Chapter 15 Crises
The meltdown of the New York Stock Exchange in October 1929 sent shockwaves through the
world economy. Central Europe was particularly affected. Corporate profits in Austria had
been squeezed under the combined impact of increased taxation and labour union power.
As a consequence, private entrepreneurs were increasingly unable to attract the capital
all needed to cope with the changes. Moreover, the economy of Germany and Austria had come
to rely increasingly on public expenditure, which in turn was financed through a steady
stream of US and French credit. The main players in this process were not the federal governments
but second-level authorities and municipalities. Loyal to the prevailing socialist ideology
of the time, city mayors had used post-war foreign loans as a means to communalise firms
especially in the field of transport and public utilities. The performance of these companies
plummeted under the new public management, but this was compensated for by ever more
credit from abroad. Until 1928, the inflationary policies of the capitalist West could be relied
on for promoting the growth and perseverance of the central European welfare states. Then
the June 1928 stabilisation of the francs stopped capital exports from France and the
The volume of new foreign loans floated in the United States dropped by some 50% when
the Federal Reserve started increasing its interest rates. The party was over.
One of Mises's professional duties was to help attract capital to Austria. In the international
meetings for the semi-public comma, he represented his country and sought to protect its interests
by promoting Austria's reputation as a good credit risk. For example, in late March and
Early April 1930, Mises went on a mission to London to promote an English-language brochure
that Hayek's Institute for Business Cycle Research had prepared for the Commer's Propaganda
Department, what we would now call a public relations office, in London. Mises used the
occasion to meet his friends at LSE, although he had not announced the trip to them much
in advance, if at all. Thus he missed Robbins, who had been out of town for some time, and
then tried to meet him for lunch, but met Meyendorf in King's College on Monday, April
For first, Meindorf probably introduced him to Alastair Phillips from Trinity College,
Dublin. They had also planned to meet her in Shaw, but the latter was not in London.
He was also on a private mission. He had to see Margit again. She had never written after
leaving Vienna the year before. He somehow learned her address, and they met on his very
first evening. She recalled,
From the first look, from the first moment, everything was as it had been before. We both
knew it never would change. A few months later she returned to Vienna,
private mission accomplished. Mises' official mission was one of his less successful undertakings.
After the Wall Street crash in October 1929, U.S. loans quickly became unavailable for
for Austria and Germany. Even Mises' persuasiveness could not prevent the crisis from spilling
over to Austria. It soon turned out that the Austrian entrepreneurs, crippled by a decade
of communal socialism, labour unions and soaring taxes, were unable to provide relief. Stock
markets plummeted all over Europe and within a year reached an all-time low.
As usually happens in a financial crisis, all sorts of real and self-appointed experts
advertised their plans to solve the problem. These plans invariably involved increased
government intervention. The great panacea was meddling with the gold standard. Several
well-intentioned amateurs sent their reform proposals to Mises. Not one of them had actually
studied any of his writings. They just sought a renowned monetary expert to give leverage
to their ideas. One of them actually proposed a currency based on electricity. Mises usually
He replied, and in one case even said, he would welcome a publication of the gentleman's
proposal. A public discussion of these views would be instructive and help to bring about
a solution to the present monetary problems. This was no idle talk, he sometimes arranged
such discussions himself. A case in point was Charlotte von Reichmann, a young economist
from the University of Frankfurt. Unlike the cranks, she had actually read Mises' monetary
In fact, she had devoured all of his books and admired them very much.
Still in a doctoral dissertation she had advocated a substantially different inflationary point
of view on the nature of credit, claiming that even paper money credit was true capital.
When she sent her dissertation to Mises in December 1931 and solicited his comments,
she was quite surprised to receive a very appreciative response, plus an invitation
to give a talk to the Nationalökonomische Gesellschaft.
She could not believe her eyes when she saw she was invited to give a talk, and her teachers
laughed at her, saying it could not possibly be a serious invitation. Mises was only being
polite to a student of his friends from the Frankfurt Circle, but Mises was serious. When
he thanked her for accepting the invitation to Vienna, she exclaimed, But it is I who
have to thank you for letting me rise, as if through the touch of a magic wand from
and the mass of nameless scientists. In 1930, the Austrian government asked Mises
to join an ad-hoc economic commission to study the causes of the difficulties that plagued
the country, permanent high unemployment. In 1929, some 200,000 or 14% of the workers
in industry and commerce were without jobs, numerous bankruptcies, idle production facilities
and the lack of profitability for a large number of Austrian businesses. Mises was one
One of the three members of the anonymous editorial committee that eventually issued
the final report of December 1930. Richard von Schiller was the official president of
the committee, but he did not take part in the writing. The other two members were Edmund
Pallar, a Labour Union leader and Secretary of the Chamber of Labour, and Engelbert Dolfuss,
a rising leader of the Christian Socialist Party who would later become Austrian Chancellor.
The report detailed the factors that weakened the competitiveness of the Austrian economy.
It pointed out that the inflation years, 1914 to 1925, had produced an inflationist mentality
in the Austrian population. Continual increases of prices and incomes were now considered
to be the normal state of affairs. This mentality conflicted with stable or declining selling
prices on world markets, to which Austria was exposed after the introduction of the
Gold Exchange Standard in 1925. Once on the standard, wholesale prices could be increased
only for local products and only to a limited extent, while production costs continued their
increase. Taxation had risen by more than 30%, payments for the public social security
systems by more than 50% and the wage rates of the 1.3 million industrial workers by some
and 24%. The increase of production costs had squeezed corporate profits, which in turn
made it impossible to attract the foreign capital direly needed for a quicker adjustment
of Austrian industry. The Committee therefore recommended a reduction of public expenditure
and of public revenues, as well as renegotiation of wage contracts in order to reduce total
labour costs. Mises was not happy with the report. Neither
Mises' hand in it was obvious. The author states that Mises' views had a major impact
on Austrian policy debates in the early years of the crisis. He thought it failed to identify
the main culprits, the welfare state and the labour unions. He used his next opportunity
to set the record straight, writing under his own name. He also put the discussion of
of Crisis Related Topics on the agenda of his private seminar, which, in the academic
year 1930-1931, dealt for the first time in many years exclusively with economic problems.
Similarly, in the winter semester, the university seminar dealt with the information, maintenance
and consumption of capital. The summer semester was to deal with methodological problems,
but it was unexpectedly cancelled because Mises had to travel to the United States for
for a meeting of the International Chamber of Commerce.
These sessions were far more satisfying for Mises than were the public debates into which
he had been drawn by his reputation as Austria's greatest monetary theorist. During the crisis
he confronted some of the more influential money-cranks in public debate. He argued that
the Great Depression was more lengthy and severe than any form of bust because it resulted
from the Combined Effect of Inflation and the Regimentation of Businesses. In one of
his public appearances in late October 1930, Mises debated Robert Eisler, an Austrian economic
historian affiliated with the Paris Office of the League of Nations.
Mises apparently also gave another public talk in Vienna on Monday, December 1st, 1930.
Eisler had written a book on the history of money and taught courses on his monetary policy
Policy Schemes at the Sorbonne in Paris and the prestigious private Institut Universitaire
des Autitudes Internationales in Geneva. He advocated the entire program of anti-crisis
policies that later became known as Keynesianism. Eisler claimed that the post-1929 crisis had
resulted from previous deflationary policies and, in particular, from the deflationary
and the gold standard. In his view, the crisis should be overcome by a simple change in the
technique of international currency management, the abolition of any form of gold standard
and the creation of an international fiat money system. This would solve various problems
in the labour market, agriculture, housing and other fields. It would finance huge public
take works, give sufficient wages and old age pensions to workers, and guarantee extraordinary
bull markets for entrepreneurs and bankers. It would even appease social antagonisms within
society. No written account of the Mises-Eisler debate
remains, but Mises's argument can be inferred from a public lecture that he delivered a
few months later to the plenary meeting of the Deutsche Hauptverband der Industrie, the
Association of German Industrialists in Czechoslovakia. The title of the lecture was The Causes of
the World Economic Crisis. He delivered it on February 28, 1931, and it was soon published
under a slightly different title in a major economics series that also featured many socialist
and interventionist analyses of the crisis. On February 19, 1931, Mises had approached
Moore's CEO Paul Siebeck for the publication of his lecture in Czechoslovakia in the series
Recht und Staat. Siebeck was glad to accept this proposal, and by March 2nd they had agreed
on the terms. Mises would obtain 30 complimentary copies, 80 marks per 16 pages, and the total
number of copies in any edition would not exceed 2,000. Mises then also changed the
and the title of the work from The Causes of the World Economic Crisis to The Causes
of the Economic Crisis. In mid-April, shortly before leaving for the United States, he was
through with the revisions. On top of his 30 complementary copies, he ordered another
25 copies and had 20 out of these 55 copies sent directly to their recipients. The money
The causes of the Great Depression In a mere 34 pages, Mises presented a concise
and penetrating analysis of the crisis. He pointed out that the market economy was regulated
by the requirement that entrepreneurs satisfy consumer preferences. Inflation disrupts this
self-regulation of the market. It induces businessmen to overestimate the possibilities
for Profitable Investments so that they make bad investment decisions and squander resources.
These errors became apparent in a crisis – the US stock market crash of 1929 in this case.
The market participants now revise their plans and adopt more sober views on economic conditions.
Employment opportunities and capital goods are shifted from the unsustainable production
projects to those firms and industries that are now most important to consumers and their
are foremost profitable. The unemployed find new jobs at lower wages, production resumes
and the economy grows again. Mises stressed that this scenario, while typical of previous
business cycles, did not exactly fit the conditions of the present one. Before there was virtually
no unemployment in the boom phase, and even during the bust, unemployment and stagnation
were temporary. They lasted only as long as it took market participants to find the most
Profitable New Division of Labour, but this time, Mises observed, things were markedly
different, so much so that he had to adjust his business cycle theory. This time, despite
enormous inflation, there was no corresponding general boom economy in Europe. In light of
past experience, and of our theory, one should have assumed that the crisis would therefore
be milder, but is far more severe, and it seems business conditions will not improve
It would have been plausible to assume that the present bust would not be as painful as
it would have been in the case of a more sweeping boom. The relatively weak boom should have
induced a relatively moderate bust, but this was not the case. Why? Mises answered that
the present stagnation was the combined result of two causes layered one over the other.
The current business cycle had merely aggravated the problems of unemployment and the lack
of profitability, but these problems had existed and continue to exist independent of the
and the cycle. Both the lack of profitability and unemployment are being intensified right
now through the general depression. However, in the post-war period they have become lasting
phenomena that have not disappeared entirely even in the upswing. We are confronted here
with a new problem, one that cannot be answered by the theory of cyclical changes alone. What
were the causes of the permanent post-war crisis? Mises argued that there were several.
Each one, however, was an instance of government intervention. Mises thus explained the Great
Depression by combining his theory of business cycles with his theory of interventionism.
The least controversial of his candidate causes was the nefarious influence of price controls
and public finance. Most economists agreed that price ceilings created shortages of consumers'
Investments, and that price flaws resulted in unmarketable surpluses without benefiting
anyone. They also accepted that the growth of the state increased the costs of production
and the taxation of capital-induced capitalists to consume rather than reinvest their wealth.
