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NOTE 13. A System of Political Philosophy

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Chapter 13 A System of Political Philosophy

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Since its emergence in 18th century France, economic science has focused on the practical

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problems of policy-making. Government's impact on the economy was central to economic

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books and pamphlets. All other problems tended to be dealt with only as much as was necessary

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to achieve a better understanding of the policy issue under consideration. The Marginalist

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This revolution of the 1870s then focused the attention of theorists on the analysis

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of the market economy, somewhat one-sidedly. Academic energies were now dedicated to the

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solution of the new theoretical problems. The discipline lost much of its focus on policy

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questions. Did the new marginal value theory change any of the political implications traditionally

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Derived from Economic Science Virtually all of Mises's publications from

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the 1920s, in one way or another, dealt with this question. He could rely on some of the

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work done by his predecessors, in particular Boehm-Bawerk's essay Power and Economic Law,

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which analysed government intervention in the true labour market from a Mengerian perspective.

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But in Mises's view, the question of the political implications of economic science

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required a more comprehensive approach. His great contribution was to show how the utilitarian

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method which he had outlined in his nation, state and economy could be used to promote

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such an approach. During the 1920s, Mises developed an all-encompassing utilitarian theory

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of social organization. The kind of theory he had in mind would deal with the suitability

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be not only of all economic systems that had ever existed in the past, but of all conceivable

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ones. His theory of socialism was an important step toward the realization of such a conception,

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because he had come to the conclusion that the idea of assessing all conceivable economic

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systems was far less ambitious than it sounds. There are, he maintained, only three categories

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of which all conceivable systems are particular instances, capitalism, socialism and interventionism.

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Capitalism is a system of division of labour based on private ownership of the means of

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production. It is characterised by the cooperation of many individuals or groups, none of whom

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control all capital goods. Their cooperation is based on respect for existing property

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Rights and is regulated through contract, gift and exchange. In contrast, socialism is a

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system with only one individual or group controlling all means of production. There can be no exchange-based

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cooperation in this system because exchange presupposes that the items traded have different

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owners. Thus, by 1922, the bulk of the work had been done. Mises could now turn to the

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and the third system, interventionism, which had been the traditional subject of economics.

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His great task was to reconstruct the traditional analysis of government interventionism by

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applying the utilitarian method of the classical economists from a Mengerian point of view.

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Mises published his research in a series of articles written primarily between 1922 and

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1926 and later republished as chapters of the book The Critique of Interventionism. Just

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how important Mises considered this project can be gathered from the fact that during

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those years he worked on hardly any other research project and even rejected an offer

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to write a standard textbook on monetary policy. Mises said he was very busy and had a number

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of projects that he wanted to complete before accepting new obligations.

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and the outline of a theory of interventionism.

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Economists had traditionally asked whether government interventions into the otherwise

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unhampered market could benefit the national economy. Their characteristic answer was that

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this was not possible. For the rest of the 18th and much of the 19th century, this verdict

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continued to be one of the defining features of what it meant to be an economist. Each

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succeeding generation refined the explanation of why government intervention was unsuitable.

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When Mises set out to reformulate and systematise this traditional field of economic inquiry

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at the beginning of the 1920s, he had already made one significant contribution to the analysis

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of government intervention through his generalisation of the Ricardian theory of international trade.

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It is significant that Mises presented this theory of international trade as a generalisation

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of Ricardo's Model rather than of John Stuart Mills.

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Whereas Ricardo had studied a world in which only commodities could be transferred from

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one country to another, Mises dropped the assumption of immobility for labour and capital.

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In his 1916 article on the goal of trade policy, he described the impact of free migrations

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and capital flows on the global allocation of factors of production and on the composition

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of nations.

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Most importantly, he dealt with the question of whether trade policy – tariffs, quotas,

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subsidies – could be helpful in enhancing or maintaining national greatness, the number

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of persons belonging to the national community and their welfare. His answer was negative.

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Trade policy cannot reach this goal in a manner beneficial to the nation, and he observed

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that even the champions of protectionism had to notice that their proposed policies could

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did not even advance, much less reach, those goals that they had set themselves. He restated

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this argument more forcefully three years later in Nation, State and Economy. Combining

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detailed theoretical and historical analysis, he showed that the protective tariffs the

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German government introduced after 1879 did not achieve their purpose, which was to halt

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the emigration of German workers into foreign lands.

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The next occasion for him to elaborate on this traditional field of economics came rather

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unexpectedly. In 1922, Friedrich von Mises invited him to contribute to the new fourth

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edition of the standard social science dictionary, Handwertherbuch der Staatswissenschaften, concise

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guide to the political sciences. Mises' invitation had an air of reluctance and condescension.

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And I do not want to forgo your cooperation on the new edition of the Handwörter Buch

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der Staatswissenschaften. Would you not be able to pen the entry on price controls?

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Visa to Mises, letter dated April 1st, 1922. Rather than soliciting an article on a topic

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covered by Mises's previous research, he asked him to write on price controls, a subject

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that could have been given to an average economist. All entries relating to money, banking, business

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The Theory of Price Controls was a contested field, where two incompatible views dominated.

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On the one hand, free market economists denied outright that price controls were possible

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at all. Laws of nature govern society and economy, and no government decree could violate

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such natural law. It might therefore be possible to create a socialist society, though this

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would not be advisable for several reasons, but it is impossible to create a society based

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on government decree. On the other hand, the Cateda socialist professors of government

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science objected that legislation and government decrees regulating prices obviously did exist.

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No law of nature had prevented them from coming into existence and from modifying prices according

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to the wishes of the authorities.

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The facts proved that it was possible to create such a thing as a mixed economy or third way

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which could be made to combine the advantages of capitalism and socialism while avoiding

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the disadvantages of either extreme.

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Now Mises definitely believed that economic laws are as unbreakable as the laws of nature.

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How then could he handle the Catedra Socialist objection? He applied the utilitarian method

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of analysis that he had discussed in nation, state and economy. The decisive question,

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Mises argued, was not whether it was possible to enforce price controls, it evidently was,

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but whether price controls can attain the goals of the policymakers, and he proceeded

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to show in his article that they actually detract from the very goals they were supposed

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to Attain. They are therefore destructive from the policymaker's own subjective point

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of view. It follows that the old liberals and some of the old socialists, too, had it

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right. There is no third way in the sense of a meaningful non-destructive economic system.

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Mises emphasized that this was the political significance of the theory of price controls.

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And this insight, in turn, led straight to the adoption of laissez-faire policies. By

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By this reasoning, classical liberalism was not an ideology in the value-laden sense but

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only the straightforward application of economic science.

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Following Archbishop Watley, Mises called economics the science of catallactics.

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Only in one sense could it be meaningful to talk about mixed economies, namely in the

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sense that some means of production may be publicly owned while others are owned privately.

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In other words, a meaningful economic system presupposed clearly defined and respected property

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rights.

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When the government blurred property rights through the crease and legislation, making

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itself a virtual co-owner of the factors of production, then the original owners would

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use the remaining control in a way contrary to the stated purposes of the government.

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Price controls prevent factor owners from using their property the way they think best.

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They fixed prices and deviation from those prices that would be formed on the unhampered

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market. Mises distinguishes these genuine price controls from controls that merely sanctioned

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the state of affairs that the market would have brought about anyway. Thus, the factor

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owners turned to various second-best actions that jeopardized the government's plans.

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Mises showed that these unintended reactions of the factor owners would prompt the government

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to encroach even further on the property rights of the citizens, thus instigating a downward

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spiral of interventionism. Each additional intervention would be counteracted by another

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round of reactions contrary to purpose and so on. The process can stop only when the

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government controls all factors of production, that is, once a system of pure socialism comes

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into existence. The German and Austrian economist in the First World War are perfect examples.

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He who traces back the war economy policies can easily find the phases mentioned above,

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at first price controls, then forced sales, then rationing, then regulation of production

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and distribution, and finally attempts at instituting central planning of the entire

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process of production and distribution. Mises' account of the dynamics of wartime

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time interventions into the price system came to be reflected in Gutt's briefs entry

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for the Handwerterbuch der Staatswissenschaften. The beginning of war economy prices meant

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highest price policies in Austria as well. Experiences here were exactly like those in

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Germany. Artificially high prices, misallocated goods, so that they were not directed to the

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most desired channels of trade and consumption. After the Italians entered the war and the

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The blockade became a reality in Austria, in particular the growing scarcity of raw materials

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and goods, left no alternative but the path down which Germany had already turned, official

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confiscation, centralised rationing and disbursement of goods.

