Front Page Titles (by Subject) III: Economic History & Theory - Literature of Liberty, Spring 1982, vol. 5, No. 1
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III: Economic History & Theory - Leonard P. Liggio, Literature of Liberty, Spring 1982, vol. 5, No. 1 
Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.
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Economic History & Theory
The following summaries range, historically, from Adam Smith to Ludwig von Mises and, theoretically, from supply-side economics to the socialist calculation debate. In economics, theory and history interpenetrate one another. A failure of historical knowledge can lead to gross theoretical misunderstanding (as argued by Fores concerning the ‘myth’ of the industrial revolution, and by Lamoreaux concerning the historical failure of governmental intervention in the American economy). Likewise, as implied in Rashid's study of “Adam Smith's Rise to Fame,” a falsely impressionistic picture of Adam Smith's role in economic theory arises from ignorance of the details of Smith's historical context and contemporary documents. On the other hand, crucial deviations and historical retrogression may occur when economists fail to theoretically grasp conceptual meanings. Teichgraeber's study demonstrates this regarding das Adam Smith Problem. An even more significant example of the unfortunate consequences of a failure of theoretical understanding is given by Richard M. Ebeling's detailed anatomy of how the ‘neoclassicals’ misperceived the very terms of Mises' Austrian or dynamic critique of socialist calculation.
Adam Smith: Sympathy & Self-Interest
“Rethinking Das Adam Smith Problem.” Journal of British Studies 20 (Spring 1981): 106–123.
During the past decade, there has been a steady growth in scholarship concerning the moral and philosophical dimensions of Adam Smith's economic theory. Curiously, the literature has given only perfunctory treatment to das Adam Smith Problem—a phrase coined by a group of German scholars at the end of the nineteenth century. These German writers thought they saw a possibly fundamental contradiction between the assumptions of Smith's first work, The Theory of Moral Sentiments (1759) and those contained in his later book, the Wealth of Nations (1776). In the first treatise, Smith explained moral judgment on the basis of “sympathy,” the capacity of every person to “enter into” the situation of another and thereby bring his own “sentiment” into accord with those of his fellow. On the other hand, in the Wealth of Nations, Smith asserted that every individual was essentially self-interested.
Contrary to the relative neglect of the problem shown by modern scholars, Prof. Teichgraeber finds it crucial to an understanding of Smith's intentions as a moral and social theorist. The resolution of the contradiction inherent in das Adam Smith Problem may be found in a new understanding of the concepts of The Theory of Moral Sentiments. Three fundamental reinterpretations of the Theory help reconcile the notions of sympathy and self-interest.
First of all, the word “virtue” in the Theory has been traditionally linked to the humanist notion, that is, the pursuit of a single ideal that encompasses all the intentions and actions of the virtuous man. In the Theory, the notion of virtue as a comprehensive unity of ends was absent. Instead, virtue is discussed under the two headings of “humanity” and “self-command.” Smith's idea of moral personality was in fact a hybrid of Christian benevolence and classical stoical self-discipline. Successfully balancing the two to meet the contingencies of one's life was the essence of moral conduct.
Secondly, one cannot say that Smith simply abandoned the humanistic concern for virtue and later replaced it with a straightforward endorsement of economic self-interest. It was rather that Smith gave an account of virtue in the plural with a crucial distinction between ethics and justice. By and large, the Theory was an example of ethics, of personal moral rules. Smith's account of the types of personal virtue included at least one positive and fairly elaborate psychological account of how man's moral sentiments came into play in a society of individuals who were invited to be concerned primarily with their own self-interests. He argued that, in a “society of strangers,” sympathy translated concretely into the virtues of self-restraint and self-discipline because reliance on the sympathy of others would weaken one's moral fiber. If one accepts Smith's argument, where else would this ethic of self-command be more practicable than in a society fully based on self-interest?
Finally, the ascendancy of economic life in Smith's thought must also be explained in terms of a sharp limitation of the moral importance which traditional humanism had accorded to politics. Smith's accounts of justice and “public spirit” in the Theory devalue politics as a realm of human virtue. He found that the conduct of law-abiding, moderately public-spirited men was necessary to maintain a social order. But it did not represent a “real positive good.” Thus, in the Theory, individual morality was depoliticized and politics demoralized.