More controversial, however, was Mises' stance on the labour market, where he was
one of the few economists with the courage to stand fast on the law of supply and demand,
In January 1926, the Neues Wiener Tagblatt approached Mises to get his opinion on how
unemployment was to be reduced, and on March 6, 1930, the Vienna journal Welt am Morgen
published Mises' advocacy of the abolition of unemployment relief.
On the unhampered market, he argued, unemployment could only be a temporary phenomenon. There
are probably always a certain number of job seekers, just as on the unhampered housing
market there are always unoccupied apartments and apartment seekers. Today we would say
that search costs cause a certain amount of natural unemployment. Five years before, in
his piece on interventionism, Mises had characterised this free market unemployment as a frictional
is a fundamental phenomenon that would not exist in a static state that is in equilibrium.
Except for this natural residue, however, the market cleared at a wage rate resulting
from a competitive demand by entrepreneurs and a competitive supply of workers.
Now this self-regulation of the market is strongly obstructed through the intervention
of the labour unions acting under the protection and support of government power.
The labour unions seek to establish the wage rates of their members at higher than market
rates, the goal the unions pursue by the use of violence.
Mises went on to explain, Only those workers who belong to the union who demand the wage
rates prescribed by the union and who do their work in the manner prescribed by the union
are permitted to work in the firms. Should the entrepreneur refuse to accept the conditions
of the union, a strike ensues. Those workers who wish to work despite the
The Union's imposed ban will be forced by acts of violence to refrain from their plan.
These Union tactics naturally presuppose that the Government tolerates this behaviour at
the least. Were it to proceed in its usual way and interfere with the criminals who abuse
job seekers and vandalise the machines and other of the entrepreneurs' facilities, then
circumstances would be different, but that it has capitulated to the Union is the precise
This feature characterises the modern state. Owing to this position of power which enables
them to abuse the property rights of the capitalists as well as the human rights of workers and
would-be workers, the unions can push wages above the market rate, but at this higher
level it is impossible to hire all those who would have found employment otherwise. The
result is unemployment and the concomitant misery of a great many people. For some time
Even the masses might tolerate their immiseration, but sooner or later they would demand jobs.
Even the unions could not resist such a large-scale popular movement, and therefore the Institution
of Taxed Financed Unemployment Relief was created, he concludes. Unemployment as a permanent
and mass phenomenon results from the labour union policy of pushing up wage rates. Without
unemployment relief this policy would long since have collapsed. Unemployment relief
Life is therefore not, as misguided public opinion assumes, a measure to alleviate emergencies
caused by unemployment. To the contrary, it is an element in the chain of causes that
create unemployment as a permanent and mass phenomenon in the first place. In short, the
crisis had turned into a great oppression through government interventionism, and this
economic calamity in turn accentuated political antagonism within states and between states
Spurring Yet Another Round of Destructive Policies, How to Break Out of the Vicious
Circle
Mises argued that ultimately there was no choice but to abolish all government intervention
and to confront Union power head on. The confrontation had better be sooner rather than later. The
longer it is delayed, for example, through inflation, the more capital will be consumed,
which in turn causes ever-decreasing wages and living standards. And yet this idea continued
to enjoy great popularity, as Mises wrote some months after publication of his lecture
to a friend in Paris.
Today, with the exception of a dozen or two reasonable individuals, the whole world is
in complete agreement on two points, debts should remain unpaid, and the economy should
be stimulated through strong inflation.
Not all criticisms of his views were based on this opinion, however.
Some critics charged Mises with one-sidedness.
Some of his colleagues in the Commer thought it was illegitimate to focus only on the problems
of Government Interventionism. There was also something like entrepreneurial interventionism,
which brought about very similar problems. The nub of Mises' response to this argument
is contained in the letter he wrote to CUMMA colleague Rudolf von Baermann, who agreed
with Mises on questions of government interference but insisted that the government was not the
only agency to engage in interventionism. Baermann had been a student of Mises in 1918.
Hans Mises brought the gifted behrman into the comer and also maintained close private
contact. In his answer Mises stressed the particular features of the selection process
of the market.
It is certain that entrepreneurs too commit errors. This has never been denied. But the
characteristic feature of the capitalist economy is that the entrepreneur diminishes his own
position as entrepreneur and property owner to the very extent to which he commits errors.
The capitalist social order, unhampered by interventions therefore, provides for a permanent
selection among the capitalists and entrepreneurs. Why can incompetent people in the German Reich
and in Austria remain CEOs for many years? Because, in an interventionist state, these
executives are selected primarily in regard to whether they enjoy a good reputation with
The most popular alternative explanation of unemployment
in those days, at least in intellectual circles, was the one that Émile Lederer had published
in the same series in which Mises' brochure appeared. Lederer ridiculed the primitive notion
Even that faced with unemployment one could always restore equilibrium by reducing wage
rates.
He argued that the crisis was a consequence of fast technological progress, so fast indeed
that an adjustment of the market participants was somehow intrinsically impossible.
As long as innovations applied only to consumer products, according to Lederer, unemployment
would not result.
The new industries would absorb any remaining idle labour, but when innovations occurred
in the form of fast technological progress, which replaced labour by cheaper machinery
at such a speed that entrepreneurs could not keep pace, unemployment ensued.
He had advocated these views for many years, along with the opinion that inflation can
somehow create additional goods. The problem with this argument was not only its implicit
premise that entrepreneurial speculation could not possibly keep up with fast technological
progress, but the even deeper assumption that technological progress could somehow take
Mises pointed out that capital was inherently conservative in the sense that the value of
the existing capital structure forced the entrepreneurs constantly to weigh its maintenance
against its Displacement. It is not the case that any new technology merely by virtue of
being technologically superior to those presently in use would displace the older ones. Such
a complete replacement would occur only if it were warranted by market prices. While
Lederer, Conrad and others had tried to counter Mises' analysis of the causes of the crisis
by proposing alternative explanations, other economists confronted his main thesis head
and on. They criticized Mises' argument that in an unhampered economy nothing prevents
the clearing of the market through price adjustments. Erich Carrell claimed that each change of
supply and demand would induce cumulative, Vixilian effects that amplified the initial
dis-equilibrium, and Wilhelm Rübke argued, In the present phase of the crisis, it seems
to me it is wrong to expect that a reduction of the level of wages could re-establish equilibrium.
Mises is wrong because given the total paralysis of investment each, reduction of prices and
incomes would lead to a continued sterilization of means of payment in the form of an increase
of the liquidity of the banking system and thus to an extended disequilibrium.
Mises and his fellow travellers apparently do not sufficiently take account of the fact
that today we have monstrous productive reserves that are unused.
In other words, we have a gigantic capital surplus that requires credit expansions to
become visible.
For this reason it is not correct that government investment would deprive the private economy
of its means. The paradoxical fact which cannot be grasped on the basis of purely static ideas
is that the means of the private economy would thereby be multiplied.
Mises had anticipated this line of argument in The Causes of the Economic Crisis. He
noticed that some economists had come up with a new theory of how inflation could be beneficial.
Mises economists knew full well that unemployment resulted from excessive wage rates, but rather
than confronting the unions with the demand to stop their harmful practices, they suggest
to cheat the unions. Mises summarized the argument and identified its crucial flaw.
In the next inflation nominal wages shall not be changed, which would be equivalent
to a reduction of real wage rates. This blithely assumes that in the next boom the unions will
will not demand further wage increases but quietly contemplate a reduction of real wages.
It was not reasonable to expect such union behaviour. Mises's refutation of the new
pro-inflation argument was grounded in common sense, and by analogy it also applied to the
owners of all other monstrous productive reserves that are unused, as Röpke had claimed. It
was unreasonable to assume that these owners would quietly contemplate a reduction of the
As one reviewer of the causes of the economic crisis explained, the labour unions have become
so powerful and such an important political factor in state and public opinion that nobody
Mises ventures to tell the truth. Neither the journals, which seek to avoid being accused
of antisocial sympathies, nor the government, which is afraid of becoming unpopular and
of exposing itself to the unfettered demagoguery of all these parties that, not surprisingly,
attract the masses with their bellicose cries against any reduction of wages.
The plague of political correctness existed well before the end of the twentieth century.
Some of Mises' critics could not help admiring his courageous stance faced with overwhelming
Banking Opposition, Eugen Altschul, while calling Mises one of the most extreme representatives
of liberalism, admitted that he was unafraid to argue consistently.
Another reviewer said the Vienna Professor Mises, who has been called the last knight
of liberalism, fights indefatigably against government intervention in the market process.
Even an otherwise fearless ally like Fritz Wolfram criticised him for stressing labour
and the Union intervention as the primary factor responsible for the crisis. Wolfram would have preferred Mises to stress other factors, such as price controls, because everybody is better at recognising a fault in others and, after all, our purpose must be to enlighten the broad masses.
Enlightenment of the broad masses. Often Mises felt that it was precisely the elites who were in need of more light.
A case in point was his 1931 trip to the United States and Canada, where he took part in a
congress of the International Chamber of Commerce, ICC, and met many other colleagues and economists.
The trade policy of the United States was one of the top problems discussed at the ICC
meeting. In June 1930, the US Congress had passed and President Hoover had signed into
law the Smoot-Hawley Tariff Act, which authorised the highest tariffs on imports of agricultural
Products and Manufactured Items in the History of the United States. Within a year it was
already obvious that the Act was devastating for international trade. It protected the
farmers and manufacturers who produced for domestic markets, but hurt the consumers and
farmers and manufacturers who produced for foreign markets. It undermined the international
gold exchange standard. The American political leadership would not admit this. The President,
Congress and the American representatives at the ICC meeting were firmly committed to
the cause of what some of them called the New Economics, rescuing the capitalist economy
through more government intervention, fighting the disease by torturing the patient. A few
months later Hoover signed the 1932 Revenue Act, which brought about the largest peacetime
increase of tax rates in the history of the United States, but this did not raise the
absolute amount of taxes collected and did not keep Hoover from losing re-election at
At the end of that year, starting in 1933, the new president, Franklin Delano Roosevelt,
would intensify the New Deal policies that had begun with Smoot Hawley.
At the 1931 Washington meeting of the ICC, the interventionist spirit that produced these
policies was evident. Mises wrote in correspondence,
At the Congress I saw again how difficult it is today to battle against increasing protectionism.
The U.S. government and political parties energetically oppose all attempts to impose
a moderation of U.S. tariffs. What I saw in America was not very pleasant. The official
circles of the United States hold fast to a policy of high tariffs. To be certain, the
United States pursues the most pernicious interventionist ideas in its domestic and
foreign economic policies. But the situation in Austria was certainly no better and declined
In March, at the general meeting of the stockholders of Österreichische Nationalbank, Mises had
publicly pointed out that the bank had succeeded in stabilising the exchange rate of the shilling.
The meeting took place on March 20th, 1931.
That was probably the best thing that could be said about Austrian finance, but he knew
that grave problems lay ahead.
Several times he had rejected executive positions with some of the major banks because he believed
they were bankrupt, and it was only a matter of time before this state of bankruptcy would
become apparent. In early May 1931, the day of reckoning came. The default of Austria's
largest bank, the Rothschild-dominated Kreditanstalt, put the Austrian payments system into immediate
jeopardy. Anselm von Rothschild had founded the Kreditanstalt in 1855 as a public-private
venture to stimulate economic development. Its difficulties in 1931 were essentially
Only due to the fact that, two years before, the Rothschild family had given in to demands
from the Austrian government to save the semi-public Bodenkrediteanstalt after it had been subject
to a bank run of several weeks, merging with this bankrupt institution proved to be too
much even for the financial acumen of Louis von Rothschild, who owned some 30% of the
Krediteanstalt.
