A great book, it has been remarked, is like a great castle. It can be viewed from many different angles, each offering a unique perspective. Viewing Ludwig von Mises’s monumental work from the vantage of 2009 permits one to see with great clarity one fascinating aspect of the book–the sheer drama of its emergence at the time that it appeared. This is a theme on which I have touched more than once over the years. I am grateful for the present opportunity to articulate this theme in somewhat greater detail.
Some 13 years ago (in the May 1996 , which celebrated the first 50 years of public service splendidly contributed by the Foundation for Economic Education), I dwelt on the pivotal role played by FEE in upholding the flag of Austrian economics. I dwelt especially on the role it played (most importantly by providing Mises with a congenial “base”) in nurturing the Austrian economics tradition during decades in which the professional reputation of the school was at its very lowest. That paper focused, in part, on the contribution of the Foundation to the subsequent revival of Austrian economics in this country. The present note complements that earlier piece by focusing on the altogether dramatic character of the long-run impact of this magnum opus of Mises, a work that anchored everything which Mises was to write under FEE auspices, and to which the Austrian economics revival is, unquestionably, to be attributed.
The Intellectual Drama of Human Action
The term “drama” may seem out of place in regard to a serious tome on the foundations of a serious discipline. But Human Action is no ordinary work. It is a work which, at the time, was seen as written in starkly uncompromising fashion, articulating a particular worldview and a particular understanding of economics–at a time when that worldview and that understanding were thought to have been decisively nudged off the professional stage. The book came to be summarily dismissed, and subsequently ignored, as the last gasp of a dying intellectual tradition. But this judgment was grievously mistaken.
Human Action was not a work merely presenting, once again, the ideas of an earlier tradition. The book in fact represented, we must point out, a dramatic revision, a dramatic deepening of the insights of the Austrian school. Precisely when the Austrian economics tradition was widely seen as virtually dead, as material only for treatises on the history of economic thought–precisely at that time that very tradition brilliantly produced a sparkling, fresh, fundamentally new interpretation of its central tenets. Six decades later we can see how Mises’s revision and reinerpretation inspired a revival of serious academic and scholarly interest in Austrian economics. Seen from this perspective, the 1949 publication of Human Action must surely be recognized as a dramatic episode in the history of economics.
The Decline of Austrian Economics, 1932–1945
At the outset of the 1930s the Austrian school of economics was recognized on the continent, in the United Kingdom, and in the United States as an important component of contemporary academic economics. For young scholars from America visiting the European academies at that time, an invitation to present their work at a seminar at the University of Vienna was a highly valued professional achievement. In Britain, Lionel Robbins, the most prominent economist at the University of London, published his 1932 classic, An Essay on the Nature and Significance of Economic Science, replete with insights and citations the author had culled from the Austrian literature and from his visits to Vienna. In that same year Robbins invited the brilliant young Friedrich Hayek (a close associate and protégé of Mises) to join the London faculty in a prestigious professorship. And Hayek’s appearance on the British academic scene had an almost dramatic impact on British economics discussion, especially in regard to capital and monetary theory.
Yet just a few short years later, it seemed, this success had evaporated. The advance of economic theory in the ’30s (advances related in particular to the work of Piero Sraffa and John Maynard Keynes, to theories of imperfect and monopolistic competition, to the theories of socialist economics, and to sophisticated advances in mathematical economics) seemed to have left the Austrians far behind. They were seen to have been defeated by Keynes (in regard to macroeconomic issues), by Frank Knight (in regard to capital theory), and by Oskar Lange and by Abba Lerner (on the possibility of efficient socialist economic planning), and to have failed to keep pace with the exciting developments in welfare theory, econometrics, and mathematical economics. The physical dispersal of the circle of Vienna economists who had attended Mises’s famed privatseminar as a result of the political turmoil of the times certainly contributed to the impression that the Vienna tradition was no longer a live component of modern economic thought. (Mises himself had left Vienna for Geneva in 1934.) Although Mises published Nationalökonomie in Geneva in 1940 and Hayek published The Pure Theory of Capital in 1941, the economics profession paid virtually no attention to these works. By the end of World War II, with Mises a refugee in New York and without a regular academic position, the outlook for the future of the Menger-Böhm-Bawerk tradition seemed bleak indeed.
Moreover, it can be argued, certain aspects of the developments in mainstream economic theory during the ’30s–despite their overall thrust away from the path of Austrian theory–may well have seemed to erode the case for a distinctive Austrian presence. In its early years the Austrian school had gained its distinctiveness from its pioneering challenge to the dominance of the German Historical School. But by the 1930s, that war (on behalf of the legitimacy of abstract economic theory) had been decisively won; all the major schools of European economic thought were on the side of the Austrians in regard to the role of pure theory. And in 1932 Mises himself had written to the effect that all “modern” schools of economic thought subscribe to the same set of economic principles, albeit in different languages and with different modes of exposition. Mises himself, it seems clear, had (in 1932) not recognized the gulf that (as would later become amply clear!) separated the dominant Anglo-American mainstream from the economics that Mises himself identified with the Austrian tradition. So a number of Mises’s disciples (including, perhaps, Fritz Machlup, Gottfried Haberler, and Paul Rosenstein-Rodan) might be excused for thinking that what was important to the Austrian tradition was by now (the ’30s) well-accepted in mainstream economics. There was no intellectual profit, such Austrians came to believe, to be gained by insisting on the distinctiveness of the Austrian label.
