Seventy-five years ago, on September 14, 1949, Yale University Press published Ludwig von Mises’s Human Action: A Treatise on Economics. Almost 900 pages in length, it soon became recognized as one of the major works in economics in the twentieth century.
Not that this recognition was felt in the economics profession of the time. Few reviews appeared in the professional economics journals, and the ones that did were far from complimentary. This was not surprising given the dominance of Keynesian and socialist ideas in the years following the Second World War. Few were the voices in the economics profession who were consistent advocates of a liberal, free-market perspective or had the courage to challenge the theoretical and economic policy orthodoxy of that time.
It was presumed that the Great Depression had “proven” the failure of unbridled capitalism and that every society needed a transformation into either some form of government centralized planning or at least strong fiscal and monetary intervention by the federal government to ensure economy-wide stability and full employment. At the same time, any “reformed” capitalist system needed government regulatory restrictions on market competition to prevent monopoly and unfair business practices, along with a larger and larger redistributive welfare state.
But then in 1949 there appeared this major work that not only offered a systematic and detailed analysis of the logic and workings of the free market and its dynamic competitive process but also defended its philosophical foundations, its historical importance, and its institutional prerequisites if there was to be a free and prosperous society.
Shortly after the German-language predecessor of Human Action had been published in Switzerland in 1940 under the title Nationalökonomie, Mises’s friend and colleague Friedrich A. Hayek wrote in a review:
There appears to be a width of view and an intellectual spaciousness about the whole book that are much more like that of an eighteenth-century philosopher than that of a modern specialist. And yet, and perhaps because of this, one feels throughout much nearer reality, and is constantly recalled from the discussion of the technicalities to the consideration of the great problems of our time…. It ranges from the most general philosophical problems raised by all scientific study of human action to the major problems of economic policy of our time…. The result is a really imposing unified system of a liberal social philosophy. It is here also, more than elsewhere, that the author’s astonishing knowledge of history as well as the contemporary world helps most to illustrate his argument.
Similarly, when Human Action appeared in 1949, the free-market journalist and Newsweek columnist Henry Hazlitt wrote in his weekly article:
[The] book is destined to become a landmark in the progress of economics…. Human Action is, in short, the most uncompromising and the most rigorously reasoned statement of the case for capitalism that has yet appeared…. It should become the leading text of everyone who believes in freedom, in individualism, and the ability of a free-market economy not only to outdistance any government-planned system in the production of goods and services for the masses, but to promote and safeguard, as no collectivist tyranny can ever do, those intellectual, cultural, and moral values upon which all civilization ultimately rests.
The foundations of the study of human action
The very structure of Mises’s book made it seem alien to the mainstream of the economics profession when it appeared. Economics was increasingly becoming a narrowly technical and highly mathematical discipline, with a growing use of and dependency on aggregate statistical data in designing theories and “models” of the economy.
Instead, the first 200 pages of Human Action were devoted to the philosophical and epistemological problems of the human sciences, especially economics and history. Most economists had come to believe that if economics was to be a “real” science, it needed to ape the methods and techniques of the natural sciences. This was the reason behind the presumption that all economic theorizing required the reduction of human activity and interactions to mathematical functions and simultaneous equations to achieve states of economic equilibrium. Statistical data was assumed to capture and incorporate the objectively measurable aspects of human conduct that would ensure economics becoming an “empirical” science for hypothesis testing and predictions of future economic trends.
Mises challenged this entire direction of the economics profession. He argued that there was a distinctly unique quality and characteristic to the study of human beings. Unlike the inanimate objects of the world that fields like physics or chemistry primarily studied, man acts. That is, human beings have consciousness. They think and reason. They reflect on their past and imagine their future. They conceive of desired ends to pursue and imagine means and methods to try to successfully realize those ends.
The study of economics, Mises said, began with reflections on the logical workings of man’s own mind because all human action is nothing more than human reason applied to the pursuit of human purposes. Economics, therefore, begins not with observations of the external manifestations of the outcomes of human action but with an introspective reflection on the logical structure of human reasoning.
What, then, does it mean to “act” and to be able to act? Mises stated that there were three prerequisites in the context of which human beings undertook purposeful action: First, causality. The individual must believe that there are discoverable causal relationships the use of which could enable a desired end to be achievable. Second, uncertainty. The actor must believe that his actions can influence the course of events in such a way that future circumstances may be made different than they would have been if not for his active intervention. Third, temporality. Causality implies the existence of time, since any action undertaken implies a before, a during, and an after. Therefore, all human action occurs in and through time and is something about which man is not indifferent.
