Free Market Defense Essay, Research Paper

Ludwig

von Mises: Defender of the Free Market

Ludwig von Misis thoughts on human behavior, socialism, and money and credit

have had a major impact on economic thought. He championed true free markets and

is seen as a defender of liberty. Former President of the United States Ronald

Reagan said ?Ludwig von Mises was one of the greatest economic thinkers in the

history of Western Civilization. Through his seminal works, he rekindled the

flames of liberty. As a wise and kindly mentor, he encourages all who sought to

understand the meaning of freedom. We owe him an incalculable debt?(Mises

Institute). The remainder of this paper will outline the life of Ludwig von

Mises. This will be accomplished by describing the social, political, technical,

and economic environment that influenced his ideas. A description of his major

ideas in economic thought will be presented. Next, the people and ideas that

influenced his approach to economics will be addressed. Finally, the paper will

conclude with an assessment of Ludwig von Mises contributions to economic

thought. Overview of the Life of Ludwig von Mises Ludwig von Misis was born on

September 29, 1881 in Lemberg, Austria. He attended a private elementary school,

the public Akademishe Gymnasium in Vienna from1892 to 1900. In 1900 Mises

entered the University of Vienna. On February 20,1906 he received a Dr. Jur

degree, a Doctor of both Canon and Roman Laws, from the University of Vienna.

When Mises attended the University, it had no separate economics department; the

only way to study economics was through law (Mises Institute). From 1907 to 1914

Mises was employed as an advisor to the Austrian Chamber of Commerce. His first

major thesis, the Theory of Money and Credit was published in 1912. In 1913

Mises was awarded the position of Privatdozent (unsalaried lecturer) at the

University of Vienna (Mises Institute). Mises? academic pursuits were

interrupted from 1914 to 1918 due to World War I. After World War I Mises

returned to the University of Vienna and his position at the Austrian Chamber of

Commerce. His next major thesis, Socialism, came in 1922. In 1934 Mises accepted

a position as Professor of International Economic Relations at the Graduate

Institute of International Studies, in Geneva, Switzerland. Even though he bad

left Vienna to accept this position in Switzerland, Mises did work for the

Austrian Chamber of Commerce on a part-time basis until Hitler’s annexation of

Austria in March 1938 (Mises Institute). On July 6, 1938 Ludwig von Mises

married Margit Sereny in Geneva. Ludwig von Mises immigrated to the United

States in 1940 arriving in New York on August 2. In the United States Mises

taught as a Visiting Professor at the University of New York from 1945 to 1969.

He also traveled to Central and South America giving lectures from 1942 to 1959.

In 1949 Mises published his crowning achievement Human Action. This treatise

summarized his thoughts on economics. Through out the rest of his life Mises

received several distinguished awards. On October 10, 1973 Ludwig von Mises

passed away at St. Vincent Hospital in New York City. Factors Influencing Ludwig

von Mises Ideas The major influence on Ludwig von Mises ideas was the Austrian

school of economic thought. The political and economic events that influenced

Mises included two world wars and an extended worldwide depression. In the

political turmoil after World War I, the main theoretician of the now socialist

Austrian government was Marxist Otto Bauer. Mises had befriended Bauer during

his school years and the two often discussed economics and politics. Mises

explained economics to him night after night, eventually convincing him to back

away from Bolshevik-style policies (Mises Institute). His actions kept Austria

from following to the hyperinflation that the Germans experienced. The

prevailing political climate during this time was Socialism. Mises strongly

opposed Socialism and its prevalence inspired him to write his next great work

Socialism. The Great depression brought about the rise of Keynesian Economics.

Mainstream economics embraced Keynesian economics and as a result Mises theory

of money and credit was pushed into the background as the cause for business

cycles. Political activity in Europe, specifically Hitler?s aggression, drove

Mises from his homeland and then Europe just before World War II. Mises

continued to lecture widely in the United States, Europe and Latin America. He

served as economic advisor to the Foundation for Economic Education (FEE) from

its founding in 1946 until his death. He was appointed a Visiting Professor at

New York University Graduate School of Business Administration in 1945 and

served there until 1969 (FEE). In his life time Mises witnessed the completion

of the industrial revolution in the western world as well as the pervasion of

government intervention into the free market through fiscal policy, based on

Keynesian Economics, and through the institutionalization of central banking.

