A new and exciting blog “Causes of the Crisis” run by the Critical Review Foundation has been started a few days ago. All those interested in a serious and comprehensive analysis of the roots of the present crisis will find important insights and engaging discussions there. Blog contributers include Nobel Laureate Vernon L. Smith, Critical Review editor Jeffrey Friedman, David Colander, our Mateusz Machaj and other important scholars.

The latest entry, Three Myths about the Crisis: Bonuses, Irrationality, and Capitalism by Jeffrey Friedman is particularly noteworthy.

The concepts of socialism and capitalism have definite meanings. Socialism is defined as state ownership of the means of production. The definition has been accepted by the most consistent practitioners of collectivist creed in failed socialist countries. But certain left-libertarian theoreticians (“mutualist” Kevin Carson is prominent among them) deny that state ownership captures the essence of socialism or that it has anything to do with the state or central planning of the Soviet style. To them socialism has a cosmopolitan and innocuous meaning which is really just about voluntary cooperation. Proudhon said so, Benjamin Tucker said so, even Friedrich Engels did say so. Did they not all preach and hoped so sincerely for the withering away of the state? Were they not among the most uncompromising foes of the oppressive state – that great anathema of voluntary association and classless society?

What is going on here? In a sense, left-libertarians have a legitimate point. Upon closer examination, the definition by state ownership is indeed definition by non-essentials. It is too narrow because its focus is merely on the final stage, the practical consummation of the collectivist creed. Initially, state ownership was conceived as a mere mechanism to abolish the hated “wage system”, the “undemocratic” and “oppressive” concentration of economic power in the hands of a few industrialists, bankers, landowners. Socialism has always defined itself by the hatred of the “wage system”, not by any meaningless bromides about “true” freedom and “true” voluntary cooperation. This is the real meaning of socialism. And this is what really unites Proudhon, Marx, Engels, Lenin, Stalin, Trotsky, Mao, Carson, and probably the majority of so-called left-libertarians. Make no mistake about it, Carson and other left-libertarians are open about their desire to abolish the “wage system” and replace it somehow with something but which would be genuinely voluntary and really and finally just (of course, in the sense of labor being paid the “full product” – Carson).

The problem is that like the old crop of collectivists, the recent one does not understand that the hated “wage system” is precisely the essence and beauty of capitalism and an indispensable element of civilization and human progress. Economically, the “wage system” is an indispensable precondition for and thus a necessary manifestation of a modern division of labor society, for it is responsible for every increase in productivity of labor and standard living of all members of society, especially the wage earners.

Prior to industrial revolution, division of labor did not go very far beyond a small number of simple tasks. Self-sufficient farming was the predominant mode of economic organisation. In such economies virtually all goods and services, the quantity and quality of which were barely sufficient to provide for mere physical survival, were produced either by families or within narrow confines of a tribe or village. The wealth both in form of directly consumable goods and primitive means of production was typically jointly owned by family or tribe members and exists directly and exclusively for their own benefit; in other words, producer and consumer are almost always one and the same person.

In contrast, as Mises has shown, and which was one of his greatest contributions to economic science, because of the very nature of economic organisation in a market economy, the physical beneficiaries of the means of production owned by capitalists are those who buy consumers’ goods produced with the help of these means of production. As a matter of fact, and contrary to Marxists and other collectivists, the greatest beneficiary of capitalistic ownership and mode of production is the average wage earner in his capacity as buyer of consumers’ goods. Indeed, the actual motivation of producers, who are the owners of the means of production, is to produce commodities not for the satisfaction of their own needs but of the needs of consumers; in short, in a market economy producers and consumers are almost always different persons.

In a self-sufficient economy the extent to which one owns means of production determine directly the amount of consumption one will have. The life and well-being of a family possessing a large fertile plot of land, cultivation tools, large herds of cows and sheep etc. is directly dependent on how much of this wealth it owns. In order to benefit from the wheat, the milk or meat, one, or one’s family or tribe, has to own things that help to produce wheat, milk or meat.

Quite different is the situation in a market economy ruled by the “wage system.” Here in order to benefit from products made with the help of the means of production, one does not have to own these means of production themselves or to own stocks or bonds of the companies employing these capital goods. In order to benefit, say, from Toyota automobiles or Sony TV sets or any other product available for purchase, one does not need to be an owner of stocks or bonds of Toyota Corporation or Sony Corporation or any other company; all one needs is merely to be able to buy these goods. The buyers of these products are overwhelmingly wage and salary earners, not businessmen and capitalists. Capitalism is distinguished by the mass market for the masses of wage earners.

Wage and salary earners benefit not only in their capacity as buyers of products while the means or production used in their production are owned by capitalists, they also benefit when it comes to the monetary demand for labor which is the source of almost all wage payments in the economic system. The necessity to employ labor and to pay wages is dictated by both the unlimited need for human labor as the ultimate source of value and the competitive pressures in the market process. Continuous survival under conditions of economic competition positively requires that businessmen and capitalists plow back into the production process the far greater part of their sales revenues in order to maintain, and if economically feasible under given circumstances, to expand the scale of production. Since labor and capital goods represent the actual, physical means with which the quantity and quality improvements of products can be expanded, each and every capitalist is forced to restrict his consumption down to an absolute minimum and reinvest the far greater portion of his earnings into the maintenance and, if possible, into the enlargement of his business operations.

It is precisely in this way that with the rise of capitalism the demand for labor and capital goods has come into existence and has remained in existence and can be practiced on the presently existing large scale only under institutional arrangements of a market economy with its all pervading elements of economic competition, the profit motive and economic inequality.

As a matter of fact, by far the greatest fraction of aggregate wage payments in a modern market economy originate in business enterprises and are paid out of that portion of sales revenues which are not spent for personal consumption of businessmen and capitalists but saved and productively expended. The average wage earner in developed countries, as far as his economic status is concerned represents the overwhelming majority of population, benefits indirectly from the wealth invested into the means of production. He benefits from this particular category of wealth to a far greater degree as long it remains invested than if it were simply sold and the selling proceeds equally distributed among his fellow workers, as hoped by such “mutualist” theoreticians as Kevin Carson.

It would do no good to the economic condition of the average wage earner if accumulated savings invested in factory buildings, machinery, equipment, inventories and other capital goods were expropriated and distributed to him and his fellow workers. Rather, it would be tantamount to the case of a farmer consuming all his seeds in the present only to discover that he has nothing to plant and consequently to eat in the future.

To conclude. Semantics aside, the ultimate problem that Carson and other left-libertarians have is the hated „wage system.” In this respect, they are no different from Proudhon, Marx and all other collectivists. They have the same mindset when it comes to the analysis of capital, the capitalist “wages system”, the source of profits, the inequalities in wealth and income. Anyone who advances such views and on that basis opposes the “wage system” is a socialist. Anyone who understands the essence of the “wage system” as one of civilization’s most essential and benevolent institutions and upholds it on the basis of that understanding is a defender of capitalism.

The kings and queens of graduate economics classrooms — real business cycle sophists, have been surprisingly mute on causes and consequences of the Second Great Depression. The silence is probably best explained by the feelings of shame for the utter failure of their models and predictions. But, alas, no need to wait any longer! Edward Prescott, Nobel Laureate of 2004, has finally chosen to creep out of the woods and enlighten us here.

If one just skims through the slides, one might notice some good points about 100 percent bank reserves, lower tax rates, the evil of stimulus packages etc. and, perhaps, conclude that Prescott makes sense after all and that we should be glad to have such a distinguished economist weigh in on the battle. Superficially, perhaps. But if looked at the thing in its entirety, one will see why the entire analysis is rife with enormous errors and contradictions — reflecting the utter intellectual bankruptcy of neoclassical theorizing. The fact that he’s more or less in favor of free enterprise is totally irrelevant in the face of such lapses in analysis. In fact, it is potentially disastrous for the cause of economic freedom.

