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Wednesday, August 19, 2009

Human Action: The 60th Anniversary

We are celebrating the 60th anniversary of a great book, Human Action: A Treatise on Economics, by a learned man and a clear thinker: the Austrian economist Ludwig von Mises. It presents Mises’s understanding–after long years of study and thought–of how the market economy functions. It is a major contribution to human knowledge.

Interventionist ideas dominated Europe when Mises was a young man. He wrote later that when he entered the university in 1900, he was “a thorough statist [interventionist].” Unlike most of Mises’s fellow students, he was not a Marxist; he had studied the works of Marx, Engels, and Lassalle, found them incomprehensible and so was “consciously anti-Marxian.”

At that time the teachings of Gustav Schmoller’s Historical school of economic state science prevailed in the German universities. According to Schmoller, the only scientific method for the sciences of human action was history, the study of the past from which economic theory was to be abstracted. Moreover, Schmoller’s school did not really deal with scientific problems but was dedicated instead to the glorification and justification of Prussian policies and Prussian authoritarian government. Thanks to Mises’s intense interest in historical knowledge, he never accepted historicism, having rejected this view of economics even as a high school student.

During his Christmas vacation in 1903, Mises’s senior year at the university, he read Carl Menger’s Grundsätze der Volkswirtschaftslehre (Principles of Economics). The book opened his mind to a new way of thinking, a completely different approach to economics from that of either Marxism or historicism. As he wrote later, it “made an ‘economist’ of me.”

As Menger presented it, economics is a science of reason and logic, the study of the actions of men, their ideas, and the means they use to accomplish their chosen ends. Menger’s book dealt with the economizing individual as a universal phenomenon–that is, his principles apply to everyone at any time. We all act on the basis of our own subjective values in the effort to acquire things we consider important for “our continued existence and development (life and well-being).” We try to use what we have to get what we want as expeditiously and economically as possible, given the time and circumstances. Once Mises realized that economics was a science and that subjective value and marginal utility were the bases for all economic theory, his interest turned from history to economics.

Subjective value theory explained that voluntary exchanges improved the situation of both parties to a trade. One man’s gain was not another man’s loss; rather, both parties expected to benefit. In the absence of force, fraud, or human error, they did. Then ipso facto in a free-market world, conditions would continually improve and people would become better off , richer, more peaceful, and more prosperous. But the market then was by no means free. Almost all European governments forcefully interfered with it, regulating and controlling their economies to a considerable extent. The Austrian government controlled rents, restricted imports, and inflated the money supply to subsidize the railroads and food producers. Germany’s socialistic policy would culminate in an almost completely controlled economy in World War I and later in Hitler’s National Socialism. In the Soviet Union the communists destroyed the market and private property.

Mises reasoned that if in a free-market society, where peaceful social cooperation prevailed, the voluntary actions and choices of individuals tend to coordinate the actions of all market participants, improve production, and contribute to peace and prosperity, then interference through force or threat of force hampered and disrupted that process. Mises was a serious and conscientious student. The more he studied and thought, the more he realized that future peace and prosperity depended on promoting an understanding of good free-market ideas and opposing bad government-interventionist ideas. As a high school student he had adopted as his motto a phrase from the Latin poet Virgil: “Do not yield to the bad, but always oppose it with courage.” Hence he determined not only to improve his own understanding of economics but also to fight interventionist ideas by explaining their harmful consequences and by teaching sound economic ideas in the classroom, lectures, seminars, books, and articles.

Early Development

In his 1922 book, Socialism, Mises followed Menger in explaining how money developed out of barter as a trading commodity and became society’s medium of exchange. Without such a common denominator, traders would be unable to calculate consumer demand, production costs, and selling prices. Mises pointed out that in a socialist society without private property, there could be no market prices and without market prices, the task of the government’s central planners would be like trying to steer a ship without a rudder–chaos!

In Mises’s earlier book, The Theory of Money and Credit (1912), he pointed out that by lowering the interest rate asked of borrowers, banks could expand credit, create more “money” to lend, make borrowing easier, and thus stimulate businesses artificially. He explained later that the German government itself had been responsible for its runaway inflation in 1923 by printing money to spend and to lend. Only much later did Mises realize that unexplained economic crises were due not to market failure, but to the artificial reduction of interest rates–by banks and by governments–that caused a “boom” by inducing businesses to borrow more than they would have otherwise and then later a “bust,” when their projects, which turned out to be malinvestments, made losses.

A Comprehensive Treatise

Mises had written books on money, inflation, the trade cycle, and socialism, as well as articles on practically every aspect of economics. Yet he felt the need to integrate all the teachings of the Austrian school–subjectivism, the division of labor, monetary theory, international trade, pricing, competition, monopoly, savings, investment, and more–into a comprehensive treatise on economics. Mises’s activities with the Austrian Chamber of Commerce in Vienna occupied him almost full-time. However, anticipating the rise of socialism in Austria and of Hitler in Germany, Mises accepted a teaching position at the Graduate Institute of International Studies in Geneva, Switzerland, in 1934. His teaching schedule in Switzerland was not strenuous, and he finally had time to devote to the book on economic theory he had been contemplating for some time. He began shortly after he arrived in Geneva, and he kept on writing in between his other obligations–teaching, getting married (his wife-to-be had managed to get out of Vienna shortly after the Nazis arrived in 1938), and lecturing at international meetings. He wrote in longhand, submitting his manuscript page by page to be typed. Finally, in the spring of 1940, thanks to Mises’s determination and persistence, the manuscript for Nationalökonomie, an all-encompassing 756-page book on economics, was in the hands of the publisher.

