Chapter 13 A System of Political Philosophy
Since its emergence in 18th century France, economic science has focused on the practical
problems of policy-making. Government's impact on the economy was central to economic
books and pamphlets. All other problems tended to be dealt with only as much as was necessary
to achieve a better understanding of the policy issue under consideration. The Marginalist
This revolution of the 1870s then focused the attention of theorists on the analysis
of the market economy, somewhat one-sidedly. Academic energies were now dedicated to the
solution of the new theoretical problems. The discipline lost much of its focus on policy
questions. Did the new marginal value theory change any of the political implications traditionally
Derived from Economic Science Virtually all of Mises's publications from
the 1920s, in one way or another, dealt with this question. He could rely on some of the
work done by his predecessors, in particular Boehm-Bawerk's essay Power and Economic Law,
which analysed government intervention in the true labour market from a Mengerian perspective.
But in Mises's view, the question of the political implications of economic science
required a more comprehensive approach. His great contribution was to show how the utilitarian
method which he had outlined in his nation, state and economy could be used to promote
such an approach. During the 1920s, Mises developed an all-encompassing utilitarian theory
of social organization. The kind of theory he had in mind would deal with the suitability
be not only of all economic systems that had ever existed in the past, but of all conceivable
ones. His theory of socialism was an important step toward the realization of such a conception,
because he had come to the conclusion that the idea of assessing all conceivable economic
systems was far less ambitious than it sounds. There are, he maintained, only three categories
of which all conceivable systems are particular instances, capitalism, socialism and interventionism.
Capitalism is a system of division of labour based on private ownership of the means of
production. It is characterised by the cooperation of many individuals or groups, none of whom
control all capital goods. Their cooperation is based on respect for existing property
Rights and is regulated through contract, gift and exchange. In contrast, socialism is a
system with only one individual or group controlling all means of production. There can be no exchange-based
cooperation in this system because exchange presupposes that the items traded have different
owners. Thus, by 1922, the bulk of the work had been done. Mises could now turn to the
and the third system, interventionism, which had been the traditional subject of economics.
His great task was to reconstruct the traditional analysis of government interventionism by
applying the utilitarian method of the classical economists from a Mengerian point of view.
Mises published his research in a series of articles written primarily between 1922 and
1926 and later republished as chapters of the book The Critique of Interventionism. Just
how important Mises considered this project can be gathered from the fact that during
those years he worked on hardly any other research project and even rejected an offer
to write a standard textbook on monetary policy. Mises said he was very busy and had a number
of projects that he wanted to complete before accepting new obligations.
and the outline of a theory of interventionism.
Economists had traditionally asked whether government interventions into the otherwise
unhampered market could benefit the national economy. Their characteristic answer was that
this was not possible. For the rest of the 18th and much of the 19th century, this verdict
continued to be one of the defining features of what it meant to be an economist. Each
succeeding generation refined the explanation of why government intervention was unsuitable.
When Mises set out to reformulate and systematise this traditional field of economic inquiry
at the beginning of the 1920s, he had already made one significant contribution to the analysis
of government intervention through his generalisation of the Ricardian theory of international trade.
It is significant that Mises presented this theory of international trade as a generalisation
of Ricardo's Model rather than of John Stuart Mills.
Whereas Ricardo had studied a world in which only commodities could be transferred from
one country to another, Mises dropped the assumption of immobility for labour and capital.
In his 1916 article on the goal of trade policy, he described the impact of free migrations
and capital flows on the global allocation of factors of production and on the composition
of nations.
Most importantly, he dealt with the question of whether trade policy – tariffs, quotas,
subsidies – could be helpful in enhancing or maintaining national greatness, the number
of persons belonging to the national community and their welfare. His answer was negative.
Trade policy cannot reach this goal in a manner beneficial to the nation, and he observed
that even the champions of protectionism had to notice that their proposed policies could
did not even advance, much less reach, those goals that they had set themselves. He restated
this argument more forcefully three years later in Nation, State and Economy. Combining
detailed theoretical and historical analysis, he showed that the protective tariffs the
German government introduced after 1879 did not achieve their purpose, which was to halt
the emigration of German workers into foreign lands.
The next occasion for him to elaborate on this traditional field of economics came rather
unexpectedly. In 1922, Friedrich von Mises invited him to contribute to the new fourth
edition of the standard social science dictionary, Handwertherbuch der Staatswissenschaften, concise
guide to the political sciences. Mises' invitation had an air of reluctance and condescension.
And I do not want to forgo your cooperation on the new edition of the Handwörter Buch
der Staatswissenschaften. Would you not be able to pen the entry on price controls?
Visa to Mises, letter dated April 1st, 1922. Rather than soliciting an article on a topic
covered by Mises's previous research, he asked him to write on price controls, a subject
that could have been given to an average economist. All entries relating to money, banking, business
The Theory of Price Controls was a contested field, where two incompatible views dominated.
On the one hand, free market economists denied outright that price controls were possible
at all. Laws of nature govern society and economy, and no government decree could violate
such natural law. It might therefore be possible to create a socialist society, though this
would not be advisable for several reasons, but it is impossible to create a society based
on government decree. On the other hand, the Cateda socialist professors of government
science objected that legislation and government decrees regulating prices obviously did exist.
No law of nature had prevented them from coming into existence and from modifying prices according
to the wishes of the authorities.
The facts proved that it was possible to create such a thing as a mixed economy or third way
which could be made to combine the advantages of capitalism and socialism while avoiding
the disadvantages of either extreme.
Now Mises definitely believed that economic laws are as unbreakable as the laws of nature.
How then could he handle the Catedra Socialist objection? He applied the utilitarian method
of analysis that he had discussed in nation, state and economy. The decisive question,
Mises argued, was not whether it was possible to enforce price controls, it evidently was,
but whether price controls can attain the goals of the policymakers, and he proceeded
to show in his article that they actually detract from the very goals they were supposed
to Attain. They are therefore destructive from the policymaker's own subjective point
of view. It follows that the old liberals and some of the old socialists, too, had it
right. There is no third way in the sense of a meaningful non-destructive economic system.
Mises emphasized that this was the political significance of the theory of price controls.
