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Ludwig von Mises and the Austrian
School of Economics

Jeffrey M. Herbener*

Everyone carries a part of society on his shoulders: no one is
relieved of his share of responsibility by others. And no one
can find a safe way for himself if society is sweeping towards
destruction. Therefore everyone, in his own interests, must
thrust himself vigorously into the intellectual battle. No one
can stand aside with unconcern: the interests of everyone
hang on the result. Whether he chooses or not, every man is
drawn into the great historical struggle, the decisive battle
into which our epoch has plunged us (Mises 1988, p. 169).

his is the message of Ludwig von Mises. No one has ever

fought the battle more courageously than Mises, nor had a

more decisive long-run effect. Murray Rothbard is correct
when he says “. . . if the world is ever to get out of its miasma of
statism, or, indeed, if the economics profession is ever to return to a
sound and correct development of economic analysis, both will have
to abandon their contemporary bog and move to that high ground that
Mises developed for us” (Rothbard 1983, p. 5).

Now, as the battle appears to be turning in favor of freedom, is
an appropriate time to reconsider the role of economic theory in these
world-wide changes. Specifically, it is time to consider the work of
Mises and the Austrian school in the development and dissemination
of the economic principles of social progress. Two steps are necessary
to complete this task. The first is to demonstrate the pre-eminence of
the Austrian school in developing the principles of free enterprise.
The second is to demonstrate that Mises is the champion of this
tradition in the twentieth century.

*Jeffrey M. Herbener is assistant professor of economics at Washington and
Jefferson College in Pennsylvania.

The Review of Austrian Economics, Vol. 5, No. 2 (1991): 33-50
ISSN 0889-3047

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34 The Review of Austrian Economics, Vol. 5, No. 2

Method and the Austrian Tradition

Carl Menger founded the Austrian school during the marginalist
revolution of the late nineteenth century in his attempt to correct the
errors of the classical economists. As Menger said:

Adam Smith and this school have neglected to reduce the complicated
phenomena of human economy in general, and in particular of its social
form, “national economy” to the efforts of individual economies, as would
be in accordance with the real state of affairs. They have neglected to
teach us to understand them theoretically as the result of individual
efforts. Their endeavors have been aimed, rather, and to be sure,
subconsciously for the most part, at making us understand them
theoretically from the point of view of the “national economy” fiction.
On the other hand, the historical school of German economists follows
this erroneous conception consciously (Menger 1985, pp. 195-96).

It is the adherence to these methodological precepts of individu-
alism and essentialism that distinguish the Austrian school from all
others. Although Mises significantly refined and improved his posi-
tion, Menger laid the groundwork:

This is the ground on which I stand. In what follows I have endeavored
to reduce the complex phenomena of human economic activity to the
simplest elements that can still be subjected to accurate observation, to
apply to these elements the measure corresponding to their nature, and
constantly adhering to this measure, to investigate the manner in which
the more complex economic phenomena evolve from their. elements
according to definite principles (Menger 1976, p. 47).

It is now the task of the reader to judge to what. results the method
~ of investigation I have adopted has led, and whether I have been able
to demonstrate successfully that the phenomena of economic life, like
those of nature, are orderly strictly i in accordance with definite laws
(Menger 1976, p. 48). :

Via this method, Menger solved the paradox of value, derived the
subjective theory of value, developed a unified theory of price and
reconstructed the origin of social institutions such as money, mar-
kets, property, and law. More than this, he began the process, culmi-
nating in the work of Mises, that has resulted in universally correct
economic laws of social systems. As Menger stated:

The aim of this orientation, which in the future we will call the exact
one, an aim which research pursues in the-same way in all realms of -
the world of phenomena, is the determination of strict laws of phe-
nomena, of regularities in the succession of phenomena which do not
present themselves to us as absolute, but which in respect to the
approaches to cognition by which we attain to them simply bear within
themselves the guarantee of absoluteness (Menger 1985, p. 59).


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Herbener: Mises and the Austrian School 35

In contrast, most other schools of economic thought deny, because
of their methodological positions, the existence of universal laws of
economics. Most prevalent are empirically based schools such as the
German historical school that Menger fought. Menger was quite clear
on this:

If, therefore, exact laws are at all attainable, it is clear that these
cannot be obtained from the point of view of empirical realism, but
only in this way, with theoretical research satisfying the presupposi-
tions of the above rule of cognition.

But the way by which theoretical research arrived at the above goal,
a way essentially different from Bacon’s empirical-realistic induc-
tion, is the following: it seeks to ascertain the simplest elements of
everything real, elements which must be thought of as strictly typical
just because they are the simplest.

The specific goal of this orientation of theoretical research is the
determination of regularities in the relationships of phenomena
which are guaranteed to be absolute and as such to be complete.

It examines, rather, how more complicated phenomena develop from
the simplest, in part even unempirical elements of the real world in
their (likewise unempirical) isolation from all other influences . . .