Upon his return to Vienna, Mises had to decline several invitations to comment on the event
and its implications for the Austrian government's effort to balance its budget, saying such
public statements could not be reconciled with his position as Secretary of the Commer.
A penal lawsuit was brought against the executives of the bank, and Austrian law prohibited any
initiative to influence public opinion before the verdict of the judges.
Only three years later did he feel free to analyse these events in an article published
in a prominent review, Der Weg der österreichischen Finanzpolitik, The Path of Austrian Financial
Policy.
Too big to fail, Kreditanstadt was bailed out by Reich's central bank. In exchange,
it and other leading banks were co-opted into reintroducing foreign exchange controls through
the back door. They were asked to hamper any gold exports of their consumers. Mises must
Augusta felt this resurgence of mercantilist ideas was the beginning of the end. To the
editor of Deutsche Wirtschaftszeitung, one of the journals that had solicited a comment,
he confided, our financial situation is far worse than the official view admits, and yet
Parliament opposes any heart-hitting measures out of concerns for the voters, in particular
the many civil servants. The reluctance of the official view to admit the true extent
of Austria's socialist plight stemmed also from the corruption of the media. This concerned
a particular report on the city of Vienna, which had become an international showcase
for communal socialism. As Mises pointed out in correspondence with a fellow Rotary member
from the Netherlands, none of the Vienna newspapers dared oppose rent control or criticised a
budget and other financial reports of the city of Vienna, because the newspapers depended
in so many ways on the city administration. Mises to Josefus Yeter. Letter dated June 10, 1931.
Yeter was the president of the Rotary Club in Den Haag, The Hague. Mises never met him on his
pre-war trips to Holland, 1926, 1936. The two men met for the first time at the second, 1949,
Mont-Pilerin Conference. Few economists were critical enough to see through the public propaganda,
and even fewer dare to speak out against it. Again, it was the group around Mises that
filled this gap, most notably when Hayek published his study on rent control, F. R. Hayek, Das
Mieterschutzproblem, Nationalökonomische Betrachtungen. Mises was fond of this publication
and recommended it in private correspondence. Another good study was published by Joseph Schell,
Gerechtigkeitsidee und Mietungsgesetzgebung. Schell was married to a young woman who had
Attended Mises' Classes at the Handelsakademie. Mises was so convinced that all the major
Austrian banks were bankrupt that he kept personal bank accounts elsewhere. He held
this opinion after 1921. These prophecies materialised at an amazing speed. Bankruptcy
of the Kreditanstalt could be prevented only with help from the Rothschild banks in Paris
and London. Few other establishments had saviours from abroad. Within two months financial
The capital collapse spread throughout Austria and on Black Monday, July 13, 1931 it reached
Germany. One of the best reputed German banks, the Darmstetter und Nationalbank, closed its
counters triggering a chain reaction that quickly involved all payments within Germany.
When the government decreed a compulsory holiday for the banks and the capital markets, international
Payments came to a halt.
A Lieutenant in London
In the spring of 1931, the political prospects for Europe were bleak. The roaring twenties
had turned out to be a short interlude of relative liberty and international economic
cooperation. Now the pendulum had swung back to interventionism and state idolatry. The
The only signs of hope were those few individuals and groups that had liberated themselves from
the political prejudices of the time. The most promising group was the one led by Lionel
Robbins at the London School of Economics. Robbins' career had been on a fast track.
After a two-year stay at Oxford, he had become the chair of LSE's economics department
in 1929, following the unexpected death of Alan Young. Robbins gathered around himself
a group of brilliant students who would become stars of 20th century economic science, Ronald
Coase, William Hutt, John Hicks, Nicholas Caldor, Abba Lerner, Tibor Duszytowski, George
Shackle, Ludwig Lachmann, Paul Sweezy and Ursula Webb, who married Hicks.
Coase started his recollections of his early years at LSE with the following words,
I will be discussing what happened in economics in England, but these were times when, to
a very considerable extent, this was what happened in economics.
They were exposed to Mises's ideas like no other group outside Vienna. Mises's influence
on Robbins was mainly based on his writings, but it had been nurtured through personal
Contact since the early 1920s. By 1931 Mises was thoroughly familiar with the school's
staff and faculty and could give detailed instructions to foreign visitors about how
to meet people at LSE. In a January 1931 letter to Walter Sulzbach, for example, he recommended
that Sulzbach get in touch with Gregory and Robbins, the best economists and freest minds
in Contemporary England. They had to be looked up in their offices and, if not there, called
on at home. Meyendorf and Schwartz would certainly be willing to receive him if he gave the secretaries
his calling card, mentioning that he was a friend of Mises's. He recommended the same
procedure to solicit the assistance of Mr. Hedicar, the librarian. In those days Robin's
admiration for Mises was boundless. He eagerly proselytized among his countrymen and had
already converted his friend Arnold Plant to the cause of Austrian economics. He also
sought to increase the Misesian profile of the economics department through regular guest
lectures by Mises and his closest students. His long-term plan was to build up an effective
counterweight against the pernicious influence of John Maynard Keynes, whose advocacy of
of Inflation and Government Intervention had swept the universities of Cambridge and Oxford
as well as the Bank of England. Robbins also sought to stem the tides within his own school.
This concerned not only political orientation but also fundamental questions pertaining
to the nature and method of economics. For years LSE's management had sought to make
the school a centre of economic research in the image of mathematics and biology. The
A few remaining old-style economists did not believe the young Robbins was strong enough
to fend off the positivist crusaders. But then an unexpected opportunity arose when
Hayek visited the department in late January and early February 1931 to present his Theory
of Business Cycles, which was based on an elaboration of Boehm-Bawerk's Theory of
Capital. It was Hayek's first personal encounter with Robbins, who had known him only through
to his writings.
Marta Brown later said that Robbins had tried for years to get Hayek to LSE. Robbins had
liked in particular Hayek's critique of the doctrines of the American economists, William
Truffin Foster and Waddell Catchings, two highly influential champions of the notion
that excessive savings might prevent economic growth. This work earned Hayek a habilitation
degree at the University of Vienna. It was published in 1929 as Gipters einen Wilders
as in the Spahns. Similar views were prominent also in the United Kingdom, and in particular
in Cambridge, where, as we now know, Keynes went so far as to make plans for the euthanasia
of the coupon-clipping classes. Keynes suggested that a deliberate policy of lowering interest
rates would mean the euthanasia of the rentier, and consequently the euthanasia of the cumulative
Hayek delivered four lectures to an audience composed of professors and students. They
met with mixed success. The senior faculty, most of whom did not know much about Austrian
economics, found Hayek's tall figure far more impressive than his arguments. But the
The younger audience members were stunned. Robbins had prepared his students to receive
a revelation from the epicentre of theoretical research, and under the impact of such passionate
guidance they indeed felt that Hayek's lectures were a great success. One of them later, to
become a noble laureate, wrote about them in retrospect,
They were undoubtedly the most successful set of public lectures given at LSE during
During my time there, the audience, notwithstanding the difficulties of understanding Hayek,
was enthralled. What was said seemed to us of great importance and made us see things
of which we had previously been unaware. After hearing these lectures, we knew why there
was a depression. Most students of economics at LSE and many members of the staff became
from Hayekians, or at any rate incorporated elements of Hayek's approach in their own
thinking. Robbins himself later characterized the Hayek lectures as a sensation that was
at once difficult and exciting. Robbins went on, I do not think nowadays that the analytical
constructions which excited us so much in the lectures on prices and production had
all the width or appropriateness of assumption which some of us, including conspicuously
The present writer were disposed to claim for them.
He immediately prepared their publication and began lobbying to get Hayek a position
at LSE. Hayek, probably at the behest of Robbins, wrote a review of Keynes' Treatise on Money
and sent the manuscript to Robbins, who was the editor of LSE's journal Economica. The
Cambridge Economist's book had just appeared in December 1930, and Hayek's review of it
was brilliant and devastating.
Robbins now persuaded LSE director William Beveridge to make him an offer.
Hayek became the TUC Professor of Political Economy.
His lectures were published under the title Prices and Production, and his review of Keynes's
book appeared in Economica.
The last night of liberalism had found a worthy lieutenant in London.
In the fall of the same year, Hayek and Robbins co-taught Hayek's first LSE seminar.
The entire economics teaching staff was in attendance when he explained and defended the
Austrian Theory of Capital. In a letter to Mises, Hayek reported on the atmosphere of
the discussions.
Some of the junior, rank-wise, not age-wise, colleagues, in particular Hicks, Benham or
Toysenby, are excellent too. There is much opportunity for me to learn, and I am hindered
in doing so only because Robbins presented me as an eminent authority so that people
I am aware for the first time that I owe to you virtually everything that gives me an
advantage as compared to my colleagues here and to most economists even outside my narrow
field of research. Here my indebtedness to you goes without saying. In Vienna one is
less aware of this intellectual debt to you because it is the unquestioned common basis
of our circle. If I do not deceive too many expectations of the people here at NSE, it
is not to my credit but to yours. However, my advantage over the others will disappear
with your books being translated and becoming generally known. Hayek went on, I must tell
you this because I here feel more indebted to you than any time before. Moreover, given
that Robbins and Plante provide excellent support to championing your ideas, I hope
to have some success.
Mises was certainly happy with this development, commenting on the work of Hut, one of Robbins's
Students who had just published a revisionist account of the impact of capitalism on the
condition of the 19th century English working classes, an account that was devastating for
the established view that the free market had worsened the plight of the working poor,
he wrote in December 1931, In England one can observe a decided turning away from the
a-theoretical direction. The movement that today is centred in the London School of Economics
Mises and in the person of Robbins will have the greatest scientific and political impact.
Robbins and Hayek in turn encouraged their Viennese Meister to visit London more frequently.
Mises had a standing invitation to stay at Robbins' home. Hayek argued, Here you have
at least as many honest admirers as anywhere else, and it would be good if you could reinforce
the influence that you exercise any way through frequent personal visits. The absolute high
My point of Mises's impact was reached with the publication of Robinson's Nature and
Significance of Economic Science. Sending a copy to Mises, the author called it a modest
attempt to popularise, for English readers, the methodological implications of modern
economic science, and he apologised for my crudities of exposition. But the love affair
between LSE and Misesian economics did not last. The new Austrian doctrines had initially
benefited from their exoticness and novelty, but their policy implications prevented certain
long-term conversions. A case in point was William Beveridge, who during the late 1920s
had been infected by Robbins' enthusiasm for the logical rigour of Mises' writings,
which had made him more tolerant towards classical liberal policy prescriptions. He was a notorious
champion of intervention, most notably in the free labour market, but by the time Hayek
Hayek delivered his inaugural lecture in early 1933. Sir William had become again a socialist
of the purest sort. Hayek surmised that this was an emotional reaction to Gemeinwirtschaft,
which he had just read and not understood, said Hayek to Mises in a letter dated March
10, 1933. Mises replied, I am sorry that the impact of Gemeinwirtschaft on Sir William
was not the intended one. By the way, has he already read the English version? Mises
Mr. Hayek and a letter dated March 17, 1933. Thus, the manuscript must have been available
by March 1933. Beveridge's opposition could explain why the book came out only in 1936.