While these three elements —causality, uncertainty, and time —are inseparable from the very notion of the “doing” of an action, there remain three other conditions that must be present: First, a feeling of uneasiness. The actor must be dissatisfied in some way with his present or expected circumstances. Second, an imagined and preferred state of affairs. The actor is able to imagine and project into the future a situation or circumstance he would prefer to the one that is likely to prevail if he does not act. Third, a belief or expectations about the availability of useable and useful means to bring his preferred state of affairs into existence at a point in the future.
From these fundamental concepts, Mises argued, all the core principles and relationships of economics were derivable. The reality of the world shows man that many of the available and useful means are insufficient to simultaneously pursue all his desired ends. This implies that the human actor must rank his desired ends in some order of relative importance and apply the means for pursuing these ends in a descending order reflecting the subjective (personal) valuation of these ends. While some choices are categorical (either/or), most choices, due to the discreteness of both the ends and the means, are incremental (“marginal”) in nature. This imposes upon man the necessity of trade-offs, that is, a little bit more of this versus a little bit less of that. Hence, scarcity of means for the attainment of ends imposes upon man the necessity of choice.
Every such trade-off likewise implies something given up in exchange for something gained. That which is potentially gained from a trade-off is the benefit of a choice, while that which is given up or forgone is the cost of any choice. The profit from such trade-offs is the subjective sense of a net improvement in personal wellbeing from having or achieving the “A” over the “B” that is given up. However, since all actions and choices undertaken are done so under degrees of uncertainty, it is always possible that after an action and trade, the actor will find that the outcome was less than he expected and hoped for. He may regret the choice made and consider himself worse rather than better off; that is, he has suffered a loss.
None of this has anything to do with mathematical functions or data collection and statistical correlation. They precede any attempt to represent human decision-making in mathematical functional form, because it would not be known how to formulate the nature and shape of the functions without this prior introspective knowledge of how human beings think, reason, and act. And it is the choices first made in the minds of interacting human beings about valuations of both ends and means before any external manifestation of it occurs in the forms of production and consumption, buying and selling, prices offered, and bids made and agreed upon in the marketplace that the data collector and statistician attempt to arrange and correlate.
This led Mises to conclude:
Economics is not about things and tangible material objects; it is about men, their meanings and actions. Goods, commodities, and wealth and all the other notions of conduct are not elements of nature; they are elements of human meaning and conduct. He who wants to deal with them must not look at the external world; he must search for them in the meaning of acting men.
This is why for Mises social and market interactions not only begin with individuals — after all, only individuals think, reason, and act — but that human actions arise from people’s subjective interpretations of the world. What are desirable ends and useful means, what are the methods by which means may be applied to achieve ends, what is valued more and what less, which trade-offs would make the actor better off or worse off, and what outcomes would be considered a net gain rather than a loss? None of this is independent and separable from the subjective (personal) interpretations and judgements of the individual human actors.
Equally, all human interactions arise from and depend upon how the actors view the intentions and actions of others. Someone is running toward you waving his arms late at night in a dark alley. Is he a threatening attacker or a long lost relative rapidly approaching to embrace you? The man standing over you has a pointed, sharp instrument in his hand. Is he planning to use this knife to kill you, or is he a surgeon about to make an incision with a scalpel to save your life? Are a group of people jumping up and down in a circle performing a war dance or celebrating at a wedding? The meanings seen in one’s own actions and that of others defines and determines the type of social and economic interactions they are and which influence the respective actions each individual plans and undertakes.
It was Mises’s emphasis on methodological individualism and subjectivism that made Hayek observe in The Counter-Revolution of Science (1952):
It is probably no exaggeration to say that every important advance in economic theory during the last one hundred years was a further step in the consistent application of subjectivism…. This is a development which has probably been carried out most consistently by Ludwig von Mises, and I believe that most peculiarities of his views which at first strike many readers as strange and unacceptable trace to the fact that in the consistent development of the subjectivist approach, he has for a long time moved ahead of his contemporaries.”
Division of labor as the bond of human association
Society emerged out of a long evolutionary process of various forms of human association based on intersubjective beliefs and rules of interaction. The fundamental basis of human beings continuously living together, Mises argued, was the tacit discovery of the benefits from division of labor, that specialization of activities and tasks are far superior to attempts at self-sufficient methods of production to satisfy people’s wants.
From the most ancient of primitive, tribal times, some men were found to be better at fishing or tool making, while others had advantages at hunting or as warriors to protect the tribe from the threats of rival human groups. “The division of labor is what first makes social ties,” Mises explained, “it is the social element pure and simple.” Throughout history, there have been two general forms of human association under division of labor: hegemonic and contractual. Hegemonic relationships are based on command and subjugation, with one or a small group of men ruling over and controlling and directing the actions of others under the threat or use of force. Contractual relationships are based on voluntary agreement and mutual consent of the participants in the association.
