Human Action: A Treatise on Economics

  HUMAN ACTION

  A Treatise on Economics

  BY

  LUDWIG VON MISES

  LUDWIG VON MISES INSTITUTE

  AUBURN, ALABAMA

  The Ludwig von Mises Institute gratefully dedicates this

  restored Human Action to all its Members who aided in this

  historic project, and in particular to the following Patrons:

  Mark M. Adamo

  Thomas K. Armstrong

  The Armstrong Foundation

  Richard B. Bleiberg

  Dr. John Bratland

  Jerome V. Bruni

  The Bruni Foundation

  Sir John and Lady Dalhoff

  John W. Deming

  John A. Halter

  Mary and George Dewitt Jacob

  The Kealiher Family

  William Lowndes, III

  Ronald Mandle

  Ellice McDonald, Jr., CBE, and Rosa Laird McDonald, CBE

  William W. Massey, Jr.

  Joseph Edward Paul Melville

  Roger Milliken

  Richard W. Pooley, MD

  Sheldon Rose

  Gary G. Schlarbaum

  Conrad Schneiker

  Loronzo H. and Margaret C. Thomson

  Quinten E. and Marian L. Ward

  Keith S.Wood

  * * *

  The Ludwig von Mises Institute thanks Bettina Bien Greaves for permission to reissue the first edition of Human Action.

  Copyright © 1998 by Bettina Bien Greaves

  Introduction Copyright © 1998 by The Ludwig von Mises Institute

  Produced and published by The Ludwig von Mises Institute, 518 West Magnolia

  Avenue, Auburn, Alabama 36832, (334) 844–2500; fax (334) 844–2583;

  [email protected]; www.mises.org

  All rights reserved.

  ISBN 0–945466–24–2

  INTRODUCTION1 TO THE SCHOLAR'S EDITION

  I.

  ONCE in a great while, a book appears that both embodies and dramatically extends centuries of accumulated wisdom in a particular discipline, and, at the same time, radically challenges the intellectual and political consensus of the day. Human Action by Ludwig von Mises (1881–1973) is such a book, and more: 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. Not even such milestones in the history of economic thought as Adam Smith's Wealth of Nations, Alfred Marshall's Principles, Karl Marx's Capital, or John Maynard Keynes's General Theory can be said to have such enduring significance and embody such persuasive power that today's students and scholars, as much as those who read it when it first appeared, are so fully drawn into the author's way of thinking. For this reason, and others discussed below, this Scholar's Edition is the original 1949 magnum opus that represents such a critical turning point in the history of ideas, reproduced (with a 1954 index produced by Vernelia Crawford) for the fiftieth anniversary of its initial appearance.

  When Human Action first appeared, its distinctive Austrian School approach was already considered a closed chapter in the history of thought. First, its monetary and business cycle theory, pioneered by Mises in 19122 and extended and applied in the 1920s and 1930s,3 had been buried by the appearance of Keynes's General Theory, which gave a facile but appealing explanation of the lingering global depression. Second, Mises's 1920 demonstration that a socialist economy was incapable of rational economic calculation4 sparked a long debate in which the “market socialists” had been widely perceived to be the eventual victors5 (in part because it became a debate among Walrasians6). Third, and fatal for the theoretical core of the Austrian School, was the displacement of its theory of price, as originated by Carl Menger in 18717 and elaborated upon by Eugen von Böhm-Bawerk, John Bates Clark, Philip H. Wicksteed, Frank A. Fetter, and Herbert J. Davenport.8 Another strain had begun to develop along the lines spelled out by Menger's other student Friedrich von Wieser, who followed the Walrasian path of developing price theory within the framework of general equilibrium. Wieser was the primary influence on two members of the third generation of the Austrian School, Hans Mayer and Joseph A. Schumpeter.9

  Members of the fourth generation, including Oskar Morgenstern, Gottfried von Haberler, Fritz Machlup, and Friedrich A von Hayek, also tended to follow the Wieserian approach. The crucial influence on this generation had been Schumpeter's treatise Das Wesen und der Hauptinhalt der Theoretischen Nationalökonomie, published in 1908.10 This book was a general treatment of the methodological and theoretical issues of price theory from a Walrasian perspective. Apart from Wieser's writings, it was the only “Austrian” work of pure theory to appear prior to Mises's Nationalökonomie, the German-language predecessor to Human Action. For the young economists studying in Vienna, and despite criticisms by Böhm-Bawerk, Schumpeter's book became a guide to the future of the science. As Morgenstern said, “the work was read avidly in Vienna even long after the First World War, and its youthful freshness and vigor appealed to the young students.… [L]ike many others in my generation I resolved to read everything Schumpeter had written and would ever write.”11

  After Böhm-Bawerk's death in 1914, no full-time faculty member at the University of Vienna was working strictly within a Mengerian framework, while Mises's status as a Privatdozent diminished his academic standing. Prior to die geographical dispersal of the school in the mid-1930s,12 moreover, none of die members of these latter generations had achieved international recognition, particularly among English-speaking economists, on the order of Böhm-Bawerk. After the retirement of Clark, Wicksteed, Fetter, and Davenport from the debate on pure theory by 1920, the School's influence on the mainstream of Anglo-American economics declined precipitously. This left the field of high theory, particularly in the United States, completely open to a Marshallian ascendancy.

