Ludwig von Mises: Defender of the Free Market
Ludwig von Mises’ thoughts on human behavior, socialism, and money and credit have had a major impact on economic thought. He championed true free markets and is seen as a defender of liberty. Former President of the United States, Ronald Reagan, said, “Ludwig von Mises was one of the greatest economic thinkers in the history of Western Civilization. Through his seminal works, he rekindled the flames of liberty. As a wise and kindly mentor, he encourages all who sought to understand the meaning of freedom. We owe him an incalculable debt” (Mises Institute).
The remainder of this paper will outline the life of Ludwig von Mises. This will be accomplished by describing the social, political, technical, and economic environment that influenced his ideas. A description of his major ideas in economic thought will be presented. Next, the people and ideas that influenced his approach to economics will be addressed. Finally, the paper will conclude with an assessment of Ludwig von Mises’ contributions to economic thought.
Overview of the Life of Ludwig von Mises
Ludwig von Mises was born on September 29, 1881, in Lemberg, Austria. He attended a private elementary school and the public Akademische Gymnasium in Vienna from 1892 to 1900. In 1900, Mises entered the University of Vienna. On February 20, 1906, he received a Dr. Jur degree, a Doctor of both Canon and Roman Laws, from the University of Vienna. When Mises attended the University, it had no separate economics department; the only way to study economics was through law (Mises Institute).
From 1907 to 1914, Mises was employed as an advisor to the Austrian Chamber of Commerce. His first major thesis, the Theory of Money and Credit, was published in 1912. In 1913, Mises was awarded the position of Privatdozent (unsalaried lecturer) at the University of Vienna (Mises Institute). Mises’ academic pursuits were interrupted from 1914 to 1918 due to World War I.
After World War I, Mises returned to the University of Vienna and his position at the Austrian Chamber of Commerce. His next major thesis, Socialism, came in 1922. In 1934, Mises accepted a position as Professor of International Economic Relations at the Graduate Institute of International Studies in Geneva, Switzerland. Even though he had left Vienna to accept this position in Switzerland, Mises did work for the Austrian Chamber of Commerce on a part-time basis until Hitler’s annexation of Austria in March 1938 (Mises Institute).
On July 6, 1938, Ludwig von Mises married Margit Sereny in Geneva. Ludwig von Mises immigrated to the United States in 1940, arriving in New York on August 2.
In the United States, Mises taught as a Visiting Professor at the University of New York from 1945 to 1969. He also traveled to Central and South America, giving lectures from 1942 to 1959. In 1949, Mises published his crowning achievement, Human Action. This treatise summarized his thoughts on economics.
Throughout the rest of his life, Mises received several distinguished awards. On October 10, 1973, Ludwig von Mises passed away at St. Vincent Hospital in New York City. Factors Influencing Ludwig von Mises’ Ideas The major influence on Ludwig von Mises’ ideas was the Austrian school of economic thought.
The political and economic events that influenced Mises included two world wars and an extended worldwide depression. In the political turmoil after World War I, the main theoretician of the now socialist Austrian government was Marxist Otto Bauer. Mises had befriended Bauer during his school years, and the two often discussed economics and politics. Mises explained economics to him night after night, eventually convincing him to back away from Bolshevik-style policies (Mises Institute).
His actions kept Austria from falling into the hyperinflation that the Germans experienced. The prevailing political climate during this time was Socialism. Mises strongly opposed Socialism, and its prevalence inspired him to write his next great work, Socialism. The Great Depression brought about the rise of Keynesian Economics. Mainstream economics embraced Keynesian economics, and as a result, Mises’ theory of money and credit was pushed into the background as the cause for business cycles.
Political activity in Europe, specifically Hitler’s aggression, drove Mises from his homeland and then Europe just before World War II. Mises continued to lecture widely in the United States, Europe, and Latin America. He served as an economic advisor to the Foundation for Economic Education (FEE) from its founding in 1946 until his death. He was appointed a Visiting Professor at New York University Graduate School of Business Administration in 1945 and served there until 1969 (FEE).