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Mises also discussed various other examples to illustrate the counter-productivity of

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price control. His most important example of the destructiveness of price flaws was

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Critique of the Anti-Marxists

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Having restated in his piece on price controls the classical liberal case against government

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and meddling with market prices. Mises further developed his system of political philosophy

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through a systematic critique of the two major variants of pro-interventionist theory that

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dominated the German scene in the mid-1920s, non-Marxist socialism and social liberalism.

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The abject practical failure of the Marxist revolutionaries in the post-war period had

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done much harm to their image as the vanguard of social progress. The explanation for this

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This failure in the writings of Mises, Max Weber, and Boris Brutskus had led many economists

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to revise their views about the suitable scope of government within society, but others remained

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unrepentant advocates of the total state. They merely rejected the specifically egalitarian

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agenda of the socialists. The uncontested leader of this group was Werner Sombart, the

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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.

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Before Zombart's appearance, the German universities received Marx's writings very critically.

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In the United States, too, the rise of Marxism encountered the same reservations in academic

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circles until, some forty-five years later after Zombart, Joseph Schumpeter popularised

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Marx as an important thinker in his capitalism, socialism and democracy. Later editions testify

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to Zombart's increasing estrangement with his initial Marxist ideals. The tenth edition,

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which appeared under the new title in 1924, featured an outright demolition of Marxist

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Zombart had turned back to the mainstream Schmoller-right socialism which advocated

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the total state without an egalitarian agenda. Here is the most favourable thing Mises had

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to say about Zombart. He was highly gifted, but at no time did he endeavour to think and

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work seriously. And yet it was more stimulating to talk to Zombart than to most other professors.

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At least he was not stupid and obtuse. Zombart's intellectual qualities had gained him a bit

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and the place of preeminence. Where most Marxist intellectuals held dogmatically to the tenets

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of Marx and Engels, Sombart sought to analyse and develop their doctrines with a critical

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mind in quest of objectivity. This made his work the perfect target for a thorough criticism

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of the intellectual current of anti-Marxist socialism, and Mises provided such a criticism

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in an article with the title Anti-Marxismus, Anti-Marxism.

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Already in his article on price controls, Mises had pointed out that the shortcomings

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of interventionism did not result from the egalitarian agenda that some governments pursued,

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but from the very nature of government intervention itself, namely the infringement of private

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property rights. Socialism and interventionism were destructive economic systems, whether

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are explicitly egalitarian or not. They would be unsuitable forms of social organization

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even if they pursued some other ideal of distribution, even meritocracy. There might be certain superficial

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similarities between a free society and a non-egalitarian one controlled by a total

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state, but these two would still be essentially different. On the surface, the social idea

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of etatism does not differ from the social order of capitalism. Etatism does not seek

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to overthrow the traditional legal order and formally convert all private property and

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production to public property, but in substance all enterprises are to become government operation.

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Under this practice, the owners will keep their names and trademarks on the property

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and the right to an appropriate income, or one befitting their ranks. Every business

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Mises becomes an office and every occupation a civil service. Prices are set by government

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and government determines what is to be produced, how it is to be produced and in what quantities.

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There is no speculation, no extraordinary profits, no losses, there is no innovation

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except for that ordered by government. Government guides and supervises everything. Mises showed

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The government is not omnipotent if its goal is to improve collective life, as opposed to

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that of mere aggregates of individuals, but neither is it omnipotent if it seeks to enhance

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the welfare of the totality of individual citizens. In both cases, government intervention

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is counterproductive. It follows that the time-honoured and seemingly significant distinction

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The distinction between individualism and collectivism is of only secondary importance.

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The primary distinction is between policies that work and policies that do not work, which

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leads in turn to the distinction between a social order based on private property which

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works, and those social orders that depend on infringements of private property rights

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and do not work.

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It is therefore beside the point whether individuals or collectives run the economy, provided only

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Many that the property rights of all individual members of the collectives are preserved.

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It also follows that the size of the firm is of no importance. As long as private property

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is respected, the buying decisions of the consumers reward only those companies that

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offer the best products. If these companies are larger than others, so be it.

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Keynes was convinced that in attacking and criticizing individualism he had destroyed

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The case for laissez-faire. The postulate of a dichotomy between individualism and collectivism

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led Keynes to anticipate the now-famous Kozian view on the problem of optimal social organisation.

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Thus, Keynes surmised that the ideal size for the unit of control and organisation lies

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somewhere between the individual and the modern state. The Kozian theory is best expressed

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in Ronald Ko's The Firm, the Market and the Law.

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Mises emphasised this fact against the doctrines of Dietze, Carl Pribram and Spann, which

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had a great influence on interwar political thought in Germany and after the Second World

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War in the wider Western world. Dietze and Pribram sided with individualism, where as

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Spann championed collectivism, but they all agreed that these were the ultimate categories

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and that all political points of view derived from them. Mises disagreed. He argued that

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There was a point of view that was derived from neither individualism nor collectivism,

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namely the utilitarian method of social analysis. He stated, In the final analysis there is

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no conflict of interest between society and the individual, as everyone can pursue his

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interests more efficiently in society than in isolation. The sacrifices the individual

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makes to society are merely temporary, surrendering a small advantage in order to attain a greater

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He had already proved how successful this method was in analysing the static and dynamic problems

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of social holes, such as language communities, and he emphasised that the analysis of such

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holes is the very point of theoretical social science. What society is, how it originates,

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How it changes, these alone can be the problems which scientific sociology sets itself.

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To be perfectly clear, Mises believed that the positive analysis of the emergence and

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transformation of social wholes had to rely on methodological individualism.

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Based on this analysis, one could apply the utilitarian method, that is, raise the question

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whether any given policy was suitable to attain its goals.

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Otmar Spann rejected not only individualism as a political orientation, but also as a methodological device.

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It was fallacious to believe that individual action could be understood out of its wider social context,

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just as it was false that the proper understanding of social wholes required that this social analysis itself be holistic.

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The utilitarian method alone was a truly scientific one, because it traced all social phenomena

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back to facts of experience.

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Utilitarian social doctrine does not engage in metaphysics, but takes as its point of

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departure the established fact that all living beings affirm their will to live and grow.

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The higher productivity of labour performed in division of labour, when compared with

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Isolated Action is ever more uniting individuals to association, society is division and association

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of labour. Each person seeks to enhance his welfare, and cooperative labour is more productive

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than isolated labour, therefore insofar as the growth of a person's welfare presupposes

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greater quantities of material goods, the person can best attain his ends by engaging

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In a division of labour, this is how society comes into being. All elements in this economic

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explanation of society are ascertainable facts, in contrast the doctrines of individualism

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and collectivism do not lend themselves to any such causal explanation of the origin

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of society because they are based on postulates rather than on analysis of fact, and Mises

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proceeded to show that the same criticism also applied to the Marxist theory of proletarian

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and Class Struggle. He did not deny that human history featured many group conflicts and

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that they often had great importance for the course of events. Rather, he argued that the

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fashionable struggle theories of which the Marxist theory of class struggle was but one

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particular instance purported to be much more than they really were. Group conflicts were

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not and could not possibly be the basic elements of human life. The real question was how any

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group could come into existence in the first place. One first had to explain the formation

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of groups before one could explain the struggle between them, but all struggle theorists,

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Marx included, failed on this front. The reason for this negligence is not difficult to detect,

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it is impossible to demonstrate a principle of association that exists within a collective

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group only, and that is inoperative beyond it. If war and strife are the driving forces

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If we take this warfare sociology to its logical conclusion, we arrive at no social doctrine

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at all but at a theory of unsociability. Mises pointed out that Marx's theory of class struggle

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even failed to give an empirical account of its most basic concept. What is a class in

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in the Marxist sense, Marx had never defined it, and it is significant that the posthumous

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manuscript of the third volume of Das Kapital halts abruptly at the very place that was

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to deal with classes.

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Mises went on,

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Since his death more than forty years have passed, and the class struggle has become

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the cornerstone of modern German sociology, and yet we continue to await its scientific

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Definition and Delineation. Known as vague are the concepts of class interests, class

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condition and class war, and the ideas on the relationship between condition, class

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interests and class ideology.

