Money, Method, and the Market Process

I

In the 1920s and the 1930s, Ludwig von Mises was recognized as one of the leading economic theorists on the European Continent.1 F. A. Hayek has said that Mises’s critique of the possibilities for economic calculation under socialism had “the most profound impression on my generation. ... To none of us ... who read [his] book [Socialism] when it appeared was the world ever the same again.”2 Lord Lionel Robbins, in introducing the Austrian School literature on money and the trade cycle to English-speaking readers in 1931, emphasized the “marvelous renaissance” the “School of Vienna” had experienced “under the leadership of ... Professor Mises.”3 In his comprehensive study of German Monetary Theory, Howard Ellis insisted that Mises’s Theory of Money and Credit was “one of the most substantial treatises upon monetary theory in the German literature” and that his personal role in bringing an end to the Austrian hyperinflation of the early 1920s made “Mises a significant figure.”4 Fritz Machlup pointed out that in the early 1920s, “Ludwig v. Mises was the first, so far as I know, to point to the phenomena of the consumption of capital” due to the distortion of capital accounts caused by inflation and the fiscal policies of the Austrian State.5 And in a study of the evolution of the theory of cost in economics, James M. Buchanan has emphasized that “Ludwig von Mises was one of the chief sources for the subjectivist economics” expounded in the 1930s at the London School of Economics and developed further, more recently, by the latest generation of the Austrian School.6

Yet, for most of the post-war period, Mises’s writings have been in a general eclipse among economists, even though he continued to lecture widely, published over a half-dozen books during this time and taught on a regular basis at New York University until his retirement in 1969 at the age of 89. The cause of this peculiar circumstance arose from his position vis-à-vis Keynesian economics. The almost monolithic hold Keynesianism had over economists following 1945 resulted in any individual who challenged either the theoretical edifice or policy proposals of the then “New Economics” experiencing almost certain intellectual death. Yet, this is exactly what Ludwig von Mises did in questioning and unflinchingly criticizing the entire body of Keynesian doctrine. The result was his near total ostracism from the economics profession.

During the 1970s, the intellectual terrain began to shift. In the wake of the dismal failure of Keynesian policy prescriptions, doubts began to be generated about the fundamentals of the Keynesian system. A great amount of scholarly self-criticism emerged as myriad exegetical readings were made in an attempt to divine what Keynes “really meant.” The various investigations lead to the conclusion that Keynes really meant almost anything, depending upon which of his volumes was read and which passages in any particular book were given emphasis.

The decline of Keynesianism has brought about a new spirit of open, intellectual competition among economists the likes of which has not been seen since the early 1930s. And occupying a prominent place in this competition have been the ideas of Ludwig von Mises and the Austrian School of Economics, of which he was an illustrious member.

II

The 1871 publication of Carl Menger’s Grundsätze der Volkswirtschaftslehre7 marks the beginning of the Austrian School. Carl Menger is usually classified along with William Stanley Jevons and Léon Walras as one of the co-founders of the “Marginalist Economics” which replaced the Classical School and its labor theory of value. In his landmark volume, however, Menger produced a pioneering contribution to economic theory which distinguishes him uniquely from Jevons and Walras.

All three men had grasped the essential role of marginal utility: value was a matter of relative comparison between alternatives and each alternative’s significance was evaluated by the decision-maker at the margin, i.e., the importance of the next unit of a good or service that could be obtained or would have to be given up in an act of choice.

For both Jevons and Walras, however, the value of the marginal utility concept was its power in demonstrating the conditions for equilibrium in a given exchange environment. For Menger, on the other hand, equilibrium was purely a useful limiting case that portrayed the circumstances under which no further motivations for exchange among traders would exist; the importance of marginal utility, in the Mengerian scheme, was precisely its value in enabling an analysis of the exchange process itself, regardless of the concrete manifestation of any eventual equilibrium outcome.8

An investigation of exchange sequences and processes in disequilibrium circumstances necessarily raised questions concerning the knowledge possessed by the respective market participants, the role of time as it related to adjustment periods and production periods relative to change, and the formation of expectations and foresight as potential traders attempted to anticipate future conditions as a guide for their own actions.