Science starts out, however, with these assumptions, since it would
never be able otherwise to reach the goal of exact research, the
determination of strict laws. On the other hand, with the assumption
of strictly typical elements, of their exact measure, and of their
complete isolation from all other causative factors, it does to be sure,
and indeed on the basis of the rules of cognition characterized by us
above, arrive at laws of phenomena which are not only absolute, but
according to our laws of thinking simply cannot be thought of in any
other way but as absolute (Menger 1985, pp. 60-61).

Menger, like Mises, leaves no doubt regarding his view of the
efficacy of empirically testing economic theory; providing a refutation
of positivism and falsification in economics almost a century before
Milton Friedman and F. A. Hayek espoused them.

Among economists the opinion often prevails that the empirical laws,
“because they are based on experience,” offer better guarantees of
truth than those results of exact research which are obtained, as is
assumed, only deductively from a priori axioms.

The error at the basis of this view is caused by the failure to recognize
the nature of the exact orientation of theoretical research, of its
relationship to the realistic, and by applying the points of view of the
latter to the former.

Nothing is so certain as that the results of the exact orientation of


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36 The Review of Austrian Economics, Vol. 5, No. 2

theoretical research appear insufficient and unempirical in the field
of economy just as in all the other realms of the world of phenomena,
when measured by the standard of realism. This is, however, self-ev-
ident, since the results of exact research, and indeed in all realms of
the world of phenomena, are true only with certain presuppositions,
with presuppositions which in reality do not always apply. Testing
exact theory of economy by the full empirical method is simply a
methodological absurdity, a failure to recognize the bases and pre-
suppositions of exact research. At the same time it is a failure to
recognize the particular aims which the exact sciences serve. To want to
test the pure theory of economy by experience in its full reality is a
process analogous to that of the mathematician who wants to correct the
principles of geometry by measuring real objects, without reflecting that
the latter are indeed not identical with the magnitudes which pure
geometry presumes or that every measurement of necessity implies
elements of inexactitude. Realism in theoretical research is not some-
thing higher than exact orientation, but something different.

The results of realistic orientation stand in an essentially different
relationship to the empirical method than those of exact research. The
former are based, of course, on the observation of phenomena in their
“empirical reality” and complexity, and of course the criterion of their
truth is accordingly the empirical method. An empirical law lacks the
guarantee of absolute validity a priori, i.e., simply according to its
methodological presuppositions. It states certain regularities in the
succession and coexistence of phenomena which are by no means neces-
sarily absolute. But bearing this firmly in mind, we note that it must
agree with full empirical reality, from the consideration of which it was
obtained. To want to transfer this principle to the results of exact
research is, however, an absurdity, a failure to recognize the important
difference between exact and realistic research. To combat this is the
chief task of the preceding investigations (Menger 1985, pp. 69-70).

While referring to the German historical school, Menger also
refuted the modern hermeneutic economists.

There is scarcely any need to remark that the nature and significance
of the exact orientation of research is completely misunderstood in the
modern literature on national economy. In German economics, at least
in the historical school, the art of abstract thinking, no matter how
greatly distinguished by depth and originality and no matter how
broadly supported empirically—in brief, everything that in other theo-
retical sciences establishes the greatest fame of scholars is still consid-
ered, along with the products of compilatory diligence, as something
secondary, almost as a stigma. The power of truth, however, will
finally also be tested for those who, sensing their inability to solve
the highest problems of the social sciences, would like to raise their
own inadequacy as a standard for the value of scientific work in
general (Menger 1985, p. 65).


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Herbener: Mises and the Austrian School 37

Neither Hayek, who has come to accept the empirical method of
Karl Popper, nor the modern hermeneuticians who advance the
epistemology of subjective interpretation, have any grounding in
Menger. Only Mises has accepted Menger’s basic deductive procedure
and forged ahead to refine it into praxeology. Mises is the true heir
of the Austrian tradition and the person who has advanced the edifice
of absolute economic laws in this century.

Hayek versus Menger

As Hayek progressively left his grounding in the praxeological
method, he drifted further and further into error. This process has
culminated in Hayek’s latest work on socialism which he claims is
based on Menger:

But to me, at any rate, [[nvestigations’] main interest to the econo-
mist in our days seems to lie in the extraordinary insight into the
nature of social phenomena which is revealed incidentally in the
discussion of problems mentioned to exemplify different methods of
approach . . . Discussions of somewhat obsolete views, as that of the
organic or perhaps better physiological interpretation of social phe-
nomena, gave him an opportunity for an elucidation of the origin and
character of social institutions which might, with advantage, be read
by present-day economists and sociologists (Hayek 1976, p. 23).

Menger was the only one of these to have come after Darwin, yet all
attempted to provide a rational reconstruction, conjectural history,
or evolutionary account of the emergence of cultural institutions
(Hayek 1988, p. 70).

