- Post-Covid Policy Advice from Ludwig von Mises for Developing Countries - March 2, 2021
- Socialism-in-Practice Was a Nightmare, Not Utopia - February 23, 2021
- The Case for Freedom in Ludwig von Mises, F.A. Hayek, and Ayn Rand - February 19, 2021
Ludwig von Mises’s majestic magnum opus, Human Action: A Treatise on Economics, was published on September 14, 1949. In the nearly seven decades since its appearance, Human Action has come to be recognized as 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 decades of the twenty-first century precisely because of the economic crises through which the world has been passing. It rings just as relevant today as when it was published in 1949 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.
The World When Human Action was Published
It is perhaps useful to recall the state of the world when Human Action appeared in 1949. The Soviet system of central economic planning had been imposed on all of Eastern Europe. In Asia, Mao Zedong’s communist armies were just completing their conquest of the Chinese mainland. In Western Europe, many of the major non-communist governments were practicing what one free market critic called “national collectivism – a form of repressed inflation with price and wage and foreign exchange controls, and Keynesian influenced “full employment” policies with deficit spending and “easy money.”
In Human Action, Ludwig von Mises opposed every one of these trends and policies, plus many others in contemporary social philosophy, philosophy of science, and in economic theory and method. He challenged the foundations, logic, and conclusions of every facet of twentieth century collectivism.
In 1949, Mises’s arguments were often ignored or scorned as the reactionary misconceptions of a man out-of-step with the more “progressive” ideas and economic policies of the postwar period. In this second decade of the twenty-first century, however, it is evident that it was Mises who understood far better than the vast majority of the contemporary economists and policy advocates the fundamental flaws in socialism, interventionism, and the welfare state.
Mises the Enlightenment-Like Philosopher
Human Action was the revised and improved outgrow of an earlier German-language treatise,Nationalökonomie, which Ludwig von Mises had published in May 1940 while he was still living in Geneva, Switzerland, shortly before he permanently moved to the United States.
Mises’s friend and fellow Austrian economist, Friedrich A. Hayek, said in a review of the earlier German version:
There appears to be a width of view and an intellectual spaciousness about the whole book which 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 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.
A few months later another review appeared, this one by Walter Sulzbach, a prominent free market German economist then living in the United States. He, too, emphasized the uniqueness of the man and the work. “Mises has written a remarkable book,” Sulzbach said. “Few economists of our generation can boast of a similar achievement. It is the work of a man who combines an immense knowledge of economic history, economic theories and present-day facts with a thoroughly logic mind.”
And as Mises’s American student and friend, Murray N. Rothbard explained many years after the first appearance of Human Action:
Human Action is it: Mises’s greatest achievement and one of the finest products of the human mind in our century. It is economics whole . . . In addition to providing this comprehensive and integrated economic theory, Human Actiondefended Austrian economics against all of its methodological opponents, against historicists, positivists, and neoclassical practitioners of mathematical economics and econometrics. He also updated his critique of socialism and interventionism.
Ludwig von Mises’s Life and Career
Ludwig von Mises was born in Lemberg, Austria-Hungary on September 29, 1881. Though originally interested in history, shortly after entering the University of Vienna in 1900 he turned to economics after reading Principles of Economics by Carl Menger, the founder of the Austrian School of Economics. While at the university he studied with Eugen von Böhm-Bawerk, the person perhaps most responsible for establishing the internationally respected reputation of the Austrian School in the late nineteenth and early twentieth centuries. In 1906 Mises was awarded a doctoral degree in jurisprudence (at the time economics was studied as part of the law faculty at the University of Vienna).
Beginning in 1909, Mises was employed at the Vienna Chamber of Commerce, Crafts and Industry as an economic analyst within the department of finance, rising to the position of a senior secretary with the Chamber in the years between the two World Wars and played a prominent role in the economic policy discussions in the Austria of the 1920s and 1930s. Living in an ideological environment dominated by socialist, interventionist and increasingly totalitarian ideas, his was mostly a rearguard defense of classical liberal and free market policies.
In 1934, Mises was offered and accepted a position as Professor of International Economic Relations at the Graduate Institute of International Studies in Geneva, Switzerland. It was shortly after arriving in Geneva that he set about a project that he had long had in mind, the writing of a comprehensive treatise on economics that finally became Nationalökonomie, and then Human Action, in its final and finished form.
After arriving in the United States in 1940, he settled in New York City, eventually being appointed as a visiting professor in the Graduate School of Business at New York University a position he held until retirement at the age of 89, in 1969. Ludwig von Mises passed away on October 10, 1973, at the age of 92.
The Meaning and Logic of Human Action
In the late 1920s and early 1930s, Mises wrote a series of essays in which he argued that economics was a distinct science derived from the insight that all social processes arise from the choices and actions of the individual participants in the social and market order. Attempts to reduce conscious and intentional human conduct to the physical methods of the natural sciences would not merely distort any real understanding of human decision-making and activity, it would create a serious false impression that social and market processes could be manipulated and controlled in more or less the same manner as inanimate matter in a laboratory experiment.
In Human Action, this theme was refined and fully developed. All of the social processes have their origin in and can be reduced to the actions and reactions of individual human beings. Being human himself, the social scientist can draw upon a source of knowledge unavailable to the natural scientist: introspection. That is, the social scientist can look within and trace out the logic and formal characteristics of his own mental processes.