  In Germany, the long night of domination by the anti-theoretical German Historical School was coming to an end, but the book that reawakened the theoretical curiosity of German economists after the First World War was Gustav Cassel's Theoretische Sozialökonomie, which offered a verbal rendition of Walrasian price theory.13 In the Romance countries of France and Italy, Mengerian price theory never achieved a firm foothold and, by the 1920s, it had been shunted aside by the Lausanne School and Marshallian-style neoclassicism. By die mid-193 Os, the Austrian School had melted away in Austria as more attractive prospects abroad or die looming National Socialist threat drove the leading Austrian economists to emigrate to Great Britain (Hayek), the United States (Machlup, Haberler, and Morgenstern), and Switzerland (Mises). Hayek was well positioned to spark a revival of Mengerian theory in Great Britain, but having been a student of Wieser rather than Böhm-Bawerk,14 he saw the core of economics as the “pure logic of choice,” which could be represented by the timeless equations of general equilibrium.15 In the end, Walrasian general equilibrium theory was imported into Great Britain by John R. Hicks under Hayek's influence.16

  In addition, analytical deficiencies internal to the pre-Misesian approach contributed to the sharp decline of the Austrian School after the First World War. The Austrians themselves lacked the analytical wherewithal to demonstrate that the timeless and money-less general equilibrium approach and the one-at-a-time Marshallian approach—the analytical pyrotechnics of the 1930s notwithstanding—are both plainly and profoundly irrelevant to a central problem of economic theory: explaining how monetary exchange gives rise to the processes of economic calculation that are essential to rational resource allocation in a dynamic world.17 Thus, after a period of remarkable development and influence from 1871 to 1914, by the early 1930s the Austrian School w
as on the edge of extinction.

  Mises was fully cognizant of this unfortunate state of affairs when he emigrated to Switzerland in 1934. Ensconced at the Graduate Institute of International Studies in Geneva, for the first time he could fully focus his attention on academic research. Mises used this opportunity to write Nationalökonomie, a book that intended to revive the Mengerian approach and elaborate it into a complete and unified system. As evidence of the importance that Mises attached to this book, and of the time and energy he poured into it, he wrote very little else in the years leading up to its publication in 1940. Previously an enormously prolific writer, the extent of his output from 1934 to 1939 was comparatively meager: in addition to book reviews, short memos, newspaper and magazine articles, notes, and introductions, there was only one substantial article for an academic audience.18

  Retrospectively describing his purpose in writing Nationalökonomie, Mises left no doubt that he sought 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. “I try in my treatise,” Mises wrote, “to consider the concept of static equilibrium as instrumental only and to make use of this purely hypothetical abstraction only as a means of approaching an understanding of a continuously changing world.”19 Regarding his effort to incorporate money into the older Austrian theoretical system, Mises identified his immediate inspiration as his opponents in the socialist calculation debate of the 1930s. These economic theorists, under the influence of the general equilibrium approach, advocated die mathematical solution to the problem of socialist calculation. As Mises argued: “They failed to see the very first challenge: How can economic action that always consists of preferring and setting aside, that is, of making unequal valuations, be transformed into equal valuations, and the use of equations?”20

  But without an adequate theory of monetary calculation, which ultimately rests upon a unified theory of a money-exchange economy, Mises realized that there could be no definitive refutation of the socialist position. Accordingly, Mises revealed: “Nationalökonomie finally afforded me the opportunity to present the problems of economic calculation in their full significance.… I had merged the theory of indirect exchange with that of direct exchange into a coherent system of human action.”21

  Thus, Nationalökonomie marked the culmination of the Austrian theoretical approach, and, in a real sense, the rebirth of the Austrian School of economics. It was designed 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. Using this mighty architectonic of economic theory, Mises formulated a radical and impermeable defense of laissez-faire policy conclusions that were distinctly unfashionable when the book first appeared.

