Part 5 Mises in Geneva
Chapter 16 The Geneva Years
The economic crisis heightened political antagonisms throughout Europe. Fewer and fewer citizens
believed democracy could meet the current challenges. Only two alternatives seemed available,
both based on violence – either the dictatorship of the proletariat, or more precisely the
The dictatorship of labour union bosses and socialist party leaders or an authoritarian
dictatorship bent on restoring the old order. In the wake of a financial scandal on February
6th, 1934, two right-wing mass organisations demonstrated in the streets of Paris. The
angry mobs tried to storm the Palais Bourbon, whereupon the police opened fire, killing
The French government under Daladier stepped down and the violence spread to other countries
including Austria. Mises later said that it was the growing power of the Nazi party in
Austria that prompted him to leave the country. With this remark he did not refer to the government
of Engelbert Dolphus, which had reintroduced authoritarian corporatism into Austrian politics
Mix to resist the socialism of both the Marxist and the Nazi variety. Mises meant the Austrian
branch of the National Socialist German Workers' Party, which enjoyed strong backing from Berlin
and fought a daily battle to conquer the streets of Vienna. Dolphus's authoritarian policies
were in his view only a quick fix to safeguard Austria's independence, unsuitable in the
in the long run, especially if the general political mentality did not change.
In March 1934, Mises was delighted to receive an offer from the Geneva-based Graduate Institute
of International Studies to become a visiting professor of international economic relations.
He accepted immediately. However, he did not flee Austria as he would when the Nazis seized
control of the country four years later. He moved to Geneva in disgust, but he considered
the move temporary. Mises had been an employee of the Kama long enough to qualify for early
retirement, but he did not wish to burn his bridges and eventually arrived at an agreement
according to which he would do some work for it during his school vacations and be paid
half his former salary, as we learn from a letter dated October 31, 1934, from the Kama
Amtsdirektor zu Mises. The file also concerns salary statements for the years 1936 and 1937.
In both years, Mises had a gross annual income of 14,620 shillings. In early December 1934,
he returned to Vienna for the first time and worked some weeks in his old position. Thereafter,
he continued to work as a consultant and liaison officer for the Vienna Comma. He often came
Institute des Autitudes International Geneva had been a quiet town before the First
First World War, even though it already hosted the International Red Cross Committee. After
the war, it became the home of the International Labour Office, 1919, and of the League of
Nations, 1920. The latter was the result of an initiative of US President Woodrow Wilson.
The idea was to create an international political organisation that would resolve conflicts
between nation-states without resorting to war. Ironically, Wilson did not receive the
The League began its operations in 1921 without the participation of the man who had created
it. Geneva was chosen for its location because of the long-standing neutral status of Switzerland,
a status that in those days had more than mere nominal significance, and because Geneva
was culturally a French city.
One of the most pressing problems for the new international bureaucracies was the lack
of qualified employees. To cope with this problem, a Swiss director of the League named
William E. Rappard, 1883 to 1958, proposed the creation of a special bilingual school
for the advanced scientific study of problems of international politics and administration.
The school was to offer courses in French and English and make full use of the resources
of the League and the ILO in the form of specialized knowledge, documents and direct observation
of how international affairs were conducted in the new context of multilateralism.
Rappard was a diplomat and constitutional historian who combined in himself all the
qualifications necessary to breathe life into this project.
His mother was a scion of the Hoffmann-La Roche family from Basel. In July 1919, William
Emmanuel Rappard became secretary-general of the New League of Red Cross Societies, a position
he quit in 1921. Before 1919, he was already a member of the International Committee of
the Red Cross. His magnum opus was the Bundesverfassung der Schweizer Eidgenossenschaft, 1848-1948,
1848, Vorgeschichte, Ausarbeitung, Weiterentwicklung. He was not only a brilliant diplomat with
connections to politicians, scholars and statesmen, private firms and foundations as well as government
institutions in France, Britain, Switzerland and the United States, but was also a highly
respected scholar with appointments at Harvard University and the University of Geneva, where
he served as an influential member of the Academic Senate and even briefly headed the
and the University itself. Last but not least, he had the good fortune to enjoy the personal
friendship of Woodrow Wilson, his colleague at Harvard from 1911 to 1913. This certainly
proved to be helpful in more than one respect. Elected as rector in 1926, Rappard launched
the new School of International Political Relations as a joint venture of the University
of Geneva, which provided academic affiliation and oversight, and the Rockefeller Foundation
in New York, which pledged to finance the school in cooperation with the City of Geneva
and the Swiss Federal Government.
Rothbard had been in touch with the Rockefeller Foundation since 1924, or more precisely with
the Laura Spellman Rockefeller Memorial Fund. In 1926, Rockefeller representative Dr. Abraham
Flexner pledged five annual payments of US$20,000 to the Geneva Department of Education, giving
Giving the green light to the creation of the school, this was the same Flexner who
had written the famous Flexner Report, Medical Education in the United $tates and Canada,
a report to the Carnegie Foundation for the Advancement of Teaching, 1910, which led to
the closure of four out of six medical schools in the United States.
Repar hired the Frenchman Paul Montoul as its first director. The school opened its
The Rockefeller Foundation's pledge of financial support was extended and increased in subsequent
years, and the Foundation would continue to be the main financial sponsor for nearly twenty
years. By 1938, the School was receiving annual payments of US$80,000, and by March 1948,
had received a total of 1.4 million. Rappard and Montou had first met at the Versailles
Peace Conference in 1919. Rappard had been granted Special Diplomatic Observer status
due to his personal acquaintance with Woodrow Wilson, and Montou was the principal interpreter
in the Allied camp and wrote the official records of the Council of Four. During the
war he had served as a personal interpreter between his college friend Albert Thomas and
Lloyd George, both of whom were commissioned to coordinate the reorganization of the British
and French munitions industry. At the end of the war, George was Prime Minister and Thomas
could soon become the first President of the International Labour Organization in Geneva.
A die was cast, Montou's new career was made. Rappard had known Montou already through his
writings on economic history, which had won Montou an excellent international reputation.
As a young man, he had published a monograph on the Industrial Revolution in the 18th century,
which brought him quick fame and catapulted him into the higher strata of French academics
and politics. A few months after the Versailles Conference, he became Rappard's colleague
in the Directorate of the League of Nations. Giving his academic and political background,
he was an obvious and excellent choice for the new school.
Rappard later joined Montoux in the management of the Institute and together they led it
for about 20 years.
The harmonious cooperation between the two men proved to be the foundation of the Institute's
success and its cordial atmosphere, which made it attractive as a destination for scholars
from around the world.
The position that Mises would hold for six years was a one-year renewed visiting position
for economists of international reputation.
Its predecessors had been Samuel Patterson, Philadelphia, Frank Graham, Princeton, and
Jacob Weiner, Chicago. Other recent visiting economists of international pedigree were
Gustav Kassel, Stockholm, and Theodore Gregory, London. It might well have been Gregory who
brought Mises to Geneva, they had known each other for many years, and in 1933-1934 cooperated
closely in the International Chamber of Commerce. Michael Halperin later stated that Ropin and
the economists had particular affinities with Charles Rist, Jacques Ruff, Jacob Weiner,
and Lionel Robbins.
All the initiative could have come from someone else, Professor Alfred Zimmern, for example,
who ran the Geneva School of International Studies and had asked Mises in December 1929
Who Recommends Suitable Students for Scholarships
Simon was a professor at the University of Geneva and Head of International Affairs at
the Institute for Intellectual Cooperation. Before the establishment of the Institute,
he had run summer vacation schools on international affairs, the Simon School, for some years.
He then moved to Oxford University. In any case, it's fairly certain that Mises's
long-standing and close association with the Rockefeller Foundation proved to be beneficial
once again. He himself had been very active in helping colleagues from Germany find new
jobs abroad after Hitler rose to power in January 1933, and at least some of these new
positions were likely financed by the Rockefeller Foundation. It was natural, therefore, that
he himself received support once the political situation in Austria became untenable for
him. This was certainly the case after the violence of February 1934 and its aftermath.
It would be an exaggeration to say that Mises was on the payroll of the Rockefeller Foundation.
This was effectively precluded both by Rappard's insistence that funds be received with no
strings attached, and by the co-financing of the Institute from Swiss sources. The fact
remains that during the Geneva years Mises' salary was paid to a large extent out of Rockefeller
money, and so things would remain for the next decade.
With strong financial connection, dependence was downplayed by all sides. In 1942, Tracy
Kidridge wrote in a letter to the US State Department that the Foundation has been familiar
with the work of Professor von Mises for more than ten years and has contributed to it research
projects under his direction in Vienna and in Geneva, and to his present stipend at the
National Bureau of Economic Research. In fact, the Rockefeller Foundation paid to the NBER
academic life Rappard quipped that the institute owed the
excellence of its teaching staff to Hitler and Mussolini. A case in point was Guillermo
Ferrero, who had been under house arrest in Italy before coming to Geneva as a professor
of history, and it was also true for men like Mises, Kelsen and Röpke, who found in the
institute a political safe haven. In Kelsen's case, language also played a role to the extent
that he was fluent in French but had difficulties with the English language. When Kelsen was
ousted from his chair at the University of Cologne in 1933, he received offers from the
Institute, from LSE and from the New School for Social Research. The language issue prompted
him to opt for Geneva, where professors could teach in French. Mises' command of English
was also much weaker than his French. Once they located on the shores of Lake Geneva,
These refugee scholars discovered that their new school also offered a congenial social
and intellectual atmosphere. Mises arrived in the fall of 1934 and took an apartment
on 16 Chemins Grigues, literally the war path, but after the first extension of his visit
he moved to nicer accommodations on Trois Chemins d'Humain. At that point the permanent
faculty featured in addition to Rappan and Manteau, Eugène Borel, Mark Eastman, economics,
Hans Wehberg, International Law, Maurice Bourquin, Diplomatic History, Bittman Potter, Political
Science, Paul Guggenheim, International Public Law, Guillermo Ferrero, Modern History, Karl
Burkhardt, Modern History and Hans Kelsen, Law. The personal relationships among these
men appear to have been extraordinarily cordial by the standards of academic life at any rate.
What is amazing is that there was something like a social life there at all. These famous
Mises scholars did what other professional groups did as well – exchange visits, entertain
one another at home, and become acquainted with the family members of their colleagues.
And they liked it. Mises was apparently most at ease with Rappard, Montoul, Bouquin and
Ferreiro. He also associated with scholars from the League of Nations Economic Intelligence
Research Unit, Loveday, Habler, Tinbergen, Mead, Koopmans, Pollack, Fleming, Nurkse,
Kontliff and Hilgert, the International Labour Office, Carl Primoram and the Geneva Research
Centre, John B. Witten. The most immediate common bond among these groups was that they
all depended on funding from the Rockefeller Foundation which in those very years launched
a massive international programme of business cycle research with a special focus on economic
Stabilisation. The foundation not only funded the economists working at the League of Nations
and at Rappard's Graduate School, but also business cycle institutes in Louvain, New
York, Paris, Sofia, Vienna and Warsaw. Its offices were careful not to impose any research
agenda, but their wishes could not be ignored. Thus, a group of financially endowed laymen
had a decisive impact on the path that business cycle research would follow over the course
of the coming decades. The League's authority and Rockefeller's money gave leadership to
people such as Alexander Loveday and Alvin Hansen. Business cycle research would henceforth
be conducted with an increasingly quantitative orientation.
By the time Mises moved to Geneva, he was already an anachronism, a vestige of the early
Rockefeller involvement in the social sciences. These developments were noticeable but not
yet dominant in 1934. Mises and others could conduct their research as they saw fit, and
in Geneva they could do it under the most pleasant circumstances. Much of the Institute's
conviviality was related to size. Throughout the 1930s the school remained small and virtually
free from the plague of bureaucracy. Its administration counted a mere six heads and one part-time
accountant. Student numbers almost never exceeded 100, and just under half of them were in the
Malthout was not present all the time. Already in 1928, he had moved his home to Paris because
the city on the Seine offered better educational possibilities for his children and also because
he continued to work on the official records of the Versailles Conference. This had prompted
Rapa to join him as a co-director of the institute in the same year. These residential scholars
were complemented by one or two visiting professors who stayed for a semester or a year, and there
were also guest lecturers who gave high-profile short courses, which typically ran for a week.
