- Introducing Ludwig von Mises
- Why Does Human Action Remain a Closed Book to Mainstream Intellectuals?
- The Monetary Credit Theory of Business Cycle
- Impact of Business Cycle
- Disproportionality Doctrines as Explanations of Business Cycle
- The Study of Economics, and
- Economics, Citizenship, and Freedom
Introducing
Ludwig von Mises
In the Introduction to the Scholar’s Edition (October
1998) of Human Action, Jeffrey M.
Herberner of Grove City College, Hans-Herman Hoppe of University of Nevada, and
Joseph T. Salerno of Pace University as well as Jorg Guido Hulsmann and David
Gordon introduced to us Ludwig von Mises and his magnum opus. The man was
described as “uniquely prepared” to undertake the rebirth of the Austrian
School of Economics by virtue of his long tenure beginning 1912 “as economic
advisor and chief economist of the Vienna Chamber of Commerce” (p. x). The
works he published gained him “a reputation as a leading monetary theorist and
defender of the gold standard, and as an outstanding critic of socialism and
proponent of laissez-faire capitalism” (p. xi). These works include The Theory of Money and Credit (1912);
Nation, State, and Economy (1919); Socialism: An Economic and Sociological
Analysis (1922); Liberalism: In the Classical Tradition (1927); A Critique of
Interventionism (1929), and; Epistemological Problems of Economics (1933).
The mentioned works
contributed to the greatness of the man and his influence. In My Years with Ludwig von Mises (1976),
Margit, Mises’ wife identified two reasons for the greatness of her husband,
his ideological enemies and the extent of his intellectual influence.
As for his enemies,
Mises' name was on the black list of both the Nazis and the Russians (pp. 35,
53). Margit recalled what the Nazis did on the night they arrived to Vienna:
"They had rushed into the apartment where Lu had lived with his mother,
had taken his valuable library, his writings, his documents and everything they
found of importance, packed it all into thirty-eight cases, and drove
away" (p. 35). The story of the second revised edition of Human Action also provides us another
concrete example of hostility to Mises' ideas. In it we learn how a coward and
an invisible enemy hid behind the impersonality of Yale University Press to
sabotage the spread of Mises' ideas. Margit quoted Henry Hazlitt's explanation
of that attack "in 'Mangling a
Masterpiece,' an article in the May 5, 1964, National Review"
explaining that “The new edition is a typographical disgrace,” and “full of
misprints” (p. 110). Lines were
omitted, pages missing and printed twice, paragraphs were transposed, “printed
in a comparatively light type, and others in a blacker, thicker type” and “the
running heads that appeared at the top of each page of the 1949 edition”
disappeared (pp. 110-111). And then Hazlitt asked:
“Why, in a press that
has shown itself capable of producing first-rate work, did this particular book
go wrong? Do the present editors of the Yale University Press (who are not
those who originally accepted the book) know that this is the most important
work on general economic theory that has appeared in our generation? They know
it is commercially profitable; they know it sold six printings and brought in
revenues from translation and quotation. But if they had any idea of its true
greatness, if they even had any real respect for its author and its readers, if
they had any respect for their press' own reputation, would they have permitted
such a slovenly edition to go out under its imprint? (pp. 111-112).
The person behind the
attack against Mises and his book remained unidentified until his death. His
wife was convinced that the primary reasons were ideological differences.
Concerning Mises'
influence, we can just select here few examples for its extent reaching
numerous prominent personalities who became strong defenders of the free market
in various institutions and different parts of the world. We see here what
someone said "the power of compound ideas." The material is scattered
throughout Margit’s book, and specifically found in chapters 5 to 7, 9, and 10.
At the end of chapter 8, you will see pictures from pages 115 to 132, which I
assume the personalities in those pictures have been influenced by Ludwig von
Mises in one way or another. You can see there Wilhelm Roepke, F. A. von Hayek,
Philip Cortney, Sylvester Petro, Professor Vernon Carbonari, George Koether,
Henry Hazlitt, Otto von Habsburg, Fritz Matchlup, Leonard E. Read, Lawrence
Fertig, and Jacques Rueff. If you will google each of them, you will find out
that most of them are influential free market defenders.
In browsing other
chapters of the book, you will gain an overview of Mises' intellectual
influence by identifying several key positions that he held. As already
mentioned, he became "the full-time legal adviser and financial expert of
the Chamber of Commerce; he had his lectures at the University of Vienna; he
had his seminar; he had conferences and luncheons with visiting authorities . .
. ." (pp. 31-32). "The Austrian ambassador, Baron von Phuegl,"
was a frequent visitor (p. 49). In 1940, Mises "delivered a lecture before
a banking seminar at the School of Business, Columbia University, on ‘Postwar Economic Reconstruction of Europe';
on November 19 he spoke at the Political Economy Club on the 'Non-Neutrality of Money' " (p.