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Werner Zombart, along with a great majority of German sociologists, of whom he was the

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undisputed leader, had adopted the Marxist view that proletarian class struggle was the

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the ultimate driving force in modern societies. He was now an opponent of Marxist ideology,

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but his analysis still remained Marxian. He merely refrained from drawing all the practical

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conclusions which Marx and the Marxists had consistently deduced from the theory of class

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struggle. He did not and could not provide an alternative to the Marxist scenario of

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social evolution. His only objection came in the form of a postulate. Things should

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did not happen as they would happen according to the theory of class struggle, therefore

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government should resist such developments. Yet with this admission, Zombart and the bulk

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of the German sociologists had again left the realm of science and entered that of religion

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and ethics. Zombart, in fact, championed a return to medieval forms of social organisation,

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the guilds, just as Keynes in England proposed, a return, it may be said, towards medieval

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and the general conceptions of separate autonomies, similarly the few theorists who had thoroughly

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criticised Marx's concept of class struggle, like Otmar Spann, marvelled at the alleged

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blessings of National Socialism in the Middle Ages. Mises concluded,

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For every scientific thinker the objectionable point of Marxism is its theory, which seems

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to cause no offence to the anti-Marxist. The anti-Marxist merely objects to the political

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He regrets the harm done by Marxian policies to the German people, but is blind to the

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harm done to German intellectual life, for the platitudes and deficiencies of Marxian

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problems and solution. Above all, he fails to perceive that political and economic troubles

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are consequences of this intellectual calamity. He does not appreciate the importance of science

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for Everyday Living, and under the influence of Marxism believes that real power instead

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of ideas is shaping history. Anti-Marxism caused outrage among the Marxists. What was

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Mises' sin? First, he had dared criticise the great master with a penetrating analysis

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of the insurable shortcomings of Marxist theory of class struggle. Second, he had again contended

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that from an economic point of view Marxist socialism was not essentially different from

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and the various new brands of National Socialism that had begun to spring up in the 1920s mostly

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in reaction against Marxist movements. Thus a fraction of Italian socialists who rejected

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the teachings of Marx and called themselves fascists rose to power under the leadership

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of Benito Mussolini. There was also a movement of non-Marxist National Socialists in Germany.

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The father of this movement was Friedrich Naumann, who by a strange coincidence later

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Mises came to be regarded as the godfather of 20th century German liberalism. The leader

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of the National Socialists from the 1920s until their bitter end was, of course, Adolf

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Hitler. Marxist Socialists forciverously object to being classified under the same heading

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that includes Fascist Socialists and National Socialists, but as Mises showed, all distinctions

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Critique of the New Liberals After dealing with Zombart and others who

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had remained unrepentant champions of powerful central government, Mises turned to a critique

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of the more moderate branch of the cartelist socialist movement. In the wake of the crisis

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of social policy, these intellectuals had lost their faith in the blessings of an omnipotent

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Government. They thought of themselves as social liberals, meaning that they recognized

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certain fundamental defects of free markets and advocated government interventions to

296
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fix them. The leaders of this group were Heinrich Herkner, Luiu Brentano and Leopold von Wiese.

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Their most important pre-war predecessors were Eugen von Philippowitz and Friedrich Naumann.

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As Raikow, Die Partei der Freiheit, chapter 6, explains, Naumann inspired several post-war

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movements with often contradictory agendas. The German social-liberal movement's endeavour

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to appropriate the term liberal paralleled the strategy of Leonard Hoppe House in England

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and John Dewey in the United States. Hoppe House, 1864-1929, a professor of sociology

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at LSE became famous with his liberalism. Among the writings of John Dewey, 1859-1952,

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see in particular liberalism and social action. Both groups championed a much broader scope

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for government action than the classical liberals whom they derided for their laissez-faire

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position. So why did they call themselves liberals? The only claim to the word was that

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They did not believe in the ideal of all-out central planning. The omnipotent state threatened

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the core of individual freedom, the civil liberties of individual citizens. But in contrast

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to classical liberals, these new social liberals had no principled objection to far-reaching

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limitations of citizens' economic liberties. Such intrusions into private property rights

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could, they contended, be justified on various grounds, for example, the principle that there

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should be no income without work, or the contention that government intervention was needed to

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make the economy better resemble the model of perfect competition. They also argued that

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economic liberty was not truly liberal because it entailed a certain cold-heartedness to

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one's fellow citizens. The rest was marketing, anticipating an important manoeuvre of twentieth-century

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Party Politics and Western Democracies. They presented themselves as liberals because of

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the positive connotations of the still popular notion of individual liberty. The strategy

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worked so well that today the words liberal and liberalism are often taken to be the exact

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opposite of their original meaning. Mises objected to this intellectual and practical

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confusion. He emphasized that what was at stake was not the use of words, but the substantial

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The differences between an economy unhampered by government intervention and an economic

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system characterised by such interventions, to use the word liberal in the new sense,

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was to obscure these differences.

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The new liberals gave the impression that politics concerned only the ends to be attained.

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The choice, they implied, was between cold-hearted and parasite-friendly economic liberties on

325
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the one hand and warm-hearted, equitable civil liberties on the other.

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An extreme case of this confusion was Keynes, who not only held that politics was about

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the ends to be pursued, but about emotional attitudes to these ends. Thus he held that

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the essential characteristic of capitalism was the dependence upon an intense appeal

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to the money-making and money-loving interests of individuals as the main force of the economic

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machine. But Mises explained that this view was entirely unfounded. Politics is not about

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00:32:31.280 --> 00:32:37.520
ends but about means. Classical liberals often cherished the same ideals as their socialist

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rivals. What set them apart was their practical program to attain those ideals. While classical

333
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liberalism championed the inviolability of private property, the defining mark of all

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other political orientations was that they sought to attain their ends through violations

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of private property rights. In an ideal classical liberal society, every

336
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Every man is sovereign within the boundaries of his property.

337
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All relations between human beings are based on mutual consent.

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Each person cooperates with others to promote common interests.

339
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If one side is unwilling, cooperation stops.

340
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This withdrawal from cooperation might appear brutal in the eyes of the other party, but

341
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the only way to prevent it would be to force the first party to continue against his will,

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which would no longer promote the common interests of both.

343
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What might seem to be the unsocial excesses of the capitalist order are therefore in truth

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desirable consequences of the fact that cooperation is based on mutual consent.

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If in a capitalistic society the buyer seeks to buy an economic good wherever it is least

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expensive without regard for other considerations, he does not act with insensitivity to its

347
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suffering. If the superior enterprise successfully competes with one working less economically,

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There is no brutal use of elbows or struggle to overpower and enslave fellow men. The process

349
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in this case is no undesirable concomitant effect or outgrowth of capitalism and unwanted

350
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biliberalism. On the contrary, the sharper the competition, the better it serves its

351
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social function to improve economic production. That the stagecoach driver was replaced by

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the railroad, the hand weaver by mechanical weaving, the shoemaker by the shoe factory

353
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did not happen contrary to the intentions of liberalism.

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And when small shipowners with sailing vessels were replaced by a large steamship company,

355
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when a few dozen butchers were replaced by a slaughterhouse, a few hundred merchants

356
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by a department store, it signifies no overpowering and enslaving of fellow men.

357
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Similarly, he observed, in fact, unearned income flows from control over the means of

358
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production.

359
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He who opposes unearned income must oppose private property in the means of production.

360
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Therefore, a liberal cannot sympathise with such efforts. If he does so nevertheless,

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he is no longer a liberal.

362
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It is true that an ideal classical liberal society has never existed. The picture of

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what fully developed capitalism can achieve is incomplete at best, even if we reflect

364
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upon British society at the zealot of capitalism when liberalism was leading the way. Capitalism

365
00:35:22.720 --> 00:35:28.080
Capitalism was thus an unknown ideal, as Ayn Rand would later say. It is neither impossible

366
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nor undesirable to bring such a society about. Economic science shows both that it is a practical

367
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political option and that all the alternatives to it are inferior. Socialism is necessarily

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less efficient than capitalism because it cannot rely on economic calculation, and interventionism

369
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does not work at all, Mises asserted, economic knowledge necessarily leads to liberalism.

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The best proof was that the social liberals had been unable to develop an alternative

371
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economic theory that would substantiate their agenda. The outstanding example of the social

372
00:36:02.880 --> 00:36:08.280
liberal's intellectual impotence was the theory of wages. As the webs had done before

373
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him, Brent Harnow attempted to prove that labour unions could raise the wage rates of

374
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Mises himself had in an early article explained that labour unions could possibly raise wage

375
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rates for all workers in the short run. His studies on interventionism in the 1920s convinced

376
00:36:34.880 --> 00:36:42.320
him that this short-run rise was invariably bought at the price of capital consumption.

377
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In his article on social liberalism, Mises finished the job. He added that even if it

378
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were possible for labour unions to raise wage rates to some degree for all workers, there

379
00:36:53.920 --> 00:36:58.680
was another fundamental question to be asked. If labour unions actually had the power to

380
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raise the average wage of all workers above the rate that would prevail without their

381
00:37:03.080 --> 00:37:10.080
intervention, the question remains how high can wages go? Can average wages go so high

382
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that they absorb all unearned income and must be paid out of capital? Or is there a lower

383
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limit at which this rise must stop? This is the problem that power theory must answer

384
00:37:21.960 --> 00:37:28.640
with regard to every price, but until today no one has ever tried to solve the problem.

