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NOTE 14. Booms

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Chapter 14 – Booms The year 1923 witnessed a political paradigm

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shift in Austria and Germany. Previously socialism had been an almost non-debatable ideal and

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inflation an uncontested means of economic policy. After 1923, most Central European

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intellectuals were disillusioned with the former and outright opposed to the latter.

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Many debates had not only shifted topics, they had changed orientation. This is one

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of the central findings of Irma La Gorgos' comprehensive study of research subjects and

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methodological orientations of three representative social science organizations of the time

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– the Verein für Sozialpolitik, the Deutsche Gesellschaft für Soziologie, and the Cologne

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Forschungsinstitut für Sozialwissenschaften. More and more economists and other social

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Social scientists recognized that the use of government to improve social affairs was

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problematic. A young generation arose that learned to think more critically than their

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elders who had government interventionism and socialist schemes. This burgeoning, anti-statist

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movement was still a minority when it crumbled under the assent of Hitler in early 1933,

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but to the very end it had been a vigorous and growing movement, and there was no doubt

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and its protagonist was Ludwig von Mises. One observer who met him first as a young

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man in 1928 would later recall. What Edwin Canaan has been for England, Frank H. Knight

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for the USA and Luigi Naudi for Italy, Ludwig von Mises was, for the German-speaking world,

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Austria, Germany and Switzerland, the initiator of a renaissance of liberalism and the market

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Economy.

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This leadership in policy debate was based on similar leadership in the field of positive

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analysis as can be inferred from a 1925 festschrift for Luiu Brentano that set out to portray

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the state of the art in economics after the First World War.

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Here Mises figures among the thirteen most cited authors, along with Boehm-Bawerk, Brentano,

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The year 1926 brought another improvement in Mises' good fortune. He started cooperating

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with the Rockefeller Foundation and established an Austrian Institute for Business Cycle Research,

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which allowed his young political allies, most notably Friedrich Hayek, to earn a living

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in economic research. In the following years Mises also became involved with various European

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and European Free Trade Organisations and used the International Chamber of Commerce

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as a platform for networking and for promoting classical liberal policies. But because none

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of his major writings had been translated into French or English, his primary influence

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remained limited to Germany and Austria. What could be called the first Mises revolution

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took place between 1929 and 1932, during which time he became a board member of the

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and the Reine für Sozialpolitik. His works were discussed in all major economic textbooks,

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and more and more young economists were pursuing Misesian themes in their research. It was

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also in these years that Mises completed his system of thought, at least in broad strokes,

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with a series of path-breaking essays on value theory and on the epistemology of economics.

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Had it not been for the rise of Hitler, this quiet revolution would have had a significant

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1926 journeys The 1926 Congress of the International Chamber

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of Commerce took place in the United States, and Mises made his way across the Atlantic

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for the first time. He left by way of London, where he met Canaan and Robbins at a critical

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in the history of LSE's economics department. Lionel Robbins had returned to LSE from Oxford

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the previous fall, and his continued interest in Austrian economics, and in Mises's work

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in particular, would become highly important in the coming years. Edwin Canaan, however,

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offered less promising news. He was about to retire, and LSE's management planned

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to hire the Harvard professor Alan Young as his successor. Young was known as a die-hard

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positivist, and he was expected to make the economics department a centre for the transformation

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of economic science into applied mathematics. This had been a long-standing plan of the

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socialist founders of the school and of the New York-based Laura Spellman Memorial, which

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donated large sums to LSE for research on the natural basis of economics.

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The founders of LSE were Sidney and Beatrice Webb. The Laura Spellman Memorial was named

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after the wife of John D. Rockefeller and later absorbed into the Rockefeller Foundation.

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In 1923 to 1924, LSM donated almost $100,000 to LSE. In 1926 it gave another $500,000 for

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research on the natural basis of economics and $175,000 for other projects.

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The idea that economics could be turned into applied mathematics or applied biology is

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is a good illustration of Cain's famous dictum that each generation labours under the ideas

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of some defunct economist. William Stanley Jevons and his followers such as Edgeworth

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had been very influential within British academia in pressing the case for mathematics in economic

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science. The great champion of the case for biology was Alfred Marshall. The mecca of

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the economist lies in economic biology rather than in economic dynamics. Principles of economic

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and Introductory, Volume 8th Edition, Keynes knew what he was talking about. Mises must have seen

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dark clouds over London as he sailed through New York. Eventually, however, two events slowed the

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pace of LSE's transformation, Young's unexpected death in 1929 and Lionel Robin's conversion to

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Austrian economics. Mises remained in the States for about two months. He had a mailbox with the

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at the Laura Spellman Rockefeller Memorial in New York City.

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Besides his participation in the ICC meeting, he made various public appearances, which

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at least, in part, had the purpose of attracting US investors to Austria. By the time of Mises's

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visit, Austria was enjoying a good press in the United States, thanks to the public relations

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effort by Mises and others. He must have noticed with satisfaction that the US Department of

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Commerce circulated reports stating that Austria, during 1925, maintained in general the advance

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The advance made in 1924 and in several respects made considerable progress, especially in

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fiscal, currency and credit matters, according to the annual report of the Board of Directors

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of the Austrian National Bank. In New York City he also met the leadership of the Rockefeller

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Foundation and seems to have made an excellent impression. The timing could not have been

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better for shortly after Mises' return to Vienna, Friedrich von Wieser died and Mises

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Mises became the foundation's main contact among Vienna's economists. After the death

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of Boehm-Bawerk and Mises, Mises was manifestly the leader of the school. He later recalled

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that the Rockefeller Foundation had taken an interest in my teachings and research work.

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The local coordinator for the Rockefeller Foundation in Vienna was British-born Alfred

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Francis Pribram, not related to Carl and Ewald Primam. In Austria, Mises had a decisive influence

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On the selection of the future Rockefeller fellows, when he moved to Geneva, the Foundation

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paid his salary at the Graduate Institute for International Studies, and when he eventually

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moved to the United States, the Foundation provided again the lion's share of his income

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during the first four years. The acquaintances he made in New York had made his trip a splendid

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success, but the reactions of academic audiences must have been disappointing. In American

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Studies, there was a marked lack of interest in theoretical work and exaggerated hopes for

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empirical research particularly in statistical studies. Mises had already noticed in meetings

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of the International Chamber of Commerce an ever greater number of American representatives

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championing interventionist views. His stay in the United States confirmed his impression

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that Americans were abandoning liberalism. Back in Vienna he summarised his impressions

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in several lectures, in particular in a talk on changes in American economic policy, which

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he delivered in November 1926 before a relatively small circle of top Austrian entrepreneurs

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in the Industrieller Klub. In December he lectured to a large audience on the less sensitive

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topic of America and the reconstruction of the European economy. This lecture was delivered

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to the German Hauptverband der Industrie in Czechoslovakia.

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On the ship back to Europe, Mises read the proof pages of his Sozialliberalismus and

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was already planning his longer work on interventionism, which he eventually delivered at an October

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conference in Rotterdam.

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He probably also delivered a version of this paper in the fall of the same year in a two-hour

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lecture on government and the national economy.

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He gave the talk at a summer university designed for American students visiting Vienna, Internationale

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Hochschulkurse.

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Before leaving for the Netherlands, however, he attended two conferences, John Maynard

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Keynes's lecture at the University of Berlin and the 1926 plenary meeting of the Verein

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für Sozialpolitik in Vienna. Mises travelled to Berlin sometime in early September 1926.

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Keynes's lecture was based on his book, The End of Laissez-Faire, which had been published

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two months earlier. In the mid-1920s, Keynes already enjoyed an excellent reputation in

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Money. He had been among the first Western intellectuals to criticise the Treaty of Versailles,

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which in his view was a manifesto of short-sighted vengefulness. He also thought it was impossible

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to implement in practice. Thereafter his writings were eagerly translated into German, and several

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German economists attended his courses in Cambridge. Mises later recalled that Keynes

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was himself influenced by the Cateda Socialist, who he eventually outdeared in many points.

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his new book would endear Keynes even more to the German public, especially to his German

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colleagues who had cultivated a tradition of criticising what they believed to be the

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many shortcomings of liberty.

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To what extent Keynes was welcomed with open arms can be gathered from Friedrich von Mises'

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endorsement in his very last work of Keynes' proposals for replacing the gold exchange

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standard by fiat paper money.

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An economist with the broad vision and scientific acuity of Keynes could raise the question

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of whether it would be possible to replace the gold standard altogether with another

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system that would allow for stable exchange rates at lower costs.

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The end of laissez-faire reads like a parody of anti-liberalism. For example, Keynes listed

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several features of real-world economies that did not fit the model of perfect competition

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and then went on to claim that these were problems for laissez-faire rather than for

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and the perfect competition concept itself.

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These complications arise according to Keynes, 1. when the efficient units of production

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are large relative to the units of consumption, 2. when overhead costs or joint costs are

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present, 3. when internal economies tend to the aggregation of production, 4. when the

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time required for adjustments is long, 5. when ignorance prevails over knowledge, and

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2006, when monopolies and combinations interfere with equality in bargaining. Anticipating

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the views he would expound in more detail ten years later in his general theory, he

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argued that many of the greatest evils of our time are the fruit of risk, uncertainty

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and ignorance. As if these would be banished by socialism or interventionism, Keynes did

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not seem to realise how absurd this diagnosis of contemporary social problems was.

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To cope with the universal problems of human existence, Keynes advocated the following

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policies.

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1.

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Deliberate control of the currency and of credit by a central institution.

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2.

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Collection and dissemination, on a great scale, of data relating to the business situation,

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including full publicity by law, if necessary, of all business facts which it is useful to

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know.

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3.

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Complete control of savings and investment.

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And 4.

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Control of the population.

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Mises' last point required, according to Keynes, that the government try to control

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both the number and the quality of its population, much as a breeder controls livestock.

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Mises was thoroughly unimpressed by Keynes' case against laissez-faire. As he later wrote

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in a review of the event, the intellectual significance of Keynes' book was negligible.

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Its author had merely restated arguments that had been advanced and refuted many times in

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in the past. What made Keynes important were his personality and the prestige he enjoyed

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from his status at the University of Cambridge. This prestige had been further enhanced by

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his critique of the Treaty of Versailles, which had gained him an international reputation

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as an impartial observer. When Mises returned to Vienna, Richard Schöller caused a scandal

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at the Viraille in Fürsotelpolitik through his account of the cause for growing unemployment

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in Germany and Austria. Mises was probably in attendance, but it is possible that he

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was among those Austrian gentlemen who reportedly did not attend the sessions they were supposed

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to attend to the great dismay of the Varhain secretary, Franz Böser. He argued that the

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permanent unemployment resulted from the consolidation of political power for both labour unions

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and entrepreneurs. Organised labour and organised capital had eclipsed the self-healing processes

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Statements of Markets which Involved Falling Prices and Wages Rates

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These statements offended many of the assembled economists, but it was no longer taboo to

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bring them up.

