Economic historians of the 21st Century will undoubtedly be puzzled by the reception accorded to economic theorists of the 20th Century. They will be particularly puzzled by what occurred in the span of years between World War I and 1970.
On the one hand the record revealed that academic honors, and in many cases substantial monetary rewards were showered on academicians whose contributions were miniscule. Their works were based on abstruse “model-building” to the delight of a coterie of fashionable economists in leading universities. They employed intricate mathematical formulae which gave the false impression of scientific accuracy – a presumptive accuracy which disappeared on analysis of the precise meaning of the mathematical symbols employed as the basis of their equations.
Moreover, great honors were showered on economists whose major accomplishments had been to promote a major inflation which, by the end of the 20th Century, was acknowledged to be the source of tremendous social unrest and economic crises. These were the fashionable economists who were sponsored by wealthy Foundations and indeed by most of the intellectuals of Academe.
But when economic historians of the future came to evaluate precisely who had made the most significant contributions to economic theory – to those broad and fundamental principles which explain human actions in the practical world people must live in – their puzzlement increased. For they could find only a meager record of academic honors or monetary prizes by leading ivy-league universities accorded to the one economist who had discovered and formulated some of the most brilliant economic theories of that century. His name was Ludwig von Mises.
Of course Mises had a substantial following among so-called conservatives of that era (most of whom were old-fashioned liberals), who practically venerated him for his great works. But the fashionable world of the intellectuals rather paid homage to some of the most inconsequential statisticians and economists of that era.
After having researched the detailed history of economic thought in the 20th Century, historians of the 21st Century paid tribute to Mises as one of the most powerful and perceptive minds of that earlier era. They stressed the depth of his seminal thinking, and they dwelt upon his significant contributions to economic theory.
The above account may sound like a fanciful look into the future, but it could – it should – happen because the logic of Mises’ analysis is being confirmed increasingly every decade and every year. The majestic sweep of his ideas, the genius of his insights, and the rigorous formulation of his theories all combine to stamp his work as of the highest order.
When Mises advanced the concept of “human action “(he terms this ‘praxeology’) as the basis of economics, he did as much to create a whole new world as did the explorers of the 15th and 16th centuries who discovered new continents. “Choosing determines all human decisions”, said Mises. “In making his choice, man chooses not only between various material things and services, all human values are offered for option.” His monumental work, Human Action, develops this thought in a profound and wide-ranging discussion which reveals the knowledge of a philosopher, sociologist, historian and economist of the first order.
As everyone who has studied Mises knows, he makes no compromise whatever in defending the principles of the free market. Interventionism of any kind and the development of the welfare state are scourged by his searing prose. Naturally welfare statists and interventionists are not sympathetic to Mises. This accounts for the coolness of many Establishment economists towards this great figure. But the truth of his views is being demonstrated every day.
Crisis in the Equalitarian State
As I write these words in the early spring of 1971, there appeared in the press remarkable accounts of the shattering crisis in the leading equalitarian state of the world – the Nirvana of welfare states – Sweden. The nation was torn by strikes of its leading intellectuals and white-collar workers, including teachers and college professors, railway employees, civil servants, white- collar municipal workers and a host of others. Seven hundred thousand students in secondary schools were left without teachers. Tempers flared and anger was displayed in arguments between blue- collar and white-collar workers.
“Equality issue has shattered – perhaps forever – Sweden’s world state social and economic climate”, commented a leading news magazine.
The head of the 1. 6 million member Swedish trade union federation said, “There has been an element of class struggle in this dispute. The people on strike feel that their position has been degraded.”
Mirabile dictu, Gunnar Myrdal, who was the architect of interventionism and did much to promote the welfare state in Sweden, as in other parts of the world, had this to say: “The organized welfare state has gone mad ... It (the strike) has become a class struggle, with judges, academics and civil servants seeing the lower classes creep up on them ... It’s an impossible situation.”
There is a measure of poetic justice in the anguish of Gunnar Myrdal and the other academics in Sweden who promoted the equalitarian society, and are now hoist by their own petard.
Mises stated the insoluble dilemma of the welfare state very succinctly. Under the chapter heading “Inequality and Income” in Human Action, he says, “No system of the social division of labor can do without a method that makes individuals responsible for their contributions to the joint productive effort. If this responsibility is not brought about by the price structure of the market and the inequality of wealth and income it begets, it must be enforced by the methods of direct compulsion as practiced by the police.”
Since Sweden, with the approval and urging of its intellectuals, adopted strong restrictions on the inequality of wealth and income, it must now suffer from the “direct compulsion” of the state as it seeks to establish equalitarianism.