64). In the same year, "he had lunch with Drs. Herbert B. Dorau and J. T.
Madden, dean of the School of Commerce and Finance," which both
demonstrated "a lively interest in him" (p. 69). In 1941, he “ met
Senor Montes de Oca, former secretary of the treasury of Mexico and at that
time president of Mexico's Banco Internationale '' (p. 74). This bank president
displayed familiarity with all of Mises' books. In 1942, Mises held a lecture
in Mexico attended by Dr. Gustavo Velasco, Montes de Oca's relative, and
Eduardo Suarez, the Mexican Minister of finance (pp. 78-79). The former
"is one of Lu's greatest admirers'' and claimed that he "translated
at least half a dozen of Mises' writings'' (p. 79).
Other names influenced
by Mises include "Frank Dierson, a prominent lawyer in New York City. . .
." (p. 133); "Jack Holman, who for many years was director of Johnson
& Johnson and has a Ph.D. in economics and is a licensed professional
engineer in the state of New York, . . . ." (p. 134); Hans Sennholz who
"had studied law and political science in Germany, and in 1949"
studied economics at NYU, attended Lu's seminar for years, and became the head
"of the Economics Department at Grove City College" (p. 136); even
the famous Ayn Rand once attended Mises' lecture in 1957-58 (p. 138); and of
course not to mention other influential economists such as F. A. Hayek, Israel
Kirzner, and Henry Hazlitt. Furthermore, just want to add three unusual
students, which include a Filipina, Phebes Tan (p. 139), and two Jesuit
priests, William McInnes and Michael Mansfeld who are also both professors of
economics (p. 138).
Three more people
deserve concluding attention due to the importance of their words about the
influence of Mises. One is Sylvester Petro, "professor of labor law at
NYU" and also served as "director of Wake Forest Institute for Labor
Policy Analysis in Winston Salem, North Carolina" (p. 157). He described
Mises intellect and books as follows:
"I told him in
that letter that I had never encountered such a work and thought it should
easily rank among the greatest writings of mankind.... The main things that
attracted me to Lu were the virtually superhuman qualities of intellect, of
judgment, and of wisdom that he possessed in such extraordinary abundance. I
have done my fair share of reading in the classics, in logic, in philosophy, in
epistemology, in law, in economics, in social theory, in politics and all the
rest. In spite of this rather wide reading, Lu's work seemed to stand out
sharply and brilliantly. It was on a different level from anything I had ever
read before" (ibid.).
The second person is
Lawrence Fertig. His comparison between mainstream economists and Ludwig von
Mises is worthy of attention:
"Economic
historians of the 21st Century will undoubtedly be puzzled by the reception
accorded to economic theorists of the 20th Century. They will be particularly
puzzled by what occurred in the span of years between World War I and 1970....
Great honors were showered on economists whose major accomplishments had been
to promote a major inflation which, by the end of the 20th Century, was
acknowledged to be the source of tremendous social unrest and economic crises.
These were the fashionable economists who were sponsored by wealthy Foundations
and indeed by most of the intellectuals of Academe. But when economic
historians of the future came to evaluate precisely who had made the most
significant contributions to economic theory-to those broad and fundamental
principles which explain human actions in the practical world people must live
in-their puzzlement increased. For they could find only a meager record of
academic honors or monetary prizes by leading ivy-league universities accorded
to the one economist who had discovered and formulated some of the most
brilliant economic theories of that century. His name was Ludwig von
Mises" (p.178).
And then the third
person is Leonard Read. The message of the plaque he presented on the 89th
birthday of Ludwig von Mises captured the greatness of Mises' ideas:
"To A Great
Teacher: You, Mises, are truly a Teacher. Two generations of students have
studied under you, and countless thousands of others have learned from your
books. Books and students are enduring monuments of a Teacher, and these
monuments are yours. This generation of students will pass away, but the ideas
set in motion by your writings will be a fountain source of new students for
generations to come" (p.133).
Finally, Margit
herself shows the depth of influence of her husband’s ideas on her by sharing
to us her special dream:
"If I myself
could realize one special dream, it would be that every president of the United
States should get for his inauguration a complete set of Lu's books, destined
for the Oval Office in the White House. These books should be marked for special
recommended readings concerning government interference, socialism, and
inflation. Perhaps they would help to preserve freedom in the United States. My
second wish would be that every university or college where economics and
political science are taught would - of their own free will - add a course on
freedom of the market to their curriculum" (p. 181).
Why
Does Human Action Remain a Closed Book to Mainstream Intellectuals?
Human Action, Ludwig
von Mises’ magnum opus, was not widely received on its first appearance in
1940. Reading the Introduction to the Scholar’s Edition, I observe at least
four reasons for such an unfortunate event:
●
First, John Maynard Keynes’ book,
The General Theory of Employment, Interest, and Money (1936) somehow provided a
superficial but an attractive interpretation of The Great Depression in the
1930s. As a result of its popularity, Mises’ monetary and business cycle theory
brilliantly expounded in the book had been buried.