1. Prescott liberates the Fed of any responsibility and says it’s been actually doing what it should. (slide 52). “Only Fed should issue money” and maintain price stability — “a good thing.” (slide 44) This fallacious doctrine of price stability is actually an integral part of neoclassical economics, to which Prescott, to his credit, is thoroughly faithful. In this vein, one of the myths in macroeconomics, Prescott writes in this article, is that “monetary policy causes booms and busts.”

2. If not monetary policy, then what? Prescott argues it were actually, of all things, “expectations” of higher tax rates that brought about the financial meltdown, unseen before losses in equity, unprecedented reductions in all kinds of spending, bankruptcies, bank failures, mounting unemployment. That all because of a few expected hikes in tax rates?

3. Advances the usual “supply-side” lower-taxes-higher-tax-revenues nonsense.

4. Blames the loss of Japan’s “lost decade” on “lower productivity.” Banks subsidizing inefficiencies caused the low productivity.

5. Calls for a ban on financial intermediation.

6. Plus such bizarre statements: “Overbuilding in 1929 and in 2008, which depresses employment and output, but not welfare (sic).” “If mistake made and worked too much in the past building too many houses, best to enjoy more leisure (sic).” In times when people don’t know how to pay bills, Prescott suggests enjoying more leisure. I already see leftist intellectuals jumping all over this alleged defender of free markets.

What a shame.

Hoofy and Boo hit it again.

“Chrysler is in dire straits and hoping that Fiat will save the company. Join Hoofy and Boo as they watch two turkeys combine in an ill-conceived effort to make an eagle.”

Thomas E. Woods’s Meltdown may be the very first book aimed at an intelligent layman that is at once systematic, analytically sophisticated, and an easy read. It is an enjoyable study of the causes, probable consequences, and ways out of present severe economic problems. In terms of content, this book of a little over 180 pages does a thorough job of covering and putting into proper light a range of relatively technical questions in relevant economic theory and history. FULL ARTICLE

Amidst mounting unemployment, hundreds of billions of dollars of lost wealth and savings, very great hardships and gripping uncertainty about future economic conditions it is easy to be swayed by emotions and acts of empty symbolism. In such an environment, anger and sense of hopelessness are easily transformed into hatred and contempt of those who happen to do much better than oneself and, by implication, of the economic system that produces and tolerates the obvious hardships and opulence to exist side-by-side. Demagogues have already begun mobilizing people around proposals to punish the better-off and bring down whatever substance still remains of a free-enterprise economic system.

One such proposal that one hears nowadays very often is to compel the equality in suffering and sacrifice. Many business executives have bowed to the public opinion and already agreed to very substantial cuts in their salaries. A moment of honest reflection, however, should be enough to understand that to share in sacrifice can never create a single job or increase productivity of labor by a single unit. It will not and cannot produce anything of real and lasting value for anyone involved; it is a recipe for destruction. Sacrifice and sharing of wealth can never be a foundation for rational economic policy and continuous economic progress that raises the living standard of everyone in terms of a growing supply of more and better consumers’ goods. Its only appeal is symbolic which in itself is of a very limited or non-existent constructive psychological value. Only psychopaths will find in equal sacrifice something that, in the words of Sen. Claire McCaskill, creates “confidence that we can face down these problems and move forward.” It will have no such effect. But the only thing it will certainly create is a constant worry over whether the guy next-door is sacrificing more or less and how to bring him down if he still happens to have some more.

It is, therefore, a great fortune and the only hope indeed to have people such as Prof. Reisman who never tire to point out the absurdities of such proposals and defend what is just and truly works for everybody’s benefit. In his most recent article, New York Times Columnist Maureen Dowd Wants Soviet-Style Show Trials with Capitalist Defendants in Shackles, Prof. Reisman once again disentangles the enormous web of confusions, misrepresentations intermixed with feelings of naked envy, resentment, and blind lust for destruction that characterizes the writings of commentators and opinion makers of leading news outlets in the United States.

Some highlights of this superb article.

First of all, to blame the allegedly prevalent laissez-faire ideology in our economic system for the present crisis is to set up and knock down a straw man. In terms of institutional and economic policy fundamentals, United States’ economy is a mixed economy, i.e. a heavily regulated economy. And it is the major elements of statism and government intervention (particularly related to the structure and functioning of financial markets) which ought to be held accountable for the present crisis, not the few remnants of economic freedom and its necessary element – profit motive.

In a mixed economy, every significant-sized business must fear what the government can do to it. It needs protection, in the form of political connections. It secures these through appointing former government officials to its board of directors, paying such officials lavish consulting fees, and giving lavish campaign contributions to candidates for public office. In these ways it buys the protection it needs.

But soon businesses learn that their protectors can also be used to gain lucrative government contracts, government subsidies, and monopolistic privileges ranging from tariffs and licensing laws to antitrust suits against competitors. Thus, it is not long before the upper echelons of large firms become populated not only with men who cower before the government but also with those who seek to manipulate the government to their advantage, which is where we are today.

Prof. Reisman then turns to the “burning” question of Wall Street bonuses, John Thain case, corporate jets, and bailouts. He shows why private business firms awarding bonuses, ordering corporate jets and the like have a very legitimate economic/efficiency reasons to do so and should therefore be free to do at their discretion. The bottom-line of the discussion is that competition under capitalism

is a system in which absurd, self-destructive behavior severely punishes whoever is guilty of it. Such people suffer losses, go bankrupt, and lose their ability to have significant further economic influence. Their example then serves as a lesson to others to avoid such behavior.

Everything changes once such massive intrusions as bailouts become a very significant economic factor:

Government bailouts put everything in a different light. They give everyone in the country the right to second guess every decision of the firms that have received the bailouts, on the grounds that the money used by those firms is theirs, the taxpayers.

Understandably, the taxpayers become furious about things like bonuses, corporate jets, and expensive office remodelings. They see themselves simply as being made to pay for these things. This is because, unlike the shareholders of a private company, the taxpayers will never have any possible financial benefit even if the expenditures might actually be perfectly reasonable and well made if they took place in the context of a privately owned company. And unlike the shareholders of a private company, they were never given a choice about whether or not they wanted their funds to be turned over to this or that company. Their funds were simply seized in order that others might have the means with which to pay bonuses and financially profit from and/or personally enjoy such things as corporate jets and expensive offices.

In short, it is an article that needs to be read carefully and understood by anyone who cares about justice, human progress and is therefore serious about defending economic freedom and laissez-faire capitalism. If you like this article and many other articles by Prof. Reisman, please make sure to download or, even better, buy a hardcopy of his enormously valuable book Capitalism: A Treatise on Economics. There you will find the strongest case for capitalism, by far surpassing the writings and theories even of his teacher Ludwig von Mises and any other defender of capitalism in analytical coherency, depth and clarity of the overall argument.

It is in these times of despair and hopelessness that we are particularly in need of powerful beacons of reason and sound economic theory. Prof. Reisman’s writings provide the best intellectual weapons to stop the avalanche of anti-capitalistic filth of ignorant media and educational centers and reverse the course of history.

Some of you might find of interest this incredibly ignorant piece by one Robert Nadeau, “intedisciplinary scholar and historian of science” at GMU, published in March issue of Scientific American.

Nadeau seeks to discredit neoclassical economics by claiming that its scientific approach to describe human economic activities in relation to the “environment” was inspired and constructed on the basis of certain by now obsolete 19th century formulations of the law of conservation of energy and a theory of a “field of conserved energy that fills all space and unifies the phenomena of heat, light and electricity.” Nadeau then comes up with a list of in his views totally unwarranted neoclassical assumptions. It is not clear what connection 19th century theories of heat and electromagnetism have with such absolutely basic and unassailable assumptions as that “the market system is a closed system of production and consumption, with no inlets and outlets.” It is probably just a clever maneuver to furnish his arguments with the veneer of serious science. Certainly, such big names as Maxwell and Boltzmann cannot fail to impress.