The combination of these circumstances made for something approaching academic paradise.
Rapa explained the recipe.
I know of no better means of being useful to advanced students than placing at their
disposal as completely and as informally as possible the most eminent specialists available,
if these specialists are well chosen, not only for their intelligence and erudition,
but also for their character and if they are made to realize that their sole professional
duty is to contribute to the progress of science through their own work and to advise and assist
The advanced students I believe our job is practically done. Each professor was free
to choose the subject of his courses and seminars. The only constraint was to give from time
to time some introductory class for non-specialists. In practice this meant that Mises, on top
of the three hours he was required to teach anyway, occasionally had to give an introductory
course on economics for non-economists, which he did in rotation with the other economists.
The school occupied the basement and first floor of the splendid Blondamour mansion, located
on the border of the old city centre at 5 Promenade du Pain.
Mises started lecturing on October 25, 1934. He gave a two-hour seminar on international
finance and a one-hour course on the international aspects of monetary policy, which he held
Thursdays from 5.15 to 6.00 pm. In one of the first sessions on November 15, 1934, he
He gave his inaugural lecture on the gold standard and the problems of controlled currency.
Apart from the three hours of required teaching, Mises was free to pursue his research as he
saw fit, and all of this at a very comfortable annual salary of 25,000 Swiss francs or 233.375
ounces of gold, which corresponded to some 8,177 US dollars in the 1930s and 15 times
as much in our day.
For years he had told his students that high salaries, combined with few obligations, were
the prime factor for the low productivity of university professors, and a few years
after he had gone to Geneva, Hayek told him about a discovery he had just made. Adam Smith
too had held this opinion of the consequences of high salaries for academics.
As Adam Smith quoted in Hayek's letter to Mises dated October 15, 1937, I have thought
What a great deal upon this subject and I have inquired very carefully into the constitution
and history of several of the principal universities of Europe. I have satisfied myself that the
present state of degradation and contempt into which the greater part of these societies
had fallen in almost every part of Europe arises principally first from the large salaries
which in some universities are given to professors and which render them all together independent
of Their Diligence. Now was the opportunity for Mises to prove himself wrong by finally
writing his general treatise on economic science, a project he had postponed twenty years earlier
in anticipation of the coming war. His appointment and the lectures on money coincided with the
publication of the English edition of his monetary treatise. After many years, Batson had finally
completed the translation with Robinson's help and published the work under the title The Theory
It was the first foreign edition of a Mises book, perfect timing to support the new professorship in International Economic Relations.
Mises had pursued a hands-off policy with his translator, a policy he maintained for the rest of his life.
But while laissez-faire is an unshakable maxim as far as the limitation of governments is concerned, it does not always apply in private affairs.
I am outright horrified about the since distorting errors that I have found in French and German translations of my English publications, and in English and French translations of my German books.
In the present case, for example, the title of the English edition, Theory of Money and
Credit, certainly made for a smoother reading than the more literal Theory of Money and
Fiduciary Media, but it blunted the title's edge. The point of the original title was
precisely to highlight the particular character of fiduciary media, which the book showed
distorted the operation of a monetary economy. For future scholarship, Mises had to develop
his English. In a letter to Mahlub, he observed that one of the practical consequences of
Hitlerism was to reduce the importance of the German language.
The future belonged to English, and to practice, Mises decided to give his institute lectures
in English instead of French. In light of subsequent events, his decision turned out
to be extremely fortunate. It was the general policy of the institute that professors and
Both students were required to understand both French and English, but it was customary
to speak the language in which one felt most at ease. It was therefore entirely normal
that a question be asked in English and the answer given in French. Similarly, in written
examinations, students could use either language, regardless of which language had been used
for the question. Even greater liberties existed for written homework and doctoral dissertations,
which could also be written in German or Italian. This information is taken from the school's
catalogue pertaining to the 1939-1940 academic year. But Mises did not master the English
language. Tape recordings made in the late 1950s and early 1960s reveal a very strong
accent, even after some thirty years of lecturing in English. One might therefore assume that
his early lectures in Geneva were quite a challenge to the patience of his audiences.
Mises did his best to compensate for his linguistic deficiencies by writing his lectures out in
advance, but his delivery remained poor. He was a solid lecturer, but never a brilliant
one, and could not compete in the classroom with charismatic speakers such as Bourcoin
and Repard, who impressed and overwhelmed their audience through personality and oratorical
skills.
Harvard graduate, Parker T. Hart, who attended the Institute in 1935 to 1936, wrote a revealing
student evaluation.
At the end of his first semester, Hart did not even mention Mises, but at the end of
the second semester he praised him in the following words.
I have gradually come to the conclusion that Professor Mises ranks as one of the best here,
as an analyser of current economic problems.
The title of his course is likely to have little relation to the topics treated, but
his lectures are always stimulating and lucid, and, as a unique feature, always carefully
written out in advance. His English leaves a good bit to be desired. From a grammatical
point of view, and a first impression is likely to be unfavourable, however, his vocabulary
is rich and his meaning always clear. In short, he wears well, indeed, and for those interested
in the economic riddle left by the breakup of the old Austro-Hungarian Empire, he has
an especially valuable contribution to make. Best of all, he is able to enliven his discussions
and lectures by concrete experience and first-hand observations drawn from wide travel and research
on the spot.
This is from a typewritten copy of an extract of Parkety Hart's report to the Institute
of International Education of New York. Rappard had obtained a copy of the report from the
The President of the Federal Technical University of Zurich, Mr. Rohan, who organized students'
exchanges between the United States and Switzerland. The report suggests one of the reasons why
he did not produce any outstanding students during his years in Geneva. An even more important
reason was the typical mindset of the students at the Institute who were eager to obtain
employment in an international organization, that is, in a government bureau. It is safe
It is safe to assume that such students were not especially receptive to Mises' message.
His two best-known students from these years became experts in the economics of war, Stefan
Pozzoni and Edmund Silberner. Habeler later singled out J. Marcus Fleming and Alexandre
Kafka. Still, overall relations between Mises and his students were quite good, reflecting
the general atmosphere in the Plantamour mansion. A student who was at the Institute during
Mr. Mises' first two years later recalled a scene from one of the soirées that brought
students and faculty together playing charades.
Mr. Montou found himself paired with Roland Sharp in the role of the classical lovers
Leander and Hero. Sharp, despite his little black moustache, managed to achieve a certain
feminine charm by tying a bright red ribbon around his hair, mounted a chair behind a
high screen, and held aloft a candle to light the way for Leander.
Mr. Montreux bravely cast aside his coat, crossed a helispont with a vigorous swimming motion on the floor, and won both first prize of the evening and an abiding place in our hearts as one who was not only a distinguished scholar but also a very good sport.
Mises also had great fun pursuing a new hobby, driving. While in Vienna all of his activities took place within the confines of the city centre, his new life in Geneva required greater mobility.
To make excursions into the mountains and into France, he needed an automobile. At some
point in 1935 or 1936 he must have started taking lessons. In late 1936 he had obtained
his driver's license and a car. During his training he had become so enthusiastic that
he bought his first vehicle, a black eight-cylinder Ford called Grand Tourisme Luxe, some six
6 weeks before he got his license. The price of the car was 5,900 Swiss francs, about
a quarter of his annual salary. The initial rides he took only with a chauffeur, then step
by step he set out for excursions on his own, his first guest for a day-tour was Heilbrunn,
and in the spring of 1937 he set out with Margit for a two-week vacation to the Côte
d'Azur. He was and would always remain a poor driver, but he greatly enjoyed it nevertheless,
And he truly wanted to share his new passion with the woman he loved. He made arrangements
for Margit to take driving lessons in Vienna. Together they spent many happy hours on the
road.
Alienation from Former Associates The 1930s witnessed the first phase in a process
that distanced Mises from some of his closest associates. The most dramatic cases were those
of Fritz Machlup and Lionel Robbins, both of whom would in the course of the years change
Mises changed their views on a number of important issues, particularly on money and the gold
standard. In Makhloub's case, Mises eventually broke off all contact for a few years. The
issue for him was integrity. It was one thing to disagree on the importance of the gold
standard, but he believed Makhloub's change of heart to be unprincipled. At a 1965 conference
Makhloub had attributed the attempt to restore a gold standard to special interest politics.
Mises was in the audience, and thereafter refused to talk to Machlup. According to his wife, he said,
He was in my seminar in Vienna. He understands everything. He knows more than most of them,
and he knows exactly what he is doing. In the 1930s, the seeds of this alienation were newly
sown, and only hindsight allows us to see where the process began. In 1934, Machlup left Vienna
for the United States on a Rockefeller stipend. From February to June 1935 he lectured at Harvard
and then moved on to a full professorship at a new Rockefeller creation, the University of Buffalo.
Rather than a stalwart of the Austrian School, however,
Machloub became part of the new economics movement.
Mises must have sensed the shift in his former student. In January 1936 he appealed to him,
I hope that you will not become American over there, but to the contrary, that you convert
the Americans to liberalism and Austrianism. They need it indeed.
Seventeen months later he asked rhetorically what the Austrian economists could learn from
the new theory of monopolistic competition. Machlup wrote on Mises's letter,
That's not the issue, but if we raised the question anyway, the answer would be quite a lot.
The break with Lionel Robbins was less severe. At the end of Mises' first academic year
in Geneva, Robbins had come to the Institute to give one of the prestigious week-long short
courses that attracted not only the entire faculty of the Institute, but also representatives
of the local authorities, the diplomatic missions and the international organisation. Robbins
delivered a series of lectures in the summer of 1935 on problems of international economic
Organization. The product of these lectures was a book with the title International Economic
Planning. He had brought his family and took the mountain climbing with Mises. The Robbins
children would later recall how, after a day of climbing, Mises had filled their rucksacks
with Swiss chocolate. But correspondence between the two men stopped after December 1935 and
was resumed, somewhat reluctantly on Robbins's part, only in 1943, when Mises made a last
First Attempt to Win Robbins Back to the Side of Liberty
Mises commented on the second edition of Lionel Robbins, The Nature and Significance of Economic
Science, in particular on Robbins' use of the word experience. Speaking about the significance
and role of tautologies, Mises said that he had learned from Meyerson. Robbins later distanced
himself very clearly from the ideas he had cherished in the early 1930s. He said in his
In his autobiography that he wished, he had never written his book The Great Depression,
1934, Economic Planning and International Order, 1937, the book in which he published
his Geneva lectures, was to be his last Austrian work.
In The Economic Bases of Class Conflict, 1939, Robbins started having second thoughts about
idle resources, the presence of which he felt undermined the applicability of the Austrian
and Business Cycle Theory. From then on, the Austrian influence on Robbins' thought receded
more and more into the background. Although he remained on friendly personal terms with
Mises, they were no longer intellectual comrades in arms.
In contrast to Mahloub and Robbins, Mises' friendship with Hayek grew stronger during
these years, especially during the war. It was Hayek who managed Mises' bank accounts
in London. He paid Mises a subscription for Economica and the Review of Economic Studies
and bought books for him, a sign of the great trust Mises put in his former Vienna associate.
Apart from his bankers and Gustav Fischer, a quasi-banker for Mises in the early years
of German credit controls, the hypercautious Mises never let anybody peek into his financial
records. The deposit account would be quite substantial after the publication of The Theory
and Socialism. In February 1936, Mises had more than £237 in the account. By May 1939, it was almost £780.