385
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In other words, if the labour unions or whoever else really can increase wages rates for all

386
00:37:34.400 --> 00:37:39.680
by a mere display of power, that is, if prices really depend on power rather than on economic

387
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Law, then why ask for wage increases of say 10%, why not ask increases of 100% or 1000%

388
00:37:47.480 --> 00:37:55.240
or 1,000,000%? To ask this question is to answer it. The wages are a matter of bargaining

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power theory is an absurdity. Because the social liberals were aware of these problems,

390
00:38:00.560 --> 00:38:06.220
they denied the validity of economic science altogether. But as Mises showed, the self-serving

391
00:38:06.220 --> 00:38:18.060
The social liberals even denied that present problems would ever be solved. For decades

392
00:38:18.060 --> 00:38:22.420
they had accustomed the German people to the notion that willpower and strength are the

393
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driving forces of all social processes. Now, at a time when they themselves had lost their

394
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faith in the omnipotent state, they left the people with all prejudices and no outlet.

395
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In his conclusion, Mises spelled out the grave political dangers of a situation in which

396
00:38:39.140 --> 00:38:44.300
the masses demand the establishment of socialism and their political leaders are unwilling

397
00:38:44.300 --> 00:38:46.260
to comply.

398
00:38:46.260 --> 00:38:50.720
Politics does not dare introduce what the prevailing ideology is demanding.

399
00:38:50.720 --> 00:38:56.300
Taught by bitter experience, it subconsciously has lost confidence in the prevailing ideology.

400
00:38:56.300 --> 00:39:01.220
In this situation, no one, however, is giving thought to replacing the obviously useless

401
00:39:01.220 --> 00:39:03.360
ideology with a useful one.

402
00:39:03.360 --> 00:39:08.600
No help is expected from reason. Some are taking refuge in mysticism. Others are setting

403
00:39:08.600 --> 00:39:14.120
their hopes on the coming of the strong man, the tyrant, who will think for them and care

404
00:39:14.120 --> 00:39:21.000
for them. Mises submitted the manuscript of Social Liberalism at the end of February 1926.

405
00:39:21.000 --> 00:39:26.560
At this point he had already made up his mind about his next two books. The first would

406
00:39:26.560 --> 00:39:30.680
be a collection of his papers criticising the different manifestations of the interventionist

407
00:39:30.680 --> 00:39:36.560
Creed. It would feature his anti-Marxism and social liberalism, as well as one or two new

408
00:39:36.560 --> 00:39:42.100
pieces to generalise his thesis from the theory of price control. The second book would spell

409
00:39:42.100 --> 00:39:47.300
out the political implications of these findings from a classical liberal point of view. As

410
00:39:47.300 --> 00:39:54.180
it turned out, the second book appeared first in 1927 under the title Liberalismus, Liberalism.

411
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The other book was published only two years later under the title Kritik des Interventionismus,

412
00:40:00.140 --> 00:40:02.900
Critique of Interventionism

413
00:40:02.900 --> 00:40:05.740
The Transformation of Economic Science

414
00:40:05.740 --> 00:40:11.860
By early 1926, Mises had worked out four elements of a general theory of interventionism. Two

415
00:40:11.860 --> 00:40:16.780
case studies in the fields of international trade and price controls, a critique of the

416
00:40:16.780 --> 00:40:22.580
spurious anti-Marxist socialism prevalent in Germany, and a critique of the social liberal.

417
00:40:22.580 --> 00:40:28.840
Now he had to pull these elements together into one unified theory of interventionism.

418
00:40:28.840 --> 00:40:35.160
The occasion came when he delivered two lectures in Rotterdam and Utrecht in October 1926.

419
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The manuscript of these lectures was subsequently published as an article for the Archiv für

420
00:40:40.560 --> 00:40:45.920
Sozialwissenschaften und Sozialpolitik. The article generalised the thesis contained in

421
00:40:45.920 --> 00:40:51.240
the piece on price controls and placed great emphasis on the continuity between Mises's

422
00:40:51.240 --> 00:40:55.540
work and that of previous generations of economists.

423
00:40:55.540 --> 00:41:00.560
One of the objections that Mises sought to counter was that his theory made it seem that

424
00:41:00.560 --> 00:41:07.080
virtually all government activities were necessarily contrary to their professed purpose. Was he

425
00:41:07.080 --> 00:41:13.840
some sort of anarchist? Replying to this objection, Mises sought to delineate precisely which

426
00:41:13.840 --> 00:41:19.560
government actions constituted intervention and which did not. His answer, in a nutshell,

427
00:41:19.560 --> 00:41:24.120
was that government does not intervene if it respects the will of private owners to

428
00:41:24.120 --> 00:41:39.040
Interventionism is a limited order by a social authority forcing the owners of the means

429
00:41:39.040 --> 00:41:44.520
of production and entrepreneurs to employ their means in a different way than they otherwise

430
00:41:44.520 --> 00:41:50.080
would. Mises stressed that interventionism is a larger phenomenon than the ill-suited

431
00:41:50.080 --> 00:41:54.980
Actions of Governments. The characteristic feature of interventionism is an authorised

432
00:41:54.980 --> 00:42:00.680
violation of private property. If committed by anyone other than the social authorities,

433
00:42:00.680 --> 00:42:07.000
invasions of private property would be considered a crime. So what are these social authorities?

434
00:42:07.000 --> 00:42:11.960
Their characteristic feature is that their actions are legitimated by an intellectual

435
00:42:11.960 --> 00:42:18.120
power, Geistige Macht. Thus, their interventions are deemed to be a legitimate violation of

436
00:42:18.120 --> 00:42:23.560
of Property. Intellectual power can give a monopoly over property rights violations to

437
00:42:23.560 --> 00:42:29.160
a particular agent, such is the case with all statist theories which justify violations

438
00:42:29.160 --> 00:42:35.240
of property only by a special body of persons, the state or the government. But intellectual

439
00:42:35.240 --> 00:42:41.000
power could also be such as to enable violations of property without a central agent. This

440
00:42:41.000 --> 00:42:47.560
is so, for example, when religious doctrine prohibits payments of high prices as usual.

441
00:42:47.560 --> 00:42:53.460
The characteristic feature of intervention is that it brings about unwanted co-ownership.

442
00:42:53.460 --> 00:42:58.360
The government, or whatever else intervenes, claims a level of control over the property,

443
00:42:58.360 --> 00:43:04.180
but otherwise leaves it in the hands of its owner. Even outright expropriations do not

444
00:43:04.180 --> 00:43:09.920
counter interventions according to Mises because they involve a clear-cut change of ownership.

445
00:43:09.920 --> 00:43:14.580
Most important, measures that serve to protect the physical integrity of private property

446
00:43:14.580 --> 00:43:19.300
are not interventions. Since this projection is the proper function of government in a

447
00:43:19.300 --> 00:43:24.820
classical liberal vision of society, Mises's theory of interventionism cannot be interpreted

448
00:43:24.820 --> 00:43:31.260
as making the case for anarchism. Mises used the term anarchism to refer to the Proudhonian

449
00:43:31.260 --> 00:43:37.700
idea of a society without the defence of private property rights and anarchy to designate the

450
00:43:37.700 --> 00:43:44.300
chaos he believed to be inevitable for such a society. He did not have in mind the anarchism

451
00:43:44.300 --> 00:43:49.560
some of his later student Murray Rothbard, who used the same words to advocate a free

452
00:43:49.560 --> 00:43:56.040
market society without a modern state, a system in which even the defence of property rights

453
00:43:56.040 --> 00:43:58.220
would be provided privately.

454
00:43:58.220 --> 00:44:04.640
However, Mises stressed that protection of property should not be interpreted too loosely.

455
00:44:04.640 --> 00:44:09.860
In response to the particular notion increasingly popular among economists of the 1920s that

456
00:44:09.860 --> 00:44:15.740
A free market essentially resembled a Walrassian model of perfect competition, Mises warned.

