Mises and Keynes
MARCH 01, 1982 by WILLIAM H. PETERSON
Dr. Peterson is the director of the Center for Economic Education and the Scott L. Probasco, Jr., Professor of Free Enterprise at The University of Tennessee at Chattanooga.
This article is reprinted and extended from a paper delivered at the September 10 and 11, 1981, conference at Hillsdale College, Hillsdale, Michigan, commemorating the centenary of the birth of Ludwig von Mises.
Memories clear, memories blurred. Springs remembered, winters forgotten.
Do I betray an onrush of years? For I look back, with special pleasure and reverence, at those verdant springs and golden summers when that giant of our age, Ludwig von Mises (1881-1973), walked and talked in our midst, when he shone in our lives and minds, when he gently schooled us on the meaning of praxeology and the pain of interventionism.
Today we remember Lu Mises, we honor his name, we celebrate his birth, we glory in his truth, we marvel at his lonely and courageous struggle against heavy odds. The question remains, however, will the world remember? And in that question, I have, if you will, a charge for you, his successors here on this earth. Let me defer that charge to the end of my remarks.
And let me borrow some lines from the 18th-century English poet, William Cowper, so as better to express my feelings at this moment:
What peaceful hours I once enjoy’d!
How sweet their mem’ry still!
But they have left an aching void,
The world can never fill.
Our world is a perilous place—as much, I believe, as any time in human history. Look about you. Record high interest rates. A crime rate that has more than tripled in the last two decades. Federal transfer payments at some $400 billion yearly. Eight million unemployed. Abroad, the French vote in socialism . . . the Thatcher government in Britain contends with the IRA, rioting in the streets and three million unemployed . . . The Soviet Union menaces Poland . . . Soviet advisers and Cuban troops infect Angola and Ethiopia . . . Iran disintegrates.
We Shape the Future
Still, there lives the spirit of Mises, this defender of human liberty and free enterprise, this leader of the Austrian School of economics, this foe of communism and interventionism. So the die is not cast. We are not, after all, prisoners of the future. The future is what we, all of us, each of us, make it. I am reminded of the opening lines of Charles Dickens’ Tale of Two Cities:
It was the best of times,
It was the worst of times,
It was the age of wisdom,
It was the age of foolishness . . .
It was the spring of hope,
It was the winter of despair.
So I repeat my question: Will the world remember Mises and what he stood for? Or will it continue to era-brace, more or less, the philosophy of that other, if misperceived, colossus in this century, that purveyor of inflationism and interventionism, John Maynard Keynes?
Let me couch these reflections, then, in the framework of the world that lies behind and before us, for my remarks involve both retrospect and prospect.
I speak of two revolutions: the Keynesian Revolution, which you all know about, with its handiwork of inflation and other political and economic trauma all about us; and the Misesian Revolution, which I hold is incipient but growing, which may yet win for us a new birth of freedom and free enterprise. Straws in the wind: Of late the American, Southern and Western Economic Associations hold—unprecedentedly—panels on Austrian economics at their annual meetings.
I remember Lu Mises in three courses I took under him at New York University’s Graduate School of Business Administration in the early 1950s. The courses were “Socialism and the Profit System,” “Government Control and the Profit System,” and “Seminar in Economic Theory.” (I attended the seminar many times after I was graduated.)
In each course he carefully established, in a Mengerian methodological sense, the primacy of the individual and the indispensability of freedom in the marketplace. His focus was ever on social cooperation springing from individual human action, in turn springing from subjective ends and limited means. He denied the concept implied in much of modern macro-economic theory, that of standardized, homogenized human beings, of human beings amounting to so many mindless interchangeable units. He concurred with Adam Smith’s put-down of that universal omnipresent, omnipotent economic policy maker, who “wise in his own conceit,” seems
. . . to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board; he does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislator might choose to impress upon it.
Thus Mises started with the praxeological premise that man is a being unique in the animal kingdom, a being who alone has a vision of the future, a being possessed of abstract reasoning power and a broad range of subjective values, a being whose ends and means, whose thought and action, are tightly integrated into cause and effect, a being whose human action is therefore always purposeful and rational if not always logical and effective, a being who therefore belies the simplistic notion of homo oeconomicus, of “economic man,” of a being driven to make the greatest possible material or monetary profit. All this was subsumed under the title of his 900-page magnum opus, Human Action, first published in 1949.
A Man of Influence
I remember Mises the man in his tastefully decorated apartment on West End Avenue. There Margit and Lu kindly had Mary and me to dinner and occasionally our children, Mark and Laura. There we enjoyed the company of people like the Fertigs, Hazlitts, Reads, Cortneys, Petros, Koethers and others. The parties were always sparkling affairs, ever graced with the enchanting beauty of Margit and the courtly charm of Lu.
