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The Economics of Ludwig von Mises: Toward a Critical Reappraisal; Edited by: Moss, Laurence S.
47 paragraphs found.

A large portion of Mises' writing is concerned with the broad issues of political economy and sociology. On Rothbard's recommendation, we contacted Professor William Baumgarth, who agreed to prepare a paper on Mises' political philosophy, inasmuch as Baumgarth's own doctoral research on Friedrich Hayek's political thought had brought him into contact with Mises' writings. Finally, I chose to speak about Mises' contribution to monetary economics by emphasizing the use Mises made of the cash-balance mechanism in his treatment of monetary disturbances.

Essay 1

In 1926 Mises toured the United states under the sponsorship of the Laura Spelman Rockefeller Memorial. When he returned to Austria in 1926, he established the Austrian Institute for Business cycle Research. At that time Mises reformulated and expanded his monetary theory of the business cycle, first sketched in his 1912 study on money and credit mentioned previously. Many of Mises' articles and books containing elaborations and applications of his cycle analysis are still untranslated. *6 One route by which Mises' basic ideas did, however, reach a wider audience was through the lectures of his student firedrich Hayek at athe London School of Economics during the thirties. *7

At the University, Mises taught a variety of courses over the years. They included history of economic thought, monetary theory, and business cycles. At his office in the Austrian Chamber of Commerce, Mises held a second seminar for his select student and friends where individual reports on recent work were followed by lengthy discussions. Apparently admission to Mises' private seminar was a great honor. Issue ranging from pure economic to the philosophy of science were discussed Oscar Morgenstern, Gottfried Haberler, Gerhard Tintner, Karl Schlesinger, Erich Schiff, Martha Stefanie Braun, Ilse Mintz, Felix Kaufmann, and Alfred Schutz. Mises, together with Hans Mayer, Friedrich Hayek, Fritz Machulp, and Oskar Morgenstern, founded the Austrian Economic Society (Nationalkömomische Gesellschaft), which met one to three times a month. Among the guest spekers were Jacob Viner, Frank Knight, Lionel Robbins, and Frank Graham, to mention only a few of the british visitors to Vienna.
Essay 2

In addition, Keynes cited Hans Neisser's Der Tauschwert des Geldes (1928) and Friedrich Hayek's Geldtheorie und Konjunkturtheorie (1929). *15 Following these citations Keynes added a footnote that is of interest because, although Keynes had already attributed to Mises the novel and original idea of the relationship between saving and investment and had credited him with having discussed its importance to monetary theory, Keynes confessed:

I should have made more references to the work of these writers if their books, which have only come into my hands as these pages are being passed through the press, had appeared when my own thought was at an earlier stage of development, and if my knowledge of the German language was not so poor (in German I can only clearly understand what I know already!—so that new ideas are apt to be veiled from me by difficulties of language). *16
Hans Neisser's book has not been translated into English. Friedrich A. Hayek's work was translated by Nicholas Kaldor and H. M. Croome under the title Monetary theory and the Trade Cycle (London: Alden Press, 1933).
Essay 3

The first edition of Ludwig von Mises' Theory of Money Credit appeared in 1912, one year after the publication of Irving Fisher's Purchasing Power of Money (1911) but more than a decade before Alfred Marshall's Money, Credit, and Commerce(1922). *18 Despite the important contributions of Fisher and Marshall to the area of monetary economics, it was Mises who produced the first systematic study of the relationship among money, interest, and prices after Wicksell's celebrated Interest and Prices (1898). *19 While Wicksell's, Marshall's, and Fischer's respective contributions are ritualistically consulted by contemporary scholars, Mises' contribution is largely neglected and is no longer considered essential to a mastery of the subject matter of monetary economics. Yet the Theory of Money and Credit cannot be described as either an obscure book or one that has failed to influence the development of monetary economics. The list of scholars who have indicated at least some familiarity with Mises' monetary thought is formidable and includes men of acknowledged reputation such as Knut Wicksell, Benjamin Anderson, Lionel Robbins, John Maynard Keynes, John R. Hicks, A. W. Marget, and Don Patinkin. If to this list we add the names of several generations of veteran participants in Mises' famous monetary seminars, offered first in Vienna, then in Geneva, and later in New York, the roster must be expanded to include Friedrich Hayek, Fritz Machlup, Gottfried Haberler, Alexander Kafka, Leland Yeager, Murray Rothbard, Israel Kirzner, and myself, to name only a few. *20


In section 3 I show how the Mises-Hayek theory of the business cycle originated in Mises' attempt to apply his theory of money to the "cumulative expansion" problem raised by Wicksell. A concluding section offers a brief statement of Mises' contribution to monetary policy.