The crucial factors in their friendship were Hayek's integrity and appreciation for free markets,
not any one point-by-point correspondence in outlook on politics or economics,
Economics, although Hayek felt it necessary to assure his former mentor that he need have
no fear about my becoming converted to Keynesianism. Their friendship grew despite rather significant
disagreements. While they did not affect the personal and professional relationships between
the two men, these disagreements would come to play a role in the rebirth of the Austrian
School after 1974. What were these disagreements? Mises' impact on Hayek's economic thought
made itself felt in Hayek's theories of monetary equilibrium and of neutral money, both theories
that Mises would explicitly reject. Other points of contention appeared when Hayek turned
to Capital Theory. In the spring of 1934, Fritz Machlup queried the inner circle of
Austrian economists – Mises, Hayek, Striegel, Haberler, Machlup – about Capital Theory
in general and the concept of the period of production in particular. Mises had answered
Mahloub's Five Questions in May, stating that three of them seemed to be based on an
untenable interpretation of the period of production concept. Mahloub replied with some
astonishment,
I should be very grateful for you to write to me whether you totally maintain your fundamental
objections against my and Hayek's conceptions. Hayek's new book on capital would from A
to Z be subject to your objections, if strictly interpreted.
When the later Oskar Morgenstern demolished the idea that the average period production
was an adequate measure of capital intensity, historian Harald Hagermann suggests that this
critique was instrumental for Hayek to abandon the period of production concept in later
works.
Another difference emerged when Hayek turned his attention to the theory of socialism.
In 1935 Hayek edited a volume of essays making the case for the impossibility of socialist
Economic Calculation. The volume contained an introductory essay by Hayek, the two classic
pieces by Pierson and Mises, and two concluding essays discussing the current state of the
debate in the continental literature, Halm, and in English language publications Hayek.
An appendix of the volume featured Barone's 1908 article, arguing that a socialist directorate
could use a system of general equilibrium equations as a planning device.
In his introduction Hayek pointed out that Mises had been the first writer to emphasise
that the pricing process must cover intermediate products and factors of production lest economic
calculation be impossible. Yet by pricing process Hayek seemed to mean the mere expression
of prices in terms of money. In other words, his argument seems to be based on the Viserian
assumption that money prices were just one convenient way of expressing values and performing
and Value Calculations. In his discussions of the proposal to use mathematical equation
systems as economic planning tools, Hayek then admits that this proposal is not an impossibility
in the sense that it is logically contradictory. Rather, the true problem of central planning
was, according to Hayek, a result of the type and quantity of information required.
This distinctive perspective on the problem of economic calculation under socialism was
was a consequence of Hayek's acceptance of mathematical general equilibrium analysis
as the most advanced expression of modern economic science. This was correctly noticed
on all sides. For example, Professors Hayek and Robbins of the London School of Economics,
who next to Mises are the leading opponents of socialism among economists, have apparently
been influenced by Baron. They have taken up a second line of attack, the line that
is usually taken after a principle has been admitted. They admit that rational allocation
Central planners would first need precise information about the location and the physical
characteristics of every single economic good. Second, they would need to centralise all
available technical knowledge, as well as knowledge about how to gain new technical
knowledge, techniques of thought. And third, they would need data relative to importance
of the Different Kinds and Quantities of Consumers' Goods.
Given these requirements, socialist economic calculation was clearly impracticable, even
though it was not, as Mises had contended, impossible. Hayek emphasised all the difficulties
which have been raised are only due to the imperfections of the human mind, but while
this makes it illegitimate to say that these proposals are impossible in any absolute sense,
Hayek's conclusion was that socialist calculation posed insuperable practical difficulties.
For him the formidable cognitive problem of economic calculation without money prices
was the beginning and end of his economic argument against central planning. Mises too
who recognized the existence and importance of knowledge problems. He pointed out these
problems in his original 1920 article and throughout his later works. But he had also
perceived a deeper problem of an altogether different nature. For Mises, the pricing process
was not just the solution to an intellectual puzzle. He did not merely express the knowable
reality of value in terms of some other knowable reality of money prices. Rather, the pricing
In 1938, Mises published an article on using the equations of mathematical economics as
as the tools of a socialist planning board.
The original version of this article was written in German but never published. A French translation
by Gaston Le Duc appeared in 1938 in Charles Rist's Revue d'Economie Politique in 1938.
The quoted English translation by Vera Smith was originally prepared for Economica but
not published there because the editorial board of the journal rejected all submissions
that had already appeared elsewhere. Here he argued that Hayek had underrated the significance
of the assumption that the Socialist Planning Board knows future consumer preferences. Hayek
had pointed out that the quest for such knowledge encounters great practical problems. Mises
concurred, but there was also a logical riddle, one that subsists even with foreknowledge
of the Future. One cannot simply plug such known future consumer preferences into a system
of equations and obtain a solution of the resource allocation problem. The equations
of Valras, Pareto and Barron merely describe how the economy would look in a state of general
equilibrium. They describe an economy in equilibrium, not an economy tending toward equilibrium.
A real-world economy is always in a state of flux. It is continually in disequilibrium.
The fundamental economic problem is to choose the best actions to approach the equilibrium
state and to do this in the most efficient way. For a person confronted with real-world
decisions in the present, whether an entrepreneur or a socialist dictator, it is therefore no
help whatsoever to know the hypothetical future consumer preferences according to some theoretical
Mises argued that the decisive advantage the market economy has over socialism is in the
use of present experience. For a socialist dictator, the knowledge of present conditions
can be no more than a starting point for speculations about the ultimate equilibrium state of the
economy, but these speculations are overthrown every day by unforeseen changes. In contrast,
the entrepreneurs of a market economy can apply present-day experiences in present-day
decision-making. They can use their knowledge of current conditions, supply-side, and current
entrepreneurial opinions about conditions in the future, demand-side, to bring about
piecemeal improvements of the existing structure of the economy.
Apparently Mises had presented several versions of the paper to Hayek without gaining his
approval.
Even the version that was eventually published in the Revue d'Economie Politique did not
convince Hayek.
He wrote to Mises in a private correspondence.
There would be much to say about the paper, but the problem it raises is so broad that
it is very difficult to deal with it adequately in a letter.
As I mentioned in Paris, I am not yet entirely satisfied even with the new version of the
last section.
Suppose all knowledge of the individual entrepreneurs about the future had come together in the
head of the economic dictator, and suppose it were conceivable that he solved the countless
equations into which these data were to fit, would then really only one other problem remain?
A difference between the position of the entrepreneur and of the dictator? I do not quite see it.
At that point Hayek had already published his now famous paper on economics and knowledge,
in which he had argued that general equilibrium economics, a la Valrace, Pareto, and Visa
was a system of tautological propositions, a pure logic of choice, as it were, and as
such unassailable. It did not give an adequate explanation of how real economies work because
it assumed from the outset that a fundamental problem has already been solved, namely the
problem of knowledge acquisition. Hayek argued that the market could solve this problem because
Thus Hayek had found his way out of the general equilibrium box. The views he adopted on the
theoretical and practical importance of information and the acquisition of knowledge were part
and parcel of his attempt to reconcile his voracian outlook with the fact of life. The
The problem was, however, that he projected these problems onto all other theorists, and
in particular onto Mises. His 1937 essay on economics and knowledge was directed against
what he believed to be the a priorism of Mises. The author quotes from a 1981 letter that
Hayek wrote to Terence Hutchinson,
But the main intention of my 1936 lecture was to explain gently to Mises why I could
Hayek's speculations about the importance of knowledge and information did not change
Despite Mises' views about the a priori nature of economic science, Hayek attributed this
fact to the intellectual inflexibility of his 66-year-old mentor. Yet it was the young
Hayek who lacked openness to new ideas. When Mises published his first pioneering essays
on the nature of value and the relationship between economic theory and the real world,
Hayek and his fellow students had already made up their minds on these questions. Despite
Beyond all this, Hayek did continue to be Mises' favourite student and closest ally.
He visited Geneva in the spring of 1937 to conduct a brilliant and successful Cours Temporaire.
The lectures were published a year later in one of his best books ever, Monetary Nationalism
and International Stability. Unfortunately, Mises could not attend the entire course.
Soon after Hayek's arrival, he received terribly bad news about his mother and immediate
The Disagreement on the Question of Socialist Calculation was but a symptom of a larger
and the dissent between Mises and his erstwhile comrades-in-arms.
Not only did Mises unabashedly defend the central tenets of the Manchester School, which
had by then fallen into general disrepute, he went beyond them. He showed that any third-way
system was inherently unstable because it could not solve the problems it purported
to solve, and thus motivated ever more government intervention, until the interventionist system
Capitalism had been transformed into outright socialism, but socialism was not viable. There
remained only one meaningful option, 100% capitalism. Again and again Mises insisted
that there was no choice in this matter. It was ludicrous to speculate about some particular
third-way policy that would fit the sensibilities of a given group. Society was viable only
to the extent that private property rights were respected, and that was that. This message
which resonated well with the old liberals who marvelled at such splendid restatement
of the ideals of their youth. But Mises's views were received less wholeheartedly by
the rising generation which had been raised in an intellectual environment soaked in statism.
Their school teachers and university professors had come to endorse all the main ideas behind
the case for socialism, the doctrine of class conflict and class struggle, the notion of
the immiseration of the working classes under capitalism and the belief that an unfettered
capitalist system tended toward monopoly.
On the positive side, Mises had definitely dethroned full-blown socialism as a policy
ideal. The energies of Hayek, Machloub, Habeler, Robbins, Pérou and Rübke, men who would
play a significant role in shaping post-Second World War policies in the Western world,
no longer served the idol of omnipotent government. This proved to be of decisive importance for
the course of history, but Mises's influence proved too weak to inspire in them the courage
necessary for a wholehearted return to the kind of vibrant liberalism that had characterized
the Manchester School and the worldwide laissez-faire movement of the 19th century. Mises had not
yet published the systematic treatise on economic science that would have clarified the scientific
Case for Unfettered Capitalism
He had presented some important elements of his general economic theory of social systems
but before 1940 it was not yet clear how these elements interrelated and on which general
analytical framework they relied.
In 1940 Mises finally published such a general treatise under the title Nationalökonomie
but by 1940 Hayek was 51 years old and an established scholar. The book came too late
for him and it also came too late for the rest of his generation. For the Röpkes and
Machloops and Robinses and all the others, Mises had steered away from socialism in the
1920s. In the minds of these men, Mises's early work on the impossibility of socialism
Socialism and the ineffectiveness of interventionism had created a paradox. Mises had convinced
them that full-blown socialism was neither feasible nor desirable. They were also persuaded
that third-way systems were overrated, but many of them did not yet question the claim
that nineteenth-century liberalism had failed because its economic program, laissez-faire
capitalism, had not delivered the goods. They believed it to be a simple matter of fact
that the unfettered free market tends toward monopoly, and that the 19th century working
classes had lived in misery because of laissez-faire capitalism.
A revision of the historical performance of 19th century capitalism set things straight
after the Second World War. The feeble beginnings are in F. R. Hayek, capitalism and the historians.
For these men theory had disproved the viability of socialism and history had proven the defects
of Capitalism. What was needed was a third way, a third way that could somehow get around
Mises' demonstration that interventionism was necessarily counterproductive. The solution
that emerged in the 1930s was based on an intellectual construct that split the social
economy into two elements, one, an institutional framework, and two, the processes that played
themselves out within that framework, most notably the pricing process.
According to this new creed, government should not meddle with the processes, but it did
have to establish and maintain the institutional framework.
This set of assumptions is characteristic of what has come to be called neoliberalism.
We find a clear expression of the neoliberal worldview in a paper Hayek wrote in 1935.
Commenting on Mises' theory of interventionism, Hayek observes that it did not follow from
Mises' argument that the only form of capitalism which can be rationally advocated is that
of complete laissez-faire in the old sense. He continued,
The recognition of the principle of private property does not by any means necessarily
imply that the particular delimitation of the contents of this right as determined by
the existing laws are the most appropriate, the question as to which is the most appropriate
permanent framework which will secure the smoothest that most efficient working of competition
is of the greatest importance, and one which must be admitted has been sadly neglected
by economists.
The roots of the neoliberal ideology went back at least to the 1880s and 1890s, when
German economists of the historical school and their American disciples became convinced
that industrial concentration has harmful effects and required moderation through government
intervention.
One of the visible consequences of this mindset was the Sherman Act, which to the present
day has replaced the powers of consumers with that of bureaucrats.