  II

  MISES was uniquely prepared to undertake such a radical task. Beginning in 1912, during a long tenure as economic advisor and chief economist of the Vienna Chamber of Commerce, Mises produced a steady stream of works in economic and political theory. The publication of his first treatise, Theorie des Geldes und der Umlaufsmittel (1912) was followed by Nation, Staat und Wirtschaft (1919), Die Gemeinwirtschaft (1922), Liberalismus (1927), Geldwertstabilisierung und Konjunkturpolitik (1928), Kritik des Interventionismus (1929), and Grundprobleme der Nationalökonomie (1933).22 Among the professional public, these works earned Mises 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. In academia, he was also recognized as the heir to the intellectual tradition of Menger and Böhm-Bawerk, and a leading defender of the deductive method in the social sciences against the claims of historicists. However, outside the circle of the participants in his Privatseminar, the “Mises-Kreis,”23 the philosophical depth and systematic breadth of Mises's work was rarely acknowledged or recognized. Even his students and friends, who beginning in 1920 met regularly every two weeks in his Chamber of Commerce office, had at best only an inkling of Mises's systematic ambition. From book to book, they witnessed the appearance of the successive building blocks of a Misesian system. But when Mises left Vienna in 1934 to move to Geneva, even they could not have had more than a vague notion of how to fit these pieces into a unified whole. Mises was fifty-eight years old when Nationalökonomie: Theorie des Handelns und Wirtschaftens24 appeared. It was Mises's crowning intellectual achievement and the sum of his scholarly life. At long last, this book should have established him as the foremost German-language economist and social theorist of his generation.

  Mises's masterwork, however, appeared in the midst of political and personal crisis. After the Anschluss on March 12, 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.25 By June 1940, German troops had virtually encircled Switzerland, and, urged by his wife, Mises decided to leave Geneva and emigrate to the United States. “I could no longer bear,” he explained in his Erinnerungen written shortly after his arrival in New York City on August 4, 1940, “to live in a country that regarded my presence as a political burden and danger to its security.”26

  From the outset, the book was cut off almost completely from the German market, and its Swiss publisher would become one of the countless economic casualties of war. Meanwhile, almost all members of the former Mises-Kreis had likewise left Austria and emigrated to other countries. In their new, foreign, and uncertain environment, they paid little or no attention to it. Thus, Nationalökonomie remained virtually unread.27 What should have been a moment of immense satisfaction and even triumph, a moment which might have brought about a shift away from the growing Keynesian/Walrasian-Marshallian consensus, and even inoculated the profession against the positivist onslaught of later decades, became for Mises a moment of tragedy and likely the lowest point in his career.

  Nine more years would pass until, with the publication of Human Action, Mises would reap some of the rewards that had escaped him in 1940.28 Yale University Press, headed by Eugene Davidson, had published Mises's Omnipotent Government and Bureaucracy in 1944, on the recommendation of Henry Hazlitt, who was then working for the New York Times as an editorial writer. The success of these works prompted Davidson to send a note to Mises in mid-November that would set the process in motion. Mises and Davidson met on Monday, December 4, at the Roosevelt Hotel for lunch, and made plans for a translation of Nationalökonomie, under the working title Treatise in Economics. Davidson found the idea enticing and solicited further opinions on the matter from a variety of economists and public figures.

  Hazlitt recommended immediate publication, as did John V. Van Sickle of Vanderbilt University (“I hope you will decide on publication”29), Ray Bert Westerfield of Yale University (“a first-rate book”30), Hayek (“the general standard of the work is of a kind that it will do credit to any University Press”31), and Machlup (who, with effusive praise for Mises, encouraged Davidson to ignore all protests against publication; any book “out of sympathy with the New Deal in economics” would be opposed by the same people32). Haberler, however, wrote, “It is a little embarrassing for me to answer your question because Professor Mises is a good friend of mine. Please do keep the contents of this letter strictly confidential. The book you are considering for translation is a very big one. It contains Professor Mises's life work in economics. It is well written and interesting but I must say for my taste it is very extreme, and I am pretty sure it will not be well accepted in academic quarters.… May I suggest that you ask Professor Knight of the University of Chicago for his opinion?”33

  Yale then consulted Frank H. Knight, who wrote back that Mises is “no doubt the last of the great Austrian or Viennese school, since other members of comparable standing turned their scientific along with their political coa
ts, if they did not leave Austria and Germany, and started work on new problems under new auspices.… It is my impression—not based on adequate knowledge—that the author's views on monetary and cycle problems are more important than those on general theory.” In an addendum, Knight says he in turn consulted Oskar Lange (one of Mises's leading opponents in the socialist calculation debate) who was “surely not more in favor of the project. He thinks von Mises did some pioneering at one time in the monetary field but that is old and long available in English.”34In addition, B.H. Beckhart, a former student of Mises's teaching at Columbia University, wrote a terse reply to Davidson: “I doubt if Professor Mises's work would have a sufficiently wide sale to justify its translation or publication. Professor Mises's theories are developed rather fully in his works which have already appeared in English.”35

  Despite the protests, bale's Committee on Publications voted to approve the publication March 5, 1945, under the working title National Economy, which would become Human Action just prior to publication.36 The publisher received the final manuscript on October 1,1948. 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 1947.37

  In the decades following the appearance of Human Action, it was left to Mises's own students, who studied with him while he served as an unsalaried professor at New York University from 1945–1969, to take up the task of developing, propagating, and extending Austrian School theory. Preeminent among these students was Murray N. Rothbard, whose Man, Economy, and State in 1962,38 America's Great Depression in 1963, and a long series of theoretical and historical studies,39 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.40 The revival became firmly entrenched and internationalized41 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.42