Ludwig Heinrich Edler von Mises (September 29, 1881 - October 10, 1973) was a notable Austrian-American economist and a major influence on the modern libertarian movement and revival of classical liberalism. Prominent in the Austrian school of economics, his theories influenced many other significant economists of the twentieth century, including Friedrich von Hayek and Murray Rothbard. His view that "value lies in us, not in things" exemplifies the subjective theory of value promoted by the Austrian School and opposition to materialism. Using the analysis of the individual consumer as the basis rather than starting with classes of goods, he developed applications of the concept of marginal utility to issues such as the value of money. Von Mises also produced a devastating critique of a socialist economy, showing that it was not a viable system. His conclusion was that without private property, no society ever developed into an advanced civilization—competition and the opportunity to express one's creativity are essential components of human advancement.
Ludwig Heinrich Edler von Mises was born on September 29, 1881, in Lemberg (then part of the Austro-Hungarian Empire and now the city of Lviv, Ukraine), where his father was stationed as a construction engineer. Both his father and mother came from prominent Viennese families. The family was Jewish, and his grandfather was raised to nobility by Emperor Franz-Josef in 1881, on the day Ludwig was born.
In the years from 1904 to 1914, von Mises attended lectures given by the prominent Austrian economist Eugen von Boehm-Bawerk and, eventually, was awarded his doctorate in 1906. He taught at the University of Vienna without pay as Privatdozent in the years from 1913 to 1934, while also serving as a principal economic adviser to the Austrian government. His student, Friedrich von Hayek, explained, "he was a Jew, he was known to be aggressive, and he was an anti-socialist” (hence he had no chance of getting a full professorship anywhere in Austria).
To avoid the influence of National Socialists in his Austrian homeland, in 1934, von Mises left for Geneva, Switzerland, where he was a professor at the Graduate Institute of International Studies until 1940. In 1940, he emigrated to New York City. He was a visiting professor at New York University from 1948 until he retired in 1969. During those years, his salary was paid by a private foundation. Ludwig von Mises died at the age of 92, at St Vincent's hospital in New York City.
Ludwig von Mises wrote and lectured extensively on behalf of classical liberalism and is seen as one of the leaders of the Austrian School of economics. He wrote many works on three closely related themes:
Ludwig von Mises described his distinction between economics, ideology, and world view in his, Human Action, published in 1949, and revised in 1966. There, he recognizes two or three ideologies: Liberalism, socialism, and possibly interventionism. He makes this distinction in order to clarify his view of the goal of economics.
According to von Mises, economics is a set of logical deductions about "what is" in the sense that the images it constructs must be relevant to the social facts one aims to describe. Ideology goes beyond the study of things as they are. It is "about the ought, i.e., about the ultimate ends which man should aim at in his earthly concerns" (von Mises 1996).
Because ideologies are concerned with "earthly ends … if we want to evaluate them from a logical point of view, we must use economics. And this means that we must understand why the market economy is conducive to the production of what ordinary people regard as wealth" (von Mises 1996).
Thus, von Mises writes that the economist's task is to evaluate the arguments put forth by what one might call non-ascetic ideologists, that is, by the ideologists who are concerned with the attainment of earthly ends. For these, "no appeal to any religious or metaphysical dogmas and creeds can invalidate the theorems and theories concerning social cooperation as developed by logically correct praxeological reasoning. …Thus, the main objective of praxeology and economics is to substitute consistent correct ideologies for the contradictory tenets of popular eclecticism” (von Mises 1996).
He notes that the economist's conclusions about the market economy stem not from a normative judgment, but from the study of arguments favoring intervention:
It is true that economists have drawn from their investigations the conclusion that the goals which most people, practically even all people, are intent on attaining by toiling and working and by economic policy can best be realized where the free market system is not impeded by government decrees. But this is not a preconceived judgment stemming from an insufficient occupation with the operation of government interference with business. It is, on the contrary, the result of a careful unbiased scrutiny of all aspects of intervention (von Mises 1996).