●
Second, it was generally
recognized that the “market socialists” won the socialist calculation debate.
●
Third, the displacement of the
Mengerian-Bawerkian price theory with the Walrasian-Marshallian price theory.
●
Fourth and the final reason is
political and intellectual hostility against Mises and his book.
The last two reasons
require a more elaborate narration. But before we do that, let me first
introduce the book.
The Brilliance of Human Action
The Human Action is
described as a book “that both embodies and dramatically extends centuries of
accumulated wisdom in” economics “and, at the same time, radically challenges
the intellectual and political consensus of the day” (p. v). It is further
claimed that the book is “a comprehensive treatise on economic science that
would lay the foundation for a massive shift in intellectual opinion that is
still working itself out fifty years after publication” (ibid.). In its
“enduring significance” and “persuasive power,” it is even portrayed as greater
than the considered landmark books in economics such as Adam Smith’s Wealth of
Nations, Alfred Marshall’s Principles, Karl Marx’s Capital, and John Maynard
Keynes’s General Theory. Now the puzzling question is, why despite the
brilliance of Human Action compared to the mentioned books, Mises’ most
important work remains closed for many especially the mainstream economists?
This question has been answered by Jeffrey M. Herbener, Hans-Hermann Hoppe,
Joseph T. Salerno, Jorg Guido Hulsmann, and David Gordon.
The History of The Displacement
The genesis of such
displacement started with one of the students of Carl Menger, Friedrich von
Wieser. The other student of equal importance was Eugen von Bohm-Bawerk who elaborated
Menger’s price theory.
Wieser, following the
Walrasian path influenced Hans Mayer and Joseph A. Schumpeter, two members of
third generation that belong to the Austrian School of Economics (Walrasian
price theory, by the way, is a theory of price within the framework of general
equilibrium). Wieser even convinced the fourth generation of the Austrian
School, prominent among them was Friedrich A. von Hayek. Schumpeter, through
his 1908 book, The Nature and Essence of Economic Theory, shaped the minds of
the fourth generation. This book served as a guide to the future of economics.
On the other hand,
when Bohm-Bawerk died in 1914, “no full-time faculty member at the University
of Vienna was working strictly within a Mengerian framework” (p. vii). Mises
who adhered to Mengerian-Bawerkian price theory became a private lecturer at
that time and as a result, “diminished his academic standing” (ibid.). Other
Austrian economists too who followed this price theory never achieved any
international recognition. And so when John bates Clark, Philip H. Wicksteed,
Frank A. Fetter, and Herbert J. Davenport withdrew from the debate on price
theory in 1920, the influence of the Austrian School on mainstream
Anglo-American economists sharply declined. This unfortunate event opened an
opportunity for a Marshallian ascendancy in price theory.
In Germany, after WW1,
the Walrasian price theory gained dominance through the book of Gustav Cassel,
Theoretische Sozialokonomie. In France and Italy, the Mengerian price theory was
pushed aside both by the Lausanne School and Marshallian price theory. By the
middle of the 1930s, the “National Socialist threat drove the leading Austrian
economists to emigrate to Great Britain (Hayek), the United States (Machlup,
Haberler, and Morgenstern), and Switzerland (Mises)” (p. viii). In Great
Britain, the Walrasian price theory was brought by John R. Hicks under Hayek’s
influence.
The foregoing reasons
explained why after four decades, from 1871 to 1914 of remarkable development
of the Austrian School of Economics, by the early 1930s, this school “was on
the edge of extinction” (p. ix). When Mises migrated to Switzerland in 1934, he
was fully aware of such undesirable state of affairs and that is why he decided
to write Human Action “to revive the Mengerian approach and elaborate it into a
complete and unified system” (ibid.). To achieve this goal, Mises wanted “to
address the two burning issues left unresolved by the founders of the Austrian
School: the status of the equilibrium construct and the bifurcation of monetary
and value theory” (ibid.). His opponents in the socialist calculation debate
served as his motivation in accomplishing his second objective. For Mises, only
“an adequate theory of monetary calculation” that is based on “a unified theory
of a money-exchange economy” can provide the “definitive refutation of the
socialist position” (p. x).
And so in Human
Action, we find here “the culmination of the Austrian theoretical approach” and
thereby inaugurated “the rebirth of the Austrian SchooI of Economics' '
(ibid.). This book was written “to play a decisive role in reconstructing the
whole of economic science in its moment of crisis, including reformulating and
unifying price theory, monetary theory, and business cycle theory, and at the
same time establishing the correct methodological foundations of the social
sciences'' (ibid.).