The history of human civilization has been a slow replacement of the hegemonic relationship with the society of contract. Individual freedom, voluntary association, and market-based cooperation have served as the basis for the material and cultural advancement of mankind. But the improvements in the human condition have required the emergence and maintenance of certain crucial institutions. Mises explained them:
First, private property, that is, the private ownership of the means of production. Individuals have the right of possession and use of not only goods ready for consumption but the factors of production out of which final goods and services can be manufactured and used.
Second, freedom, that is, the individual liberty to be guided by one’s own purposes and plans, on the basis of which people voluntarily integrate themselves into the social system of division of labor through contract and mutual agreement concerning the terms of association and trade.
Third, peace, that is, the removal and abolition of violence from human relationships, because only in a climate of tranquil association can each individual feel secure to apply his mind, talents, and efforts for creative improvements to the human condition.
Fourth, equality, that is, equal personal and political freedom before the law so each individual may have the liberty to participate in the system of division of labor as he thinks most profitable without legal barriers or restrictions.
Fifth, inequality of wealth and income, that is, each individual’s material position in society depends on his success in serving others in the system of division of labor; the relative income and wealth positions of each individual reflects his inevitable unequal accomplishments in satisfying the wants and desires of others as demonstrated in the profits, wages, interest, or rent each earns for services rendered to their fellow man.
Sixth, limited government, that is, the political authority is restricted in its powers and responsibilities to those tasks required for the securing of the peace under which each individual’s freedom and honestly acquired property is protected from violence, fraud, and aggression.
Market, prices, and economic calculation versus socialist planning
In a system of division of labor, the privately owned means of production are set to work to produce products and provide services desired by others as the means by which each owner — including the owners of their own labor — may successfully earn the financial means to obtain, in turn, the goods and services they want that are being offered by others in their respective roles as producers.
But given the complex network of specialization, and the fact that the participants are separated from each other by both space and time, how can each person successfully communicate to all the others what they desire and are willing to pay as a consumer and what might they be able to do, and at what cost, in their role as a producer?
The answer to this became part of Ludwig von Mises’s most important and recognized contribution to economics. In the years immediately following the First World War, especially in revolutionary Russia, postwar Germany, and in some other European countries, the case was made that the time had come to do away with the capitalist system and replace it with socialist central planning. Mises responded to this with an article on “Economic Calculation in the Socialist Commonwealth” (1920), which he soon expanded into a full treatise in 1922 on the dangers and unworkability of a socialist economic order, which was later published in English as Socialism: An Economic and Sociological Analysis (1936). In the face of criticism and often vicious attacks, Mises restated and refined his argument against central planning in the pages of Human Action.
A functioning and complex market system of division of labor is made possible by the existence of a competitively generated price system on the basis of which both consumer goods and the physical means of production (land, labor, and capital) are expressed in commensurable value through a medium of exchange — money. A market-based monetary price system enables a process of economic calculation through which it is possible to compare and determine the value of outputs relative to the value of inputs in terms of sums of money.
Hence, those guiding and directing production in the market economy — the enterprising entrepreneurs — are able to estimate whether particular productive activities would be profit-making or loss-suffering and, among the alternative ways of combining the factors of production to manufacture desired products, which ones would enable the least-costly methods of bringing desired goods to market. For this reason, Mises highlighted that
Monetary calculation is the guiding star of action under the social system of division of labor. It is the compass of the man embarking upon production…. Monetary calculation is the main vehicle of planning and acting in the social setting of a society of free enterprise directed and controlled by the market and its prices…. Our civilization is inseparably linked with our methods of economic calculation. It would perish if we were to abandon this most precious intellectual tools of acting.
The socialist system of centralized government planning did away with private ownership and control of the means of production; market transactions were eliminated in determining what and how things would be produced, with no market-generated money prices informing what consumer goods or factors of production would be worth for different purposes and in different uses.
The gist of Mises argument against socialist planning can be expressed in the following way: With no private property in the means of production, there is nothing (legally) to buy and sell. With no buying and selling of the factors of production, there are no incentives for people to make bids or offers. With no bids and offers, there can be no agreed-upon terms of trade. With no agreed-upon terms of trade, there would be no real prices telling factor owners what their services and resources may be worth in alternative employments, and no way for the central planners to know what lines of production might be profit-making versus loss-creating, or which combinations of the means of production would enable the least-costly ways of producing what consumers actually want. Thus, rather than a material horn-of-plenty exceeding anything ever experienced under capitalism, socialism in practice would result in what Mises once entitled a short work of his, Planned Chaos (1947). (See my article, “The Centenary of Ludwig von Mises’s Critique of Socialism,” Future of Freedom, June 2022.)