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Theverein moved slowly, but it was moving in the direction of the free market radicals.

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This intellectual change was reflected in the improved social standing of former outcasts

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such as Mises, even left-wingers such as the young Adolf Löw in Kiel now maintain friendly

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the relations with the Vienna champion of laissez-faire.

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Immediately after the 1926 Verein für Sozialpolitik meeting in Vienna, Mises recommended Konrad

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Zweig to Adolf Löw for a position in Kiel.

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Zweig was just about to receive his doctorate.

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Mises knew him from his university seminar.

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Löw eventually hired Zweig, emphasizing the angenehmen Beziehungen, pleasant relationship

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he had established with Mises.

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for Business Cycle Research.

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One thing that impressed Mises on his 1926 trip to America was the empirical research

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on business cycles conducted at Harvard University. More precisely, he was impressed by the commercial

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success of the monthly reports. The price of an annual subscription was on the order

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of one hundred dollars, a small fortune at the time. One hundred dollars could buy roughly

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Many years later, a member of the sales team that marketed these reports, Frederic Neumeyer,

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would become a devoted Misesian and set up the Libertarian Press, a publishing house

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to disseminate Mises' writings. Mises did not meet Neumeyer in 1926, but his trip to

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Harvard provided the inspiration to establish a similar institute in Austria. His idea was

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was to use the money generated through the sales of reports to fund young libertarian

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intellectuals with little chance of obtaining one of the rare positions at public universities.

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Vienna enjoyed a living scientific tradition and still attracted great numbers of excellent

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students, but the Austrian government's financial calamities after the First World

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War made it impossible to exploit this potential. Whatever private means had once been available

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had been eaten up by the inflation of the early 1920s. The result was a shortage of

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research positions. The selection of candidates and the funding of research projects were

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increasingly a function of party allegiance. The universities were politicised in general,

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but particularly so in the social sciences. In this context, the establishment of private

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research institutions that financed themselves by the sale of products rather than by state

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Funds offered an attractive alternative. Mises have thoroughly prepared the project, studying

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the operation and organisation of comparable foreign institutes and consulted with experts

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throughout the world. In fact, he was not the first to think along these lines. The

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League of Nations had for some years encouraged the creation of business cycle institutes

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in the United States and in Europe. The study of business cycles was, at the time, one of

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the most fashionable topics, and one that seemed to be relevant for international economic

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Cooperation, the League's initiative could rely on funding by the Rockefeller Foundation.

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After Harvard 1919, the NBER established by Mitchell in 1921 and London 1922, the wave

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had spread to Germany with establishments in Berlin, Hamburg, Kiel and Essen, all in

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1925. In the same year, a group of businessmen and academics had set up a private Konjunktur

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Kasselschaft as a department of the Frankfurt Chamber of Commerce, which in turn was affiliated

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with the Frankfurt Stock Exchange. The director of this society was Eugen Altschul, who personally

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trained young economists in statistics and other methods used in Anglo-Saxon-style business

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cycle research. Similarly, another group of young men, around Paul Lazarsfeld, would establish

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a private institute of consumer research in Vienna a few years later, with Mises on its

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Board In the fall of 1926, Mises coordinated the

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final preparations for the establishment of the Österreichisches Konjunkturforschungsinstitut,

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the Austrian Institute for Business Cycle Research, hereafter Institut. From a legal

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point of view, the Institut was set up as a private association and publicly registered

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on December 2, 1926. The composition of the board, the Kuratorium,

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reflected Mises's connections, as well as the need to involve, at least nominally, all

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major stakeholders. Mises found academic frontmen in Hans Mayer and Karl Pribram, obtained funds

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from his friends in the Vienna community of bankers and industrialists such as Victor

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Gretz, Helene Liese and Gustav Weiss-Wellenstein, received support from Kammer colleagues such

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as Otto Geiringer and Emil Peerls, as well as from the Kammer itself, which provided

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and office space. Other board seats were occupied by representatives of public administrations,

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such as the Chamber of Labour, the Nationalbank and the Federal Railways. Chairman of the

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board was Richard Reich. Mises himself was one of the two vice-chairmen, but he was in

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fact the main force behind the new organisation. The Institut had an executive committee cheered

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by a comer representative, but its daily operations were in the hands of an executive with the

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title of director. Mises made sure that Hayek would be appointed to this position. At first

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his most important duty was to ensure the publication of the Institute's main product,

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the monthly reports on Austrian business conditions, which he fashioned after the three-curve barometer

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of the Harvard Committee of Economic Research. Hayek himself wrote the first, very lengthy

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Institute, which contained a detailed description of the definitions and quantitative methodologies

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used in the Institute's research activities. Over the years he relied more and more on

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contributions from others. By April 1931 the monthly reports of the Institute had a circulation

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of 500 copies. In the fall of that year Hayek left Vienna to become a professor of economics

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in London, and Morgenstern assumed leadership of the Institut.

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In addition to the monthly reports, the Institut had the mission of organizing meetings and

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lectures and to act as a focal point for further research in theoretical economics. Thanks

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to funding from the Rockefeller Foundation, it also published a series of monographs on

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problems of business cycle theory that became the most visible outlet for the work of the

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The Rockweller Foundation provided funding from 1929 to 1938. The first seven volumes

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in this series have passed the test of time, and are today classics of Austrian economics.

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F. A. Hayek's Geldtheorie und Konjunkturtheorie, 1929, Fritz Machlubs Börsenkredit, Industriekredit

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und Kapitalbildung, 1931, Hayek's Preise und Produktion, 1933, Erich Schiff's Kapitalbildung

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und Kapitalaufzehrung im Konjunkturverlauf, 1933, Oskar Morgensterns Grenzen der Wirtschaftspolitik,

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1934, Machlubsführer durch die Krisenpolitik, 1934, and Richard Striegers Kapital und Produktion,

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1934. After Mises' departure from Vienna in 1934,

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Morgenstern, who in 1931 had succeeded Hayek as the Director of the Institute, began to

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publish works with a markedly less Austrian orientation.

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Ragnar Nurx's Internationale Kapitalbewegungen, 1935, Gerhard Tintnes' Die Preise im Konjunkturverlauf, 1935, and Abraham Walz's Berechnung und Ausschaltung von Saisonschrankungen, 1936.

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Apart from these series of monographs, the most important outlet for theoretical research was the Zeitschrift für nationale Ökonomie established in 1930,

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1930, which under the editorship of Hans Meyer featured many pioneering articles on the role

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of time in economics, on equilibrium analysis, on capital theory and on business cycle theory.

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It was the only institution that Mises ever established, and it turned out to be a great

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success. Mises set it up as a private association which secured a maximum of political independence.

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Many years later, the then director of the Institut acknowledged that the private character

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of his institution was the basis for the constructive role it played in Austrian politics. He also

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mentioned that in difficult times he found inspiration and encouragement in reading Mises'

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inaugural speech, in which he had made the case for independence.

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Austrian Politics and the Onset of the Gold Exchange Standard

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The establishment of the Institut and the beginning of Mises' liaison with the Rockefeller

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Foundation coincided with the fundamental change of the business environment in Austria.

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The Geneva Protocols of October 1922 and the simultaneous currency reform had eliminated

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the government's financial disasters that came at the price of Austria's sovereignty.

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and continued but at a much lower pace, while unemployment soared from 94,000 in 1922 to

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150,000 in 1925. Red Vienna and other socialist municipalities grew larger with the help of

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foreign loans. Business expanded too, especially because the financial and industrial community

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in Vienna had successfully renewed its pre-war ties with other regions of the former Austro-Hungarian

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Empire, the wounds the war had left in the social fabric of Central Europe seemed to

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be healing.

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The quiet growth began to leave its mark on Austrian psychology. Many now believed that

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the country was destined to act as an intermediary between East and West. Optimism and wishful

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thinking combined in extrapolating the debt-financed expansion into an indefinite future. These

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These fantasies were crushed by the establishment of the gold exchange standard in 1925. The

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new monetary system stimulated the international division of labour and brought greater growth

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to all participating countries, but it also exposed mercilessly the limits of their interventionist

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governments. Mises later summarised the experience of the second half of the 1920s in a report

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to the Austrian government that he co-authored at the government's behest in 1930. International

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competition drove down prices and while the consumers rejoiced, firms found it nearly

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impossible to cut costs accordingly because of labour union power and entrenched economic

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regulations. The inflation of the early 1920s reduced the harm done by labour unions and

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regulations because rising costs were paired with rising prices. But with the return to

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To an international gold standard in 1925, sales prices stabilised and even decreased

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while there was still no downward flexibility on the cost of labour. Doing business in Austria

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became even more difficult and discouraging. Industrial firms found it harder to raise

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new funds through equity capital or bonds. Labour unions, local politicians and newspapers

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The bankers began pressuring the banks to fill the gap. They had to fulfill an economic

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duty of bailing out the threatened firms during bad times, according to Rudolf Sieghart, die

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letzten Jahrzehnte einer Großmacht. Sieghart went on, later the same circles reproached

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the directors of the bank, he means the large and influential Bodenkreditanstalt, which

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he directed in those years, with having too generously complied with the credit wishes

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of these same industries. This was the context in which Mises wrote and spoke during the

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second half of the 1920s on monetary problems and public finance. Shortly after the creation

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of the Institut, he gave a widely publicised public address on the consequences of Austria's

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interventionist policies. He delivered the address to the plenary meeting of the Niederösterreichischen

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in Gewerbeverein, Commercial Association of Lower Austria, Mises argued that after a year

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of doing business under the gold standard, the time had come for a sober analysis of

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the impact of Austrian economic policies. The effects of inflation on business accounting

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had been exhausted, and the new gold-denominated balance sheets provided a more realistic picture

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of the state of the economy. The past policies had not merely taxed the income streams of

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Prior to 1925, tax laws and other regulations prohibited Austrian firms from calculating

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capital consumption in terms of gold prices. The legally permissible balance sheets therefore

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presented an unrealistically optimistic picture of the firms. Mises demanded an intermediate

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reduction of taxes and of the company's contributions to the government's social insurance schemes.

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He also called for the privatisation of public firms such as postal savings offices, railroads,

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postal and telegram services, forestry and coal and steel firms, arguing that their deficits

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amounted to more than 170 million shillings, which is more than the Federal Government's

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1927 budget deficit of 135 million shillings. Also, because of the rent control laws, the

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The local state and federal governments, which already in 1914 owned more than half of all

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urban rental housing, significantly reduced their income. This calamity, Mises argued,

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was the inevitable result of two entirely incorrect principles of public finance, that

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one, public expenditure comes first, and public income follows public expenditure, and two,

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The privatisation of capital and private enterprise does not affect the broad masses of the people.