Hayek himself was instrumental in turning the LSE group away from Mises and toward the
emerging verbal Walrassian movement that had begun in Germany a decade earlier under the
leadership of Wieser, Kassel and Schumpeter. Given Hayek's background, this was hardly
Really surprising, his economic thought had been nurtured in the classes of Friedrich
von Mises and he had never made a secret of this intellectual heritage. Mises knew this
perfectly well. Significantly, he hailed Hayek's article on capital consumption as the best
and clearest of all his writings after Hayek had published his two early books on money
and the trade cycle. Hayek not only stressed the common features of the Austrian and the
and Lausanne schools, but also believed the latter to be far more technically advanced
and therefore better suited to deal with the more demanding problems of economic analysis,
in particular with the problem of value imputation. He would have presented these views from his
very first LSE seminar on capital theory, where he must have found the ready support
of the young John Hicks, who at that time had already embarked on his project of bringing
in Valrass and Pareto II LSE. Hicks had taught advanced classes in economics from 1929 onwards.
That is, from the moment Robbins assumed leadership of the department. Their combined influence
came to be felt most notably in the second edition of Robbins' Nature and Significance
of Economic Science, which appeared in 1935. While the first edition almost completely
Hayek actually neglected the Lausanne School. The new edition was replete with references
to mathematical economists. Hayek acquainted Robbins's group with the views of the fourth
generation Austrian economists. He championed the notion that general equilibrium theory
was the state of the art and that all verbal economists, including Mises, worked within
the very same framework. They were convinced that all further elaborations had to depart
From Here
Morgenstern and Hayek most vividly felt the need for reform, but neither of them grasped
that the alternative was already at hand. It has escaped their notice that the logical
structure of Mises' arguments against socialism and interventionism was squarely outside the
Wallrassian paradigm. Hayek's two books on money appeared in English before any of Mises'
works, and he was the first Austrian economist ever to have a direct personal impact on the
Anglo-Saxon World, the last best hope for Austrian economists after Germany and Austria
turned socialist in the 1930s. It was Hayek, therefore, who was responsible for the impression
of most English and American economists about modern Austrian economics during those critical
years before the publication of Keynes's General Theory. It seems he made his case
less successfully than his great rival from Cambridge. Hayek later regretted that he had
Hayek has not refuted Keynes's general theory in 1936 as he had done earlier with his treatise
on money, and he seems to have believed that his failure to do so was crucial to the success
of the Keynesian Revolution. But this was certainly an exaggeration of the influence
he had with his British colleagues at the time. Hayek failed to do in 1930s Britain
what Mises had done in 1920s Germany, reverse the orientation of the profession by the sheer
and the power of his arguments. Hayek had his chance, but in the perception of the British
mainstream his writings were at best controversial. Straffer's review of prices and production
had at least the same negative impact on Hayek's influence as Hayek's review of the treatise
on money had had on Keynes's. To a certain extent this resulted from the inconsistencies
and contradictions Hayek had inherited from his real mentor. Hayek was and would remain
Throughout his life a disciple of Mises, this was so despite the fact that of the entire
fourth generation of Austrian economists, he was the one closest to Mises in both methodological
and political views. In the few years following the creation of the Institut für Konjunkturforschung,
his political views became indistinguishable from those of Mises. The main reason, however,
was that Hayek still in his early thirties was simply overburdened by the amount of work
involved in trying to live up to Robin's expectations. He never managed to publish
more than essays or excerpts of much larger but unfinished manuscripts, a fact he constantly
lamented. He never had the time to think through the fundamental problems of economic theory
in its relationship to all other elements of Austrian economics. His presentations
Theories of Monetary Theory, Capital Theory and Business Cycle Theory were mainly syntheses
of already existing doctrines. Where he could not rely on the work of others as a supporting
framework he lost himself in the analysis of details and never produced a coherent picture
of his subject. The best illustration of this is F. Hayek Pure Theory of Capital, the product
of ten years at LSE. It was a book with neither head nor tail.
When Keynes's general theory appeared, in the same year as the English translation of
Mises' socialism, the initial curiosity about Austrian economics had faded. The stage was
set for the return of the local champion. Hayek had made no progress in promoting Austrian
economists among the group of brilliant students who, after the Second World War, would shape
economic teaching and research throughout the world. After ten years at LSE he had used
up the authority he inherited from Mises, and lost former allies to the burgeoning
Keynesian Revolution. This might seem in retrospect like a lost opportunity. Hayek was in a pivotal
position to prepare for the rise of Austrian economics in England and the United States,
and he certainly could have done more to promote Austrian economics in London had the circumstances
been different. But the circumstances were what they were. Hayek had come to LSE at a
the time when the chair of the economics department was politically weak, and when the efforts
of the school's management to turn economics into applied mathematics had attracted a number
of highly gifted students eager to explore this new direction. Moreover, Austrian economics
was not yet what it was about to become. The school was still in the phase before Mises's
quantum leap. The encompassing system of economic thought that would first be expressed in Nazionale
and Social Economy, 1940, and then Human Action, 1949, was then only visible in its
broadest outlines. Finally, there is the simple fact that Hayek
was not a Misesian. In the early 1930s, Hayek was a pillar of the very same general equilibrium
movement that he decried a few years later. It would be meaningless to regret in hindsight
that Hayek did not do what he had never set out to do. What he could not have succeeded
Return to Foreign Exchange Controls
After his return from the ICC meeting in Washington, Mises spent two busy months trying to limit
the political damage of the Kreditanstalt crisis. When he left Vienna at the end of
July, he had helped beat back attempts to officially establish a system of foreign exchange
He returned to Vienna in mid-September, just in time to learn that the Bank of England had abandoned the gold standard, refusing to redeem its notes in gold.
The Bank of England suspended payments on September 19, 1931.
Mises was shocked and feared the worst. He surprised the members of his seminar but especially
his English student Ursula Webb with the announcement that, in one week, England will be in a hyperinflation.
The incident was reported in John R. Hicks' A Market Theory of Money. Ursula Webb was
at the time studying in Vienna. A few years later she married John Hicks. He still did
not fully anticipate the political landslide that soon set in. A week later he left Vienna
and again this time for lectures in London and Frankfurt.
In London, Mises stayed at Robin's house.
He had probably arranged this trip at the end of September in order to avoid celebrations
of his 50th birthday in Vienna.
He asked his secretary to stifle all such attempt.
He would be more agreeable if the organizers of birthday parties returned in 20 years.
When he returned to Vienna on October 6th, the government had officially reintroduced
Most foreign exchange controls instituting a return to the bad old days he had thought
were gone forever, as he wrote to one of his friends,
Events in Austria taking a turn that causes me to fear the worst. We have found ourselves
in a controlled economy once again. Foreign currency stocks are being managed. A kind
of central economic agency, albeit under a different name, is being set up for each of
The collapse of the brief period of free trade that had blossomed in the second half of
the 1920s was now at hand. More bad news poured in. Some of Mises's former allies
were now advocating inflation using theories that had been refuted countless times. For
For example, Reich published a paper arguing that although all fiduciary media are by their
very nature inflationary, this inflation was not harmful if the fiduciary media were
issued only as short-term commercial credits. Reich, it will be recalled, was the president
of the Österreichische Nationalbank. Mises commented on the paper in private correspondence.
Horrendous! One incident epitomised the entire situation. In July 1930, Mises had been invited
by the League of Nations to write a memorandum for the League's gold delegation. The mission
of the delegation was to examine into and report upon the causes of fluctuations in
the purchasing power of gold and their effect on the economic life of the nations. Among
its members were Keynes, Kassel, Sprague and Janssen, certainly a bad sign. Still Mises
complied and in early October 1930 sent his paper to Alexander Loveday, the head of the
The League's Rockefeller-sponsored economic intelligence unit. Publication was delayed,
however, and a year later Mises was notified that none of the memoranda that had been solicited
for the gold delegation would be published, ostensibly for budgetary reasons.
Keynes and others had meanwhile published the Macmillan Report, which made a highly
successful case for inflationary finance to stop the fall of the price level. Mises was
He was invited to sit on the new foreign exchange board, whose job was to do everything of which he disapproved.
He probably accepted the position in order not to hurt Austrian credit abroad.
His absence from the board would have disquieted foreign investors.
In a letter to Robbins he described the new system and his function within it.
Just when I returned to Vienna the crazy foreign exchange control was introduced.
At the top of this unfortunate system is a foreign exchange board,
which decides everything pertaining to our foreign commerce and thus is some sort of a
general director of the national economy. I am the only non-interventionist member of
this body and to which I fit as well as into the Executive Council of the Third International
in Moscow. There is a general enthusiasm for new interventionist measures and for state
capitalism and hyper-interventionism. Any resistance against this policy is pre-emptorily
by pointing out that England too is now going to adopt a policy of high protective tariffs.
The original German term for the board was Divisienbeirat or more explicitly Beirat für
die Divisienzuteilung in der Nationalbank. The power of the board was soon cut back quite
drastically, possibly as a consequence of Mises' agitation from within. Only two weeks
after Mises had presented it as a central planning bureau in a letter to Robbins, he
Hayek wrote to Hayek that the board was a totally superfluous institution since it has
no power, and that he regretted having agreed to spend his time there. Still, a board position
seems to have been powerful enough to influence the allocation of foreign currency to individual
firms, giving Mises the unwanted power to grant favors to special interests. In January
1932, for example, he received a letter from Abraham Vorwein, an important German industrialist
and Vice-President of the International Chamber of Commerce, Frohwein owned a silk factory
in Vienna. The firm's activities depended crucially on access to foreign currency to
pay for imported raw materials. Mises ignored the offer to return any services as a matter
of course and instead referred Frohwein's representative to a colleague on the board
who was responsible for the silk industry. After the war, Frohwein became the honorary
The President of the ICC and remained on good terms with Mises.
Since no Austrian could buy foreign currency or take shillings out of the economy, travelling
was almost impossible for ordinary citizens, a considerable problem for Mises, who often
went abroad for lectures. And for other private reasons, he had a small account at the Österreichisches
Kreditinstitut für öffentliche Unternehmungen und Arbeiten, through which all foreign payments
were channeled. Mises used it to pay for his books, for example, for the encyclopedia of
the social sciences to which he had subscribed before the foreign exchange controls were
instituted. Yet this private clearing involved a markup of 22%. But he had just concluded
a new contract with Gustav Fischer for a new edition of socialism, and Fischer agreed to
become Mises' unofficial banker. He did not pay royalties to Mises' account in Vienna,
had capped the money and sent it piecemeal to the hotels where Mises stayed on his trips
in Germany.
This is how Mises was able to participate, for example, in board and committee meetings
of the Verein für Sozialpolitik in Berlin in early January 1932 and in the Verein's
annual convention in September of the same year.
Back home in the fall of 1931, Mises organised a meeting of the Nationalökonomische Gesellschaft
and in a passionate speech attacked the notion that the current crisis resulted from shortcoming
of Capitalism and required the remedy of more government intervention. The only rational
response to the present calamity was finally to stand against the labour unions, which
were the root cause of the inflationary policies behind the crisis. The lecture drew international
attention. Hayek in London had heard reports about it. Some reacted with hysteria, especially
after Mises published his position as Die Krise unter Kapitalismus, Crisis and Capitalism.