Adequate explanations of [the market, etc.] were disseminated . . .
especially by the Austrian school following Menger, into what became
known as the “subjective” or “marginal utility” revolution in economic
theory. [The most elementary and important] was the discovery that
economic events could not be explained by preceding events acting as
determining causes that enabled these revolutionary thinkers to
unify economic theory into a coherent system (Hayek 1988, p. 97).

What Menger wrote about using organic analogies in the social
sciences in no way justifies Hayek’s claim. Menger stated clearly that
the analysis of social development must be built from individual
action and that reason is the guiding force in understanding social
processes.

In [the organic] category belong above all the attempts of those who
- think that they have solved the problem involved merely by desig-
nating as “organic” the developmental process we are discussing. The
process by which social structures originate without action of the
common will may well be called “organic,” but it must not be believed


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38 The Review of Austrian Economics, Vol. 5, No. 2

that even the smallest part of the noteworthy problem of the social
sciences that we alluded to above has been solved by this image or by
any mystic allusions attached to it (Menger 1985, p. 149).

Yet Hayek makes just such allusions when he claims that the
spontaneous order of the market “forms itself” or:

The answer to [how we came to acquire the economic order of the market]
is built upon the old insight, well known to economics, that our values
and institutions are determined not simply by preceding causes but as
part of a process of unconscious self-organisation of a structure or
pattern. This is true not only of economics, but in a wide area, and is
well known today in the biological sciences (Hayek 1988, p. 9).

Menger sees two mistakes made in the analysis of social pro-
cesses: the mystic one mentioned above, and the view that society is
a product of the “common will,” i.e., created by positive legislation.

Just as meaningless is another attempt to solve the problem dis-
cussed here. I mean the theory, which has attained widespread
currency, that recognizes in social institutions something original,
that is, not something that has developed, but an original product of
the life of the people. This theory (which, incidentally, is also applied
by a few of its adherents, for whom a unified principle means more
than historical truth or the logic of things, by way of a peculiar
mysticism to social institutions created by positive laws) indeed
avoids the error of those who reduce all institutions to acts of positive
common will. Still, it obviously offers us no solution of the problem
discussed here, but evades it. The origin of a phenomena is by no
means explained by the assertion that it was present from the very °
beginning or that it developed originally (Menger 1985, p. 149).

But Hayek is reduced to such a conclusion, “Although also ac-
claimed as a biologist, Aristotle lacked any perception of two crucial
aspects of the formation of any complex structure, namely, evolution
and the self-formation of order” (Hayek 1988, p. 45). Appeals to words
like evolution or self-formation are not solutions to the problems of
the origin and development of social institutions. Menger clearly
looked to individual action as the foundation of the solution.

Such a phenomenon must obviously have developed at some time
from its simpler elements; a social phenomenon, at least in its most
original form, must clearly have developed from individual factors.
The view here referred to is merely an analogy between the develop-
ment of social institutions and that of natural organisms which is
completely worthless for the purpose of solving our problem. It states,
to be sure, that institutions are unintended creations of the human
mind, but not how they came about. These attempts at interpretation
are comparable to the procedure of a natural scientist who thinks he
is solving the problem of the.origin of natural organisms by alluding


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Herbener: Mises and the Austrian School 39

to their “originality,” “natural growth,” or their “primeval nature”
(Menger 1985, p. 149).

In contrast, Hayek approvingly quotes Popper, who stated, “Cul-
tural evolution continues genetic evolution by other means” (Hayek
1988, p. 16). He continues:

For example, by the time culture began to displace some innate
modes of behavior, genetic evolution had probably also already en-
dowed human individuals with a great variety of characteristics
which were better adjusted to the many different environmental
niches into which men had penetrated than those of any non-domes-
ticated animal. . . . Among the most important of these innate
characteristics which helped to displace other instincts was a great
capacity for learning from one’s fellows, especially by imitation
(Hayek 1988, p. 18).

Menger pointed out the poverty of this line of argument:

The previous attempts to interpret the changes of social phenomena as
“organic processes” are no less inadmissible than the above theories
which aim to solve “organically” the problem of the origin of uninten-
tionally created social structures. There is hardly need to remark that
the changes of social phenomena cannot be interpreted in a social-prag-
matic way, insofar as they are not the intended result of the agreement
of members of society or of positive legislation, but are the unintended
product of social development. But it is just as obvious that not even the
slightest insight into the nature and the laws of the movement of social
phenomena can be gained either by the mere allusion to the “organic”
or the “primeval” character of the processes under discussion, nor even
by mere analogies between these and the transformations to be
observed in natural organisms. The worthlessness of the above ori-
entation of research is so clear that we do not care to add anything
to what we have already said (Menger 1985, p. 150).

Hayek bases his analysis on exactly these allusions and analogies:

Despite such differences, all evolution, cultural as well as biological,
is a process of continuous adaptation to unforeseeable events, to
contingent circumstances which could not have been forecast (Hayek
1988, p. 25).