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The proposal to privatise the deficit-prone public firms was a slap in the face of the

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statists in all parties. The main bastion of statism was Otto Bauer's socialist party,

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and one of their preferred means of political persuasion was the open threat of violent

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insurrection. A few months after Mises' talk, however, the credibility of those threats

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The socialists received a serious setback in a showdown between the socialists and the

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Vienna police. The event occurred in the wake of a questionable court decision that had,

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in the socialist view, been slanted in favour of a political right-winger. The socialists

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now called for a general strike and demonstrations on Friday, July 15, 1927. To the government,

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This was a thinly disguised attempt at its overthrow. In those days demonstrations were

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armed demonstrations as a matter of course. The Socialist Party had its own private army,

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the Republikanische Schutzbund or Republican Alliance for Mutual Protection. Established

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in 1924 it counted some 80,000 men in 1928. Similarly, on the other side of the political

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Spectrum, there was the Heimwehr, or Home Defence Movement, a private military organisation

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that had emerged shortly after 1918, and which later split into a patriotic Austrian and

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a National Socialist wing. In September 1933, the Austrian wing joined the new Vater Linde

324
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Schafront, or Patriotic Front. When the crowd gathered in front of the palace that hosted

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The Department of Justice Someone set the building on fire and the police

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stepped in immediately. In the resulting carnage, 90 demonstrators were killed even before the

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army arrived, Mises commented in a private letter to a former student in Paris.

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Friday's pooch has cleansed the atmosphere like a thunderstorm. The Social Democratic

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Party has used all means of power and yet lost the game. The street fight ended in complete

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Victory of the Police, all troops are loyal to the Government. The General Strike has

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collapsed and the leaders of the Social Democrats then had to counsel it. The threats by which

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the Social Democratic Party has up to now permanently tried to bully the Government

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and the public have proved to be far less dangerous than one had believed. The failure

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of the General Strike and the accompanying massacre also had an unexpected personal impact

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on Mises' Life as we will see at the end of the present chapter.

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Free Trade, Monetary Stabilisation and Cyclical Policy

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Mises was reluctant to become involved in any organised political campaign. In a November

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1924 letter, he declined an honorary executive position in an Austrian free trade association,

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stating, As a matter of principle, I do not belong to any political or economic political

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This attitude changed over the next couple of years as he enjoyed the early successes

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of the European Free Trade Movement, but his original apprehensions proved correct and

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his involvement, while intense and high-profile, was also short-lived. Among his international

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associates in the movement he saw political maneuvering, nepotism and other forms of questionable

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Mises waited for the right opportunity to take his leave. The opportunity came when

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the International Committee of the Europäischer Zollverein, the European free trade organisation

346
00:32:35.600 --> 00:32:41.040
of which Mises had founded the Austrian chapter, campaigned against Austria's annexation to

347
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the German Reich, the Anschluss-Question. Neither Mises nor his Austrian colleagues could

348
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would afford to be associated with either side of the dispute, and when the committee

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ignored Mises' urging to withdraw from its campaign, Mises left the organisation in February

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of 1929.

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Disillusioned with the official free trade movement, Mises returned his focus to the

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00:33:05.920 --> 00:33:13.220
battle of ideas. At the height of his involvement with the Europäische Zollverein, Mises had

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Rudd had written an update of his theory of money in light of more recent developments,

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to take account, in particular, of the workings of the gold exchange standard. In February

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00:33:22.820 --> 00:33:28.180
1928 he published a concise presentation of the main event in the Modern History of Money

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for a more general public. A few weeks after this publication, he was in the process of

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completing a monograph on monetary stabilisation and economic policy designed to combat business

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On March 17th, he offered the manuscript to Gustav Fischer. Mises emphasized that the

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time was right for such a book, both because of the increased general interest in business

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cycles and because the Verein für Sozialpolitik would deal with these problems at their annual

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meeting in the fall. Fischer was convinced. Geld für Stabilisierung und Konjunkturpolitik,

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Monetary Stabilisation and Cyclical Policy were sent to bookstores on May 22nd.

363
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Mises received a fee of 550 marks. Yet Fisher sent him a cheque from a German bank.

364
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Fisher sent 15 complimentary copies directly to their recipients and 15 complimentary and 10 more paid copies to Mises.

365
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In the book, Mises delivered a systematic critique of Irvin Fisher's views on monetary reform,

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which had gained great support in the world of academic economists.

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It had prompted men such as John Maynard Keynes and Gustav Kassel to endorse similar schemes.

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According to Fisher, the deficiency of commodity money such as gold and silver coins was that

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it did not provide the standard of constant purchasing power.

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As a consequence, long-term investment and contracts for deferred payments involved excessive

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risk.

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This proposed solution was to replace the gold standard with a currency of stable purchasing

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power as defined by a price index. Mises pointed out that stability of the purchasing power

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of money was not a requisite of capital-intensive production. Market participants could very

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well take account of expected changes in the purchasing power of money when they made any

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long-term investments or contracts. Moreover, because the purchasing power of money could

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could not be defined without arbitrary assumptions, Fischer's index number standard would not

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00:35:34.740 --> 00:35:40.620
be different in essence from the prevailing commodity standard. In terms of an arbitrary

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00:35:40.620 --> 00:35:46.180
index number it might be stable, but no price index could possibly represent the relevant

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purchases of all market participants. So any single index number would necessarily fail

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00:35:52.500 --> 00:35:58.300
to stabilise purchasing power for many market participants. Fischer's scheme could not

382
00:35:58.300 --> 00:36:06.300
can't possibly establish money of stable value, but only a transfer of value other than that which would occur on the free market.

383
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The crucial issue from Mises' point of view was not value stability, but distribution.

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While it was certainly true that the gold standard did not produce stable purchasing power, its virtue was that its distribution effects were free from political interference.

385
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Any artificial currency, such as paper money, would constantly invite political manipulation

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and thus lead to a redistribution of resources based on political bargaining power rather

387
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than the will of the consumer.

388
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Frischat completely overlooked this problem.

389
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Like all those who endorsed price stabilisation, he focused exclusively on redistribution resulting

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from variations of the price level, but as Mises showed the problem was already addressed

391
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in the Market and Expressed as Price-Premiums in the Gross Interest Rate, but there was

392
00:37:00.440 --> 00:37:06.100
no such counterbalance for the redistribution that resulted from Cantillon effects, new

393
00:37:06.100 --> 00:37:10.260
money reaching different market participants at different times.

394
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Fischer's diagnosis did not cover this problem and his scheme for monetary reform ignored

395
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it.

396
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In the second part of the book, Mises presented a revised version of his business cycle theory.

397
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He introduced the distinction between two types of inflation, inflation of fiduciary media

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and inflation of money proper. Mises argued that the recurrence of the business cycle,

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00:37:34.300 --> 00:37:41.260
its cyclical nature, resulted exclusively from the inflation of fiduciary media. Increases

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00:37:41.260 --> 00:37:47.380
of the money supply were more or less one-time shots. They could entail malinvestment, but

401
00:37:47.380 --> 00:37:52.900
This was only one time for all. In contrast, there was a tendency to repeat experiments

402
00:37:52.900 --> 00:37:57.980
with fiduciary media, because businessmen and politicians believed that the issuance

403
00:37:57.980 --> 00:38:04.020
of additional fiduciary media was a suitable way to reduce interest rates. With this explanation

404
00:38:04.020 --> 00:38:09.260
Mises complemented his previous analysis of the business cycle which had focused on the

405
00:38:09.260 --> 00:38:14.540
process linking boom and burst, but which had not yet included an explanation of the

406
00:38:14.540 --> 00:38:21.780
Recurrence of Cycles. Mises also radicalised his praise for free banking in the second

407
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edition of his Treatise on Money. He had said that future money reformers would be well

408
00:38:26.480 --> 00:38:32.780
advised to reconsider the case for free banking. Now he added that, historically, fiduciary

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00:38:32.780 --> 00:38:39.500
media have become a large-scale problem only because the state had gotten involved in banking.

410
00:38:39.500 --> 00:38:44.940
has privileged certain banks with a monopoly on note issuance. They also intervened to

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bail out these banks when the fractional reserve scheme collapsed in bank runs. As a consequence,

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the crises of fractional reserve banking had reached far greater proportions than they

413
00:38:55.580 --> 00:39:01.060
would have in a free market, and the cooperation between fractional reserve central banks,

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00:39:01.060 --> 00:39:06.700
which had been reinforced in the wake of the 1922 January conference, and which had become

415
00:39:06.700 --> 00:39:12.400
Some standard practice under the gold exchange standard only further increased the dimensions

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00:39:12.400 --> 00:39:19.100
of the problem. Free banking would have minimised these crises, but Mises did not believe that

417
00:39:19.100 --> 00:39:24.800
it was possible to overcome the political resistance against the establishment of this

418
00:39:24.800 --> 00:39:30.560
system. He hoped that monetary policymakers would be wiser in the future and heed the

419
00:39:30.560 --> 00:39:34.280
The Teachings of His Business Cycle Theory

420
00:39:34.280 --> 00:39:36.480
The New Theoreticians

421
00:39:36.480 --> 00:39:42.840
Mises' hope for a wiser future monetary policy did not seem quite as naïve at the time as

422
00:39:42.840 --> 00:39:46.040
it now seems in retrospect.

423
00:39:46.040 --> 00:39:51.600
The year 1928 marked the high point of his influence on German monetary thought.

424
00:39:51.600 --> 00:39:57.440
The majority of the contributions to the meeting of the Vereinführung Sozialpolitik in Zürich

425
00:39:57.440 --> 00:40:00.360
elaborated on his writings.