In his lifetime, Mises witnessed the completion of the industrial revolution in the western world as well as the pervasion of government intervention into the free market through fiscal policy, based on Keynesian Economics, and through the institutionalization of central banking. Ludwig von Mises: Money and Credit, Socialism, and Human Action During his lifetime of teaching and writing, Mises wrote 25 books and more than 250 scholarly articles (Mises Institute). Percy Greaves gives a list of Mises’ more prominent books in Mises Made Easier. They include: Human Action (1st edition, Yale, 1949; 2nd revised edition, Yale, 1963; 3rd revised edition, Regnery, 1966), Bureaucracy (Yale, 1944; Arlington House, 1969), Omnipotent Government (Yale, 1944; Arlington House, 1969).
Socialism” (Yale, 1951; Jonathan Cape, 1969). “The Theory of Money and Credit” (Yale, 1953; Foundation for Economic Education, 1971). “The Anti-Capitalistic Mentality” (Van Nostrand, 1956; Libertarian Press, 1972). “Theory and History” (Yale, 1957; Arlington House, 1969). “Epistemological Problems of Economics” (Van Nostrand, 1960). “The Free and Prosperous Commonwealth” (Van Nostrand, 1962).
“Planning for Freedom” (2nd edition, Libertarian Press, 1962). “The Ultimate Foundation of Economic Science” (Van Nostrand, 1962). “The Historical Setting of the Austrian School of Economics” (Arlington House, 1969).
According to Allen Dalton, Professor of Economics at Boise State University, Mises’ major contributions to economic thought appear in his three books: “The Theory of Money and Credit”, “Socialism”, and “Human Action”. In his first major work, “The Theory of Money”, Mises argued that just as the price of any commodity is determined by supply and demand, so is the purchasing power of money, its “price” (Mises Institute). Money, according to Mises, is not a measurement of prices: it is a medium whose exchange ratio varies in the same way, although as a rule not with the same speed and to the same extent, in which the mutual exchange ratios of the vendible commodities and services vary (Koether).
Mises showed that prices can increase faster or slower than the money supply, the amount and speed of price increases depending on people’s desire to hold cash. He also argued that because prices increase only relative to one another, monetary inflation has the effect of redistributing wealth from savers and earners to banks and the government and its connected interest groups that receive the counterfeit money first (Mises Institute). Mises’ student, Murray Rothbard, summarized Mises’ ideas concerning the effects of fractional reserve banking and central banking in his article “The Case Against the Fed” by stating that counterfeiting (credit expansion) is inflationary, redistributive, distorts the economic system, and amounts to stealthy and insidious robbery and expropriation of all legitimate property owners in society (Rothbard).
The business cycles of booms and busts that monetary inflation causes are even more damaging to society. When the government inflates, it lowers the interest rate below the proper market level, which is dependent on saving. The artificially low interest rate misleads businesses into making uneconomic speculative investments and creates an inflationary boom. When the credit expansion slows or stops, investment errors are revealed, and bankruptcies and unemployment result. Central banks like the Federal Reserve will ultimately create the business cycle. Mises argued that because money originated as a market commodity, not by government edict or social contract, it should be returned to the market.
Banking should be treated as any other industry in a market economy and be subject to competition. The currency should be tied to gold, its originating commodity, through free convertibility (Rothbard). Mises’ book “Socialism” predicted the downfall of communism and warned against socialist institutions in government. He stated that socialism could not function in an industrial economy because there would be no market for the factors of production and therefore no price system to calculate profit and loss (Rothbard).
Therefore, planning in a planned economy is impossible due to the lack of economic calculation. The result of planned economies is no economy at all but rather a system of “groping in the dark” (Koether). Just as importantly, he showed that mixed economics cannot function efficiently either. Through taxes, regulation, and spending, the government distorts the price system and the allocation of resources to their most highly valued uses (Rothbard). Evidence of this pitfall is all around us and is manifested in the downfall of Russia and China’s moves toward capitalist economics.
“Human Action” is Ludwig von Mises’ masterwork. Murray Rothbard summarized the importance of “Human Action” in his essay “The Essential Ludwig von Mises” with the following statements; “Human Action is IT; it is economics whole, developed from sound praxeological axioms, based squarely on the analysis of acting man, the purposive individual as he acts in the real world. It is economics developed as a deductive discipline, spinning out of logical implications of the existence of human action. To the present writer, who had the privilege of reading the book on publication, it was an achievement that changed the course of his life and ideas.