In the very same decade that Smith wrote the Theory, Rousseau complained that “The ancient politicians spoke incessantly of morals and virtue, ours speak only of commerce and money.” Rousseau was wrong, Prof. Teichgraeber feels, in at least one very important respect. The eighteenth century did in fact displace the broad ideals of classical and Christian humanism by the more narrow, yet practicable goals of economic growth. But an awareness of what the humanist tradition had asked of man did not suddenly die out. The humanist concern for virtue remained in Smith. It is the classical assumption that the term “virtue” can be used to describe an ideal of all-encompassing human excellence that has been abandoned. “This point,” Teichgraeber concludes, “is at the center of a ‘das Adam Smith Problem’ that should still perplex us.”
Adam Smith & Paradigm Shifts
“Adam Smith's Rise to Fame: A Reexamination of the Evidence.” The Eighteenth Century: Theory and Interpretation 23 (Winter 1982): 64–85.
A common academic myth holds that Adam Smith's (1723–1790) Wealth of Nations became a popular and influential work upon its publication in 1776. Rashid counters that although Adam Smith lived for fourteen more years after the Wealth of Nations was published, the victory of Smithian free-market economics did not come during Smith's own lifetime. Rashid refutes the myth of Smith's instant popularity by comparing Smith's fame with that of the government interventionist, Sir James Steuart, in the years before 1790. By unveiling the reasons why Smith achieved the status of undisputed authority on political economy after 1790 (reasons other than Smith's scientific analysis), the author comments on the applicability of Thomas Kuhn's framework of scientific progress to economics. Rashid also calls into question the attempt to specifically identify Smith's free-trade doctrines as a “cause” of the Industrial Revolution.
The evidence is against the claim that Smith's influence dominated public policy, merchant opinion, and the public's mind in the period between 1776–1790. Mercantilism lingered, and what support for freer trade existed was promulgated long before Smith's volume by the influential popular writers on economics, the Rev. Josiah Tucker and Arthur Young. It is more instructive to contrast the reception of Smith's free-trade ideas with the more statist views of Sir James Steuart in the period before 1790. Smith, during this period, may have influenced an important elite, but he had not yet engaged the support of the more numerous, but necessarily more diffuse, educated classes. Rashid casts doubt on the myth of Smith's instantaneous fame by citing the lackluster reporting given to Smith in the leading English and Scottish journals of the 1770s and 1780s.
In the period before 1790, the most popular British journals, such as the Monthly Review and the Critical Review do not support the traditional view of the overnight victory of Smithian economic ideas. By contrast, these journals did not ignore either the mercantilist Sir James Steuart or the interventionist complex of ideas which he represented. Smith was not hailed as a new prophet except by some few, but very influential persons such as Lord Shelburne and William Pitt. Smith's death in 1790 did not set the intellectual world to mourning.
Even though there is no definite evidence to establish Smith's superiority over Steuart in popular estimation before 1790, there is no doubt of the drastic turn-about in favor of Adam Smith by 1815. The factors that contributed to this reappraisal go beyond Smith's analytical and scientific merits. First of all, Smith's stylistic merits outshone the heavy, stilted, and formal Steuart. Next, Smith's position as a professor of moral philosophy at a famous university seemed to confer greater objectivity on his analysis than that of Steuart, a known Jacobite. Also, by 1800, as Britain's industrial superiority displayed itself, Smith's free-trade doctrines appeared as the best policy to British manufacturers. The public admiration of politicians and the praise of partisan admirers also played a part in raising Smith's stock (as witness the support given Smith by the Whig spokesman, Charles James Fox, and the Smithian eulogy delivered by Prime Minister William Pitt).
The fact that a majority of influential men did not support the basic free-trade ideas of the Wealth of Nations until the mid 1790s should call in question the causal links between Adam Smith and the Industrial Revolution, which was clearly underway in England by 1780. A general move toward freeing trade from government restrictions was well under way by the 1750s.