Sovereignty of the consumers and the entrepreneur
In the free, open, and competitive market economy, the ultimate decision-makers are the consumers, who are “sovereign” in deciding what they want to buy and the prices they are willing to pay. They are the determiners of how the scarce means of production are allocated and used in producing and supplying which goods and services. But standing as the market intermediary between the consumers of the society and the factors of production employed to make what those consumers want are the entrepreneurs. Their role in the social system of division of labor is to be the undertakers of private enterprises, the decision-makers as to what to produce, where and how to produce what consumers want, and with what combinations of the factors of production.
The entrepreneur’s reward for successfully doing so are profits earned and the additional revenues for expanding his operations. Losses are the punishment for failure in mistaking what consumers desire and the prices they are willing to pay, or in doing so less effectively and less efficiently than his supply-side market rivals; unless he mends his decision-making ways, the loss-making enterpriser eventually goes out of business and control of the means of production at his disposal passes into potentially more competent entrepreneurial hands.
This dynamic and never-ending competitive market process, Mises stated, brings about the cooperative coordination of the actions of everyone in the society by determining each person’s most efficient and productive place in the division of labor. It is the process that brings about a matching of supplies with demands and creates the incentives and opportunities for entrepreneurs and others in trying their hands at producing more, better, different, and less costly goods and services in the quest for profits and avoidance of losses. The outcome has been the ever-improving standard of living that free market capitalism has brought to millions and now billions of people.
Government interventions and monetary distortions
Hampering the ability of free markets to do so to the greatest extent, Mises lamented, has been the interventionist welfare state. Government price and production regulations do not abolish the market economy, but these government interventions play the role of sand in the machine, preventing the price system from successfully coordinating all the supplies and demands in the market and hindering entrepreneurs from use their personal (subjective) knowledge, judgment, and “reading” of consumer demand to bring to market what buyers want and in the forms and types they desire. Carried far enough, government controls on prices and production cumulatively can end up imposing a form of planned economy in its place by suffocating the market with controls and regulations.
Mises’s other major contribution to economics during his lifetime was his “Austrian” theory of money and the business cycle. First presented in The Theory of Money and Credit (1912, 2nd ed., 1924) and Monetary Stabilization and Cyclical Policy (1928), he used the publication of Human Action as the opportunity to restate and refine his theory of the origin of money and of how changes in the money supply impact prices, wages, production, and resource uses in “non-neutral” distorting ways.
One form of this monetary-induced distortion of market relationships came through central bank manipulation of money and interest rates that brought about the booms and busts of the business cycle. The only real protection from this happening over and over again, Mises insisted, was the separation of money from the state through private, competitive free banking. (See my three-part series, “Ludwig von Mises and the Austrian Theory of Money, Banking and the Business Cycle,” Future of Freedom, March, April, and May 2024.)
Free markets bring freedom and prosperity
The conclusions that Mises reached based on his analysis of the market economy versus socialism versus the interventionist state was that there was no viable alternative to an open, competitive capitalist system. This was the case not only in terms of which economic system has the potential to most effectively “deliver the goods” that people want and at the least cost but also in the sense of providing the individual with the greatest degree of personal freedom consistent with a peaceful living with others in society.
Private property provides the individual an autonomous sphere in which to live independently of the control and command of government through his own actions and interactions with other private individuals by the voluntary associations of the marketplace. Such freedom is threatened and does not exist in any political arrangement
in which government has a commanding control of production and employment. Especially under socialism, there are no employment opportunities, no accesses to the necessities or amenities of life, or availability to independent sources of knowledge and information outside of the State. As Mises pointed out:
The concepts of freedom and bondage make sense only when referring to the way in which government operates…. As far as the government — the social apparatus of compulsion and oppression — confines the exercise of its violence and the threat of such violence to the suppression and prevention of antisocial action, there prevails what reasonably and meaningfully can be called liberty….
Liberty and freedom are the conditions of man within a contractual society. Social cooperation under a system of private ownership of the factors of production means that within the range of the market the individual is not bound to obey and to serve an overlord. As far as he gives and serves other people, he does so of his own accord in order to be rewarded and served by the receivers. He exchanges goods and services; he does not do compulsory labor and does not pay tribute. He is certainly not independent. He depends on the other members of society. But this dependence is mutual. The buyer depends on the seller and the seller on the buyer…. There is no kind of freedom and liberty other than the kind which the market economy brings about….
Government is in the last resort the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom.
Seventy-five years may have passed since Ludwig von Mises’s Human Action was published. Yet, the logic of human action and the workings of the market economy are no different now than when Mises enunciated them in his treatise. Nor are the impossibilities and dangers from various forms of government planning and intervention any different today than in 1949.
Indeed, in the midst of the current collectivist counterrevolution against freedom in all its facets —political, cultural and social, as well as economic — the lessons to be learned from within the pages of Human Action have never been more important. It remains one of the timeliest classics of the last 100 years.
This article was originally published in the September 2024 issue of Future of Freedom.