Despite his scientific aspirations, Nadeaus’s own “scientific” litmus test for neoclassical economics allegedly “having no clothes” is, hold your breath, — the “environmental crisis” itself: “If the environmental crisis did not exist”, Nadeau writes, “the fact that neoclassical economic theory provides a coherent basis for managing economic activities in market systems could be viewed as sufficient justification for its widespread applications. But because the crisis does exist, this theory can no longer be regarded as useful even in pragmatic or utilitarian terms because it fails to meet what must now be viewed as a fundamental requirement of any economic theory–the extent to which this theory allows economic activities to be coordinated in environmentally responsible ways on a worldwide scale.”

Unfortunately, he fails to explain what those “environmentally responsible ways” are and why are they to serve as a standard for both positive science and economic policy. He concludes by saying that neoclassical economics “constitutes one of the greatest barriers to combating climate change and other threats to the planet.”

I am far from being a supporter of neoclassical economics on the issue of the environment or any other issues but this is a thinly veiled attack at economic science as such whose ultimate purpose is to explain and defend the overwhelming importance of production and consumption of wealth for human life and well-being. It is an attempt to divorce economics and management of nature-given resources from human needs as the foundation and standard of value and erect in its stead a standard of the well-being of the planet that must be protected from man-caused harm.

Nadeau apparently does not understand the basic nature of economics which places the subject’s life and well-being at the center of scientific investigation. Intrinsic theories of value have nothing to do with economics.

In the context of the recent spike in oil prices, this clip from Glenn Beck show might be of interest to some.

Particularly noteworthy is the fact that the oil industry has been facing a thirty years [sic] moratorium on exploring new fields within the United States. According to the president of Shell Oil, John Hofmeister, the US is dependent on the order of over 60% of its overall consumption on oil imports. The moratorium, though not mentioned in the clip, I suspect has got a great deal to do with environmentalism. Speaking about sponsoring of international terrorism!

Another fact is that the profit margin of oil companies is about 8% on capital invested. There are other extremely interesting facts in the clip as well.

This is the last post of a quite long journey across the content of the book. I have decided to stop here, i.e. omit the discussion of the last two chapters, Fragmentation of the Movement and Last Years, not because they are uninteresting, in a number respects they certainly are, but because I am not particularly interested in personal matters. Those of you who have followed this live blog more or less regularly will have noticed that it is theoretical matters which interest me most. In this particular respect, the reading of the book was more than just entertaining; it has been a profound intellectual experience for me. I have not only learned a great deal about a number of key aspects in doctrinal history, but have come to see more clearly along which lines economics can be improved. Those of you who have a serious interest in important problems in economics will benefit enormously from studying this biography. I also hope that you take the time to read great works by Mises himself, above all Socialism and Human Action, which are also among my most favorite books in general, and not just in economics.

I would like to conclude with a profound quote from Human Action, which is included in the Epilogue, on the importance of studying economics.

The body of economic knowledge is an essential element in the structure of human civilization; it is the foundation upon which modern industrialism and all the moral, intellectual, technological, and therapeutic achievements of the last centuries have been built. It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not annul economics; they will stamp out society and the human race.

A special thank you is due to Dr. Hülsmann for writing this book, and to the Mises Institute for publishing it and for letting me to live-blog on it.

In this entry I am going to comment on some aspects in one of Mises’s book-length monograph, Theory and History, on epistemology/methodology of social science as a whole, not just economics narrowly conceived. Last Knight’s chapter 21 deals comprehensively with a number of issues in Theory and History. As the book’s title suggests, the meaning and problems in connection with multi-faceted problems in theoretical and historical dimensions of social science research constitute the core of it. The specific issues that are discussed in the book include: methodological dualism, knowledge and judgments of value, the doctrines of determinism and materialism, and a general discussion of the nature and place of historical/empirical investigations in social science.

Instead of summarizing the chapter, I want to continue my thoughts on epistemology that I began in a recent entry. This time it is methodological dualism that I will focus on.

In the preface to Theory and History, Murray Rothbard offers a clear-cut introduction of the essence of methodological dualism:

At the heart of Mises and praxeology is the concept with which he appropriately begins Theory and History: methodological dualism, the crucial insight that human beings must be considered and analyzed in a way and with a methodology that differs radically from the analysis of stones, planets, atoms, or molecules. Why? Because, quite simply, it is the essence of human beings that they act, that they have goals and purposes, and that they try to achieve those goals.

I strongly disagree with this position. I am not convinced why the distinguishing characteristics of man and his free-will place the social scientist apart from his colleagues in natural sciences. My position is that both group of scientists face the same fundamental problem and task that unite all sciences: explaining and describing the regularities we observe in the real world.

Fundamentally, when we speak about regularities (or laws) in the real world what we mean with it is that the nature and behavior of the phenomena subject to those regularities are independent of human will and consciousness. They are, in other words, metaphysically given. As all things metaphysically given, they cannot be changed, it is rather humans who must bow to them. But if they are metaphysically given, then ultimately it does not matter whether we deal with natural phenomena or with social phenomena. The element of the free-will which Mises stressed in arguing for methodological dualism becomes simply irrelevant.

To put it another way, if science, in general, is about finding objective laws which by definition cannot be altered by human will and consciousness then starting with the fact of human will and consciousness cannot represent a valid scientific method. Yet this is precisely the essence of praxeology. It regards the fact of human free-will and consciousness not only as self-evident fact (or axiom) but makes it as the starting point of theoretical social science, here economics. But certainly the former does not imply the latter; that is, being a self-evident fact does not follow that it also must constitute the key element in scientific efforts.

In both physical and social sciences, the task of the scientist is to come up with a description (theory) of these laws that would explain observable phenomena, so long as we suspect regularities in observable events. On the other hand, no regularities imply that there are no metaphysical forces at work and thus human free-will reigns supreme and man can alter things which are subject to his control. It is precisely the distinction between metaphysical and man-made that Ayn Rand so beautifully and convincingly stressed. (Cf. Metaphysical Versus The Man-Made in Ayn Rand, Philosophy Who Needs It. In my opinion, of all Rand’s writings, this essay is the most profound.) Rand writes, without mentioning economic laws though:

The primacy of existence (of reality) is the axiom that existence exists, i.e., that the universe exists independent of consciousness (of any consciousness), that things are what they are, that they possess a specific nature, an identity. The epistemological corollary is the axiom that consciousness is the faculty of perceiving that which exists – and that man gains knowledge of reality by looking outward. (last emphasis mine, — W. Kraus) The rejection of these axioms represents a reversal: the primary of consciousness – the notion that the universe has no independent existence, that it is the product of a consciousness (either human or divine or both). The epistemological corollary is the notion that main gains knowledge of reality by looking inward (either at his own consciousness or at the revelations it receives from another, superior consciousness).

…

Today, this is (implicitly) understood and (more or less) accepted in regard to the physical sciences (hence their progress). It is neither understood nor accepted – and is, in fact, vociferously denied – in regard to the humanities, the sciences dealing with man (hence their stagnant barbarism).

…

Man’s faculty of volition as such is not a contradiction of nature, but it opens the way for a host of contradictions – when and if men do not grasp the crucial difference between the metaphysically given and any object, institution, procedure, or rule of conduct made by man. (emphasis in original)

Economic life in a modern division of labor economic system does follow distinctive paths prescribed by economic laws and which are definitely and absolutely independent of human will and consciousness. In this extremely crucial regard, economics IS very much like physics.