The economic analysis derived from Jevons and Walras took on a fundamentally static quality being basically an attempt to stipulate the prerequisites for an equilibrium state. The “Austrian” approach derived from Menger had, in comparison, essential dynamic qualities that set it apart from other schools of thought over the years.9

The foundations laid by Menger in 1871 were developed further in the last two decades of the nineteenth century and in the first decade of the twentieth century. The two most notable contributors to this endeavor and, in fact, the ones who gave the Austrian School its world-wide recognition, were Eugen von Böhm-Bawerk and Friedrich von Wieser. Böhm-Bawerk extended Menger’s analysis to questions concerning the theory of capital and the origin and formation of interest.10 Wieser, appreciating Menger’s insight that marginal utility and valuation are subjective estimates by the individual decision-maker, demonstrated that cost was a subjective phenomenon as well, nothing more than the next best alternative or opportunity set aside or foregone when a choice and an exchange are made.11

III

Ludwig von Mises’s contributions to the Austrian School spanned six decades and touched upon almost every aspect of economic science. The most controversial of Mises’s writings have undoubtedly been those devoted to questions of methodology. Yet, at the same time, they are probably the most important of all his works. Indeed, what Mises attempted was the laying of a philosophical foundation for the entire edifice of economic science as it had developed from Adam Smith’s first analysis of the spontaneous market order to Carl Menger’s restatement of the principles of that spontaneous order on the basis of a conscious use of methodological individualism.12 ,13

Mises’s writings on methodology covered practically his entire career. His early statements on the subject were collected in 1933 under the title, Epistemological Problems of Economics.14 They were refined and integrated into a general economic treatise, Nationalökonomie (1940)15 and in its English-language counterpart, Human Action (1949),16 and restated in Theory and History (1957)17 and in The Ultimate Foundation of Economic Science (1962).18

The unique factor that separates the natural sciences from the social sciences, Mises argued, is the purposefulness or intentionality of all human endeavors. Man above all else is the being who acts, who inquisitively looks out upon the world, is conscious of opportunities to improve his lot and proceeds to apply means to achieve ends when circumstances are perceived by the actor as offering the possibility for success.

Purposefulness, perception of circumstances, alertness to opportunities, Mises emphasized, are all attributes assignable only to individuals; and their concrete content are functions of the particular perspectives, circumstances, and interpretations of the respective actors themselves. Social science, therefore, is grounded at its start in methodological individualism and methodological subjectivism. The alpha and omega of social phenomena is the subjective world of acting man. The laws of nature and the physical environment may be the limits within which human endeavors are possible of accomplishment, but it is the human actor’s perception of the possible and the attainable that will be the divining rod for action initiated.

We also see in this Misesian schema all the dynamic elements that dominated Menger’s Grundsätze: imperfect knowledge, time and change, expectations and foresight. Each of these has implied residence in the concept of purposeful action, for action—conscious behavior directed towards selected goals—has logical meaningfulness only where choice is seen as possible. And choice, as selection among alternative opportunities, has reality only where certain knowledge of the future is lacking. In turn, time and change, as Mises was wont to emphasize, are inseparable from action, for the very thought of action implies a becoming and a became.

A methodological subjectivist approach to analyzing the relationship of time to action, or the meaning of “ends possible” and “means available,” or costs (as foregone opportunities) and benefits (as prospective gain in psychic improvement) resulted in Mises’s rejection of what he saw as Positivist imperialism, i.e., the imposition of the methods considered appropriate in the natural sciences into the social sciences. Application of the Positivist rules of “objective science” would require the abandonment of that aspect that comprises the unique element in human events: appreciation of human action as having subjective meaning from the actor’s point-of-view. The movement of physical objects between individuals only took on the quality of an “exchange,” Mises argued, to the extent that that was the meaning the actors respectively assigned to their own action and to that of the other.

Yet, for Mises, this rejection of measurement and quantification as the standards for social science did not at the same time mean a collapse into Historicism, i.e., the argument that there are neither laws nor permanent regularities in the social world. The laws of social phenomena, Mises said, are ultimately derivatives from the logic of action which, itself, is one and the same with the logic of thought and reason. The processes of the market that tend to make market prices equal to market costs, for supply to tend towards an equilibrium with demand, are all reducible to the logic guiding the actions of the respective individuals subsumed under the terms, “suppliers” and “demanders,” i.e., that the value of any particular means should not exceed the value of any particular end they serve.

This accounts, also, for what has usually been perceived as Mises’s peculiar insistence that economic theory is both a priori and empirically truthful. It is a priori, for Mises, because the logic of action and its requisite categories of means and ends, costs and benefits, etc., must conceptually precede in thought the selection of any concrete end and the application of any concrete means and, therefore, the designating of something as one or the other. And it is empirically truthful because the logic of human thought precludes the conceiving of any conscious human action not operating within these categories, hence, it empirically reflects the essential qualities of all conscious human conduct.