457
00:44:15.740 --> 00:44:21.060
Regulations for the preservation of competition do not at all belong to those measures preserving

458
00:44:21.060 --> 00:44:26.060
the private property order. It is a popular mistake to view competition between several

459
00:44:26.060 --> 00:44:32.060
producers of the same product as the substance of the ideal liberal order. In reality, the

460
00:44:32.060 --> 00:44:37.180
central notion of classical liberalism is private property and not a certain misunderstood

461
00:44:37.180 --> 00:44:42.900
and concept of free competition. It does not matter that there are many recording studios,

462
00:44:42.900 --> 00:44:47.700
but it does matter that the means of record production are owned privately rather than

463
00:44:47.700 --> 00:44:52.400
by government. This misunderstanding, together with an interpretation of freedom that is

464
00:44:52.400 --> 00:44:57.940
influenced by the natural rights philosophy, has led to attempts at preventing the development

465
00:44:57.940 --> 00:45:02.740
of larger enterprises through laws against cartels and trusts.

466
00:45:02.740 --> 00:45:20.740
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.

467
00:45:20.740 --> 00:45:26.620
See, on this change of views of the economics profession, Thomas di Lorenzo and Jack High

468
00:45:26.620 --> 00:45:32.980
Antitrust and Competition historically considered Economic Inquiry July 1988, the authors show

469
00:45:32.980 --> 00:45:38.220
that during the 1920s the rising neoclassical movement more and more abandoned the project

470
00:45:38.220 --> 00:45:44.660
of modelling reality in favour of squeezing reality into the procustion bed of their models.

471
00:45:44.660 --> 00:45:49.420
The political implications were disastrous. The new approach opened an endless agenda

472
00:45:49.420 --> 00:45:54.040
for Government Agencies, which, through endless novel interventions, saw to shape the real

473
00:45:54.040 --> 00:46:01.080
world through their impossible model. Mises sensed this danger. Economic science had been

474
00:46:01.080 --> 00:46:05.820
the intellectual foundation of the nineteenth century's liberty. It was a science that

475
00:46:05.820 --> 00:46:10.620
dealt with real human life, not with the fictitious constructions that were at the heart of the

476
00:46:10.620 --> 00:46:15.620
rising neoclassical movement. Moreover, it was a science with clear political implications,

477
00:46:15.620 --> 00:46:19.940
Without a mere intellectual exercise, the very nature of the science made it odious

478
00:46:19.940 --> 00:46:22.660
to the powers that be.

479
00:46:22.660 --> 00:46:28.100
Its results violated the political correctness of the day, which suddenly found itself exposed

480
00:46:28.100 --> 00:46:31.300
to the cold light of rational criticism.

481
00:46:31.300 --> 00:46:35.280
Mises knew he was making no friends when, at the height of the debate on the introduction

482
00:46:35.280 --> 00:46:41.140
of a national unemployment relief programme in Germany established in 1927, he stated,

483
00:46:41.140 --> 00:46:48.820
In capitalist social order, unemployment is merely a transition and a frictional phenomenon.

484
00:46:48.820 --> 00:46:53.380
Various conditions that impede the free flow of labour from place to place, from country

485
00:46:53.380 --> 00:46:59.740
to country, may render the equalisation of wage rates more difficult. They may also lead

486
00:46:59.740 --> 00:47:05.460
to differences in compensation of the various types of labour, but with freedom for entrepreneurs

487
00:47:05.460 --> 00:47:12.020
Workers and capitalists, they could never lead to large-scale and permanent unemployment.

488
00:47:12.020 --> 00:47:17.140
Workers seeking employment could always find work by adjusting their wage demands to market

489
00:47:17.140 --> 00:47:24.660
conditions. If the market determination of wage rates had not been disrupted, the effects

490
00:47:24.660 --> 00:47:30.180
of the World War and the destructive economic policies of the last decades would have led

491
00:47:30.180 --> 00:47:38.180
to a decline in wage rates but not to unemployment. The scope and duration of unemployment, interpreted

492
00:47:38.180 --> 00:47:44.340
today as proof of the failure of capitalism, results from the fact that labour unions and

493
00:47:44.340 --> 00:47:50.340
unemployment compensation are keeping wage rates higher than the unhampered market would

494
00:47:50.340 --> 00:47:55.800
set them. Mises knew that by insisting on these truths he was making life difficult

495
00:47:55.800 --> 00:48:00.820
for the vast majority of his colleagues. He also understood why so few of them dared to

496
00:48:00.820 --> 00:48:05.920
articulate even the most elementary lessons of their science. Most of them depended on

497
00:48:05.920 --> 00:48:11.360
government support. Opposing their employer or benefactor would have been both impolite

498
00:48:11.360 --> 00:48:17.560
and impolitic. He who timidly dares to doubt the justifications of the restrictions on

499
00:48:17.560 --> 00:48:24.400
capitalists and entrepreneurs is scorned as a hiling of injurious special interests or

500
00:48:24.400 --> 00:48:30.400
are at best treated with silent contempt. One can easily fall under the suspicion of

501
00:48:30.400 --> 00:48:36.840
serving capital. Anyone using economic arguments cannot escape this suspicion. Because of this

502
00:48:36.840 --> 00:48:42.220
ostracism of genuine economists, those who held or hoped to hold academic positions in

503
00:48:42.220 --> 00:48:46.960
political economy became eager to avoid any behaviour that could offend the powers that

504
00:48:46.960 --> 00:48:53.120
be. The most innocent strategy was to understate one's findings when they risked upsetting

505
00:48:53.120 --> 00:48:58.200
Among certain powerful social groups, Das Mises observed about Richard Striegel's book

506
00:48:58.200 --> 00:49:04.280
Ungewandte Lohntheorie, 1926, which essentially confirmed the old insight that labour unions

507
00:49:04.280 --> 00:49:07.680
cannot increase wages rates for all workers.

508
00:49:07.680 --> 00:49:12.920
All Striegel's statements are carefully worded in the same manner that authors of previous

509
00:49:12.920 --> 00:49:17.800
centuries worded theirs in order to escape inquisition or censure.

510
00:49:17.800 --> 00:49:22.160
In a similar vein, an increasing number of young economists turned their attention to

511
00:49:22.160 --> 00:49:27.400
to abstract and technical problems that did not have any political implications unwelcome

512
00:49:27.400 --> 00:49:33.160
to their employers. This helps explain the success of mathematical economics, econometrics,

513
00:49:33.160 --> 00:49:38.160
Keynesian economics and game theory after the Second World War.

514
00:49:38.160 --> 00:49:43.360
Mises observed that this retreat from traditional economic inquiry was in part the result of

515
00:49:43.360 --> 00:49:48.200
a perverse interpretation of value freedom in the social sciences. According to this

516
00:49:48.200 --> 00:49:52.760
In his view, any critique of practical politics by the very fact that it deals with a political

517
00:49:52.760 --> 00:49:56.260
problem cannot possibly be scientific.

518
00:49:56.260 --> 00:50:00.220
Such was the strongly held opinion of Friedrich von Mises and others.

519
00:50:00.220 --> 00:50:02.100
Mises did not concur.

520
00:50:02.100 --> 00:50:04.300
Economic analysis is suitability analysis.

521
00:50:04.300 --> 00:50:09.380
It examined whether a proposed means is fit to attain a purported end.

522
00:50:09.380 --> 00:50:14.260
This is a factual question, and thus subject to a scientific answer.

523
00:50:14.260 --> 00:50:18.940
The personal values of the economist do not come into play here at all. Mises illustrates

524
00:50:18.940 --> 00:50:21.820
at this point with the following example.

525
00:50:21.820 --> 00:50:26.780
When I say that price controls are illogical, I mean to assert that they do not achieve

526
00:50:26.780 --> 00:50:31.820
the objective they are usually meant to achieve. Now a communist could reply, I favour price

527
00:50:31.820 --> 00:50:35.980
controls just because they prevent the smooth functioning of the market mechanism, because

528
00:50:35.980 --> 00:50:42.700
they turn human society into a senseless chaos and all the sooner lead to my ideal of communism.

529
00:50:42.700 --> 00:50:47.820
and the Theory of Price Controls cannot answer him, as physiology cannot answer the man who

530
00:50:47.820 --> 00:50:54.300
wants to kill with hydrocyanic acid. Economic analysis shows that all government interventions

531
00:50:54.300 --> 00:50:59.180
are unsuitable to attain the ends they are professed to attain, statement of matter of

532
00:50:59.180 --> 00:51:04.280
fact. In the light of this result, classical liberalism advocated that there shall be no

533
00:51:04.280 --> 00:51:09.800
intervention, judgment or value. Government shall be limited to the protection of private

534
00:51:09.800 --> 00:51:14.960
Property and the Elimination of All Obstacles to Free Market Access for Individuals or Groups

535
00:51:14.960 --> 00:51:22.200
of Individuals. This is nothing but another wording of the principle laissez-faire, laissez-passer.