Economics has from its origins been concerned with how an extended
order of human interaction comes into existence through a process of
variation, winnowing and sifting far surpassing our vision or our
capacity to design. . . . We are led—for example by the pricing system
in market exchange—to do things by circumstances of which we are
largely unaware and which produce results that we do not intend
(Hayek 1988, p. 14).

Menger rejected these mystic forces and Hayek’s characterization


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40 The Review of Austrian Economics, Vol. 5, No. 2

of individuals as mindless, passive, and ignorant:

If this significant problem of the social sciences is truly to be solved,
this cannot be done by way of superficial and, for the most part,
inadmissable analogies. It can be done, in any case, only by way of
direct consideration of social phenomena, not “organically,” “anatom-
ically,” or “physiologically,” but only in a specifically sociological way.
The road to this, however, is theoretical social research, the nature
and main orientations of which (the exact and the empirical-realistic)
we have characterized above (Menger 1985, p. 150).

Hayek relies upon evolution to explain language, law, morals, mar-
kets, and money (Hayek 1988, p. 24); in contrast Menger claims that
these institutions can be understood as built upon individual action.

[These are] the unintended result of innumerable efforts of economic
subjects pursuing individual interests. The theoretical understand-
ing of them, the theoretical understanding of their nature and their
movement can thus be attained in an exact measure only in the same
way as the understanding of the above mentioned social structures.
That is, it can be attained by reducing them to their elements, to the
individual factors of their causation, and by investigating the laws
by which the complicated phenomena of human economy under
discussion here are built up from these elements. This, however, as
scarcely needs saying, is that method which we have characterized
above as the one adequate for the exact orientation of theoretical
research in the realm of social phenomena in general. The methods
for the exact understanding of the origin of the “organically” created
social structures and those for the solution of the main problems of
exact economics are by nature identical (Menger 1985, pp. 158-59).

Hayek versus Mises

Menger began to build the principles of economics from what he saw
as the essence of these individual factors—the human need to satisfy
material ends. From this idea of subjective value, he proceeded to
derive principles of action of an isolated individual, then the more
complex principles; two-person exchange (based upon mutual bene-
fit), the social division of labor, and finally, a consistent, unified
theory of price (see Menger 1976). These principles were the basis of
his advocacy of laissez faire (see Rothbard 1991).

Eugen von Bohm-Bawerk, accepting Menger’s methodological
position, constructed the theories of advanced social production,
capital and interest, and demolished the underpinnings of Marxian
economics (B6hm-Bawerk 1959).

Refining and building upon this work, Mises constructed a very
different picture of society’s origin and development from that of
Hayek (Salerno 1990). His answer to a Hayekian view of society is:


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Herbener: Mises and the Austrian School 41

To those pretending that man would be happier if he were to renounce
the use of reason and try to let himself be guided by intuition and
instincts only, no other answer can be given than an analysis of the
achievements of human society. In describing the genesis and work-
ing of social cooperation, economics provides all the information
required for an ultimate decision between reason and unreason. If
man reconsiders freeing himself from the supremacy of reason, he
must know what he will have to forsake (Mises 1966, p. 91).

Mises saw society as a strategy of acting individuals in their
struggle against scarcity; purposefulness is the essence of the mar-
ket, not spontaneity.

Seen from the point of view of the individual, society is the great
means for the attainment of all his ends (Mises 1966, p. 165).

Society is concerted action, cooperation. Society is the outcome of
conscious and purposeful behavior. This does not mean that individ-
uals have concluded contracts by virtue of which they have founded
human society. The actions which have brought about social cooper-
ation and daily bring it about anew do not aim at anything else than
cooperation and coadjuvancy with others for the attainment of defi-
nite singular ends. The total complex of the mutual relations created
by such concerted actions is called society (Mises 1966, p. 143).

For Mises the division of labor (which is predicated on the inher-
ent differences in individuals and natural resources) is the essence
of society and the linchpin of all aspects of civilization.

Society is division of labor and combination of labor (Mises 1966, p. 143).

The fundamental social phenomenon is the division of labor and its
counterpart human cooperation (Mises 1966, p. 157).

The fundamental facts that brought about cooperation, society, and
civilization and transformed the animal man into a human being are
the facts that work performed under the division of labor is more
productive than isolated work and that man’s reason is capable of
recognizing this truth. But for these facts men would have forever
remained deadly foes of one another, irreconcilable rivals in their
endeavors to secure a portion of the scarce supply of means of
sustenance provided by nature (Mises 1966, p. 144).

The law of association makes us comprehend the tendencies which
resulted in the progressive intensification of human cooperation. We
conceive what incentive induced people not to consider themselves
simply as rivals in a struggle for the appropriation of the limited
supply of means of subsistence made available by nature. We realize
what has impelled them and permanently impels them to consort
with one another for the sake of cooperation. Every step forward on
the way to a more developed mode of the division of labor serves the


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42 The Review of Austrian Economics, Vol. 5, No. 2

interests of all participants. In order to comprehend why man did not
remain solitary, searching like the animals for food and shelter for
himself only and at most also for his consort and his helpless infants,
we do not need to have recourse to a miraculous interference of the
Deity or to the empty hypostasis of an innate urge toward association.
Neither are we forced to assume that the isolated individuals or
primitive hordes one day pledged themselves by a contract to estab-
lish social bonds. The factor that brought about primitive society and
daily works toward its progressive intensification is human action
that is animated by the insight into the higher productivity of labor
achieved under the division of labor (Mises 1966, p. 160).