I remember the Mises seminar, first in the Wall Street area and later on Washington Square. I remember some of the Mises seminarians like Henry Hazlitt, Lawrence Fertig, Israel Kirzner, Murray Rothbard, Ralph Raico, Robert Anderson, Hans Sennholz, Laurence Moss, George Reisman, George Koether, Sylvester Petro, Toshio Murata, Edward Facey, Leonard Liggio and Bettina and Percy Greaves.
I remember Mises at meetings of the Foundation for Economic Education in Irvington, New York, with such FEE people as Leonard Read, Ben Rogge, Charlie Curtiss, Paul Poirot, Frank Chodorov, Ed Opitz, Bob Anderson and George Roche.
I remember Mises at meetings of the Mont Pelerin Society with such stalwarts—some of them Mises’ own students—as Friedrich Hayek, Fritz Machlup, Gottfried Haberler, Milton Friedman, John Van Sickle, Wilhelm Ropke, Bill Hutt, Phil Cortney, Albert Hahn, Jacques Rueff, Jim Buchanan, Frank Knight, George Stigler, Arthur Shenfield, Arthur Seldon, Ralph Harris, Gordon Tullock and John Davenport, among many others.
Again, I remember Mises the man and very much the individual. I remember his poise, his bearing, his European graciousness, his world view of things, his tremendous command of history and philosophy. I remember his kindliness and understanding to graduate students, even when they put inane questions to him. One such question in the 1960s followed his discussion of the inflationary implications of deficit finance. He was then asked why President Lyndon Johnson couldn’t have both “guns and butter.” But he can have both, replied Mises, adding with a twinkle in his eye, “if he is willing to pay for them.”
Yet I also remember as part of my intellectual development another name, another figure, a figure writ large by the media and intelligentsia, but one I never met, one whose thinking was of a genre wholly alien to Lu’s—John Maynard Keynes (1883-1946). I remember the name of Keynes first cropping up during the Great Depression in an economics course at the William L. Dickinson High School in Jersey City in the late 1930s and more often in my undergraduate economics courses at New York University and graduate courses at Columbia University. The references were reverential. Keynes was a savior. He saved capitalism from itself-don’t you see!
John Maynard Keynes
Keynes was a sometime prophet, too. In 1935, he sent a note to George Bernard Shaw saying, “I believe myself to be writing a book on economic theory which will largely revolutionize—not, I suppose, at once but in the course of the next ten years—the way the world thinks about economic problems.” This is one Keynesian prediction that was right on the mark.
Keynes the man is also of interest. Roy Harrod, his biographer, partly attributes Keynes’ personal success to his lifelong “abounding and unfailing enthusiasm.” He made a fortune speculating in financial markets, a lot of it on behalf of his school, King’s College at Cambridge University. He was a flamboyant kingpin in that snobbish, elitist, literary-intelligentsia group—the Bloomsbury Set. He married Lydia Lopokova, a prima ballerina of Diaghilev’s Russian Ballet. He took pleasure in art, opera, drama and literary works. He enjoyed bridge. He delighted in taking issue with professional economists and prime ministers, needling them left and right. In 1942 he was raised to the English peerage by King George VI.
What a name to conjure with, this Keynes, this global architect, this messiah who, like Julius Caesar, did bestride the world and shook it to its very foundation and shakes it still with his legacy of tremendous inflation and political trauma. Witness the plight of Western Europe today. Of America. Of Western Civilization itself.
Keynes, you recall, from his General Theory of Employment, Interest and Money, published in 1936, had the answer to the Great Depression. The answer was, in a phrase, demand- management, which really amounted to—eureka!—demand-creation, i.e., income-creation.
Keynes dwelt on macro-demand, on the aggregate national demand for goods and services that determines, supposedly, the level of national employment and, conversely, unemployment. He further supposed that central governments could henceforward fine-tune demand to the level of “full employment” through the magic dial of a “contra-cyclical budget.” That is, central governments were to run surpluses in good times and deficits in bad times. In short, government was to become the great equalizer, the balancing wheel when demand was deficient, the knight in shining armor who would neatly banish joblessness forever.
Keynes and government had to come to the rescue of unplanned capitalism, for—he reasoned—are not the act of saving and the act of investment two entirely different and dangerously unrelated activities, with oversaving, underinvestment and consequent mass unemployment likely developments?