If it were possible to measure the amount of price variation that characterizes each market in the economy, the resulting "coefficients of price variation" would come out lowest for those markets in which standardized commodities like bread, milk, and other articles of final consumption are sold and highest for the markets in which the industrial ovens for baking bread and the machinery needed to process the milk are sold. What I have in mind here is that capital goods transactions as well as all other transactions that involve other highly specialized goods may offer an opportunity for speculative behavior that does not exist in markets closer to the consumer. If this is true, a lowering of the market rate of interest will produce not only an increased demand for speculative balances but also an increased trade in markets for what Menger called "higher order" goods. This may result in a deepening of the capital structure, something that both Mises and later Hayek described as characteristic of the boom period of the business cycle, when banks encourage borrowing by lowering the market rate of interest. It is unfortunate that Mises overlooked Menger's speculative demand for money and the implied interest elasticity of the demand for real balances, because it really opens a line of investigation that might have proved quite congenial to his own work on the business cycle. *44


The details of the theory are sketchy, and Mises failed to prove that the rate of growth of the money supply must necessarily accelerate when the market rate is held below the natural rate. It remained for Mises' student F. A. Hayek to develop Mises' idea into a full-fledged theory of the modern trade cycle. *77 The Mises Hayek theory of the business cycle centers around the idea that the route by which newly created money enters the economy is essential in determining its impact on the monetary order. The analysis treats increases in the quantity of money as necessarily involving changes in relative prices and transfers in wealth among individuals. If present-day monetary economics seems far removed from the concerns of Mises and Hayek, the only reason is that it treats all increases in the quantity of money as being essentially alike and disregards the question of the "transmission mechanism" by which the new money makes its impact felt on the money economy by assuming relative prices are (after a brief transition period) left unchanged.


Menger, Principles, pp. 357-71. Cf. Friedrich A. Hayek, The Counter-Revolution of Science: Studies on the Abuse of Reason (Glencoe, Ill.: Free Press, 1955), pp. 82-83.
For this interpretation of Menger, I am indebted to Erich W. Streissler, "Menger's Theories of Money and Uncertainty—A Modern Interpretation," in Carl Menger and the Austrian School of Economics, ed. J. R. Hicks and W. Weber (Oxford: Clarendon Press, 1973), pp. 164-89. Streissler's discussion of Menger's view on the speculative demand for money was based on an article entitled "Geld," which Menger contributed to Handwörterbuch der Staatswissenschaften; it was reprinted in The Collected Works of Carl Menger, ed. Friedrich A. Hayek (London: London School of Economics and Political Science, 1936) 4: 1-124. The article went through several editions between 1891 and 1909, the time when Mises was attending the University of Vienna, yet, apparently, Mises did not notice the argument.
See esp. Friedrich A. Hayek's early writings, such as Prices and Production (London: George Routledge & Sons, 1935), pp. 148-52; and Hayek, "Capital and Industrial Fluctuations," Econometrica 2 (April 1934): 152-67.
Essay 4

Ludwig von Mises and
The Theory of
Capital and Interest
Israel M. Kirzner

Students of Misesian economics often agree that the theory of capital and interest occupies a central and characteristically Austrian position in the general Misesian system. That is the reason Frank H. Knight, in his lengthy and critical review article of the first complete exposition of that system, *82 chose to concentrate on "the theory of capital and interest" after deciding to confine his review to "some one main problem which at once is peculiarly central in the structure of theory, and on which [his] disagreement with the author reaches down to basic premises and methods." *83 In that article Knight identified Mises as the foremost exponent of the Austrian position on capital and interest. In a 1945 article Friedrich A. Hayek also alluded to Mises as the most thoroughgoing among the Austrians on these problems. *84