Von Mises' view is that even evaluating arguments relating to public policy should be value free. This is because the logic of the arguments in economics is independent of any particular judgment about the effects of a policy. The postulate of Wertfreiheit (freedom from value judgments) can easily be satisfied in the field of the aprioristic science—logic, mathematics, praxeology (of which economics is a branch)—and in the field of the experimental natural sciences. "It is logically not difficult to draw a sharp line between a scientific, unbiased treatment of these disciplines and a treatment distorted by superstition" (von Mises 1996).
It is because of his sharp line between scientific treatment and "superstition," Ludwig von Mises wrote, that:
The usual terminology of political language is stupid. What is "left" and what is "right?" Why should Hitler be "right" and Stalin, his temporary friend, be "left?" Who is "reactionary" and who is "progressive?" Reaction against an unwise policy is not to be condemned. And progress towards chaos is not to be commended. Nothing should find acceptance just because it is new, radical, and fashionable. "Orthodoxy" is not an evil if the doctrine on which the "orthodox" stand is sound. Who is anti-labor, those who want to lower labor to the Russian level, or those who want for labor the capitalistic standard of the United States? Who is "nationalist," those who want to bring their nation under the heel of the Nazis, or those who want to preserve its independence (von Mises 1988).
"The Nazis" he wrote,
have not only imitated the Bolshevist tactics of seizing power. They have copied much more. They have imported from Russia the one-party system and the privileged role of this party and its members in public life…the administrative execution and imprisonment of political adversaries; concentration camps; the punishment inflicted on the families of exiles; the methods of propaganda. They have borrowed from the Marxians even such absurdities as the mode of address, party comrade (Parteigenosse), derived from the Marxian comrade (Genosse), and the use of a military terminology for all items of civil and economic life (Mises 1944).
In his analysis of economic theory, von Mises realized that the critical flaw was that classical economics had attempted to analyze the economy in terms of “classes” rather than the actions of individuals. As a result, the classical economists could not find the correct explanation of the underlying forces determining the values and relative prices of goods and services; nor could they analyze the action of consumers, the crucial determinants of the activities of producers in the economy. Looking at “classes” of goods, for example, the classical economists could never resolve the “paradox of value:" The fact that bread, while extremely useful and the “staff of life,” had a low value on the market; whereas diamonds, a luxury and hence a mere frippery in terms of human survival, had a very high value on the market. If bread is clearly more useful than diamonds, then why is bread rated so much more cheaply on the market? Mises wrote:
We are now reaping the unfortunate fruits of this grievous split in the current disjunction between “micro” and “macro” economics. “Micro-economics” is at least roughly grounded on the actions of individual consumers and producers; but when economists come to money, we are suddenly plunged into a never-never land of unreal aggregates: of money, “price levels,” “national product,” and spending (von Mises 1912).
Thus, Ludwig von Mises set out to repair this split, and to ground the economics of money and its purchasing power (misnamed the “price level”) on the Austrian analysis of the individual and the market economy. Through this, he hoped to arrive at a great integrated economics that would explain all parts of the economic system (von Mises 1912).
Von Mises showed that, just as the price of any other commodity was determined by its quantity available and the intensity of consumer demands for that item (based on its marginal utility to the consumers), so the “price” or purchasing power of the money-unit is determined on the market in the very same way. In the case of money, its demand is a demand for holding in one’s cash balance (in one’s wallet or in the bank so as to spend it sooner or later on useful goods and services). The marginal utility of the money unit (the dollar, euro, or gold-ounce) determines the intensity of the demand for cash balances; and the interaction between the quantity of money available and the demand for it determines the “price” of the dollar (how much of other goods the dollar can buy in exchange).