And this insight, in turn, led straight to the adoption of laissez-faire policies. By
By this reasoning, classical liberalism was not an ideology in the value-laden sense but
only the straightforward application of economic science.
Following Archbishop Watley, Mises called economics the science of catallactics.
Only in one sense could it be meaningful to talk about mixed economies, namely in the
sense that some means of production may be publicly owned while others are owned privately.
In other words, a meaningful economic system presupposed clearly defined and respected property
rights.
When the government blurred property rights through the crease and legislation, making
itself a virtual co-owner of the factors of production, then the original owners would
use the remaining control in a way contrary to the stated purposes of the government.
Price controls prevent factor owners from using their property the way they think best.
They fixed prices and deviation from those prices that would be formed on the unhampered
market. Mises distinguishes these genuine price controls from controls that merely sanctioned
the state of affairs that the market would have brought about anyway. Thus, the factor
owners turned to various second-best actions that jeopardized the government's plans.
Mises showed that these unintended reactions of the factor owners would prompt the government
to encroach even further on the property rights of the citizens, thus instigating a downward
spiral of interventionism. Each additional intervention would be counteracted by another
round of reactions contrary to purpose and so on. The process can stop only when the
government controls all factors of production, that is, once a system of pure socialism comes
into existence. The German and Austrian economist in the First World War are perfect examples.
He who traces back the war economy policies can easily find the phases mentioned above,
at first price controls, then forced sales, then rationing, then regulation of production
and distribution, and finally attempts at instituting central planning of the entire
process of production and distribution. Mises' account of the dynamics of wartime
time interventions into the price system came to be reflected in Gutt's briefs entry
for the Handwerterbuch der Staatswissenschaften. The beginning of war economy prices meant
highest price policies in Austria as well. Experiences here were exactly like those in
Germany. Artificially high prices, misallocated goods, so that they were not directed to the
most desired channels of trade and consumption. After the Italians entered the war and the
The blockade became a reality in Austria, in particular the growing scarcity of raw materials
and goods, left no alternative but the path down which Germany had already turned, official
confiscation, centralised rationing and disbursement of goods.
Mises also discussed various other examples to illustrate the counter-productivity of
price control. His most important example of the destructiveness of price flaws was
Critique of the Anti-Marxists
Having restated in his piece on price controls the classical liberal case against government
and meddling with market prices. Mises further developed his system of political philosophy
through a systematic critique of the two major variants of pro-interventionist theory that
dominated the German scene in the mid-1920s, non-Marxist socialism and social liberalism.
The abject practical failure of the Marxist revolutionaries in the post-war period had
done much harm to their image as the vanguard of social progress. The explanation for this
This failure in the writings of Mises, Max Weber, and Boris Brutskus had led many economists
to revise their views about the suitable scope of government within society, but others remained
unrepentant advocates of the total state. They merely rejected the specifically egalitarian
agenda of the socialists. The uncontested leader of this group was Werner Sombart, the
The greatest star among the interwar economists in Germany. Zombart had started his career popularising Marxism in academic circles with his 1896 book Sozialismus und soziale Bewegung in 19. Jahrhundert, Socialism and Social Action in the 19th century.
Before Zombart's appearance, the German universities received Marx's writings very critically.
In the United States, too, the rise of Marxism encountered the same reservations in academic
circles until, some forty-five years later after Zombart, Joseph Schumpeter popularised
Marx as an important thinker in his capitalism, socialism and democracy. Later editions testify
to Zombart's increasing estrangement with his initial Marxist ideals. The tenth edition,
which appeared under the new title in 1924, featured an outright demolition of Marxist
Zombart had turned back to the mainstream Schmoller-right socialism which advocated
the total state without an egalitarian agenda. Here is the most favourable thing Mises had
to say about Zombart. He was highly gifted, but at no time did he endeavour to think and
work seriously. And yet it was more stimulating to talk to Zombart than to most other professors.
At least he was not stupid and obtuse. Zombart's intellectual qualities had gained him a bit
and the place of preeminence. Where most Marxist intellectuals held dogmatically to the tenets
of Marx and Engels, Sombart sought to analyse and develop their doctrines with a critical
mind in quest of objectivity. This made his work the perfect target for a thorough criticism
of the intellectual current of anti-Marxist socialism, and Mises provided such a criticism
in an article with the title Anti-Marxismus, Anti-Marxism.
Already in his article on price controls, Mises had pointed out that the shortcomings
of interventionism did not result from the egalitarian agenda that some governments pursued,
but from the very nature of government intervention itself, namely the infringement of private
property rights. Socialism and interventionism were destructive economic systems, whether
are explicitly egalitarian or not. They would be unsuitable forms of social organization
even if they pursued some other ideal of distribution, even meritocracy. There might be certain superficial
similarities between a free society and a non-egalitarian one controlled by a total
state, but these two would still be essentially different. On the surface, the social idea
of etatism does not differ from the social order of capitalism. Etatism does not seek
to overthrow the traditional legal order and formally convert all private property and
production to public property, but in substance all enterprises are to become government operation.
Under this practice, the owners will keep their names and trademarks on the property
and the right to an appropriate income, or one befitting their ranks. Every business
Mises becomes an office and every occupation a civil service. Prices are set by government
and government determines what is to be produced, how it is to be produced and in what quantities.
There is no speculation, no extraordinary profits, no losses, there is no innovation
except for that ordered by government. Government guides and supervises everything. Mises showed
The government is not omnipotent if its goal is to improve collective life, as opposed to
that of mere aggregates of individuals, but neither is it omnipotent if it seeks to enhance
the welfare of the totality of individual citizens. In both cases, government intervention
is counterproductive. It follows that the time-honoured and seemingly significant distinction
The distinction between individualism and collectivism is of only secondary importance.
The primary distinction is between policies that work and policies that do not work, which
leads in turn to the distinction between a social order based on private property which
works, and those social orders that depend on infringements of private property rights
and do not work.
It is therefore beside the point whether individuals or collectives run the economy, provided only
Many that the property rights of all individual members of the collectives are preserved.
It also follows that the size of the firm is of no importance. As long as private property
is respected, the buying decisions of the consumers reward only those companies that
offer the best products. If these companies are larger than others, so be it.