426
00:40:00.360 --> 00:40:06.900
One of the many participants from Vienna later recalled. In their year 1928, almost all professors

427
00:40:06.900 --> 00:40:12.200
and other members held Mises in high esteem and admired him. The conference was attended

428
00:40:12.200 --> 00:40:17.940
by about 300 participants. Another sign of his influence was the international recognition

429
00:40:17.940 --> 00:40:23.920
he received on a May 1928 lecture tour in England. Mises visited England just when his

430
00:40:23.920 --> 00:40:29.780
new book on monetary stabilisation was about to come out. He had already written his lectures,

431
00:40:29.780 --> 00:40:35.240
which dealt with private property and socialism, and he offered the manuscript to the University

432
00:40:35.240 --> 00:40:40.760
of London Press for publication. The press eventually declined, saying the manuscript

433
00:40:40.760 --> 00:40:46.680
was not voluminous enough. Still, the 1928 lecture tour marked one of the high points

434
00:40:46.680 --> 00:40:53.320
of the golden age of the Vienna-London-Austrian axis. Mises later recalled that he had first

435
00:40:53.320 --> 00:40:58.700
joined the British Royal Economic Society in the 1920s because it did not yet promote

436
00:40:58.700 --> 00:41:06.580
at the time, Lionel Robbins and Sir William, now Lord Beverage, were dubbed Austrians by

437
00:41:06.580 --> 00:41:12.340
their critics because they agreed with me. He had also joined the American Economic Association

438
00:41:12.340 --> 00:41:18.260
for the same reason. A few months after Mises' lecture tour in England, the annual convention

439
00:41:18.260 --> 00:41:23.700
of the Vereinfelsultalpolitik was held in Zurich. The subject of the discussions, goals

440
00:41:23.700 --> 00:41:29.940
Rules and methods of business cycle research had been determined at the 1926 Vienna meeting.

441
00:41:29.940 --> 00:41:34.620
Already at that point it was clear that the second edition of Theory of Money and Credit

442
00:41:34.620 --> 00:41:41.020
had been received far more positively than the 1912 edition. General experience with

443
00:41:41.020 --> 00:41:46.860
wartime inflation and post-war hyperinflation had made the Misesian message that business

444
00:41:46.860 --> 00:41:52.620
cycles were the result of fiduciary credit more palatable to a broad public. In the following

445
00:41:52.620 --> 00:41:56.300
In the following years the popularity of the monetary theory of the trade cycle increased

446
00:41:56.300 --> 00:42:02.380
to such an extent that by 1933 Mises himself believed that it had become the dominant theory

447
00:42:02.380 --> 00:42:04.580
in Germany and Austria.

448
00:42:04.580 --> 00:42:10.800
In his 1922 Habilitation monograph on business cycles Wilhelm Röpke did not even mention

449
00:42:10.800 --> 00:42:12.300
Mises.

450
00:42:12.300 --> 00:42:18.280
Ten years later he had read the Austrians, see his Krise und Konjunktur.

451
00:42:18.280 --> 00:42:23.840
He at first met Mises in 1922 at the meeting of the Verein. In the early 1920s he worked

452
00:42:23.840 --> 00:42:29.320
in the German reparations office. It is likely that he often met Mises at international conferences

453
00:42:29.320 --> 00:42:35.000
dealing with war debt. The 1928 Zurich meeting was an important milestone

454
00:42:35.000 --> 00:42:39.800
in this progress. In preparation for the meeting, the Verein subcommittee on economic theory

455
00:42:39.800 --> 00:42:46.840
published a 370 page volume on business cycle theory, containing papers written predominantly

456
00:42:46.840 --> 00:43:05.500
Mises himself took an active part in the sessions and concluded with the statement that the

457
00:43:05.500 --> 00:43:09.940
present discussion was a proof of progress, even though no agreement had been reached

458
00:43:09.940 --> 00:43:12.860
and many problems still remained.

459
00:43:12.860 --> 00:43:17.260
Only 16 years earlier he had been the only German to develop the monetary theory of the

460
00:43:17.260 --> 00:43:23.700
trade cycle. He was proud that many of his ideas, rejected at the time, were now commonplace

461
00:43:23.700 --> 00:43:29.480
for the majority of economists. The progress was even more pronounced when the comparison

462
00:43:29.480 --> 00:43:36.020
was to the meeting of 1903, 25 years earlier, which was the only other time the Verein had

463
00:43:36.020 --> 00:43:41.460
even dealt with the problem of economic crisis. At the heart of the German language debate

464
00:43:41.460 --> 00:43:47.220
on Business Cycle Theory in the late 1920s? Was the question whether this theory was or

465
00:43:47.220 --> 00:43:53.300
could be part of Leon Walras's general equilibrium theory, or whether it required a different

466
00:43:53.300 --> 00:43:59.540
approach? Mises took no active part in this methodological debate. He later addressed

467
00:43:59.540 --> 00:44:05.300
the main issues when he set out to formulate his own equilibrium theory in the late 1930s.

468
00:44:05.300 --> 00:44:09.060
We will deal with his contribution in chapters 16 and 17.

469
00:44:09.060 --> 00:44:16.900
A few months later, Mises was one of six new members elected to the board of the Verein.

470
00:44:16.900 --> 00:44:23.300
Mises was elected in absentia at the meeting of the Reform Committee on March 6th and 7th,

471
00:44:23.300 --> 00:44:29.220
1929. He received a report from one of his closest allies in those years, Georg Jan, a

472
00:44:29.220 --> 00:44:35.580
professor from Halle. Although he himself did not attach much importance to the event,

473
00:44:35.580 --> 00:44:41.140
symbolised better than anything else his professional standing in those days.

474
00:44:41.140 --> 00:44:46.940
Starting as an eccentric in 1912, Mises had become a respected academic leader.

475
00:44:46.940 --> 00:44:52.420
The Verein establishment may not have appreciated him, but it was realistic enough to recognise

476
00:44:52.420 --> 00:44:56.860
him as the representative of a growing movement among the members.

477
00:44:56.860 --> 00:45:02.620
More importantly, however, his rise epitomised the new respectability of theoretical research,

478
00:45:02.620 --> 00:45:07.600
which the Verein's founding generation had despised.

479
00:45:07.600 --> 00:45:10.180
The Theory of Value reconsidered.

480
00:45:10.180 --> 00:45:14.720
For Mises it was a sign of hope that a new generation of students had risen to fill the

481
00:45:14.720 --> 00:45:16.660
ranks of the theoreticians.

482
00:45:16.660 --> 00:45:21.420
The spell of the historical school was definitely broken.

483
00:45:21.420 --> 00:45:26.260
Another danger loomed on the horizon, bad theory.

484
00:45:26.260 --> 00:45:30.580
One important area where the danger was very real was value theory.

485
00:45:30.580 --> 00:45:36.100
While Menger had applied his exact method with great success in this field, Mises himself

486
00:45:36.100 --> 00:45:42.000
had refined Menger's analysis by stressing the relationship between value and choice.

487
00:45:42.000 --> 00:45:47.260
But these works had had virtually no impact on the younger generation. Many new theoreticians

488
00:45:47.260 --> 00:45:52.240
believed that economic theory applied only to those human actions that were guided by

489
00:45:52.240 --> 00:45:58.900
economic considerations, which made sense only if there were also non-economic considerations,

490
00:45:58.900 --> 00:46:06.740
which in turn seemed to presuppose that there were two types of values, economic and non-economic.

491
00:46:06.740 --> 00:46:11.600
This error was reinforced when in 1923 Carl Menger's Principles of Economics was published

492
00:46:11.600 --> 00:46:17.700
in a revised second edition. The book had been out of print for many years and Menger

493
00:46:17.700 --> 00:46:22.940
had never authorised a new printing. The revisions contained in the new edition had been found

494
00:46:22.940 --> 00:46:28.360
in manuscripts that Menger had left at the time of his death. Most important Menger had

495
00:46:28.360 --> 00:46:33.560
that introduced the distinction between real ones and imaginary ones, a distinction that

496
00:46:33.560 --> 00:46:38.080
seemed to confirm the notion that economic science dealt only with a specific type of

497
00:46:38.080 --> 00:46:44.040
value, namely with real values that could be used in economic calculations.

498
00:46:44.040 --> 00:46:49.240
Mises had been convinced, at least as early as Theory of Money and Credit, that the notion

499
00:46:49.240 --> 00:46:54.520
of value calculation was a chimera. The only economic calculation was calculation with

500
00:46:54.520 --> 00:46:59.500
and Money Prices, but in discussions of his socialist calculation argument, he must have

501
00:46:59.500 --> 00:47:05.160
seen how much he had underestimated the extent to which the notion of value calculation had

502
00:47:05.160 --> 00:47:09.300
taken hold of the minds of the rising generation.

503
00:47:09.300 --> 00:47:14.120
Because of ambiguities in the exposition of that argument, those who were not perfectly

504
00:47:14.120 --> 00:47:20.120
acquainted with Mises' views on value theory were unlikely to notice the foundational claim

505
00:47:20.120 --> 00:47:26.960
that there is no such thing as value calculus, only price calculus. These difficulties were

506
00:47:26.960 --> 00:47:33.240
barely visible in the early 1920s. When Mises first presented his case for the impossibility

507
00:47:33.240 --> 00:47:40.000
of socialist calculation at the Vienna Nationalökonomische Gesellschaft, he talked to a generation that

508
00:47:40.000 --> 00:47:45.480
had been raised in Boehm-Bawerk's seminar, but in the course of the next few years the

509
00:47:45.480 --> 00:47:50.320
The conditions for a genuine understanding of this case diminished rapidly because of

510
00:47:50.320 --> 00:47:51.560
two factors.

511
00:47:51.560 --> 00:47:58.280
One, the emphasis on value theory had always been a specialty of the Austrian School.

512
00:47:58.280 --> 00:48:03.220
Where Mengerian value theory was a theory of value judgements, Jevons and Maras had

513
00:48:03.220 --> 00:48:08.920
based their price theories on the concept of utility, which remained entirely in the

514
00:48:08.920 --> 00:48:12.160
realm of felt satisfactions.

515
00:48:12.160 --> 00:48:16.960
Walter Boehm-Bawerk's deaf value theory in Austria was completely dominated by Wieser,

516
00:48:16.960 --> 00:48:22.480
the least Mengerian of the Austrian economists. Two, in the German-speaking countries Gustav

517
00:48:22.480 --> 00:48:28.360
Kassel started promoting Wilfredo Pareto's idea that price theory could do without value

518
00:48:28.360 --> 00:48:35.300
theory. Ironically, Mises himself had indirectly revitalised the use of the Walrassian general

519
00:48:35.300 --> 00:48:41.480
equilibrium approach. His case against socialism had pushed socialist-minded economists into

520
00:48:41.480 --> 00:48:46.600
to the General Equilibrium Camp, which seemed their only escape from the problems of value

521
00:48:46.600 --> 00:48:53.480
theory and economic calculation. A case in point was his 1929 to 1930 correspondence

522
00:48:53.480 --> 00:49:00.720
with Leopold von Mises, sociologist at the University of Cologne. Mises argued that the

523
00:49:00.720 --> 00:49:06.540
Italian mathematical economist Enrico Barone had shown that general equilibrium models

524
00:49:06.540 --> 00:49:11.320
Examples of the economy could be used to solve the problem of economic calculation in socialist

525
00:49:11.320 --> 00:49:18.340
commonwealths. Mises replied that Barone's entire demonstration was based on the untenable

526
00:49:18.340 --> 00:49:25.340
assumption that the subjective values of different individuals could be reduced to a common denominator.