While the categories of action can serve as the filing system enabling the social scientist and the economist to both order and give intelligible interpretation to the complexity of the social world, the categories remain purely generic in nature, i.e., they do not provide any information about the specific ends and means selected by individuals or the concrete outcomes that may arise from a series of actions. Thus, the “elasticities” of demand and supply and the particular “speeds of adjustment” in prices, output and expectations will depend upon the historical circumstances. This is lucidly explained by Mises in “The Treatment of ‘Irrationality’ in the Social Sciences,” one of the essays in this volume:

We have plenty of figures available concerning the German inflation of the years, 1914–1923. Economic theory provides us with all the knowledge needed for a perfect grasp of the causes of price changes. But this knowledge does not give us quantitative definiteness. Economics is ... qualitative and not quantitative. ... There are in the sphere of human action no constant relations between magnitudes. ... The rise of German prices in the years of the First World War was not only due to the increase of the quantity of bank notes. Other changes contributed, too. The supply of commodities went down because many millions of workers were in the army and no longer worked in the plants, because government control of business reduced productivity, because the blockade prevented imports from abroad, and because workers suffered from malnutrition. It is impossible to establish by methods other than Verstehen [interpretive “understanding”] how each of these factors—and of some other relevant factors—contributed to the rise of prices. ... The Verstehen is in the realm of history the substitute, as it were, for quantitative analysis and measurement, which are unfeasible with regard to human actions outside the field of technology, (pp. 28–29)

Similarly, economic forecasting, as Mises pointed out, is fundamentally an attempt to act as a “historian of the future.”19 It is an attempt to project oneself into the future and anticipate how market actors over a future period will classify various entities as either means or ends; what expectations they will form about the most advantageous courses of action to undertake; and to then analyze both the intended and the likely unintended consequences of a multitude of individual plans as they meet and mesh in the social arena over that future period of time.20

Mises’s contributions to economic science have all been attempts, to one degree or another, to apply this methodology to particular problems. As F. A. Hayek has perceptively pointed out, “... most peculiarities of [Mises’s] views which at first strike many readers as strange and unacceptable trace to the fact that in the consistent development of the subjectivist approach he has for a long time moved ahead of his contemporaries.”21

In monetary theory, for instance, Mises made one of the first successful applications of marginal utility analysis to explain the value of money by emphasizing the role of uncertainty and expectations in the actions of market participants. His classic work, The Theory of Money and Credit (1912; 1924; 1935)22 and his monograph, Monetary Stabilization and Cyclical Policy (1928),23 as well as portions of Human Action,24 however, contain much more than this. In the parlance of contemporary economics, Mises tried to develop a microeconomic foundation for macroeconomics. Utilizing Böhm-Bawerk’s capital theory and Knut Wicksell’s distinction between the money and “natural” rates of interest, he devised a dynamic process analysis showing how changes in the money supply could generate shifts in income distribution, cause resource misallocations via relative price distortions and induce trade cycle fluctuations.

What distinguished Mises’s approach, for example, from Irving Fisher’s quantity theory of money was precisely his refusal to make the analytical jump (made by Fisher and others) from changes in the aggregate money stock to changes in the general “price level.” Mises insisted upon a strict adherence to methodological individualism. Any explanation of statistically calculated changes in total employment and output or in the “price level” needed to be dissected into the “step-by-step” sequential process of individual market actions, reactions and plan adjustments and readjustments following an increase (or decrease) in the money supply. Thus, the macroeconomic aggregates were to be decomposed into their micro-economic components by rigorously analyzing the “transmission mechanism” of a monetary injection.25

The same methodological considerations permeate Mises’s famous writings on comparative economic systems. Already in the 1880s and 1890s, Wieser and, in particular, Böhm-Bawerk had critically evaluated the Marxian labor theory of value and discovered fundamental defects in both the assumptions and the logic.26 However, almost no thought had been given by either socialist or non-socialist economists to the efficacy of state economic planning as an alternative to a market economy. In a series of three books, Socialism (1922),27 Liberalism (1927)28 and A Critique of Interventionism (1929)29 Mises took up this very question.

Mises saw the issue as concerning questions of knowledge, change, and adjustment—the Mengerian themes, once again. In the Walrasian world of general equilibrium, on the other hand, where it is assumed that the relevant supply and demand conditions are known and all markets are cleared at equilibrium prices, it superficially appears as if a “market” outcome and a “planned” outcome are interchangeable with each other.30 But what are the implications if, instead, it is assumed that an economy is not in equilibrium and that constant changes on both the demand and supply sides are an integral part of the system? In other words, what are the implications in the real world? How is the coordination of a multitude of individual human plans and activities to be brought about so as to assure a tendency towards an efficient allocation of scarce consumer goods and means of production?