And yet, in his published works, Mises appears to have devoted little attention to the theories of capital and interest until relatively late in his career. His influence on these matters was largely confined to his oral teaching and seminar discussions. As late as 1941 (presumably without having seen Mises' Nationalökonomie, published in 1940), Hayek remarked in his Pure Theory of Capitalthat, while Mises' "published work deals mainly with the more complex problems that only arise beyond the point at which [this book] ends," Mises had nonetheless "suggested some of the angles from which the more abstract problem is approached [in this book]." *85


Apart from a 1931 Festschrift paper on inconvertible capital, *86 Mises' published work on capital and interest prior to 1940 is confined (apart from casual obiter dicta) to a few brief pages in his Socialism*87 On the other hand, there is an intriguing, somewhat cryptic footnote in the second (1924) edition of his Theory of Money and Credit*88 It makes clear that since 1912 Mises (1) had given much critical though to the theory of interest, (2) now considered Eugen von Böhm-Bawerk, while "the first to clear the way that leads to understanding of the problem," nonetheless to have presented a theory that was not satisfactory, and (3) hoped to publish "in the not-too-distant future" his own special study of the problem. It is certainly unfortunate that Mises never published such a study and that we are forced to rely on a relatively meager collection of scattered remarks in his larger works in order to understand what he considered unsatisfactory about Böhm-Bawerk's position. Fortunately, while his later works do not include a detailed critical discussion of Böhm-Bawerk's writings, they do provide us with a complete theoretical treatment of the problems of capital and interest, thereby justifying Knight's claim that the theory of capital and interest occupies a central position in the Misesian system. In what follows I shall first summarize Mises' own views on the problems of capital and interest and then discuss the extent to which his views differed from those of Böhm-Bawerk and knight. In so doing we shall discover that Mises' later position is, as was noted by both Knight and Hayek, characteristically and consistently Austrian.



We have already seen that, as early as 1924, Mises had indicated dissatisfaction with Böhm-Bawerk's theory. This may come as a surprise to those who—quite mistakenly—believe that the Austrian position on most questions of economic theory, and especially on the theory of capital and interest, is a monolithic one. The truth of the matter is that, while the suggestive brilliance of Böhm-Bawerk's contribution won international recognition as typifying the work of the Austrian school, it was by no means acceptable to other leading representatives of that school. It is by now well known, as reported by Joseph A. Schumpeter, that Carl Menger considered Böhm-Bawerk's theory of capital and interest to have been "one of the greatest errors ever committed." *93 Referring specifically not only to Menger but also to Friedrich von Wieser and Schumpeter himself, Hayek remarked that those "commonly regarded as the leaders of the 'Austrian School' of economics" did not accept Böhm-Bawerk's views. *94 So we should not be overly surprised at Mises' disagreement with his own mentor's teachings.


Mises' disagreements with the Böhm-Bawerkian theory reflect a consistent theme. Mises was concerned with distilling Böhm-Bawerk's basic ideas from the nonsubjective, technical, and empirical garb in which they had been presented. Mises tried to show that Böhm-Bawerk's basic ideas flowed smoothly out of his own praxeological approach, or, in other words, that they could be cast in a strictly subjectivist mold. Knight (correctly) characterized Mises as taking an extreme Austrian position on interest by refusing to attribute any explanatory role to the objective, or physical, conditions governing production in a capital-using world. As the Austrian theory of value depends on utility considerations, with no recognition accorded objective costs, so, too, Knight explained, the Misesian theory of interest depends entirely on subjective time preference, with no influence attributed to physical productivity. *95One is reminded of Hayek's penetrating comment concerning the nature of Mises' contribution to economics. Remarking that "it is probably no exaggeration to say that every important advance in economic theory during the last hundred years was a further step in the consistent application of subjectivism," *96 Hayek cited Mises as the economist who most consistently carried out this subjectivist development: "Probably all the characteristic features of his theories...follow directly...from this central position." *97 More specifically, Mises' theory of capital and interest is in disagreement with Böhm-Bawerk's on the following points:


Mises' refusal to accept the notion of capital as an aggregate of produced means of production expressed his consistent Austrian emphasis on forward-looking decision making. Menger had already argued that "the historical origin of a commodity is irrelevant from an economic point of view." *109 (Later Knight and Hayek were to claim that emphasis on the historical origins of produced means of production is a residual of the older cost-of-production perspectives and inconsistent with the valuable insight that bygones are bygones. *110) Thus, Mises' rejection of Böhm-Bawerk's definition reflects a throughgoing subjective point of view.