Keynes was convinced that in attacking and criticizing individualism he had destroyed
The case for laissez-faire. The postulate of a dichotomy between individualism and collectivism
led Keynes to anticipate the now-famous Kozian view on the problem of optimal social organisation.
Thus, Keynes surmised that the ideal size for the unit of control and organisation lies
somewhere between the individual and the modern state. The Kozian theory is best expressed
in Ronald Ko's The Firm, the Market and the Law.
Mises emphasised this fact against the doctrines of Dietze, Carl Pribram and Spann, which
had a great influence on interwar political thought in Germany and after the Second World
War in the wider Western world. Dietze and Pribram sided with individualism, where as
Spann championed collectivism, but they all agreed that these were the ultimate categories
and that all political points of view derived from them. Mises disagreed. He argued that
There was a point of view that was derived from neither individualism nor collectivism,
namely the utilitarian method of social analysis. He stated, In the final analysis there is
no conflict of interest between society and the individual, as everyone can pursue his
interests more efficiently in society than in isolation. The sacrifices the individual
makes to society are merely temporary, surrendering a small advantage in order to attain a greater
He had already proved how successful this method was in analysing the static and dynamic problems
of social holes, such as language communities, and he emphasised that the analysis of such
holes is the very point of theoretical social science. What society is, how it originates,
How it changes, these alone can be the problems which scientific sociology sets itself.
To be perfectly clear, Mises believed that the positive analysis of the emergence and
transformation of social wholes had to rely on methodological individualism.
Based on this analysis, one could apply the utilitarian method, that is, raise the question
whether any given policy was suitable to attain its goals.
Otmar Spann rejected not only individualism as a political orientation, but also as a methodological device.
It was fallacious to believe that individual action could be understood out of its wider social context,
just as it was false that the proper understanding of social wholes required that this social analysis itself be holistic.
The utilitarian method alone was a truly scientific one, because it traced all social phenomena
back to facts of experience.
Utilitarian social doctrine does not engage in metaphysics, but takes as its point of
departure the established fact that all living beings affirm their will to live and grow.
The higher productivity of labour performed in division of labour, when compared with
Isolated Action is ever more uniting individuals to association, society is division and association
of labour. Each person seeks to enhance his welfare, and cooperative labour is more productive
than isolated labour, therefore insofar as the growth of a person's welfare presupposes
greater quantities of material goods, the person can best attain his ends by engaging
In a division of labour, this is how society comes into being. All elements in this economic
explanation of society are ascertainable facts, in contrast the doctrines of individualism
and collectivism do not lend themselves to any such causal explanation of the origin
of society because they are based on postulates rather than on analysis of fact, and Mises
proceeded to show that the same criticism also applied to the Marxist theory of proletarian
and Class Struggle. He did not deny that human history featured many group conflicts and
that they often had great importance for the course of events. Rather, he argued that the
fashionable struggle theories of which the Marxist theory of class struggle was but one
particular instance purported to be much more than they really were. Group conflicts were
not and could not possibly be the basic elements of human life. The real question was how any
group could come into existence in the first place. One first had to explain the formation
of groups before one could explain the struggle between them, but all struggle theorists,
Marx included, failed on this front. The reason for this negligence is not difficult to detect,
it is impossible to demonstrate a principle of association that exists within a collective
group only, and that is inoperative beyond it. If war and strife are the driving forces
If we take this warfare sociology to its logical conclusion, we arrive at no social doctrine
at all but at a theory of unsociability. Mises pointed out that Marx's theory of class struggle
even failed to give an empirical account of its most basic concept. What is a class in
in the Marxist sense, Marx had never defined it, and it is significant that the posthumous
manuscript of the third volume of Das Kapital halts abruptly at the very place that was
to deal with classes.
Mises went on,
Since his death more than forty years have passed, and the class struggle has become
the cornerstone of modern German sociology, and yet we continue to await its scientific
Definition and Delineation. Known as vague are the concepts of class interests, class
condition and class war, and the ideas on the relationship between condition, class
interests and class ideology.
Werner Zombart, along with a great majority of German sociologists, of whom he was the
undisputed leader, had adopted the Marxist view that proletarian class struggle was the
the ultimate driving force in modern societies. He was now an opponent of Marxist ideology,
but his analysis still remained Marxian. He merely refrained from drawing all the practical
conclusions which Marx and the Marxists had consistently deduced from the theory of class
struggle. He did not and could not provide an alternative to the Marxist scenario of
social evolution. His only objection came in the form of a postulate. Things should
did not happen as they would happen according to the theory of class struggle, therefore
government should resist such developments. Yet with this admission, Zombart and the bulk
of the German sociologists had again left the realm of science and entered that of religion
and ethics. Zombart, in fact, championed a return to medieval forms of social organisation,
the guilds, just as Keynes in England proposed, a return, it may be said, towards medieval
and the general conceptions of separate autonomies, similarly the few theorists who had thoroughly
criticised Marx's concept of class struggle, like Otmar Spann, marvelled at the alleged
blessings of National Socialism in the Middle Ages. Mises concluded,
For every scientific thinker the objectionable point of Marxism is its theory, which seems
to cause no offence to the anti-Marxist. The anti-Marxist merely objects to the political
He regrets the harm done by Marxian policies to the German people, but is blind to the
harm done to German intellectual life, for the platitudes and deficiencies of Marxian
problems and solution. Above all, he fails to perceive that political and economic troubles
are consequences of this intellectual calamity. He does not appreciate the importance of science
for Everyday Living, and under the influence of Marxism believes that real power instead
of ideas is shaping history. Anti-Marxism caused outrage among the Marxists. What was
Mises' sin? First, he had dared criticise the great master with a penetrating analysis
of the insurable shortcomings of Marxist theory of class struggle. Second, he had again contended
that from an economic point of view Marxist socialism was not essentially different from
and the various new brands of National Socialism that had begun to spring up in the 1920s mostly
in reaction against Marxist movements. Thus a fraction of Italian socialists who rejected
the teachings of Marx and called themselves fascists rose to power under the leadership
of Benito Mussolini. There was also a movement of non-Marxist National Socialists in Germany.