But of course. So to kill off over-saving, heavy death duties and progressive income taxes were just the thing for wealthy countries like England and America. Keynes wrote that economic growth, “far from being dependent on the abstinence of the rich, as is commonly supposed, is more likely to be impeded by it.” Consumer and capital demand would also have to be controlled by the wise men in Whitehall or Washington: “The State will have to exercise a guiding influence on the propensity to consume” and achieve “a somewhat comprehensive socialization of investment.”
To bring off his call for governmental demand-management, for his reconstitution of the nature of income, Keynes sought to destroy Say’s Law, the idea behind today’s supply-side economics, the idea that supply creates its own demand, the idea that goods and services are ultimately paid for by other goods and services, the idea that consumption is strictly a function of production, the idea that a general overproduction of all commodities is simply impossible.
How, then, would any deficiency in “full employment” income be met? No, not through sweaty production, nor through grubby capital formation, nor through that outworn principle, Say’s Law. Instead, Keynes pushed credit expansion or his more formalistic concept of the pump-priming multiplier that would furnish national income sufficient to yield full employment. So let the printing presses roll. In his puckish way, perhaps reflecting his admiration for his friend and wit, George Bernard Shaw, Keynes wrote:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well tried principles of laissez-faire to dig the notes up again . . . there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.
Wonderment emerges from this reading of Keynes: Is income, at least initially, only pieces of fancy colored paper, green in this-country, orange in Britain? Can government print wealth? Why not?
Yet more wonderment: Is capitalist efficiency really the road to survival? Why not make- work? Public works? Lofty public monuments? Listen to Keynes again in his waggish tongue:
Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for precious metals, the fruits of which, since they could not serve the needs of many by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York.
Obviously in such a scheme of things there is not much room for a typical efficiency-minded, profit-seeking capitalist. Clearly this parasite would have to be shipped off to Siberia or at least put out to pasture. Thus Keynes proceeded to call for “the euthanasia of the rentier” and consequently for “the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.” Keynes went on in this let’s-expropriate-the-expropriators vein to declare, brazenly if not logically: “Interest today rewards no genuine sacrifice . . . [for] there are no intrinsic reasons for the scarcity of capital.”
With such notions at large, I think there’s no question that Keynes greatly helped launch this age of economic planning and the Welfare State. Interestingly, he even looked on the rise of totalitarian states as countries lending themselves more readily to the application of his principles. According to his foreword to the German edition of the General Theory, he wrote on September 7, 1936:
The theory of aggregate production, which is the point of the following book . . . can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory.
As you know, the General Theory was a roaring success around the world. Somehow, though, theory and experience didn’t jibe. In the ensuing 45 years of the Keynesian Revolution, world- wide central government deficits—and inflation—proliferated as never before. As I previously observed, political torment or painful economic trade-offs have become commonplace the world over, today as much as ever, or more so. This is the legacy of Keynes.
Yet, as I noted earlier, there is a ray of hope and the highest intelligence in the thinking of the man whose 100th birthday we celebrate today. As Keynes stood to the left, so Mises stood to the right—and for the right. While Keynes would arm the government with extraordinary peacetime powers—oblivious to the Actonian principle that power cor-rupts—Mises called for limited, non- interventionistic government. Mises wrote: “In stark reality, peaceful social cooperation is impossible if no provision is made for violent prevention and suppression of antisocial action on the part of refractory individuals and groups of individuals.”
The Role of Government
Mises took exception to the oft-repeated phrase that government is an evil, although a necessary and indispensable evil. In The Ultimate Foundation of Economic Science, he reminded us: “Government as such is not only not an evil but the most necessary and beneficial institution, as without it no lasting social cooperation and no civilization could be developed and preserved.”
Even so, in the face of modern tendencies toward greater empowerment and even deification of government and state, Mises noted: “It is good to remind ourselves that the old Romans were more realistic in symbolizing the state by a bundle of rods with an ax in the middle than are our contemporaries in ascribing to the State all the attributes of God.”
In like manner, Mises opposed Keynes’ attempted overthrow of Say’s Law, pointing out that with regard to ever-scarce economic goods there can be only relative overproduction. Surpluses and shortages are short-lived, savings and investment converge—thanks to the sensitivity of the price mechanism, including interest rates. Commodities are ultimately paid for, not by money, but by other commodities—by, in other words, work, production, the creation of wealth. Money is, yes, a commonly used medium of exchange; it plays-or ought to play—only an intermediary if vital role; but it is not a tool or plaything of governments.
Mises accordingly excoriated the Keynesian mentality denying Say’s Law so that nearly all “governments are now committed to reckless spending, and finance their deficits by issuing additional quantities of unredeemable paper money and by boundless credit expansion.” He derided “the new prophet of inflationism” that people saw in Keynes. He thought little of the Keynesian “miracle” of turning “a stone into bread,” as Keynes himself described credit expansion on April 8, 1943 in his Paper of the British Experts.