Furthermore, economics is most emphatically not a kind of “interpretative science” of human action and its consequences, as hermeneuticians and radical Austrian subjectivists want make us to believe. If this were true, then it would in principle be conceivable, like in psychology, by putting enough effort and will, to adjust key economic variables such as interest or wage rates, for example, according to one’s liking or disliking. But certainly the fact is that no amount of reflection, interpretation, discussion, persuasion, strong-will, incentive-setting and similar attempts to alter behavior can ever lift the average money wage rate above the equilibrium level.

Mises clearly recognized the danger of conceiving economics as yet another branch of psychology or some other behavioral science. Mises knew that unlike psychology, economics is about finding and formulating objective laws. Unfortunately, as I have pointed out in one of my earlier posts, Mises’s specific proof of the existence of immutable economic laws by means of the logical structure of human mind (universal to all human beings), which in turn implies purposeful human action, is clearly unsatisfactory. This is precisely because economic laws are something which is outside human will and consciousness. Thus, the proof of economic laws can be found only in something which is given but which is not “inside” of human mind. In my opinion, this “something” must be inherent in the system of market economy, in things, in relationships that define and sustain the system.

The revival of Austrian economics and the spread of its distinctively consistent and uncompromising libertarian message would have been inconceivable in absence of Mises’s magnum opus Human Action: A Treatise on Economics.

Chapter 20, Human Action and Its Consequences, is about the success and impact of this book — on Mises himself, on his readers, on other scholars, on the intellectual opinion through various publications spreading his ideas and advocating his views but, most of all, the chapter is on the future generations of Misesians who would carry forward the great man’s legacy.

Here we meet young Murray Rothbard, learn about his conversion to Misesian economics, the writing and the development of Rothbard’s own treatise, Man, Economy, and State, that went beyond Mises. We also learn about other Mises’s students such as Ralph Raico, George Reisman, and Hans Sennholz. All of them would later make important to revolutionary contributions in history and economics. This and more awaits the reader in this very exciting and, finally, a not too-heavy-on-theory chapter. And on the end of the chapter, there are some quite funny pictures of Mises. Enjoy!

The intellectual climate of the decades prior and after WWII was marked by enthusiastic plans loudly proclaiming statism and comprehensive large-scale social planning as the next panacea. These were considered the means to deliver humankind from superstition, moral depravity, economic chaos and misery to unprecedented heights of rationality and unrestrained development of human potential. Individual liberty, private property, economic freedom and limited government were scorned at as reactionary artifacts of barbaric, unenlightened age.

Everyone interested in how amidst such a hostile environment a new movement for liberty could arise and thrive that consistently and convincingly argued against the omnipotent powers of government and stressed the actual nature and value of decentralized, uncoerced planning and cooperation of individuals, should read the next Chapter, Birth of a Movement.Once again, I cannot help but marvel at the outstanding merits of Prof. Hülsmann as a historian of ideas and economist. His unique ability to discern the essential elements and bring them together into one coherent picture is superbly demonstrated in the present chapter. What do we learn in it?

Many people were involved and contributed importantly to the birth and rise of a new movement for liberty, but no one did more in terms of crucial intellectual content than Ludwig von Mises.

Generous businessmen such as William Volker (of Volker Foundation), courageous politicians such as Ludwig Erhard in Germany, bright and enthusiastic young students were able to galvanize their efforts and contribute to intellectual revival of practical relevance of liberal ideas only because such men as Ludwig von Mises, Friedrich Hayek, Milton Friedman, Wilhelm Röpke, Jacques Rueff and others provided the indispensable theoretical framework. Doctrinal and methodological differences notwithstanding that existed and still exist; each of these scholars did contribute enormously to a shift of opinion from the view that favored statism to conceptions that define a truly rational social order by its ability to leave the individual to discover for himself and develop the means to arrive at his highest potential.

First, America, although under siege from Marxism and Keynesianism, still preserved a few outstanding intellectuals who used their diverse talents ranging from political science to literature to press hard into another direction. It was crucial, though, to have economics and economists join the battle because without economics and economists no convincing and successful case for capitalism can ever be accomplished.

Why? Economics is uniquely qualified to give answers to questions about how to achieve and preserve the material basis of society which makes everything else possible, from literature to arts to many other applied science. Historically, economic problems have always been the decisive element that brought mighty empires to their knees, introduced tyrannies and unnecessary hardships by popular consent of precisely those who suffered the most. In this sense economics ranks among the foremost practical sciences, it provides vital understanding of the way the economic system works.

It was therefore no wonder that the development of sound economics and dissemination of laissez-faire policy prescriptions was given lion’s share of earlier work efforts on the part of those who wanted to see changes in opinion. The participants of the early meetings of the Mont Pèlerin Society were overwhelmingly comprised by economists and the majority of topics discussed concerned directly major problems in economic theory and policy.

Still it was and is extremely important to discuss differences between various scholars on problems of theory and policy, which often concerned not just fine points but matters of principle and which from the standpoint of logical consistency and the necessity to present a united front could not be underestimated. In this regard, whenever Mises recognized and could prove that his opponents were wrong or intentionally dishonest; he was uncompromising even to the point of putting in jeopardy long-lasting personal relationships with his former students.

The birth of a new movement for liberty was anything but a smooth process, the present chapter gives a rich account of formative years of this movement. It is a must read!

Chapter 18, Émigré in New York, opens the fourth and last part of the book, Mises in America. The outbreak of WWII and the rapid advance of German troops throughout Western Europe created an imminent threat to Mises’s freedom and very life even in neutral and relatively safe Geneva. He had to leave Europe almost immediately, leaving behind everything he accomplished and cared about, starting a new life and facing an insecure future in the only country that could provide safe haven for him – United States of America.

We learn in the chapter how heartbreakingly hard it was for a world-class intellectual of the age of fifty eight to find suitable employment in America. University professorships during war years, the only position Mises could accept, were at any rate extremely rare, especially for those with Mises’s outstanding credentials as outspoken and uncompromising defender of classical liberalism and laissez-faire capitalism.

During the first few years, Mises taught several seminars, gave occasional lectures to business groups and at universities in the US and abroad (his six weeks stay in Mexico where he delivered a series of lectures and established important contacts is especially notable and which almost led to the establishment of an international research institute), was even briefly employed at the National Bureau of Economic Research where he produced a German manuscript of what was later published as Omnipotent Government. Reading about Mises’s struggles is distressing, the image of an eminent scholar and a truly great man not able to land a suitable place to live and work is worse than just discomforting; it is a tragic testimony of the state of received intellectual atmosphere of that time. In a letter to Hayek, Mises commented:

I am, however, rather skeptical in regard of the practical results of our endeavors. It seems that the age of reason and common sense is gone forever. Reasoning and thinking have been replace by empty slogans.

A few days ago, Alvin Hansen [a former Austrian who later turned major Keynesian in the US, -- WK] delivered a lecture on post-war economic reconstruction. The old stories about full-employment, scarcity of foreign exchange, the need for foreign exchange control and planning, more self-sufficiency etc. He did not even mention the problem of capital shortage. He seems to believe that taxing rich would make it possible to maintain the pre-war standard of living of the masses. Two centuries of economic theory were in vain, as they could not kill the mercantilist prejudices. The audience – many ex-members of the Verein für Sozialpolitik – expressed full agreement with the lecturer. (pp. 809-810)

Eventually, however, Mises did settle in New York and was offered a position of visiting scholar at New York’s University, where he would remain exclusively for many years. The position of a visiting scholar meant that it is not paid by the university; the scholar had to find outside sources of income. But he could work and his work produced outstanding fruits, in persons of a new generation of Austrian scholars, of which more next time.

It is said that no other book on economics has done more to advance sound economics than Human Action: A Treatise on Economics. The book is a product of many years of scholarship and reflection on purely abstract aspects of science of economics and most pressing problems confronting practical economic affairs. It offers a grand system of thought; it integrates a great many ideas and major doctrines ranging from epistemology to business cycle theory into one unified whole to comprehend the forces that shape the contours of economic life in a modern division of labor society.

