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Thursday, June 1, 2006

Ludwig von Mises: The Political Economist of Liberty, Part II

In Socialism (1922), Liberalism (1927), and Critique of Interventionism (1929), the task Ludwig von Mises set for himself was to offer a radically different vision of man in society from that presented by the socialists, nationalists, and interventionists. In place of their starting premise of inescapable conflicts among men in terms of “social class,” nationality, and race, or narrow group interest, Mises insisted that reason and experience demonstrated that all men could associate in peace for their mutual material and cultural betterment. The key to this was an understanding and appreciation of the benefits of a division of labor. Through specialization and trade the human race has the capacity to lift itself up from both poverty and war.

Men become associates in a common process of social cooperation, instead of antagonists with each attempting to rule over and plunder the others. Indeed, all that we mean by modern civilization, and the material and cultural comforts and opportunities that it offers man, is due to the highly productive benefits and advantages made possible by a division of labor. Men collaborated in the arena of competitive market exchange.

The confusion, Mises pointed out, is the failure to view this cooperative social process from a longer-run perspective than the changing circumstances of everyday life. In the rivalries of the market, there are always some who earn profits and others who suffer losses in the interactive and competitive processes of supply and demand. But what needs to be understood is that these changes in the short-run fortunes of various participants in the division of labor are the method through which each participant is informed and nudged into either doing more of some things or less of others. This process brings about the necessary adjustment of society’s productive activities in order to assure that they tend to match and reflect the market pattern of consumer demand.1

Of course, political force can be substituted for the “reward” of profits and the “punishment” of losses. However, the costs of this substitution are extremely high, Mises argued. First, men are less motivated to apply themselves with intelligence and industry when forced to work under the lash of servitude and compulsion, and thus society loses what their free efforts and invention might have produced.2 Second, men are forced to conform to the values and goals of those in command, and thus they lose the liberty of pursuing their own purposes, with no certainty that those who rule them know better what may give them happiness and meaning in life.

And, third, socialist central planning and political intervention in the market, respectively, abolish or distort the functioning of social cooperation. A sustained and extended system of specialization for mutual improvement is only possible under a unique set of social and economic institutions. Without private ownership in the means of production, the coordination of multitudes of individual activities in the division of labor is impossible. Indeed, Mises’s analysis of the “impossibility” of a socialist order being able to match the efficiency and productivity of a free-market economy was the basis for his international stature and reputation as one of the most original economists of his time, and was the centerpiece of his book Socialism.3

Private ownership and competitive market exchange enable the formation of prices for both consumer goods and the factors of production, expressed in the common denominator of a medium of exchange—money. On the basis of these money prices, entrepreneurs can engage in economic calculation to determine the relative costs and profitability of alternative lines of production. Without these market-generated prices, there would be no rational way to allocate resources among their competing uses to assure that those goods most highly valued by the buying public were produced in the least costly and therefore most economical manner. Economic calculation, Mises demonstrated, guarantees that the scarce means available best serve the members of society.

Such rationality in the use of means to satisfy ends is impossible in a comprehensive system of socialist central planning. How, Mises asked, will the socialist planners know the best uses for which the factors of production under their central control should be applied without such market-generated prices? Without private ownership of the means of production there would be nothing (legally) to buy and sell. Without the ability to buy and sell, there will be no bids and offers, and therefore no haggling over terms of trade among competing buyers and sellers. Without the haggling of market competition there would, of course, be no agreed-on terms of exchange. Without agreed-on terms of exchange, there are no market prices. And without market prices, how will the central planners know the opportunity costs and therefore the most highly valued uses for which those resources could or should be applied? With the abolition of private property, and therefore market exchange and prices, the central planners would lack the necessary institutional and informational tools to determine what to produce and how, in order to minimize waste and inefficiency.

Mises Challenged

Socialists and many nonsocialist economists claimed over the decades that Mises was wrong when he said that socialism was “impossible.” They pointed to the Soviet Union and said it existed and operated. However, in numerous places in his various writings, beginning from the early 1920s, Mises insisted that he was not saying that a socialist system could not exist. Of course, the factors of production could be nationalized and a central planning agency could be delegated the responsibility to direct all the production activities of the society.