Mises’ Intellectual Preparation
Prior to the
publication of Human Action, Mises had already published several books in
German and translated later in English such as The Theory of Money and Credit
(1912), Nation, State and the Economy (1919), Socialism: An Economic and
Sociological Analysis (1922), Liberalism: In the Classical Tradition (1927), On
the Manipulation of Money and Credit (1928), A Critique of Interventionism
(1929), and Epistemological Problems of Economics (1933).[1] And so besides the fact that Mises served
as an “economic advisor and chief economist of the Vienna Chamber of Commerce”
(p. x) for a long time, his books on economics and political theory shows that
he was academically prepared to launch such a reconstruction of economic
science and establishment of the methodological foundations of the social
sciences.
Mises’ books earned
him “a reputation as a leading monetary theorist and defender of the gold
standard, and as an outstanding critic of socialism and proponent of
laissez-faire capitalism” (p. xi) among the professional public. “In academia,
he was also recognized as the heir to the intellectual tradition of Menger and
Bohm-Bawerk. . .” (ibid.). Regrettably, “outside the circle of the participants
in his” private seminar, “the philosophical depth and systematic breadth of
Mises’s work was rarely acknowledged or recognized” (ibid.). But for Ludwig von
Mises, the Human Action was his “crowning intellectual achievement and the sum
of his scholarly life” (ibid.). Those who wrote this Introduction agreed that
the Human Action should have confirmed Mises ‘as the foremost German-language
economist and social theorist of his generation” (ibid.).
Political and Intellectual Hostility
So returning to that
question of the unpopularity of Human Action among mainstream economists,
perhaps, another reason that we could add is the fact that when the book first
appeared, the political climate at that time was hostile to Mises. In March of
1938, “Mises could no longer travel to Austria. His apartment in Vienna had
been ransacked by National Socialists and his library and personal papers
confiscated” (p. xii). In 1940, he was forced to leave Geneva and migrated to
the United States for his presence was considered a threat to the national
security of Switzerland.
The natural outcome of
such dislocation was that Mises’ “book was cut off almost completely from the
German market . . .” (ibid.). Thus, Human Action “remained virtually unread”
(ibid.). Only after nine years, in 1949 that Mises’ book “would reap some of
the rewards that had escaped him in 1940” (pp. xii-xiii). With the recommendation
of Henry Hazlitt, Mises’ Omnipotent Government and Bureaucracy were published
by Yale University Press. The success of
these two books motivated Eugene Davidson, the head of Yale University Press,
to meet Mises and discuss the possible publication of Human Action.
Unfortunately when Davidson solicited ideas from economists and public
personalities, the project was received with mixed opinions. Some would
recommend immediate publication, but others considered Human Action as “very
extreme,” “will not be well accepted in academic quarters,” and “old” (pp.
xiii-xiv).
Providentially,
despite the mixed response from economists and public figures, “Yale’s
Committee on Publications voted to approve the publication March 5, 1945” (p.
xiv). It took four years more before Human Action was published into English
language. Notice how the contributors to the Introduction to the Scholar’s
Edition describe the situation when Human Action was finally published in
English language:
By the time the
English-language version appeared, circumstances were no longer conducive to an
early renewal of the Austrian School. Leadership in pure economic theory had
passed from Europe to the United States, in part because of the migration of
many Central European economists to America. Marshallian price theory in
various forms had dominated the textbook literature and undergraduate teaching
in the United States since the 1920s, and this dominance was strengthened by
the widespread interest in the doctrine of imperfect competition in the
journals. In addition, the general equilibrium approach had secured a firm
foothold in the United States economics profession with the publication of Paul
Samuelson’s Foundations of Economic Analysis in 1947” (pp. xiv-xv).
Despite the dominance
of the Marshallian price theory in economic literature, still Human Action had
a commercial success that “exceeded both the author’s and the publisher’s
expectations” (p. xviii). Only just three weeks after its day of publication,
“the press was already planning the second and even a third printing” and “in
January 1950, it became a Book-of-the-Month. . .” (ibid.)
Just like the response
of economists and public personalities to Mises, his book also received a mixed
reaction. The book reviews were highly divided. Some would praise Human Action
“as the brilliant work of a genius,” while others would regard it as
“shockingly archaic” and mocked it by setting up “Capitalism as a god” (ibid.).
After twelve years, in
February 1961, Mises decided to have a second revised edition of the book that
ended in a disaster. The event surrounding the publication of this second
revised edition demonstrates the hostility of an unseen enemy hiding behind the
impersonality of Yale University Press. In Chapter 8 of My Years with Ludwig
von Mises, Margit, the wife of Mises narrated this unfortunate event. In it, we
learn how a coward and an invisible enemy sabotaged the spread of Mises’ ideas
and yet at the same time that enemy refused to reject the publication of Mises’
book due to anticipated profit. Here’s how Margit quoted Henry Hazlitt’s
explanation of that attack “in ‘Mangling a Masterpiece,’ an article in the May
5, 1964, National Review”:
The Press does not
honor Professor Mises in this new edition. And it does not honor itself. The
new edition is a typographical disgrace.