Friedrich A. Hayek, "Time-Preference and Productivity: A Reconsideration," Economica 12 (February 1945): 22.
Friedrich A. Hayek, Pure Theory of Capital (London: Routledge & Kegan Paul, 1941), p. 45.
Heyek, Pure Theory of Capital, p. 46n. For Hayek's criticisms of Böhm-Bawerk's work, see ibid., pp. 414-23. A critique of Böhm-Bawerk by an "Austrian" theorist may be found in Ludwig M. Lachmann, Capital and Its Structure (London: London School of Economics and Political Science, 1956).
Friedrich A. Hayek, The Counter-Revolution of Science: Studies on the Abuse of Reason (Glencoe, III.: Free Press, 1955) p. 31.
Friedrich A. Hayek, "Carl Menger," in Grundsätze der Volkswirtschaftslehre, Scarce Tracts in Economic and Political Science (London: London School of Economics and Political Science, 1934), p. xxvi.
Hayek, "Carl Menger," p. xxvi.
Hayek, Pure Theory of Capital, p. 89.
Essay 5

Ludwig von Mises first raised the question of Socialist economic calculation in 1920 by asserting that socialism could not calculate economically because of the absence of a price system for the factors of production. Enrico Barone "then" showed (the fact that he had done so twelve years earlier is laid to accidents of timing and translation) that this was not a theoretical problem because all the equations existed for a solution. F. A. Hayek then retreated to a second line of attack by conceding the "theoretical" solution to economic calculation in a Socialist state but challenging its "practical" possibility. Finally, Oskar Lange, Abba Lerner, and others "demonstrated" the practical solution by advancing the concept of "market" socialism, in which the Planning Board arrives at market clearing prices through trial and error. Q. E. D. and Socialist planning has been salvaged, replete with Lange's ironic tribute to Mises for raising the problem for Lange and other Socialists to solve. If the actual record of Communist economies is brought into the discussion at all, it is usually done as a vindication of the Lange-Lerner thesis in practice.


But a particularly important flaw in the orthodox story is, as Hayek tried to make clear during the debate, the curious disjunction between the "theoretical" and the "practical." It is not simply that Barone and his mentor Pareto scoffed at the workability of the theoretical equations under Socialist planning. More important is the point that Mises and Hayek were implicitly attacking the relevance of the entire concept of Walrasian general equilibrium from which these equations flowed. For Mises and Hayek there was no disjunction between the "theoretical" and the "practical"; following the Austrian tradition, a theory that necessarily violated practical reality was an unsound theory. The fact that in a changeless world of perfect knowledge and general equilibrium a Socialist Planning Board could "solve" equations of prices and production was for Mises a worse than useless demonstration. Clearly, as Hayek would later develop at length, if complete knowledge of economic reality is assumed to be "given" to all, including a Planning Board, there is no problem of calculation or, indeed, any economic problem at all, whatever the economic system. The Mises demonstration of the impossibility of economic calculation under socialism and of the superiority of private markets in the means of production applied only to the real world of uncertainty, continuing change, and scattered knowledge.


In developing this approach, Hayek engaged in a searching critique of Schumpeter's assertion that socialism suffers from no problem of economic calculation, because, to quote Schumpeter, the"consumers, in evaluating ('demanding') consumers' goods ipso facto also evaluate the means of production..." *133 Hayek pointed out, however, that this easy step would only follow"to a mind to which all these facts were simultaneously known...The practical problem, however, arises precisely because these facts are never so given to a single mind...instead, we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge." Hayek concluded that"any approach, such as that of much of mathematical economics with its simultaneous equations, which in effect starts from the assumption that people's knowledge corresponds with objective facts of the situation, systematically leaves out what is our main task to explain." *134