By then, World War II had begun. Germany had overrun and occupied Austria, Poland, Holland, Belgium, Norway, and France, and attacked Russia. Mises’s situation in Switzerland, as a “stateless citizen” after the Nazis occupied Austria, had become uncomfortable. Friends of Mises arranged for him to be issued a non-quota U.S. visa, and he made plans to leave Switzerland. The publication of Nationalökonomie was announced in the Tribune de Genève on June 16-17, 1940. With the Nazis in control of most of Europe, 1940 was an unpropitious time for launching on the European market a new German-language free-market-oriented book. Though depressed by the war and sorry to leave Switzerland, Mises was undoubtedly proud and pleased to be carrying with him in his luggage, when he left for the United States on July 4, a copy of his newly published treatise on economics.

Mises and his new wife arrived in New York on a hot and muggy August 2, 1940. It took some time for Mises to feel settled in the United States. But by 1944 he had written and had published two English-language books (Omnipotent Government and Bureaucracy). In 1946 he became economic adviser to FEE.

Hazlitt’s Suggestion

Around this time, FEE trustee Henry Hazlitt, economic journalist, author of the popular Economics in One Lesson, and a close friend and supporter of Mises, suggested that Nationalökonomie be translated into English. Mises disagreed, saying it should be rewritten in English for an American audience. So Mises set to work. FEE founder and president Leonard E. Read was supportive of the effort. A FEE secretary helped type the final manuscript, and Read committed FEE to purchasing 500 copies to assure its publication by Yale University Press.

Human Action (1949) is organized along similar lines to Nationalökonomie. But it is a very different book, longer than the German original (889 pages) with fewer references to European history. Instead Human Action is illustrated with incidents of interest to American readers. For instance, it cites Margaret Mitchell’s Gone with the Wind, the U.S. experiment with Prohibition in the 1920s and 1930s, and General Billy Mitchell, ardent advocate of air power in the 1930s, who was demoted and court-martialed for criticizing the military, then posthumously rehabilitated and honored.

Beginning at the Beginning

In Human Action Mises starts at the very beginning. Human beings act. Why? Because they are not neutral with respect to their situation; they are dissatisfied, uneasy in some respects, and have an idea about how to improve their condition. All actions are, by definition, purposive–that is, aimed at ends. This is the subject of economics. Economics is not a study of the physical production of material things; that  is physical science, mechanics, or technology. Economics is not a study of what men did in the past; that is history. It is not a study of why men act; that is psychology or, Mises’s term, thymology. It is not the study of unconscious bodily functions (digestion, breathing, the beating of the heart, the involuntary reflexive responses of the human body to stimuli); that is physiology.

Humans act based on subjective evaluations, so subjective value theory is crucial for understanding all economic phenomena. Men have values, wants, and preferences. Some things are more important to them than others. They seek to trade things they have that they value less for things they value more. They are uneasy, dissatisfied, so they strive to exchange their present situation for another. Mises explained that prices are ratios reflecting the relative subjective values of buyer and seller expressed in money terms at the instant of exchange. Thus economics is not a study of material things or monetary statistics, but of decisions, ideas, choices, values, and the purposive actions of human beings. From this point of view, Mises described the workings of the market. Production, the division of labor, exchanges, wages, money, savings, and trades all stem from the decisions, choices, purposive actions, ideas, and personal subjective values of economizing individuals as they bid and compete with one another to improve their respective situations. Similarly, Mises explained supply, demand, competition, unemployment, monopoly, domestic and international trade, and more as outcomes of the actions and interactions of valuing individuals, each doing their best under the circumstances to seek their ends.

In Human Action Mises also analyzed government interventions into the market–taxes, price controls, price supports, inflation and credit expansion, special privileges and subsidies to some and special costs to others, trade restrictions, monetary expansion and contraction, war, and so on. Such government interventions inevitably have unintended consequences, such as increased costs, distorted production, higher prices, idle resources, and unemployment.

Human Action: An Economic Treatise represents the culmination of Mises’s life-long effort to present a comprehensive economic theory of the operations of an unhampered market plus a description of how government interferes with and obstructs social cooperation and market activities. It is a sober, scientific book, not a diatribe.

It is our relatively free market that has produced the cornucopia of goods and services we enjoy today; it has increased our knowledge of the world, improved living standards, and supported an ever-increasing population. By describing in Human Action the workings of a society based on social cooperation, the division of labor, and private property, Mises believed he presented the guideline for maintaining a free-market economy. He also believed he explained how this trend toward plenty, peace, and prosperity can be disrupted by government interventions. He concluded:

The body of economic knowledge is an essential element in the structure of human civilization; it is the foundation upon which modern industrialism and all the moral, intellectual, technological, and therapeutical achievements of the last centuries have been built. It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not annul economics; they will stamp out society and the human race.

  • Contributing editor Bettina Bien Greaves was a longtime FEE staff member, resident scholar, and trustee. She attended Ludwig von Mises’s New York University seminar for many years and is a translator, editor, and bibliographer of his works.