The 1949 edition was
originally priced at $10; the revised edition is offered at $15. Yet
qualitatively it is cheaper in every respect. It is full of misprints. On page
322 four lines are omitted. Page 468 is missing altogether. Page 469 is printed
twice. On page 563 two paragraphs are transposed. On page 615 eight lines are
wrong. The running heads that appeared at the top of each page of the 1949
edition are all gone.
In belated reparation,
the Yale University Press has printed errata pages (though they are not bound
in). But these make wholly inadequate amends for an inexcusable printing job.
On page after page one finds some paragraphs printed in a comparatively light
type, and others in a blacker, thicker type that can only be described as at
least quasi-boldface. The reader will inevitably assume that this marked
contrast is intentional, and that the author meant to give special emphasis to
the passages printed in Accidental Bold . . . .
I started to note
merely the pages on which the contrast in type between various paragraphs was
particularly glaring, and got a list of seventy. I leave it to the Yale Press
to explain the technical reasons for the type contrasts . . . .
I have said nothing
about the uncountable instances in which whole pages of quasi-boldface are
found opposite whole pages of lighter type. This must irritate any reader
sensitive to typographical tidiness; but it is at least less likely to mislead
him into supposing that changes in emphasis are intended. What possible human
explanation can there be for this typographical botch, which would disgrace a
third-rate commercial publisher? Who reads galley proofs? Who saw page proofs?
Who let this mess pass?
I asked Professor
Mises what light he could throw on the matter. He was able to supply very
little, because the publishers had been extraordinarily reticent. It appears
that, in order to do as cheap a job as possible, the press had resorted to some
mixture of photo-offset and reset never tried before. When Dr. Mises asked for
page proofs, they were denied “for mechanical reasons.” When he protested,
Chester Kerr, director of the press, replied on Jan. 22, 1963: “We are entirely
willing to take responsibility for seeing that the new edition of Human Action
is printed without error. I am confident that you will have no cause to regret
not having seen page proofs.” When the first copies were sent out to the
distributors, the author did not receive one.
The Press has conceded
in a letter of Sept. 30 that “the general quality of the work is undeniably
below our customary standard.” But it apparently does not intend to do anything
but go on selling the new edition at $15. The least reparation that could be
made, to the author and to the readers of Human Action, would be to order the
press to start on a new edition immediately (instead of waiting till the
present botched edition is exhausted), and meanwhile to sell copies of the
present edition at a cut price in candid recognition of their defectiveness.
A final question. Why,
in a press that has shown itself capable of producing first-rate work, did this
particular book go wrong? Do the present editors of the Yale University Press
(who are not those who originally accepted the book) know that this is the most
important work on general economic theory that has appeared in our generation?
They know it is commercially profitable; they know it sold six printings and
brought in revenues from translation and quotation. But if they had any idea of
its true greatness, if they even had any real respect for its author and its
readers, if they had any respect for their press’ own reputation, would they
have permitted such a slovenly edition to go out under its imprint? (pp.
110-112).
The act was clearly
intentional. The person behind the attack against Mises and his book remained
unidentified until his death. Margit was convinced that ideological differences
were the primary reasons.
Decades after the
appearance of Human Action, the task now to develop, propagate and extend the
ideas of Austrian School is left to Mises’ students. The most distinguished
among these students was Murray N. Rothbard who wrote Man, Economy, and the
State (1962), America’s Great Depression (1963), and many other theoretical and
historical studies. All these published books “prepared the groundwork for a
full-scale revival of the Austrian School in the 1970s (precipitated by F. A.
Hayek’s Nobel Prize in 1974) and the 1980s” (p. xv). “The revival became firmly
entrenched and internationalized in the 1990s with the establishment of
scholarly journals dedicated to advancing Misesian economics, and a vast and
continuing series of papers, conferences, books, teaching seminars, and
professional meetings” (ibid.).
The Monetary Credit Theory of Business Cycle
The
knowledge of Austrian economic way of thinking is a basic requirement in the
education of an informed entrepreneur. Financial education and personal
development are insufficient. They failed to supply the necessary knowledge to
understand inescapable realities that all entrepreneurs face. Understanding of
the increase in money supply, credit expansion, and business cycle are relevant
economic realities that a responsible entrepreneur cannot afford to ignore
without serious negative financial consequences.
Our
goal in this article is to share our personal understanding of the writings of
Ludwig von Mises about business cycle.
And we will start with Chapter 20, Section 8 of Human Action where Mises discusses the monetary credit theory of business cycle.
This
business cycle is popularly known as business “boom” and “bust.” Understanding
the cause of this cycle serves as necessary information for those who made the
decision to enter into the world of entrepreneurs.