Mises’ Devastating Analysis of Socialism
The establishment of an equalitarian super-welfare state is a giant step toward socialism. On this subject Mises is the master. His brilliant analysis in his now famous book, Socialism, has had tremendous impact all over the world. In fact, his analysis has been so widely accepted that his ideas are frequently purloined by writers who fail to realize their origin.
Quite often there appears in some article, or in the daily press a statement by someone who suddenly discovers that the economy of totalitarian Soviets and their satellites are in trouble because of the breakdown of their productive process. Great surpluses of unwanted goods appear, and there are shortages of many essential commodities. Some writer then points out that the Soviet commissars of production have no way to decide what to produce and how much of each category. The socialist economy cannot successfully engage in economic calculation, it is stated. Rarely is it pointed out that Mises, in his great book, Socialism, published in 1922, was the first to discover this fact and to formulate his argument with irrefutable logic.
Communist theoreticians, faced with the appalling inefficiencies of production, of shortages, of public complaints, etc. seek to meet their problems by adopting some of the slogans of the capitalist system. They institute “incentive systems” in factories, rewarding those which produced more efficiently, etc. Also, they assert that some major factories are not producing according to government- indicated quotas but rather are responding to “consumer demand.” Practically this is nonsense.
Long before any of these attempts to leech off the ideas of the private enterprise system Mises, in one brief section of his book, Socialism, destroyed their propaganda with these words: “Where there is no market there is no price system, and where there is no price system there can be no economic calculation.”
Another attempt at employing free-market data as a guide to totalitarian managers of industry was reported in newspapers several years ago. It seems that the bureaucracy of the Soviet Union, in order to get some intelligent idea of the relationship of various consumer products to each other actually imported from the United States about one thousand Sears Roebuck catalogues. The prices and product relationships of Sears Roebuck thus were used as guides to educate and inform those who were managing the closed system. Apologists for the socialist system did not see the humor and bathos of such a policy.
Socialists are always trying to achieve “stability, “ but the modern world is an ever-changing one. Here again Mises makes a most interesting statement. He says, in Socialism: “To use a popular but not altogether satisfactory terminology, we can say that the problem of economic calculation is one of economic dynamics: it is no problem of economic statics.”
I have in a previous tribute to Mises, printed in the Mont Pelerin Quarterly of October 1961, related an incident which illustrates the tremendous influence of Mises. It relates to an important Washington personality who was once a communist disciple and who later became a knowledgeable defender of private capitalism after renouncing his socialist past. One day I attended a dinner party at the home of this gentleman, which included Mises. Towards the end of the evening our host described how Mises had changed the course of his life. It seems that, while he was under communist influence, he had by chance come upon a copy of Mises’ Socialsim in a book store and sat up all night to read it. He related how he was completely shaken by this experience, and from that point on he reevaluated his socialist concepts, and finally repudiated them in toto. He described in glowing terms the impact of Mises’ Socialism upon his mature mind, and he contributed the complete change of his intellectual life to the power and logic of Mises’ concepts.
Mises’ Dynamic Marginal Analysis
In passing I might mention another instance of Mises’ brilliant insight in his contribution to the purely theoretical subject of marginal utility. It illustrates very well the thrust of Mises’ ideas in the direction of a changing, dynamic world.
The Mises view is that the consumer’s evaluation of marginal utility changes as his mind changes - every week, every day. His preferences of yesterday are not necessarily his. preferences of today. The consumer’s evaluation of any item changes not only with the introduction of new products, but also with the consumer’s idea of the relative merit of these products and services - whether it be that of an automobile, a suit of clothes, or the private education for his child. Thus not only are products and services always in a state of flux, but the consumer’s own conditions and ideas are in a state of flux.
Obviously this theory fits a modern, changing, dynamic world. It is interesting to contrast Mises’ view with that of a modern economist who has received much publicity and many honors, Paul Samuelson. Samuelson’s view is that the concept of marginal utility is useless because it does not provide any basis for making hard and fast empirical judgments. So Samuelson developed a theory based on the actual choice which consumers have made, and he calls this “revealed preference.” This is a typical approach of one who is statistically-minded. “Revealed preference” is history, and history becomes out-moded very soon. Revealed preference of yesterday may be no guide to the consumer’s preference today, and certainly not tomorrow.
In a dynamic, changing world, it is the Mises formulation which is the only true guide to a solid economic theory.