In Germany the philosophy of the Third Way became pervasive in the socialpolitik instigated
under Kaiser Wilhelm. France followed, invoking the necessity of a tiers solution, as did
the United States under the New Deal. Still, the first programmatic statements of neoliberalism
were published only in the 1930s, again unsurprisingly in Germany and the United States. The most
influential statement came from Chicago economist Henry Simons, who in 1934 circulated a working
paper with the title A Positive Programme for Laissez-faire, in which the word positive
indicated that this programme justified ample government intervention, whereas classical
laissez-faire was a negative programme in that it did not provide such a justification.
Humans called on government to regulate money and banking, prevent the formation of monopolies
and provide minimum income for the destitute, a departure indeed from laissez-faire liberalism.
These ideas perfectly expressed the feelings of a generation of economists who had been
raised in a thoroughly statist intellectual environment, but who still knew the teachings
of the classical liberals, F. R. Hayek, Wilhelm Röpke, Fritz Machlup, Milton Friedman, Michael
Paulani, Walter Euken and many others received their university training and their decisive
intellectual impulses during the 1920s and early 1930s. During the later 1930s they began
to acquire more senior positions and would after the Second World War assume intellectual
leadership on the right. Some of them, most notably Hayek, later turned toward a more
laissez-faire stance, but this turn came at a time when the neoliberal steamroller was
already well underway. Their neoliberalism animated the work of the post-war institutions
that would stem the tide of growing statism, in particular the Mont Blérin Society and the Institute
for Economic Affairs in London. In more recent years, the neoliberal agenda is carried forward
by a new wave of educational institutions, such as the Institute for Humane Studies,
the Cato Institute and the Atlas Research Foundation.
Popular Fronts
Meanwhile, the enemies of civilization made further inroads. By the mid-1930s,
Stalin had launched a new offensive both in national politics and in the international theatre.
Through a series of show trials, he affected the wholesale execution of his most important rivals,
as well as their constituencies within the Communist Party. In Geneva, his foreign minister
Lydvinov forged an antifascist alliance that for the first time brought the democratic western states
into coalition with the internationalist socialists in Moscow. The common ground of the alliance was,
of course, opposition to the national socialists in Rome and Berlin. As things turned out,
Lydvinov's move proved to be successful. In retrospect, it seems to have been by far the
are the most effective strategy in the 20th century for undermining Western resistance
to statism of the Russian variety. Western journalists and intellectuals played a shameful
role covering up the reality of the Soviet regime.
At first Western diplomats in Geneva resisted the Russian advances, but this reluctance
crumbled under the impact of the Spanish Civil War 1936-1939. In Western Europe all attention
German was thenceforth focused on nationalist socialism. The presence of fascist governments
in Berlin, Rome and Madrid posed an immediate threat to the security of France and the United
Kingdom while the menace of internationalist socialism seemed remote. None of the diplomats
in Geneva could yet imagine the Red Army standing on the Elbe and in Vienna. This lack of imagination
was reinforced by the communist infiltration of the Roosevelt administration in the United
States, Mrs. Roosevelt in particular, entertained an entire coterie of communist intellectuals.
Roosevelt had swept the states with a panoply of new laws and bureaus that made the country
increasingly resemble old Europe, to mention just a few of these new laws and bureaus,
the Tennessee Valley Authority, 1933, the Agricultural Adjustment Act, 1933, establishing
a system of price control, the National Recovery Administration as part of the National Industrial
National Recovery Act, the Wagner Act, 1935, attempting to establish compulsory unionisation,
the Undistributed Profits Tax, 1936, confiscating up to 74% of profits, the Wages and Hours
Act, 1938, establishing compulsory higher minimum wages, and a compulsory 40-hour workweek.
The New Deal was new for America, but old for Europeans. Mises recognised in the American
and events the very follies he and others had denounced ever since the war socialism
of the First World War. He wrote,
President Roosevelt's New Deal has been greeted with enthusiasm not only in its country
of origin but also throughout the world. The reason for this general affinity is that the
essential idea of the New Deal conformed exactly to public opinion. Everyone believed that
it was necessary to replace capitalism and private enterprise with more government intervention,
Although certain isolated measures were criticised, the new policy as a whole was received favourably.
Most economists believed that American capitalism was now effectively doomed. Schumpeter, who
in the year of Roosevelt's election had moved from Bonn to Harvard, was widely quoted as
complaining that he could just as well have stayed in Germany. These premonitions turned
out to be justified.
In the spring of 1936, Communism,
The communists initiated popular fronts, won elections in France and Spain. Although the
communists stayed in the background, ostensibly to fend off any concerns about secret ambitions
for Bolshevik-style coup d'etat, the fact remains that for the first time ever these
countries had socialist governments. The French socialists now did what their Austrian and
German comrades had done 18 years earlier – Leon Blum and his government nationalised the
the arms industries, outlawed right-wing political organisations, increased compulsory education,
outlawed resistance against labour union violence, imposed a mandatory increase of wage rates,
coercively increased minimum wage rates even further by reducing the labour time to forty
hours per week without reducing weekly salaries, imposed a minimum annual vacation of two weeks
for Every Employee, along with subsidised train tickets courtesy of the taxpayer, and
forced each firm with more than ten employees to pay for worker delegates to supervise the
application of the new policies. Not surprisingly, a great number of small and medium-sized firms
had to cease operations under this wave of regulations, and many of the workers who lost
their jobs in this process could not find employment elsewhere, because the surviving
Capitalists fled the country, and Leon Blum soon had to rely on public debt and inflation
to keep his government functioning at all. In June 1937, he resigned, after little more
than a year in power. In April 1938, the new Daladier government took over, reversing
virtually all the new socialist laws and crushing labour union power in short but violent confrontations.
In Spain the correction was far less swift and far more violent. Mises travelled to Madrid
in May 1936 to attend a conference for the promotion of international studies. In a press
interview he said that the conference was a step forward in improving international
relations but Spain's relations with other nations made no further progress before the
country imploded. Mises reported to Mahlup,
The anarcho-syndicalists are preparing the takeover, and the people on the right sharpen their long knives.
In July 1936, the new Popular Front government had hardly taken office when civil war erupted.
After more than two years of extremely bloody fighting, in the course of which more than one million Spaniards lost their lives,
the authoritarian insurrectionists under General Franco marched victoriously into Madrid.
The Spanish translation of The Theory of Money and Credit had appeared just a couple of weeks
before the outbreak of the war. Now it was condemned to oblivion until decades later.
A group of determined economists resuscitated this work. Outside Spain, the case for laissez-faire
fell on deaf ears, too, while the opponents of the free society found a growing audience,
especially if the rhetoric for more government control was flexible enough to accommodate
a wide variety of political regimes. Thus John Maynard Keynes made a splash in Germany,
where the translation of his general theory appeared the very same year as the original.
In the preface to the German edition, Keynes boasted that his theory was particularly well
suited for totalitarian regimes, and lamented that it was less fit for the conditions prevailing
in freer societies. Keynes writes, Nevertheless the theory of output as a whole, which is
What the following book purports to provide is much more easily adapted to the conditions
of a totalitarian state than is the theory of production and distribution of a given output
produced under conditions of free competition and a large measure of laissez-faire. Similarly,
in 1933 Keynes allowed a German translation of his paper on national self-sufficiency
to be purged of passages that might have been offending to the new Hitler government.
Mises did not comment on Keynes's general theory. When it appeared in 1936, he reacted
only when the Keynesian movement came into full swing and elevated the British economist
to the status of a guru of the profession. In Mises's eyes, the Keynesian Revolution
was insignificant from the point of view of the history of ideas. Keynes had not brought
forth a single new doctrine. At the onset of the Keynesian Revolution, a few eminent
Historians of Thought had pointed out that Keynes's views about the relationship between
variations of the money supply, employment and output had been anticipated and stressed
in mercantilistic thought. The implication is that Keynes was not so much a revolutionary,
but a reactionary champion of the ancien régime. The single most detailed study of his magnum
opus confirmed this implication in rather devastating terms.
Now though I have analyzed Keynes's general theory in the following pages, theorem by
theorem, chapter by chapter, and sometimes even sentence by sentence, to what some readers
may appear a tedious length, I have been unable to find in it a single important doctrine
that is both true and original. Even as major fallacies were old and had been refuted hundreds
of times, the proper way to deal with Keynesianism, therefore, was to consider it from a sociological
In 1948, Mises wrote,
For a correct appraisal of the success which Keynes's general theory found in academic
circles one must consider the conditions prevailing in university economics during the period
between the two world wars. Among the men who occupied the chairs of economics in the
last two decades there have been only a few genuine economists, that is, men fully conversant
with the theories developed by modern subjective economics. The ideas of the old classical
The classical economists, as well as those of the modern economists, were caricatured
in the textbooks and in the classrooms. They were called such names as old-fashioned, orthodox,
reactionary, bourgeois, or Wall Street economics. The teachers prided themselves on having refuted
for all times the abstract doctrines of Manchesterism and laissez-faire. Two years later, he added,
the great classical economists were harbingers of new ideas. The economic policies they recommended
were at variance with the policies practised by contemporary governments and political
parties. As a rule, many years, even decades, passed before public opinion accepted the
new ideas as propagated by the economists, and before the required corresponding changes
in policies were effected. It was different with the new economics of Lord Keynes. The
policies he advocated were precisely those which almost all governments, including the
British, had already adopted many years before his General Theory was published. Keynes was
was not an innovator and champion of new methods of managing economic affairs. His contribution
consisted rather in providing an apparent justification for the policies which were popular with those
in power in spite of the fact that all economists viewed them as disastrous. His achievement
was a rationalisation of the policies already practiced.
and Transformations.
From August 1st to August 6th, 1937, Mises took part in the meetings of the Ninth International
Congress of Philosophy, where he presented a paper on the logical character of the science
of human conduct. Here he met the Polish philosopher Tadeusz Kuturbinski, who delivered a fascinating
paper on the idea of the methodology of general praxeology. Though the paper itself did not
Mises had already come across it in a 1926 paper from another Polish scholar, the mathematical
economist Eugen Slutsky. Mises quotes this paper in Epistemological Problems of Economics.
This very passage contains the phrase, a universal praxeology, and thus suggests that Mises had
An Allgemeine Praktik – a general science of human practice or human action
Sociology, but by the early 1930s he had to acknowledge that most other social scientists
had come to understand something completely different by this term.
Under the influence of fanatic anti-economists such as Otmar Spann and Werner Sombart, sociology
had become shorthand for an alternative social science, one that did not integrate the tenets
of economics, but instead denied them and sought to replace economics with other explanations
of the Market Economy, Socialism and the Hammered Market Economy.
But now there was a new term – praxeology. It was gaining ground in the academic literature
and, what is more, its champions seemed to use it in a way congruent with Mises's understanding
of what a general science of human action was all about. Kotarbinski probably talked
to Mises about his General Theory of Fighting, in which he applied the general praxeological
method to the phenomenon of war. And it was probably also Kotarbinski who referred Mises
to some of the pioneers of praxeology, such as the French philosopher Alfred Espina.
Mises apparently did not have direct access to Espina's work. Hayek looked up the reference
for him in London, and it was also Hayek who discovered that the relevant passage from
Espina's book was taken verbatim from an article that Espina had published some years earlier.
Mises found that the meaning of praxeology in Espinaz's work was quite different from
what he had in mind. Slutsky's use of the term was somewhat closer to his own views,
but still did not quite hit the nail on the head. Mises thus initiated a second praxeological
tradition. Present-day followers of the early French school call themselves praxeologists
and their discipline praxeology. These scholars, most of whom are academics from France and
in Poland published the series Praxeology, the International Annual of Practical Philosophy
and Methodology. Mises himself kept up with the praxeologists at a distance. In 1956 he
noticed with interest the existence of a journal of praxeology that was edited by a scholar
at the University of Melbourne in Florida. He distinguished the two approaches in a letter
to Stephen B. Miles, dated April 19, 1961. In any case, praxeology had not yet come to
be as closely associated with anti-economics as had the term sociology, and Hayek reported
from London that the term was unknown in English, and thus Mises eventually adopted it as a
label for his general theory of human action. Work on his Great Treatise also progressed
in other fields. One of the important areas that he had neglected for the past two decades
was methodology. He had written on the epistemology of economic science, but he had not yet dealt
with the more narrowly technical aspects of economic analysis. Mises now proceeded to
this task by elaborating on the scattered methodological observations he had made in
previous writings. Occasionally he made interesting observations on the methodology and the logical
Character of Economics in his correspondence. Of particular interest is a letter to Lionel
Robbins commenting on the second edition of The Nature and Significance of Economic Science.