The father of this movement was Friedrich Naumann, who by a strange coincidence later
Mises came to be regarded as the godfather of 20th century German liberalism. The leader
of the National Socialists from the 1920s until their bitter end was, of course, Adolf
Hitler. Marxist Socialists forciverously object to being classified under the same heading
that includes Fascist Socialists and National Socialists, but as Mises showed, all distinctions
Critique of the New Liberals After dealing with Zombart and others who
had remained unrepentant champions of powerful central government, Mises turned to a critique
of the more moderate branch of the cartelist socialist movement. In the wake of the crisis
of social policy, these intellectuals had lost their faith in the blessings of an omnipotent
Government. They thought of themselves as social liberals, meaning that they recognized
certain fundamental defects of free markets and advocated government interventions to
fix them. The leaders of this group were Heinrich Herkner, Luiu Brentano and Leopold von Wiese.
Their most important pre-war predecessors were Eugen von Philippowitz and Friedrich Naumann.
As Raikow, Die Partei der Freiheit, chapter 6, explains, Naumann inspired several post-war
movements with often contradictory agendas. The German social-liberal movement's endeavour
to appropriate the term liberal paralleled the strategy of Leonard Hoppe House in England
and John Dewey in the United States. Hoppe House, 1864-1929, a professor of sociology
at LSE became famous with his liberalism. Among the writings of John Dewey, 1859-1952,
see in particular liberalism and social action. Both groups championed a much broader scope
for government action than the classical liberals whom they derided for their laissez-faire
position. So why did they call themselves liberals? The only claim to the word was that
They did not believe in the ideal of all-out central planning. The omnipotent state threatened
the core of individual freedom, the civil liberties of individual citizens. But in contrast
to classical liberals, these new social liberals had no principled objection to far-reaching
limitations of citizens' economic liberties. Such intrusions into private property rights
could, they contended, be justified on various grounds, for example, the principle that there
should be no income without work, or the contention that government intervention was needed to
make the economy better resemble the model of perfect competition. They also argued that
economic liberty was not truly liberal because it entailed a certain cold-heartedness to
one's fellow citizens. The rest was marketing, anticipating an important manoeuvre of twentieth-century
Party Politics and Western Democracies. They presented themselves as liberals because of
the positive connotations of the still popular notion of individual liberty. The strategy
worked so well that today the words liberal and liberalism are often taken to be the exact
opposite of their original meaning. Mises objected to this intellectual and practical
confusion. He emphasized that what was at stake was not the use of words, but the substantial
The differences between an economy unhampered by government intervention and an economic
system characterised by such interventions, to use the word liberal in the new sense,
was to obscure these differences.
The new liberals gave the impression that politics concerned only the ends to be attained.
The choice, they implied, was between cold-hearted and parasite-friendly economic liberties on
the one hand and warm-hearted, equitable civil liberties on the other.
An extreme case of this confusion was Keynes, who not only held that politics was about
the ends to be pursued, but about emotional attitudes to these ends. Thus he held that
the essential characteristic of capitalism was the dependence upon an intense appeal
to the money-making and money-loving interests of individuals as the main force of the economic
machine. But Mises explained that this view was entirely unfounded. Politics is not about
ends but about means. Classical liberals often cherished the same ideals as their socialist
rivals. What set them apart was their practical program to attain those ideals. While classical
liberalism championed the inviolability of private property, the defining mark of all
other political orientations was that they sought to attain their ends through violations
of private property rights. In an ideal classical liberal society, every
Every man is sovereign within the boundaries of his property.
All relations between human beings are based on mutual consent.
Each person cooperates with others to promote common interests.
If one side is unwilling, cooperation stops.
This withdrawal from cooperation might appear brutal in the eyes of the other party, but
the only way to prevent it would be to force the first party to continue against his will,
which would no longer promote the common interests of both.
What might seem to be the unsocial excesses of the capitalist order are therefore in truth
desirable consequences of the fact that cooperation is based on mutual consent.
If in a capitalistic society the buyer seeks to buy an economic good wherever it is least
expensive without regard for other considerations, he does not act with insensitivity to its
suffering. If the superior enterprise successfully competes with one working less economically,
There is no brutal use of elbows or struggle to overpower and enslave fellow men. The process
in this case is no undesirable concomitant effect or outgrowth of capitalism and unwanted
biliberalism. On the contrary, the sharper the competition, the better it serves its
social function to improve economic production. That the stagecoach driver was replaced by
the railroad, the hand weaver by mechanical weaving, the shoemaker by the shoe factory
did not happen contrary to the intentions of liberalism.
And when small shipowners with sailing vessels were replaced by a large steamship company,
when a few dozen butchers were replaced by a slaughterhouse, a few hundred merchants
by a department store, it signifies no overpowering and enslaving of fellow men.
Similarly, he observed, in fact, unearned income flows from control over the means of
production.
He who opposes unearned income must oppose private property in the means of production.
Therefore, a liberal cannot sympathise with such efforts. If he does so nevertheless,
he is no longer a liberal.
It is true that an ideal classical liberal society has never existed. The picture of
what fully developed capitalism can achieve is incomplete at best, even if we reflect
upon British society at the zealot of capitalism when liberalism was leading the way. Capitalism
Capitalism was thus an unknown ideal, as Ayn Rand would later say. It is neither impossible
nor undesirable to bring such a society about. Economic science shows both that it is a practical
political option and that all the alternatives to it are inferior. Socialism is necessarily
less efficient than capitalism because it cannot rely on economic calculation, and interventionism
does not work at all, Mises asserted, economic knowledge necessarily leads to liberalism.
The best proof was that the social liberals had been unable to develop an alternative
economic theory that would substantiate their agenda. The outstanding example of the social
liberal's intellectual impotence was the theory of wages. As the webs had done before
him, Brent Harnow attempted to prove that labour unions could raise the wage rates of
Mises himself had in an early article explained that labour unions could possibly raise wage
rates for all workers in the short run. His studies on interventionism in the 1920s convinced
him that this short-run rise was invariably bought at the price of capital consumption.