536
00:51:22.200 --> 00:51:25.760
Economists can evoke the authority of their science when they reject a policy that does

537
00:51:25.760 --> 00:51:31.960
not achieve what its proponents say it will. Mises concluded by pointing out that erroneous

538
00:51:31.960 --> 00:51:37.000
notions of value freedom threatened to make the research of the rising generation sterile.

539
00:51:37.000 --> 00:51:43.920
We destroy economics if all its investigations are rejected as inadmissible. We can observe

540
00:51:43.920 --> 00:51:49.360
today how many young minds, who under other circumstances would have turned to economic

541
00:51:49.360 --> 00:51:54.320
problems, spent themselves on research that does not suit their talent, and therefore

542
00:51:54.320 --> 00:52:01.240
adds little to science. Enmeshed in the errors described above, they shun significant scientific

543
00:52:01.240 --> 00:52:06.240
and Economic Tasks. What Mises was describing was the beginning of the process through which

544
00:52:06.240 --> 00:52:12.520
economic science was being redefined, altered to suit the needs of the young and the ambitious,

545
00:52:12.520 --> 00:52:17.040
who in their mercenary way were willing to elevate certain comfortable errors to the

546
00:52:17.040 --> 00:52:23.000
level of principle. Mises was only a bystander in this process and did not see it as clearly

547
00:52:23.000 --> 00:52:31.040
then as he would see it in the 1950s and 1960s. In 1926 he did perceive that the replacement

548
00:52:31.040 --> 00:52:35.400
of economic science, which had shaped the modern world because of its practical implications

549
00:52:35.400 --> 00:52:41.500
for public policy, would entail grave danger for civilization. The transformation of economics

550
00:52:41.500 --> 00:52:48.380
into a self-absorbed technical discipline made it politically toothless. A mere theory

551
00:52:48.380 --> 00:52:53.160
based on fictitious stipulations, and therefore without scientifically valid implications

552
00:52:53.160 --> 00:52:58.180
for public policy, was no threat to vested interests, and the champions of this theory

553
00:52:58.180 --> 00:53:03.940
We did not have to fear reprisals. Clearly, this state of affairs suited the majority

554
00:53:03.940 --> 00:53:09.940
in the economic profession, both employers and employees. But it was disastrous for science,

555
00:53:09.940 --> 00:53:16.760
human liberty and economic progress. The transformation of economics amounted to the abandoning of

556
00:53:16.760 --> 00:53:22.280
the authority that previous generations of economists had gained for their science. But

557
00:53:22.280 --> 00:53:27.180
even those who championed real economic science could still destroy through their self-promotion

558
00:53:27.180 --> 00:53:32.600
and what remained of its credibility. These men, good writers and speakers, authors of

559
00:53:32.600 --> 00:53:38.540
very successful textbooks, claimed that there was no economic science prior to them. Robert

560
00:53:38.540 --> 00:53:44.100
Liefmann, Franz Oppenheimer, and Friedrich von Gottel-Ort Lilienfeld had inherited a

561
00:53:44.100 --> 00:53:48.540
rhetorical strategy of Karl Marx, who thought he could enhance the respectability of his

562
00:53:48.540 --> 00:53:54.100
own arguments by belittling the efforts of his predecessors and contemporaries. Owing

563
00:53:54.100 --> 00:53:58.340
Due to the eloquence of these authors, their condemnations of all previous accounts of

564
00:53:58.340 --> 00:54:02.100
economic law reached a broad audience.

565
00:54:02.100 --> 00:54:06.260
Of course, Liefmann did not intend to discredit economic science.

566
00:54:06.260 --> 00:54:12.820
Mises's point was that the effect was the unintentional result of Liefmann's rhetoric.

567
00:54:12.820 --> 00:54:16.820
Things were completely different in the case of Keynes, who consciously sought to discredit

568
00:54:16.820 --> 00:54:22.340
economic science in his crusade to vindicate government interventionism.

569
00:54:22.340 --> 00:54:27.040
Mises claimed that the case for laissez-faire had no scientific basis, but was entirely

570
00:54:27.040 --> 00:54:33.880
founded on postulates of political philosophy, private property as a natural right, and theology,

571
00:54:33.880 --> 00:54:39.680
harmony of interests. Without quoting Keynes, Mises showed that these claims missed the

572
00:54:39.680 --> 00:54:45.180
point. Private property does not require natural law for justification, but can be vindicated

573
00:54:45.180 --> 00:54:51.680
on the basis of suitability analysis alone. Further, the theological garment of the harmony

574
00:54:51.680 --> 00:54:58.240
of Interest doctrine was just that. Already in his anti-Marxism, Mises had proved that

575
00:54:58.240 --> 00:55:03.000
the attacks on the thought of pre-established harmony do not touch the substance, merely

576
00:55:03.000 --> 00:55:09.520
the wording of the utilitarian social theory. The average lay reader almost inevitably came

577
00:55:09.520 --> 00:55:14.880
away with the impression that, at its best, economic science relied on the work of a single

578
00:55:14.880 --> 00:55:19.160
author. The public, unfortunately, is led to believe that in economics everything is

579
00:55:19.160 --> 00:55:25.160
is uncertain and problematic, and that economic theory merely consists of the personal opinions

580
00:55:25.160 --> 00:55:27.160
of various scholars.

581
00:55:27.160 --> 00:55:31.680
The excitement created by these authors in German-speaking countries succeeded in obscuring

582
00:55:31.680 --> 00:55:37.180
the fact that there is a science of theoretical economics which, despite differences in detail

583
00:55:37.180 --> 00:55:42.220
and especially in terminology, is enjoying a good reputation with all friends of science.

584
00:55:42.220 --> 00:55:46.200
The result was that government interventionism was no longer subject to scrutiny.

585
00:55:46.200 --> 00:55:58.200
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.

586
00:55:58.200 --> 00:56:11.200
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.

587
00:56:11.200 --> 00:56:21.200
In other words, economic science was most constant and most unshakable precisely in that field where it mattered most, in economic policy analysis.

588
00:56:21.200 --> 00:56:32.200
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,

589
00:56:32.200 --> 00:56:38.200
and via the marginal revolution with its different schools, up to Mises's own work in the 1920s.

590
00:56:38.200 --> 00:56:42.800
Mises recognized, of course, that there were often profound differences between the various

591
00:56:42.800 --> 00:56:47.320
schools of thought, but he stressed that these differences had never affected the practical

592
00:56:47.320 --> 00:56:52.680
results. When it came to stating the impact of government intervention on the economy,

593
00:56:52.680 --> 00:56:57.320
there were no relevant differences of opinion between the schools. By and large economists

594
00:56:57.320 --> 00:57:03.280
agreed on the practical issues. Notable disagreement existed only between economists and those

595
00:57:03.280 --> 00:57:08.040
who denied that there was such a thing as economic science at all.

596
00:57:08.040 --> 00:57:13.120
We need not here deal with the deeper epistemological question of conflicting systems, nor need

597
00:57:13.120 --> 00:57:19.080
we discuss the multiplicity of opposing systems. To investigate the problems of interventionism

598
00:57:19.080 --> 00:57:23.520
there are on the one hand modern economics together with classical theory, and on the

599
00:57:23.520 --> 00:57:28.040
other hand the deniers of system and theory, no matter how carefully they word their denial

600
00:57:28.040 --> 00:57:32.660
of the possibility of theoretical knowledge. Our answer to them is simple, try to create

601
00:57:32.660 --> 00:57:37.960
a system of theoretical knowledge that pleases you more than ours, then we can talk again.

602
00:57:37.960 --> 00:58:03.760
At the beginning of the 21st century, Mises's emphasis on the continuity of economic thought

603
00:58:03.760 --> 00:58:09.800
in Practical Matters and to the characterisation he made of economists no longer seems true,

604
00:58:09.800 --> 00:58:14.920
but this is because the transformation whose beginnings he noticed in the mid-1920s has

605
00:58:14.920 --> 00:58:17.400
since been completed.

606
00:58:17.400 --> 00:58:21.740
Present-day mainstream economics is heavily focused on purely technical problems of modelling

607
00:58:21.740 --> 00:58:26.280
reality with mathematics, econometrics and game theory.

