Ludwig von Mises (1881-1973) (pronounced Meesez) was born in the Austro-Hungarian empire. Hard money advocates and free market economists consider him to be the greatest economic thinker in history. He believed in limited government, the gold standard, sound money, capitalism and personal freedom. If you have never heard of him, it’s time you learned more. Mises attended the University of Vienna during the high tide of the “Austrian School” of economics. His accomplishments are prodigious. In 1920, he showed that socialism and planning must fail because of the lack of market pricing. Mises insightful checkmate to collectivism was widely acknowledged when communism collapsed seventy years later.
Among other things, Mises was able to show that inflation was no more than taxation and redistribution of wealth; that prices will most often fall without government induced money injections; that increases in the money supply, e.g. a sudden doubling of everyone’s money holding benefits society not an iota and in fact only dilutes purchasing power; that only growth in the factors of production, land, labor, plant and equipment will increase production and standards of living.
In a brilliant and important theoretical accomplishment Mises answered a problem most economists thought unanswerable. How can we explain that the price of money is influenced by demand if to have demand it must first have a price? He traced the time component in the demand for money back in time to a useful barter commodity (e.g. silver and gold).
The dramatic implications meant money could only originate on the free market out of demand. Government, despite any attempts to the contrary, could not originate money. Money is not arbitrary pieces of paper but must originate as a useful and valuable commodity.
Mises also pointed out how central banking acts as an accomplice to government money expansion. And he began to explain his great business cycle theory. Recognizing that the market economy could not generate by itself a series of booms and busts he fixed the blame on an outside factor – the habitual expansion of money and credit.
He argued that a credit-induced boom must eventually “lead to a crack-up boom.” He wrote, “The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.”
He warned, “The credit expansion boom is built on the sands of banknotes and deposits. It must collapse.” He stated that, “If the credit expansion is not stopped in time, the boom turns into the crackup boom; the flight into real values begins, and the whole monetary system founders. Continuous inflation (credit expansion) must finally end in the crack-up boom and the complete breakdown of the currency system.”
Mises further claimed that, “Expansion (of credit) squanders scarce factors of production by malinvestment and overconsumption.” Malinvestment means building shopping centers rather than factories. Overconsumption means a borrowing and spending boom by consumers that depletes savings and reduces capital investment.
Mises was aware that a credit excess could spill over into stock and bond speculation. But even he would be surprised at today’s unprecedented level of credit-induced speculation. He would be depressed by the astonishing levels of public and private debt, government borrowing, central bank market interventions, trade deficits, non-bank credit growth, money velocity, illiquidity, overconsumption and foreign indebtedness. The magnitude of these excesses seemingly without penalties would appear to be rewriting the laws of economics as expressed by Mises. Trade deficits fail to harm the dollar. The stock market outperforms the economy. Capital gets used up by government and consumers at the expense of investment. Yet business rolls along. Savings are depleted but interest rates stay low. The boom seems unending, the bust postponed indefinitely. Can these phenomenon persist?
Absolutely not says Mises. “Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.” He warns that, “Accidental, institutional, and psychological circumstances generally turn the outbreak of the crisis into a panic. The description of these awful events can be left to the historians. It is not...(our task)...to depict in detail the calamities of panicky days and weeks and to dwell upon their sometimes grotesque aspects.”
“The final outcome of the credit expansion is general impoverishment. Some people may have increased their wealth; they did not let their reasoning be obfuscated by the mass hysteria, and took advantage in time of the opportunities offered by the mobility of the individual investor....but the immense majority must foot the bill for the malinvestments and the overconsumption of the boom episode.”
Austrian economics rests on the foundation of readily observable human actions. Beings have goals, they set out to attain them; they have individual preferences; and they act within the framework of time. Each person and his or her actions are different and unique. The very nature of human behavior defies economic codification.
Mises points out that there are not quantitative constants in human behavior. In his greatest book, “Human Action,” he developed a rational economic science based on this human factor. At the same time he tweaked the nose of today’s highly popular mathematical economics, statistical economics and econometrics. This posturing and economic forecasting he dismissed as little more than poppycock.
In the early thirties, Austrian school economics was on the verge of carrying the day. But in England, the publication of John Maynard Keynes, “General Theory of Employment, Interest and Money,” provided the rationalizations necessary for politicians and government to spend and inflate endlessly. Until that moment virtually the entire body and history of economic thought stood against such theories. But, Keynes theories fit hand in glove with the mentality of intervention and statism. It rationalized politicians, economists and governments jumping in bed together to expand their power and influence.
Not that Mises was rebutted or that anyone overturned his conclusions – he was simply ignored. How many Americans have ever heard of Ludwig von Mises? How many businessmen know that he placed the girders and underpinnings under free enterprise that cement that system to reason? How many know that he won the moral high ground for capitalism?
Ludwig von Mises emigrated to the U.S. in 1940. He continued to write and lectured and taught as a visiting professor at N.Y.U. But it was a far cry from his prestige on the continent. Ignored by the media, by the academic community, by business and by government he remained undaunted, a lone figure firm of principle and intellectual courage, a genuine liberal in the classical sense.
Professor von Mises is the painstaking architect of the economy of a free society. However, mainstream economists totally ignore his blueprint. He stands far above the current arguments about how the money supply and the economy should be manipulated. For he maintains our greatest error is for government to exert any influence or control over the supply of money and the economic system.
We ignore Mises teaching at our own peril and he tells us so. “It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not only annul economics; they will stamp out society and the human race.”