527
00:49:25.340 --> 00:49:30.260
The correspondence was a follow-up to personal discussions in Cologne. On Tuesday, December

528
00:49:30.260 --> 00:49:36.360
In 1923 to 1929, Mises had lectured in Cologne on economic interests and political parties.

529
00:49:36.360 --> 00:49:41.600
Rudolf Seifert, who was the head of the Department of Economics and Social Sciences, directed

530
00:49:41.600 --> 00:49:46.920
the lecture series Contemporary Political Theories and invited Mises to give one of

531
00:49:46.920 --> 00:49:52.280
the talks. At that point, Mises had already recognized that part of the problem was his

532
00:49:52.280 --> 00:49:58.780
own ambiguity in previous writings and he began correcting himself. Thus, in the second

533
00:49:58.780 --> 00:50:04.460
In an edition of Theory of Money and Credit 1924, he had de-psychologised his exposition

534
00:50:04.460 --> 00:50:10.980
of value theory, deleting the ominous sentence as a feeling value cannot be measured. It

535
00:50:10.980 --> 00:50:16.680
is however possible to compare it with other similar feelings, and replacing it with acts

536
00:50:16.680 --> 00:50:21.820
of valuation are not susceptible of any kind of measurement.

537
00:50:21.820 --> 00:50:27.880
In the original text we read, Als Gefühl ist der Wert jeder Messung unzugänglich.

538
00:50:27.880 --> 00:50:32.200
Vergleiche mit anderen gleichartigen Gefühlen sind möglich.

539
00:50:32.200 --> 00:50:38.760
Twelve years later he changed this to Der Wertungsakt ist jeder Messung unzugänglich.

540
00:50:38.760 --> 00:50:44.520
In the English edition, acts of valuation are not susceptible of any kind of measurement.

541
00:50:44.520 --> 00:50:49.940
Similarly speaking about his book Nation, Staat und Wirtschaft in the fall of 1925, Mises

542
00:50:49.940 --> 00:50:54.720
Mises said in a letter to Robbins that he would have to rewrite the book thoroughly for a

543
00:50:54.720 --> 00:51:00.040
new edition. Although this change did not affect his actual analysis of the problems

544
00:51:00.040 --> 00:51:06.320
of conceiving of value as a quantifiable entity, it marked a conscious transition from a psychological

545
00:51:06.320 --> 00:51:12.400
conception of value to one in which value was an act rather than a feeling. His next

546
00:51:12.400 --> 00:51:17.600
step was much bolder. For the first and only time, Mises published

547
00:51:17.600 --> 00:51:22.640
Mises published an article whose only purpose was to criticise his scientific forebears.

548
00:51:22.640 --> 00:51:29.000
He took issue with passages in Menger and Boehm-Bawerk that had given rise to objectivist interpretations

549
00:51:29.000 --> 00:51:34.640
of their value theories. Mises criticised the ethical connotations of Menger's concept

550
00:51:34.640 --> 00:51:40.400
of imaginary wants as unnecessary for the explanation of market prices. In the same

551
00:51:40.400 --> 00:51:45.960
vein he criticised Boehm-Bawerk's psychological distinction between economic and non-economic

552
00:51:45.960 --> 00:51:54.080
Mises stressed that the essence of the modern theory that Menger and Boehm-Bawerk had developed

553
00:51:54.080 --> 00:52:00.320
was to recognize that human behaviour results from choice, and that choice always concerns

554
00:52:00.320 --> 00:52:05.560
the relative importance of quantities at stake in the concrete choice in question – the

555
00:52:05.560 --> 00:52:10.760
marginal quantities. Psychology does not come into play here.

556
00:52:10.760 --> 00:52:16.440
For catallactics, the ultimate relevant cause of the exchange ratios of the market is the

557
00:52:16.440 --> 00:52:22.920
fact that the individual in the act of exchange prefers a definite quantity of good A to a

558
00:52:22.920 --> 00:52:31.120
definite quantity of good B. The reasons he may have for acting exactly thus and not otherwise

559
00:52:31.120 --> 00:52:37.200
are of absolutely no importance for the determination of a market price. Other disciplines such

560
00:52:37.200 --> 00:53:02.960
Why, then, did so many economists bring these considerations into play?

561
00:53:02.960 --> 00:53:08.280
Mises explained that this unfortunate habit was the result of an accident of the history

562
00:53:08.280 --> 00:53:14.440
of economic thought. The development of subjective value theory coincided with the development

563
00:53:14.440 --> 00:53:20.200
of a psychological law of the satiation of wants and of the decrease in the marginal

564
00:53:20.200 --> 00:53:27.660
utility of the unit in an increasing supply. Mises went on. All attention was turned to

565
00:53:27.660 --> 00:53:52.100
This piece, Remarks on the Fundamental Problem of the Subjective Theory of Value, was published

566
00:53:52.100 --> 00:53:57.500
published in February 1928, more than eight years after Mises' first exposition of the

567
00:53:57.500 --> 00:54:03.740
socialist calculation argument. It had its impact. The Verein für Sozialpolitik decided

568
00:54:03.740 --> 00:54:10.580
to discuss the problems of value theory at an annual convention. Mises and Arthur Spiethoff

569
00:54:10.580 --> 00:54:15.680
were appointed editors of a special volume on value theory to be published in preparation

570
00:54:15.680 --> 00:54:20.100
for these discussions, which were delayed several times, but eventually took place in

571
00:54:20.100 --> 00:54:26.860
In the fall of 1932 in Dresden, Mises wrote two entries for this volume, one giving an

572
00:54:26.860 --> 00:54:32.380
exposition of the development of the subjectivist theory of value, the other analyzing the psychological

573
00:54:32.380 --> 00:54:38.220
motivations of its critics. In the first piece, Mises gave a systematic exposition of the

574
00:54:38.220 --> 00:54:43.180
theory of value. In light of this account, he explained previous contributions to the

575
00:54:43.180 --> 00:54:50.060
theory of value. Again, he stressed the act of preferring, or human choice, as the basic

576
00:54:50.060 --> 00:54:55.660
Economic Element in Human Conduct. Mises on the development of this subjective theory

577
00:54:55.660 --> 00:55:01.820
of value epistemological problems of economics. All conscious conduct on the part of men involves

578
00:55:01.820 --> 00:55:07.100
preferring an A to a B. It is an act of choice between two alternative possibilities that

579
00:55:07.100 --> 00:55:13.280
offer themselves. Only these acts of choice, these inner decisions, that operate upon the

580
00:55:13.280 --> 00:55:18.660
external world, are our data. We comprehend their meaning by constructing the concept

581
00:55:18.660 --> 00:55:24.460
of Importance. If an individual prefers A to B, we say that at the moment of the act

582
00:55:24.460 --> 00:55:30.860
of choice, A appeared more important to him, more valuable, more desirable than B. But

583
00:55:30.860 --> 00:55:34.940
he also spelled out for the first time the implications of the difference between value

584
00:55:34.940 --> 00:55:40.720
and price. He now saw the wider theoretical significance of his socialist calculation

585
00:55:40.720 --> 00:55:46.700
article of 1920. It had been the first and decisive step toward the development of a

586
00:55:46.700 --> 00:55:51.780
a general theory of economic calculation, in light of which economics was only a sub-discipline

587
00:55:51.780 --> 00:55:57.300
of a more general theory of human action. In the 1920s, Mises called this discipline

588
00:55:57.300 --> 00:56:05.180
sociology, but he eventually came to call it praxeology, the logic of action. Where

589
00:56:05.180 --> 00:56:11.320
praxeology deals with the general principles behind all human action, economics deals more

590
00:56:11.320 --> 00:56:15.700
narrowly with the laws of human action in a system where the means of production are

591
00:56:15.700 --> 00:56:22.740
The characteristic feature of such a system is that it enables the profitability calculus

592
00:56:22.740 --> 00:56:25.180
to guide actions.

593
00:56:25.180 --> 00:56:29.660
Businessmen can contrast the money prices they expect to receive for a product with

594
00:56:29.660 --> 00:56:34.940
the expected money expenditure related to its production, and they can compare the expected

595
00:56:34.940 --> 00:56:40.260
profit from any investment to the profit expected from any available alternative.

596
00:56:40.260 --> 00:56:45.680
The selection of the projects that will secure the available resources and prevent the alternative

597
00:56:45.680 --> 00:56:58.000
The actual selection process merely can be based on the profitability calculus, but does

598
00:56:58.000 --> 00:57:00.960
not preclude other decisions.

599
00:57:00.960 --> 00:57:05.220
Nothing prevents a businessman from building a social hall for his friends, rather than

600
00:57:05.220 --> 00:57:07.080
a factory for his customers.

601
00:57:07.080 --> 00:57:12.360
Yet, the benefit of the money calculus remains even in this case, when it tells the businessman

602
00:57:12.360 --> 00:57:17.900
Man exactly what he is giving up for his personal consumption, satisfaction of providing unpaid

603
00:57:17.900 --> 00:57:20.000
catering for his friends.

604
00:57:20.000 --> 00:57:24.900
Without prices, he could not calculate the opportunity cost of his decision.

605
00:57:24.900 --> 00:57:30.460
In short, the money calculus of the businessman makes it possible for him to compare alternatives

606
00:57:30.460 --> 00:57:31.460
in common terms.

607
00:57:31.460 --> 00:57:37.220
Thus, he is in a position to pass summary judgments on states of affairs involving physically

608
00:57:37.220 --> 00:57:39.360
heterogeneous goods.

609
00:57:39.360 --> 00:57:45.000
It is not possible to say whether one million gallons of milk are somehow more or less than

610
00:57:45.000 --> 00:57:50.280
the one thousand cows that produce this milk, just as it is impossible to say whether a

611
00:57:50.280 --> 00:57:56.240
palace garden is more or less than the hundred gardeners who brought it into shape. The reason

612
00:57:56.240 --> 00:58:02.260
is that all these things are heterogeneous and therefore cannot be compared quantitatively.

613
00:58:02.260 --> 00:58:07.400
The problem of adding apples and oranges. For the same reason, it is also impossible

614
00:58:07.400 --> 00:58:12.520
To tell whether using the cows to produce the milk is more efficient than using the gardeners

615
00:58:12.520 --> 00:58:17.720
to bring the garden into shape, that once all these things are exchanged against money,

616
00:58:17.720 --> 00:58:23.240
we can make such quantitative comparisons, namely by comparing their money prices. Depending

617
00:58:23.240 --> 00:58:27.800
on what these prices are, we can say that the milk exchanges for more or less money

618
00:58:27.800 --> 00:58:33.320
than the cows, and that the garden exchanges for more or less money than the services of

619
00:58:33.320 --> 00:58:40.120
And depending on the ratios of selling and buying prices, the profitability, we can assert

620
00:58:40.120 --> 00:58:45.440
that our money is more or less efficiently used in producing milk than in producing a

621
00:58:45.440 --> 00:58:47.240
palace garden.

