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Book Review: Ludwig von Mises

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Ludwig von Mises: The Man and His Economics
by Israel M. Kirzner (Wilmington, Del.: ISI Books, 2001); 226 pages; $24.95.

LUDWIG VON MISES was, without a doubt, one of the most important economists of the 20th century. Every textbook on comparative economic systems, for example, will point out that it was Mises who initiated the famous debate over economic calculation under socialism in the 1920s, which caused a firestorm of controversy for the rest of the century.

It was Ludwig von Mises who first formulated what is known as the Austrian theory of the business cycle, which was then taken over by Friedrich A. Hayek in the late 1920s and early 1930s. Through Mises’s own writings, and those of Hayek and the English economist Lionel Robbins, the Austrian theory of the business cycle became the leading competing explanation of the Great Depression against the emerging Keynesian framework in the decade before the Second World War. And it was Mises who presented the most consistent case for the classical-liberal, free-market society against the interventionist welfare state during most of the decades of the 20th century.

Mises stood alone through most of his life in defense of freedom and the free market, with very few allies, and in both Europe and America he was frequently ignored or ridiculed as an out-of-date extremist for laissez-faire. Yet all those who knew him on two continents have said that he never wavered from his determination to stand firm for the economic ideas and policies that he believed to be true and essential for a society of freedom and prosperity.

It is amazing, therefore, that practically no books have been written about him since his death in 1973. Nothing could be more fitting, then, than that one such work that has recently appeared, Ludwig von Mises: The Man and His Economics, should have been authored by Israel M. Kirzner. No other economist (with the exception of the late Murray N. Rothbard) has done so much to both restate and creatively refine Mises’s ideas during the last four decades. (See “Israel M. Kirzner and the Austrian Theory of Competition and Entrepreneurship” in Freedom Daily, August 2001.)

The volume is meant to be an introduction to Mises’s life and ideas for the intelligent reader who may have little prior knowledge of either Mises or Austrian economics. And for this purpose, Kirzner has done an exceptionally outstanding job.

At the start the reader is given an overview of Mises’s career and professional activities in Europe and the United States. This is followed by a summary of the state of economic theory in 1900, around the time the young Mises entered the University of Vienna to begin his studies that led to a law degree with specialization in economics.

Kirzner places Mises’s various contributions to general economic theory and monetary theory and the debate over the feasibility of a socialist economy in the context of the trends and currents of economic thinking in the 20th century.

He then turns to detailed discussions of Mises’s writings on these various topics. Kirzner begins with Mises’s particular view of the nature of economic inquiry. Mises rejected the dominant perspective in economics that to be a “real” science economics must be modeled after the methods of the natural science.

Mises comes out of a different tradition, one that was widely held in Europe and highly respectable in the early decades of the 20th century. This tradition argued that the study of man and social phenomena must begin with the insight that human beings are intentional and purposeful agents who assign meanings to their actions and interactions with others. But the human meanings that form the threads that connect men to their actions and their social relationships with others cannot be reduced to the merely measurable and quantifiable.

Mises stated that from this conception of man and meaning, it is possible to develop a formal and logical science of human action. Its source was in the human mind, from which emanates men’s purposes and the meanings they assign to actions, objects, and social events. From the concept of action Mises suggested that the laws of economics could be deductively derived, because the logic of our thought is also the source of the logic of our action.

Thus, Mises claimed that the formal and logical relationships of economic action and choice were a priori and purely qualitative. Since men have the ability to choose and change their minds, no firm and constant empirical relationships could be derived from quantitative and statistical analysis of social events.

Consumers, producers, and the market

In a lengthy and core chapter, Kirzner explains Mises’s theory of competition, entrepreneurship, and the market process. Most economic theory over the last century has been constructed on the basis of a theory of market equilibrium that explains the logical relationships and conditions for there to be a perfect balance between all supplies and all demands in all markets simultaneously.

Mises argued that the formulating of a perfect equilibrium state was a useful mental exercise, but secondary to the main task of economic analysis, which is to explain how markets actually work. What brings supply and demand in balance? What role do profits and losses play in this process? Who actually organizes production and directs it in the most appropriate ways?

Consumers are the ultimate captains of the market process, Mises explained. Their willingness to buy various goods and services and at what prices dictates the direction that production should take. But this does not happen automatically. Someone must initiate a production plan on the basis of expectations of future consumer demands. Someone must hire the factors of production, assign and oversee their use in the processes of production, and market the finished goods in the hope of earning a profit and avoiding losses. This, Mises said, is the task of the entrepreneur.

Entrepreneurs compete both in hiring the scarce resources of the society and in marketing finished goods to the buying public. Those entrepreneurs who demonstrate that special ability in anticipating consumer demands and in efficiently and creatively manufacturing and marketing goods better than their closest supply-side rivals earn profits and the ability to expand their operations.

Those who lack this ability suffer losses and are weeded out of the entrepreneurial role, and must find some other niche in the social system of division of labor for earning a living. Thus, the market is constantly and continuously adapting to change and innovation, with the most skillful tending to be assigned the role of entrepreneur at the service of the consumers of the society.

After also discussing Mises’s views on monopoly, Kirzner turns to the subject of money and the business cycle. Here he points out that Mises had developed a dynamic-sequence analysis of how changes in the money supply can bring about shifts in the structure of relative prices, the allocation of resources, and the direction of investment activities.

Thus, monetary mismanagement distorts market interest rates and may set in motion a sequence of events that generate an inflationary boom at first. Logically and inevitably this boom creates the conditions for an economic downturn when it is discovered that resources have been misallocated between the production of consumer goods and the production of investment goods.

Finally, Kirzner discusses Mises as one of the most forthright and uncompromising advocates of the free market during the last 100 years. He explains that Mises always insisted that there is a sharp distinction between pure economic theory and the value judgments surrounding questions of economic policy. As pure theory, economics is like any other science. It attempts to explain what is: the nature of man, the logical relationships in his actions, the necessary consequences from human interactions in various social and institutional and market settings.

As pure, formal theory, economics can merely trace out laws of cause and effect, e.g., given assumptions about the market and institutional setting in which people interact as suppliers and demanders, if the demand for hats goes up then the price of hats will tend to rise. Economic policy is concerned with applying the most appropriate means to attain some desired ends. The value of economic theory is that it is an invaluable tool for understanding what will most likely happen, when we try to achieve our ends with certain economic means rather than some others, and why.

Mises strongly believed that the power of economic science and reasoning is that while imposing no value judgments itself, it can clearly demonstrate that the vast majority of the common ends that most people everywhere tend to value — freedom, prosperity, opportunity, choice, and variety — can be attained to the greatest extent only in the unhampered free market. Both socialism and the interventionist-welfare state are false avenues to men’s purposes, which will lead to outcomes often viewed as undesirable even by the proponents of socialist and interventionist policies.

Kirzner concludes by showing that almost 30 years after Ludwig von Mises’s death in 1973, his ideas on economic theory and policy are still a fountainhead of inspiration for a new and growing generation of young economists interested in the tradition of the Austrian school. And if his ideas succeed in continuing to influence economists outside of this Austrian circle as the 21st century progresses, he will have helped point the way to a freer society for tomorrow.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).