As Mises explained, in a market economy this is accomplished via the price mechanism: rivalrous entrepreneurs bid for the use or purchase of scarce factors of production based upon their respective anticipations of the relative consumer demands for either existing or new products. Prices for these factors of production are formed out of the interaction of, on the one hand, entrepreneurs who have expectations about the prices consumers would be willing to pay for the final output the productive factors could assist in producing and, on the other hand, owners of the productive factors who form expectations about alternative employment opportunities. In turn, the on-going process of profit and loss assures that economic control of those scarce factors of production always tends to be in the hands of those entrepreneurs who demonstrate a greater capacity for forming a more nearly correct foresight about changes in underlying market conditions.31

Socialism, Mises argued, negated the entire market process. Without private ownership of the means of production, no markets would exist upon which prices for scarce resources could be generated. And without real market-created prices, reflecting ever-changing supply and demand conditions, no rational technique would exist for carrying out the economic calculations required for the estimation of various least-cost methods of production. Hence, concluded Mises, the establishment of universal socialism would necessitate the demise of all rational economic planning.32

Government intervention within a market order, Mises reasoned, ultimately created the same problems as did socialism, only in a more moderate form. To the extent that the interventions infringed upon the free market formation of prices and direction of production, to that extent, market forces—i.e., entrepreneurial attempts to competitively satisfy consumer demands in the most efficient manner—were thwarted. Furthermore, as each government intervention would distort and disrupt the competitive market price structure, the government would continually face the problem of either extending its controls and regulations in an attempt to compensate for the imbalances its previous interventions had caused or repeal the existing interventions and allow a return to a competitive market arrangement. Thus, Mises insisted, an interventionist, “mixed-economy” was inherently unstable; logically it required either an extension of the interventions until all-round planning was established via a continuing piecemeal process or else the interventionist state would have to contract until a free market order once again predominated.33

Mises’s conclusion that a market economy was the only reasonable solution to the problem of economic order was not meant by him to be taken as a personal value judgment on his part. Quite to the contrary, he saw it as a purely scientific conclusion to a scientific problem. Once a society is beyond a primitive economic state, or more exactly, if it is to get beyond such a state, there must exist a certain set of institutional structures that enable advantageous utilization of extensive division of labor. The growing complexity and dispersion of knowledge that emerges with the division of labor precludes any successful coordination via some central directing authority. Some mechanism must assist in this endeavor and the price mechanism, argued Mises, was just such an apparatus. Information about a multitude of consumer preferences and entrepreneurial expectations could be successfully transmitted across a nation, across a continent and, indeed, across the world through changes in market prices for both finished goods and the factors of production.

Real market prices—reflecting real preferences, real expectations, real information about scarcity conditions—were impossible if private ownership of the factors of production was outlawed, for without ownership there could be no trades, without the ability to trade there could be no bids and offers and without bids and offers there were no real prices. Interventions in a market economy, on the other hand, did not abrogate prices, but they could distort and disrupt the informational flow, thus seriously diminishing the efficiency of the society’s extended use of the division of labor. Thus, as a scientist, Mises felt confident in saying that ultimately there was no alternative to a thorough-going market order.

We also see in Mises’s critique of interventionism the same micro-economic process analysis that is visible in his monetary studies. An intervention impinges upon the economic system at some point. The relative price and production relations of the market are disturbed, resulting in modifications in the actions of various market participants that distorts the market order. These modified actions, in turn, influence the behavior and response of still others, resulting in even further imbalances and distortions between various supplies and demands. The implication that Mises drew was that the longer-term, complex ramifications from any specific intervention can, therefore, tend to have the consequence of making worse any initial market condition that the intervention was meant to remedy. Thus, with the tools of modern economic theory, Mises was able to construct a sophisticated sequence analysis that reinforced the older arguments of the Classical Economists concerning the importance of understanding both what is seen (the initial, short-run effect of an intervention) and what is unseen (the longer-run consequences) in the implementation of economic policy.

IV

In the post-war years, the methodological thrust implicit in Mises’s writings was inevitably bound to conflict with the Keynesian spirit of the times. For a wide range of theoretical and policy issues, microeconomics was declared a defective analytical device. A “subjectivist” microeconomic approach such as Mises’s was certain to be rejected. Instead, for special “macro”-economic problems, different tools, it was said, needed to be forged. The search was made to discover quantitative “functional” relationships that were postulated to exist between certain economic aggregates, e.g., total investment and total employment, and total income and total consumption. The search has ended in dismal failure; it was bound to fail.

From the beginning its failure was preordained because Keynesianism was shot through and through with the fallacy of “conceptual realism,” i.e., the imputing to statistically derived magnitudes, attributes and qualities independent of and separate from their component parts. As Mises’s fellow Austrian economist, F. A. Hayek, has pointed out, the application of such a macroeconomic approach has, in fact, been “a positive hindrance to further progress” in monetary and business cycle theory. Indeed, economic theory, itself, is abrogated by attempts

to establish direct causal connections between the total quantity of money, the general level of prices and ... also the total amount of production. For none of these magnitudes as such ever exerts an influence on the decisions of individuals; yet, it is on the assumption of a knowledge of the decisions of individuals that the main propositions of ... economic theory are based. It is to this “individualistic” method that we owe whatever understanding of economic phenomena we possess. ... If, therefore, monetary theory still attempts to establish causal relations between aggregates and general averages, this means that monetary theory lags behind the development of economics in general. In fact, neither aggregates nor averages do act upon one another, and it will never be possible to establish necessary connections of cause and effect between them as we can between individual phenomena, individual prices, etc.34