Mises' former student, Hedwig Lemberger, claimed that economic science was bankrupt
if it had no other solution for unemployment than to allow the unhampered market to reduce
wage rates. She argued that Mises' Manchester liberal analysis applied only to the conditions
of the nineteenth century, while in the present crisis unemployment resulted from unmanageably
fast technological progress, as Emil Lederer had explained. Mises replied,
I cannot understand why it is a declaration of bankruptcy for economic science to see one
of the causes of disruptions of economic life in the labour union policy of keeping wage
rates above the level that would be established on the unhampered market, and in the fact
that government supports this policy through unemployment relief and the refusal to protect
job seekers. Streamlining has nothing to do with unemployment there, while streamlining
Banking also in the 19th century may be even to a relatively greater extent than today,
but because at the time there were no interventions in the formation of wage rates, the fired
workers found employment in new and extended industries. They would even have been absorbed
far quicker, but for a number of government regulations that hampered their freedom of
migration and change of profession. My assumptions do not merely rely, as you believe, on the
the experience of times long past, but especially, on irrefutable theoretical considerations.
Eventually the crisis was settled the same way as the post-war crisis ten years earlier,
more foreign debt. In July 1932, Austria secured a foreign credit of 300 million shillings
from the League of Nations. The road was free for a new beginning. The crisis prompted a
renewed interest in business cycle research and in seeking the means for government to
to steer the economy away from the increasingly dramatic swings between boom and bust.
The Vienna Institute for Business Cycle Research published two monographs that were to become
classics in the literature of economic science, Hayek's Preise und Produktion and Fritz
Machlups Börsenkredit, Industriekredit und Kapitalbildung.
Mises was very proud of these works, especially of Machlups Bock, which he called a masterpiece.
and analysis of the fundamental practical issues of the day were much needed to counter
prevailing anti-capitalist views.
Mises' educational mission over the past ten years now paid off.
Many years later, a member of the Mises Orbit recalled in correspondence the Die Hard Kempferischer
group of Mises, Hayek, Striegel, Morgenstern and Meiner that used all available media and
and institutions to plead the case for economic liberty and against government interventionism.
These activities had their impact on public policy. In distinct contrast to the massive
proto-Keynesian deficit spending policies that in the early 1930s came to be applied
in other Western countries, the Austrian government pursued a programme of comparative austerity
with some very positive results. From 1932 to 1937 national production dramatically
When they increased in industry and agriculture, the government's budget was balanced, foreign
public debt was cut in half, central bank reserves doubled, and unemployment shrank
from 310,000 to 222,000.
One ally of this group, Fritz Wolfram, proposed a radical remedy to the situation, total liberalisation
of the monetary sector.
Wolfram not only recommended rescinding foreign exchange controls, he also called for the
The abolition of all impediments to private minting and the private issue of banknotes.
This reform, he argued, would not only be a way out of the present calamity and prevent
similar crises in the future, it would also lead to monetary liberalisation in other countries.
This in turn would raise the price of precious metals, further rewarding the early adopters.
It is certain that the country that first liberates the monetary economy will benefit
most from its fructifying benefits, and it is obvious that once the process is set in
motion each country must follow the others.
As Wolfram's case demonstrates, the crisis divided the wheat from the chaff within the
classical liberal movement.
Some abandoned liberalism and returned to interventionism, while others became more
radical in their defense of liberty.
Lionel Robbins wrote to Mises, Every day reveals fresh incursions of the system of free exchange
and Private Property, and it becomes clear that the number of persons capable of putting
up an intelligent defence of capitalist institutions is very small. Behind the scenes we do what
we can, but there are not many of us to carry on the battle. The sad thing about the crisis
is that it seems to be driving so many who at one time were good liberals over to the
other side. With me it has been just the opposite. All sorts of doubts and mental reservations
have been cleared up, and I am conscious of being much more strengh than in the past.
Certainly to judge from the quality of the argument on the other side, it ought not to
be difficult to defeat it on that plane.
Strengh means severe.
Mises agreed.
At the end of December he wrote a two-part article for the Neue Feierpresse on the gold
standard and its enemies.
He argued it was impossible to replace gold in international exchanges, and even in domestic
and Economic Exchanges.
The position of this metal would only grow stronger the more the national governments
followed their inflationary policies.
Mises accepted a proposal of the journalist Robert Shoy, who in February 1932 had invited
him to take part in what was then an entirely new format, the talk show.
Shoy's idea was to conduct live interviews with prominent experts on the pressing economic
issues of the day.
The interviews would be held in a public auditorium and broadcast to a radio audience. The first
interviewee in early March 1932 was Ottmar Spahn. The evening was apparently a great
success despite the fact that Spahn had rarely given public lectures. Still, Mises hesitated.
From previous correspondents, Mises knew sure to be a money crank, so he sought to establish
a list of questions to which he would reply. Mises eventually peered on the talk show on
Thursday, March 17th, to discuss the gold standard compared to other monetary systems,
the regulation of the monetary circulation of a national economy, the role of central
banks in monetary policy, the creation of national currencies, and the theories of Silvio
Gazel, Germany's most popular money-crank who advocated new laws to encourage the spending
of money by special tax on hoarding, that is, on savings. Gazel's views found a spokesman
in the Eloquent and Authoritative Keynes.
In early April 1932, then, Mises eventually got the Cummer to adopt a resolution against
the artificial exchange rate of the shelling.
Albert Hahn wrote from Frankfurt, asking Mises to what extent he was responsible for the
contents of the Cummer report, to which Mises replied,
The resolution has resulted from a first draft that I wrote.
But after difficult and lengthy negotiations it has been revised to obtain unanimity through
The Austrian government did not change its course and by June a return to the old gold
parity was no longer possible without upsetting the price system, which had adjusted to the
circumstances.
The economic situation had considerably deteriorated and Mises was furious, fulminating in a letter
In Austria we stand on the debris of the interventionist and state socialist system. All of the public
firms have passive balances and considerable sums of tax money must be used to compensate
for these deficits. Unemployment grows and unemployment relief devastates public finance,
but the peak of the madness is the foreign exchange controls. He who seeks to study the
consequences. A thorough going state socialism, city socialism and interventionism should
pursue these studies in Austria where we enjoy government interventionism without gaps. We
have reached the point where those who merely argue in favour of protective tariffs and
against the prohibition of imports are decried as free traders. It was probably in these
days that Mises became a metalist. Having supported the gold exchange standard, he now
Mises here states that he advocated the classical old gold standard and not the gold exchange
standard, and that I changed my mind concerning the functioning of the gold exchange standard
as it happened more than thirty years ago.
More than twenty years earlier, in the first edition of his Theory of Money and Credit,
he had come close to poking fun at the simpletons who believed coins of precious metal were
for Money in some stronger sense than banknotes were. As a young man, he had come across
gold and silver coins only as collector's items. His father had a famous collection.
He had always understood the merit of a metallic standard to keep the quantity of money independent
of political manipulation, but he had never advocated the actual circulation of gold or
silver coins, but now the evidence was undeniable. Governments could not be trusted even with
and the Production of May. He remained a monetary metallist for the rest of his life. In a roundtable
discussion on the gold standard that took place in January 1948, Mises spoke only once,
and only to underline a point made by another speaker.
Under present conditions, no return to the gold standard is possible without a return
to an effectual circulation of gold coins. If gold coins are employed in daily transactions,
if everybody is used to receiving and giving away gold pieces, if people are accustomed
and to carry in gold coins for retail purposes, the public becomes aware of the fact that
gold is the nation's standard money and that the country is under a gold standard.
This cognizance is not merely pedagogic value, it enables the average citizen to realise
in time whether his government is clinging to sound monetary policies or whether it is
tampering with the currency system.
The weakness of a gold standard without effectual circulation of gold coins consists precisely
and the fact that it makes it extremely difficult for the average citizen to discern inflation
in its early stages. An effectual gold coin circulation makes the voter the guardian of
the gold standard. This is its main function. He was underlining something said by Spar.
Second Edition of Socialism The battles on the political front had their
Their impact on Mises's academic pursuits, especially on his teaching. The 1931-1932
private seminar met more irregularly, or at any rate was less well planned than usual.
At least some of the sessions apparently dealt with the theory of capital and the business
cycle featuring lectures by Machloub, Morgenstern and Bloch. His university seminar now focused
on methodological problems of the social sciences. Subjects dealt with in the winter semester
There were the relationship between theory and praxis, and between facts and theories,
the implications of the is-ought distinction, the universal validity of economic knowledge,
quantitative and qualitative knowledge, the relations between statistical, historical
and theoretical research, the meaning of Verstehen, behaviourism, the mathematical method, forecasting
in economics and economics and sociology. Mises had to begin the 1932 summer semester
was delayed because he had to attend two conferences of the International Chamber of Commerce and
also take part in a World Economic Conference in Berlin, which reunited politicians and
experts from all over the world to discuss the implications of the present crisis for
international commerce and finance. The ICC conference in Innsbruck took place
in the third week of April, the Welthandelswoche in the first week of May and the ICC conference
in Munich started on May 18th. The Weltwirtschaftskonferenz Berlin 1932 was part of a Welthandelswoche,
a week-long conference organised by the newspaper Berliner Tageblatt. Mises was back in Vienna
by Friday morning, May 6th, for urgent karma business. The seminar sessions continued the
discussion of the winter semester, dealing in particular with behaviourism and its relationship
with the approach of German historicism, the meaning of meaning in the social sciences
and its connections with utilitarianism, the concept of homo economicus, economics and
sociology, sociology and history, and again forecasting in economics.
Mises' biggest academic project in 1931-1932 was the preparation of the second edition
of socialism. Upon his return from the United States, he found on his desk a letter from
Gustav Fischer announcing that Fischer was running out of copies of socialism and inquiring
whether Mises would be interested in doing a second edition. Of course he would. The
first edition comprised 2,000 copies, plus 100 complementary and review copies, more
than a thousand of which had been sold within two years of publication, to the point that
in 1924 already Fischer anticipated a second edition for some time after 1925. Eventually,
Unfortunately, however, the sales did not confirm these hopes. Mises's friend F. G.
Steiner, a Paris-based banker, believed the main reason the book was not more popular
was the inadequacy of its German title. The prospect of learning something about Gemeinwirtschaft,
the communal economy, did not appeal to less educated readers. He hoped a new edition would
soon be forthcoming.
Even more so than when your book was first published, there is today a kind of defeatism
Mises began revising the manuscript, probably in the summer of 1931. In order not to increase
the length of the book, he had to cut some parts to compensate for additions. Following
suggestions by Robbins, for example, he added a comment on the impossibility of syndicalism
and also added a discussion of Haymann's Mehrwert und Gemeinwirtschaft 1922 as an appendix
to the new edition. Mises in fact reproduced in his book the entire survey on recent contributions
to the analysis of socialist calculation that he had published some years before in the
archive. The passages on Haymann stress the dynamic nature of the problem of pricing.
Prices for factors of production cannot simply be imputed backwards from the prices for
Mises sent the first 405 pages of the revised manuscript to Fisher at the end of October
1931. Then the process slowed due to Mises' greater involvement in the campaign against
foreign exchange controls. In order not to lose too much time, Mises had asked four friends
The Division of Labor worked well and on February 26, 1932 Mises sent the last pages to Fischer
by courier. Fischer received it the next day and immediately forwarded it to Lippert and
Company in Nuremburg. A month later, Fischer held the first copies in his hands and on
April 1st Mises received his complimentary copies in Vienna. He received 30 complimentary
Hardcover copies of the book, ten of which were hardcover, twenty of these sexual hardcovers
were sent to Vienna. Mises had Fischer send the remaining ten plus nine more copies, who
which he himself paid, to the following people. Hardcover copies went to Robbins, Anderson,
Sulzbach and Beveridge. Paperbacks went to Gregory, Hayek, both for Reims-Stewards, Adolf
Weber, Passau, Wiese, Oswald, Fleurus, Holm, Hahn, Röpke, Wolfram, Putzguss and Lederer.