Ludwig von Misis: Money and Credit, Socialism, and Human Action During his

lifetime of teaching and writing Mises wrote 25 books and more than 250

scholarly articles (Mises Institute). Percy Greaves gives a list of Mises more

prominent books in Mises Made Easier, they include: Human Action (1st edition,

Yale, 1949; 2nd revised edition, Yale, 1963; 3rd revised). edition, Regnery,

1966 Bureaucracy (Yale, 1944; Arlington House, 1969). Omnipotent Government

(Yale, 1944; Arlington House, 1969). Socialism (Yale, 1951; Jonathan Cape,

1969). The Theory of Money and Credit (Yale, 1953; Foundation for Economic

Education, 1971). The Anti-Capitalistic Mentality (Van Nostrand, 1956;

Libertarian Press, 1972). Theory and History (Yale, 1957; Arlington House,

1969). Epistemological Problems of Economics (Van Nostrand, 1960). The Free and

Prosperous Commonwealth (Van Nostrand, 1962). Planning for Freedom (2nd edition,

Libertarian Press, 1962). The Ultimate Foundation of Economic Science (Van

Nostrand, 1962.) The Historical Setting of the Austrian School of Economics

(Arlington House, 1969). According to Allen Dalton, Professor of Economics at

Boise State University, Mises major contributions to economic thought appear in

his three books The Theory of Money and Credit, Socialism, and Human Action. In

his first major work The Theory of Money, Mises argued that just as the price of

any commodity is determined by supply and demand, so is the purchasing power of

money, its "price" (Mises Institute). Money, according to Mises, is

not a measurement of prices: it is a medium whose exchange ratio varies in the

same way, although as a rule not with the same speed and to the same extent, in

which the mutual exchange ratios of the vendible commodities and services vary (Koether).