The crucial point against this still prevailing macroeconomic approach is that the aggregate components entering into the analysis are all elements having no existence of their own outside the economist’s own calculations of the chosen magnitudes. The “price level,” for example, is a statistical averaging at a point in time of a group of selected and weighted prices. But the individuals in the market place are never confronted by such a statistical “price level.” What they do face is an array of particular prices representing the exchange ratios between money and every good or service against which the medium of exchange is traded. Any calculated change in the “price level” can only be an ex post statistical averaging of a series of individual price changes. The causal links generating changes in market decisions will have been the alterations in the specific, individual exchange ratios between money and various goods, not a statistical “price level” created by the economic analyst after all the individual price changes have already worked, or are still in the process of working, their effects upon the economy.

The same reasoning applies to any measured changes in total output and total employment. Such statistical calculations are, again, purely the ex post summations and averaging of an array of changes in particular and individual outputs and specific and individual employment opportunities. One cannot, in any meaningful sense, separate the “total” changes from the particular circumstances in each sector of the economy that has contributed to the measured “total” outcome. Any attempt to do so must necessarily eliminate practically all possibility of analyzing the conditions that have generated these changes as well as the forces that would have to come into operation to either maintain or change further the output and employment “levels” already attained.35

The inevitable conclusion that the bulk of macroeconomics must be seen as having shunted economic theory on to a wrong track has been too much for some economists to take. In a methodological discussion that included a critical evaluation of Mises and the Austrian School, Professor Mark Blaug perceived “what methodological individualism strictly interpreted ... would imply for economics. In effect, it would rule out all macroeconomic propositions that cannot be reduced to microeconomic ones, and since few have yet been so reduced, this amounts in turn to saying goodbye to almost the whole of received macroeconomics.” In exasperation, Blaug declares, “[t]here must be something wrong with a methodological principle that has such devastating implications.”36

In reply to Blaug, I can do no better than to quote another economist, Arthur W. Marget, who, like Mises, was washed away in the tidal wave of Keynesian euphoria because he, too, questioned the very foundation of Keynes’s system:

It is a fundamental methodological proposition of “modern” versions of the “general” Theory of Value that all categories with respect to “supply” and “demand” must be unequivocally related to categories which present themselves to the minds of those “economizing” individuals (or individual business firms) whose calculations make the “supplies” and “demands” realized in the market what they are ... [T]he type of problem raised by the necessity for establishing a relation between these “microeconomic” decisions and these “macroeconomic” processes is not solved by the arbitrary introduction of an “aggregate supply function” and an “aggregate demand function” for industry as a whole, in defiance of the fact that neither of these “functions” deals with elements which enter directly into the calculations of the individual entrepreneurs whose “microeconomic” decisions and actions make “macroeconomic” processes what they are. On the contrary, it must be said, of such an attempt at “solution,” that it misconceives entirely the true nature of the relation between microeconomic analysis and macroeconomic analysis. ...37

Up until recently, a good many macro-theorists abdicated any responsibility for even trying to establish microeconomic linkages. While the last few years have seen the development of a new literature with this goal as its motivating force, it has developed along mostly “static” lines, i.e., an analysis of the choice theoretics that serve as the logic guiding the market participants in selecting particular pricing, output, and employment options, with the microeconomic quantities then being summed into macroeconomic totals.

The Austrians, following the directions suggested by Mises, have attempted a much more dynamic analysis. The heart of Mises’s “step-by-step” procedure is to show how changes in the various microeconomic elements set in motion sequential effects through time that generate modifications in individual actions, which, in turn, result in changes not only in the “aggregate” quantities but in the relative price and production structures, as well.38

This has been clearly explained by another Austrian, Oskar Morgenstern. Using an inflationary process as an example, Morgenstern argued that if,

no account is given where this additional money originates from, where it is injected, with what different magnitudes and how it penetrates (through which paths and channels and with what speed), into the body economic, very little information is given. The same total addition will have different consequences if it is injected via consumer’s loans, or producer’s borrowings, via the Defense Department, or via unemployment subsidies, etc. Depending on the existing conditions of the economy, each point of injection will produce different consequences for the same aggregate amount of money, so that the monetary analysis will have to be combined with an equally detailed analysis of changing flows of commodities and services.39

The emphasis placed by Mises and the Austrians on analyzing macroeconomic phenomena in terms of microeconomic processes led Joseph Schumpeter to conclude that, “the Austrian way of emphasizing the behavior or decisions of individuals and of defining exchange value of money with respect to individual commodities rather than with respect to a price level of one kind or another has its merits, particularly in the analysis of an inflationary process; it tends to replace a simple but inadequate picture by one which is less clear-cut but more realistic and richer in results.”40