The degree to which individuals extend and intensify the division
of labor depends on their understanding and acceptance of it. In
contrast to Hayek, who says, “The curious task of economics is to
demonstrate to men how little they really know about what they
imagine they can design” (Hayek 1988, p. 76), Mises attached an
important role to teaching people economic principles and persuading
them to pursue their “rightly understood interests.”

The principle of the division of labor is one of the great basic princi-
ples of cosmic becoming and evolutionary change. The biologists were
right in borrowing the concept of the division of labor from social
philosophy and in adapting it to their field of investigation . . . But
one must never forget that the characteristic feature of human
society is purposeful cooperation; society is an outcome of human
action, i.e., of a conscious aiming at.the attainment of ends. No such
element is present, as far as we can ascertain, in the processes which
have resulted in the emergence of the structure-function systems of
plant and animal bodies and in the operation of the societies of ants,

bees, and hornets. Human society is an intellectual and spiritual
phenomenon. It is the outcome of a purposeful utilization of a univer-
sal law determining cosmic becoming, viz., the higher productivity of
the division of labor. As with every instance of action, the recognition
of the laws of nature is put into the service of man’s efforts to improve
his conditions (Mises 1966, p. 145).

The body of economic knowledge is an essential element in the struc-
ture of human civilization; it is the foundation upon which modern
industrialism and all the moral, intellectual, technological, and ther-
apeutical 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 (Mises 1966, p. 885).

The prerequisite for advanced social production is calculation
that allows purposeful action within the framework of the division of


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Herbener: Mises and the Austrian School 43

labor. Calculation requires money prices and thus, money and free
exchange, which requires private property.

Economic calculation is the fundamental issue in the comprehension
of all problems commonly called economic (Mises 1966, p. 199).

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.

The system of economic calculation in monetary terms is conditioned
by certain social institutions. It can operate only in an institutional
setting of the division of labor and private ownership of the means of
production in which goods and services of all orders are bought and
sold against a generally used medium of exchange, i.e., money.

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 tool of action (Mises 1966, pp. 229-30).

From this analysis Mises made his criticism of socialism, that it
cannot calculate and thus, it is not an economic system at all. The
attempt to implement socialism must lead to poverty, death, and
retrogression of civilization. Mises said, “In abolishing economic
calculation the general adoption of socialism would result in complete
chaos and the disintegration of social cooperation under the division
of labor” (Mises 1966, p. 861). While Mises saw calculation as the
problem of socialism, Hayek views it as a knowledge problem:

To the naive mind that can conceive of order only as the product of
deliberate arrangement, it may seem absurd that in complex condi-
tions order, and adaptation to the unknown, can be achieved more
effectively by decentralizing decisions, and that a division of author-
ity will actually extend the possibility of overall order. Yet that
decentralization actually leads to more information being taken into
account. This is the main reason for rejecting the requirements of
constructivist rationalism (Hayek 1988, pp. 76-77).

Mises demonstrated that even with perfect information, the cen-
tral planners in socialism cannot rationally calculate how to combine
resources to render efficient production (Ebeling 1991). They can only
grope in the dark; as Mises put it, socialism is “planned chaos,” an
irrational endeavor that must leach off and mimic capitalism to
provide even a subsistence standard of living to its citizens.


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44 The Review of Austrian Economics, Vol. 5, No. 2

The paradox of “planning” is that it cannot plan, because of the
absence of economic calculation. What is called a planned economy
is no economy at all. It is just a system of groping about in the dark.
There is no question of a rational choice of means for the best possible
attainment of the ultimate ends sought. What is called conscious
planning is precisely the elimination of conscious purposive action
(Mises 1966, pp. 700-01).

If no other objections could be raised to the socialist plans than that
socialism will lower the standard of living of all or at least of the
immense majority, it would be impossible for praxeology to pronounce
a final judgment. Men would have to decide the issue between
capitalism and socialism on the ground of judgments of value and of
judgments of relevance. . . . However, the true state of affairs is
entirely different. Man is not in a position to choose between these
two systems. Human cooperation under the system of the social
division of labor is possible only in the market economy. Socialism is
not a realizable system of society’s economic organization because it
lacks any method of economic calculation (Mises 1966, p. 679).

Mises and the Austrian Tradition

These principles, representing the pinnacle of free-market economic
theory, cannot be found in any other modern school of economic
thought. By failing to correctly understand the process of the social
creation of wealth these other schools have not played a significant,
independent role in the current advancement of freedom. Advocates
of the free market within other schools have relied upon the basic
Austrian arguments or have been relatively ineffective since their
economic theories are more easily rebuffed.