But only few people know that the essence of Human Action, which was written in English and published in the United States, was already present in an earlier book under the German title Nationalökonomie, which Mises wrote while in Geneva. In Chapter 17, A Treatise on Economics, Prof. Hülsmann presents a summary of this book.
Once again, I was stunned by Prof. Hülsmann’s outstanding ability to identify and pin down in a very accessible language the most abstract and difficult themes in this large treatise. We are offered not only a superb description of main ideas but also his own fresh perspective, which makes the reading of the book an interesting and exciting event. Any serious student of Austrian economics will find in the present chapter a veritable treasure chest of unexpected insights, ideas, issues and theoretical puzzles to keep him busy for a long time.

Prof. Hülsmann identifies two broad themes Nationalökonomie is centered around: the value theory and epistemology. Since I commented on the theory of value already on a number of occasions, I would like to make some brief remarks on Mises’s epistemological case.

Epistemology is defined as the theory of knowledge (or, alternatively, of cognition) and is one of pillars of philosophy. The theory deals with questions such as: what is knowledge, how to distinguish between correct and incorrect knowledge, how is knowledge acquired and enlarged etc.

In order to understand why so much of Mises’s efforts and time went into this very difficult philosophical area, we need to keep in mind the historical context of intellectual battles that Mises was involved in at the time. Mises aimed to show that there are objective laws in economics, just like in physics, that operate outside of human will and consciousness. This was important in order to fight back ambitious but ultimately misguided plans of various sorts of social engineers to manipulate human nature and society at large according to (usually) some egalitarian ideal. The bottom-line is that if there are indeed immutable laws then all these plans are doomed to failure. To be sure, aside of its ideological aspect, the problem of objective economic laws is also important from the standpoint of logic and proper method for economics.

But to build an epistemological case for the existence of economic laws meant to confront a number of distinct facts, all relating to the nature of social science. In contrast to natural phenomena, all economic phenomena are ultimately creations of human will and consciousness. Goods and services are produced, bought and sold by conscious actions of men, money prices are established on the basis of specific amounts of money exchanged against specific amounts of goods and services, wages and salaries are paid, dividends are distributed etc., etc. by human beings who have specific economic objections in their minds. Austrian economists have been known for emphasizing precisely the fact that all social phenomena are products of ideas, perceptions, specific understanding, evaluations, expectations of individuals, some of which change constantly as humans learn more about their physical and social environment.

Yet despite the fact that society is comprised of men, is shaped by men, its structure and inner interrelations are continuously modified by conscious actions of men, it is also absolutely true that, for example, there is an equilibrium average money (and real) wage rate in the economic system that cannot be increased by any kind and amount of consciousness efforts without causing unemployment, or that there is an equilibrium amount of aggregate profit and an average rate of profit, or that shortages and chaos in production and distribution of goods and other effects created by price controls cannot be eliminated by a government decree or popular consent, or that continuous rise of the average price level can only result from a continuous increase of the money supply.

The general difficulty with the idea of immutable laws in social sciences is thus to be found precisely in this apparent conflict. On the one hand, there is the radical uncertainty about human preferences, human expectations, and human knowledge (Kirzner, Lachmann). On the other, the economic system displays remarkable regularities in the occurrence of its key phenomena, the profound rationality manifest in the distinct orderliness of economic life under capitalism is apparent. The great scientific task in social sciences is thus to reconcile the primacy of human consciousness and action when it comes to social phenomena with the claim that there are things outside of our control, be it as individuals or as society as a whole, even in the realm of human affairs and that these things exist according to laws of the nature which can be grasped and used in the practice to improve human life and well-being. Sound economics teaches us precisely that.

The fundamental failure of those schools that refuse, intentionally or not, to accept the very existence of immutable laws resides in their failure to reconcile this apparent conflict. In this group belong the German Historical School AND various currents in the Austrian economics, from Lachmanians to hermeneuticians. Though, the latter are clearly led astray by their overemphasis of the subjective element of social phenomena at the expense of objective parameters that develop in the process of social interactions and which in turn constrain human action.

The great achievement of Mises is that he succeeded in proving the case that any attempts to forcibly impose restrictions on the spontaneous order of a free society must necessarily backfire, produce unintended consequences, and generally not accomplish the goals that served as rationale for those restrictions. And this constitutes the essence of his immortal contributions. But, unfortunately, as far as his specific epistemological defense of economics as a science of immutable laws is concerned, it is unsatisfactory and this might be one of major reasons for the proliferation of radical subjectivists.

It is a vast subject but I think the main problem is that he attempted to prove the existence of economic laws with the notion of the logical structure of human mind. The logical structure of human then implies purposeful human action. The purposefulness of human action, which in turn implies consciousness and rationality, is then offered as proof of the existence of economic laws! I would like to argue that just because humans act purposefully and rationally, this fact does not establish anything about the existence of specific economic laws that govern a capitalist economic system, not to mention the further important problem that such method does not provide any means to arrive at a description of these laws.

As economic crisis deepened and the social situation and civil order in Austria deteriorated accordingly, Mises was happy to receive an invitation from Geneva-based Graduate Institute of International Studies to become a visiting professor of international economic relationships. The Institute Mises was to join was established to produce a next generation of bureaucrats equipped with necessary scientific knowledge to run administrational affairs of politically increasingly integrated world order. Geneva hosted a number of major international organizations and was very much in need of expert knowledge.

Where did Mises fit in that institution and how lived during his Geneva years is the subject of chapter 16.
Being one of world’s foremost monetary theorists, his formal responsibilities were confined to a two-hour seminar on International Finance and one-hour course on “The International Aspects of Monetary Policy”. Otherwise he enjoyed unrestrained academic freedom, a salary to live on very comfortably, and plenty of time to write a general treatise on economic science, to which Prof. Hülsmann devoted the whole next chapter.

Despite his titanic efforts to strengthen the case for capitalism, it was impossible possible to stem the tide of collectivism and interventionism just by his own efforts. Amidst the most severe economic depression in the history of capitalism, the intellectual case for free markets and liberalism had become increasingly unfashionable and harder to defend. The degree of difficulties and challenges that Mises faced in the thirties can be glimpsed from the diminishing number of serious intellectual allies in the common fight for capitalism and liberalism.

To be able to stand alone and withstand the enormous pressure to give in and conform to the prevalent opinion, nothing short of stalwart convictions in the correctness of the fundamental insight that a capitalist economic order is to the material benefit of all was required. Later in the book, Prof. Hülsmann likened Mises’s unbending character to that of Howard Roark in Ayn Rand’s novel The Fountainhead.

The character of Howard Roark stands for integrity, the courage to follow the dictates of one’s own intellect, the unshakable confidence in and reliance on one’s ability to judge the facts of reality rationally without paying any attention to views of the majority regardless of how fashionable they may be. Furthermore, integrity and the love for truth are ideals to strive for but they are also ultimately practical, i.e. rational, guides to action.

As we learn in greater details from the chapter, the cases of Mises’s allies Fritz Machlup and Lionel Robbins resembled – to various degrees, to be sure – more the character of Peter Keating: the arch-compromiser and second-hander whose actions were sensitive to and followed blindly the immediate and prevalent fashion trends of his contemporaries. On the other hand, it was particularly Friedrich von Hayek who despite obvious theoretical disagreements with his mentor remained true to fundamental principles of liberalism. Certainly on that count, he deserves our utmost admiration and respect. There is also a lesson to learn from these cases. One does not abandon fundamental convictions simply because of one or two finer theoretical difficulties and embrace a blatantly irrational theory such as Keynesianism instead.