Courage and Integrity
The courage and integrity of Mises can be seen in an incident during a meeting of the Mont Pelerin Society in Seelisberg, Switzerland in 1953. Mises expressed concern that some of the MPS members themselves were becoming inadvertently infected by the virus of intervention- ism—state ownership of transport, social insurance, minimum wages, contracyclical fiscal policy, etc.
“But what would you do,” a member asked him, “if you were in the position of our French colleague, Jacques Rueff,” who was present at the meeting and at the time responsible for the fiscal administration of Monaco. “Suppose there were widespread unemployment and hence famine and revolutionary discontent in the principality. Would you advise the government to limit its activities to police action for the maintenance of order and the protection of private property?”
Mises stood fast. He replied: “If the policies of nonintervention prevailed free trade, freely fluctuating wage rates, no form of social insurance, etc.—there would be no acute unemployment. Private charity would suffice to prevent the absolute destitution of the very restricted hard core of unemployables.”
Again, Mises had no taste for the Keynesian notion of a “contracyclical budget” so as to maintain “effective demand” and hence “full employment.” He regarded the “G” in the Post- Keynesian “full employment” formula of Y = C + I + G (National Income = Consumption Spending + Investment Spending + Government Spending) as about the most unstable, inflationary, politics-ridden, and unscientific balancing wheel that the economic managers could employ. For one thing, the formula ignored the political propensity to spend and spend, good times or bad. Moreover, it assumed the “pretense of knowledge,” the statistical or mathematical measurability of the unmeasurable, for how much consumers and businessmen will spend in year X is not given to the mind of man. Most grievously, it ignored myriad market-sensitive cost-price relationships, especially the proclivity of trade unions and minimum wage laws to price labor out of markets—i.e., into unemployment.
Thus Mises held that Keynesian theory in practice leads, through fits of fiscal and monetary expansion, to inflation, controls, and ultimately stagnation. Further, “G” so used, generally meant the secular swelling of the public sector and shrinking of the private sector—a trend that spelled trouble for human liberty.
The Theory of Money
In a way, Mises anticipated and rebutted the 1936 Keynesian “general theory” a quarter- century ahead of Keynes: In his 1912 work, The Theory of Money and Credit, Mises contended that forced-draft credit expansion, not so-called “mature capitalism,” carried the seeds of boom and bust. Here Mises praxeologically tied individual subjective values to price determination and to the quantity theory of money (but in ways much less mechanistic than in other schools of thought). In other words, he integrated the supply of and demand for money to marginal utility theory. And he saw that government, Keynes to the contrary, has no magical money save what it taxes or borrows from the people. As he said in Human Action:
At the bottom of the interventionist argument there is always the idea that the government or the state is an entity outside and above the social process of production, that it owns something which is not derived from taxing its subjects, and that it can spend this mythical something for definite purposes. This is the Santa Claus fable raised by Lord Keynes to the dignity of an economic doctrine and enthusiastically endorsed by all those who expect personal advantage from government spending.
Of course Mises covered the world of human action, saying much outside of critiques of Keynesian doctrine. For example, long before Ralph Nader made consumerism a household name for Big Business supposedly bossing and doing in the consumer, Mises propounded the doctrine of consumer sovereignty, declaring:
The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain’s orders. The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him.
Again, Mises held that censorship and drug control flow from the same interventionistic mentality. From Human Action:
Opium and morphine are certainly dangerous, habit-forming drugs. But once the principle is admitted that it is the duty of government to protect the individual against his own foolishness, no serious objections can be advanced against further encroachments. A good case could be made out in favor of the prohibition of alcohol and nicotine. And why limit the government’s benevolent providence to the protection of the individual’s body only? Is not the harm a man can inflict on his mind and soul even more disastrous than any bodily evils? Why not prevent him from reading bad books and seeing bad plays, from looking at bad paintings and statues and from hearing bad music? The mischief done by bad ideologies, surely, is much more pernicious, both for the individual and for the whole society, than that done by narcotic drugs.
To be sure, many contemporary economists felt Mises was entirely too impolitic, too adamant, too pure, too uncompromising with the real world on its terms and values. He lived in an ivory tower, they said, and was simply not attuned to the way the world works. In contrast, Keynes was seen as not only the Great Redeemer but as a hardheaded realist, the pragmatist who knew how to translate politics and economics into practical action.