Chapter
20, Section 8 of the book provides two major explanations of the business
cycle: direct exchange theory and monetary credit theory. The first explanation
is the dominant one and the second is coming from the Austrian school.
In
the study of modern capitalism, it is popularly accepted that progress and
depression characterized its history. Investigating this economic phenomenon,
one can discern a general connection among the increase in the amount of
capital, visible prosperity, and economic decline. The efforts of statisticians
to go beyond the general connection into details of business fluctuations with
statistical methods are useless and futile due to the misdirection caused by
mainstream interpretation.
It
is evident that the Austrian school does not have the monopoly in explaining
business fluctuations. Other schools of thought have their own version of
business “boom” and “bust.” An example of this is the British Currency School.
The
explanation of the British Currency School about the business cycle is
unsatisfactory in two ways: it failed to see the role of bank deposits in
credit expansion and it limited its explanation of economic crisis to external
sources. As such, it failed to analyze the connection between money supply,
lower interest rate, and credit expansion and their relationship to economic
boom and bust.
Interest
rates are anathema in the eyes of the public. It is considered a great barrier
to production. For critics of the free market, high interest is perceived as a
tool for economic exploiters. Such mindset is a favorite dominant social theme
for the interventionists. The state is seen as the savior from economic woes
through either lowering or totally abolishing interest rates. Mainstream
publication praises constant credit expansion as necessary to economic
prosperity and advocate lower interest rates. Money’s neutrality is accepted as
a given assumption.
The
above trend results in misleading analysis of economic crisis and business
cycle using the theory of direct exchange. The monetary credit theory has
therefore faced two primary obstacles: erroneous economic theory providing
alternative and misleading explanations of economic crisis and business
fluctuation and political bias.
The
monetary credit theory therefore
provides an explanation how the increase in money supply, lower interest rates,
and credit expansion affect the trade cycle. Business fluctuation is the
unavoidable consequence of credit expansion resulting from the increase in
money supply and lower interest rates. The boom created by credit expansion
would naturally result into bust, and nothing can be done to avoid such a
collapse. The only alternative is either to accept the crisis sooner by
abandoning further credit expansion or by delaying the crisis through continued
credit expansion that would ultimately result in the collapse of the monetary
system.
Impact of Business Cycle
Let
us now proceed to Chapter 20, Section 9 of Human
Action. The central idea discussed under this section is about the impact of business cycles on the market.
Reading
the previous post should make it clear by now that an increase in money supply
promoting credit expansion is the real cause for business fluctuations. These
fluctuations are popularly known as “boom” and “bust” of business.
Mises
appropriately describes the “boom” aspect of the business cycle as “delusive
prosperity.” It is an economic illusion not based on real data. It is an
artificial wealth. No corresponding increase in production is taking place with
the increase in money supply. This increase in money supply also called
inflation is mistakenly identified with economic progress. Such an artificial
boom therefore is already doomed from its very source. It is the real culprit.
It is the disease caused both by inflation and credit expansion.
The
“bust” side of business is dreaded by politicians, bankers, economists, and the
public. But in reality, economic depression is the way of the free market to
restore health back into the economy. It is an act of economic recovery. Mises
states: “we must call the boom retrogression and the depression progress” (p.
575).
The
business cycle has several serious impacts on the market. In reality, a
business boom is a waste of economic resources through bad investments and
decreases the quantity of goods through overconsumption. Its inescapable
outcome is impoverishment.
The
material impoverishment that follows after economic prosperity is a little
consequence in comparison to the mental and psychological damages resulting
from economic depression. People would turn despondent, dispirited, and
frustrated. People would lose their “self-confidence and the spirit of
enterprise to such an extent that they even fail to take advantage of good
opportunities” (p. 578). “The more
optimistic they were under the illusory prosperity of the boom, the greater is
their despair and their feeling of frustration” (p. 576).
The
unthinkable part among the impact of the business cycle in the market is the
public longing for more inflation and credit expansion. For Mises, this proves
the incorrigibility of the people. For the public, “more inflation and more
credit expansion are the only remedy against the evils which inflation and
credit expansion have brought about” (pp. 576-577).
A
popular argument in favor of more credit expansion upholds that more credit
would enable the entrepreneurs to expand production, the unemployed to find
jobs, and consumers to purchase products. It is argued that refraining from
more credit would sink the economy into a prolonged depression. It is an
erroneous analysis. In fact, this longing for more credit expansion only
interrupts and prolongs the curative process resulting from depression. It
could create a new boom resulting in deeper economic depression. This failure
to learn the lesson from depression would keep the old story of boom and bust
in repeating itself.
The
prevailing erroneous opinion and response to economic depression is a result of
the influence of the nonmonetary explanations of the trade cycle and the
advocates of inflation and credit expansion. Only the monetary credit theory
has clarified the notion about the neutrality of money and has also provided
reasonable explanation about the cause of the business cycle.