In his article on social liberalism, Mises finished the job. He added that even if it
were possible for labour unions to raise wage rates to some degree for all workers, there
was another fundamental question to be asked. If labour unions actually had the power to
raise the average wage of all workers above the rate that would prevail without their
intervention, the question remains how high can wages go? Can average wages go so high
that they absorb all unearned income and must be paid out of capital? Or is there a lower
limit at which this rise must stop? This is the problem that power theory must answer
with regard to every price, but until today no one has ever tried to solve the problem.
In other words, if the labour unions or whoever else really can increase wages rates for all
by a mere display of power, that is, if prices really depend on power rather than on economic
Law, then why ask for wage increases of say 10%, why not ask increases of 100% or 1000%
or 1,000,000%? To ask this question is to answer it. The wages are a matter of bargaining
power theory is an absurdity. Because the social liberals were aware of these problems,
they denied the validity of economic science altogether. But as Mises showed, the self-serving
The social liberals even denied that present problems would ever be solved. For decades
they had accustomed the German people to the notion that willpower and strength are the
driving forces of all social processes. Now, at a time when they themselves had lost their
faith in the omnipotent state, they left the people with all prejudices and no outlet.
In his conclusion, Mises spelled out the grave political dangers of a situation in which
the masses demand the establishment of socialism and their political leaders are unwilling
to comply.
Politics does not dare introduce what the prevailing ideology is demanding.
Taught by bitter experience, it subconsciously has lost confidence in the prevailing ideology.
In this situation, no one, however, is giving thought to replacing the obviously useless
ideology with a useful one.
No help is expected from reason. Some are taking refuge in mysticism. Others are setting
their hopes on the coming of the strong man, the tyrant, who will think for them and care
for them. Mises submitted the manuscript of Social Liberalism at the end of February 1926.
At this point he had already made up his mind about his next two books. The first would
be a collection of his papers criticising the different manifestations of the interventionist
Creed. It would feature his anti-Marxism and social liberalism, as well as one or two new
pieces to generalise his thesis from the theory of price control. The second book would spell
out the political implications of these findings from a classical liberal point of view. As
it turned out, the second book appeared first in 1927 under the title Liberalismus, Liberalism.
The other book was published only two years later under the title Kritik des Interventionismus,
Critique of Interventionism
The Transformation of Economic Science
By early 1926, Mises had worked out four elements of a general theory of interventionism. Two
case studies in the fields of international trade and price controls, a critique of the
spurious anti-Marxist socialism prevalent in Germany, and a critique of the social liberal.
Now he had to pull these elements together into one unified theory of interventionism.
The occasion came when he delivered two lectures in Rotterdam and Utrecht in October 1926.
The manuscript of these lectures was subsequently published as an article for the Archiv für
Sozialwissenschaften und Sozialpolitik. The article generalised the thesis contained in
the piece on price controls and placed great emphasis on the continuity between Mises's
work and that of previous generations of economists.
One of the objections that Mises sought to counter was that his theory made it seem that
virtually all government activities were necessarily contrary to their professed purpose. Was he
some sort of anarchist? Replying to this objection, Mises sought to delineate precisely which
government actions constituted intervention and which did not. His answer, in a nutshell,
was that government does not intervene if it respects the will of private owners to
Interventionism is a limited order by a social authority forcing the owners of the means
of production and entrepreneurs to employ their means in a different way than they otherwise
would. Mises stressed that interventionism is a larger phenomenon than the ill-suited
Actions of Governments. The characteristic feature of interventionism is an authorised
violation of private property. If committed by anyone other than the social authorities,
invasions of private property would be considered a crime. So what are these social authorities?
Their characteristic feature is that their actions are legitimated by an intellectual
power, Geistige Macht. Thus, their interventions are deemed to be a legitimate violation of
of Property. Intellectual power can give a monopoly over property rights violations to
a particular agent, such is the case with all statist theories which justify violations
of property only by a special body of persons, the state or the government. But intellectual
power could also be such as to enable violations of property without a central agent. This
is so, for example, when religious doctrine prohibits payments of high prices as usual.
The characteristic feature of intervention is that it brings about unwanted co-ownership.
The government, or whatever else intervenes, claims a level of control over the property,
but otherwise leaves it in the hands of its owner. Even outright expropriations do not
counter interventions according to Mises because they involve a clear-cut change of ownership.
Most important, measures that serve to protect the physical integrity of private property
are not interventions. Since this projection is the proper function of government in a
classical liberal vision of society, Mises's theory of interventionism cannot be interpreted
as making the case for anarchism. Mises used the term anarchism to refer to the Proudhonian
idea of a society without the defence of private property rights and anarchy to designate the
chaos he believed to be inevitable for such a society. He did not have in mind the anarchism
some of his later student Murray Rothbard, who used the same words to advocate a free
market society without a modern state, a system in which even the defence of property rights
would be provided privately.
However, Mises stressed that protection of property should not be interpreted too loosely.
In response to the particular notion increasingly popular among economists of the 1920s that
A free market essentially resembled a Walrassian model of perfect competition, Mises warned.
Regulations for the preservation of competition do not at all belong to those measures preserving
the private property order. It is a popular mistake to view competition between several
producers of the same product as the substance of the ideal liberal order. In reality, the
central notion of classical liberalism is private property and not a certain misunderstood
and concept of free competition. It does not matter that there are many recording studios,
but it does matter that the means of record production are owned privately rather than
by government. This misunderstanding, together with an interpretation of freedom that is
influenced by the natural rights philosophy, has led to attempts at preventing the development
of larger enterprises through laws against cartels and trusts.
Here Mises addressed for the first time a fallacy that he would have to confront on many occasions and for the rest of his life, especially after the Second World War, when the neoclassical movement swept the academic world and perfect competition models were taken to be ideal representations of the market economy.
See, on this change of views of the economics profession, Thomas di Lorenzo and Jack High
Antitrust and Competition historically considered Economic Inquiry July 1988, the authors show
that during the 1920s the rising neoclassical movement more and more abandoned the project
of modelling reality in favour of squeezing reality into the procustion bed of their models.
The political implications were disastrous. The new approach opened an endless agenda
for Government Agencies, which, through endless novel interventions, saw to shape the real
world through their impossible model. Mises sensed this danger. Economic science had been
the intellectual foundation of the nineteenth century's liberty. It was a science that
dealt with real human life, not with the fictitious constructions that were at the heart of the
rising neoclassical movement. Moreover, it was a science with clear political implications,
Without a mere intellectual exercise, the very nature of the science made it odious
to the powers that be.