“Connexity” of Mises’ World”
I would like to select just one more instance – out of literally dozens that could be quoted – of the power of Mises’ analysis and its practical application in the world today. As every student of Mises knows, he greatly stresses the interrelationship of all economic phenomena. At one point he calls it “the inescapable interdependence of market phenomena.” At another point, in Human Action, he has a section on “Connexity of Prices.” Mises regarded the market as a vast mosaic or tapestry of interwoven colors and forms. To arbitrarily change any one part is to affect the whole. Thus the interventionists who think they have developed a foolproof scheme for establishing a “more just” condition invariably find that their intervention has caused serious disturbances in other sections of the market. Unfortunately, the interventionist is never cured of his folly, but generally insists that what is needed is more power for him to cure the new disturbance.
“Connexity” of Monetary Policy and Labor Laws
We can see the workings of Mises’ principle of “connexity” in one very vital area – one which affects prices and production of practically every product and service on the market. I refer to the intervention of Labor Laws which are intended to protect workers, but which have the practical effect of robbing them of some of their income and creating a condition of general inflation in the nation. The various Labor Laws of this country – the original Wagner Act, the Norris-LaGuardia Act, the Taft-Hartley Law, etc. – all protect the monopoly power of labor unions. Thus unions are able to demand and get, through the weapon of the strike, wage rates which are clearly uneconomic and far in excess of the true market. This has long been apparent and conceded by practically all observers.
But what has not been apparent to all but a handful of conservative economists is the fact that this power of labor unions is directly related to the uncontrollable inflation which is undermining this country. This is the “connexity” which is now being realized by nearly everyone.
It is indeed surprising that despite the obvious effect of labor unions and inflation, no popular figure, and very few economists, have offered the correct prescription – change of the labor laws. It seems strange that economists who admit the problem invariably prescribe “an incomes policy” - which is some form of wage and price control. Since there is practically no disagreement about the correct diagnosis of our galloping economic malady, it is remarkable that the economic prescriptions are so far afield.
These facts are now apparent: because of their monoply power, which was granted to them by the U. S. Congress and confirmed by the courts, labor unions are able to demand and get wage rates far in excess of productivity. Employers naturally attempt to recover the excess wage demands by raising prices. However, there comes a time when rising wages and rising prices decrease the consumer’s ability to pay. The result is recession and unemployment.
At that point tremendous pressure is brought to bear on the government to prevent recession. Every administration seeks to avoid at all costs the consequences of an economic debacle. Therefore it is the tendency of every administration and of the Federal Reserve Board to validate the spiralling wage-price level by printing enough money and extending enough bank credit to increase general demand and thus increase employment and production.
Precisely such a syndrome is now becoming obvious as write these words. An annual increase of 6 percent in the money supply is not sufficient to create full employment, say administration officials. Therefore they are urging the Federal Reserve to increase the money supply to 8 or 9 percent. In effect they are demanding a tremendous inflation.
Thus it becomes clear that the power to regulate the quality of money and credit is no longer solely in the hands of the Federal Reserve Board, which has been given that authority by Congress. As a practical matter, at crucial times that power resides with the labor unions and their leaders. If they demand and get uneconomic wage rates far in excess of the market they will inevitably cause recession and consequent action by the Federal Reserve to inflate the money supply.
Despite this very obvious cause of the current inflation, it is strange indeed that there is so little demand for revision of our labor laws. Quite the contrary. It would seem that public figures as well as most economists carefully avoid any attack on the underlying cause– the monoply power of labor unions– and instead offer the old nostrum, wage and price controls in some form or other.
There is no better example of “connexity” inherent in the market system than that of wage rates and monetary policy. Mises has for many years expounded this viewpoint.
Many modern economists and politicians think they know better than the market what the relationships should be. A familiarity with Mises would convince them that such intervention is not the road to well being and prosperity but the road to crisis and national unrest.
Economic historians of the 21st Century may well be impressed by this lesson, which will be clearly revealed in the history of the previous era. In their evaluation Mises undoubtedly will be considered a colossel figure in the world of economic theory.
Perhaps they will come upon these pregnant sentences in an editorial in the Wall Street Journal of June 17, 1963, which commented upon presentation to Mises of an honorary Doctorate of Law by New York University.
The editorial writer said that Mises had impressed upon the world the lesson that “the free market and the free society are indissoluble.” Then he concluded, “In this sense von Mises is the champion not merely of an economic philosophy but of the potential of man. “
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This essay was first published in Toward Liberty (Menlo Park, CA: Institute of Humane Studies, Inc., 1971), pp. Pages: 123 -131