The Socialist Calculation Debate and the Mises-Hayek Revolution
Yet if the immediate post-World War II scene appeared so wholly inhospitable to a distinctive Austrian economics, both Mises and Hayek were in fact working, independently but along parallel paths, toward a revolutionary reinterpretation of their intellectual heritage. (This note is, of course, focusing on Mises’s classic work of 1949. But it would be a serious mistake to fail to note that the “drama” we have seen in the appearance of Mises’s book had its parallel in the appearance of Hayek’s 1948-49 volume of essays, Individualism and Economic Order. I have elsewhere discussed the complementarity between those two contributions in “Ludwig von Mises and Friedrich von Hayek: The Modern Extension of Austrian Subjectivism,” republished as chapter 7 in my The Meaning of Market Process: Essays in the Development of Modern Austrian Economics.)
The “socialist economic calculation debate” that raged in the prewar decade had, it seems reasonable to believe, induced the revolutionary revisions in their understanding of markets. The uncritical acceptance by the economics profession of the Lange-Lerner thesis–that socialists can plan efficiently by modeling their plan after general equilibrium conditions (postulated by mainstream theorists as governing competitive market systems)–taught Mises and Hayek that their own understanding of how markets work differed fundamentally from that of their neoclassical colleagues. Mises, in particular, now realized that mainstream neoclassical theorists do not subscribe to the same understanding of the economic principles governing markets to which Austrian economists (or, at any rate, he) subscribe. Mises wrote Human Action to articulate with utmost conviction his refusal to accept that mainstream neoclassical interpretation of how markets work. Human Action was a defiant declaration of theoretic independence–a declaration spelling out explicitly what had hitherto (at least in Mises’s view) been implicit in earlier neoclassical (and particularly in Austrian) market theory. (See Frank M. Machovec’s Perfect Competition and the Transformation of Economics.)
This explicit articulation constituted a dramatic, revolutionary deepening and extension of existing Austrian theory. That it came to inspire the late-twentieth-century revival of Austrian economics, although ignored and overlooked when it was first published, is in large part what made the publication of Human Action an episode of intellectual drama.
Market Process Versus Market Equilibrium
What the socialist economic-calculation debate taught Mises, I believe, is that it is necessary, in order to promote economic understanding of what the market system achieves, to replace expository emphasis on attainable market equilibrium patterns with an emphasis on the character of the processes of equilibration. (For an exhaustive exploration tending to support this assertion, see Don Lavoie’s Rivalry and Central Planning:The Socialist Calculation.)
This latter emphasis reveals the essentially entrepreneurial character of the market process and underscores the role of dynamic competition (as against the state of so-called “perfect competition”) in this entrepreneurial process. (In Hayek’s work a parallel shift of emphasis was being articulated: namely, a replacement of a world of imagined perfect mutual knowledge by a world in which the market “learning” process tends continually to expand the scope of mutual knowledge–subject, of course, to the continual disruptions generated by exogenous changes in demand patterns, resource availabilities, and so on.) The writers who believed that central planners could emulate market efficiency had overlooked, in Mises’s view, the subtle processes of entrepreneurial discovery, through which alone one could postulate any systematic tendencies toward market equilibrium.
By focusing on the entrepreneurial process at work in markets unhampered by governmental obstacles to competitive entry, Mises offered much more than a reinterpretation of traditional price theory. His insights offered a brilliant new understanding of the meaning of market competition and thus also a revolutionary perspective on the theory of monopoly. Mises’s understanding of the market process implied not only the rejection of mainstream orthodoxy in the theory of socialism, but also far-reaching implications for the theory of antitrust policy and, more generally, for the theory of government regulatory policy.
For many years this new emphasis in Misesian-Austrian economics was completely ignored. In the immediate post-World War II decade the focus of professional attention was not on the precise formulation of the foundations of microeconomics, but on the extent to which microeconomics must, in the real world, be superseded, as a practical matter, by Keynesian macroeconomic considerations. Moreover, the increasing sophistication of mathematical economics, and its applications in the elaboration of the ambitious Walrasian general-equilibrium theoretic enterprise, combined to make Mises’s ideas seem old-fashioned, elementary, and even primitive. As is now well-known, these were decades (stretching from after the 1921 publication of Knight’s Risk, Uncertainty and Profit until William Baumol’s pioneering work almost half a century later in the resurrection of the entrepreneurial role) in which mainstream economic theory almost completely lost sight of the entrepreneur.
The Drama of the Austrian Revival
But Mises’s great work was not destined to be buried forever under this deafening silence. By the 1960s and ’70s younger students and scholars were beginning to discover Mises’s work and to recognize the sparkling freshness of his ideas. The economics profession–or at least some of its more daring and independent-minded graduate students–was at the same time beginning to take note of and to acknowledge the stultifying irrelevance of much of what was being taught in mainstream graduate departments. The downfall of Keynesian economics during the latter decades of the century focused renewed attention on the foundation of microeconomics. In Human Action more and more young scholars rediscovered ideas that enabled them to make sense of the complex world that economic science is supposed to help us understand. The downfall of the Soviet Union focused attention on the profound truths about socialism to be extracted from the Misesian foundations. That downfall taught many that the mainstream of the profession, which had for decades defended the possibility of socialist economic efficiency and had contemptuously dismissed those who had challenged that possibility, was simply and ingloriously wrong.
The modest revival of interest in the Austrian economics tradition over the past four decades has highlighted, in my opinion, the drama inherent in the first appearance of Human Action. This work was the courageous manifesto of a scholar of incorruptible integrity who, close to the seventh decade of his life, contributed a brilliantly fresh articulation of economics truths. That this work was ignored for decades and only subsequently won recognition (albeit modest) adds to the intellectual drama of this episode in the twentieth-century development of economic thought. Speculation concerning the future influence that may yet be exerted by this towering work only enhances the excitement sparked by this drama.