608
00:58:26.280 --> 00:58:30.880
The relationship between these models and the real world that they supposedly portray

609
00:58:30.880 --> 00:58:36.360
is still as problematic as it has been from the outset. As a consequence, the professional

610
00:58:36.360 --> 00:58:42.160
economists of today are not really economists in the sense in which Mises used the word,

611
00:58:42.160 --> 00:58:47.040
the same sense in which it was used throughout the 19th century. The Austrian School of Mises

612
00:58:47.040 --> 00:58:53.080
and Hayek, after the latter had repudiated his early neoclassical views, was in fact

613
00:58:53.080 --> 00:58:58.220
the only 20th century school of economic thought in the classical sense. Significantly, John

614
00:58:58.220 --> 00:59:01.500
John R. Hicks said many years later about the Austrian School,

615
00:59:01.500 --> 00:59:07.140
I am writing in their tradition, yet I have realized, as my work has continued, that it

616
00:59:07.140 --> 00:59:10.940
is a wider and bigger tradition than it at first appeared.

617
00:59:10.940 --> 00:59:14.960
The Austrians were not a peculiar sect out of the mainstream.

618
00:59:14.960 --> 00:59:16.800
They were in the mainstream.

619
00:59:16.800 --> 00:59:18.740
It was the others who were out of it.

620
00:59:18.740 --> 00:59:24.300
But Mises's ecumenical stress on the homogeneity of the different schools of economic thought

621
00:59:24.300 --> 00:59:29.100
in regard to the necessity of economic theory in general, and the analysis of government

622
00:59:29.100 --> 00:59:32.820
interventionism in particular, has turned out to be problematic.

623
00:59:32.820 --> 00:59:37.420
Present-day historians of economic thought, well acquainted with Mises' work, have claimed

624
00:59:37.420 --> 00:59:42.900
that until the early 1930s, Mises and virtually all other Austrian economists were unaware

625
00:59:42.900 --> 00:59:47.340
of the profound differences between the Mangerian approach to economic analysis and that of

626
00:59:47.340 --> 00:59:49.580
the other marginal utility schools.

627
00:59:49.580 --> 00:59:54.260
These historians claim that it was the socialist calculation debate of the 1930s that really

628
00:59:54.260 --> 00:59:59.860
radicalised Mises and Hayek, spurred them to reflect on the uniqueness of their approach,

629
00:59:59.860 --> 01:00:05.140
and to distinguish themselves more sharply from the followers of William Stanley Jevons

630
01:00:05.140 --> 01:00:11.900
and Lyon Walras. But Mises's ecumenism was not meant to cover all problems or branches

631
01:00:11.900 --> 01:00:16.840
of economic theory. The message he sought to convey was that there was such a thing

632
01:00:16.840 --> 01:00:21.580
as economic science relevant to policy-making, and he thought the best evidence for this

633
01:00:21.580 --> 01:00:28.020
Mises' claim was that there were some economic laws on which all schools agreed. The disciples

634
01:00:28.020 --> 01:00:34.420
of Carl Menger could not subscribe to Ricardo's theory of value, but they could endorse almost

635
01:00:34.420 --> 01:00:40.500
everything he had written on political economy. Mises later wrote that political economy,

636
01:00:40.500 --> 01:00:46.500
as developed by several generations of English thinkers, brilliantly expounded by Hume and

637
01:00:46.500 --> 01:00:52.180
Adam Smith and perfected by Ricardo was the most exquisite outcome of the philosophy of

638
01:00:52.180 --> 01:00:57.060
the Enlightenment, and regarding the classical theory of free trade and protectionism he

639
01:00:57.060 --> 01:01:02.700
observed that the critics did not embark upon the hopeless task of discovering some false

640
01:01:02.700 --> 01:01:06.920
syllogisms in the chain of Ricardo's reasoning.

641
01:01:06.920 --> 01:01:11.520
Mises stressed these common points not because he believed that the remaining disagreements

642
01:01:11.520 --> 01:01:32.880
Liberalism With the analysis of interventionist dynamics,

643
01:01:32.880 --> 01:01:37.720
Mises had gained a complete picture of all possible forms of the economic organisation

644
01:01:37.720 --> 01:01:45.280
for Human Society. The time was ripe for publishing his first book-length synthesis of the results.

645
01:01:45.280 --> 01:01:51.240
He sought to make the case for a free society, a case that was not based on aesthetic or

646
01:01:51.240 --> 01:01:57.960
ethical considerations, but on the rock-solid foundation of economic science. From there,

647
01:01:57.960 --> 01:02:02.420
he would spell out the further implications of the case for liberty in fields such as

648
01:02:02.420 --> 01:02:10.020
as Monopoly and Antitrust, The State, Colonialism, Democracy, Foreign Trade and Foreign Policy.

649
01:02:10.020 --> 01:02:15.300
The book would be a synthesis of his post-First World War writings, summarising the politically

650
01:02:15.300 --> 01:02:21.460
relevant results from nation, state and economy, as well as from socialism and his more recent

651
01:02:21.460 --> 01:02:28.180
writings on interventionism. Mises packed all these subjects into a book of a mere 175

652
01:02:28.180 --> 01:02:39.020
It remains one of the most important manifestos of political liberalism. It was not addressed

653
01:02:39.020 --> 01:02:44.700
to economists or to the larger community of scholars. It did not contain any new contributions

654
01:02:44.700 --> 01:02:50.420
to the social sciences. Rather, it was an exposition and application of the state of

655
01:02:50.420 --> 01:02:56.660
the art in economic science, a book for the public, for the citizens of Austria and Germany,

656
01:02:56.660 --> 01:02:59.480
and for the citizens of the world.

657
01:02:59.480 --> 01:03:03.620
That state of the art was largely shaped by Mises's own efforts.

658
01:03:03.620 --> 01:03:08.780
Socialism had been published five years earlier and his essay Intervencionismus had only just

659
01:03:08.780 --> 01:03:14.280
appeared in print, but Mises presented his views as being held by the liberals, and it

660
01:03:14.280 --> 01:03:16.680
was not improper for him to do this.

661
01:03:16.680 --> 01:03:20.240
He had defined the state of the art.

662
01:03:20.240 --> 01:03:25.580
His views on socialism and interventionism were unrefuted and did bring up to date the

663
01:03:25.580 --> 01:03:32.060
and a classical liberal position on both topics. Still, while Mises expanded the views of the

664
01:03:32.060 --> 01:03:39.220
classical liberals on property, liberty, peace, equality, government, democracy, socialism,

665
01:03:39.220 --> 01:03:44.380
free trade and so on, what the book essentially did was to give a concise presentation of

666
01:03:44.380 --> 01:03:49.660
the results of his own work, spelling out for the first time the political implications

667
01:03:49.660 --> 01:03:53.340
in detail. Mises began his argument by stressing two

668
01:03:53.340 --> 01:03:59.020
Two fundamental facts. First, the division of labour is physically more productive than

669
01:03:59.020 --> 01:04:04.780
the work of isolated individuals. Emphasis on the centrality of this point had a venerable

670
01:04:04.780 --> 01:04:09.260
tradition in Western thought ever since St. Thomas Aquinas wrote on the nature of government

671
01:04:09.260 --> 01:04:14.000
in the 13th century. It is more than likely that Mises was acquainted with this edition

672
01:04:14.000 --> 01:04:18.220
of St. Thomas' classic work because it was published in a series under the direction

673
01:04:18.220 --> 01:04:24.680
of Otmar Spann. Second, all men, save a handful of ascetics, prefer a higher productivity

674
01:04:24.680 --> 01:04:30.940
of their labour to a lower one. These two facts represented common ground. Neither socialists

675
01:04:30.940 --> 01:04:37.780
nor fascists denied them. The question then arises which way of dividing labour is most

676
01:04:37.780 --> 01:04:44.300
productive. All members of society can agree that this is the decisive question. Where

677
01:04:44.300 --> 01:04:50.120
Where they disagree is on which answer is correct. The Liberals want to entrust all

678
01:04:50.120 --> 01:04:55.580
aspects of the division of labour to the decisions of individuals who work out competing schemes

679
01:04:55.580 --> 01:05:02.720
of cooperation based on mutual consent and recognition of private property. The Socialists

680
01:05:02.720 --> 01:05:08.540
want to expropriate all private property, or at least abolish all private property in

681
01:05:08.540 --> 01:05:13.200
the means of production. For them, the division of labour is to be organised by a central

682
01:05:13.200 --> 01:05:19.640
Social Plan, which regulates all instances of cooperation between individuals. The Social

683
01:05:19.640 --> 01:05:26.560
Democrats and other partisans of a third way champion partial expropriations to curb what

684
01:05:26.560 --> 01:05:32.160
they believe are the excesses of capitalism. In light of Mises's insights concerning

685
01:05:32.160 --> 01:05:38.520
socialism and interventionism, there can be no doubt as to which is the correct answer.

