to these types of arguments in 1928, even before the Great Depression began, including a warning about what today is understood as "moral hazard," the danger of reinforcing the repetition of bad decisions by the government bailing out mistakes made in the market:

In any event, the practice of intervening for the benefit of banks, rendered insolvent by the crisis, and of the customers of these banks, has resulted in suspending the market forces which could serve to prevent a return of the expansion, in the form of a new boom, and the crisis which inevitably follows. If the banks emerge from the crisis unscathed, or only slightly weakened, what remains to restrain them from embarking once more on an attempt to reduce artificially the interest rate on loans and expand circulation credit? If the crisis were ruthlessly permitted to run its course, bringing about the destruction of enterprises which were unable to meet their obligations, then all entrepreneurs — not only banks but also other businessmen — would exhibit more caution in granting and using credit in the future. Instead, public opinion approves of giving assistance in the crisis. Then, no sooner is the worst over, than the banks are spurred on to a new expansion of circulation credit.[10]

Just as there was a huge shift toward more and bigger government in the years leading up to Mises's writing of Human Action, so today we appear to be on the threshold of a similar expansion of governmental presence and domination of even more of social life, especially in health care, education, and the energy sector — as well as a much greater control over the financial and capital markets.

But where will all the money come from to fund this new gargantuan largess for expanded political paternalism? In the Austria of the interwar period of the 1920s and 1930s, Mises had witnessed and explained the consequences from unrestrained government spending that finally resulted in the "eating of the seed corn" — capital consumption.[11] Mises warned of this danger, too, in the pages of Human Action, and the fact that there must be a point at which the interventionist welfare state will have exhausted "the reserve fund" of accumulated wealth, after which the consumption of capital becomes the only basis upon which to continue to feed the fiscal demands of the redistributive state.[12] Those currently in political power in Washington seem hell-bent on bringing this about in the decades ahead.

When Friedrich A. Hayek reviewed the German-language predecessor to Human Action, shortly after it appeared in 1940, he emphasized its astonishingly unique qualities:

There appears to be a width of view and an intellectual spaciousness about the whole book that are much more like that of an eighteenth-century philosopher than that of a modern specialist. And yet, or perhaps because of this, one feels throughout much nearer reality, and is constantly recalled from the discussion of the technicalities to the consideration of the great problems of our time … It ranges from the most general philosophical problems raised by all scientific study of human action to the major problems of economic policy of our time … [T]he result is a really imposing unified system of a liberal social philosophy. It is here also, more than elsewhere, that the author's astounding knowledge of history as well as of the contemporary world helps most to illustrate his argument.[13]

The years since the original appearance of Human Action in 1949 have done nothing to diminish the validity of Hayek's interpretation. Indeed, the social, political, and economic conditions of our world today give Ludwig von Mises's treatise a refreshing relevance matched by few other works written over the last century. That is what results in it being read by more and more people today, rather than simply being one of those many "classics" collecting dust on a shelf.

If enough people discover and rediscover the timeless truths in the pages of Human Action, the ideas of Ludwig von Mises may well assist us in stemming this growing tide toward an even larger leviathan state.