The letter also demonstrates that Mises was in touch with the positivistic Vienna Circle.
He refers to correspondence with the mathematical economist Carl Menger, the son of the founder
of the Austrian School. He presented his very first paper dealing with purely methodological
Methodological Questions in early March 1938 in Venice, at a conference held in memory
of the French pioneer of mathematical economics, Augustin Cournot. The paper was eventually
published in the proceedings of the conference as L'hypothèse de travail dans la science
économique, Working Hypotheses in Economic Science. In previous writings, he had no more
than touched on methodological questions. Fittingly, Mises dealt with one of the core
Four elements of mathematical economics, namely the concept of economic equilibrium. He argued
that this concept did have an important role in economic analysis, but not nearly as important
as the champions of mathematical economics made it out to be. The equilibrium construct
was necessary as the logical opposite of entrepreneurial profit and loss. In equilibrium there would
should be no such thing as profit or loss, only in disequilibrium did these phenomena
come into being. But where these statements only refined the basic conceptual framework
that had already been elaborated by Frank Knight, Mises also emphasized that the equilibrium
construct was necessary only for the correct conception of profit and loss, and for no
other economic phenomena. For some time he had also advocated the use
of Equilibrium as a methodological device for the analysis of dynamic changes. Notice
that Mises was perfectly familiar with the pioneering works on mathematical equilibrium
theory that Walt, Rosenstein-Rodan, Morgenstern and others had just published in the Zeitschrift
für Nationalökonomie. At about the same time the Austrian Chamber
of Commerce was completely reorganised, Mises asked to be retired by January 1, 1938, emphasising
In early February 1938, Wilhelm Becker, right-hand man to the new president of the Bundeskammer,
asked Mises to become the chief of the Department for Monetary and Financial Affairs. The only
caveat was that Mises had to give up his position in Geneva. Mises probably went to Vienna around
February 20 to discuss the project. Eventually the reforms turned the comer into a pure bureaucracy.
One reason for his renewed interest in returning to Vienna might have been the precarious financial
situation of the Institute. In the course of 1936 it had become clear that certain elements
within the Rockefeller Foundation were increasingly reluctant to lend further support. Thus, in
In the fall of 1937, Mises seriously considered a return to Vienna. He then gave much thought
to the central political problem of his fatherland, preserving the liberty of its citizens against
the encroachments of the mighty neighbours North and South. Mises was convinced that
this problem could only be solved within a federation of the East European language communities,
In early 1938 he laid out a confidential master plan for the necessary reforms in a ten-page
paper with the title Principles for the Creation of a New Order in the Danube Area. He left
a copy at the Graduate Institute in Geneva but also took copies with him when he left
for the United States in 1940. Hay argued that such a new order would require the East
European countries to overcome their protectionism, which Mises saw as the root cause of conflict
among them, which was in turn the cause of their weakness confronted with their three
mighty neighbours, Russia, Germany and Italy. But to abandon protectionism requires far
more than the legal abolition of customs and import quotas. It also implies abolishing
the special privileges that come through monetary policy, taxation, health and safety regulations
and construction codes, public works, railway rates and many other fields of public administration.
From this, Mises draws a far-reaching conclusion. It is not sufficient to limit the sovereignty
of the different governments through a customs union. Indeed, their whole administration
would have to be run by a federal government. Without a central government overarching all
For all national governments, the latter would engage in nationalistic policies against the
minorities within their territory, thus creating tensions and conflicts that would ultimately
explode the Confederation.
In short, Mises proposed to counteract the military threat of the moment through a political
federation with other smaller states of the Danube area, but such a federation could work
only if national protectionism could be eliminated.
It followed that the political institutions of the Federation had to be radically centralised.
He went into more detail. The local governments and courts must take account of minorities
by using all languages spoken by more than 15% of the local population. Because economic
legislation, in particular free trade and the regulation of banking and money, must
be uniform in all countries, one needs a central parliament and a central jurisdiction. The
The proceedings of these institutions would be in an official language and Mises believed
French or English should be chosen.
The central organisations would have to be located in Vienna, which would have a special
status corresponding to the status of Washington DC within the United States.
In order to avoid jealousy among the national populations, some of the federal officers
would have to be of French or British nationality.
It needs to be stressed that the primary purpose of Mises' proposal was not to create closer
economic cooperation in the Danube area. This could have been achieved without any political
unification whatsoever through the simple unilateral adoption of free trade by each
government. The point of his scheme was to secure a maximum of political liberty under
present conditions. In his eyes, Austria and the other countries of the area had the choice
between abandoning a part of their autonomy, to become strong enough to resist foreign
and pressure, or losing their autonomy altogether. Either they would become subservient provinces
ruled by Germany, Russia and Italy, or they would rule themselves in a common central
state. A majority of Austrian leaders abhorred the prospect of political centralisation.
They sought national self-determination first and foremost. The point of Mises' paper
was to show that they were in error. National independence was not a suitable means, under
the present circumstances to attain the end of national self-determination. Those who
rejected a supra-national central government for the Danube Basin implicitly believed that
England and France were going to defend them permanently, that these two countries would
become tired of fighting wars on behalf of the eastern states and would eventually demand
that they create a political system that could survive on its own. With these plans in mind,
Mises went to Vienna in February 1938. He later developed his plan for the establishment
of an Eastern Democratic Union in much more detail in two major papers that have only
recently been published, Entwurf von Richtlinien für den Wiederaufbau Österreichs, May 1940,
51 pages, and an Eastern Democratic Union, a proposal for the establishment of a durable
Peace in Eastern Europe, October 1941, 43 pages. He had other reasons to return to the
city on the Danube, getting the paperwork done for marriage. For some ten years Margit
had waited patiently for him to propose. Eight months after the death of his mother
at Christmas 1937, Ludwig was finally ready. True to himself, he left out all ornamental
and went on to propose with his habitual concision, I cannot go on further, I cannot live without
you darling, let's get married.
Margit was incredulous and the happiest she'd ever been. They lost no time making plans.
One of the formalities was the public announcement of their wedding plans six weeks before the
ceremony, but world events conspired against personal happiness. During those weeks before
Before their announced wedding date Adolf Hitler threatened Austrian Chancellor Schussnick.
Germany would provoke civil war in Austria and invade the country. On extremely short
notice Schussnick announced a general referendum on Austria's unification with Germany. The
vote was to take place the next Sunday, March 13th. Mises was in town on one of his short
visits, probably coming in from the Couronneau conference he had attended in Venice. In the
The course of this week it became clear that the Germans were preparing to invade Austria
to prevent the referendum from ever taking place. The cautious Mises knew that he was
high on the Nazi enemy list and he left Vienna on Thursday the 10th or early on Friday the
11th of March, not a moment too soon as it turned out.
On Friday, March 11th, 1938, SS Chief Heinrich Himmler arrived in Vienna with an advance
A group of men broke into Mises' apartment and searched it. At the end of March the Gestapo came and took twenty-one boxes full of Mises' possessions and sealed the apartment when they left. In the fall the Gestapo returned and took the rest.
test, they looted everything they could find, the books Mises had lovingly collected over
decades, his personal correspondence, paintings, silver, personal and administrative documents,
everything, even the laundry. Mises would never see these belongings again and never
learn what happened to them. At the end of the Second World War the Red
Army found his personal files together with the documents of other prominent enemies of
the Nazi regime in a train in Bohemia. They were then sent to a secret archive in Moscow.
In 1991, 18 years after Mises' death, they were rediscovered and are today a most precious
tool for biographers of the great economist. Mises' personal library went in different
directions. The Nazis sent his book collection to a new Judenbibliothek in Berlin. This library
History was under the control of Heinrich's Sicherheitsdienst SD and located at Eisenacher
Straße 12. However, it is not known where Mises' books are today. During the Second
World War the collections of the Judenbibliothek were sent back and forth to the provinces
to protect them against Allied bombings. They were also subject to various transfers, book
exchanges with other libraries and plunder. By 1956 Mises knew that some of his books
had turned up in German second-hand bookshops and opined that some of his letters, two letters
he had received from Sigmund Freud, for example, would be found one day in the possession of
an autographed dealer. The looting of his apartment was only the beginning. The new
authorities soon discontinued his salary and pension payments and attached his bank account
for an escape tax, Reichsfluchtssteuer, and a Jewish tax, Judenabgabe. Nine years later,
Speaking of the reluctance of the Comer to make restitution for those payments, his former
secretary wrote, But how right you were when you prophesied that we would be cheated of
everything.
They also confiscated the most marketable part of Ludwig and Richard's inheritance,
a widely known collection of some 150 rare gold coins and more than 3,000 other coins
There is also the summary list of stolen coins that Mises composed in 1960 but apparently
did not submit to the authorities. Koerner was a lawyer in Vienna. Mises got in touch
with him after learning about the ratification of a US-Austrian treaty in 1955, but the deadline
for claims had already expired in 1953. Most of the gold coins were Polish and pre-1892
Austrian Coins. In 1962 Mises eventually obtained restitution, not from Austrian but
from German authorities, in the value of the estimated weight of the collection, some 25
troy ounces. Mises' family property had become free booty.
The Nazis had prepared the takeover of Austria with diligent care. They had studied all writings
that even remotely questioned the Nazi cause or any of its ideals. After the takeover they
They sought the authors of these works. Perfectly harmless men such as Carl Brokhausen, a philanthropist
and pacifist of some international reputation, were interviewed by the German secret police.
But the Gestapo also took on the greatest champion of National Socialism in Vienna,
Ottmar Spann. The author of Der wahre Staat was all in favour of strong government, but
it would have to be a government in the service of the right ideas, his ideas. Attempts to
who co-opt him as a Hitler propagandist quickly failed, and he and his son Raphael ended up
in the Dachau concentration camp, where he was tortured and partially lost his eyesight.
Mises later testified, Not all those persecuted were anti-Nazis. For instance, Professor Ottmar
Spahn, one of the outstanding champions of the Nazi doctrine, spent some time in a concentration
camp because he was connected with Gregor Strasser, the personal rival of Hitler. Ironically,
and the prison term that he served under Hitler eventually whitewashed him after the war.
Spahn's doctrines continued to be taught in Vienna until the late 1960s.
This was not a time of people with backbone. It was the time of the Hans Mayas of the world.
A few weeks after the Anschluss, Mayer wrote the members of the Nationalökonomische Gesellschaft
announcing that the membership of non-Aryans had been cancelled. Mayer kept his chair at
The University just as he would retain it when the Social Democrats returned to power
after the Second World War.
Decades afterward Lionel Robbins recalled exactly the time when his love affair with
Vienna came to an abrupt end, namely, when to his eternal shame, Hans Meyer, the Senior
Professor of Economics in the University of Menger, Wieser and Boehm-Bawerk, whom I myself
had more than once heard denouncing Hitler and all his works, instead of closing down,
As he could honorably have done, expelled the Jewish members from the Nationalökonomische Gesellschaft, of which he was the president.
I have never been able to screw myself up to go back since.
This is also how Mises felt about the incident.
It took him many years after the war before he could bring himself to return to his once beloved city.
Many scholars had to leave Austria to make way for the Hans Meyers of the new era, and a great number of them passed through Switzerland.
In the coming months and years, Mises increased his efforts to find employment for Austrian expatriates abroad. Engeljanozzi could not find a job in Turkey where only Turks were allowed to teach modern history. To Machloub, Mises wrote,
I'm completely clueless what to do with the masses of Viennese that turn to me for help.