Its results violated the political correctness of the day, which suddenly found itself exposed
to the cold light of rational criticism.
Mises knew he was making no friends when, at the height of the debate on the introduction
of a national unemployment relief programme in Germany established in 1927, he stated,
In capitalist social order, unemployment is merely a transition and a frictional phenomenon.
Various conditions that impede the free flow of labour from place to place, from country
to country, may render the equalisation of wage rates more difficult. They may also lead
to differences in compensation of the various types of labour, but with freedom for entrepreneurs
Workers and capitalists, they could never lead to large-scale and permanent unemployment.
Workers seeking employment could always find work by adjusting their wage demands to market
conditions. If the market determination of wage rates had not been disrupted, the effects
of the World War and the destructive economic policies of the last decades would have led
to a decline in wage rates but not to unemployment. The scope and duration of unemployment, interpreted
today as proof of the failure of capitalism, results from the fact that labour unions and
unemployment compensation are keeping wage rates higher than the unhampered market would
set them. Mises knew that by insisting on these truths he was making life difficult
for the vast majority of his colleagues. He also understood why so few of them dared to
articulate even the most elementary lessons of their science. Most of them depended on
government support. Opposing their employer or benefactor would have been both impolite
and impolitic. He who timidly dares to doubt the justifications of the restrictions on
capitalists and entrepreneurs is scorned as a hiling of injurious special interests or
are at best treated with silent contempt. One can easily fall under the suspicion of
serving capital. Anyone using economic arguments cannot escape this suspicion. Because of this
ostracism of genuine economists, those who held or hoped to hold academic positions in
political economy became eager to avoid any behaviour that could offend the powers that
be. The most innocent strategy was to understate one's findings when they risked upsetting
Among certain powerful social groups, Das Mises observed about Richard Striegel's book
Ungewandte Lohntheorie, 1926, which essentially confirmed the old insight that labour unions
cannot increase wages rates for all workers.
All Striegel's statements are carefully worded in the same manner that authors of previous
centuries worded theirs in order to escape inquisition or censure.
In a similar vein, an increasing number of young economists turned their attention to
to abstract and technical problems that did not have any political implications unwelcome
to their employers. This helps explain the success of mathematical economics, econometrics,
Keynesian economics and game theory after the Second World War.
Mises observed that this retreat from traditional economic inquiry was in part the result of
a perverse interpretation of value freedom in the social sciences. According to this
In his view, any critique of practical politics by the very fact that it deals with a political
problem cannot possibly be scientific.
Such was the strongly held opinion of Friedrich von Mises and others.
Mises did not concur.
Economic analysis is suitability analysis.
It examined whether a proposed means is fit to attain a purported end.
This is a factual question, and thus subject to a scientific answer.
The personal values of the economist do not come into play here at all. Mises illustrates
at this point with the following example.
When I say that price controls are illogical, I mean to assert that they do not achieve
the objective they are usually meant to achieve. Now a communist could reply, I favour price
controls just because they prevent the smooth functioning of the market mechanism, because
they turn human society into a senseless chaos and all the sooner lead to my ideal of communism.
and the Theory of Price Controls cannot answer him, as physiology cannot answer the man who
wants to kill with hydrocyanic acid. Economic analysis shows that all government interventions
are unsuitable to attain the ends they are professed to attain, statement of matter of
fact. In the light of this result, classical liberalism advocated that there shall be no
intervention, judgment or value. Government shall be limited to the protection of private
Property and the Elimination of All Obstacles to Free Market Access for Individuals or Groups
of Individuals. This is nothing but another wording of the principle laissez-faire, laissez-passer.
Economists can evoke the authority of their science when they reject a policy that does
not achieve what its proponents say it will. Mises concluded by pointing out that erroneous
notions of value freedom threatened to make the research of the rising generation sterile.
We destroy economics if all its investigations are rejected as inadmissible. We can observe
today how many young minds, who under other circumstances would have turned to economic
problems, spent themselves on research that does not suit their talent, and therefore
adds little to science. Enmeshed in the errors described above, they shun significant scientific
and Economic Tasks. What Mises was describing was the beginning of the process through which
economic science was being redefined, altered to suit the needs of the young and the ambitious,
who in their mercenary way were willing to elevate certain comfortable errors to the
level of principle. Mises was only a bystander in this process and did not see it as clearly
then as he would see it in the 1950s and 1960s. In 1926 he did perceive that the replacement
of economic science, which had shaped the modern world because of its practical implications
for public policy, would entail grave danger for civilization. The transformation of economics
into a self-absorbed technical discipline made it politically toothless. A mere theory
based on fictitious stipulations, and therefore without scientifically valid implications
for public policy, was no threat to vested interests, and the champions of this theory
We did not have to fear reprisals. Clearly, this state of affairs suited the majority
in the economic profession, both employers and employees. But it was disastrous for science,
human liberty and economic progress. The transformation of economics amounted to the abandoning of
the authority that previous generations of economists had gained for their science. But
even those who championed real economic science could still destroy through their self-promotion
and what remained of its credibility. These men, good writers and speakers, authors of
very successful textbooks, claimed that there was no economic science prior to them. Robert
Liefmann, Franz Oppenheimer, and Friedrich von Gottel-Ort Lilienfeld had inherited a
rhetorical strategy of Karl Marx, who thought he could enhance the respectability of his
own arguments by belittling the efforts of his predecessors and contemporaries. Owing
Due to the eloquence of these authors, their condemnations of all previous accounts of
economic law reached a broad audience.
Of course, Liefmann did not intend to discredit economic science.
Mises's point was that the effect was the unintentional result of Liefmann's rhetoric.
Things were completely different in the case of Keynes, who consciously sought to discredit
economic science in his crusade to vindicate government interventionism.