Nevertheless, we should never underestimate the importance of a correct theory and mercilessly point out any logical contradictions and/or inconsistencies in the writings of most important defenders of capitalism. Having said that, I think Prof. Hülsmann once again scored a number of major points against Hayek’s analysis of economic calculation under socialism. Again, the problem is that Hayek, through his Wieserian/Walrasian lenses, could not help but argue that while economic calculation under socialism was solvable in principle, i.e. in theory, it was impossible to implement it in the praxis (see the quote in the footnote 42 on p. 703 of The Last Knight).

The most pernicious element in this point of view is the notion that what is true in theory must not necessarily be true in the practice. In other words, it is an instant where thinking looses the anchor to the facts of reality. Consciousness then becomes not a tool to comprehend the reality but a means of creating another, often viewed as a “higher” or superior, form of reality which is often elevated as a standard against which to evaluate facts and conditions of the real world. This is how, for example, the neoclassical theory of pure and perfect competition, with its assumptions of perfect knowledge, instantaneously clearing markets etc., is presented. Even though such competition is purely a construct of arbitrary assumptions, it is used as benchmark to evaluate the degree of “purity” of the real world competition, most notably in the field of industrial organization.

Please take a note also of the important discussion in connection with neo-liberal ideas mainly in the section Walter Lippmann Colloquium. The colloquium comprised representatives of different “liberalisms” to discuss the true meaning and goals of liberalism from the point of view of a proper balance between economic freedom and the “need” to improve market outcomes by means of government intervention. Largely because of Mises’s devastating case against the pure form of socialist central planning, everybody was convinced that to maintain the already attained and enlarge the degree of division of labor a price system is indispensable after all. But only few were prepared to uphold a total separation of state from economics. The idea that it might be possible and under certain circumstances even desirable to supplement the price mechanism with appropriate laws and institutions to construct a more just, free and productive society, has gained in prominence between the two world wars and stands behind of what has become to be known as the Third Way in economics and politics.

The theoretical framework for the new ideal was provided, as Prof. Hülsmann quite correctly points out, by the “theories of public goods and the Chicago (Coasean) theory of law and economics” that use neoclassical partial-equilibrium microeconomic analysis of choice and incentives to answer the question: what combination of property rights is most compatible with the underlying preferences and incentives patterns of agents to yield the most efficient outcome. I think that the distinctive characteristic of this approach is not the issue of direct or indirect meddling with prices, as Prof. Hülsmann seems to argue, but its inability to provide an integrated picture of economic life. The apparatus of the neoclassical partial-equilibrium analysis is ultimately to blame, not the recognition of the fact that “framework of the market” matters.

One reviewer of the second edition of Socialism commented: “In some circles Mises is called the last representative of a liberal economic order. He is certainly not the last, but after many years the first who has dared to think through all the consequences of such an order [liberal economic order], and to erect and demonstrate a doctrine with unshakable logic.”

In chapter 15, Crisis, we learn about Mises at his best: fighting for economic freedom and succeeding in a number of ways. But the extraordinary complexity of the multifaceted fight, primarily intellectual, he faced was at times too much even for him. Nevertheless, one cannot help but marvel at the immense energy, courage, and intellectual curiosity that characterized all his efforts.As a result of a worldwide economic crisis coupled with extensive interventionist measures particularly in the spheres of labor relations and money and banking, problems in Austria’s economy intensified and became visible in stagnating profitability of Austrian firms. Despite overwhelming opposition from all sites, Mises did not hesitate a minute to identify the evil forces that caused the high and rising unemployment – labor unions and the welfare state ideology that stands behind them.

Attending various international conferences, Mises was attempting again and again to drive home his main argument that the Great Depression was caused by inflation and aggravated by interventions into business; particularly the persistency of large-scale unemployment was chiefly due to policies of labor unions that prevented the necessary fall of money wages.

The chapter is also jam-packed with significant discussions of a number of very important theoretical points. Austrian economists are very much advised to study it very closely.

While I agree with almost everything Prof. Hülsmann writes here, I must disagree with what to me appears a quite unwarranted conclusion that Hayek deserted Mises to become a “verbal-Walrasian” and that this was one of the primary reasons Mises’s ideas failed to displace neoclassicism and become a dominant theoretical paradigm.

The truth is that no strict differences in substance existed between Misesian economics and Wieserian/Walrasian general-equilibrium economics; at least this is how Mises himself saw matters. In chapter 7 of Epistemological Problems of Economics, Mises writing in 1933, says the following:

Within modern subjectivist economics it has become customary to distinguish several schools. We usually speak of the Austrian and the Anglo-American Schools and the School of Lausanne. Morgenstern’s work … has said almost all that is necessary about the fact that these three schools of thought differ only in their mode of expressing the same fundamental idea and that they are divided more by their terminology and by peculiarities of presentation than by the substance of their teachings. (p. 228)

I want to emphasize that I totally agree with the observation that “the logical structure of Mises’s arguments against socialism and interventionism was squarely outside the Walrasian paradigm”. Moreover, I would even venture to argue that the “logical structure of Mises’s arguments” has absolutely nothing to do with the Marginal Utility School in general. It stands squarely outside the main doctrines of that School and even contradicts them at several important junctures, as was clearly recognized by Hayek and others (see my previous blog entry).

The deeper-seated reason for the triumph of Keynesian Revolution is thus to be found first and foremost in the logical inadequacy of the theories inspired by the Marginalist Revolution of 1870s, and confusions they created. Neither Hayek, nor Mises, nor anyone else working within the Marginal Utility School paradigm, could withstand Keynes’s attack simply because neither of them possessed effective intellectual weapons to ward it off. I think Prof. George Reisman hits the nail on its head when he writes:

The reason was that in the two generations preceding the appearance of Keynes, much of the foundations of sound economics had quietly been lost, without anyone even being aware of the loss. The loss took place starting in the 1870s, in the abandonment of British classical economics in favor of the newer neoclassical economics. [T]he cause of this development was the fact that classical economics, with its labor theory of value, appeared to lay the groundwork for Marxism. Instead of eliminating the particular, localized errors of classical economics which did provide support for Marxism and then integrating the new doctrine of marginal utility propounded by neoclassical economics with the essential substance of classical economics that remained, virtually the whole theoretical body of knowledge constituted by classical economics was abandoned. What then remained were largely just out-of-context, memorized conclusions that in the absence of the necessary theoretical foundations could no longer be supported. Thus, when Keynes came along, it was only necessary for him to overturn such out-of-context, intellectually severed conclusions, not serious, living convictions. (Cf. Capitalism, p. 865)

Incidentally, let me point out that Prof. Reisman offers a refutation of Keynesianism which is entirely unprecedented in that it integrates Mises’s calculation argument with major doctrines of the Classical British economists such as the wages fund doctrine and his own revolutionary ideas in the theories of profit/interest and saving and capital accumulation. If you want to understand what Keynesianism, in all its variations, is, what are its central doctrines and precisely why Keynes’s system is contradictory in its inner logic as well as totally incompatible with how a capitalist economic system works in reality, look no further than Chapter 18 of Prof. Reisman’s Capitalism: A Treatise on Economics.

In this blog entry as well as in previous entries, I repeatedly emphasized the centrality of Mises’s calculation argument and that it actually has been leading a life of an orphan within prevailing Austrian/neoclassical paradigm at the time because it is incompatible with almost all of it. Now, as it turns out, Mises’s calculation argument finds its natural home and fullest development and integration in the system of Prof. Reisman. More on this in a later post.

Chapter 14, titled Booms, is a detailed and excellent narrative of a relatively short period of Mises’s life when he exercised strong intellectual influence and contributed significantly to the reemergence of free market ideas in Europe, particularly in Austria and Germany. At the London School of Economics, in persons of Professors Lionel Robbins and Friedrich von Hayek, Mises’s ideas had been given additional boost in the English speaking world.