Nobody is allowed to stay in Switzerland," Margit later recalled.
We helped whenever we could. Our living room looked like a miniature Red Cross office.
I was always writing, packing, shipping. This came at a time when his own position in Geneva
became financially precarious. Together with his brother Richard, he also took care of
for relatives and personal friends who had not managed to flee in time.
These efforts were instrumental in bringing about a rapprochement of the Mises brothers,
even though it could still not be called a warm relationship.
When Ludwig married Margit in July, he did not deem it necessary to mention the fact
in their correspondence.
Richard found out about it a month later through their aunt Fanny, and asked Ludwig for a confirmation,
yet even then it was not Ludwig who replied, but Margit.
Through her warmth and charm, she eventually eased the relationship between the recalcitrant
brothers when they were later in some proximity on the western shores of the Atlantic.
Margit and her daughter Gitta had remained in Vienna for several weeks after the Anschluss
because they did not have the necessary paperwork to leave the country. At this time their lives
would have been in greater danger if their relationship with Mises had been known. Eventually
They were able to leave and Ludwig greeted them at the train station in Zurich, flowers
in hand. She later recalled,
In the thirteen years we shared before our marriage I had never seen Lew cry, nor did
I ever see him cry in all the thirty-five years of our married life. He wept, unrestrained
and unabashed, tears were streaming down his face, and he was not ashamed of them. On July
On May 6, 1938, they were married in Geneva. The original marriage certificate is in the
files of the Graduate Institute of International Studies, Margit's records, Hungarian nationality
born on July 3, 1890, father's name was Albert Herzfeld, mother's name was Selika
von Theim. It was a simple administrative ceremony before a civil judge and two witnesses,
Hans Kelsen and Gottfried von Habeler. Ludwig and Margit spent their honeymoon in the French
His years with Margit brought about a profound positive transformation of Mises's personality.
He was still obstinate, in his opinions, and formal in his demeanour, but in interaction
with other people he became much less buttoned down. Most importantly, his temper improved.
The outbursts and tantrums that Margit had so dreaded disappeared completely after a
few years. He greatly needed her love and he got it. Even though she herself had a great
ego, she adapted her life to make him happy. Arriving in Geneva, she had to start at square
Mises' good friend, Weiss Wellenstein, had warned her that her life with Ludwig would
not be easy, and indeed it was quite difficult at first. Mises introduced her to his closest
associate only after the marriage, and not without warning. Here in Geneva, when men talk,
women have to be silent. They only listen. Even Kelsen and Habeler, who were after all
their witnesses, she met only shortly before the wedding, and only afterward did Margit
move into Ludwig's apartment. There she found, to no surprise, a bachelor's residence. The
furniture was first class and beautifully kept, but the whole apartment looked to me
like a display in a department store. It was cold and impersonal. She went on,
For the first time I saw a refrigerator. We did not have them yet in Vienna, and it was
a real marvel to me. I loved Lew's sparkling kitchen, but otherwise I had my doubts. The
But right from the first day, the transformation of his personality set in. Mises had changed
his attitude. Margit was no longer just a friend and lover. She was now Mrs. von Mises,
the comrade he had longed for, and the object of his true and deep love. So complete and
radical was this change that he would henceforth refuse to even talk about the thirteen years
before the wedding. It was as if he had put the past in a trunk, stored it in the attic
and thrown away the key. For Margit this total break with the past would always be a burden,
but the benefits were obvious. From the day of our marriage, Lew was a changed person.
Not that he spoiled me with gifts or presents, he would not have known how to do that, but
he was relaxed, affectionate, and his eyes were sparkling with happiness. Every little
The whole thing I did was of interest to him. The world had changed for him. Lew was overpowering
in his love and affection for me. Never was he cross or dissatisfied with anything I did.
He could not nag. There was not one day to the very end of his life that he did not tell
me, I love you, darling. Oh, how I love you! It seemed to me after our marriage that for
The events in Austria had brought a number of their former Vienna friends to Geneva,
and it was almost like the old days – lunches and dinners with Helene Lieser, Louis Sommer,
Lisa Berger, Hans Kelsen and the Nierensteins. Mises also visited frequently with the local
Guggenheims and Ginzbergs. They went out almost every weekend for a drive across the French
French Border, and with the help of the Michelin Guide they explored the delights of French
cuisine and the beauties of the alpine landscape on both sides of the border. Margett bravely
assisted her new husband on the road. He definitely had an adventurous side and enjoyed the thrills
of high speed and the centrifugal pull of mountain curves. On one of these curves he
lost control of the car, which suddenly lurched over the roadside barrier into the valley's
After this, Margit and Ludwig held their breath, but the car did not move. Then he pulled back
slowly and they continued the rest of the way in a more civilised composure. They were
both thoroughly fond of driving, but they were terrible drivers. They had at least two
other serious accidents in 1948 and 1966. They had other scary moments for completely
One day a dark car stopped them on one of their excursions, and a man in a long dark
coat told Mises he had to talk to him. He asked Mises to follow him into the other car,
which of course Mises refused to do. There were veiled threats, but the situation was
resolved when a friend who was a high official of the League of Nations presented himself
to the strangers who hurried back to their car and left. Mises and family had the distinctive
Richard von Mises refers to such statements from Margit in a letter to Ludwig dated December
29, 1938. At this point Mises's treatise on nationale économie was already very close
The Volta-Lippmann Colloquium Seven weeks after his wedding Ludwig attended
a historic meeting of the champions of both old Manchester-style liberalism and of neo-liberalism
Neoliberalism was at first a purely informal phenomenon. Virtually all of its proponents
were economists who cooperated in a spontaneous network within a few institutions such as
the International Chamber of Commerce in Paris. By the mid-1930s the network had reached the
critical mass needed for a more formal organisation under the banner of the New Third Way. One
One important step to the organised appearance of the emerging neoliberal network was made
when in 1937, the American journalist Walter Lippmann published a neoliberal manifesto
with the title Inquiry into the Principles of the Good Society. The book appealed to
European neoliberals because Lippmann gave eloquent expression to their own deeply held
views about the roots of the present political and economic crisis. Those who still called
They called themselves liberals, rejected socialism, but did not want to be too strongly associated with the Manchester doctrine of laissez-faire.
Lippmann placed himself in opposition of both the old liberals and to the contemporaneous socialist agitators.
Lippmann's middle-of-the-road position suited the pragmatic mentality of his countrymen.
Americans tended to take a businesslike approach to political conflicts, seeking to solve them through negotiation and compromise.
One of these was Louis Roger, 1889-1982, a philosopher at the University of Paris and
Director of Centre Danubien, Roger considered Lippmann's book a brilliant exposition of
a consensus that had emerged among liberal scholars in the recent past, most notably in
books by Mises, Robbins, Laverne, Marliot and Ruff. He quickly arranged for a French
edition of The Good Society and seized the occasion to convene a five-day colloquium
in Paris, with the idea of reviewing the process of capitalism and of trying to define the
doctrine the conditions necessary for its implementation and the new responsibilities
of a True Liberalism. He later emphasized that the purpose was to define neoliberalism.
The event took place on August 26-30, 1938, at the International Institute of Intellectual
Cooperation and it assembled representatives of very different liberalisms. These men fell
into at least four groups, with distinctly different views on the history, theory and
political agenda of modern liberalism. The first group, which represented the mainstream
of New Liberalism, promoted not only practical but also theoretical compromise with coercive
socialism. They were willing to compromise on any particular item to make their general
agenda more palatable to the voter. Their position can be thought of as pro-market social
democracy. Second, there was a small group of men such as Hayek who were dissatisfied
with various aspects of classical liberalism and endorsed a somewhat larger scope for
or Government intervention. In contrast to the first group, however, their fundamental
concern was with individual freedom and in time they therefore took an increasingly radical
stance, moving ever closer to the classical liberal position. Third, there was an equally
small group of men such as Alexander Rustov, who were reluctant to endorse classical liberalism
root and branch, but their main objection was to the egalitarianism such as it was of
of its advocates. They argued that hierarchy was absolutely necessary for the maintenance
of a free society, because only the authority implied in it would effectively transmit the
cultural tradition of liberty. The great error of the French Revolution was that it had not
only abolished the coercive hierarchy of ancienne régime, but it also jettisoned the principle
of hierarchy per se. In its egalitarian favour it had tossed out the natural hierarchy baby
with the coercive hierarchy bathwater. Fourth and finally, Ludwig von Mises upheld
19th-century laissez-faire policies on refined theoretical grounds that he himself had developed
over the past 18 years. By the 1930s he was acknowledged both within and outside libertarian
circles as the most important contemporary representative of the Manchester School. The
anonymous reviewer of the French edition of Gemeinbirchhoff presented the author as the
The Uncontested Head of the School of Austrian Economists
When Louis Boudin invited Mises to join the scientific committee of a new French journal
of comparative economics in 1939, he told him that all political orientations would
be represented in this committee, reason enough to have liberalism defended by masters such
as Mises. The uniqueness of Mises's role was still recognised some twenty years later
by one of the last surviving students of the French laissez-faire school. Writing to Mises
in September 1957. The Professor A. Bastet said that Mises was the successor to our master,
Yves Guillot, who himself was the successor to Gustave de Molinarie, 1819-1912, and Molinarie
was successor to the great Proto-Austrian, Frederic Bastiat, 1801-1850.
The Lipman colloquium showed that three of Mises' insights had had a profound impact
on the neoliberals. First, his demonstration that socialist calculation was impossible had
liberated them from all notions that a full-blown socialist commonwealth was feasible or even
desirable on economic grounds. Second, the socialist calculation argument had convinced
them that competitive pricing is of utmost importance and a defining characteristic of
the free market. Third, they endorsed Mises' original case for liberalism, which stressed
that a private property order was the only feasible system for the division of labour.
The latter two insights, however, came to be twisted so as to fit the neoliberal interventionist
agenda. Whereas Mises had simply stated that a calculation-based division of labour could
take place only where private property exists, the neoliberals set out to manipulate the
legal and judicial systems in order to improve on the spontaneous division of labour that
would have resulted from political laissez-faire. For these men, the market was critically important,
but they believed that government intervention could enhance the efficiency and fairness
of the market process. Unlike socialists, neoliberals believed that the market took society
in the right direction, but unlike classical liberals, they believed that the unhampered
market fell short of its true potential. In a preface to the first German edition of The
The Good Society, 1945, Wilhelm Röpke emphasised the orientation of neoliberal policies toward
the optimisation of the social machine. Thus the question is not for or against laissez-faire,
rather it is which judicial order, Rechtsordnung, fits an economic constitution that is just,
free of the highest productivity and based on a sophisticated division of labour? As
this preface shows, Röpke was deeply impressed by Lippmann's work, which he believed had
had a tremendous impact on the neoliberal movement. As a consequence of this particular
interpretation of Mises' theory of social systems, the neoliberals also reinterpreted
the significance of Mises' insights about the importance of competitive pricing. Mises
had argued that a rational division of labour could be based only on market prices for factors
of production, which in turn required private ownership of these factors. In contrast, the
The neoliberals focused exclusively on the prices themselves, neglecting the conditions
under which free pricing occurs. For them, the practical conclusion of their socialist
calculation argument was not that government should not interfere with property in general,
but rather that it should be kept from meddling with prices specifically. At the colloquium,
Lippmann was praised for his distinction between market-compatible interventions and interventions
Incompatible with the operation of a market economy.
Roustov prided himself on having coined the phrase liberale interventionismus, classical
liberal interventionism, as early as 1932, he probably referred to his talk at the 1932
Graysden meeting of the Verein.
Only direct interference with the working of the price mechanism was illegitimate,
if the government limited itself to controlling only the legal framework within which the
The Unifying Principle of Postwar Neoliberal Theories was an attempt to justify liberty
in some cases and state-sponsored violence in others through one and the same theory.