Mises' followers in the debate have continued to develop his basic critique of the impossibility of economic calculation under socialism. Thus, the attempted Lange-Lerner criterion of pricing in accordance with"marginal cost"has been attacked on what are essentially Austrian grounds, namely, that costs are not"given"and objective but are subjective estimates by various individuals of future selling prices and other economic conditions. Thus Hayek wrote that

excessive preoccupation with the conditions of a hypothetical state of stationary equilibrium has led modern attribute to the notion of costs in general a much greater precision and definiteness than can be attached to any cost phenomenon in real life...[A]s soon as we leave the realm of...a stationary state and consider a world where most of the existing means of production are the product of particular processes that will probably never be repeated; where, in consequence of incessant change, the value of most of the more durable instruments of production has little or no connection with the costs which have been incurred in their production but depends only on the services which they are expected to render in the future, the question of what exactly are the costs of production of a given product is a question of extreme-difficulty which cannot be answered...without first making some assumption as regards the prices of the products in the manufacture of which the same instruments will be used. Much of what is usually termed cost of production is not really a cost element that is given independently of the price of the product but a quasi-rent, or a depreciation quota which has to be allowed on the capitalized value of expected quasi-rents, and is therefore dependent on the prices which are expected to prevail. *138

At another place, Hayek added that Lange and others"speak about 'marginal costs' as if they were independent of the period for which the manager can plan. Clearly, actual costs depend in many instances, as much as on anything, on buying at the right time. In no sense can costs during any period be said to depend solely on prices during that period. They depend as much on whether these prices have been correctly foreseen as on the views that are held about future prices." *139 And Paul Craig Roberts, while writing generally from a different perspective, pointed out that"under real-world conditions characterized by the passage of time, the marginal rule gives no clear guidance to those directed to organize production in accordance with it. Introducing the element of time brings in uncertainty and requires the exercise of judgment. Neither uncertainty nor judgment is present in the formulation of perfect competition from which Lange took his idea of the marginal rule." *140 Moreover, the outstanding critique of the marginal cost as well as of other authoritarian rules imposed on the entrepreneur was by G. F. Thirlby, who pointed out that costs are wrapped up inextricably in subjective estimates by the individual capitalists and entrepreneurs of alternative choices that are forgone, and since these alternatives are usually never undertaken, they can never be"objectively"determined by outside observers. *141


The subjectivist Austrian critique of the modern concept of costs and its relevance to the question of Socialist calculation were neatly summed up by Professor Buchanan:

Confusion arises...when the properties of equilibrium, as defined for markets, are transferred as criteria of optimization in nonmarket or political settings. It is here that the critical distinction between the equilibrium of the single decision-maker and that attained through market interaction, the distinction stressed by Hayek, is absolutely essential...The theory of social interaction, of the mutual adjustment among the plans of separate human beings, is different in kind from the theory of planning, the maximization of some objective function by a conceptualized omniscient being. The latter is equivalent, in all respects, to the problems faced by Crusoe or by any individual decision-maker. But this is not the theory of markets, and it is artificial and basically false thinking that makes it out to be....Shadow prices are not market prices, and the opportunity costs that inform market decisions are not those that inform the choices of even the omniscient planner. These appear to be identical only because of the false objectification of the magnitudes in question....

Simply considered, cost is the obstacle or barrier to choice, that which must be got over before choice is made. Cost is the underside of the coin, so to speak, cost is the displaced alternative, the rejected opportunity. Cost is that which the decision-maker sacrifices or gi ves up when he selects one alternative rather than another. Cost consists therefore in his own evaluation of the enjoyment or utility that he anticipates having to forego as a result of choice itself. There are specific implications to be drawn from this choice-bound definition of opportunity cost:


1. Cost must be borne exclusively by the person who makes decisions; it is not possible for this cost to be shifted to or imposed on others.


2. Cost is subjective; it exists only in the mind of the decision-maker or chooser.


3. Cost is based on anticipations; it is necessarily a forward-looking or ex ante concept.


4. Cost can never be realized because of the fact that choice is made; the alternative which is rejected can never itself be enjoyed.


5. Cost cannot be measured by someone other than the chooser since there is no way that subjective mental experience can be directly observed....


In any general theory of choice cost must be reckoned in a utility rather that in a commodity dimension. From this it follows that the opportunity cost involved in choice cannot be observed and objectified and, more importantly, it cannot be measured in such a way as to allow comparisons over wholly different choice settings. The cost faced by the utility-maximizing owner of a firm, the value that he anticipates having to forego in choosing to produce an increment to current output, is not the cost faced by the utility-maximizing bureaucrat who manages a publicly owned firm, even if the physical aspects of the two firms are in all respects identical. *142