But any supposed rationality and seeming degree of efficiency observed in the workings of the Soviet and similar socialist economies was due to the fact that such socialist planning systems existed in a world in which there were still functioning market societies. The existing market economies provided various “shadow prices” that the socialist planners could try to use as proxies and benchmarks for evaluating their own allocation and production decisions. However, since the actual economic circumstances in such a socialist economy would never be an exact duplicate of the conditions in the neighboring market societies—resource availabilities, labor skills, the quantity and qualities of capital equipment, the fertility and variety of land, the patterns of consumer demand—such proxy prices could never completely “solve” the economic calculation problem for the socialist planners in places like the Soviet Union.4

Therefore, Mises declared in 1931, “From the standpoint of both politics and history, this proof [of the ‘impossibility' of socialist planning] is certainly the most important discovery by economic theory. . . . It alone will enable future historians to understand how it came about that the victory of the socialist movement did not lead to the creation of the socialist order of society.”5

At the same time, Mises demonstrated the inherent inconsistencies in any system of piecemeal political intervention in the market economy. Price controls and production restrictions on entrepreneurial decision-making bring about distortions and imbalances in the relationships of supply and demand, as well as constraints on the most efficient use of resources in the service of consumers. The political intervener is left with the choice of either introducing new controls and regulations in an attempt to compensate for the distortions and imbalances the prior interventions have caused, or repealing the interventionist controls and regulations already in place and allowing the market once again to be free and competitive. The path of one set of piecemeal interventions followed by another entails a logic of the growth of government that eventually would result in the entire economy coming under state management. Hence, interventionism consistently applied could lead to socialism on an incremental basis.6

The most pernicious form of government intervention, in Mises’s view, was political control and manipulation of the monetary system. Contrary to both the Marxists and the Keynesians, Mises did not consider the fluctuations experienced over the business cycle to be an inherent and inescapable part of the free-market economy. Waves of inflations and depressions were the product of political intervention in money and banking. And this included the Great Depression of the 1930s, Mises argued.

Monetary Manipulation

Under various political and ideological pressures, governments had monopolized control over the monetary system. They used the ability to create money out of thin air through the printing press or on the ledger books of the banks to finance government deficits and to artificially lower interest rates to stimulate unsustainable investment booms. Such monetary expansions always tended to distort market prices resulting in misdirection of resources, including labor, and malinvestment of capital. The inflationary upswing caused by an artificial expansion of money and bank credit sets the stage for an eventual economic downturn. By distorting the rate of interest, the market price for borrowing and lending, the monetary authority throws savings and investment out of balance, with the need for an inevitable correction. The “depression” or “recession” phase of the business cycle occurs when the monetary authority either slows downs or stops any further increases in the money supply. The imbalances and distortions become visible, with some investment projects having to be written down or written off as losses, with reallocations of labor and other resources to alternative, more profitable employments, and sometimes significant adjustments and declines in wages and prices to bring supply and demand back into proper order.7

The Keynesian revolution of the 1930s, and which then dominated economic policy discussions for decades following World War II, was based on a fundamental misconception of how the market economy worked, in Mises’s view. What Keynes called “aggregate demand failures” to explain the reason for high and prolonged unemployment distracted attention away from the real source of less-than-full employment: the failure of producers and workers on the “supply side” of the market to price their products and labor services at levels that potential demanders would be willing to pay. Unemployment and idle resources constitute a pricing problem, not a demand-management problem. Mises considered Keynesian economics basically to be nothing more than a rationale for special-interest groups, such as trade unions, that didn’t want to adapt to the reality of supply and demand and of what the market viewed as their real worth.8

Thus Mises’s conclusion from his analysis of socialism and interventionism, including monetary manipulation, was that there is no alternative to a thoroughgoing unhampered free-market economy, including a market-based monetary system such as the gold standard.9 Both socialism and interventionism are, respectively, unworkable and unstable substitutes for capitalism. The classical liberal defends private property and the free-market economy, he insisted, precisely because it is the only system of social cooperation that provides wide latitude for freedom and personal choice to all members of society, while generating the institutional means for coordinating the actions of billions of people in the most economically rational manner.