However,
those motivated by political bias would certainly persist in nonmonetary
explanations of the cyclical trade fluctuations despite evidence. Mises
identified them as the Marxians, non-Marxian socialists, and the
interventionists.
The
Marxians uphold that business boom and bust are inherent flaws in capitalism.
The primary concern of non-Marxian socialists and interventionists is to
exploit the alleged weakness of the free market in order to destroy it and
establish statist omnipotence. As a whole, the non monetary theorists of the
business cycle receive inspiration from the Marxian and explain the trade
cyclical fluctuations in terms of “disproportionality in the size of
investments made in various branches of industry” (p. 582). They see it as an
inherent contradiction within the free market economy.
Disproportionality Doctrines as Explanations of Business
Cycle
This
is the last article in our study of Chapter 20, Section 9 of Human Action. We end here our discussion
about the impact of the business cycle on the market. And we will focus our
attention on the charges against the free market advanced by non monetary
theorists of the business cycle known as “disproportionality doctrines.”
In
the previous article, we mentioned that non monetary theorists of the business
cycle explain an inherent contradiction within the free market as the real
cause of business boom and bust. They identified it as the “disproportionality
in the size of investments made in various branches of industry” (p. 582). And
the two most popular disproportionality doctrines are “durable goods doctrine”
and “acceleration principle.” Let us give a brief definition of each of them.
Durable
goods doctrine is an economic belief that:
“…goods retain their serviceability for some
time. As long as their life period lasts, the buyer who has acquired a piece
abstains from replacing it by the purchase of a new one. Thus, once all people
have made their purchases, the demand for new products dwindles. Business
becomes bad. A revival is possible only when, after the lapse of some time, the
old houses, cars, refrigerators, and the like are worn out, and their owners
must buy new ones'' (p. 583).
Acceleration
principle on the other hand is:
“A temporary rise in the demand for a certain
commodity results in increased production of the commodity concerned. If demand
later drops again, the investments made for this expansion of production appear
as mal investments. This becomes especially pernicious in the field of durable
producers’ goods” (p. 584).
Responding
to the first accusation against free market, Mises argued:
“There are, to be sure, always promoters who are
in a mood of deceptive optimism are prone to over-expand their enterprises. In
the pursuit of such projects they snatch away factors of production from other
plants of the same industry and from other branches of industry. Thus their
overexpansion results in a relative restriction of output in other fields. One
branch goes on expanding while others shrink until the unprofitability of the
former and the profitability of the latter rearranges conditions. Both the
preceding boom and the following slump concern only a part of business” (p.
584).
Mises’
response shows that the accusation is unsound for in the trade cycle, not only
part of a business is affected. In fact, almost all entrepreneurs suffer
financial loss. Durable goods doctrine cannot provide a reasonable explanation
for this economic phenomenon.
Responding
to acceleration principle, Mises explains that:
“The fundamental error of this doctrine is that
it considers entrepreneurial activities as a blindly automatic response to the
momentary state of demand. Whenever demand increases and renders a branch of
business more profitable, production facilities are supposed instantly to
expand in proportion. This view is untenable. Entrepreneurs often err. They pay
heavily for their errors. But whoever acted in the way the acceleration
principle describes would not be an entrepreneur, but a soulless automaton” (p.
584).
Mises
then goes on to describe the character of a real entrepreneur as a speculator.
By this, he meant the quality of an entrepreneur to have an “anticipative
understanding.” This quality is basically instinctive and cannot be learned in
school. No existing rules could assess the presence of this entrepreneurial
quality. An entrepreneur according to Mises is not guided by what was and is,
but by how he sees the future.
Concluding
his refutation of disproportionality doctrines, Mises claims that even if the arguments
of nonmonetary theorists are accepted as valid, still they could not
sufficiently explain how businessmen could proceed in expanding their business
apart from credit expansion caused by increase in money supply. Only monetary
credit theory of business cycles could provide a reasonable explanation for
business expansion caused by credit expansion.
The Study of Economics
In
this article, we will begin our study of Chapter 38 of Human Action. The chapter is about The Place of Economics in Learning. And we will start with Section
1, The Study of Economics.
According
to Mises, the study of economics is a very important duty for every citizen.
However, studying it is not easy due to several obstacles. Among them, the
primary obstacle is the antagonism coming from the socialists and
interventionists’ camps. This antagonism is a result of the economists’
unanswerable objections against the teachings of both the socialists and the
interventionists.
Intellectually,
the antagonism is done by sowing confusion into the minds of the people as to
the real nature of economics. This is accomplished particularly through the
academic attempt to remove the distinction between natural sciences and the
science of human action. The
introduction of economic history is the concrete demonstration of an attempt to
destroy the academic prestige of economics in order to advance the socialist
and interventionists’ propaganda.