Such an approach, it is important to bring out, has significance for more than “pure theory” alone. The continuing crisis in macro-economic theory reflects the consequences of ignoring these very aspects of microeconomic dynamics. Directing all their attention to policy effects on “total” demand, “aggregate” employment and the general “price-level,” the Praetorian Guard of the aging “New Economics” still remains blind to the warping effect their policies have had on the entire structure of the economy. Perpetual monetary injections by the central bank (the Federal Reserve System) have disrupted the market price structure, creating artificial employment opportunities and, thus, inducing massive misdirections of labor and capital. Fiscal policies have so distorted incentive structures that savings in the United States is among the lowest in the Western World. And layers of interventions and regulatory acts have severely curtailed effective utilization of existing productive capacity as well as narrowing the range of opportunities open to new entrepreneurial discovery and innovation.

The present times, however, seem to offer a chance for a change. With orthodox Keynesianism in disrepute, with a new and growing awareness and sympathy for the free market among economists and with increasing concern among the general public over the degree of government intervention in social and economic affairs, a reversal might just be possible.

V

The present volume, by one of the leading figures of twentieth century economic thought, and touching on almost every major issue of the day, could serve as an important handbook in bringing about such a reversal in both theory and policy.

The essays contained in this collection, many previously unpublished, offer a convenient composite of “Misesian economics.” They include discussions of almost every aspect of economic and social theory that Mises considered of paramount importance. Furthermore, in many instances they offer applications of Mises’s schema that are not to be found in his other writings.

The first three essays, on “Method,” carefully delineate the differences between the social and natural sciences, discuss the importance of value-freedom in social analysis and explain the distinction that Mises saw between his science of human action—praxeology—and the methods of the German Historical School.

The next five essays, on “Money,” discuss the unique position of money in economic exchange, the distortive effects of monetary expansion on market activity and the devastating consequences of ever-worsening inflation. Of particular interest is an analysis by Mises of the limits of any attempt to stabilize economic activity via stabilization of the price level.

The following four essays, on “Trade,” focus on the economic distortions and inefficiencies arising in a world of economic nationalism. Though mostly written in the 1940s and early 1950s, these essays are more relevant than ever. With third-world countries aggressively pursuing policies of economic self-sufficiency and with a rising tide of protectionism in the industrialized western nations, Mises’s warnings of the danger of international conflict and war in a world without free trade will be found particularly cogent.

The seven essays, on “Comparative Economic Systems,” analyze the political-economic clash between the free market order and collectivist economic planning. Included are detailed studies of socialism, the cooperatives movement, and the economic basis for group conflicts.

The final two essays, on “Ideas,” emphasize that the ultimate contest in politics and economics is not between nations and armies, but between the ideas that rule the actions of men.

The noted German economist Wilhelm Röpke once recounted how the reading of Mises’s post-World War I book, Nation, State, and Economy (1919) had been “in many ways the redeeming answer to the questions tormenting a young man who had just come back from the trenches.”41 With the collapse of Keynesian supremacy and the initiation of a new battle of ideas among economists and policy-makers, the writings of Ludwig von Mises might once again be of assistance to the new generation of combatants who will be manning the intellectual trenches. It is with this idea in mind that this volume of essays on Money, Method, and the Market Process is offered to the public.

Richard M. Ebeling
Ludwig von Mises Assistant Professor of Economics
Hillsdale College
Hillsdale, Michigan
September 1989