During that time, Mises’s undeniable intellectual influence finally got him on the board of Verein für Socialpolitik, an association of German speaking economists. In addition, he was also extensively involved in the establishment and work of the Austrian Institute for Business Cycle Research that produced important studies advancing and spreading the word about Austrian theory of business cycles.

On the theoretical front, Mises formulated new directions in the theory of value and in monetary economics. It is on these two aspects of Mises’s work that I would like to comment in the following.
First, a short comment concerning an important detail in connection with Mises’s Irving Fisher’s proposal on monetary reform, which in its political dimension essentially pointed to a governmentally managed monetary system, with similar proposals offered by Keynes in his A Tract on Monetary Reform and other economists.

Mises devastated Fisher’s proposal on several junctures and showed that it was theoretically flawed as well as impracticable.

The principal argument for the reform was that for economies to function without both business fluctuations and major disturbances in the distribution of income between debtors and creditors, an elastic currency must be present to ensure stability of purchasing power of money. Incidentally, the essence of this argument has not lost any of its weight and continues to represent the final line of defense of those who see in central banking and the fractional reserve banking system indispensable institutions for promoting macroeconomic performance and maintaining price stability. To ensure stability of purchasing power a price index was to be worked out which would link the price of dollar currency not just to changes in the price of one commodity (gold under a gold standard) but to a set of different goods.

In the first place, Mises pointed to insurmountable difficulties in arriving on an objective standard for an index due to the existence of no objective standard for the importance of various goods that would be accounted for in such an index. Second, Mises tried to show that one of alleged major “evils” of unstable currency – the problem of unexpected shifts in the distribution of income between debtors and creditors, which would occur whenever the purchasing power of money changes, is entirely illusory.

While I agree with Mises’s overall conclusion that “unstable” currency based on the gold standard is not a problem, I tend disagree with one aspect of his analysis. Mises argued that so-called “price premiums” in the “gross interest rate” would usually take care of the alleged redistributive effect that failing (or rising) prices cause in the relation between debtor and creditor. I object to the analysis and argue that the doctrine of “purchasing-power-price premiums” leads directly to the erroneous conclusion that under conditions of rapid increases in productivity and falling prices, the “negative” premium would decrease or rather eliminate the rate of interest on the market for loanable funds. A zero rate interest on the loanable funds market in turn implies a stronger incentive to hold money rather than to invest it which, in turn, would reduce spending and incomes in the process. But this is a completely erroneous, and thus politically potentially dangerous, point of view.

In reality, decreasing or increasing commodity prices do not have any influence on the rate of profit, and thus on the interest on the market for loanable funds.

The reason Mises advocated the doctrine of “purchasing-power-price premiums” is that he, along with virtually all other Austrian economists up to the present with the sole exception of George Reisman, worked within the conceptual framework of Böhm-Bawerkian theory of interest (Prof. Reisman offers a thorough refutation of this theory in his book, Capitalism: A Treatise on Economics, pp. 792-797. See also his lecture on the same subject he delivered at the Mises Summer University in 2005.).

In a nutshell, the theory attempts to explain the category of interest, or, more precisely, the originary interest, on the basis of the relation between subjective values of present and future goods. The fundamental flaw in this theory is that it provides an explanation in terms of value while its actual purpose is to explain how the rate of interest is determined in terms of money. Böhm-Bawerk’s theory, as well as very similar nonmonetary theories of Irving Fisher and Frank Knight, is utterly incapable of explaining precisely because there is only calculation in terms of money. Unfortunately, nowhere in his writings did Mises develop a theory of interest in accordance with his own great discovery in the realm of economic calculation.

From what we have just seen, the theory of interest has an obvious connection to the theory of value, or, more accurately, the theory of economic calculation. The subject of my second comment is the relation between Mises’s calculation argument and Austrian subjective theory of value in general.

Prof. Hülsmann’s discussion of the development of Mises’s views on the theory of value confirms my own reading and understanding of Mises on that subject: his insight that there is no calculation in terms of value but only calculation in terms of money is indeed revolutionary. The problem is that Mises’s great insight is incompatible with almost everything the subjective theory of value of Menger and Böhm-Bawerk stands for. One economist at least, Friedrich von Hayek, did recognize the incompatibility when he wrote, without mentioning Mises by name, that:

Of course, in so far as one believes that a completely satisfactory solution to the problem [of imputation] has not yet been found, we cannot exclude the possibility from the very outset that the determinants of the prices of the factors of production are to be found in the exchange economy alone, and therefore that an imputation of value is not applicable, a view held by several younger authors. Nevertheless, if this view were regarded as valid, the result would be that we would have no satisfactory explanation of economic processes based on the subjective theory of value, and it would also follow that these authors too would lack any basis for many of their investigations. (cf. pp. 472-473 of Last Knight)

Hayek’s point is confirmed by Prof. Hülsmann in his summary of Mises’s views on the subject:

In contrast, other economists [than Mises] believed economic calculation was possible outside the framework of a market economy. They assumed that calculation in terms of market prices was only one form of economic calculation. More to the point, they believed that it was possible in principle for the members of society to perform calculation in terms of utility, which they assumed to be quantifiable. It followed that all elements of economic science–the science of calculated action–had the same general applicability as marginal value theory. Categories such as saving, consumption, capital, profit, loss, and efficiency were not just categories of the market, but of human action in general. (cf. ibid p. 596)

I think Hayek is exactly right: this view is diametrically at variance with almost everything the subjective theory of value, posed as the alleged true foundation of all of economic science, stands for. This is because one of central tenets of the subjective theory of value is that categories of saving, consumption, capital, profit, loss etc. will exist under any form of economic organization because they are eternal categories of human action. Mises, as late as in Human Action, taught, in perfect accordance with everything Menger and Böhm-Bawerk wrote on the subject before him, that, for example, the phenomenon of interest would be present even under socialism and as such is explainable by the alleged universal preference of present goods to future goods which, in turn, is implied by the very nature of human action itself. The same goes for all economic phenomena, that is, they all can and must be explained by the subjective theory of value as developed by Menger, Böhm-Bawerk and other champions of subjectivism in economics.

Mises could not free himself from the shackles of the subjective theory of value but he showed the way to construct a new and much more coherent theory of the market process. And this is one of the most significant pieces of information I have gained from reading The Last Kinght Of Liberalism. I hope that contemporary Austrian economists take this extremely important aspect of Mises’ work and its implications for economic theory in general more seriously.

Economics is a science that studies production of wealth, i.e. material goods to satisfy human needs, in a division of labor society. Behind this simple definition stands the desire to understand factors that are responsible for high and rising productivity of labor. The material comfort, indeed the very survival, of billions of people depends on the knowledge of what to do to maintain the existing relatively high level of productivity of labor and how to raise it even further so as more and more people around the world will be able to enjoy high and rising living standards. Production and distribution of even the simplest goods presupposes the availability of physical means of production such as raw materials, tools, machinery, means of transportation etc and which involve thousands of individual producers in many different parts of the world. At the bottom, it is a process best characterized as the outcome of cooperation of thousands of individual scientists, innovators, investors, bankers, businessmen, workers. Cooperation in production is precisely the element that defines a division of labor society. The great value of economics is that it shows what promotes cooperation and what prevents it from flourishing.

Economics is an abstract system that organizes concepts describing real world economic phenomena and relationships in a logical and integrated manner. Precisely because it is directly involved with practical problems of economic organization by way of description and explanation of real-world economic phenomena, it is in position to provide serious recommendations as to the proper course of actions to undertake and what institutions to establish in order for a society to produce more and better consumers’ goods. Economics thus becomes an extremely powerful intellectual tool that helps us to evaluate certain normative ideals such as individualism and collectivism and the political systems which are inspired by these ideals.