Mises showed that prices can increase faster or slower than the money supply,

the amount and speed of price increases depending on people’s desire to hold

cash. He also argued that because prices increase only relative to one another,

monetary inflation has the effect of redistributing wealth, from savers and

earners to banks and government and its connected interest groups that receive

the counterfeit money first (Mises Institute). Mises student, Murray Rothbard

summarized Mises ideas concerning the effects of fractional reserve banking and

central banking in his article The Case Against the Fed by stating that

counterfeiting (credit expansion) is inflationary, redistributive, distorts the

economic system, and amounts to stealthy and insidious robbery and expropriation

of all legitimate property owners in society (Rothbard). The business cycles of

booms and busts that monetary inflation causes are even more damaging to

society. When government inflates, it lowers the interest rate below the proper

market level, which is dependent on saving. The artificially low interest rate

misleads businesses into making uneconomic speculative investments and creates

an inflationary boom. When the credit expansion slows or stops, investment

errors are revealed bankruptcies and unemployment result. Central banks like the

Federal Reserve will ultimately create the business cycle. Mises argued that

because money originated as a market commodity, not by government edict or

social contract, it should be returned to the market. Banking should be treated

as any other industry in a market economy, and be subject to competition. The

currency should be tied to gold, its originating commodity, through free

convertibility (Rothbard). Mises book Socialism predicted the downfall of

communism and warned against socialist institutions in government. He states

that socialism could not function in an industrial economy because there would

be no market for the factors of production and therefore no price system to

calculate profit and loss (Rothbard). Therefore planning in a planned economy is

impossible due to the lack of economic calculation. The result of planned

economies is no economy at all but rather a system of ?groping in the

dark?(Koether). Just as important, he showed that mixed economics cannot

function efficiently either. Through taxes, regulation, and spending, government

distorts the price system and the allocation of resources to their most highly

valued uses (Rothbard). Evidence of this pitfall is all around us and is

manifest in the downfall of Russia and China?s moves toward capitalist

economics. Human Action is Ludwig von Mises masterwork. Murray Rothbard

summarized the importance of Human Action in his essay The Essential Ludwig von

Mises with the following statements; ?Human Action is IT; it is economics

whole, developed from sound praxeological axioms, based squarely on analysis of

acting man, the purposive individual as he acts in the real world. It is

economics developed as a deductive discipline, spinning out of logical

implications of the existence of human action. To the present writer, who had

the privilege of reading the book on publication, it was an achievement that

changed the course of his life and ideas. For here was a system of economic

thought that some of us had dreamed of and never thought could be attained: an

economic science, whole and rational, an economics that should have been but

never was. An economics provided by Human Action? (Rothbard). The 900 page

treatise on economics covers topics such as accounting, advertising, banking,

business cycles, bureaucracy, capital, capitalism, charity, competition, debt,

devaluation, economics, education, entreprenuership, equality, exchange rates,

gold standard, government, history, human action, ideology, individualism,

inflation, interest, intervention in markets by government, foreign and domestic

investment, labor unions, laissez faire, land reform, markets, mathematics,

money, monopoly, morality, mortality, praxeology, prices, profits and loss,

public opinion, reason, religion, science, sex, socialism, society, speculation,

statistics, tariffs, taxes, theory, time, underdeveloped nations, unemployment,

value, wages and war (Koether). The most important ideas derived from Human

Action change the very method used to evaluate economics. Mises argues that

economics can not be viewed in specialized terms but rather must be viewed as a

whole system. This method is referred to as praxeology. Mises also argued

against the rising use of mathematics in economics. He states that ?the

fundamental deficiency implied in every quantitative approach to economic

problems consists in the neglect of the fact that there are no constant

relations between what are called economic dimensions. There is neither

constancy nor continuity in the valuations and in the formation of exchange

ratios between various commodities? (Koether). In fact Mises referred to

mathematics in economics as ?worthless mental gymnastics? because they can

not and do not apply to real economic problems. It does not help to think of

prices of production as the intersect of two curves, but it does help to realize

that price is derived through human action (Koether). Many other ideas are put

forth in Human Action but these two are the most prevalent of those that have

not already been discussed. The People and Ideas that Influenced Ludwig von

Mises. The basis for all of Mises writings came from the founder of the Austrian

School of economics, Carl Menger. Menger?s complete theory of marginal utility

and its subjective reasoning that relied on theory. Mises stated that Menger?s

views ?made an economist? out of him because of its methodology, which

stated that economics is the science of individual choice (Mises Institute).

Eugen von Boehm-Bawerk, a student of Menger, taught a young Mises from 1904 to

1914 at the University of Vienna. His views on intervention of the government

and how it reacted to economic law greatly influenced Mises thesis on socialism.

Boehm-Bawerk?s theory on interest and capital and its time preference basis

formed the logic needed to argue the viability of socialism (Spiegel). Mises

thoughts on the business cycle were derived from Ricardian models, Boehm-Bawerk?s

theory on capital and the factors of production, and Knut Wicksell?s ideas

regarding production and the effects the difference between real and nominal

interest rates has on it. Max Weber influenced Mises concerning economics as a

social science, but Menger was probably the major influence here as well.

Assessment of Ludwig von Mises Contributions to Economics The completeness of

Human Action is the most impressive contribution that Ludwig von Mises gave to

economics. The marriage of micro and macroeconomics was accomplished through

Mises theory on money and credit. This was the first time that this had been

accomplished. His argument presented in Socialism has been historically

vindicated and supported by empirical facts. Mises undying views on laissez

faire has been his sticking point with mainstream economics (Spiegel). The

failure of the gold standard and the prevailing existence of central banks are

testaments to this. The biggest triumph of Mises is the methodology used to

study economics. He solidified Menger?s theoretical approach to economic

problems.

Foundation for Economic Education ?Ludwig von Mises? [On-Line] Available

Internet www.fee.org/about/misesbio.html Greaves, Percy L. ?Mises Made

Easier,? 1974, Free Market Press Koether, George ?The Wisdom of Ludwig von

Mises? 1981, The Freeman Ludwig von Mises Institute ?Who is Ludwig von Mises?

[On-Line] Available Internet www.mises.org/mises.asp Ludwig von Mises Institute

?What is Austrian Economics? [On-Line] Available Internet www.mises.org/austian.asp

Ludwig von Mises Institute ?Why Austrian Economics Matters? [On-Line]

Available Internet www.mises.org/why_ae.asp Ludwig von Mises Institute ?An

American Classical Liberalism? [On-Line] Available Internet www.mises.org/classical.asp