What effective defense of the free market has been made by econo-
metrics? By its nature all such work tells us only of what has happened
and not what can happen—it cannot result in universal laws applicable
to any conceivable historical episode. As such it is easily ignored by those
who wish to conduct social experiments for the future. Furthermore,
econometrics is coming under increasing criticism as a method capable
of rendering useful knowledge at all (see Hoppe 1988).

This criticism extends with equal force to modern neoclassical
theory, since it is built upon positivism (Friedman 1974). Milton
Friedman tells us that all proper economic theory must be testable and
subject to falsification; that economic propositions, like those in physics,
are hypothetical, tentative, and forever subject to testing and potential
rejection. Yet what basic principles of economics have neoclassical
economists rejected for failing tests of statistical significance? The laws
of supply and demand? The principle of diminishing marginal utility?
The concept of opportunity cost? The idea that exchange leads to


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Herbener: Mises and the Austrian School 45

mutual benefit? Such basic principles are either non-testable, and
thus, not positivist economic theories at all, or routinely rejected in
econometric tests. Yet all economic defenses of the free market are
built from basic principles. Friedman and other neoclassical econo-
mists say that economic theory must be empirical but they do eco-
nomic theory deductively, although not as well as Mises.

Neoclassical economics has failed to provide any role in defense
of the free market to the extent that it stands outside the Austrian
tradition. It contains no free-market principles that are both unique
and true. It should be kept in mind that after Mises’s devastating
article on the inability of socialism to calculate, socialists tried to
refute him by using mathematical economics and econometrics to
show that, in theory at least, the problem could be solved by a system
of equations if the economy is perfectly competitive (Ebeling 1991).
Their failure has not prevented others from employing the pre-emi-
nent neoclassical theory as an argument against the free market. It
is a common barb that the free market would be a superior economic
system if it was perfectly competitive. And since it obviously is not
perfectly competitive, then government control is essential.

To the contrary, Mises has shown that the argument for free
markets does not depend on any type of competition, perfect or
otherwise. In contrast, Hayek claims:

One revealing mark of how poorly the ordering principle of the
market is understood is the common notion that “cooperation is better
than competition.” Cooperation, like solidarity, presupposes a large
measure of agreement on ends as well as on methods employed in their
pursuit. It makes sense in a small group whose members share partic-
ular habits, knowledge and beliefs about possibilities. It makes hardly
any sense when the problem is to adapt to unknown circumstances;
yet it is this adaptation to the unknown on which the coordination of
efforts in the extended order rests. Competition is a procedure of
discovery, a procedure involved in all evolution, that led man unwit-
tingly to respond to novel situations; and through further competi-
tion, not through agreement, we gradually increase our efficiency.

To operate beneficially, competition requires that those involved
observe rules rather than resort to physical force. Rules alone can
unite an extended order. Neither all ends pursued, nor all means
used, are known or need to be known to anybody, in order for them
to be taken account of within a spontaneous order. Such an order
forms of itself (Hayek 1988, pp. 19-20).

Biological and cultural evolution share other features too. For exam-
ple, they both rely on the same principle of selection: survival or
reproductive advantage. Variation, adaptation and competition are
essentially the same kind of process, however different their particular


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46 The Review of Austrian Economics, Vol. 5, No. 2

mechanisms, particularly those pertaining to propagation. Not only does
all evolution rest on competition; continuing competition is necessary
even to preserve existing achievements (Hayek 1988, p. 26).

Mises has shown that the social division of labor isnot an arena
of competition but cooperation, a complex network of voluntary inter-
action that is absolutely necessary for the continuing life and pros-
. perity of the world’s population. If people fail to understand this'and

act against their “rightly understood interests” then prosperity and
civilization will end.

What makes friendly relations between human beings possible is the
higher productivity of the division of labor. It removes the natural
conflict of interests. For where there is division of labor, there is no longer
question of the distribution of a supply not capable of enlargement.
Thanks to the higher productivity of labor performed under the division
of tasks, the supply of goods multipliés. A pre-eminent common interest,
the preservation and further intensification of social cooperation, be-
comes paramount and obliterates all essential collisions. Catallactic
competition is substituted for biological competition. It makes for har-
mony of the interests of all members of society. The very condition from
which the irreconcilable conflicts of biological competition arise—viz.,
the fact that all people by.and large strive after the same things—is
transformed into a factor making for harmony of interests. Because
many people or even all people want bread, clothes, shoes, and cars,
large-scale production of these goods becomes feasible and reduces the
costs of production to such an extent that they are accessible at low
prices. The fact that my fellow man wants to acquire shoes as I do, does
not make it harder for me to get shoes, but easier. What enhances the, -
price of shoes is the fact that nature does not provide a more ample
supply of leather and other raw material required, and that one must
submit to the disutility of labor in order to transform these raw materials
into shoes. The catallactic competition of those who, like me, are eager
to have shoes makes shoes cheaper, not more expensive.