• 1Ludwig von Mises was born in Lemberg, Austria-Hungary on September 29, 1881. After studying with Böhm-Bawerk, he received his doctorate from the University of Vienna in 1906. He taught at the University of Vienna (1913–1938), was Economic Advisor to the Austrian Chamber of Commerce (1909–1934) and served as Director of the League of Nations’ Austrian Reparations Commission (1918–1920). In 1927, he founded the Austrian Institute for Trade Cycle Research. Professor Mises also taught at the Graduate Institute for International Studies in Geneva (1934–1940) and at New York University (1945–1969). Professor Mises died on October 10, 1973, at the age of 92.
• 2F. A. Hayek, “Tribute to Ludwig von Mises,” app. 2, in Margit von Mises, My Years with Ludwig von Mises (New Rochelle, N.Y.: Arlington House, 1976), p. 189.
• 3Lionel Robbins, Foreword to F. A. Hayek, Prices and Production (New York: Macmillan, 1932), p. ix.
• 44Howard Ellis, German Monetary Theory, 1905–1933 (Cambridge, Mass.: Harvard University Press, 1934), p. 77.
• 5Fritz Machlup, “The Consumption of Capital in Austria,” Review of Economic Statistics 17 (January 15, 1935): 13.
• 6James M. Buchanan, Cost and Choice: An Inquiry in Economic Theory (Chicago: Markham Publishing, 1969), p. 34.
• 77Carl Menger, Principles of Economics [1871] (New York: New York University Press, [1950] 1981).
• 8William Jaffe, “Menger, Jevons and Walras De-Homogenized,” Economic Inquiry 14, no. 4 (December 1976): 511–24; and Erich Streissler, “To What Extent was the Austrian School Marginalist?” in The Marginalist Revolution in Economics, R. D. Collision Black, A. W. Coats and Craufurd D. W. Goodwin, eds. (Durham, N.C.: Duke University Press, 1973), pp. 160–75.
• 9Ludwig M. Lachmann, “The Significance of the Austrian School of Economics in the History of Ideas,” in Capital, Expectations, and the Market Process (Kansas City, Kans.: Sheed Andrews and McMeel, 1977), pp. 45–64. On the evolution of the early Austrian School, see Ludwig von Mises, The Historical Setting of the Austrian School (New Rochelle, N.Y.: Arlington House, 1969); also Richard M. Ebeling, “Austrian Economics—An Annotated Bibliography, pt. 1: The Austrian Economists,” Humane Studies Review 2, no. 1 (1983).
• 10Eugen von Böhm-Bawerk, Capital and Interest, 3 vols. (South Holland, Ill.: Libertarian Press, 1959).
• 11Friedrich von Wieser, Natural Value [1889] (New York: Augustus M. Kelley, [1893] 1971); and Wieser, Social Economics [1914] (New York: Augustus M. Kelley, [1927] 1967).
• 12Carl Menger, Problems of Economics and Sociology [1883] (Urbana, Ill.: University of Illinois Press, 1963).
• 13Ludwigvon Mises, Notes and Recollections (South Holland, Ill.: Libertarian Press, 1978), pp. 122–23; these autobiographical “notes and recollections” were written by Mises in 1940, shortly after his arrival in the United States from Nazi-occupied Europe; see, also, Margit von Mises, My Years with Ludwig von Mises, 2nd enl. ed. (Cedar Falls, Iowa: Center for Futures Education, 1984).
• 14Ludwig von Mises, Epistemological Problems of Economics [1933] (New York: New York University Press, [1960] 1981).
• 15Ludwig von Mises, Nationalökonomie, Theorie des Handelns und Wirtschaftens [1940] (Munich: Philosophia Verlag, 1980).
• 16Ludwig von Mises, Human Action: A Treatise on Economics, 3rd rev. ed. [1949] (Chicago: Henry Regnery, 1966).
• 17Ludwig von Mises, Theory and History: An Interpretation of Social and Economic Evolution [1957] (Auburn, Ala.: The Ludwig von Mises Institute, 1985).
• 18Ludwig von Mises, The Ultimate Foundation of Economic Science: An Essay on Method (Kansas City, Kans.: Sheed Andrews and McMeel, [1962] 1976).
• 19Mises, Theory and History, p. 320; also, Richard M. Ebeling, “Expectations and Expectations Formation in Mises’s Theory of the Market Process,” Market Process (Spring 1988).
• 20For an analysis of the relationship between Mises’s view of economic science and alternative perspectives in the history of economic thought, see, Israel M. Kirzner, The Economic Point of View (Kansas City, Kans.: Sheed Andrews and McMeel [1960] 1976); and for Mises’s relationship to other members of the Austrian School, see Lawrence H. White, The Methodology of the Austrian School Economists (Auburn, Ala.: The Ludwig von Mises Institute, 1984); and, Richard M. Ebeling, “Austrian Economics—An Annotated Bibliography, pt. 2: Methodology of the Austrian School,” Humane Studies Review 3, no. 2 (Fall 1985); see also Murray N. Rothbard, “Praxeology as the Method of the Social Sciences,” in Individualism and the Philosophy of the Social Sciences (San Francisco: Cato Institute, 1979).
• 21F. A. Hayek, The Counter-Revolution of Science (Indianapolis, Ind.: Liberty Press, [1952] 1979), p. 52, n. 7.