See Enrico Barone, "The Ministry of Production in the Collectivist State," in Collectivist Economic Planning, ed. Friedrich A. Hayek (London: George Routledge & Sons, 1935), p. 286. See also Trygve J. B. Hoff, Economic Calculation in the Socialist Society (London: William Hodge & Co., 1949), pp. 140-43.
Friedrich A. Hayek, Individualism and Economic Order (Chicago: University of Chicago Press, 1948), pp. 90-91.
Friedrich A. Hayek,"The Present State of the Debate,"in Collectivist Economic Planning, pp. 226-27.
Hayek, Individualism and Economic Order, p. 198.
Essay 6

Mises' notion of "equality," then, is not connected with equality of condition but with equality of opportunity. Mises was concerned with means rather than ends. His political philosophy is a species of the ethics of constraint rather than of "end realization." To treat men equally under the law, as Hayek has demonstrated, *171 is to permit unequal results insofar as each human actor starts from a position of inequality with regard to talent and opportunity. To bring about an equality of status among men necessarily requires that they be treated unequally before the law. Both notions of equality cannot be pursued simultaneously, and each pursuit is characteristic of opposite political regimes. Mises summed up the modern liberal case for equality in terms of the notion of equal treatment before the law and characteristically insisted that the liberal case must be argued on utilitarian grounds:

It is therefore quite unjustifiable to find fault with the manner in which liberalism put into effect its postulate of equality, on the ground that what it created was only equality before the law, and not real equality. Men are and will always remain unequal. It is sober considerations of utility such as those we have here presented that constitute the argument in favor of the equality of all men under the law. *172

In conclusion, we may say that the political thought of Ludwig von Mises represents an attempt to escape from the difficulties of the classical liberal position but that it is not without difficulties of its own. While Mises' insights into problems of applied economics are of great significance in instructing modern governments about how the material gains already won by capitalism are not to be lost, his prescriptions regarding notions of "equality" and "liberty" are defective in several respects. On the moral problems of a commercial economy Hayek's examination of the concept of the "rule of law" seems a more adequate confrontation with the phenomena than does Mises' complete disavowal of interest in "metaphysical issues." *181 The solution to the problem of justifying private property must reduce itself to questions of justice, as Murray N. Rothbard has pointed out." *182 It is precisely Hayek's concern with justice that marks him as a more suitable candidate than Mises for the title of the modern political philosopher of liberalism. Yet Hayek's definitions also suffer from the same formalistic difficulties that are found in Mises: neither offers us a substantive theory of liberty based upon a consideration of terms like "freedom" and "justice." The ultimate question presented by Mises and still left unanswered is whether we can ever arrive at a theory of society that is value free. Mises' attempt to offer such a theory was a bold one and went as far in the direction of utilitarianism as perhaps it is possible to go. But, as Aristotle noted in the fifth book of his Politics, it is not only the masses who ferment revolution but the elite as well. The masses are spurred on by a sense of outrage based upon oppression and a desire for equality. The better sort of men have higher motives—they revolt because of loftier issues like "justice" and "honor." Liberalism will succeed, according to Hayek, if it has ideals, but ideals are linked to a philosophical form of reasoning that Mises wished to avoid. The theory of the liberal state cannot be complete unless or until the moral side of liberalism is reexamined. Liberal theory simply will not succeed in redirecting civilization toward the old liberal program unless questions of an ethical sort are viewed as more fundamental than questions of economics. The battle against statism must not be fought in terms of "efficiency" alone if the entire war is to be won!

Ibid., pp. 7-8; cf. Friedrich A. Hayek, The Constitution of Liberty (Chicago: Henry Regnery, 1972), p. 52.
Hayek, Constitution of Liberty, pp. 85-102.
Hayek, Constitution of Liberty, pp. 162-75.
Essay 7

Mises' theory of capital provides a good transition to the next paper on our program, Professor Rothbard's on Mises and the controversy over economic calculation under socialism, because the heart of the Misesian challenge was his contention that it would be impossible to calculate efficiently under socialism without capital markets to determine input prices. Rothbard's paper was also well placed in the program because the controversy about which he wrote summarizes Mises' view of the functioning of a market economy. To paraphrase Professor Rothbard, the controversy was much more than one over socialism versus capitalism as we know it, rather it was a controversy over the efficacy of political versus economic action. It is ironic that this is the one area discussed in the session where Mises was given glowing recognition for his achievement while it is generally believed that he lost the debate. I am reminded of Buchanan's statement that the degree to which one accepts the alleged defeat of Mises is the degree to which one is confused as to what the debate was about. Though I think that Professor Rothbard perhaps gave Mises too much credit for working out the details of the Austrian answer to the controversy about economic calculation, when in fact it was Hayek who chose to respond to some of the more difficult problems (Mises' so-called final refutation in Human Action is mostly polemic and glosses over the real problems), I admit that it was Mises, nevertheless, who indicated in what direction the answer to the Socialists lay.