686
01:05:38.520 --> 01:05:42.600
Socialism cannot possibly be as productive as capitalism because it cannot have recourse

687
01:05:42.600 --> 01:05:48.440
to monetary calculation, and therefore lacks the wherewithal to compare physically heterogeneous

688
01:05:48.440 --> 01:05:54.880
production alternatives. Interventionism is intellectually incoherent. It does not achieve

689
01:05:54.880 --> 01:06:01.440
the self-proclaimed aims of its champions, which is why even Marx loathed it, and it

690
01:06:01.440 --> 01:06:06.720
cannot be the foundation of a permanent economic order, because it has the tendency to move

691
01:06:06.720 --> 01:06:12.760
Toward Socialism. The unbiased observer is therefore forced to admit that capitalism is

692
01:06:12.760 --> 01:06:18.840
the only rational, productive economic order, since all other alternatives squander resources

693
01:06:18.840 --> 01:06:25.360
and destroy wealth. One might like capitalism or hate it. One might deem it ethically justified

694
01:06:25.360 --> 01:06:32.520
or offensive. The fact is that there is nothing else that can possibly take its place. Economising

695
01:06:32.520 --> 01:06:38.960
and a large-scale division of labour are possible only in a free market based on private property.

696
01:06:38.960 --> 01:06:44.680
The free market, then, is necessarily more productive and happiness-enhancing insofar

697
01:06:44.680 --> 01:06:50.800
as happiness is at all enhanced by material things than any other social system. Hence,

698
01:06:50.800 --> 01:06:56.660
the primary goal of liberalism is to ensure a productive division of labour, and the fundamental

699
01:06:56.660 --> 01:07:01.160
postulate of its political programme is to protection of private property as the means

700
01:07:01.160 --> 01:07:03.000
to achieve that goal.

701
01:07:03.000 --> 01:07:05.520
All other postulates are secondary.

702
01:07:05.520 --> 01:07:11.320
For example, the postulate of personal freedom for all members of society, rejection of slavery,

703
01:07:11.320 --> 01:07:14.920
relies on the fact that free men work better than slaves.

704
01:07:14.920 --> 01:07:18.680
It is therefore not only in the interest of all other citizens, but also in the interest

705
01:07:18.680 --> 01:07:23.160
of the slave masters, that the chains of slaves be broken.

706
01:07:23.160 --> 01:07:29.040
Similarly, the postulate of legal equality of all men is not based on some notion of

707
01:07:29.040 --> 01:07:34.320
of Natural Law According to which all men are born equal, to Mises it was obvious that

708
01:07:34.320 --> 01:07:40.920
men are born unequal. Still he held that they should enjoy legal equality. Why? Because

709
01:07:40.920 --> 01:07:46.100
if they were not treated equally before the law, if some have a privileged legal position

710
01:07:46.100 --> 01:07:51.120
compared to others, then group conflicts are artificially brought about, disturbing the

711
01:07:51.120 --> 01:07:54.800
peace that is the very basis for the division of labour.

712
01:07:54.800 --> 01:08:00.480
Here again Mises championed essentially the same view as St. Thomas, who stressed that

713
01:08:00.480 --> 01:08:05.320
the maintenance of peace was the supreme goal of government precisely because the fruits

714
01:08:05.320 --> 01:08:09.360
of the division of labour could not be obtained otherwise.

715
01:08:09.360 --> 01:08:14.680
The same consideration applies in the case of democracy. Mises restated the utilitarian

716
01:08:14.680 --> 01:08:21.320
justification of democracy that he first presented in socialism. In a letter to Antoine Ercadens,

717
01:08:21.320 --> 01:08:26.680
The editor of the influential left-liberal, now Manian, journal Die Hilfe, Mises elaborated

718
01:08:26.680 --> 01:08:30.720
on the significance of his approach in the context of the 1920s.

719
01:08:30.720 --> 01:08:36.180
You claim with some regret that I am not a democrat as a matter of principle, but only

720
01:08:36.180 --> 01:08:42.360
for economic reasons. It is certain that political principles are to be desired or repudiated

721
01:08:42.360 --> 01:08:47.720
only from the point of view of their social consequences. Can one refute those opposed

722
01:08:47.720 --> 01:08:53.240
to Democracy if one cannot offer any argument in favour of democracy other than one claiming

723
01:08:53.240 --> 01:08:57.920
that every individual should have the same rights. Thus this snot leave one defenceless

724
01:08:57.920 --> 01:09:03.540
then against the objection that human beings are extraordinarily varied and that it is

725
01:09:03.540 --> 01:09:08.840
illicit to grant equal rights to the good and the evil, that young academics have turned

726
01:09:08.840 --> 01:09:14.180
against democracy is, above all, because the common way of defending democratic principles

727
01:09:14.180 --> 01:09:44.180
is Thoroughly Flawed

728
01:09:44.180 --> 01:09:49.060
and the ruthlessness of the Bolshevist parties organised in the Third International.

729
01:09:49.060 --> 01:09:55.060
The extent that the fascists used naked force to combat the violence of the Bolshevists,

730
01:09:55.060 --> 01:10:00.460
Mises said, it was unobjectionable. There was no other remedy against force but force

731
01:10:00.460 --> 01:10:06.940
itself. But the danger of the fascists was their blind faith in the omnipotence of this

732
01:10:06.940 --> 01:10:07.940
means.

733
01:10:07.940 --> 01:10:12.620
Ultimately, peace and social co-operation can only be founded on victories in the realm

734
01:10:12.620 --> 01:10:18.340
Problem of Ideas. Presently he stated, The victory of fascism in a number of countries

735
01:10:18.340 --> 01:10:24.500
is only an episode in the long series of struggles over the problem of property. The next episode

736
01:10:24.500 --> 01:10:29.380
will be the victory of communism. The ultimate outcome of the struggle, however, will not

737
01:10:29.380 --> 01:10:37.060
be decided by arms, but by ideas. It is ideas that group men into fighting factions, that

738
01:10:37.060 --> 01:10:42.100
to press the weapons into their hands, and that determine against whom and for whom the

739
01:10:42.100 --> 01:10:48.680
weapons shall be used. Fascism was an emergency makeshift. To view it as something more would

740
01:10:48.680 --> 01:10:51.260
be a fatal error.

741
01:10:51.260 --> 01:10:55.560
The sentence is preceded by the following statement that is often quoted out of context

742
01:10:55.560 --> 01:11:02.580
to demonstrate the absurd contention that Mises endorsed fascism. It cannot be denied

743
01:11:02.580 --> 01:11:07.280
that fascism and similar movements aiming at the establishment of dictatorships are

744
01:11:07.280 --> 01:11:12.900
full of the best intentions, and that their intervention has, for the moment, saved European

745
01:11:12.900 --> 01:11:20.100
civilization. The merit that fascism has thereby won for itself will live on eternally in history,

746
01:11:20.100 --> 01:11:24.380
but though its policy has brought salvation for the moment, it is not the kind which could

747
01:11:24.380 --> 01:11:30.380
promise continued success. Unfortunately, that fatal error was not avoided, and the

748
01:11:30.380 --> 01:11:35.620
The lesson was not learned. Fascism was not wrong for condoning the use of force – all

749
01:11:35.620 --> 01:11:41.840
social systems do – but for idolising its use. For Mises the important lesson was that

750
01:11:41.840 --> 01:11:47.460
fascism's error was not in its collectivist roots, but in its rejection of the social

751
01:11:47.460 --> 01:11:52.740
function of private property. Many modern libertarians still think that capitalism is

752
01:11:52.740 --> 01:11:58.960
an outgrowth and reflection of individualism, whereas socialism, both left and right, results

753
01:11:58.960 --> 01:12:04.840
from Collectivism. Whatever the merits of this view, Mises did not subscribe to it.

754
01:12:04.840 --> 01:12:10.300
He stressed that the question of how best to organise the division of labour has nothing

755
01:12:10.300 --> 01:12:14.840
to do with the question of whether society should serve the needs of the individual or

756
01:12:14.840 --> 01:12:20.680
if the individual should serve society. Neither is there a collectivist science as opposed

757
01:12:20.680 --> 01:12:27.400
to individualist sciences. There are only facts and the one true science to deal with

758
01:12:27.400 --> 01:12:57.400
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

759
01:12:57.400 --> 01:13:03.560
effect. Many years later, Mises wrote in private correspondence that in Germany and Austria it had

760
01:13:03.560 --> 01:13:10.120
no success and neither could a Swedish translation stop the drive to the planned economy. A few years

761
01:13:10.120 --> 01:13:15.560
later, after Hitler came to power, the authorities ordered the publisher to destroy all remaining

762
01:13:15.560 --> 01:13:16.120
in Copies.