The book was a financial success for Mises. He received a pre-paid 15% of the selling
price of a total volume of 1,500 copies and with royalties totalling 4,050 marks. But the
most gratifying result lay in the reactions from both friends and foes who honoured the
new edition as the leading anti-socialist and affirmatively liberal work within scientific
Economic Literature.
One reviewer said,
The battle between individualism and socialism, which by now has been waged almost 100 years,
has now entered its final phase.
In a few years or decades, at most, victory will be on one side or the other.
At the high point of this battle, Mises's book is a crucial action.
It is impossible to estimate its intellectual, economic and, in the long run, even its political
implications.
It was charged that Mises had not taken account of the most recent attempt to solve the problem
of socialist calculation, but they made no attempt to name or describe these alleged
new solutions. Another typical criticism was, to qualify Mises' ideas as utopian, some
critics apparently felt pity for Mises, whose radicalism had left him few allies. One such
critic wrote about Mises' tragic fate.
He advocates the liberalism of the so-called classical economist so unshakably and bluntly
that he has become an embarrassment to those who would normally agree with him. Mises disdains
any concessions in matters of social policy and ideology, and hence he provides a cheap
opportunity to many liberal theoreticians, who are just not as courageous as he is to
differentiate themselves from him in a self-serving and compassionate way. Inadvertently this
This critic had pointed out a great service that Mises provided for all those who were,
like the critic himself, opposed to government omnipotence, but did not want to reduce the
scope of the state as radically as did the Vienna economist. Mises put these half-baked
liberals in a comfortable middle-of-the-road position. They could make use of his arguments
without a full commitment to their practical implications. Mises made them appear less
It is true that Mises's radicalism alienated some of those who might otherwise have been
closer allies, but it also altered the thinking of many open-minded readers, those who were
willing to weigh his arguments against their prejudices. These readers often acknowledged
the pertinence of his analysis of socialism and interventionism. Mises's work made them
understand that capitalism must not be confused with the observed reality of the traditional
Economic Order.
One reviewer said, possibly the greatest merit of the work is that it shows that the present-day
shortcomings of capitalism, the so-called economic system of individualism, result to
a large extent from the fact that, for some time now, we have not had such a system but
ever more distort it in the interest of domestic and foreign policy.
Another.
In some circles Mises is called the last consistent representative of a liberal economic order.
He is certainly not the last, but after many years the first, who has dared to think through
all the consequences of such an order, and to erect and demonstrate a doctrine with unshakable
logic. The most enthusiastic responses came from younger economists, but these followers
did not expect Mises' argument to convert the mainstream any time soon. One of them,
Georg Halm, from the University of Würzburg, said Mises himself was too optimistic. I could
I find that Lederer in his amply unclear brochure centrally planned economy makes it obvious
is that socialist theory is completely bankrupt. In fact, the use of money is, in his eyes,
the only basis for economic calculation, but he feels to see that, in a society in which
the means of production are not privately owned, there is no pricing process for means
of production. Moreover, and characteristically, he falls prey to the other era of Kautsky,
in that he wants to use past prices as a starting point. The few pages dedicated to this problem
and deliver nothing new, and are even more confused than the previous justification attempts
by socialist writers.
Bresen, Meeting of the Verein für Sozialpolitik
On January 4th and 5th, 1932, in meetings of the Board and of the Committee of the Verein
für Sozialpolitik in Berlin, Mises met some of these colleagues whom he so overestimated.
He had unsuccessfully encouraged Hayek to attend the sessions, saying, doubtlessly, it will
be interesting. Maybe it is the last meeting before the abolition of usury. Brechung der
Zinsknechtschaft. The phrase abolition of usury alludes to point 11 of the National
Socialist Worker Party program of February 24, 1920.
Mises hoped to convince the Committee to have value theory and the economics of cartels
As discussed at the forthcoming plenary meeting in Dresden, both projects were thwarted when
the Committee, after a heated debate, decided to set the issue of national autarky, economic
self-sufficiency, through trade isolation, on the agenda.
Mises thought this decision was completely unacceptable, and that it had the potential
to destroy the Verein. There was no common ground for the discussion of autarky. Making
Being at the subject of discussion was bound to intensify rather than alleviate the clashes
among members. Disillusioned with the Vereins' willingness to promote productive scientific
cooperation, he did not even plan to attend the Dresden meeting, but changed his mind
when he learned from Spiethoff that there would finally be a subcommittee meeting on
value theory.
I have not yet entirely abandoned all hope that it will be possible to do fruitful work
The book within the Verein für Sozialpolitik all depends on the course of the Dresden meeting
and on the new president, said Mises in a letter to Georg Jan.
In preparation for this meeting, Spiethoff and Mises edited a volume on the problems of
value theory, Probleme der Wertlehre.
The chapters of this book were solicited from proponents and opponents of the Austrian theory
of value and prices.
The selection of the authors ensured that all major points of view could be expressed, superficially
the great divide was between the moderns, that is, advocates of marginal value theory
as the basis of price theory, and the Cacelian, kompart, Historicist, Gottel, Marxist, Oppenheimer,
and Universalist, Spann, opponents.
This divide was also reflected in the co-editorship of Mises and Spiethofe, who were known to
to be in different camps, but more to the point, the book was part of Mises's strategy
to spread the message that economic science was not a matter of mere personal opinion.
There are certain fundamental facts on which all past and present economists agreed, despite
all the differences separating the various schools. The subcommittee meeting took place
immediately after the plenary meeting, which was held on September 28th and 29th, 1932.
Mises gave the opening talk emphasizing that marginal value theory alone was able to explain
all economic phenomena, and that the different forms in which the marginal principle was
advocated were not nearly as incompatible as the opponents of economic science claim.
His speech was subsequently printed with that title in Mises and Arthur Spiethoff editors
Problems, Probleme der Wirtlehre, in Mises' book Grundprobleme der Nationalökonomie, translated
by George Reisman as The Controversy over the Theory of Value.
As one newspaper report put it, the meeting was attended by a large delegation from Vienna
and by advocates of the marginal utility school working in foreign countries. These participants
showed how productively the theories of the Vienna and the Lausanne schools could be further
developed. The discussion was less controversial than might have been expected because the
main opponents of value theory, Liefmann, Kassel, Spahn and Oppenheimer, had not even
come to take part in the meeting, neither had any of their disciples appeared. This
was a remarkable fact in its own right and was duly noticed in the preface of the proceedings.
The debate was then to a large extent a Viennese affair.
But the Dresden meeting was also a breakthrough from the point of view of contemporary history.
It was a high point of the renaissance of political economy in Germany.
During the preceding decade, economic theory had again become palatable in the places of
higher learning, where the historical school had for a long time reigned supreme.
Three publications in 1931 epitomised this change, and the central role Mises played
in it.
The most important of these publications was the third edition of Adolf Weber's textbook,
which in Mises' judgement was the most significant German-language textbook of economics in its
day. Weber had sent Mises a copy of his book in November 1931. Mises replied,
I greet the success of your book as a sign that public opinion is beginning a gradual
shift in the direction of sound ideas. Similarly, the Frankfurt Professor Budger published his
textbook on Monetary Economics, Lehrer vom Geld, in which he acknowledged Mises' achievements
and critically discussed Mises' views. Mises was very grateful. Some two years later, shortly
after Hitler had seized power in Germany, Mises stated that his Monetary Theory had
become in Germany, after the First World War, the dominant theory of the business cycle.
Last but not least, Georg Hörn published a revised edition of the late Ludwig Paulus
Standard Textbook on Capitalism and Socialism, based on Poehler's Notes.
The great bulk of the extensive editions brought a more radical rejection of socialist schemes,
bolstered by quotations from socialism and other of Mises' works.
In the same year, a PhD student of Halms in Würzburg, Carl Wagner, defended a doctoral
thesis that ripped national socialist ideology apart and received praise from Mises.
Mises said, your work needs to be welcomed not only as a scientific achievement but also
as a political deed. Wagner was one of several promising young economists who were eventually
swept aside by German National Socialism. The seeds Mises had planted in German soil
were in for a long winter. Most of them died during the Nazi episode. Those few that survived
experienced a short blossoming in the late 1940s and 1950s and helped reestablish a
market economy in the land of Bismarck and Hitler.
The 1932 Dresden meeting of the Verein gave a taste of what might have been possible if
Mises's campaign to demonstrate the libertarian political implications of economic science
had been allowed to run its course.
The first day of the meeting featured a session on industrialisation and unemployment.
Werner Zombart was now the vice president of the Verein and in charge of selecting the
invited lecturers.
He had difficulty finding lecturers he considered suitable.
Eventually, he opted for his disciple Manuel Zeitzel of Zurich and for Gerhard Kolm of Kiel,
but neither one endorsed the Zombartian line, which presented the massive unemployment in
Germany and Austria as a consequence of economization and streamlining in industry.
They argued that such technological changes could not cause unemployment on a massive
and permanent scale.
Zaitsev contended that the real reasons included high tariffs, and Cohn pointed to the inflexibility
of wage rates and other prices, which resulted from powerful labour unions and cartels.
Cohn also stated that the selection process of the market was hampered by modern bankruptcy
laws which were too lenient on debtors and by subsidies paid to unprofitable firms.
Clearly, these views were not to the liking of Zombart or the Verein establishment.
The next day of the meeting, Thursday, September 29, 1932, demonstrated even more forcefully
how much economic common sense had displaced the old allegiance to the interventionist
creed.
The sessions were supposed to deal with the question of autarky, but the meeting once
again took an entirely different course from what the Verein leadership had anticipated.
Chapter Two, Zombart had had difficulties finding suitable candidates who could make
a substantial case in favour of autarky. He eventually settled on Konstantin von Dietze
and Emil Rederer, who were only moderate autarkists at best. Dietze half-heartedly defended autarky
by arguing that food freedom was necessary in war and that agrarian workers were physically
The High Point of the meeting approached when
Amy Lederer, with the full authority of his position at the University of Berlin, in a
brilliant speech that was based on the traditional arguments of the Free Trade Doctrine and on
the most recent statistical data, argued that no country was less suited to engage in protectionism
than Germany, Indian Sewing Debate on Otaki, almost all the speakers emphasized that it
was wrong to oppose free trade as contrary to the national interest, and that it would
be wrong to make free trade policies conditional on the trade policies of other countries.
Commenting on the meeting for a major Vienna business newspaper, Luisa Sommer noticed the
historical irony of the Vines majority now advocating free trade and free markets. Sommer
Sommer traced the emergence of this new majority to the early 1920s, when Heinrich Herkner's
endorsement of Mises's socialism caused a crisis of social policy. Mises's ideas,
wrote Sommer, were the primary agent of the transformation of Germany's intellectual
landscape in the 1920s. The ideas that Mises developed in his book have affected the entire
ideology of the Verein für Sozialpolitik and turned it toward an endorsement of the
and the free market economy, it is from this point on that the Verein has unmistakably changed
its goals. It has now become a battlefield for the debate of questions of economic principle
and economic order. It is a milestone of the history of this association that free market
ideas have had a renaissance at this year's meeting, that the fight against autarky, against
the whole system of restraints and regulations that fetters economic life, has been taken
When the Nazis rose to power, they immediately began with their program of Gleich-Schalke
at all, enforced conformity, literally synchronisation, whose goal was to subordinate all organisations
to the central Nazi organisations that controlled the Federal Government.