Unheralded and Unsung
The world did not take kindly to Ludwig von Mises, at least not while he was alive. Hayek reminds us that Mises never held an important chair of economics while he remained in his native Austria. A full professorship at the University of Vienna was always denied to him. As so it was in America that the greatest academic distinction that Mises could obtain was to have been a “visiting professor” at New York University. In fact, Mises “visited” that university for 24 years—just under a quarter of a century—with his salary never originating from the university but from foundations and friends. Worse, his prolific writings and substantial contributions to the history of thought were, for the most part, ignored by the economics profession.
Yet here was a man who made momentous discoveries in the field of economics. These included his pulling together monetary theory and marginal utility theory, his logical proof that without market-determined “economic calculation” socialism was doomed to failure, and his insight that economics is a subset, albeit a very large subset, of the broader field of praxeology, the science of human action. Momentous contributions these, yet little recognition or stony silence from his professional peers or the world at large. As Henry Hazlitt comments:
Any one of these contributions, taken singly, would have entitled him to a high place in the history of economic thought; taken together, they made him the foremost economist of his generation.
To be sure, in 1969, thanks in large measure to Fritz Machlup, the American Economic Association named Mises a “distinguished fellow.” In 1963 New York University awarded him an honorary doctorate of law, thanks in large measure to Lawrence Fertig, then a trustee of the university. And earlier Oskar Lange, then of the University of California and later chief economic planner in Poland’s Politburo, even proposed a statue of Mises for having directed socialist attention to the problem of economic calculation—a still very much unsolved problem in socialism, by the way. So here and there fame flickered for Mises.
Keynes, on the other hand, was lionized the world over and even elevated to the nobility—Lord Keynes. Doctoral dissertations and textbooks galore, literally in dozens of languages, echo his theories. In this country, Nobel Laureate Paul A. Samuelson’s thoroughly Keynesianized Economics, first published in 1948, translated into many languages, and now in its 11th Ameri can edition, is still going strong. Samuelson has molded the thinking of generations of Americans and non-Americans, many of them now in positions of influence and power.
But what of the future? Let’s take a leaf from Edward Bellamy’s Looking Backward: 1887- 2000. Let’s suppose all of us here today achieve the turn of this millennium, that we reach New Year’s Day in the year 2000, that we then look backwards. Will we, at that point in time, be able to say that the world perceived two giants on the stage during the 20th century—one, if you will, to the right, the other to the left, one a genuine giant, a genius of the rank of Aristotle, Shakespeare, Newton and Adam Smith, the other a pseudo giant, a messianic inflationist?
One giant speaks of the dignity of the individual, the ethic of work, the concept of personal responsibility, the sanctity of contract, the sovereignty of the consumer, the limitation of the state, the necessity of a gold standard, the cooperation of society through individualism, the idea of world peace through world trade, the efficacy and democracy of the market, the bond between freedom and free enterprise—the fact that they are inseparable, that one without the other is impossible.
The other giant—the pseudo giant-speaks of the thrift of the rich as aggravating the distress of the poor, the antisocial nature of the hoarding of money, gold as a “barbarous relic,” the stock market as a gambling casino, the job of government to control and direct investment, the duty of the state to reduce the inequality of income and wealth, the source of real value as labor content, the idea that public debt is of no consequence since “we owe it to ourselves.”
Which of these two men will history accord the recognition of hero of this age?
That is why I have reserved my charge to you until now. Whether the remaining fifth of this century is to continue to be the age of Keynes or the beginning of the age of Mises remains to be seen, but economic education—as Leonard Read will tell you—is not a passive thing. It takes effort—very active effort. Capita]-ism does not destroy itself, Mises reminded us. Instead people attempt again and again to undermine or overturn it “because they expect greater benefits from socialism or interventionism.” Those attempts must be opposed. Yet opposition has been relatively feeble throughout this tumultuous century, especially on the part of the intelligentsia, who by and large have exhibited what Mises called an “anti-capitalist mentality.” As Mises himself wrote in a somber mood in 1940:
Occasionally I entertained the hope that my writings would bear practical fruit and show the way for policy. Constantly I have been looking for evidence of a change in ideology. But I have never allowed myself to be deceived. I have come to realize that my theories explain the degeneration of a great civilization; they do not prevent it. I set out to be a reformer, but only became the historian of decline.
Hence my charge: I hold it as the duty of each and every one of you to read, to think, to speak, to write, to realize that we are the descendants of, in Hayek’s words, “a great radical,” of a genius whose vision, whose light, whose torch should—indeed must—be passed on.
It is up to us, the living, not only to glory in the potential of man and reason but to stand up and speak out—as Lu Mises stood up and spoke out—for freedom and free enterprise, for the preservation of Western Civilization itself.