The rise of Adam Smith in economic science seems, in one respect, to confirm Kuhn's view that the history of science consists of a succession of radical changes in viewpoint. We witness a sudden paradigm shift because of the Wealth of Nations. The Smithian vision disposed of the problem of reconciling the private and public interest as well as the problem of achieving full employment. This scientific “progress”, however, was dependent on factors that go beyond “science” (e.g. literary style, partisanship, and bias). Material interests of some groups as well as the sociology of knowledge are sometimes as important as scientific arguments in the victories of economic science.
Was There a “British Industrial Revolution”?
“The Myth of a British Industrial Revolution.” History (The Journal of the Historical Association) 66 (June 1981): 181–198.
Careful attention to historical evidence reveals semantic and definitional sloppiness in the notion of a “British Industrial Revolution.” There is little support for the claim that Britain (or England) underwent a genuine ‘industrial revolution’ in the 1760–1840 period.
The myth of Britain's ‘industrial revolution’ leads to two other points. First, the British experience in economic development over the 1760–1840 period “is so untypical of similar processes experienced elsewhere that it provides a poor guide for the present less developed countries” going through ‘industrialization.’ Secondly, “the accounts of ‘industrial revolution’—whatever that phrase may mean—are recklessly dismissive of the key role of human skill, especially for the English-British case. Instead of having experienced an ‘industrial revolution,’ England experienced an urban evolution, as part of an age-old process of a shift of population to the towns...It is a mistake to take the idea of ‘revolution’ over from political to economic and social history, in order to describe changes which are best thought of as cultural.” This misuse of words is inaccurate and obscures the fact “that overall change is always slow to take effect, due to its close link with changes in the personal skills, activities and attitudes of populations...” Attempts to date a ‘before’ or ‘after’ moment in regard to a sudden transition come up empty.
In sum, the British Industrial Revolution was not ‘British’, not ‘industrial’ (except in an ambiguous sense), and not a sudden ‘revolution.’ Fores unpacks four confused senses of ‘industry’ which writers on the ‘industrial revolution’ fail to distinguish:
Since Arnold Toynbee coined the phrase ‘Industrial Revolution’ in his 1880–1881 printed lectures, there has been no convincing evidence of any revolutionary discontinuity in any legitimate economic sense of ‘industry.’ Interestingly, this semantic confusion may be attributed to the fact that the factory sense of ‘industry’ has been remote from the dominant group of scholars who have perpetuated these myths. In consequence, writers on ‘industrial’ topics “contrive invariably to stress the soullessness of arrangements in a modern ‘mechanistic’ world...; a rural past is taken to have been more sympathetic than an urban present.” A rigorous appeal to evidence makes one skeptical of all such simplifications.
Patterns in Federal Intervention
“From Antitrust to Supply-Side Economics: The Strange History of Federal Intervention in the Economy.” In Essays in Supply Side Economics. Edited by David G. Raboy. Institute for Research on the Economics of Taxation: Washington, D.C., 1982, pp. 151–173
Supply-side economics represents the most recent of a series of economic policy consensuses that have occured periodically in the 20th century: the antitrust movement of the Progressive Era, Franklin Roosevelt's early New Deal, Lyndon Johnson's Great Society. The author traces the emergence and breakdown of these moods of public agreement on economic policy in order to shed light on the immediate prospects for the Reagan political and economic options. The overall pattern discerned in the drama of these consensuses is the following: Each political-economic consensus, motivated by fear of economic concentrations of power on the one hand and desire for economic security on the other, has expressed an alliance of the aspirations of individuals and groups whose interest would normally conflict. Each consensus thus carried in itself the seeds of its own dissolution and depended for its survival on a vagueness about the specific directions that policy would take. Once translated into concrete programs, each consensus tended to dissolve and the specific sub-merged interests began to reassert themselves. Each of these shifts in consensus periods has put its mark on history; “it is these periods when government's role in the economy has been most dramatically restructed.”