This is the meaning of the theorem of the harmony of the rightly
understood interests of all members of the market society (Mises
1966, pp. 673-74). ree

Most “free-market” economists have failed t absorb Mises’s anal-
ysis of capitalism and socialism and thus hold to some form of a mixed
economy. As Mises has shown this view is untenable.

The market economy must:be strictly differentiated from the second
thinkable—although not realizable—system of social cooperation
under the division of labor: the system of social or governmental
ownership of the means of production. This second system is com-
monly called socialism, communism, planned economy, or state cap-
italism. The market economy or capitalism, as it is usually called,

1
o


===== PAGE 15 =====

Herbener: Mises and the Austrian School 47

and the socialist economy preclude one another. There is no mixture
of the two systems possible or thinkable; there is no such thing as a
mixed economy, a system that would be in part capitalistic and in
part socialist. Production is directed by the market or by the decrees
of a production tsar or a committee of production tsars.

If within a society based on private ownership by the means of
‘production some of these means are publicly owned and operated—
that is, owned and operated by the government or one of its agen-
cies—this does not make for a mixed system which would combine
socialism and capitalism. . . . These publicly owned and operated
enterprises are subject to the sovereignty of the market. They must
fit themselves, as buyers of raw materials, equipment, and labor, and
as sellers of goods and services, into the scheme of the market
economy. They are subject to the laws of the market and thereby
depend on the consumers who may or may not patronize them. They
must strive for profits or, at least, to avoid losses. The government
may cover losses of its plants or shops by drawing on public funds.
But this neither eliminates nor mitigates the supremacynof the
market; it merely shifts it to another sector.

Nothing that is in any way connected with the operation of a market
is in the praxeological or economic sense to be called socialism. The
notion of socialism as conceived and defined by all socialists implies
the absence of a market for factors of production and of prices of such
factors. The “socialization” of individual plants, shops, and farms—
that is, their transfer from private into public ownership—is a
method of bringing about socialism by successive measures. It is a
step on the way toward socialism, but not in itself socialism (Mises
1966, pp. 258-59).

This step-by-step process, in reverse, is the council given to the
countries of Eastern and Central Europe by today’s self-proclaimed,
free-market economists. After moving toward capitalism, they are to
stop at some optimum amount of government intervention. But Mises |
showed long ago that interventionism is an unstable middle ground
between capitalism and socialism that must continue in motion
toward one or the other.

The system of interventionism or of the hampered market economy
differs from the German pattern of socialism by the very fact that it
is still a market economy. The authority interferes with the operation
of the market economy, but does not want to eliminate the market
altogether. It wants production and consumption to develop along
lines different from those prescribed by an unhampered market, and
it wants to achieve its aim by injecting into the working of the market
orders, commands, and prohibitions for whose enforcement the police
power and its apparatus of violent compulsion and coercion stand ready.
But these are isolated acts of an integrated system which determines all


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48 The Review of Austrian Economics, Vol. 5, No. 2

prices, wages and interest rates and thus places full control of
production and consumption into the hands of the authorities.

The system of the hampered market economy or interventionism
aims at preserving the dualism of the distinct spheres of government
activities on the one hand and economic freedom under the market
system on the other hand. What characterizes it as such is the fact
that the government does not limit its activities to the preservation
of private ownership of the means of production and its protection
against violent or fraudulent encroachments. The government inter-
feres with the operation of business by means of orders and prohibi-
tions (Mises 1966, p. 718).

The interventionist doctrinaires repeat again and again that they do
not plan the abolition of private ownership of the means of produc-
tion, of entrepreneurial activities, and or market exchange. . .. It is
necessary, they say, that the state interfere with the market phenom-
ena whenever and wherever the “free play of the economic forces”
results in conditions that appear as “socially” undesirable. In making
this assertion they take it for granted that it is the government that
is called upon to determine in every single case whether or not a
definite economic fact is to be considered as reprehensible for the
“social” point of view and, consequently whether or not the state of
the market requires a special act of government interference.

All these champions of interventionism fail to realize that their
program thus implies the establishment of full government suprem-
acy in all economic matters and ultimately brings about a state of
affairs that does not differ from what is called the German or the
Hindenburg pattern of socialism. If it is in the jurisdiction of the
government to decide whether or not definite conditions of the econ-
omy justify its intervention, no sphere of operation is left to the
market. Then it is no longer the consumers who ultimately determine
what should be produced, in what quantity, of what quality, by whom,
where, and how—but it is the government. For as soon as the outcome
brought about by the operation of the unhampered market differs from
what the authorities consider “socially” desirable, the government in-
terferes. That means the market is free as long as it does precisely what
the government wants it to do. . . . Thus the doctrine and the practice of
interventionism ultimately tend to abandon what originally distin-
guished them from outright socialism and to adopt entirely the princi-
ples of totalitarian all-round planning (Mises 1966, pp. 723-24).