This is how Mises saw and practiced the science of economics and this is that made him one of the greatest economists of all times. The development of this view of economics, which he somewhat ambiguously called utilitarianism, is the subject of chapter 13, A System of Political Philosophy. Mises’s own understanding of the essence of utilitarianism allowed him to ground his comparative analysis of various economic systems into objective facts of economic life. Unlike earlier authors who sought to provide metaphysical arguments for their preferred political ideal, Mises’s greatness consists in the fact that he provided logically coherent and empirically ascertainable answers to the question: will the specific course of actions achieve the goals as envisioned by their proponents.

All political systems are to be evaluated in precisely this way. It thus becomes no longer enough to merely be in favor of a better health care, better education or better housing for masses, in short, higher standard of living for all. A rational evaluation of a political program, or a set of principles that embodies a specific course of action, must ask whether the specific means it proposes to use such as, for instance, total or partial central planning, subsidies, price controls, labor unionism and labor legislation, redistributions, taxes on the rich, inflation etc. will in fact achieve the goal of higher standard of living for all.

The verdict of Mises’s economic analysis on the three major forms of economic organization – socialism, interventionism, and laissez-faire capitalism, and what they actually stand for, is clear: the principles of economic and social organization that define laissez-faire capitalism are the only means to accomplish a high and rising standard of living for all. For example, simple economic reasoning shows that it is impossible for trade unions to continuously improve the standard of living of masses simply by raising money wages at the expense of profits. To be sure, the details of the analysis of the actual process of wage determination are quite complex but this cannot alter the objective fact that only through higher output per worker and lower prices of goods, not forcible redistribution of money incomes, can the living standard of the average worker be improved.

This is what the iron logic of reason dictates us to accept. But, as we learn in the chapter, there still were (and are) those, the so-called “social liberals”, who were unwilling to accept the chains of reason and embrace classical liberalism unconditionally. As far as their egalitarian ideals are concerned, the social liberals were indistinguishable from Marxists and all other socialists. Scared by the abject failure of all-around “scientific” government planning, they were forced to abandon the prescriptions of Marxism’s “scientific socialism” but then they found themselves standing without any serious intellectual backing. Already in the twenties of the last century, in his important essay A Critique of Interventionism, Mises recognized the utter intellectual bankruptcy of the “third way” or the so-called model of “social market economy”:

Politics does not dare introduce what the prevailing ideology is demanding. Taught by bitter experience, it subconsciously has lost confidence in the prevailing ideology. In this situation, no one, however, is giving thought to replacing the obviously useless ideology with a useful one. No help is expected from reason. Some are taking refuge in mysticism, others are setting their hopes on the coming of the “strong man”— the tyrant who will think for them and care for them.

Interventionism does not work. Like socialism it cannot create, it only destroys. While socialism is actually a crude scheme to enslave producers totally and exterminate those who refuse to become slaves, the essence of interventionism is that of parasitism – it merely attempts to suck off the living energies of producers as long as it can.

Chapter 12, Fresh Start, opens the Part IV of the book titled Mises in His Prime which deals with the period that was both academically productive and rewarding in a number of different respects. Chronologically, the period roughly spans the time after the WWI until Mises moved to Geneva and started lecturing there at the Institute of International Studies in 1934. During that time, in addition to his important position at the Austrian Chamber of Commerce (Kammer) he accepted major responsibilities at the newly created Bureau for Claims Settlements which dealt with questions of reparations and reconstruction after the World War. There Mises was directly and considerably involved in shaping Austria’s economic policy. While working at the Bureau, Mises also met young Friedrich August von Hayek who would later become one of his most important followers. Mises’s academic work was closely connected with the practical problems of economic policy at the time. The post-war problems with inflation meant for him in the first instance a formidable intellectual task to combat numerous pro-inflationist theories of his fellow academics.Chapter 12 might be particularly valuable to those interested in monetary theory and policy. A considerable portion of the chapter is devoted to Mises’s ideas and role in fighting the inflation which would nearly bankrupt Austria.

The chapter also contains a discussion of the gold-exchange standard and Mises’s own proposal in favor of the establishment of a “100% marginal gold standard”. The gold-exchange standard was a creation to meet two contrary objectives. First, by relying on gold’s reputation as safeguard against devaluation of money governments hoped not to disappoint the creditors who were cheated as a result of unrestrained inflation to finance war expenditure. Second, since there was virtually no chance to redeem the huge amounts of accumulated war debts at the pre-war gold prices, governments and their central banks sought to circumvent the problem by making those debts redeemable into some foreign currencies, rather than directly into gold. This was to happen through stabilization of exchange rates by means of “coordinated” actions of all central banks involvement.

The gold-exchange standard is a fraud and is the opposite of an ideal monetary system. The book contains one interesting moment in connection with it. Initially, because of the requirements of the gold-exchange standard Austrian government was forced to cut government expenditures in order to stabilize the exchange rate of the krone. This raised the creditworthiness of Austrian debtors and ensured a large influx of foreign money into the pockets of local governments who immediately increased their expenditures accordingly.

But, of course, even the generous foreign credit could not improve the difficult situation Austria found itself at the height of its economic crisis in 1923. Hyperinflations in Austria, and in a much greater extent in Germany, prompted Mises to think about a serious monetary reform that would put an end to governments’ ability to use the printing press to meet its financial obligations.

The essence of Mises’s plan for a “100% marginal gold standard” consists in the idea that all additional, i.e. marginal, issues of paper money be “covered by gold deposited with the issuing bank”. At first, Mises did not think it was necessary for gold to be used in daily transactions, in form of actual gold coins, so as to make the public aware of its actual existence and effect. But later on, in Human Action, he came to recognize that the only way for the gold standard to succeed is that the public directly perceives the benefits of using gold as money, otherwise governments would still be able to follow inflationary practices through the backdoor, as it were, just the way it happened under the various kinds of gold-exchange standard.

Chapter 11 of the Last Knight is devoted to the intellectual origin, development and main themes of Mises’s second major book, Socialism: An Economic and Sociological Analysis. Socialism offers a comprehensive analysis of the intellectual case in favor of socialism as economic and political ideal. The book presents and examines virtually every major argument for socialism, ranging from the Marxist claim of the inevitability of its coming through the development of material forces of production to various socialist critiques of certain allegedly deplorable elements of capitalism that by implication might contribute to the case for socialism.Mises’s analysis is so devastating that any honest reader will come to the conclusion that despite whatever pictures of brotherly love and unbounded prosperity people might imagine in connection with socialism, its actual character turns out to be the very opposite. Socialism cannot create; it only destroys what was previously created by capitalism. Socialism is not a higher state of human development. It is even worse than feudalism; it is institutionalized universal slavery.

The following quote from the book summarizes the nature of socialism:

In fact Socialism is not in the least what it pretends to be. It is not the pioneer of a better and finer world, but the spoiler of what thousands of years of civilization have created. It does not build; it destroys. For destruction is the essence of it. It produces nothing, it only consumes what the social order based on private ownership in the means of production has created.
Since a socialist order of society cannot exist, unless it be as a fragment of Socialism within an economic order resting otherwise on private property, each step leading towards Socialism must exhaust itself in the destruction of what already exists.

The specific avenue through which the destructionist element of socialism becomes visible is, of course, its utter incompatibility with the requirements to maintain and enlarge the division of labor. The extent of success and happiness of an individual, and by extension of the society at large, is inseparably connected with the material means of human survival and development expressed in the ability of the individual and the society at large to produce wealth. But the production of wealth requires that individuals have the best incentives as well as live under the most favorable psychological, cultural and institutional environment. Socialism destroys or makes the development of all that simply impossible because it enslaves the individual, stifles his initiative, deprives him of the physical means to take care of his own life, corrupts or weakens his individuality, makes it unfit to survive in the social context.

The great merit of Mises’s Socialism is that it delivers a comprehensive picture of destructionism of socialism in all of its dimensions – psychological, cultural, and economic. It is a must read.