Faced with the choice of becoming part of the Nazi apparatus or self-dissolution, the
Verein honourably chose to disband in December of 1936.
Even more honourably, Mises quit the Verein three years earlier in immediate protest against
The Gleichschaltung Laws Devine was re-established after the Second
World War in 1948. Mises did not wish to have anything to do with this post-war organisation.
Mises was also one of the initiators of an international effort to provide new career
opportunities to the academics, whom the Nazis expelled from Germany. At the end of
March 1933 Beveridge and Robbins were in Vienna and met Mises for dinner. Their Austrian friend
stormed into the lobby of the Hotel Bristol, breaking the news that the Nazis had fired
a number of Jewish academics, such as Bonn, Mannheim and Kantorvitz.
On the spot, the three men discussed what could be done to help these German socialists.
Would it be possible to set up relief funds in France and Britain to employ them?
Beveridge announced that he himself would oversee a relief action to LSE.
Back in London, Robbins organised a meeting of LSE's professorial council which voted
for a scheme of voluntary deduction from staff salaries to finance the relief fund. He also
convinced Beveridge to support an even larger scheme and eventually a relief fund was created
on a national scale. In a letter to Mises in which he reported on progress, Robbins praised
his correspondent for having seen the practical implications of the new situation and for
Economic Theory Completed
In the Dresden discussions of value theory, Mises had emphasized that a productive debate
could take place only among those who did not rule out the possibility of a universally
valid social theory. Those who excluded this possibility on an a priori grounds were forced
to endorse what Mises would eventually call polylogism, the extreme historicist hypothesis
Note that there is no such thing as a generally valid social theory, because the structure
of the human mind was in a state of constant flux. According to this hypothesis, there
is not just one universally valid theory of human action, there are in fact several different
logics of action.
The most explicit champion of polylogism had been the socialist Josef Dietzgen, 1828-1888,
In 1929 the case for polylogism came into the spotlight of scientific debate with the publication of Carl Mannheim's Ideologie und Utopie. It quickly found support in all political camps. Polylogism was an expedient tool to avoid the scrutiny of arguments, especially those made by economists, and to replace the sober process of reasoning with the emotional appeal of name-calling.
could simply declare all theories they disliked as bourgeois theories without entering into a detailed discussion of their contents and arguments.
Not surprisingly, the German racists were eager to adopt the same comfortable strategy to avoid critical debate of the ideology of the Aryan master race.
Mises recalled, Professor Biberbach of the University of Breslau distinguishes between Anglo-Saxon-Franco-Jewish mathematics and German mathematics.
Professor Lenard, the winner of the Nobel Prize, believes that only German physics are true, whereas the physics of all the other nations are simply nonsense.
The author was a medical doctor.
A few years later, Mises explained the historical setting of this intellectual current.
Until the middle of the 19th century, everybody took it for granted that the logical structure of the human mind is the same with every human being.
All human relations are based on this assumption. Wherever men met men, they never had any doubt in this respect.
All philosophers and all laymen agreed were unanimous in this belief.
But in the middle of the 19th century, Karl Marx expanded a different view.
According to Marx, the logical structure of mind is different with the members of different classes.
The human mind does not find truth but ideologies. Ideologies seem true in the eyes of the members
of the same class, but are meaningless in the eyes of members of other classes. Every
class produces its own ideologies, which later are debunked by ideologies of other classes.
In this way, Karl Marx stigmatised the philosophy of John Locke as a bourgeois philosophy. Later
Marxians called Schopenhauer the philosopher of the rentier class and Nietzsche the philosopher
of Big Business, Lenin, the founder of the Third International, and Friedrich Adler,
the secretary-general of the Second International, investigated whether the physical theories
of Mach are bourgeois or not. The Einstein theory of relativity is branded by some Bolsheviks
as bourgeois and reactionary. In this lecture, Mises presented material that he eventually
published in Omnipotent Government. In the 1932 debate in Dresden, Mises pointed out
that any defense of the polylogistic hypothesis involves a self-contradiction since the exchange
of arguments only makes sense if the logical structure of the human mind is independent
of social or racial class.
A Marxist, and I understand by this term not only the members of a political party that
swears by Marx, but all who appeal to Marx in their thinking concerning the sciences
If thought is conditioned by the thinker's social existence, how can he understand me
and how can I understand him?
If there is a bourgeois logic and a proletarian logic, how am I the bourgeois to come to an
and understanding with him the proletarian.
Whoever takes the Marxist point of view seriously must advocate a complete division between
bourgeois and proletarian science.
And the same is also true, mutatis mutandis, of the view of those who regard thought as
determined by the race or the nationality of the thinker.
The Marxist cannot be satisfied with separating classes in athletic contests with bourgeois
and proletarian Olympics, he must demand this separation, above all, in scientific discussion.
The fruitlessness of many of the debates that were conducted here in the Verein für Sozialpolitik,
as well as in the Gesellschaft für Sozialurgie, are to be attributed more than anything else
to the neglect of this principle, in my opinion.
The position of dogmatic Marxism is wrong, but that of the Marxist who engages in discussions
with representatives of what he calls bourgeois science is confused.
The consistent Marxist does not seek to refute opponents whom he calls bourgeois, he seeks
to destroy them physically and morally.
He had only touched on this point which he now regarded as fundamental in a paper he
wrote for Probleme der Wirtlehre, the volume that served as a basis for the discussion
in Dresden.
In a paper he had written in preparation for the Dresden meeting, Mises had highlighted
and the wider significance of polylogism, characterizing it as a romantic revolt against
logic and science, and pointing out that it does not limit itself to the sphere of social
phenomena and the sciences of human action, it is a revolt against our entire culture
and civilization.
In Dresden, Amy Lederer argued that this argument was considerably overblown. Mises
was wrong in assuming that the being generates consciousness theory implied that every single
The fundamental instance of thought is ideology, in the Marxist sense of an intellectualisation of economic interests.
According to Lederer, nobody claimed that there were no universally valid theories, logic and mathematics certainly counted,
but neither could it be denied that there were other disciplines, the basic categories of which were largely dependent on the historical situation,
that is, on the social structure of the time and on the social position of the thinker.
Later I went on.
Now the question is whether economics belongs to the first category of sciences, which totally
rely on pure intuition, rein unshau, and logic, or to the socially determined fields of knowledge
in the sense of modern sociology, or, if you wish, in the sense of Marxism.
Here von Mises apparently shares the view of the physiocrats.
The latter believed that the physiocratic theory was, as obliging for each rational thinker,
as the Theorem of Pythagoras.
Hervon Mises apparently claims the same rank, the same validity for economic theory in its
entire scope, and this is what I deny.
It is true that economic theory has a kernel that is independent of historical economic
developments, but this general or exact or pure theory, for which I feel affinities,
is not the theory of economic action per se in all its historical phases.
The substance of this theory is a narrow one.
It essentially covers the static process or stationary circulation Chryslov. It ultimately
deduces all consequences from the principle of economising, as applied to man in his dependency
on nature. In his rejoinder, Mises pointed out that static economic theory did not merely
apply to static processes, but especially to change. The word static did not mean that
The subject of inquiry was a stationary economy. Rather, it referred to a specific method of
analysis which studied the implications of a change of one datum setteris paribus, that
is, under the assumption that all other data remained unchanged. But Mises still had not
clarified his views about the epistemological character of economic science. This was the
task to which he proceeded upon his return to Vienna, where he finished an essay on the
Task and Scope of the Science of Human Action
Mises planned to publish this piece as the introductory chapter of a new book on fundamental
problems of economic analysis. The book would contain various essays he had published in
the past five years in the fields of epistemology and value theory. The idea was to clarify
the very foundations of economic science not only by a general discussion of its philosophical
The book would therefore contain both an introduction to economics from the point of view of the
philosophy of science and actual economic analyses of value and of inconvertible capital.
The first three chapters on epistemology consumed some 60% of the volume.
The next four chapters dealt with value theory and the concluding essay was his contribution
to the Verein Stuart-Festschrift. Mises finished revising the manuscript over Christmas 1932,
and on January 3, 1933, wrote to Gustav Fischer to propose the book for publication. Fischer
did not believe the book would sell well, but agreed to publish it. By mid-April, Mises
received the first copies of Grundprobleme der Nationalökonomie, Fundamental Problems
of Economics.
Almost three decades later, Mises's American student, George Weissman, produced a translation.
The American edition eventually appeared under the somewhat different title of Epistemological
Problems of Economics.
His new essay on the task and scope of the science of human action was chapter one.
It would be the keystone of the system of economics Mises had been working on for years.
Taking up Ladler's challenge, Mises argued that economic laws were true a priori on a
par with the laws of logic and mathematics.
To the present day, this has remained one of his most controversial tenets, but the
debate resulted, in most cases, from a misunderstanding of his position.
Twentieth century social scientists typically argued that science was always based on experience,
and that any proposition that was based instead on some arbitrary a priori principle was therefore
not scientific. Mises agreed. He had been a proponent of a rigid fact orientation since
his early years as a student. He had enthusiastically supported Max Weber in the controversy on
value judgments, arguing that the proper sphere of science was the world as it is, not as
it should be. Mises himself rigorously held to the notion that true science was always
So why were his epistemological views controversial?
Most other social theorists believed that the facts relevant for the social sciences
could be known through observation-based methods of inquiry.
Here Mises disagreed.
In the tradition of Carl Menger's quest for empirical theory, he believed that economic
theory describes facts of the real world such as the one that human beings make choices.
Thus, he insisted, for the purposes of science, we must start from the action of the individual,
because this is the only thing of which we can have direct cognition.
And he also stated, science cannot proceed otherwise than discursively.
Its starting points must have as much certainty as human knowledge is capable of, and it must
go on from there, making logical deductions step by step.
It can begin as an a-prioristic science, with propositions necessary to thought that find
their support and warrant in apodictic evidence. Or, as an empirical science, it can start
with experience. But facts of this sort cannot be observed. It is impossible, for example,
to look at choices, to smell them or touch them. Economics is not an empirical science
in this sense, but it is a science nevertheless because the facts it deals with are true,
The Science of Human Action that strives for universally valid knowledge is the theoretical
He went on to argue that the theory of human action ultimately coincides with the science
of logic.
When thought serves human life and action, it is not absolute thought, but the forethought
directed toward projected acts, and the afterthought that reflects upon acts done. Hence, in the
last analysis, logic and the universally valid science of human action are one and the same.
How did Mises address Liderer's argument that only a part of economic theory was universally
valid, namely, the aspect that dealt with the equilibrium relationship between human
Human Action and Nature. Mises argued that universal validity does not imply that all
laws of human action apply in every single instance of human behaviour. Rather, it means
that a law applies whenever the conditions specified by it are given. Whether or not
they are is an empirical question, but once this is stipulated, the law holds true on
a priori grams. For example, we are unable to grasp the concept of economic action and
of Economy without implying in our thought the concept of economic quantity relations
and the concept of an economic good. Only experience can teach us whether or not these
concepts are applicable to anything in the conditions under which our life must actually
be lived. Only experience tells us that not all things in the external world are free
goods. However, it is not experience but reason which is prior to experience that tells us
What is a free and what is an economic good? Some of the empirical conditions under which
human action can take place are universally given. For example, all human actions occur
during the passage of time and all acting persons age in the course of time. Other empirical
conditions, such as the use of money, are of a more contingent nature. But however universal
or contingent these conditions are, it remains true that once they are given, they cause
has certain objective effects, which are the subject matter of the a priori theory of human
action.