Mises claimed that the case for laissez-faire had no scientific basis, but was entirely
founded on postulates of political philosophy, private property as a natural right, and theology,
harmony of interests. Without quoting Keynes, Mises showed that these claims missed the
point. Private property does not require natural law for justification, but can be vindicated
on the basis of suitability analysis alone. Further, the theological garment of the harmony
of Interest doctrine was just that. Already in his anti-Marxism, Mises had proved that
the attacks on the thought of pre-established harmony do not touch the substance, merely
the wording of the utilitarian social theory. The average lay reader almost inevitably came
away with the impression that, at its best, economic science relied on the work of a single
author. The public, unfortunately, is led to believe that in economics everything is
is uncertain and problematic, and that economic theory merely consists of the personal opinions
of various scholars.
The excitement created by these authors in German-speaking countries succeeded in obscuring
the fact that there is a science of theoretical economics which, despite differences in detail
and especially in terminology, is enjoying a good reputation with all friends of science.
The result was that government interventionism was no longer subject to scrutiny.
Clearly, if there is no such thing as an economic science in the first place, if all views on the real impact of economic policy are just personal opinions, then it is pointless to change policy because of them.
Mises not only believed that there was such a thing as economic science, but also, and in particular, that its core analysis of governed economic policies had survived all changes of fashion and schools of thought.
In other words, economic science was most constant and most unshakable precisely in that field where it mattered most, in economic policy analysis.
There was an unbroken line of continuity in economic thought on this question. It ran from the 18th century physiocrats, via the classical economists and the 19th century French laissez-faire school,
and via the marginal revolution with its different schools, up to Mises's own work in the 1920s.
Mises recognized, of course, that there were often profound differences between the various
schools of thought, but he stressed that these differences had never affected the practical
results. When it came to stating the impact of government intervention on the economy,
there were no relevant differences of opinion between the schools. By and large economists
agreed on the practical issues. Notable disagreement existed only between economists and those
who denied that there was such a thing as economic science at all.
We need not here deal with the deeper epistemological question of conflicting systems, nor need
we discuss the multiplicity of opposing systems. To investigate the problems of interventionism
there are on the one hand modern economics together with classical theory, and on the
other hand the deniers of system and theory, no matter how carefully they word their denial
of the possibility of theoretical knowledge. Our answer to them is simple, try to create
a system of theoretical knowledge that pleases you more than ours, then we can talk again.
At the beginning of the 21st century, Mises's emphasis on the continuity of economic thought
in Practical Matters and to the characterisation he made of economists no longer seems true,
but this is because the transformation whose beginnings he noticed in the mid-1920s has
since been completed.
Present-day mainstream economics is heavily focused on purely technical problems of modelling
reality with mathematics, econometrics and game theory.
The relationship between these models and the real world that they supposedly portray
is still as problematic as it has been from the outset. As a consequence, the professional
economists of today are not really economists in the sense in which Mises used the word,
the same sense in which it was used throughout the 19th century. The Austrian School of Mises
and Hayek, after the latter had repudiated his early neoclassical views, was in fact
the only 20th century school of economic thought in the classical sense. Significantly, John
John R. Hicks said many years later about the Austrian School,
I am writing in their tradition, yet I have realized, as my work has continued, that it
is a wider and bigger tradition than it at first appeared.
The Austrians were not a peculiar sect out of the mainstream.
They were in the mainstream.
It was the others who were out of it.
But Mises's ecumenical stress on the homogeneity of the different schools of economic thought
in regard to the necessity of economic theory in general, and the analysis of government
interventionism in particular, has turned out to be problematic.
Present-day historians of economic thought, well acquainted with Mises' work, have claimed
that until the early 1930s, Mises and virtually all other Austrian economists were unaware
of the profound differences between the Mangerian approach to economic analysis and that of
the other marginal utility schools.
These historians claim that it was the socialist calculation debate of the 1930s that really
radicalised Mises and Hayek, spurred them to reflect on the uniqueness of their approach,
and to distinguish themselves more sharply from the followers of William Stanley Jevons
and Lyon Walras. But Mises's ecumenism was not meant to cover all problems or branches
of economic theory. The message he sought to convey was that there was such a thing
as economic science relevant to policy-making, and he thought the best evidence for this
Mises' claim was that there were some economic laws on which all schools agreed. The disciples
of Carl Menger could not subscribe to Ricardo's theory of value, but they could endorse almost
everything he had written on political economy. Mises later wrote that political economy,
as developed by several generations of English thinkers, brilliantly expounded by Hume and
Adam Smith and perfected by Ricardo was the most exquisite outcome of the philosophy of
the Enlightenment, and regarding the classical theory of free trade and protectionism he
observed that the critics did not embark upon the hopeless task of discovering some false
syllogisms in the chain of Ricardo's reasoning.
Mises stressed these common points not because he believed that the remaining disagreements
Liberalism With the analysis of interventionist dynamics,
Mises had gained a complete picture of all possible forms of the economic organisation
for Human Society. The time was ripe for publishing his first book-length synthesis of the results.
He sought to make the case for a free society, a case that was not based on aesthetic or
ethical considerations, but on the rock-solid foundation of economic science. From there,
he would spell out the further implications of the case for liberty in fields such as
as Monopoly and Antitrust, The State, Colonialism, Democracy, Foreign Trade and Foreign Policy.
The book would be a synthesis of his post-First World War writings, summarising the politically
relevant results from nation, state and economy, as well as from socialism and his more recent
writings on interventionism. Mises packed all these subjects into a book of a mere 175
It remains one of the most important manifestos of political liberalism. It was not addressed
to economists or to the larger community of scholars. It did not contain any new contributions
to the social sciences. Rather, it was an exposition and application of the state of
the art in economic science, a book for the public, for the citizens of Austria and Germany,
and for the citizens of the world.
That state of the art was largely shaped by Mises's own efforts.
Socialism had been published five years earlier and his essay Intervencionismus had only just
appeared in print, but Mises presented his views as being held by the liberals, and it
was not improper for him to do this.
He had defined the state of the art.
