Liberal Thinkers

Ludwig von Mises: "Economics is the main and proper study of every citizen"

Ludwig van Mises

All about          Ludwig von Mises

"Economics deals with society's fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen." (Ludwig von Mises)

When Ludwig Heinrich Edler von Mises died in New York City in 1973 at the age of 92, there was no front-page obituary in the New York Times. But believers in liberty knew that a giant had fallen.

Mises was born in 1881 in the Austro-Hungarian city of Lemberg, the son of a successful engineer. At the age of 19, he entered the University of Vienna, and received his doctorate at 27.

In the intellectually stimulating atmosphere of the University of Vienna, the young Mises studied in the tradition of the founder of the Austrian School, Carl Menger. Mises also attended the seminar of the other giant of the School, Eugen von Böhm-Bawerk. Along with teaching, Böhm-Bawerk was finance minister of Austria-Hungary, and he put the School's ideas into practice by balancing the budget and establishing a gold standard.

After receiving his PhD, Mises set to work on The Theory of Money and Credit (1912), his first major work. The earlier Austrians had followed the classical school in separating money from the rest of the economy, analyzing it in separate theoretical terms. 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."

The classical economists, especially David Ricardo, had seen that an increase in the supply of money causes prices to rise. But 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 brings about redistribution of wealth, from savers and earners to banks and government and its connected interest groups.

Even more damaging are the business cycles of booms and busts that monetary inflation causes. In broad outline, when government inflates, it lowers the interest rate below the proper market level, which depends on saving. The artificially low interest rate misleads businesses into making uneconomic 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 inevitably create the business cycle. What is to be done to stop the 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 ought to be tied to gold, its originating commodity, through free convertibility.

The publication of The Theory of Money and Credit gained the 31-year old Mises a Europe-wide reputation. But World War I brought a new intellectual atmosphere much less conducive to a man like Mises. The war ended the gold standard, strengthened central baking, and put an end to a century of free markets.

Seen as holding unfashionable and outdated views, he was never to receive the academic rewards that were his due. For example, Mises's position as private lecturer at the University of Vienna was prestigious but unsalaried, so his income from 1909 to 1934 came from his position as economic advisor, and then chief economic advisor, to the Austrian Chamber of Commerce, similar to the U.S. Department of Commerce.

Among his duties, he wrote economic analyses of proposed government actions, and he managed almost single-handedly to keep Austria from following Germany into hyperinflation during the early 1920s. He also established the Austrian Institute for Business Cycle Research and hired F.A. Hayek, who later won a Nobel prize for his work on Mises's trade cycle theory, as the Institute's first director. Mises's famous private seminar in these years attracted the best minds in Europe, and produced many outstanding economists.

All the while, he was researching and writing. His next major work appeared in 1922. In Socialism, now hailed as the classic that predicted the breakdown of the communist experiment, he argued that socialism could not function in an industrial economy because there would be no market for capital goods and therefore no price system to calculate profit and loss. The result, he said, would be chaos and stagnation. Just as important, he showed that mixed economics cannot function efficiently either. Through taxes, regulation, and spending, government distorts the price system and the allocation of resources to their most highly valued uses.

Socialism also argued against the other parts of the socialist agenda, such as the abolition of marriage and the family, and social egalitarianism. In opposition to the socialists, he presented a systematic and persuasive defense of the natural society's mediating structures, which stand between the individual and the state. Social cooperation, he said, rests on human inequality and institutional hierarchies.

Not content to work in the areas of economics, history, and sociology, Mises also set out to reconstruct methodology, the foundation of economics. Economics was increasingly coming under the sway of institutionalism, which denies economics altogether, and positivism, which sees no distinction between the social and physical sciences. Mises's answer was "praxeology," the science of human action, which sees each individual economic actor as having his own purposes and goals. His major works here were Epistemological Problems of Economics and the later and Ultimate Foundations of Economic Science.

Mises regarded positivism as especially dangerous. Not only was it scientifically invalid, but by treating people as inanimate objects to be manipulated at will, it gave would-be social engineers the perfect intellectual framework and justification for their activities.

Despite the early opposition, during the 1920s Mises saw a quickening of interest in his ideas in Europe, and he was one of the few to predict the Great Depression. In the early 1930s, many important economists became Misesians, but after John Maynard Keynes's General Theory swept the academic world, many of his followers defected to Keynesianism.

Undaunted and in exile in Geneva from the National Socialists, Mises wrote his monumental Nationalökonomie, published in 1940 but forgotten in the turmoil of World War II. This work was later expanded and translated into English as the 900-page Human Action (1949), his crowning achievement.

In Geneva came another milestone in Mises's life: he married the beautiful Margit Sereny, who served as chairman of the Mises Institute until her death in 1993, after warning her that while he would write much about money, he would never have much of it. In 1940 they emigrated to the United States.

Once confronted with the extraordinary growth of the federal government in the United States, in 1944 he issued a warning against mixed economy statism in his powerful book Bureaucracy. Mises applied principles from his previous books to show that government regulatory agencies, lacking a test of profit and loss, grow larger and more intrusive even while they confer no social or economic benefit. It was the first systematic economic analysis of the subject, and later spawned a new field in economics.

At a time when every communist and social democratic exile from Europe was given a high academic post in the United States, Mises was refused a job. But with the help of Henry Hazlitt and Lawrence Fertig, Mises secured a visiting professorship at New York University's Graduate School of Business. His salary was paid by business people and foundations, and he was never to be a regular member of the faculty. The dean, John Sawhill, even lobbied good students not to take Mises's "right-wing, reactionary" classes. In later years, Sawhill helped mangle the market as head energy bureaucrat in Washington, D.C.

But Mises was neither bitter nor resentful. He simply carried on the fight for Austrian economics and freedom. When he retired in 1969, at 87, he was the oldest active professor in the United States. He could look back on a lifetime of teaching and writing -- 25 books and more than 250 scholarly articles -- and of achievements for liberty. His students Wilhelm Röpke and Ludwig Erhard had turned Germany towards freedom and kindled the "economic miracle." In Italy, Mises's friend and follower Luigi Einaudi had, as president, led the successful fight against a communist takeover. In France, his student Jacques Rueff -- as advisor to General DeGaulle -- led the fight for sound money and free markets. In the United States, Mises inspired Murray N. Rothbard, the Mises Institute's first head of academic affairs, and an entire new generation of young academics.

Mises did not live to see the renewed interest in his ideas, which began with Hayek's Nobel Prize and flourished with the founding of the Mises Institute. But Margit von Mises said, "The Ludwig von Mises Institute is, for me, a dream come true." His works are read by more students than any time since his death, and more economists, historians, and philosophers are following his example and ideals. There could be no greater monument to the life and though of an eminent and noble man.