Von Mises devastatingly refuted the idea of marginal utility being in any sense measurable and showed that marginal utility is a strictly ordinal ranking, in which the individual lists his values by preference ranks (“I prefer A to B, and B to C”), without assuming any "mythological" unit or quantity of utility. He wrote: "If it makes no sense to say that an individual can 'measure his own utility,' then it makes even less sense to try to compare utilities between people in society" (von Mises 1912). Thus, von Mises’ demonstration that utilities cannot be measured completely eliminates the marginal utility case for egalitarian policies by the state. And yet, while economists generally pay lip-service to the idea that utility cannot be compared between individuals, they presume to go ahead and try to compare and sum up “social benefits” and “social costs.”
In his “Regression theorem,” von Mises showed that, logically, one can push back this time component in the demand for money until the ancient day when the money commodity was not money but a useful barter commodity in its own right; in short, until the day when the money-commodity (such as gold or silver) was demanded solely for its qualities as a consumable and directly usable commodity. Not only did von Mises thus complete the logical explanation of the price or purchasing power of money, but his findings had other important implications as well. It meant that money could only originate in one way: On the free market, and out of the direct demand in that market for a useful commodity. Consequently, money could not have originated either by the government just proclaiming something to be money, or by some sort of one-shot social contract; it could only have developed out of a genuinely useful and valuable commodity.
He also demonstrated the role of banking in the supply of money, and showed that free banking (banking free from government control and dictation) would result not in wildly inflationary expansion of money, but in banks that would be forced by demands for payment into a sound, non-inflationary policy of “hard money.”
Most economists have defended Central Banking (control of banking by a governmental bank, as in the Federal Reserve System) as necessary for the government to restrict the inflationary tendencies of private banks. However, von Mises showed that the role of central banks has been precisely the opposite: To free the banks from the stringent free-market restrictions on their activities, and to stimulate and propel them into inflationary expansion of their loans and deposits. Central banking, as von Mises argued its original proponents knew fully well, is and always has been an inflationary device to free the banks from market restraints.
In his article of 1920, “Economic Calculation in the Socialist Commonwealth,” von Mises demonstrated for the first time that socialism was not a viable system for an industrial economy. He showed that a socialist economy, totally deprived of a free-market price system, could not rationally calculate costs or allocate factors of production efficiently to their most needed tasks. Although not translated into English until 1934, von Mises’ demonstration had an enormous impact on European socialists, who tried for decades to refute him and to come up with workable models for socialist planning.
These insights were incorporated into his comprehensive critique, entitled Socialism (1922). The acknowledged failures of Communist economic planning in Russia and Eastern Europe in these increasingly industrialized economies after World War II provided a dramatic confirmation of his insights:
The only certain fact about Russian affairs under the Soviet regime with regard to which all people agree is: That the standard of living of the Russian masses is much lower than that of the masses in the country which is universally considered as the paragon of capitalism, the United States of America. If we were to regard the Soviet regime as an experiment, we would have to say that the experiment has clearly demonstrated the superiority of capitalism and the inferiority of socialism (von Mises 1981).
When the English language edition of Socialism came out in 1936, socialists expressed their outrage. G.D.H. Cole fumed in New Statesman and Nation: "His book was perhaps worth translating as a supreme example of academic absurdity." H.G. Hayes in American Economic Review: "diatribes against socialism do not help." Harold Laski called Socialism an "extravagant and often ignorant diatribe." An unsigned reviewer for the New Leader wrote that Socialism "contains more nonsense in 500 pages than any other I have recently read." Jay Douglas, writing in The Spectator, derided Socialism as "hilarious unreality." The Economist, whose editors had drifted from the magazine's original commitment to laissez faire, thought von Mises had gone too far, disparaging its "extreme and uncompromising character seldom encountered in English controversy."
The following excerpt, promoted by the von Mises Institute (a private institution founded by Ludwig von Mises in the 1930s), encapsulates his credo, that has become an axiom and his legacy:
If history could prove and teach us anything, it would be that private ownership of the means of production is a necessary requisite of civilization and material well-being. All civilizations have up to now been based on private property. Only nations committed to the principle of private property have risen above penury and produced science, art and literature. There is no experience to show that any other social system could provide mankind with any of the achievements of civilization.
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