Classical Liberalism, Freedom, and Democracy

Mises’s defense of classical liberalism against these various forms of collectivism, however, was not limited “merely” to the economic benefits from private property. Property also provides man with that most valuable and cherished object—freedom. Property gives the individual an arena of autonomy in which he may cultivate and live out his own conception of the good and meaningful life. It also protects him from dependency on the state for his existence; through his own efforts and voluntary exchange with other free men, he is not beholden to any absolute political authority that would dictate the conditions of his life. Freedom and property, if they are to be secure, require peace. Violence and fraud must be outlawed if each man is to take full advantage of what his interests and talents suggest would be the most profitable avenues to achieve his goals in consensual association with others.

The classical-liberal ideal also emphasizes the importance of equality before the law, Mises explained. Only when political privilege and favoritism are eliminated can each man have the latitude to use his own knowledge and talents in ways that benefit himself and also rebound, through the voluntary transactions of the market, to the betterment of society as a whole. This means, at the same time, that a liberal society is one that accepts that inequality of income and wealth is inseparable from individual freedom. Given the diversity of men’s natural and acquired abilities and volitional inclinations, the rewards earned by people in the marketplace will inevitably be uneven. Nor can it be otherwise if we are not to diminish or even suffocate the incentives that move men to apply themselves in creative and productive ways.

The role of government, therefore, in the classical-liberal society is to respect and protect each individual’s right to his life, liberty, and property. The significance of democracy, in Mises’s view, is not that majorities are always right or should be unrestrained in what they may do to minorities through the use of political power. Elected and representative government is a means of changing who holds political office without resort to revolution or civil war. It is an institutional device for maintaining social peace. It was clear to Mises from the experience of communism and fascism, as well as from the many tyrannies of the past, that without democracy the questions of who shall rule, for how long, and for what purpose would be reduced to brute force and dictatorial power. Reason and persuasion should be the methods that men use in their dealings with one another—both in the marketplace and the social and political arenas—and not the bullet and the bayonet.10

In his book on classical liberalism Mises bemoaned the fact that people are all too willing to resort to state power to impose their views of personal conduct and morality whenever their fellow human beings veer from their own conception of the “good,” the “virtuous” and the “right.” He despaired, “The propensity of our contemporaries to demand authoritarian prohibition as soon as something does not please them . . . shows how deeply ingrained the spirit of servility still remains in them. . . . A free man must be able to endure it when his fellow men act and live otherwise than he considers proper. He must free himself from the habit, just as soon as something does not please him, of calling for the police.”11

What, then, should guide social policy in determining the limits of government action? Mises was a utilitarian who argued that laws and institutions should be judged by the standard of whether and to what extent they further the goal of peaceful social cooperation. Society is the most important means through which men are able to pursue the ends that give meaning to their lives. But Mises was not what has become known in philosophical discussion as an act-utilitarian; that is, one who believes that a course of action or a policy is to be determined on an ad hoc, case-by-case basis. Rather, he was a rule-utilitarian, one who believes that any particular course of action or policy must be evaluated in terms of its consistency with general rules of personal and social conduct that reason and experience have accumulated as guides to conduct. Any action’s long-run consequences must be taken into consideration in terms of its consistency with and relationship to the preservation of the institutions essential for successful social interaction.12 This is the meaning of the phrase Mises often used: the “rightly understood long-run interests” of the members of society.13

Thus his defense of democracy and constitutional limits on the powers of government was based on the reasoned judgment that history has demonstrated far too many times that the resort to nondemocratic and “extra-constitutional” means has led to violence, repression, abrogation of civil and economic liberties, and a breakdown of respect for law and the legal order, which destroys the long-run stability of society. The apparent gains and benefits from “strong men” and “emergency measures” in times of seeming crisis have always tended to generate costs and losses of liberty and prosperity in the longer run that more than exceed the supposed “short-run” stability, order, and security promised by such methods.