In the early 20th century, the Progressive Era witnessed the growth of a public consensus in America for an expanded role for the federal government in the economy to restrain big business and the Great Merger Movement. Those favoring federal antitrust action were divided into two camps. One camp, the New Nationalism (named after Theodore Roosevelt's platform in 1912) saw large-scale corporate mergers as positive innovations but in need of benign federal regulation to guarantee fair play. A second camp was named the New Freedom (after Woodrow Wilson's platform of 1912) and viewed mergers and corporate bigness more suspiciously. In its view the federal government had a responsibility to break up ill-gotten concentrations of capital and to prevent similar trusts from forming. The Progressive Era's antitrust consensus was combined with legislation that was “a model of vagueness.” To accomodate business and labor interests, for example, the Clayton Antitrust Act and the Federal Trade Commission Act left interpretation of enforcement up to the political compositions of regulatory commissions.
Lamoreaux traces similar patterns (of evolving consensus that cloaked interest group divisions until specific legislation was proposed) in subsequent American political-economic history. The Hoover administration's Associationism urged government-sponsored trade associations to rationalize price competition. Roosevelt's early New Deal and its center piece, the National Industrial Recovery Act was a logical extension of Hoover's embryonic government-sanctioned trade cartels. Federal intervention in the economy was now the new consensus but soon conflict among interest groups over specific legislative provisions ended Roosevelt's earlier coalition. In the later New Deal Roosevelt abandoned hope of consensus, and, moving leftward, he sought support for the Democratic Party among economically disadvantaged interest groups and their allies. Roosevelt's earlier intervention through NRA-sponsored cartels, in any event, would only upset the economy. It sought to deal with a depression through regulatory schemes designed for antitrust purposes. Roosevelt's Keynesian approach to government spending to stimulate the economy took place in 1937–1938.
New variations on the basic regulatory consensus pattern are detailed for the post-war Keynesianism. The Eisenhower administration played a role in the formation of Keynesian fiscal policy similar to Hoover in the emergence of trade Associationism. Under Eisenhower a conservative Keynesianism formulated by the Committee for Economic Development saw to it that government exerted a counter-cyclical pressure on the economy by running deficits during recessions and surpluses during booms. With a sluggish economy setting in at the end of the 50s, the Democrats viewed the Eisenhower-CED goal of economic stabilization as insufficient; they wanted the government to assure the more comprehensive task of promoting economic growth. Kennedy (who resembles Roosevelt in being a logical, more daring outgrowth of his predecessor's cautious interventionism) sought a consensus among groups by an activist program to stimulate investment spending through tax cuts. The illusion grew after 1964 that economic direction by government (informed by Keynesian economics) could unerringly fine-tune the economy and promote growth. Johnson sustained this faith that economic growth could be stimulated by government action, but substituted government spending for tax cuts. Prices and inflation rose but not output. The heyday of Keynesianism wanted with the debunking of the concept of “money illusion” and stagflation. The Vietnam War with its attendant government spending and inflation hastened the exposure of Keynesianism's miscalculations.
President Carter's anti-government platform prepared the way for Reagan's supply-side economic approach. The death of Keynesianism created a consensus that the root of the economic problem was government itself through its expansionary fiscal policy and its regulatory interventions. After the 1980 election “Reagan was in a position similar to Roosevelt in the 1930s and Kennedy in the 1960s. All three presidents were the beneficiaries of a gradual shift in public opinion about the role of government in the economy.” All three also had their way prepared by a predecessor of the opposite party. But we may also witness the dissolution of Reagan's anti-government consensus when conflicting interest groups disagree with the concrete policies of supply-side economics.
Market-Assured Contract Performance
“The Role of Market Forces in Assuring Contractual Performance.” Journal of Political Economy 89 (August 1981): 615–641.
An implicit assumption of the economic paradigm of market exchange is the presence of a government to define property rights and enforce contracts. An important tenet of the legal-philosophical tradition upon which the economic model is built holds that without some third-party enforcer to penalize stealing and reneging, market exchange would be impossible. Nonetheless, economists have long considered communication factors such as “reputations” and brand names to be private devices which provide incentives to assure contract performance in the absence of any third-party enforcer.