The most important products of these endeavours were the theory of public goods and the Chicago
Mises relentlessly criticised the neoliberal interpretation of the significance of the
socialist calculation argument. From his point of view, the arbitrary distinction between
the play of the price mechanism and the framework of the market was nonsensical. The nature
of government intervention is to violate private property rights, thereby affecting the price
mechanism in all cases. While it is true that certain phenomena result only from direct
Interference with the pricing process, shortages and surpluses, most notably, the larger issue
of economic calculation remains. It is ultimately irrelevant whether government intervention
meddles directly with prices or indirectly through the framework of price formation.
In either case, market prices are perverted.
Plans for After the War Parallel to the work on his treatise of economics
or praxeology as he now called it, Mises spent much time writing and teaching about concrete
contemporary political problems. In my course at Geneva dealing with the economic and sociological
doctrines in modern political thought, I used to devote many hours to a full refutation
of the Nazi doctrines. He applied the general theory of praxeology to explain the rise of
Nazism and he probably also presented his plans for the time after Hitler. He also wrote
Put down these thoughts in a book manuscript and in several lengthy memoranda.
By 1938 he had already composed a book manuscript that described the way of the German people
toward National Socialism, a working title in June 1940, when he left a copy of the manuscript
with his colleague Potter.
The work would eventually be published in an English translation in 1944 under the title
Omnipotent Government, here Mises elaborates on the thesis developed in his 1919 book Nations,
State and Economy, in which he had explained the rise of German imperialism. He now stressed
that the age of nationalist protectionism had created an incentive for war. Protectionism
promoted the interests of some citizens at the expense of all other citizens, subject
to the government that applied protectionist measures, but it also came at the expense
of Foreigners, who therefore stood to gain from a violent overthrow of that government.
Mises would later make this point in a paper delivered to an American audience.
The reasoning of the old liberals can be condensed in one sentence. War is useless in a liberal
world. This theorem is absolutely correct, but we must not forget the condition in a
liberal world. Our world is very different, and in this world you cannot say that war
is useless. It is not true that the individual citizen cannot derive any advantage of a victorious
war. In the world of state interventionism, the territorial expansion of his own state
is of the utmost importance to each individual citizen. Every benefit which he derives from
his own government is the more valuable the larger its territory is. Every new conquest
further restricts the area in which discrimination is applied against him.
When the Second World War broke out in September 1939, Mises was already thinking about the
time after the war, a war that Mises was absolutely convinced Hitler would lose. When the war
eventually reached the Western theatre in May 1940, Mises had reached the conclusion
that the major economic problem of the post-war period would be shortage of capital. To attract
foreign capital and to stimulate the capital accumulation, governments would be forced to
accept far-reaching curtailment of their sovereignty. These states will have to renounce any powers
in the field of money, credit, trade and taxation on behalf of foreign capital. They will have
to submit themselves unconditionally to the jurisdiction of international courts and accept
that the decisions of these courts be imposed by an international police force. This might
It sounds somewhat strange, Mises concedes, but a state is free to choose whether it accepts
these conditions for receiving foreign capital, and there is a strong political rationale
for the abandonment of national sovereignty. Small states must have an effective protection
against aggression by bigger states. States engaging in secret rearmament must be prevented
from the execution of their plans by an international police. Governments that violate peace must
must be treated as robbers and murderers are treated within each state.
By May 1940, Mises had elaborated a fairly detailed plan for Austria's post-war reconstruction.
This plan is of some interest because 1. it is representative of the applied work he did,
for example, in the context of his comer activities, and 2. shows the relatively large scope Mises
allowed for government activity within the framework of a market economy.
The starting point for his considerations was that Austria could feed its population
of 6.5 million people only as an industrialised nation, which requires entrepreneurs who know
how to produce for the world market. In old Austria there had been about a thousand such
men. Today these entrepreneurs were gone because the government, the trade unions and the whole
country had fought a war against them. At least two-thirds of them were Jews. Their
Their firms were Aryanised according to the Marxist idea that the workers and the means
of production are all that matter in a firm. The entrepreneurs are mere exploiters. However,
without the spirit and the energy of the entrepreneur, a firm is just a heap of junk and scrap. And
even those entrepreneurs who were not murdered and tortured could not continue their business
because of foreign exchange controls and central planning. As a consequence, Austria would
would face a far more difficult situation than it faced after the First World War, when
the creative and industrious entrepreneurs saved the country despite the obstructions
thrown up by the government. This time, Austria would not be able to count on post-war imports
of foreign capital. Mises' positive programme for the post-war period contains several standard
classical liberal positions that the currency must be based on gold, that the central bank
must be obliged to redeem its notes and demand deposits against gold at the legal rate, no
foreign exchange controls would be permissible, and Austria would have to follow a strict
free trade policy. Then, however, Mises proceeded to an astounding contention. Free trade does
not mean that all import duties are abolished. It only means that one does not try to increase
domestic prices through import duties in order to enable domestic producers to sell their
are products at higher prices than their foreign competitors, thus two kinds of import duties
are in accordance with free trade, a. financial duties, which have to correspond to domestic
sales taxes, and b. retortion duties on the import of all or certain commodities from
countries pursuing a policy which is hostile to the interests of Austrian trade, and Wurf
von Richtlinien für den Wiederaufbau Österreichs.
But Mises also recommended several measures of government intervention. He said that Austria
should never impose import duties on luxury goods, which implies that such duties could
be taken on other goods, because a major part of its own export is composed of such goods.
Interdictions of imports for public health and veterinary reasons were legitimate, and
weapons imports must be reserved for the government. Interdictions of export should be allowed
Mises championed a programme of thorough political centralisation.
On behalf of taxation, he claimed, all taxes and duties accrue directly to the State. The
communal authorities have no power of taxation. They get their means from the State. He spelled
Build out a definite list of taxes a. Sales taxes for alcohol and tobacco b. A sales tax
that is only levied on commodities bought by consumers c. An income tax on wages to
finance the social security system d. A progressive tax on housing expenditures e. A tax on luxury
cars f. A tax on lottery gains g. A tax on playing cards h. Fees for certain administrative
of Acts, registering of patent rights, brands, etc., i. a moderate taxation of yields of
more than 6% on capital which are paid out to the stock owners of corporations with limited
liability. Mises emphasised that, apart from point C, there could be no income taxes. Penalising
income kills the goose that lays the golden eggs. Moreover, all public enterprises would
have to be sold or closed if their proceeds did not cover costs.
In order to avoid expensive double administration, the state alone should direct the whole administration
of the county. The only other level under the central institutions of the state was
that of the county administrations and courts. The communal authorities would have to execute
the tasks set for them by the general legislation. Their only revenue would come from the state
and from public firms and property. The purpose of this ultra-centralised structure was to
avoid corruption and waste of public money. The postal, telegram and telephone services
would be organised by a single post office in Vienna. Employment in the public administration
was to be regulated according to the French competitive system to prevent protectionism,
nepotism and corruption.
Mises goes on to discuss how to deal with the Austrian government officials who served
under the Nazis. Whether they may stay in the public services is to be decided case
by case in the interest of the State. The system of education has to be radically restructured.
The Volksschule, elementary school, needed to be nationalised, and all institutions of
higher education had to fall under the direct responsibility of the Department of Education.
Mises even made proposals on the specific content of education. In the Gymnasium, pupils
should be obliged to learn English and French, and the requirements to pass exams should
be considerably increased because only extraordinarily talented and industrial pupils merit that
the State incurs special expenses for their education.
Mises's pronouncements on the Austrian universities were severe. While their expenses constantly
increased the scientific level decreased ever further. The University of Vienna would therefore
have to be established anew with the help of Western European scholars and of Austrian
professors teaching abroad. The universities of Graz and Innsbruck would have to be closed
altogether since they had long since lost the right to call themselves universities.
In order to reduce the post-war scarcity of capital, Mises suggested publicising the new
Austria's free trade policies to foreign capitalists and entrepreneurs and attracting old Austrian
and Entrepreneurs Back to Their Home Country. He also recommended his study of the methods
of the French cultural propaganda to improve Austria's image in the world by reference
to the great cultural achievements of its sons. The selection of Austria's representatives
would therefore have to be more careful. To the western capitals, Austria should only
send men who because of their scientific importance or because of other outstanding qualities
Mises command a great personal reputation, and thereby can purvey Austria's representation
with a prestige that it would lack otherwise. Here too France may serve as an example.
Mises never put these proposals into print under his name. He always kept a strict separation
between his scientific work, for which he would stand unreservedly, and his work as
an economic and political consultant. His plan for Austria's post-war reconstruction
fell into the latter category.
One historian of his cummer activities pointed out, at the university and in his books he
showed himself as an uncompromising champion of the free market. As a practitioner and
cummer politician, he was rather flexible and ready for compromise if nothing essential
had to be given up, but even in compromise he then remained hard and would not deviate
from the course of action that had been recognised and agreed upon. It applied his scientific
Escape from Europe
The summer of 1939 was exceptionally beautiful. Ludwig and Margit spent a vacation in Elbein,
which had a magnificently alpine setting, almost as Bad Gastein, their regular vacation
spot in Austria.
On August 7th, 1939, Mises wrote from Eleben to a Giovanni de Maria. He granted permission
for an Italian translation of his Theorie des Geldes und der Umlaufsmittel, stating
that he alone had all rights for translations into foreign languages. This translation probably
Richard von Mises paid them a visit on his way to the United States. In June, he had
come to the conclusion that Turkey was no longer safe and decided to accept a visiting
The war broke out on September 1, 1939, when Mises must have been in the process of reviewing
the proof pages of his Nationalökonomie. Strangely enough, during the first eight months
of the war, everything was quiet on the Western Front. The governments of France and Britain
The Soviet Union had declared war on Germany in fulfillment of the guarantees they had extended to Poland, but they did nothing to prevent the Wehrmacht from completing its invasion of Poland within two weeks, and they did not even declare war on the Soviet Union, which also invaded Poland in visible execution of a secret agreement between Hitler and Stalin to divide Poland between them, thus continuing the tradition of Frederick II and Catherine II.
There was widespread sentiment, especially in France, that the cause was not worth another
round of mass slaughter. They believed that the First World War had been fought in vain
and the Treaty of Versailles had humiliated the Germans without creating justice. It had
given protection to former ethnic minorities through the creation of the Czechoslovak and
Polish States, but the Germans who remained there were now exposed to an oppression that
was virtually indistinguishable from the one that the Czechs, Slovaks and Poles had experienced
in pre-1914 Germany and Austria. Under Hitler, the Germans set out finally to protect their
co-nationals in the East, and a great number of Western Europeans found this foreign policy
This attitude did not express passivity or apathy. It resulted naturally from the political
dogma that ruled the West in those days, namely, that ethnic self-determination was the highest
political principle. But while most citizens of the West did not feel the Wehrmacht threatened
their existence, the governments were ready to draw a line in the sand. In September 1939,
The resolution to stop Hitler was not much more than a moral resolve, a resolve moreover
that was half-baked and corrupted by several years of anti-fascist lobbying by the Bolshevists
in Geneva, but it marked the beginning of the efforts that would eventually lead to
the German defeat in the Second World War.
Mises was silent on the subject, but Margit became nervous.
In anticipation of a German invasion, she asked him to consider emigration to America
or elsewhere. Reluctantly, Mises began to explore the possibility in correspondence
with his brother Richard and Fritz Machloub, both of whom had already crossed the Atlantic.
Machloub had discussed the idea of a California vacation for Mises with Benjamin Anderson
and other friends from the University of California. Anderson had just moved to the Los Angeles
Mises' campus of the University of California and was the most influential man in the hitherto
un-prestigious Department of Economics. UCLA showed interest, and the chairman of the department
wrote two letters to Machloub, who then mediated between the two parties. In this process things
got mixed up. At first Mises declined when Machloub told him UCLA could offer only a
Mises asked his friend, Tudel Dudley Peghram, the chair of the department, that his Austrian passport had expired, and that he could therefore not accept the offer of a salary of $4,000 per annum.
the offer at the moment and would be grateful if the invitation could be postponed a year.