In Mises’s view what we are witnessing today is not the collapse
of socialism, since socialism cannot be realized in full, but the collapse
of a form of interventionism. He predicted this in 1949: “The inter-
ventionist interlude must come to an end because interventionism
cannot lead to a permanent system of social organization” (Mises
1966, p. 858). This must happen because interventionism restricts


===== PAGE 17 =====

Herbener: Mises and the Austrian School 49

the goods available to consumers; and fails to bring about the end
aimed at, leading to a situation worse than the pre-intervention once
it has exhausted the “surplus” it seeks to confiscate (Mises 1966, p.
858). The outcome of changes in Europe depend upon understanding
and accepting these Misesian ideas.

Optimists hope that at least those nations which have in the past
developed the capitalist market economy and its civilization will
cling to this system in the future too. There are certainly as many
signs to confirm as to disprove such an expectation. It is vain to
speculate about the outcome of the great ideological conflict between
the principles of private ownership and public ownership, of individ-
ualism and totalitarianism, of freedom and authoritarian regimen-
tation. All that we can know beforehand about the result of this
struggle can be condensed in the following three statements:

(1) We have no knowledge whatever about the existence and opera-
tion of agencies which would bestow final victory in this clash on
those ideologies whose application will secure the preservation and
further intensification of societal bonds and the improvement of
mankind’s material well-being. Nothing suggests the belief that
progress toward more satisfactory conditions is inevitable or a re-
lapse into very unsatisfactory conditions impossible.

(2) Men must choose between the market economy and socialism.
They cannot evade deciding between these alternatives by adopting
a “middle-of-the-road” position, whatever name they may give to it.

(3) In abolishing economic calculation the general adoption of social-
ism would result in complete chaos and the disintegration of social
cooperation under the division of labor (Mises 1966, p. 861).

We are all participating in this great ideological struggle and thus
economic education holds paramount importance.

Economics must not be relegated to classrooms and statistical offices
and must not be left to exoteric circles. It is the philosophy of human
life and action and concerns everybody and everything. It is the pith
of civilization and of man’s human existence.

There is no means by which anyone can evade his personal respon-
sibility. Whoever neglects to examine to the best of his abilities all
the problems involved voluntary surrenders his birthright to a
self-appointed elite of supermen. In such vital matters blind reli-
ance upon “experts” and uncritical acceptance of popular catch-
words and prejudices is tantamount to the abandonment of self-de-
termination and to yielding to other people’s domination. As condi-
tions are today, nothing can be more important to every intelligent
man than economics. His own fate and that of his progeny is at stake
(Mises 1966, p. 878).


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50 The Review of Austrian Economics, Vol. 5, No. 2

Conclusions

The Austrian tradition is identified by and built upon praxeology—
the application of deductive reasoning to the irrefutable fact of
human action. This method is the red thread that runs from Menger
to Bohm-Bawerk to Mises to Murray Rothbard and the modern
practitioners of Austrian economics. Working within this tradition,

economists have produced a great edifice of irrefutable, universally
applicable economic theory. They have shown how the free market
advances mankind in its struggle against scarcity and why socialism
cannot do so. They have taught us that we must choose one of these
two social arrangements, since no system exists between them. We
must make our selection and advance, by education and persuasion,
either capitalism or socialism. Let us choose wisely.

References

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tarian Press, 1959.

Ebeling, Richard. “Economic Calculation ‘Under Socialism: Ludwig von
Mises and His Predecessors,” in The Meaning of Ludwig von Mises, Jeffrey
Herbener, ed. Boston: Kluwer Academic Publishers, 1991.

Friedman, Milton. “The Methodology of Positive Economics,” in Essays
in Positive Economics. Chicago: University of Chicago’ Press, 1974.

Hayek, F. A. “Introduction,” in Principles of Economics, by Carl Menger.
New York: New York University Press, 1976.

—— The Fatal Conceit: The Errors of Socialism. Chicago: University of
Chicago Press, 1988.

Hoppe, Hans-Hermann. Praxeology and Economic. Science. Auburn, Ala.:
The Ludwig von Mises Institute, 1988.

+ Menger, Carl. Principles of Economics. New York: New York Univesity Press, 1976.

Investigations into the Method of the Social Sciences with Special
Reference to Economics. New York: New York University Press, 1985.

Mises, Ludwig von. Human Action: A Treatise. on Economics, 3rd rev. ed.
Chicago: Henry Regnery, 1966. -

Quoted by Margit von Mises in, “A Call to Activism,” in The Free
Market Reader. Auburn, Ala.: The Ludwig von Mises Institute, 1988.

Rothbard, Murray. The Essential Ludwig i von Mises. Auburn, Ala.: The
Ludwig von Mises Institute, 1983.

“Mises and the Role of Economist in Public Policy,” in‘ The Meaning
of Ludwig von Mises, Jeffrey Herbener, ed. Boston: Kluwer Academic Pub-
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Salerno, Joseph. “Ludwig von Mises as Social Rationalist,” in The Mean-
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