The authors assert that even the existence of perfect communication among buyers (guaranteeing the loss of all future sales to a cheating firm) is not sufficient to insure noncheating behavior in the present. They then analyze the generally unrecognized importance of increased market prices and nonsalvageable capital as possible methods of making quality promises credible. Consumers are not aware of these methods as theory, but they act as if they recognize the forces at work.
The authors' analysis implies that consumers can sucessfully use price as an indicator of quality. They refer to the fact that consumer knowledge of a gap between a firm's price and salvageable costs (i.e. the awareness of a price premium) supplies quality assurance. A necessary and sufficient condition for a company's performance is the existence of a price sufficiently above salvageable production costs, so that the nonperforming firm loses a discounted stream of rents on future sales which is greater than the wealth increase from nonperformance. This will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm-specific assets. Thus advertising investments become a positive indicator of likely performance.
“The United States: Economists in a Pluralistic Polity.” History of Political Economy 13 (Fall 1981): 513–547.
In the United States “the participation of professional economists in government has swollen with the extension of the state's jurisdiction in economic life.” Barber's essay (with a useful bibliography) conveys the flavor of the interactions between professional economists and federal officialdom, especially as those interactions are peculiar to the American system. In part, this distinctiveness derives from the American central government's diffusion of political power which creates conflict among interest groups and rules out long-term coherence in monetary, fiscal, and economic policy in general. Tracing the history of the growing involvement of American economists in shaping government policy, Barber assesses the ethical and technical problems of professional intellectuals serving the state.
Although systematic linkages of economists and government began in 1946 with the creation of the President's Council of Economic Advisors (CEA), this merely culminated a trend of more than three decades. A landmark formulation of the alleged governmental responsibilities of “ivory tower” academic economists was contained in Irving Fisher's presidential address to the American Economic Association in 1918. The First World War collaboration of economists and state planners was extended into peacetime in the hope that state economic experts would spur on the efficiency of the private sector. The depression of the 1930s intensified the call for governmental planning of the economy, but without significant staffing from the aloof academic economists. With the 1937–38 recession, however, the younger breed of “Keynesian” economists gained a “beachhead” on newly created federal posts. The popular climate might suspect experts, but it politically de manded government macroeconomic intervention to prevent a recurrence of the 1930s' depression.
The Employment Act of 1946 with its Council of Economic Advisers accorded, for the first time in America, institutional standing to the economists at the pinnacle of national decisionmaking. The CEA was intended to be a clearinghouse of social and economic “science” in order to create “maximum employment, production, and purchasing power.” From a consultant-coordinator role, the CEA was transformed (under Walter Heller in the Kennedy Administration) into “policy advocacy.” “The economics profession in the United States had probably never enjoyed higher public esteem that it did in the afterglow of the 1964 tax cut.” Government “fine tuning” successes were short-lived, and the prestige of state macroeconomic strategists has declined since the mid-1960s because the Keynesian tools of aggregate-demand management could not vanquish inflation, unemployment, and sluggish growth. During the 1970s the prestige of the CEA suffered further attrition in its macroeconomic policy role, paradoxically at the same time that professional economists were raised to positions of honor on the Federal Reserve Board of Governors.
Other topics discussed by Barber are: statistical analysis of the “growth” labor market for economists in government, the ideological distinctions among macro-economists (between the “salt water” neo-Keynesians from Harvard, M.I.T., and Yale, and the “fresh water” monetarists from the University of Chicago), and the prestige-rivalries between economic bureaucrats and “outside” academic consultants to government. Finally, the author briefly examines the political behavior of government economists in suppressing and distorting data, as well as their renewed efforts to involve central government planning even more systematically in the economy.
The Political Economy of Bank Regulation
“The Political Economy of Banking Regulation, 1864–1933.” Journal of Economic History 42 (March 1982): 33–42.