622
00:58:47.240 --> 00:58:53.800
One can now define income as proceeds minus costs, one can define savings as income minus

623
00:58:53.800 --> 00:59:01.800
consumption and one can give exact and meaningful definitions of capital, profit and loss, etc.

624
00:59:01.800 --> 00:59:06.880
When a calculation thus produces phenomena absent in other systems of social organisation,

625
00:59:06.880 --> 00:59:10.360
dealing with them is the task of economic science.

626
00:59:10.360 --> 00:59:15.440
Where praxeology deals with human choices' value judgements, the sub-discipline of economics

627
00:59:15.440 --> 00:59:22.000
deals with those value judgements that can be based on quantitative economic calculations.

628
00:59:22.000 --> 00:59:27.120
In contrast, other economists believed economic calculation was possible outside the framework

629
00:59:27.120 --> 00:59:29.200
of a market economy.

630
00:59:29.200 --> 00:59:34.320
They assumed that calculation in terms of market prices was only one form of economic

631
00:59:34.320 --> 00:59:39.120
calculation, more to the point they believed that it was possible in principle for the

632
00:59:39.120 --> 00:59:44.120
members of society to perform calculation in terms of utility which they assumed to

633
00:59:44.120 --> 00:59:50.280
be quantifiable. It followed that all elements of economic science, the science of calculated

634
00:59:50.280 --> 00:59:56.040
action, had the same general applicability as marginal value theory. Categories such

635
00:59:56.040 --> 01:00:11.080
Mises' 1931 essay on value theory highlighted the differences between the approach of the

636
01:00:11.080 --> 01:00:16.720
Austrians and that of the neoclassicals. The former is a truly general and realistic approach

637
01:00:16.720 --> 01:00:22.500
that applies to every single human action. It does not merely deal with rational choices

638
01:00:22.500 --> 01:00:32.500
In contrast, the emerging neoclassical analysis of a choice did not apply to all human behaviour

639
01:00:32.500 --> 01:00:37.820
but only to those actions that would be observed if the acting person strictly followed the

640
01:00:37.820 --> 01:00:43.720
results of a utility car-killers. From this point of view, therefore, economic science

641
01:00:43.720 --> 01:00:50.320
does not deal with human action per se, but only with one aspect of human action – right

642
01:00:50.320 --> 01:00:57.640
Action or Logical Action. This was the position espoused by Friedrich von Mises, who was also

643
01:00:57.640 --> 01:01:04.000
consistent enough to advocate, in one of his rare methodological statements, the use of

644
01:01:04.000 --> 01:01:11.080
idealising abstractions, such as homo economicus. It was also the stance of Wilfredo Pareto,

645
01:01:11.080 --> 01:01:16.860
according to whom the theoretical social sciences deal mainly with logical actions, rather than

646
01:01:16.860 --> 01:01:24.420
Pareto is a subjectivist only in the sense that he recognizes the subjective character

647
01:01:24.420 --> 01:01:29.260
of the goals of human action, which is why he strictly distinguishes between objective

648
01:01:29.260 --> 01:01:35.740
utility and subjective over-limity. Yet Pareto's subjectivism stops short when it comes to

649
01:01:35.740 --> 01:01:40.700
dealing with the means of action because here he professes to consider only the case of

650
01:01:40.700 --> 01:01:46.340
logical action. And although he placed a little less emphasis than Wieser on the central idea

651
01:01:46.340 --> 01:01:52.500
of Utility Calculus, Pareto was quite explicit in stating that market prices are just helpful

652
01:01:52.500 --> 01:01:58.840
auxiliary valuables to solve the fundamental economic equations. These equations are the

653
01:01:58.840 --> 01:02:04.460
same in each economic system. They do not depend on the political organization of society

654
01:02:04.460 --> 01:02:10.940
and their ultimate elements are individual tastes and obstacles, costs. Market prices

655
01:02:10.940 --> 01:02:15.940
for factors of production could be dispensed with because the general equilibrium equations

656
01:02:15.940 --> 01:02:22.100
would produce any prices needed as accounting devices for the central planning agency.

657
01:02:22.100 --> 01:02:27.100
Even if the socialist state abolished all right of exchange and prohibited all buying

658
01:02:27.100 --> 01:02:30.780
and selling, prices would not disappear on that account.

659
01:02:30.780 --> 01:02:36.000
They would remain, at the very least, as an accounting device in connection with the distribution

660
01:02:36.000 --> 01:02:39.700
of goods and their transformation.

661
01:02:39.700 --> 01:02:45.780
The use of prices is the simplest and easiest means for solving the equations of equilibrium

662
01:02:45.780 --> 01:02:51.820
If one insisted on not using them, he would probably end up by using them under another

663
01:02:51.820 --> 01:02:57.700
name and there would then be only a change of language and not of things.

664
01:02:57.700 --> 01:03:02.540
Mises recognized that his Austrian value theory could explain every single instance of conscious

665
01:03:02.540 --> 01:03:08.440
behavior, whether calculated or not, thus generalizing the theory of homo economicus

666
01:03:08.440 --> 01:03:11.580
into a theory of homo agens.

667
01:03:11.580 --> 01:03:17.260
In contrast, other economists and sociologists believed that while it was true that marginal

668
01:03:17.260 --> 01:03:23.240
utility theory could explain only calculated, logical, rational behaviour, it was still

669
01:03:23.240 --> 01:03:28.580
a general theory of human action, because utility is a pervasive factor determining

670
01:03:28.580 --> 01:03:30.900
all human action.

671
01:03:30.900 --> 01:03:35.760
For the neoclassicals, economics was still the theory of homo economicus.

672
01:03:35.760 --> 01:03:41.920
had already been in the hands of the classical economists, but its protagonist was no longer

673
01:03:41.920 --> 01:03:48.360
confined to the market, homo economicus now lived everywhere. To the present day this has

674
01:03:48.360 --> 01:03:53.080
remained a dividing line between the Misesians and a distinguished group of thinkers in the

675
01:03:53.080 --> 01:03:59.920
Viserian-Paretian lineage, in particular Gary Becker and the movement he has inspired. It

676
01:03:59.920 --> 01:04:05.320
also accounts for the fact that Misesians markedly deviate from the present day mainstream

677
01:04:05.320 --> 01:04:10.420
when it comes to explaining phenomena such as growth, monopoly, welfare, the relationship

678
01:04:10.420 --> 01:04:14.860
between law and economics, money, conflict, etc.

679
01:04:14.860 --> 01:04:20.140
The problems of value theory and economic calculation are far more important than the

680
01:04:20.140 --> 01:04:25.540
single chapter they might get in some textbooks, if they are covered at all.

681
01:04:25.540 --> 01:04:30.820
In the late 1920s, Mises showed that these problems were at the very heart of the social

682
01:04:30.820 --> 01:04:31.820
sciences.

683
01:04:31.820 --> 01:04:36.020
In the 1940s, he would present the theory of economic calculation as one of the main

684
01:04:36.020 --> 01:04:41.300
building blocks of his general theory of human action.

685
01:04:41.300 --> 01:04:47.820
To add a new epistemology of the social sciences, Mises' reflections on the scientific and

686
01:04:47.820 --> 01:04:53.140
political significance of value theory were part of a more general effort on his part

687
01:04:53.140 --> 01:04:57.780
to pull together the different strands of his previous works to discuss their implications

688
01:04:57.780 --> 01:05:00.740
and to fill in the gaps.

689
01:05:00.740 --> 01:05:05.740
One area in which the case for liberty and private property had been less than airtight

690
01:05:05.740 --> 01:05:11.660
was epistemology. The famous Mittenstein between Menger and Schmoller had not produced the

691
01:05:11.660 --> 01:05:18.420
necessary clarification. The crucial question was whether there was such a thing as a theoretical

692
01:05:18.420 --> 01:05:25.040
social science, or whether the scientific rhetoric of the economists was just hot air.

693
01:05:25.040 --> 01:05:29.720
In previous works Mises had argued along the lines of Walter Badgett that a social theory

694
01:05:29.720 --> 01:05:35.200
is necessary to interpret the wealth of data presented by observation. Therefore the social

695
01:05:35.200 --> 01:05:40.480
analyst first needed a theory, and only as a second step could he approach the object

696
01:05:40.480 --> 01:05:46.600
of his inquiry. He also criticised the empiricists who thought they could explain the observable

697
01:05:46.600 --> 01:05:54.860
real world without relying on theory. In 1926 these statements were made only for the record.

698
01:05:54.860 --> 01:05:59.180
With the benefit of hindsight, however, we know that they heralded the beginning of a

699
01:05:59.180 --> 01:06:05.380
research programme that Mises pursued for the next 35 years. He discovered that the

700
01:06:05.380 --> 01:06:11.300
most underdeveloped area of the social sciences was epistemology, the meta-theory explaining

701
01:06:11.300 --> 01:06:17.140
how these sciences relate to reality. His very first contribution to this field was

702
01:06:17.140 --> 01:06:23.300
an essay on the relationship between sociology and history. Mises here stated that the Metoden

703
01:06:23.300 --> 01:06:28.460
Wilhelm Stein of the 1880s and 1890s had banished the teaching of economics from the

704
01:06:28.460 --> 01:06:33.740
universities of the German Reich, but that it had not clarified the central question

705
01:06:33.740 --> 01:06:40.420
of whether there was such a thing as social theory that could claim the status of a science.

706
01:06:40.420 --> 01:06:45.780
Meanwhile however, great progress had been achieved on a different front. The works of

707
01:06:45.780 --> 01:06:51.980
Wilhelm Windelband, Heinrich Rieckert, Max Weber and Henri Bergson had clarified the

708
01:06:51.980 --> 01:06:55.580
The Epistemological Nature of Historical Research

709
01:06:55.580 --> 01:07:00.960
Mises praised in particular the South-West German School of New Criticism for developing

710
01:07:00.960 --> 01:07:06.140
the concept of understanding the specific tool of the science of history.

711
01:07:06.140 --> 01:07:09.260
The works of these scholars had yielded two important insights.

712
01:07:09.260 --> 01:07:14.140
First, the application of the methodology of the natural sciences to human action did

713
01:07:14.140 --> 01:07:17.320
not exhaust the task of the historian.