The importance of the debate can, I believe, be underscored by a remark Hayek once made to the effect that because of Mises the Socialists were forced to change their claim that socialism was superior to capitalism to a defense of the possibility of socialism at all. Furthermore, to every challenge Mises and Hayek hurled at the Socialist scheme, the response was to find some means of duplicating the market. To Mises, this alone was evidence of his triumph over the Socialists, since he considered every admission of the need for markets to be one more step away from pure socialism. To Mises, the final proposals of Lange were no longer socialism at all but state capitalism, where the Planning Board assumed the entrepreneurial function and performed in a manner far inferior to the decentralization of this function, which is characteristic of the free market.


What I believe to be the most interesting results of the controversy, however, were the further developments of economic theory to which it gave rise. For example, Rothbard noted the further developments in the theory of cost as a subjective phenomenon dependent solely on the forgone utility of the choser, that took place at the London School of Economics during the thirties, forties, and fifties. This work grew out of an examination of the idea of using the rule of marginal cost pricing to direct the behavior of Socialist managers. Hayek, Coase, and Thirlby all questioned the usefulness of such a rule if one accepts the idea that the evaluation of cost is not merely a mechanical adding up of expenditures but depends upon the ability of the manager to assess the value of forgone opportunities with which he is confronted. Furthermore, when the manager's judgments are to be monitored, not by the profits or losses he earns in the market place, but by a Planning Board who must agree with his evaluation of costs, the manager's behavior is bound to differ substantially from that of the market entrepreneur.


This raises a most fundamental question involved in the Socialist controversy: what is the role of private ownership in economic activity? Mises and Hayek both believed that the essence of entrepreneurial activity was risk-taking in one's attempt to anticipate the market. If the users of capital were to be shielded even partially from the consequences of their risky actions (either good or bad), their actions would be far different from those of people who were risking their own fortunes regardless of the behavioral rules issued by the Planning Board. Hence central planning could never duplicate the outcomes of a functioning market economy.

Appendix A, Chronology

1971 September 29. Honored on the occasion of his 90th birthday by a Festchrift. In two volumes: Toward Liberty. Edited by F. A. Hayek and other members of Mont Pelerin Society. Menlo Park, Calif.: Institute for Humane Studies, 1971.

Appendix B, Major Translated Writings of Ludwig von Mises

1920-21 "Economic Calculation in the Socialist Commonwealth." In Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism, edited by Friedrich A. Hayek; translated by S. Adler. London: Routledge & Kegan, Paul, 1963. This article originally appeared under the title "Die Wirtschaftsrechnung im sozialistischen Gemeinwesen." Archiv fur Sozialwissenschaft und Sozialpolitik 47 (1920-21): 86-121. The main points of this article are treated in Murray N. Rothbard's paper "Ludwig von Mises and Economic Calculation under Socialism" in this volume.

Notes on Contributors

Held before the 44th Meeting of the Southern Economics Association Atlanta, Georgia
15 November 1974

Contributors to the Symposium on "The Economics of Ludwig von Mises"

William Baumgarth was born on 10 July 1946 in Union City, New Jersey. He attended Fordham University, where he majored in political science, and graduated in 1968. He went on to Harvard University, where the Department of Government awarded him an M.A. in 1970. Baumgarth is scheduled to defend his dissertation, "The Political Philosophy of Friedrich von Hayek," before the Harvard faculty this summer (1975). He has contributed papers to the Libertarian Scholars Conference in New York City (1972) and to the Columbia University Forum on Legal and Political Philosophy (1974). His many academic awards and honors include membership in Phi Beta Kappa and being named a traveling Earhart Fellow while at Harvard. Baumgarth is an instructor of political science at Wake Forest University in North Carolina. This fall (1975) he will teach political philosophy in the Political Science Department of Fordham University, New York City.