Changes in banking regulation in the United States were the result of protracted political struggles among different interest groups seeking to politically influence the structure of the banking industry. White analyzes the evolution of government banking regulation from the Civil War to the Great Depression by examining the actions of three interested parties: the banks, the public, and the government regulators, both state and federal. Coalitions within these interest groups determined policy, with the most effective political coalition being the smaller unit banks. This illustrates the workings of the “economic theory of regulation.”
A dual banking system of state regulated banks and national chartered banks arose in response to the regulatory restraint of the National Banking Act of 1864. This Civil War legislation, by prohibiting branch banks and regulating the size and activities of national banks, gave rise to state and local “free banking” laws of the 1880s and 1890s, by which the less restrictive and “competitive” state regulators made entry into the banking industry much easier. By 1900 state-chartered banks were growing more numerous than national banks.
Confronted by vigorous competition from state banking authorities chartering new banks, federal officials (under President Cleveland in 1895) recommended that national banks be allowed to branch. The unit banks in small towns and rural areas realized that their profits would be threatened by federally chartered city banks branching out into their territories, and so in 1898 lobbied Controller Charles Dawes to kill the branching bill in Congress. This regulatory rivalry among state, national, banking, and public sectors on the eve of World War I led to the faster growth of national over state banks, with the anti-branching lobby further strengthened by the vested interests of the new small financial institutions.
The Federal Reserve Act of 1913 did not alter the structure of the banking system, but by reducing reserve requirements it sought to siphon off state banks into its regulatory control; state banks responded by lowering their reserve requirements. These regulatory changes fit into the “economic theory of regulation.” In effect “favorable regulation will be supplied to the individuals or groups that have valued it most by voting and lobbying the government.”
In the absence of a monopoly banking regulator, federal and state governments have competed to regulate banks. Rivalry between regulators has led to a dilution of reserve requirements, but why have restrictions on branch banking remained virtually unchanged? Among the divided banking industry, unit bankers in small town and rural areas possessed more political pressure and were aided by the decentralized character of the Federal Reserve System which fought “monopolistic interest.” In Congress the unit bankers thwarted most efforts of federal officials and the larger banks (such as A.P. Giannini's Bank of America) to legislate branching by national banks. The 1920s witnessed some branching but only in a few states since no coalition to fight for branching appeared. Even after the onset of the Great Depression, the unit bankers (in league with state regulators) successfully limited the branching opportunities of the Banking Act of 1933 and maintained their favorable regulations.
Understanding the Socialist Calculation Debate
“A Critique of the Standard Account of the Socialist Calculation Debate.” The Journal of Libertarian Studies 5 (Winter 1981): 41–87.
A value-laden set of neo-classical presuppositions distorts the standard recital and understanding of the famous socialist calculation debate. We need to reconstruct the true issues by surveying the origins and development of the conventional account of the socialist debate, and to explain why this standard interpretation misreads some of the arguments.
In the socialist calculation debate, the “Austrians” or anti-socialists—Ludwig von Mises, Friedrich Hayek, and Lionel Robbins—confronted the “neoclassicals” or market socialists—Oskar Lange, H.D. Dickinson, Fred M. Taylor, Abba P. Lerner, E.F.M. Durbin, and Maurice Dobb. Both sides addressed Mises' anti-socialist challenge, namely that without private ownership of the means of production (hence no market-formed price information by which to allocate the scarce means of production) the rational central planning of a complex economy would be impossible. Without the guide of market prices, socialist central planners could not know the relative scarcity of different elements of the capital structure and thus would fail to combine them with economic efficiency.
According to the standard account of the debate, Lange's market-socialist response refuted Mises by arguing that public ownership of the means of production could employ “markets” and “prices.” But Lange's arguments (against both Mises' assertion that efficient socialism was theoretically impossible and the Hayek-Robbins thesis that socialism, though theoretically possible, was impracticable) fundamentally misunderstand the Austrian terms of the debate. Captives of a distorting neoclassical paradigm, the “market socialists” distorted Mises' and Hayek's concepts of “efficiency,” “market,” “ownership,” “competition,” the formation of “prices,” and the dynamic Austrian approach to economic processes in general through the filter of a static neoclassical theory of equilibrium and Pareto optimality.