Because the theory of human action does not rely on data gathered through the senses but
rather on a priori facts that we come to know through discursive reasoning, it cannot possibly
be verified or refuted by experience gained exclusively through observations. Mises highlighted
the practical implications of this fundamental epistemological fact.
Human action always confronts experience as a complex phenomenon that first must be analyzed
and interpreted by a theory before it can even be set in the context of a hypothesis
that could be proved or disproved.
Hence the vexatious impasse created when supporters of conflicting doctrines point to the same
historical data as evidence of their correctness.
The statement that statistics can prove anything is a popular recognition of this truth.
No political or economic program, no matter how absurd, can in the eyes of its supporters
be contradicted by experience.
Whoever is convinced a priori of the correctness of his doctrine can always point out that
some condition essential for success according to his theory has not been met.
Each of the German political parties seeks in the experience of the Second Reich confirmation
of the soundness of its program.
Studies and opponents of socialism draw opposite conclusions from the experience of Russian
Bolshevism. Disagreements concerning the probative power of concrete historical experience can
be resolved only by reverting to the doctrines of the universally valid theory, which are
independent of all experience. Every theoretical argument that is supposedly drawn from history
The Theory necessarily becomes a logical argument about pure theory apart from all history.
Twilight in Vienna The discussion of the epistemology of economics
was continued in Mises's private seminar in Vienna where his views found far more opposition
and more competently offered than in Dresden. Several members of the seminar, including
Dr. Friedrich Kaufmann and Albert Welder were also members of a discussion group of
the positivistic philosophers, the Vienna Circle. These men brought a completely different
perspective to the problems, and the clash of their views with the opinion of the seminar
director was a highlight in the history of those gatherings. Much of the fame that later
accrued to the seminar through the recollections of its prominent participants was due to the
and methodological debates in the last years of its existence. Mises characterized them
as vivid, even outright passionate. The brilliance of the discussions in the academic year 1933-1934
happily combined with the presence of a significant number of distinguished guests. Mises was
at this point more than just a well-known author. He was a recognized leader among German-speaking
Economists. After his election to the board of the Verein Für Sozialpolitik in early 1929,
the private seminar attracted an increasing number of guests, especially from foreign
countries. Alvin Hunzen came in 1929, Frank Knight for a stint in May 1930, Carver, Batson
and others in 1931, but the absolute high point was in 1933-1934 when four scholars
Viewers from Japan, Ichitani, Midutani, Otaka, Takemura, plus Hugh Gateskell, Ragnar Norske,
Karl Pribram, Francois Pierrot, Gerhard Tittner and Immanuel Wintonitz, to name just the more
prominent guests attended the sessions. During his sojourn in Vienna, Hugh Gateskell
set out to make a new translation of Boehm-Bawerk's Capital and Interest, which was still available
only in a translation from the first edition. Mises later recalled that other English economists
too were ready to shoulder the task, and even publication was not a problem in these days
when the public interest in Austrian economics was at its peak in Great Britain. They abstained
from this undertaking because they expected that Gateskill would execute his plan. But
the young man in Mises' Vienna seminar never finished the job. Gateskill opted instead
for an acceleration of his career in politics, becoming Minister of Fuel and Power in the
post-war British Labour government.
On March 9th, Mises gave the opening talk to a debate that would fill the next three
months and which more narrowly concerned the question of whether economics was an a-prioristic
science of human action.
Mises presented his case and also addressed the position of Kaufmann, who held that economic
Economic science was based on potentially fictional stipulations arrived at through
conventions. Mises' paper highlights the reason why his position was not very convincing
to the other participants. More than in his previous written essays, he stressed that
economic theory was an a priori discipline because it could not be verified or refuted
in laboratory experiments. This line of argument was rather unsatisfactory because it seemed
and to draw epistemological conclusions from a mere technical difficulty, at any rate it
was unpersuasive to the next four presenters, Felix Kaufmann, Robert Welder, Erich Schiff,
Oskar Morgenstern. In the wake of the economic crisis in 1931, the Christian socialists had
proposed a coalition government to the socialists under Bauer. When Bauer refused, voters shifted
increasingly to the Austrian National Socialists. Christian Socialists now believed that the
best way to hold back the tide of National Socialism was to use authoritarian methods
to suppress opposition to the government. These tactics were decisively intensified
after the National Socialists rose to power in Germany on January 30, 1933. Many observers
expected that Austria too would now fall into their hands, especially since they supported
their Austrian branch organization through media campaigns and terror bombings against
the Austrian government and its allies.
Desperate in its quest to stop the Nazi tide and keep Austria independent, the government
under Engelbert Dolfus concluded an alliance with fascist Italy, but also resorted to authoritarian
methods in its domestic policies.
The alliance with Italy was cemented in the Protocols of Rome signed on March 17, 1934.
Dolfus abolished the parliamentary republic, using a suitable opportunity on March 4, 1933,
when all three presidents of the parliament stepped down in protest against a questionable
procedure. The last of the three officially convened the parliament for March 15, but
now Dolfus stepped in, convinced the Christian Socialist parliamentary faction to support
his coup d'état, and sent in the police to prevent a consolidation of the pro-German
and Social Democrats and German Nationalists on March 15. In the course of the next few
months, Dolfuss also abolished the Communist Party and the Austrian branch of the German
Nazi Party. Henceforth, he ruled dictatorially, on the basis of an emergency law passed in
1917. On May 20, he established the Vaterländer Schafront, Patriotic Front, to rally all
Mises became a member on March 1st, 1934, at the Patriotic Front's Commer Branch Office.
Membership was probably mandatory for all employees of public and semi-public organisations.
Mises's membership card, number 282632, can now be found in the Grove City Archive.
He was also a member of the Werke Neues Leben, a subdivision of the Patriotic Front.
Ideologically, de Dolfour's regime relied on state-of-the-art Catholic political and
and Social Theory, as embodied in the writings of Watmach Spann and Pope Pius XI, both of
whom glorified social order based on the respect of the professional Ständer or estates.
Arguably his true significance lay elsewhere. Historian Ernst Hoare presents Dolfus as the
first and only statesman of the first Austrian Republic who consciously and explicitly reclaimed
an Austrian nation as distinct from the German nation and who framed his policies accordingly.
While Spahn's view had a deep impact on the German-speaking world, his influence could
not match Pius XI's encyclical Quadragissimo anno, 1931, which was a shot in the arm for
the corporatist movement. As one of Mises's correspondents from Switzerland reported, young
Young Catholic politicians were entirely imbued with its ideas, even more than those of Otmar
Spann. Arguably, these young politicians gave the papal encyclical a stronger statist reading
than was really warranted by its contents. Mises would later acknowledge that the man
who wrote the first draft of the encyclical, Jesuit parter Or von Nell Boining, was one
One of the few German economists who in the interwar period advocated economic freedom.
In February 1934 the socialists rose one last time against the Dolfus dictatorship when
the police tried to seize a social democratic arms depot. In the provincial town of Linz,
Dolfus had their revolt bloodily repressed and lost no time using the opportunity to
oust the social democrats from parliament. The leftover deputies then voted for a new
The New Constitution was proclaimed on May 1st, 1934. On July 25th, 1934, Engelbert
Dolfus was murdered in the wake of an attempted nationalist socialist coup d'etat. German
troops then marched on to the northern border of Austria and were called back only because
Mussolini had concentrated his army on the southern border, pledging to guarantee the
country's independence. From that day on, Austria's fate lay in the hands of the Italian
government. Italy changed its alliances in the autumn of 1936 when France and Great Britain
and sanctioned the Italian invasion and annexation of Abyssinia.
The new alliance between Hitler and Mussolini spelled the doom for Austrian independence.
In the course of these events, life in Vienna became increasingly unpleasant for Mises,
as in the First World War there was once again an official government censor.
For some years Fritz Machlup had written weekly editorials for the Neue Freie Presse.
He stopped in May 1934 when it became pointless to write on the few topics still free from
censorship. At that point, Machloub received a Rockefeller stipend to go to the United States
following in the footsteps of Virglin and Habler. Now Mises himself would leave to the
great regret of his circle of friends and colleagues, who bid him farewell at the high
point of their many years in his private seminar.
Frederic Skauffmann rhymed one last time.
Farewell to Professor Mises. What is going to become of the Mises Kreis in the year that's coming?
Geneva can't for all suffice. My fingers won't stop drumming. The question will not leave me be.
This seminar means everything to me.
Das Mises Kreislied. Liebe Kinder, weil heute Freitag ist, gibt es Mises Privatseminar.
Und dort geh ich hin, auch wenn ein Mai-Tag ist. Süß und duftend, wie keiner noch war. Denn der Blütenduft muss vergehen. Doch die Wahrheit, die bleibt bestehen. Und die Wahrheit findest du im Mises-Kreis. Jeden Abend, zehnte und scheffelweis.
The first thing you have to do is to start arguing, because the debates have already started there.
I'm going to Mises tonight, because I love being there so much.
You don't really talk about economy, society and sense anywhere in Vienna.
And if you really want to understand that, you have to go to Mises too,
because you know that nowhere else but in the Mises Circle.
Is auch ein Problem noch so konsistent, traut sich gar nicht zu Tiere herein, Denn es weiß sehr wohl, dass Gefahr es rennt, aufgelost, binnen kurzem zu sein, Sind auch noch so hart manche Nisse, knackt man doch sie durch kluge Schlisse, Bis die Kerne uns auf der Zunge zergehen, Wie sonst nur noch die sissen Palinäen, Der ein glittiger Geist offeriert, dass das Schweigen nicht gar zu schwer wird.
Refrain
The song of the Mises Circle.
Come and gather all around, it's Friday. Time for Mises' Privatseminar. I'll be
there for sure, even if it's May, and the day is the sweetest thus far. Oh, the fragrance
fades, it is certain, but truth, you'll find, knows no curtain. In the Mises case,
it's always centre stage. Buckets full of truth remain the latest rage, and when you
begin to debate, you know that the hour will grow late. You'll find me with Mises tonight,
Do you know a problem full of nasty quirks? Come escort it to Mises's door. It will know
know full well this time that danger lurks, as it's whittled right down to its core.
Many shells, of course, know the same fate, nuts, so hard to crack, but at this rate they
will melt on tongues that no deductive prose, like the chocolate creams our friends so kindly
chose, making silence a happy refrain, but now let us all sing again.
Ten o'clock comes round and wisdom's filled our minds, but our bodies demand evermore
that Green Anchor calls and here our stomachs find, import tariffs to even the score, here's
where ear is our motto, have spaghetti and eat risotto, no one ever dreams how fast the
time can race, midnight rings, we take our favourite place in that nice little Künzler
Cafe, an ingenious end to the day, refrain, all the time it comes when we must question
Why is such questioning really that smart? Life goes on and on, it just keeps flowing by,
and we all play a very small part. We could swim along, take no notice of the tide's direction,
the world's focus. Should we not keep these thoughts at bay, push our cares aside and relish
Watch What's Today, and yet there's no trade-off at hand. Somehow we must take a stand.