714
01:07:17.320 --> 01:07:21.860
The genuine purpose of historical research was to explain concrete human behaviour in

715
01:07:21.860 --> 01:07:27.180
the unique circumstances influencing this behaviour. Second, historical research could

716
01:07:27.180 --> 01:07:33.500
not do without theoretical tools. There was no such thing as historical analysis untainted

717
01:07:33.500 --> 01:07:38.620
by theoretical interpretation. For example, the mere classification of observed phenomena

718
01:07:38.620 --> 01:07:45.540
such as he was a king, or she is my neighbour, or they were Germans, involved more than a

719
01:07:45.540 --> 01:07:51.520
description of naked facts. The very words used in the description were in fact theoretical

720
01:07:51.520 --> 01:07:55.160
Theoretical Tools Max Weber had set out to develop an epistemology

721
01:07:55.160 --> 01:07:59.520
to characterise the logical character of the theoretical tools needed in the science of

722
01:07:59.520 --> 01:08:05.680
history, arguing that they were ideal types. Building on these insights, Mises set out

723
01:08:05.680 --> 01:08:11.300
to explain that sociology, the term he used as shorthand for the theoretical science of

724
01:08:11.300 --> 01:08:16.900
social phenomena, was one of the theoretical tools needed in historiography. The essay

725
01:08:16.900 --> 01:08:21.340
Mises' sociology and history would be the last time Mises would use the term in this

726
01:08:21.340 --> 01:08:26.740
sense. He had used it in the first edition of Gemeinwirtschaft. Much of his long essay

727
01:08:26.740 --> 01:08:32.380
was devoted to a critical discussion of Max Weber's approach. Mises emphasised Weber's

728
01:08:32.380 --> 01:08:38.380
merits as a logician of historical research, but also stressed that even though Weber held

729
01:08:38.380 --> 01:08:44.300
a chair of economic science, he could not be considered an economist. In Mises' view,

730
01:08:44.300 --> 01:08:50.100
Weber was simply unacquainted with economic theory. He acquired his reputation as a theoretician

731
01:08:50.100 --> 01:08:56.020
because he cultivated a new, very general form of historiography, which Mises proposed

732
01:08:56.020 --> 01:09:01.600
to call universal history. The investigations collected in Weber's posthumously published

733
01:09:01.600 --> 01:09:06.500
major work, Wirtschaft und Gesellschaft, belong to the best that German scientific literature

734
01:09:06.500 --> 01:09:12.520
of the last decades has produced. Yet in their most important parts they are not sociological

735
01:09:12.520 --> 01:09:17.760
Universal Theory in our sense, nor are the history and the customary meaning of the term.

736
01:09:17.760 --> 01:09:23.640
History deals with one town, or with German towns, or with European towns in the Middle

737
01:09:23.640 --> 01:09:29.420
Ages. Until Weber's time, it knew nothing like the brilliant chapter in his book that

738
01:09:29.420 --> 01:09:35.340
deals simply with the town in general, a universal theory of town settlement for all times and

739
01:09:35.340 --> 01:09:41.640
among all peoples, the ideal type of the town in itself. Brilliant though Weber's achievement

740
01:09:41.640 --> 01:09:48.040
was, it had nothing to do with universally valid sciences such as economics. The point

741
01:09:48.040 --> 01:09:54.760
was that ideal times, such as the Universal Town, were fictitious. They did not fit all

742
01:09:54.760 --> 01:10:00.360
or even any observed phenomena they were designed to describe. Weber had used the expression

743
01:10:00.360 --> 01:10:06.920
ideal in the same sense as Friedrich von Mises as a fictitious assumption. These fictions

744
01:10:06.920 --> 01:10:12.300
Mises vitiated the scientific and political conclusions derived from their use. Propositions

745
01:10:12.300 --> 01:10:18.680
involving them must be similarly deficient. Economic laws, in contrast, concerned universally

746
01:10:18.680 --> 01:10:24.520
existing causal relationships inherent in human action. In every single instance in

747
01:10:24.520 --> 01:10:30.400
which the cause was given, it produced the effect according to the law. Mises explained,

748
01:10:30.400 --> 01:10:37.280
The laws of sociology are neither ideal types nor averages. Rather, they are the expression

749
01:10:37.280 --> 01:10:41.920
of what is to be singled out, of the fullness and diversity of phenomena from the point

750
01:10:41.920 --> 01:10:47.680
of view of the science that aims at the cognition of what is essential and necessary in every

751
01:10:47.680 --> 01:10:53.960
single instance of human action. Sociological concepts are not derived through one-sided

752
01:10:53.960 --> 01:10:59.640
intensification of one or several aspects and through integration into an imminently

753
01:10:59.640 --> 01:11:28.120
Mises argued that the subject matter of both historical and theoretical social analysis

754
01:11:28.120 --> 01:11:29.960
Mises' Human Action

755
01:11:29.960 --> 01:11:36.040
The salient point was that not all observable human behaviours count as action. Rather,

756
01:11:36.040 --> 01:11:41.840
human action is a particular sub-class of behaviour. It is behaviour determined by conscious

757
01:11:41.840 --> 01:11:48.200
decision-making, that is, behaviour constrained by scarcity. Only as far as scarcity does

758
01:11:48.200 --> 01:11:54.520
exist does action take place. As far as it is lacking, action is also lacking.

759
01:11:54.520 --> 01:12:01.720
Once one has realised this, one also implicitly realises that every action involves choice

760
01:12:01.720 --> 01:12:07.220
among various possibilities. All action is economising with the means available for the

761
01:12:07.220 --> 01:12:13.020
realisation of attainable ends. The fundamental law of action is the economic principle. Every

762
01:12:13.020 --> 01:12:18.620
action is under its sway. He who wants to deny the possibility of economic science must

763
01:12:18.620 --> 01:12:23.860
begin by calling into question the universal validity of the economic principle, that is,

764
01:12:23.860 --> 01:12:29.300
But the necessity to economise is characteristic of all action by its very nature, but only

765
01:12:29.300 --> 01:12:34.140
one who has completely misunderstood the principle can do this.

766
01:12:34.140 --> 01:12:39.900
But what was the epistemological status of the universally valid theory of human action?

767
01:12:39.900 --> 01:12:45.580
In his 1929 essay, Mises had touched on this question only when he observed that economic

768
01:12:45.580 --> 01:12:51.660
theory was rationalistic in the sense that it makes use of the methods of reason ratio,

769
01:12:51.660 --> 01:12:57.740
And he further characterised these methods of reason as discursive reasoning and scientific

770
01:12:57.740 --> 01:13:02.380
reasoning. Only four years later he would make his famous statement that the theoretical

771
01:13:02.380 --> 01:13:09.420
social sciences were a prioristic disciplines whose validity does not depend on the evidence

772
01:13:09.420 --> 01:13:16.660
of the senses. The 1929 article on sociology and history contained already in news the

773
01:13:16.660 --> 01:13:21.760
The argument by which Mises would refute the claim of extreme historicism that there is

774
01:13:21.760 --> 01:13:26.120
no such thing as a generally valid social theory because the structure of the human

775
01:13:26.120 --> 01:13:32.860
mind was in a state of constant flux. He demonstrated that the empirical evidence offered to substantiate

776
01:13:32.860 --> 01:13:40.020
this claim failed to do so. Moreover, he argued that the historicist claim was self-contradictory.

777
01:13:40.020 --> 01:13:45.280
What the proponents of historicism fail to see is that even propositions like the theorems

778
01:13:45.280 --> 01:13:49.240
The theories of classical economics possessed relative truth for the age in which they were

779
01:13:49.240 --> 01:13:55.560
constructed can be enunciated only if one has already adopted a super-temporal universally

780
01:13:55.560 --> 01:14:01.320
valid theory. Mises also addressed the opposite error of assuming social theory could have

781
01:14:01.320 --> 01:14:06.600
exactly the same logical character as the theories of the natural sciences. While it

782
01:14:06.600 --> 01:14:12.020
is true that human action is strictly determined by external factors, the knowledge that they

783
01:14:12.020 --> 01:14:17.960
they are so determined is not sufficient to construct mathematical models of human behaviour.

784
01:14:17.960 --> 01:14:22.820
One would also have to know how these factors affect human choice, and no such knowledge

785
01:14:22.820 --> 01:14:29.460
was available, Mises argued. However, we do not know how these external factors are transformed

786
01:14:29.460 --> 01:14:34.280
within the human mind to produce thoughts and volitions directed and operating upon

787
01:14:34.280 --> 01:14:40.080
the outer world. We are able to ascertain this only post-factum, but in no way can we

788
01:14:40.080 --> 01:14:46.520
We deduce it in advance from a known regularity formulated as a law.

789
01:14:46.520 --> 01:14:53.440
A year earlier in Geltwirtstabrision und Konjunkturpolitik, Mises still maintained more empiricist notions

790
01:14:53.440 --> 01:14:59.080
about the epistemology of economics. Although he emphasized that some sort of theory was

791
01:14:59.080 --> 01:15:05.320
necessary to interpret observed fact, he at one point went so far as to assert that the

792
01:15:05.320 --> 01:15:10.080
The Harvard Business Barometer delivered a statistical verification of the circulation

793
01:15:10.080 --> 01:15:15.080
credit theory. It was therefore necessary for the social scientist to take concrete

794
01:15:15.080 --> 01:15:20.560
human action as the starting point of his analysis, as an ultimate given. He could not

795
01:15:20.560 --> 01:15:26.280
hope to determine human behaviour with any degree of quantitative exactitude. The propositions

796
01:15:26.280 --> 01:15:32.160
of the economist were qualitatively exact. In this argument, Mises drew on his previous

797
01:15:32.160 --> 01:15:39.800
Mathematics has a significance in the natural sciences altogether different from what it

798
01:15:39.800 --> 01:15:46.400
has in sociology and economics. This is because physics is able to discover empirically constant

799
01:15:46.400 --> 01:15:53.000
relationships which it describes in its equations. The scientific technology based on physics

800
01:15:53.000 --> 01:15:59.160
is thereby rendered capable of solving given problems with quantitative definiteness. The

801
01:15:59.160 --> 01:16:04.000
The engineer is able to calculate how a bridge must be constructed in order to bear a given

802
01:16:04.000 --> 01:16:05.000
load.

803
01:16:05.000 --> 01:16:09.400
These constant relationships cannot be demonstrated in economics.

804
01:16:09.400 --> 01:16:14.840
The quantity theory of money, for example, shows that, Ceteris paribus, an increase in

805
01:16:14.840 --> 01:16:19.000
the quantity of money leads to a decrease in the purchasing power of the monetary unit,

806
01:16:19.000 --> 01:16:23.240
but the doubling of the quantity of money does not bring about a 50% decline in its

807
01:16:23.240 --> 01:16:24.880
purchasing power.