Classical Liberalism and International Peace

The benefits from social cooperation through a market-based division of labor, Mises argued, are not limited to a country’s borders. The gains from trade through specialization extend to all corners of the globe. Hence, the classical-liberal ideal is inherently cosmopolitan. Aggressive nationalism, in Mises’s view, not only threatens to bring death and destruction through war and conquest, but it also denies all men the opportunity to benefit from productive intercourse by imposing trade barriers and various other restrictions on the free movement of goods, capital, and people from one country to another. Prosperity and progress are artificially constrained within national boundaries. This perversely can create the conditions for war and conquest as some nations conclude that the only way to obtain the goods and resources available in another country is through invasion and violence. Eliminate all trade barriers and restrictions on the free movement of goods, capital, and men, and limit governments to the securing of each individual’s life, liberty, and property, and most of the motives and tensions that can lead to war will have been removed.

Mises also suggested that many of the bases for civil wars and ethnic violence would be removed if the right of self-determination were recognized in determining the borders between countries. Mises took great care to explain that by “self-determination” he did not mean that all those belonging to a particular racial, ethnic, linguistic, or religious group are to be forced into the same nation-state. He clearly stated that he meant the right of individual self-determination through plebiscite. That is, if the individuals in a town or region or district vote to join another nation, or wish to form their own independent country, they should have the freedom to do so.

There still may be minorities within these towns, regions, or districts, of course, that would have preferred to remain part of the country to which they belonged, or would have preferred to join a different country. But however imperfect self-determination may be, it would at least potentially reduce a good amount of the ethnic, religious, or linguistic tensions. The only lasting solution, Mises said, is the reduction of government involvement to those limited classical-liberal functions, so the state may not be used to impose harm or disadvantage on any individual or group in society for the benefit of others.14

Liberalism and the Social Good

Finally, Mises also discussed the question: for whose benefit does the classical liberal speak in society? Unlike virtually all other political and ideological movements, liberalism is a social philosophy of the common good. Both at the time when Mises wrote many of his works and now, political movements and parties often resort to the rhetoric of the common good and the general welfare, but in fact their goals are to use the power of government to benefit some groups at the expense of others.

Government regulations, redistributive welfare programs, trade restrictions and subsidies, tax policies, and monetary manipulation are employed to grant profit and employment privileges to special-interest groups that desire positions in society they are unable to attain on the open, competitive market. Corruption, hypocrisy, and disrespect for the law, as well as abridgments on the freedom of others, naturally follow.

What liberalism offers as an ideal and as a goal of public policy, Mises declared, is an equality of individual rights for all under the rule of law, with privileges and favors for none. It speaks for and defends the freedom of each individual and therefore is the voice of liberty for all. It wants every person to be free to apply himself in the pursuit of his own goals and purposes, so he and others can benefit from his talents and abilities through peaceful market transactions. Classical liberalism wants elimination of government intervention in human affairs so political power is not abusively applied at the expense of anyone in society.15

Mises was not unaware of the power of special-interest-group politics and the difficulty of opposing the concentrated influence of such groups in the halls of political power.16 But he insisted that the ultimate power in society resides in the power of ideas. It is ideas that move men to action, that make them bare their chests at barricades, or that embolden them to oppose wrongheaded policies and resist even the strongest of vested interests. It is ideas that have achieved all the victories that have been won by freedom over the centuries.

Neither political deception nor ideological compromise can win liberty in the twenty-first century. Only the power of ideas, clearly stated and forthrightly presented, can do so. And that is what stands out in Mises’s books and makes them one of the enduring sources of the case for freedom.

When Mises wrote many of his books in the 1920s, 1930s, and 1940s, communism and fascism seemed irresistible forces in the world. Since then, their ideological fire has been extinguished in the reality of what they created and the unwillingness of tens of millions to live under their yoke. Nonetheless, many of their criticisms of the free market continue to serve as the rationales for the intrusions of the interventionist welfare state in every corner of society.17 And many of the contemporary arguments against “globalization” often resemble the criticisms leveled against free markets and free trade by European nationalists and socialists a hundred years ago.18

Mises’s arguments for individual freedom and the market economy in the pages of Socialism, Liberalism, Critique of Interventionism, Omnipotent Government, Bureaucracy, Planned Chaos, Human Action, and many others continue to ring true and remain relevant to our own times. It is what makes his works as important now as when he wrote them across the decades of the twentieth century.

  • Richard M. Ebeling is BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. He was president of the Foundation for Economic Education (FEE) from 2003 to 2008.