Ludwig von Mises (1881-1973)
Mises read Menger’s Grundsatze in 1903 while studying law in Vienna and was deeply impressed by the book. In 1912 he published Theorie des Geldes und der Umlaufsmittel (Theory of Money and the Means of Circulation), which was followed in 1920 by his influential essay, in German, on “Economic calculation in the socialist commonwealth”, and in 1926 he founded the Austrian Institute of Business Cycle Research.
Then, 1940 saw the publication of his book Nationalokonomie. Theorie des Handelns und Wirtschaftens, an English version of which, entitled Human Action, appeared in 1949 and contained his concept of “praxeology”.Mises stated: “The distinguishing feature of the Austrian School and what will constitute its immortal fame is precisely that it is a doctrine of action and not a doctrine of economic equilibrium, of non-action” (1978: 21). Mises advocated a radical demarcation vis-a-vis the economic mainstream - neoclassicism in whichever form - and chastised mathematical formalism in economics. The view entertained by Jevons and his acolytes that economics should be shaped in the image of physics, Mises considered to be fundamentally misconceived and a dead end in the social sciences. He was also strictly opposed to the view that empirics and the power to forecast decide about the quality of an economic theory.
In his habilitation Mises was concerned with extending the subjectivist approach to the sphere of money. This led him to elaborate his “money-regression theorem”: the demand for money is not determined by the purchasing power of money today, but by its purchasing power in the past, because every type of money is said to have had its origin in a proper good capable of satisfying the needs and wants of humans and is not rooted in an imposition made by the state or in a social contract, as received monetary theories maintained.
Money is to be derived from the good that eventually assumed the role of money. In order to understand money and its role in the economic system a process analysis is required. Money ought to have only a single function - that of a means of exchange. This requires that banking policy must request a reserve coefficient with respect to deposits of 100 per cent - comparable to Peel’s Bank Charter Act of 1844, according to which the Bank of England was restricted to issue new bank notes only if they were 100 per cent backed by gold. In Mises’s view money ought to be neutral, that is, ought not to affect the real economic system. This, however, necessitates regulating the monetary system in the way indicated.The implications of failing to accomplish this task Mises exemplified in terms of his explanation of business cycles. He held a monetary malinvestment theory, in which he merged ideas of the Currency School with Bohm-Bawerk’s capital theory and Knut Wicksell’s distinction between a “natural” (r) and a money rate of interest (i). The source of cycles is an inflationary credit expansion - a policy of “easy money”: if i is reduced below r, firms are induced to embark on more roundabout processes of production, which channels productive resources from industries that produce consumption goods to industries that produce intermediate products. However, with a reduction in consumer goods output their prices will tend to increase, which improves profitability in the industries producing them. Eventually this renders the production of consumption goods more profitable than that of investment goods and reverses the process of lengthening the period of production in the economy. Investment projects will be abandoned halfway and productive resources wasted. The economic system will get stuck in a crisis. The culprit of the maldevelopment is a mistaken monetary policy. Mises’s theory was the starting point of Hayek’s (1931b) theory of business cycles (see below).
At the beginning of the twentieth century several authors, including Vilfredo Pareto and Enrico Barone, had raised the question whether socialism was feasible and capable of generating efficient economic outcomes. The answer given differed as between authors, but was by and large in the positive. Mises (1920) opposed these views and insisted that socialism was logically impossible, because lacking markets it was unable to calculate and therefore incapable to effectively organise a complex society. Calculation requires prices that indicate relative scarcities, which presuppose markets in which the competitive process brings them into the open. Only a market economy was capable of dealing with the calculation problem in a satisfactory way. Mises went so far as to argue that rationality was a by-product of the dealings in markets. He also advocated a kind of domino doctrine: any state intervention in the economy causes damages that will lead to a request for more state intervention in order to make good the damages, which, alas, will cause further damages, and so on, until eventually the economy ends in socialism.
In his praxeology Mises argued against logical positivism, heralded most prominently by the neoclassical school. In contradistinction to the natural sciences, especially physics, economic laws are to be obtained by logical deduction from a small set of self-evident axioms: (1) men choose aims and means to reach them; (2) the law of diminishing marginal utility applies; (3) men are possessed of a positive rate of time preference; (4) action takes time and time is scarce. While he did not argue that predictions are impossible, he insisted that they can be qualitative only.