His views on socialism and interventionism were unrefuted and did bring up to date the
and a classical liberal position on both topics. Still, while Mises expanded the views of the
classical liberals on property, liberty, peace, equality, government, democracy, socialism,
free trade and so on, what the book essentially did was to give a concise presentation of
the results of his own work, spelling out for the first time the political implications
in detail. Mises began his argument by stressing two
Two fundamental facts. First, the division of labour is physically more productive than
the work of isolated individuals. Emphasis on the centrality of this point had a venerable
tradition in Western thought ever since St. Thomas Aquinas wrote on the nature of government
in the 13th century. It is more than likely that Mises was acquainted with this edition
of St. Thomas' classic work because it was published in a series under the direction
of Otmar Spann. Second, all men, save a handful of ascetics, prefer a higher productivity
of their labour to a lower one. These two facts represented common ground. Neither socialists
nor fascists denied them. The question then arises which way of dividing labour is most
productive. All members of society can agree that this is the decisive question. Where
Where they disagree is on which answer is correct. The Liberals want to entrust all
aspects of the division of labour to the decisions of individuals who work out competing schemes
of cooperation based on mutual consent and recognition of private property. The Socialists
want to expropriate all private property, or at least abolish all private property in
the means of production. For them, the division of labour is to be organised by a central
Social Plan, which regulates all instances of cooperation between individuals. The Social
Democrats and other partisans of a third way champion partial expropriations to curb what
they believe are the excesses of capitalism. In light of Mises's insights concerning
socialism and interventionism, there can be no doubt as to which is the correct answer.
Socialism cannot possibly be as productive as capitalism because it cannot have recourse
to monetary calculation, and therefore lacks the wherewithal to compare physically heterogeneous
production alternatives. Interventionism is intellectually incoherent. It does not achieve
the self-proclaimed aims of its champions, which is why even Marx loathed it, and it
cannot be the foundation of a permanent economic order, because it has the tendency to move
Toward Socialism. The unbiased observer is therefore forced to admit that capitalism is
the only rational, productive economic order, since all other alternatives squander resources
and destroy wealth. One might like capitalism or hate it. One might deem it ethically justified
or offensive. The fact is that there is nothing else that can possibly take its place. Economising
and a large-scale division of labour are possible only in a free market based on private property.
The free market, then, is necessarily more productive and happiness-enhancing insofar
as happiness is at all enhanced by material things than any other social system. Hence,
the primary goal of liberalism is to ensure a productive division of labour, and the fundamental
postulate of its political programme is to protection of private property as the means
to achieve that goal.
All other postulates are secondary.
For example, the postulate of personal freedom for all members of society, rejection of slavery,
relies on the fact that free men work better than slaves.
It is therefore not only in the interest of all other citizens, but also in the interest
of the slave masters, that the chains of slaves be broken.
Similarly, the postulate of legal equality of all men is not based on some notion of
of Natural Law According to which all men are born equal, to Mises it was obvious that
men are born unequal. Still he held that they should enjoy legal equality. Why? Because
if they were not treated equally before the law, if some have a privileged legal position
compared to others, then group conflicts are artificially brought about, disturbing the
peace that is the very basis for the division of labour.
Here again Mises championed essentially the same view as St. Thomas, who stressed that
the maintenance of peace was the supreme goal of government precisely because the fruits
of the division of labour could not be obtained otherwise.
The same consideration applies in the case of democracy. Mises restated the utilitarian
justification of democracy that he first presented in socialism. In a letter to Antoine Ercadens,
The editor of the influential left-liberal, now Manian, journal Die Hilfe, Mises elaborated
on the significance of his approach in the context of the 1920s.
You claim with some regret that I am not a democrat as a matter of principle, but only
for economic reasons. It is certain that political principles are to be desired or repudiated
only from the point of view of their social consequences. Can one refute those opposed
to Democracy if one cannot offer any argument in favour of democracy other than one claiming
that every individual should have the same rights. Thus this snot leave one defenceless
then against the objection that human beings are extraordinarily varied and that it is
illicit to grant equal rights to the good and the evil, that young academics have turned
against democracy is, above all, because the common way of defending democratic principles
is Thoroughly Flawed
and the ruthlessness of the Bolshevist parties organised in the Third International.
The extent that the fascists used naked force to combat the violence of the Bolshevists,
Mises said, it was unobjectionable. There was no other remedy against force but force
itself. But the danger of the fascists was their blind faith in the omnipotence of this
means.
Ultimately, peace and social co-operation can only be founded on victories in the realm
Problem of Ideas. Presently he stated, The victory of fascism in a number of countries
is only an episode in the long series of struggles over the problem of property. The next episode
will be the victory of communism. The ultimate outcome of the struggle, however, will not
be decided by arms, but by ideas. It is ideas that group men into fighting factions, that
to press the weapons into their hands, and that determine against whom and for whom the
weapons shall be used. Fascism was an emergency makeshift. To view it as something more would
be a fatal error.
The sentence is preceded by the following statement that is often quoted out of context
to demonstrate the absurd contention that Mises endorsed fascism. It cannot be denied
that fascism and similar movements aiming at the establishment of dictatorships are
full of the best intentions, and that their intervention has, for the moment, saved European
civilization. The merit that fascism has thereby won for itself will live on eternally in history,
but though its policy has brought salvation for the moment, it is not the kind which could
promise continued success. Unfortunately, that fatal error was not avoided, and the
The lesson was not learned. Fascism was not wrong for condoning the use of force – all
social systems do – but for idolising its use. For Mises the important lesson was that
fascism's error was not in its collectivist roots, but in its rejection of the social
function of private property. Many modern libertarians still think that capitalism is
an outgrowth and reflection of individualism, whereas socialism, both left and right, results
from Collectivism. Whatever the merits of this view, Mises did not subscribe to it.
He stressed that the question of how best to organise the division of labour has nothing
to do with the question of whether society should serve the needs of the individual or
if the individual should serve society. Neither is there a collectivist science as opposed
to individualist sciences. There are only facts and the one true science to deal with
and to Mises the facts were clear. There is only one way to make society work at all, namely the mutual respect for private property rights. It is therefore beside the point whether society in some sense precedes the individual or the other way round. It is also irrelevant to ask who should be served by social cooperation since there is only one type of social interaction that merits the name cooperation at all. His book did not have the desired
effect. Many years later, Mises wrote in private correspondence that in Germany and Austria it had
no success and neither could a Swedish translation stop the drive to the planned economy. A few years
later, after Hitler came to power, the authorities ordered the publisher to destroy all remaining
in Copies.