Murray N. Rothbard - The Essential von Mises

L udwig von Mises (18811973) was born on September 29, 1881, in the city of Lemberg (present day Ukraine), then part of the Austro-Hungarian Empire, where his father, Arthur Edler von Mises, a distinguished construction engineer working for the Austrian railroads, was stationed. Growing up in Vienna, Mises entered the University of Vienna at the turn of the century to study for his graduate degree in law and economics. He died October 10, 1973, in New York City.

Mises was born and grew up during the high tide of the great Austrian School of economics, and neither Mises nor his vital contributions to economic thought can be understood apart from the Austrian School tradition which he studied and absorbed.

By the latter half of the nineteenth century, it was clear that classical economics, which had reached its apogee in England in the persons of David Ricardo and John Stuart Mill, had foundered badly on the shoals of several fundamental flaws. The critical flaw was that classical economics had attempted to analyze the economy in terms of classes rather than the actions of individuals. As a result, the classical economists could not find the correct explanation of the underlying forces determining the values and relative prices of goods and services; nor could they analyze the actions of consumers, the crucial determinants of the activities of producers in the economy. Looking at classes of goods, for example, the classical economists could never resolve the paradox of value: the fact that bread, while extremely useful and the staff of life, had a low value on the market; whereas diamonds, a luxury and hence a mere frippery in terms of human survival, had a very high value on the market. If bread is clearly more useful than diamonds, then why is bread rated so much more cheaply on the market?

Despairing at explaining this paradox, the classical economists unfortunately decided that values were fundamentally split: that bread, though higher in use value than diamonds, was for some reason lower in exchange value. It was out of this split that later generations of writers denounced the market economy as tragically misdirecting resources into production for profit as opposed to the far more beneficial production for use.

Failing to analyze the actions of consumers, classical economists earlier than the Austrians, could not arrive at a satisfactory explanation of what it was that determined prices on the market. Groping for a solution, they unfortunately concluded (a) that value was something inherent in commodities; (b) that value must have been conferred on these goods by the processes of production; and (c) that the ultimate source of value was production cost or even the quantity of labor hours incurred in such production.

It was this Ricardian analysis that later gave rise to Karl Marxs perfectly logical conclusion that since all value was the product of the quantity of labor hours, then all interest and profit obtained by capitalists and employers must be surplus value unjustly extracted from the true earnings of the working class.

Having thus given hostage to Marxism, the later Ricardians attempted to reply that capital equipment was productive and therefore reasonably earned its share in profits; but the Marxians could with justice offer the rebuttal that capital too was embodied or frozen labor, and that therefore wages should have absorbed the entire proceeds from production.

The classical economists did not have a satisfactory explanation or justification for profit. Again treating the share of proceeds from production purely in terms of classes, the Ricardians could only see a continuing class struggle between wages, profits, and rents, with workers, capitalists, and landlords eternally warring over their respective shares. Thinking only in terms of aggregates, the Ricardians tragically separated the questions of production and distribution, with distribution a matter of conflict between these combating classes. They were forced to conclude that if wages went up, it could only be at the expense of lower profits and rents, or vice versa. Again, the Ricardians gave hostages to the Marxian system.

Looking at classes rather than individuals, then, the classical economists not only had to abandon any analysis of consumption and were misled in explaining value and price; they could not even approach an explanation of the pricing of individual factors of production: of specific units of labor, land, or capital goods. As the nineteenth century passed its mid-mark, the defects and fallacies of Ricardian economics became even more glaring. Economics itself had come to a dead end.

It has often happened in the history of human invention that similar discoveries are made at the same time purely independently by people widely separated in space and condition. The solution of the aforementioned paradoxes appeared, purely independently and in different forms, in the same year, 1871: by William Stanley Jevons in England; by Lon Walras in Lausanne, Switzerland; and by Carl Menger in Vienna. In that year, modern, or neo-classical, economics was born. Jevonss solution and his new economic vision was fragmented and incomplete; furthermore, he had to battle against the enormous prestige that Ricardian economics had accumulated in the tight intellectual world of England. As a result, Jevons had little influence and attracted few followers. Walrass system also had little influence at the time; as we shall see in what follows, it was unfortunately reborn in later years to form the basis of the fallacies of current micro-economics. By far the professor of economics at the University of Vienna. It was Menger who founded the Austrian School.

Mengers pioneering work bore full fruition in the great systematic work of his brilliant student, and his successor at the University of Vienna, Eugen von Bhm-Bawerk. It was Bhm-Bawerks monumental work, written largely during the 1880s, and culminating in his three-volume Capital and Interest, that formed the mature product of the Austrian School. There were other great and creative economists who contributed to the Austrian School during the last two decades of the nineteenth century; notably Bhm-Bawerks brother-in-law, Friedrich von Wieser, and to some extent the American economist John Bates Clark; but Bhm-Bawerk towered above them all.

The Austrian, or Menger-Bhm-Bawerkian, solutions to the dilemmas of economics were far more comprehensive than by the Ricardians, because the Austrian solutions were rooted in a completely contrasting epistemology. The Austrians unerringly centered their analysis on the individual, on the acting individual as he makes his choices on the basis of his preferences and values in the real world. Starting from the individual, the Austrians were able to ground their analysis of economic activity and production in the values and desires of the individual consumers. Each consumer operated from his own chosen scale of preferences and values; and it was these values that interacted and combined to form the consumer demands that form the basis and the direction for all productive activity. Grounding their analysis in the individual as he faces the real world, the Austrians saw that productive activity was based on the expectations of serving the demands of consumers.

Hence, it became clear to the Austrians that no productive activity, whether of labor or of any productive factors, could confer value upon goods or services. Value consisted in the subjective valuations of the individual consumers. In short, I could spend thirty years of labor time and other resources working on the perfection of a giant steam-powered tricycle. If, however, on offering this product no consumers can be found to purchase this tricycle, it is economically valueless, regardless of the misdirected effort that I had expended upon it. Value is consumer valuations, and the relative prices of goods and services are determined by the extent and intensity of consumer valuations and desires for these products.