808
01:16:24.880 --> 01:16:29.820
The relationship between the quantity of money and its purchasing power is not constant.

809
01:16:29.820 --> 01:16:34.860
It is a mistake to think that, from statistical investigations concerning the relationship

810
01:16:34.860 --> 01:16:40.060
of the supply of and the demand for definite commodities, quantitative conclusions can

811
01:16:40.060 --> 01:16:45.520
be drawn that would be applicable to the future configuration of this relationship.

812
01:16:45.520 --> 01:16:50.000
Whatever can be established in this way has only historical significance, whereas the

813
01:16:50.000 --> 01:16:55.340
The ascertainment of the specific gravity of different substances, for example, has universal

814
01:16:55.340 --> 01:16:57.600
validity.

815
01:16:57.600 --> 01:17:03.080
A Private Boom Bust Mises had been surprised and delighted by the

816
01:17:03.080 --> 01:17:10.360
failure of the general strike on July 15, 1927. What did not surprise him was the massacre

817
01:17:10.360 --> 01:17:16.080
that took place when the masses rallied in the streets of Vienna. One of his first thoughts

818
01:17:16.080 --> 01:17:21.720
This was to alert Margit Zirini of the danger, under no circumstances, should she let the

819
01:17:21.720 --> 01:17:27.160
children out. Margit was away during the day, however, and Mises left detailed instructions

820
01:17:27.160 --> 01:17:31.960
with the housekeeper. When Margit returned in the late afternoon she was deeply touched

821
01:17:31.960 --> 01:17:37.720
to learn how much Mises cared about her and her children. She had held him in great esteem,

822
01:17:37.720 --> 01:17:42.800
but in no way reciprocated the attentiveness he had bestowed on her during the two years

823
01:17:42.800 --> 01:17:48.480
since they had first met in Kaufmann's apartment. Red roses and expensive perfume could not

824
01:17:48.480 --> 01:17:53.540
conquer her heart. She just could not understand this man.

825
01:17:53.540 --> 01:17:59.800
In the first years of our relationship, Lew was almost an enigma to me. I never had seen

826
01:17:59.800 --> 01:18:05.480
such modesty in a man before. He knew his value, but he never boasted. I think it was

827
01:18:05.480 --> 01:18:10.180
the extreme honesty in Lew's feelings that attracted me so strongly to him. These feelings

828
01:18:10.180 --> 01:18:16.180
was so overpowering that he, who wrote thousands of pages about economics and money, could

829
01:18:16.180 --> 01:18:20.960
not find the words to talk about himself and explain his feeling.

830
01:18:20.960 --> 01:18:27.440
Fortunately actions sometimes speak for themselves. On that day, July 1927, for the first time

831
01:18:27.440 --> 01:18:33.360
Margit felt something like love for him and grew more open to his advances. It was the

832
01:18:33.360 --> 01:18:38.540
beginning of a short-lived boom in their friendship which, less than two months later, ended in

833
01:18:38.540 --> 01:18:45.460
In a resounding crash. That night Mises visited Margit to see if everything was in order.

834
01:18:45.460 --> 01:18:50.780
Telephone lines were down, and he had been unable to call her. He took her for a walk

835
01:18:50.780 --> 01:18:56.940
on the Ringstrasse where the turmoil of the day could still be felt. Only men were out.

836
01:18:56.940 --> 01:19:03.260
She did not see another woman. At the end of their excursion, he proposed to go dancing.

837
01:19:03.260 --> 01:19:06.860
When she said yes, he knew it indicated progress.

838
01:19:06.860 --> 01:19:11.940
Some days later he held her hand for the first time in a dance club, and on the following

839
01:19:11.940 --> 01:19:16.820
weekend he kissed her for the first time in a dark corner of the Prater, Vienna Central

840
01:19:16.820 --> 01:19:22.700
Park, like a couple of high school kids, as she would later recall. When she had to leave

841
01:19:22.700 --> 01:19:27.460
for Hamburg a few days later he told her that he would ask her to marry him, but that he

842
01:19:27.460 --> 01:19:33.460
first had to make up his mind to be a stepfather to her children. They parted with plans to

843
01:19:33.460 --> 01:19:39.640
to meet in Brechtesgaden, a resort town in the Bavarian Alps at the end of August. On

844
01:19:39.640 --> 01:19:45.160
August 25th, she took the train from Munich to Brechtesgaden and was happily surprised

845
01:19:45.160 --> 01:19:50.440
when Mises suddenly entered the train at one of the intermediate stations. They took adjacent

846
01:19:50.440 --> 01:19:56.560
hotel rooms in Brechtesgaden. Concerned about appearances, Mises presented Margit as his

847
01:19:56.560 --> 01:20:02.600
sister. They enjoyed a wonderful training period for marriage, as he would say. They

848
01:20:02.600 --> 01:20:07.400
They talked about the problems facing their potential union. She could not fulfil his

849
01:20:07.400 --> 01:20:12.120
wish to have a child together. She would have to become Jewish again to appease his mother.

850
01:20:12.120 --> 01:20:16.340
His mother would have to be kept out of all marriage preparations because she might jeopardise

851
01:20:16.340 --> 01:20:20.300
everything as she had done on an earlier occasion.

852
01:20:20.300 --> 01:20:25.120
We are still paraphrasing Margit von Mises's rather vague record of the events. From the

853
01:20:25.120 --> 01:20:30.220
phrase she would have to become Jewish again, one must infer that she had been Jewish before

854
01:20:30.220 --> 01:20:34.840
for Getting Married to Ferdinand Zirny, a Protestant. The phrase training period for

855
01:20:34.840 --> 01:20:40.800
marriage is liable to several plausible interpretations and has probably been selected for precisely

856
01:20:40.800 --> 01:20:46.020
this reason. On Sunday, September 4, they returned to Vienna when events took a fateful

857
01:20:46.020 --> 01:20:52.700
turn. Mises had fallen ill without noticing at first. He met her for supper on the following

858
01:20:52.700 --> 01:20:58.840
Tuesday, and on Wednesday he saw her again, shaken by fever and a severe headache. Given

859
01:20:58.840 --> 01:21:04.720
In these circumstances he would not talk about marriage. He had to have a clear head to make

860
01:21:04.720 --> 01:21:09.880
the most important declaration of his life, yet Margit felt she had already been waiting

861
01:21:09.880 --> 01:21:16.320
for quite a while and was growing impatient. She told him she would not wait a single day

862
01:21:16.320 --> 01:21:21.800
more and pressed him for a decision. He later wrote her of the event,

863
01:21:21.800 --> 01:21:27.840
Today or never, I will not allow you to postpone the decision by even a couple of hours. No

864
01:21:27.840 --> 01:21:34.560
loving woman talks that way. A single warm word from you would have made me happy, would

865
01:21:34.560 --> 01:21:40.440
have bound me to you forever. But you said no such word. You did not meet me as a loving

866
01:21:40.440 --> 01:21:46.160
woman but as a cold adversary. It was the greatest disappointment of my life.

867
01:21:46.160 --> 01:21:54.960
I had hoped to find love and goodness in you, and I found heartness, uncompromising heartness.

868
01:21:54.960 --> 01:21:59.880
I had already overcome all prior apprehensions which I have not hidden from you, because

869
01:21:59.880 --> 01:22:05.640
I thought true love was stronger than the difficulties that stood in the way of our

870
01:22:05.640 --> 01:22:06.640
union.

871
01:22:06.640 --> 01:22:11.160
Mises wrote this letter at the behest of Professor Adler, Margit's doctor, who had

872
01:22:11.160 --> 01:22:26.400
It seemed to be the end. They departed under the mutual declaration that the problems in

873
01:22:26.400 --> 01:22:31.980
their relationship were irreconcilable. She even returned the love letters he had written

874
01:22:31.980 --> 01:22:38.720
to her in Hamburg. The next morning Margit felt remorse and wrote to him, but he remained

875
01:22:38.720 --> 01:22:45.880
She continued to write every day without response, and a few days later finally got him on the

876
01:22:45.880 --> 01:22:53.920
phone. Mises reiterated what he had said on the preceding Wednesday. It was over forever.

877
01:22:53.920 --> 01:22:59.080
Not much later he must have discovered the true cause of his fever, a rare condition

878
01:22:59.080 --> 01:23:04.960
known as acute surgical abdomen, and checked into the hospital for surgery.

879
01:23:04.960 --> 01:23:10.160
On September 16th he was still in the hospital. Margit had stopped writing him, but she sought

880
01:23:10.160 --> 01:23:16.280
news of the state of his health from his second cousin, Streisur, the doctor of her late husband.

881
01:23:16.280 --> 01:23:21.040
She even prayed to God for his recovery, admitting later that she had always thought of herself

882
01:23:21.040 --> 01:23:26.560
as an atheist, but this emergency had revealed otherwise. Eventually she started writing

883
01:23:26.560 --> 01:23:32.360
him again. When he did not reply she begged Professor Adler, her physician, to ask Mises

884
01:23:32.360 --> 01:23:38.040
Mises to write and explain in full the reasons for his obstinacy. With this request coming

885
01:23:38.040 --> 01:23:44.080
from a colleague as a quasi-official request, Mises felt he had to comply. He wrote a strongly

886
01:23:44.080 --> 01:23:49.660
worded and unflattering letter and emphasised that he would have preferred to spare the

887
01:23:49.660 --> 01:23:53.000
embarrassment of reading his account.

888
01:23:53.000 --> 01:23:59.720
Margit sent the letter back, saying it was unworthy of him. At some point in late 1927

889
01:23:59.720 --> 01:24:06.960
Until 1928, he started calling her again. He would not speak. He just let her answer

890
01:24:06.960 --> 01:24:14.160
the phone and listened to her voice, sometimes twice a day. And then one day he showed up

891
01:24:14.160 --> 01:24:21.400
again at her apartment, without any explanation, and they continued their relationship where

892
01:24:21.400 --> 01:24:28.840
they had left off in September 1927. She still waited for him to propose, but he was still

893
01:24:28.840 --> 01:24:30.840
are all unable to make this step.

894
01:24:30.840 --> 01:24:32.840
Later she wrote,

895
01:24:32.840 --> 01:24:46.840
Before we married, this love must have been a very distressing factor in his life, so upsetting that he knew he could fight a battle in Carpathian Alps, but could never win the battle against himself.

896
01:24:46.840 --> 01:24:49.840
Eventually she could not bear it any more.

897
01:24:49.840 --> 01:24:54.840
She left Vienna and went to London for work as a translator.

898
01:24:54.840 --> 01:24:59.840
She would return to Vienna only after she had met him again on the Thames.