• 22Ludwig von Mises, The Theory of Money and Credit [1912; 2nd rev. ed., 1924] (Indianapolis, Ind.: Liberty Classics, [1953] 1981).
• 23Ludwig von Mises, “Monetary Stabilization and Cyclical Policy,” [1928] in On the Manipulation of Money and Credit (Dobbs Ferry, N.Y.: Free Market Books, 1978), pp. 57–171.
• 24Mises, Human Action, pp. 398–478 and 538–86.
• 25Richard M. Ebeling, ed., The Austrian Theory of the Trade Cycle and Other Essays, by Ludwig von Mises, Gottfried Haberler, Murray N. Rothbard, and Friedrich A. Hayek (New York: Center for Libertarian Studies, 1978; reprinted by the Ludwig von Mises Institute, 1983).
• 26Böhm-Bawerk, “Unresolved Contradiction in the Marxian Economic System,” [1976] in Shorter Classics of Böhm-Bawerk, vol. 1 (South Holland, Ill.: Libertarian Press, 1962), pp. 201–301; or Böhm-Bawerk, Karl Marx and the Close of His System (Clifton, N.J.: Augustus M. Kelley, [1949] 1975), an alternative translation.
• 27Ludwig von Mises, Socialism: An Economic and Sociological Analysis [1922; rev. ed., 1932] (Indianapolis: Liberty Classics, [1951] 1981).
• 28Ludwig von Mises, Liberalism: A Socio-Economic Exposition [1927] (Kansas City, Kans.: Sheed Andrews and McMeel, [1962] 1978); the original translation was published under the title, The Free and Prosperous Commonwealth.
• 29Ludwig von Mises, A Critique of Interventionism [1929] (New Rochelle, N.Y.: Arlington House, 1977).
• 30This is not to suggest that Walras believed that a “planned” solution was interchangeable with a “market” solution. Indeed, he emphasized that the problem was too complex for any solution other than that provided by the competitive market; see Léon Walras, Elements of Pure Economics (New York: Augustus M. Kelley, [1954] 1969), p. 106.
• 31Mises, Human Action, pp. 257–397; and Ludwig von Mises, “Profit and Loss,” in Planning for Freedom, enl. ed. (South Holland, Ind.: Libertarian Press, 1980), pp. 108–50.
• 32Mises, Human Action, pp. 689–715; also, Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth” [1920], in Collectivist Economic Planning, F. A. Hayek, ed., (London: Routledge and Sons, 1935), pp. 87–130. For an extended summary of Mises’s contribution to the socialist calculation debate, see Murray N. Rothbard “Ludwig von Mises and Economic Calculation Under Socialism,” in The Economics of Ludwig von Mises: Toward a Critical Reappraisal, Lawrence S. Moss, ed. (Kansas City, Kans.: Sheed Andrews and McMeel, 1976), pp. 67–77; Karen I. Vaughn, “Economic Calculation under Socialism: The Austrian Contribution,” Economic Inquiry 18 (October 1980): 535–54; Don Lavoie, Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered (New York: Cambridge University Press, 1985); and Richard M. Ebeling, “Economic Calculation under Socialism: Ludwig von Mises and His Predecessors,” in The Meaning of Ludwig von Mises (Auburn, Ala.: The Ludwig von Mises Institute, forthcoming).
• 33Ludwig von Mises, “Middle-of-the-Road Policy Leads to Socialism,” in Planning for Freedom, pp. 18–35. For an elaboration of Mises’s critique of intervention linked to his criticism of economic calculation under socialism, see Israel M. Kirzner, “The Perils of Regulation: A Market-Process Approach,” Discovery and the Capitalist Process (Chicago: University of Chicago Press, 1985), pp. 119–49.
• 34Friedrich A. Hayek, Prices and Production [1935] (New York: Augustus M. Kelley, 1967), pp. 4–5.
• 35See Roger W. Garrison, “Intertemporal Coordination and the Invisible Hand: An Austrian Perspective on the Keynesian Vision,” History of Political Economy 17, no. 2 (Summer 1985): 309–21.
• 36Mark Blaug, The Methodology of Economics, or How Economists Explain (Cambridge: Cambridge University Press, 1980), pp. 51 and 91–93.
• 37Arthur W. Marget, The Theory of Prices, vol. 2 [1942] (New York: Augustus M. Kelley, 1966), pp. 541 and 544.
• 38Cf. Richard M. Ebeling, “Ludwig von Mises and the Gold Standard,” in The Gold Standard: An Austrian Perspective, by Llewellyn H. Rockwell, Jr., ed. (Lexington, Mass: Lexington Books, 1985), pp. 35–59; also Richard M. Ebeling, “Ludwig von Mises and Some Contemporary Economic Themes,” in Homage to Mises: The First Hundred Years, by John K. Andrews, ed. (Hillsdale, Mich.: Hillsdale College Press, 1981), pp. 38–44.
• 39Oskar Morgenstern, “Thirteen Critical Points in Contemporary Economic Theory: An Interpretation,” Journal of Economic Literature 10, no. 4 (December 1972): 1184; reprinted in Selected Economic Writings by Oskar Morgenstern, Andrew Schotter, ed. (New York: New York University Press, 1976), p. 288.
• 40Joseph A. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), p. 1090.
• 41Wilhelm Röpke, “Homage to a Master and a Friend,” The Mont Pelerin Quarterly (October 1961): 6.