While Mises's letter was on its way, Machloub wrote again, this time pointing out that an
invitation from UCLA would procure you a permanent non-quota immigration visa for the United
States which might be considered an asset these days. This convinced Mises. Meanwhile,
he had received a cable from his friend Unger, a former Geneva student of his who was already
in New York City and who told him in telegraphic language that he, Mises, was making a mistake.
As soon as he received Makhloub's letter on February 28th, Mises wrote back that his
concerns about passport and visa questions had been dispelled and that he would be ready
to go to California. If he had cabled this message to Makhloub, Mises might have begun
and a career in California in August 1940, and history would have been different. But
Mises sent the letter by surface mail, and it reached Machlup only after he had already
declined the offer on Mises's behalf. When Machlup wrote to Anderson, trying as diplomatically
as I could to reopen the negotiations, he received a response from Anderson's secretary
that her boss was on a short vacation. One month later, Pegram gave him a definitive
No, meanwhile Mises himself had been in touch with Anderson, though on less vital matters.
In March 1940, Nationalökonomie was at the printer, and there was no sign that the war
would soon reach Western Europe. The printing of Nationalökonomie had started by January
1940. Mises half-jokingly surmised that it might be the last economics book published
in the German language. To most citizens of the West it was not clear that it ever would.
Following Mises from his new position in Los Angeles, Benjamin Anderson announced his intention
to come to Europe in the summer.
He hesitated to do so, though not from fear of danger.
I have a feeling that coming to Europe at this time, even to the neutral states, is
almost like going to a friend's house, when a member of the family is undergoing an operation,
and that I might simply be an additional burden on busy and wary men who have more important
things to do than to carry on discussions with a foreign economist.
In his response, Mises assured his American friend that these fears were groundless. Your
doubts about a visit in Europe are unfounded. It is just the right time for you to come
and to see what is going on.
Mises had been convinced that the new war would start just as the last war had ended
in the trenches. He was convinced that France and its allies would withstand any German attack,
modern conditions, and make defence the most effective military strategy. But the times
The history of battles of the old style, which permitted getting around the opponent's flank,
was passed on the great European theatres of war since the massiveness of the armies and
the tactics that had been reshaped by modern weapons and means of communication, offered
the possibility of arranging the armies in such a way that a flank attack was no longer
possible. Flanks that rest on the sea or on neutral territory cannot be gotten around.
Every frontal attack still remains, but it fails against an equally well-armed opponent.
With these comforting thoughts in his mind, Mises had the pleasure of holding in his hands
the freshly-bound nationale économie, the work of a lifetime. The joy lasted only for
a few days before it was overwhelmed by unexpected and devastating news.
In May 1940 the Wehrmacht ended the phony war and overran Western Europe in a series
Mises was completely taken by surprise. He had not realized that conditions had once
again changed profoundly. Tank divisions had become sufficiently fast to attack the flanks
of even very large armies, especially when the divisions operated under air support.
A few military theoreticians had perceived this threat during the interwar period, but
it was only in the spring of 1940 that General Heinz Guderian and his men proved the threat
A Reality In their purely tactical use of the Air Force
in direct confrontations with enemy troops, the Germans applied the theory of the chief
engineer of the French Navy, Rogeron, who at the beginning of the 1930s had synthesized
the experiences of the First World War. In distinct contrast, the Western Allies would
eventually apply the theories of the Italian General, Giulio Due, according to which the
Air Force should bomb the cities and supply lines in the hinterland of the enemy, thus
Destroying His Economy and the Morale of the Population
Dues' theory had already been anticipated in the strategic planning offices of the British
Royal Air Force directly after its creation in the spring of 1918. The end of the war
prevented the application of the plans at this point. Mises could hardly believe what
he read in the newspapers. Belgium, Holland, he exclaimed in his notebook on May 10. Less
Less than two weeks later, Guderian reached the Channel and cut off the Allied supply
lines. The British escaped at Dunkirk, and now the Germans took on the 80-some remaining
French divisions one by one.
On June 3, 1940, Louis Boudin wrote to Mises that Paris was calm.
I was not surprised by our early failures. We needed to get rid of our bad leaders and
to correct people's mindsets, the popular front has cost us dearly.
On June 14th, Mises exclaimed again, Paris, and three days later, armistice. It was an
ordeal. May 1940 was, as he later recalled, the most disastrous month of Europe's history.
It was the only time he was ever wrong in forecasting an important political or economic
event. After the Allied debacle at Dunkirk, Mises
He knew it was a question of days or weeks before it would be impossible to leave Geneva.
His residence in Geneva would soon be unsafe. He had to act. He was high on the German government's
list of wanted men. The Germans had already tried to kidnap him and had almost succeeded.
They had already been pressuring the Swiss authorities to surrender Mises. The Swiss
had refused, but they had also let Mises know they had acted out of charity and that his
Mises' visa was still subject to extension on a yearly basis. The situation was already
dangerous and insulting when the Germans were still on the other side of the Alps, but now
the Axis troops were about to encircle Switzerland from all sides, and Mises felt his days in
Geneva were numbered.
Hans Kelsen and Wilhelm Röpke were in the same situation. At least for some time, Rappard
and Montour planned to provide all three of them with jobs in Vichy, France, but neither
Neither of them believed this was sufficient protection, and during the next days and weeks
they actively sought admission to the United States, which they received within two weeks
of the capitulation of Paris.
Holding their invitation letters for the United States in his hands, Mises and Röpke weighed
again the pros and cons of another emigration.
Eventually Mises and Kelsen left, while Wilhelm Röpke remained in Switzerland.
Röpke Tull was high on the Nazi list of wanted men and was thus at the mercy of the Swiss
authorities, but he was courageous and trusted that the influence of his friends would keep
him in the country. He believed that sooner or later the West would win this war against
Germany as it had won the last one. Surrounded by fascist regimes, Switzerland naturally adapted
to the new political landscape as part of a strategy of conflict minimisation. In September
In 1940, for example, Switzerland temporarily introduced Nazi designations for its political
offices and institutions, creating Gauleiter and an Arbeitsfront organisation. However,
the emigres who had stayed on in the small mountain country could never be sure they
would not be surrendered to the governments they had escaped. Röpke too seems to have
considered emigration to the United States. This was apparently the prevailing opinion
in their circle. Hayek wrote to Mises,
I agree with all you say about the prospects. I have no doubts that we shall have a dreadful
time, but that in the end we shall win. But the old Europe we shall never see again. It
does not seem unlikely that at some future date we shall all rejoin on the other side
of the ocean. I have no intention of running away while the war lasts. But after it I may
find that if I want to continue my work at all, I may have to follow you. In retrospect
But one might think that Rupka's decision was the correct one. Mises could have remained
in Geneva, where he had spent some of the happiest years of his life, and enjoyed ideal
condition for his scholarly work. For him personally the US move was a disaster, but
what would the world of ideas and the world at large look like today had Mises remained
in Europe? He might never have written in English. Human Action would not have seen
in the Light of Day, and thus would not have reached the group of brilliant students whom
Mises inspired in the New York of the 1950s and 60s, those students who carry on his ideas
to this day. Mises now accepted an invitation to Berkeley
that Machloop arranged to be sent to him by radiogram on May 16th. A month later, Professor
Penrose from the University of California wrote another official letter of support,
which was ostensibly addressed to Professor Pitman B. Potter of the Geneva Research Centre
urging him to facilitate Mises's passage to the United States. The letter predicted
negative consequences on American public opinion for any country that would hinder Mises's
safe passage. He quickly proceeded to get his paperwork done, visa, transatlantic fare
from Lisbon to New York, etc. This took a few weeks, however, which proved to be too
too long. Kelsen had departed on May 28 with the last plane leaving Switzerland from Locarno
to Barcelona. When Ludwig and Margit were ready to go, Italy had entered the war on
the German side attacking France on its south-eastern flank. Although the Italian onslaught was
unsuccessful, it still made air travel out of Switzerland impossible. The German and
Italian armies were about to close the circle around Switzerland. Already they controlled
Air Traffic, and would not allow unauthorized planes to leave the country. There was just
one escape route left, by bus, but it would take them until July 3rd to obtain passage.
Hayek had urged Mises to get in touch with Roger for the French transit visa. He has
worked miracles in other cases. To avoid any loss of time, I am cabling him at the same
time and you may possibly hear from him.
On the afternoon of that day, a Wednesday, they were told they could leave with the American
Express motor car on the following morning at six o'clock. Although the suitcases had
been packed for many days, there was no more time for last visits with Montoul and Repard.
Mises wrote a good-bye letter and left. He had already written a good-bye letter to Montoul
and Repard on June 10th. He had also left a gift, possibly on this occasion, for the
Library, a copy of George F. Knapp, Staatliche Theorie des Geldes, second edition with Carl
Menger's annotations.
The Germans had not yet occupied the entire French territory between the Swiss and the
Spanish border, but their troops were already setting up control posts at strategically
important intersections. The bus driver, therefore, had to drive through the German lines, avoiding
any direct contact with them. Fortunately, he was experienced and cautious, and he could
Steadily Through Several Southeastern Provinces of France
Every stop must have made them anxious. Each bit of news about German troops ahead fuelled
their fear. Each of the many detours ate away at their nerves. Margit got upset about the
couple sitting in front of them, young Charles Kinderberger and his pregnant wife, because
they insisted on keeping the window open. Nerves!
The ride must have seemed endless, but eventually, at the end of the day, they reached the Spanish
border at Cerbère. Here they learned at the inspection house of the Spanish authorities
that the border had already been closed for a week. A diplomatic solution had been found
only for American and English citizens who were allowed to enter Spain and continue their
trip. On the next day the Swiss citizens were granted entry for similar diplomatic reasons,
which meant, in practice, that the Portuguese and the Jewish passengers of German and Austrian
origin were left stuck at the border. They stayed the night in hotels on the French
side where Ludwig and Margit found cheap accommodation. The Spanish officers had advised them to talk
to the Spanish consul in the nearby city of Perpignan. The consul found their papers in
good order and wrote a letter of recommendation to the border officers but to no avail. The
Mises now insisted they needed a special order from Madrid, and also claimed, falsely it
turned out, that the passengers' Portuguese visas were no longer valid.
It was Saturday. Two days wasted. How far were the Nazi troops from Cerdaire? Mises
had to act and did the only thing he could do on a Saturday afternoon, send cables soliciting
the help of William Repas and Louis Roger. Repas reacted immediately and cabled on the
Roger had joined the new French government of Marshal Pétain. The hour of glory for
the octogenarian Marshal Pétain had been the First World War, which had turned him
into one of France's greatest heroes. Now he had agreed to lead his country in its darkest
hour because those who had steered France into the current debacle had abandoned their
positions and fled to the country in panic. He could rely only on a handful of men, one
of whom was Roger, whom he used as a foreign liaison officer with his British ally and
possibly also with Spain. Roger therefore had the necessary personal connections to
plead on behalf of Mises and the other stranded bus passengers. Somehow Mises managed to
get in touch with his office and was told to get new visas at the Spanish consulate
in Perpignan,
It took them a few hours to reach Barcelona, where they reserved places on the next available
plane to Lisbon. Upon their arrival in Portugal, Mises lost no time getting in touch with his
travel agent. The ship for which they had made reservations had already departed. The
next ship for which bookings were still available left in three weeks. Mises arranged two places
on the waiting list, renting a room in the park hotel they lived out of a single suitcase
and would not unpack any of the others so as to be ready for immediate departure. As
As it turned out, they only spent a few days in Lisbon. Margit was amazed to see that her
husband seemed to have friends and colleagues everywhere. The city was full of foreigners
waiting for passage to America. They visited with a couple of academics and former colleagues
from the International Chamber of Commerce. She herself was mainly concerned about the
fate of her daughter Gita. Hayek made inquiries, but could not get in touch with the director
of her school in France.
The morning of Thursday, July 25, 1940, Margit received a call from the travel agent. There
was a cabin available on a ship leaving in a few hours. They had to move fast. That same
day Ludwig and Margit von Mises left Europe on a ship called the Europe. It would take
almost eight years for Mises to again set foot east of the Atlantic. By then he would
be an American citizen on his way to rebuilding the Austrian School of Economics in the United
States