As Mises expressed it, “action” is reason applied to purpose. By understanding the logic of his own reasoning processes, the social scientist can comprehend the essentials of human action: that man, as a conscious being, invariably finds some aspects of his human condition unsatisfactory; he imagines ends or goals that he would like to attain in place of his present or expected circumstances; and he perceives methods or means to try to achieve them.
But he soon discovers that some of the means with which he could attain ends are limited in quantity and quality relative to their potential uses. Hence, man is confronted with the necessity to choose among the desired ends and has to set some aside either for a day or forever, so those means may be used for the pursuit of other ends to which he has assigned greater importance or significance. Few human decisions, however, are completely categorical, that is, either/or. Most are incremental, that is, giving up a little bit of one attainable end so as possibly to attain a little bit more of some other desired end; thus, most choices are made at the “margin.”
From these elementary and self-evidently true foundations, Mises argued, all the complex theorems of economics can be, in principle, traced out. And this he attempts to do in Human Action with razor shape reasoning and often biting rhetoric in response to critics.
The “laws” of economics, Mises insisted, are not open to quantitative verification or falsification or prediction. The laws of economics, in other words, as Mises explains in careful detail in Human Action, are logical, not empirical, relationships. Why? Because man has volition, free will, the ability to change his mind and imagine new possibilities that make his actions and responses in the future different in their concrete form from what they were yesterday or today. Hence, the search for a quantitative economics for deterministic prediction of what men and markets will do today, tomorrow, or a year from now is the pursuit of the unattainable.
The Law of Human Association and the Market Economy
For Mises, one of the greatest accomplishments of mankind was the discovery of the higher productivity arising from the division of labor. The classical economists’ analysis of comparative advantage, under which specialization in production increased the qualities, qualities and varieties of goods available to all participants in the network of exchange, was more than merely a sophisticated demonstration of the mutual gains from trade.
In Mises’s view, as he expressed it in Human Action, the law of comparative advantage is in fact “the law of human association.” The mutual benefits resulting from permanent and extensive specialization of activities was the origin of society and the starting point for the development of civilization.
The rationality of the market economy arises from its ability to allocate the scarce means of production in society for the most efficient satisfaction of consumer wants in a complex system of division of labor, that is, to see to it that the means at people’s disposal are applied to their most highly valued uses as expressed in the free choices of participants in the market. This requires some method through which alternative uses for those scarce means and their relative value in those competing applications can be discovered.
Economic Calculation as the “Compass” of Market Action
That is why a central concept throughout Human Action is Mises’s insistence on the essential importance of economic calculation. In the early decades of the twentieth century, socialists of almost all stripes were certain that the institutions of the market economy could be done away with – either through peaceful democratic 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 in his earlier work, Socialism (1922) was to demonstrate that only with market-based prices expressed through a medium of exchange (money) 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, where he refined his argument and replied to his collectivist critics. “It is the compass of the man embarking on production.”
The significance of the competitive process, as Mises had expressed it in his earlier volume, Liberalism (1927), 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.”
Economic Irrationality of Central Planning and Interventionism
Such rationality in the use of means to satisfy ends is impossible in a comprehensive system of socialist central planning, once again he insisted in Human Action. Mises asked, how 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.
It was for this reason that Mises had declared back 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.
At the same time, as Mises demonstrates in Human Action 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 could result in the entire economy coming under state management. Hence, interventionism consistently applied could lead to socialism on an incremental basis.
Monetary Manipulation and the Business Cycle
The most pernicious form of government intervention, in Mises’s view, was political control and manipulation of the monetary system. One of Mises’s most important contributions to economics had been in 1912 with his book, The Theory of Money and Credit, followed in 1928 by Monetary Stabilization and Cyclical Policy.
Contrary to both the Marxists and the later Keynesians, Mises did not consider the economy-wide 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.
He offered a richer and more systematic exposition of his theory in Human Action. 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 misdirection of resources, including labor, and mal-investments 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.
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.
No Alternative to a Functioning Free Market Economy
Thus Mises’s conclusion in Human Action 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.
Both socialism and interventionism are, respectively, unworkable and unstable substitutes for capitalism. The classical liberal defends private property and the free-market economy, Mises 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.
But the heart of the interventionist system is government control of the monetary system — indeed, it a 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 in his book, This Age of Fables (1942):
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. [Ludwig von] Mises, whose intellectual influence on modern neo-liberalism was very strong, has hardly made one proselyte for that extreme conclusion.
It is in the pages of Human Action that Mises details the advantages and benefits of a private competitive banking system based on a commodity such as gold. Fortunately, over the last thirty years or so, 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 economists and other advocates.
Too Big to Fail Means Moral Hazard
Since the financial crisis of 2008-2009, the argument often has been made that some 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 post-boom reality would be too harsh. Mises responded to these types of arguments in 1928 even before the Great Depression began and again in the pages of Human Action, with 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.
The Continuing Relevance of Mises’s Human Action
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 there are still many across the political spectrum who a call for 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.
Mises warned of this danger, too, in 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. Those currently in political power in Washington seem hell-bent on bringing this about in the decades ahead.
Many of the political-economic trends since the original appearance of Human Action in 1949 have done nothing, therefore, to diminish the importance of Ludwig von Mises’s insight and profound analysis of the market order and its collectivist alternatives. 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.
[Originally Published at the Future of Freedom Foundation]