For here was a system of economic thought that some of us had dreamed of and never thought could be attained: an economic science, whole and rational, an economics that should have been but never was. An economics provided by Human Action” (Rothbard). The 900-page treatise on economics covers topics such as accounting, advertising, banking, business cycles, bureaucracy, capital, capitalism, charity, competition, debt, devaluation, economics, education, entrepreneurship, equality, exchange rates, gold standard, government, history, human action, ideology, individualism, inflation, interest, intervention in markets by government, foreign and domestic investment, labor unions, laissez-faire, land reform, markets, mathematics, money, monopoly, morality, mortality, praxeology, prices, profits and loss, public opinion, reason, religion, science, sex, socialism, society, speculation, statistics, tariffs, taxes, theory, time, underdeveloped nations, unemployment, value, wages, and war (Koether). The most important ideas derived from “Human Action” change the very method used to evaluate economics.
Mises argues that economics cannot be viewed in specialized terms, but rather must be viewed as a whole system. This method is referred to as praxeology. Mises also argued against the rising use of mathematics in economics. He states that “the fundamental deficiency implied in every quantitative approach to economic problems consists in the neglect of the fact that there are no constant relations between what are called economic dimensions. There is neither constancy nor continuity in the valuations and in the formation of exchange ratios between various commodities” (Koether). In fact, Mises referred to mathematics in economics as “worthless mental gymnastics” because they cannot and do not apply to real economic problems. It does not help to think of prices of production as the intersection of two curves, but it does help to realize that the price is derived through human action (Koether). Many other ideas are put forth in Human Action, but these two are the most prevalent of those that have not already been discussed.
The people and ideas that influenced Ludwig von Mises. The basis for all of Mises’ writings came from the founder of the Austrian School of economics, Carl Menger. Menger’s complete theory of marginal utility and its subjective reasoning that relied on theory. Mises stated that Menger’s views “made an economist” out of him because of its methodology, which stated that economics is the science of individual choice (Mises Institute). Eugen von Boehm-Bawerk, a student of Menger, taught a young Mises from 1904 to 1914 at the University of Vienna. His views on intervention of the government and how it reacted to economic law greatly influenced Mises’ thesis on socialism. Boehm-Bawerk’s theory on interest and capital and its time preference basis formed the logic needed to argue the viability of socialism (Spiegel).
Mises’ thoughts on the business cycle were derived from Ricardian models, Boehm-Bawerk’s theory on capital and the factors of production, and Knut Wicksell’s ideas regarding production and the effects the difference between real and nominal interest rates has on it. Max Weber influenced Mises concerning economics as a social science, but Menger was probably the major influence here as well.
Assessment of Ludwig von Mises’ Contributions to Economics. The completeness of Human Action is the most impressive contribution that Ludwig von Mises gave to economics. The marriage of micro and macroeconomics was accomplished through Mises’ theory on money and credit. This was the first time that this had been accomplished. His argument presented in Socialism has been historically vindicated and supported by empirical facts.
Mises’ undying views on laissez-faire has been his sticking point with mainstream economics (Spiegel). The failure of the gold standard and the prevailing existence of central banks are testaments to this. The biggest triumph of Mises is the methodology used to study economics. He solidified Menger’s theoretical approach to economic problems.
Bibliography:
- Foundation for Economic Education “Ludwig von Mises” [Online] Available Internet www. fee. org/about/misesbio. html Greaves, Percy L.
- “Mises Made Easier,” 1974, Free Market Press Koether, George “The Wisdom of Ludwig von Mises” 1981, The Freeman Ludwig von Mises
- Institute “Who is Ludwig von Mises” [Online] Available Internet www.mises.org/mises.asp Ludwig von Mises Institute “What is Austrian
- Economics” [Online] Available Internet www.mises.org/austian.asp Ludwig von Mises Institute “Why Austrian Economics Matters” [Online]
- Available Internet www.mises.org/why_ae.asp Ludwig von Mises Institute “An American Classical Liberalism” [Online] Available Internet www.mises.org/class
