A version of this article was previously published on the Learn Liberty blog.
September 29 is a day to celebrate the famous Austrian Economist, Ludwig von Mises, who was born on this day in 1881. During the middle decades of the twentieth century, Mises made a number of profoundly important contributions that challenged many of the fashionable and influential collectivist and socialist ideas of his time, and which still echo in the twenty-first century.
The Life and Career of Ludwig von Mises
Born in Lemberg, Austria-Hungary (now Lviv, Ukraine), on September 29, 1881, Ludwig von Mises died on October 10, 1973, at the age of 92. Educated at the University of Vienna, for many years he made his living as a senior economic policy analyst at the Vienna Chamber of Commerce in his native Austria. He taught at the Graduate Institute of International Studies in Geneva, Switzerland from 1934 to 1940, until permanently moving to the United States, where he taught a graduate seminar beginning in 1945 at New York University until his retirement in 1969 at the age of 89.
The author of over 20 books and hundreds of scholarly and popular articles, Mises influenced several generations of economists, sociologists, historians, and other social philosophers over his professional career, and his books and articles continue to be a major intellectual force, still regularly read by thousands every year.
His most famous work, no doubt, is Human Action: A Treatise on Economics (1949, revised ed. 1966), in which he spans the entire fields of economics, history, and social philosophy through a tightly woven interdisciplinary analysis that offers a comprehensive analysis of man, society, and the economic and political order. Nobel Prize winner, Friedrich A. Hayek, once said that in the pages of this work Mises is seen to be one of those truly great enlightenment thinkers more in the tradition of the earlier Age of Reason than simply the modern technical specialist.
Austrian Business Cycle Theory
Mises is recognized as the formulator of what has become known as the Austrian theory of money and the business cycle, especially in his work The Theory of Money and Credit (1912; revised ed., 1953). The gist of Mises’s argument is that the booms and busts of the business cycle are not inherent in the workings of the market economy. Such macroeconomic fluctuations in employment, output, and prices have their origin in central bank mismanagement of the money supply and resulting manipulations of interest rates that throw savings and investment out of balance, bringing about investment and related spending patterns that are often found to be unsustainable in the long run.
Contrary to Keynesian economics, Mises and other Austrian economists have argued that the only lasting path to a sustainable return to full employment and healthy economic growth are open, competitive markets that permit the necessary adjustments in prices, wages, and sectoral production shifts across the economy with the least interference from “activist” monetary and fiscal policies by governments.
Mises’s long-run policy prescriptions to reduce the likelihood and severity of business cycles are to limit government and central bank discretion over the money supply by linking the quantity of money and credit in the banking system to a gold standard, or to fully eliminate central bank influences over money and interest rates through an institutional shift to a private, competitive free banking system.
Mises’s Critique of Socialism
Perhaps Ludwig von Mises’ most famous contribution in the twentieth century was, no doubt, his critique of socialist central planning, especially in his book, Socialism: An Economic and Sociological Analysis (1922, revised ed. 1951). In the nineteenth and twentieth centuries, socialists condemned the capitalist system and called for the abolition of private property in the means of production, with government ownership and centralized planning of all economic activity in place of competitive free enterprise.
Mises argued that rationality and direction is given to all economic activity in the market economy through the institutions of private property, competition, and the price system. Private property and market competition not only generate the self-interested motives for people to use their labor, resources, and capital in ways that benefit others as well as themselves, but it also enables the formation of market-based prices through the interaction of buyers and sellers, both in the market for final, consumer goods and in the markets for the factors of production.
Market-generated prices enable entrepreneurs to undertake economic calculations that facilitate rational and efficient uses of income and resources in society. Prices for consumer goods tell entrepreneurs what goods consumers may want and the relative values they place on them. The prices for the factors of production—land, labor, resources, capital equipment—inform competing entrepreneurs about the alternative demands and opportunity costs of producing desired goods with differing combinations of scarce means of production. On their basis, entrepreneurs are able to calculate profit and loss, and the most cost-efficient employment of inputs to produce outputs.
But with the abolition of private property in the means of production, elimination of private enterprise, and a resulting lack of a market-generated pricing system the socialist central planner—no matter how wise and well-intentioned—would be flying blind with no way to know what consumers really want or how best to produce goods and services in the least costly value terms. Hence, full and comprehensive socialist central planning would lead to economic disorder, supply and demand imbalances and society-wide inefficiency. The experiences in virtually all socialist command economies of the last one hundred years have confirmed Mises’s critique of the “impossibility” of a socialist system superior to competitive capitalism.
The Dynamic Market Process
Matching Mises’s critique of socialist planning is his analysis of the modern interventionist or regulated economy. Partial government regulations and controls of certain prices or production methods and activities are not as deadly as comprehensive central planning. But nonetheless, they are similar to “sand in the machine” that prevents the competitive market system from operating as dynamically and adaptively to the continuous and unexpected changes that constantly arise in a diverse and interdependent global marketplace such as ours.
This latter point highlights an element that runs through most of Mises’s writings on economics, and that is his emphasis on seeing and understanding the market economy as a dynamic process of never-ending change containing within it the potential and possibilities for human creativity and entrepreneurial innovation that when left free and open offers a wide arena for human improvement and rising standards of living for all over the long run. Indeed, one sees the principles behind and the potentials for human liberty and prosperity explained most clearly in his highly readable work, Liberalism: the Classical Tradition (1927), which is as refreshing and relevant a read today as when it was first published.
Suggested additional readings:
- Richard Ebeling, Political Economy, Public Policy and Monetary Economics: Ludwig von Mises and the Austrian Tradition (New York: Routledge, 2010)
- Austrian Economics and Public Policy: Restoring Freedom and Prosperity (Fairfax, VA: Future of Freedom Foundation, 2016)
- Jörg Guido Hülsmann, Mises: The Last Knight of Liberalism (Auburn, AL: Ludwig von Mises Institute, 2007)
- Israel M. Kirzner, Ludwig von Mises (Wilmington, DE: ISI Books, 2001)
- Ludwig von Mises, The Theory of Money and Credit (Indianapolis, IN: Liberty Fund, [1912, revised ed. 1952] 1981)
- Socialism: An Economic and Sociological Analysis (Indianapolis, IN: Liberty Fund, [1922, revised ed. 1951] 1981)
- Liberalism: The Classical Tradition (Indianapolis, IN: Liberty Fund, [1927] 2005)
- Critique of Interventionism (Indianapolis, IN: Liberty Fund, [1929] 2013)
- Omnipotent Government (Indianapolis, IN: Liberty Fund, [1944] 2011)
- Bureaucracy (Indianapolis, IN: Liberty Fund, [1944] 2007)
- Human Action: A Treatise on Economics (Indianapolis, IN: Liberty Fund, [1949, revised ed., 1966] 2005)
- Planning for Freedom: Let the Market System Work (Indianapolis, IN: Liberty Fund, [1952] 2008)
- Theory and History: An Interpretation of Social and Economic Evolution (Indianapolis, IN: Liberty Fund, 2007)
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Edited by Russell Coates
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