In
section 1, we find three dominant themes. These are the inappropriateness of
empirical approach in economics, the proper place of economic history, and the
nature of economics.
Ludwig
von Mises is popularly known as the Austrian economist who refused to
categorize economics under empirical and scientific investigations. To him,
empirical studies are only appropriate for natural sciences and not for the
study of the science of human action. Since economics is under the science of
human action, the methodology appropriate for natural sciences is not suitable
for it. It is therefore erroneous to believe that the progress in economics
could only be achieved once it is subjected under experimental studies.
Since
the socialists and interventionists were determined to sow confusion, two
distinctions are necessary to avoid unnatural interference in the study of
economics. As already mentioned, these are the attempts to make economics part
of natural sciences and the removal of distinction between economics and
economic history.
The
study of economic history has its proper place provided that it will not be
used as a substitute to the study of economics itself. It must be clarified in
the first place that the value of economic history could neither be found in
providing facts that could be tested in laboratories nor in supplying data to
formulate a posteriori theorem. The appropriate place of economic history is
inseparable from the specific theory that develops it in the first place. As
such, economic history simply provides an interpretation to economic phenomena.
The
reason why economics could not be subjected to experimentation applicable to
natural sciences is due to its unique quality that can only be appreciated
through abstract reasoning. What is necessary in the study of economics is not
an expensive laboratory for its research but the ability to reason and to
distinguish the essential from the incidental in the jungle of economic
activities.
Respecting
the boundary between economics and economic history, one can therefore find no
conflict between these two branches of knowledge. Any conflict between these
two academic disciplines emerged not from the scope of study, but from the
intention of both the socialists and the interventionists to use the latter to
displace the former.
Economics, Citizenship, and Freedom
We
intentionally skip sections 4 and 5 dealing with Economics and Universities and Economics and General Education. We
now conclude with sections 6 and 7 discussing Economics and Citizenship, and Economics and Freedom.
Economics and Citizenship
Citizens
cannot withdraw from the study of economics without serious negative
consequences. We cannot trust the interventionists to teach us economics. It is
the solemn duty of each citizen to learn this science of human action.
It
is high time that the study of economics must go beyond the confines of the
academe and control of the specialists. The burning issues of today both
political and social are all economic issues. No wonder, philosophers and
theologians are now leaving the old problems dealt by earlier generations and
are becoming more interested to participate in economic issues. Even the common
man, whether he is conscious or not, is actually involved in economic affairs
in his day to day activities. Civic activities like taking side to a specific
political party and casting a ballot are inescapably economic realities. The
relevance of economics for today is captured by Mises in summarizing the
concerns of the last five centuries:
“In the sixteenth and seventeenth centuries
religion was the main issue in European political controversies. In the
eighteenth and nineteenth centuries in Europe as well as in America the
paramount question was representative government versus royal absolutism. Today
it is the market economy versus socialism” (p. 878).
With
the challenges we are facing today, the study of economics is the primary civic
duty of a responsible citizen. By fulfilling this duty, you demonstrate that
you care not only about your future but the future of your children as well.
Economics and Freedom
Interventionists
know that the study of economics could enlighten the citizens to their civic
responsibilities. This will frustrate the expansion of the interventionists’
dream and that is why all attempts are made to restrict the freedom of economic
thought.
“Subversive”
ideas are suppressed and only interventionists “truth” is allowed to reach
public consciousness. In order to have a secure position for this truth,
coercion is a necessary tool at the disposal of those who control the centers
of power. Even religion is used to justify the promotion of interventionists’
agenda resulting in the gradual loss of human freedom.
Interventionists’
policy is most evident in restraining the activity of the free market. Economic
issues like cutting down profits, lowering prices, lowering interest rates, and
raising salary rates appear commendable in the eyes of the uninformed public.
Only few are able to penetrate behind the appearances of things and fewer still
are able to connect the economic disaster brought about by the widespread
influence of those interventionists’ doctrines. Continued search for truth is
the only weapon freedom lovers have in their arsenal to reverse the trend and
provide the intellectual climate for the growth of market economy.
____________
Reference: Mises, Ludwig von. 1998. Human Action: A Treatise on Economics. Auburn, Alabama: Ludwig von Mises Institute. 912 pages.
Guide Questions for Discussion:
- How would
you describe the influence of Mises as a scholar?
- Why does Human Action remain a closed book to many mainstream
economists?
- Describe the brilliance of the
book.
- Describe Mises’ intellectual
preparation.
- Describe the political and
intellectual hostility against Mises’ ideas.
- What is the business cycle theory?
What are the two major explanations of the business cycle?
- In what way is the explanation of
Business Currency School unsatisfactory?
- Describe the impact of the business
cycle.
- Why is
the study of economics a very important duty for every citizen?
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