To explain how such a systematic misunderstanding occurred, Lavoie outlines (1) the major elements of the standard account of the socialist calculation debate, documenting in copious footnotes that this misinterpretation permeates contemporary (neoclassical) economics, and (2) the contrasting elements of an alternative (Austrian or dynamic) interpretation. A critique of the standard account follows through seven representative chroniclers of the debate: Schumpeter, A. Bergson, B. Ward, Lippincott, A. Sweezy, Dobb, and Knight. A superior “revisionist” account of the debate is provided by Trygve Hoff's Economic Calculation in the Socialist Society (1949) and others. The neoclassical side of the debate has yet to appreciate the radically distinct way in which the Austrian tradition approaches economic theory and reality. A better understanding would bolster the case against central planning. Extensive bibliography to improve the understanding of both sides in the debate is supplied in the footnotes and detailed text.
Mises & Economic Theory
“Mises' Influence on Modern Economic Thought.” Wirtschafts Politische Blätter (Journal of Political Economy, Vienna) 28, 4 (1981): 15–24. Part of a Festschrift issue on the Centennary of Ludwig von Mises' birth (1881–1981).
Ludwig von Mises' contributions to modern economic science represent pathbreaking, increasingly influential, and creative scholarship within the Austrian School of Economics. “The common thread permeating the entire ‘Misesian’ edifice is a conscious and fundamental adherence and development of the concept of methodological subjectivism.” Within this Austrian perspective, economics is not limited to an analysis of wealth but, more ambitiously, aims at being a comprehensive science of purposeful human action, a logic of choice, and the “science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” Mises' themes—methodological individualism, individual purposeful action, subjective perception of circumstances and costs, and alertness to opportunities—run as unifying threads through his impressive economic theory.
“Over the six decades beginning in 1912 and ending in 1969, the implications of the subjectivist perspective for questions concerning the applicability of economic analysis beyond the boundaries of the ‘marketplace,’ the study and comparison of alternative economic systems, the place of knowledge and expections in disequilibrium processes of adjustment and the role of money and the study of monetary dynamics were all explored by Mises.” With some time-lag, Mises' farranging economic analysis has exerted a profound influence on the very direction of economic research.
A bare listing of Mises' contributions, stemming from the Austrian School's methodological subjectivism and individualism, would include: (1) His expansion of the previously restricted scope of economics to embrace a comprehensive analysis of human action and choice with their implications of dynamic process. This approach influenced the later development of Buchanan and Tullock's theory of “public choice” and Gary S. Becker's “economic approach to human behavior” (which can embrace an analysis of crime, law, bureaucracy, war, and politics). (2) His influence on the London School of Economics (particularly Hayek, Thirlby, and Wiseman) in developing a dynamic, non-static formulation of subjective costs, which called into question the objective, measurable costs presuppositions of interventionist public utility and regulatory policy. (3) His creation in 1920 of the terms of debate on the impossibility of rational economic planning and calculation under socialism. (4) His grand synthesis of monetary theory and trade cycle analysis in Theorie des Geldes, which provided microeconomic foundations for macro-economics; during the 1930s Mises' approach to money and the business cycle (with Hayek's contributions) was an Austrian rival to the emerging Keynsian Revolution. The conceptual and practical failure of the Keynsian experiment from the 1940s through the 1960s has awakened during the past 15 years a renewed interest in the problems of disequilibrium adjustment processes as elaborated within Mises' microeconomic and subjective-individualist framework. (5) His anticipation of “rational expectations” theory and his influence on the so-called “neo-Austrian” expositors of this analysis. (6) His most important influence has been that of preserving the vitality of the Austrian School of Economics during the Keynsian interlude and of fostering the revival of the Austrian tradition in both Europe and the United States. Through Mises' inspiration and scholarship the Austrian School has exercised an increasing appeal because of its impressive coherence as a logically integrated system. Inspired and vitalized by Mises, this tradition continues to grow and offer fresh insights into the entire range of human action.