The Online Library of Liberty

A project of Liberty Fund, Inc.

• Titles In the Liberty Fund Library of the Works of Ludwig Von Mises
• Acknowledgments
• Preface
• Introduction
• Monetary and Economic Policy Problems Before, During, and After the Great War
• Part 1: Austro-hungarian Monetary and Fiscal Policy Issues Before the First World War
• Chapter 1: The Political-economic Motives of the Austrian Currency Reform 1
• Chapter 2: The Problem of Legal Resumption of Specie Payments In Austria-hungary 1
• Chapter 3: The Foreign Exchange Policy of the Austro-hungarian Bank 1
• Chapter 4: On the Problem of Legal Resumption of Specie Payments In Austria-hungary
• Chapter 5: The Fourth Issuing Right of the Austro-hungarian Bank 1
• Chapter 6: Financial Reform In Austria 1
• Chapter 7: The General Rise In Prices In the Light of Economic Theory 1
• Chapter 8: On Rising Prices and Purchasing Power Policies 1
• Chapter 9: Disturbances In the Economic Life of the Austro-hungarian Monarchy During the Years 1912-1913 1
• Part 2: Economic Policy Issues In the Midst of the Great War
• Chapter 10: On the Goals of Trade Policy 1
• Chapter 11: Inflation 1
• Chapter 12: On Paying For the Costs of War and War Loans 1
• Chapter 13: Remarks Concerning the Problem of Emigration 1
• Part 3: Austrian Fiscal and Monetary Problems In the Postwar Period
• Chapter 14: Monetary Devaluation and the National Budget 1
• Chapter 15: For the Reintroduction of Normal Stock Market Practices In Foreign Exchange Dealings 1
• Chapter 16: On Carl Menger’s Eightieth Birthday 1
• Chapter 17: How Can Austria Be Saved?
• Chapter 18: The Claims of Note Holders Upon Liquidation of the Bank 1
• Chapter 19: The Austrian Currency Problem Thirty Years Ago and Today 1
• Chapter 20: The Restoration of Austria’s Economic Situation 1
• Chapter 21: The Austrian Problem 1
• Chapter 22: The Gold-exchange Standard 1
• Chapter 23: The Social Democratic Agrarian Program 1
• Chapter 24: America and the Reconstruction of the European Economy 1
• Chapter 25: The Currency and Finances of the Federal State of Austria 1
• Chapter 26: The Economic Crisis and Lessons For Banking Policy 1
• Part 4: Interventionism, Collectivism, and Their Ideological Roots
• Chapter 27: The Economic System of Interventionism 1
• Chapter 28: Economic Order and the Political System 1
• Chapter 29: Remarks Concerning the Ideological Roots of the Monetary Catastrophe of 1923 1
• Appendixes
• Appendix A: Maxims For the Discussion of Methodological Problems In the Social Sciences: Paper Delivered At the Private Seminar 1
• Appendix B: Short Curriculum Vitae of Mayer Rachmiel Mises of Lemberg 1

PART 4

Interventionism, Collectivism, and Their Ideological Roots

CHAPTER 27

The Economic System of Interventionism1

Two economic systems are struggling for supremacy. On the one hand there is the capitalist system—that is, private ownership of the means of production—advocated by liberalism; on the other hand, there is the socialist or communist system—that is, collective ownership of the means of production supported by socialists of all shades.2 Between these two systems, however, there is a third system, interventionism, which its adherents and supporters claim is neither socialism nor capitalism, and avoids the drawbacks of both while combining the advantages of each. It is applied today by almost all governments, and virtually all political parties advocate it in one or another form.3

Interventionism does not want to abolish private ownership of the means of production but only to restrict it. It declares, on the one hand, that unlimited private ownership of the means of production is harmful to society; but it maintains, on the other hand, that public ownership of the means of production—socialism—is, either in general or at least for the time being, impractical. Thus it wants to create some third way: a state of society that is midway between private ownership of the means of production, on the one hand, and collective ownership of the means of production, on the other hand. In this way the “excesses” and damages of capitalism are supposed to be prevented, while the advantages of free initiative and vitality, which socialism cannot provide, are preserved.

The method that is used is “interventions” in economic life. By such interventions we mean isolated commands of social control (through the regulation of the state) that force the owners of the means of production and the entrepreneurs to use the means of production at their disposal in a way different than they otherwise would. “Isolated commands” means that the commands do not form a part of a system of interventions that regulates all production and distribution, and would thereby eliminate private ownership of the means of production and put collective ownership (socialism) in its place. The commands that we have in mind, no matter how much they may pile up, are to be regarded as isolated commands as long as they are not issued as a plan to direct the whole economy in place of the individuals’ pursuit of profit guided by the forces of the market. The term “means of production” is to be understood to mean all goods of a higher order, that is, all goods that are not yet ready for use or consumption by the consumers; this includes all those goods that retailers have in stock and are designated as “ready for use” in the commercial sense.

The interventions can be of two kinds: they can be either production-restricting interventions, that is, orders that directly obstruct or impede production, or price-restricting interventions, which amount to the same thing as setting the prices of goods and services other than as they would be formed on the unhampered market.

Production-restricting interventions, by their very nature, can have no other effect than to reduce the productivity of economic activity. No more will be said about them here. We will limit ourselves exclusively to the treatment of price-restricting interventions; for this purpose we will investigate price controls ordered by the authorities that legally specify a maximum price.

At the price that is formed on the unhampered market, or would have been formed if the government had not prevented the free formation of prices, the costs of production are covered by revenues. If a lower price is ordered by the authorities, the revenues fall below costs. If it is not a question of nondurable goods that can undergo a rapid loss of value if kept in storage, the dealers and producers will refrain from selling them in order to hold on to their goods in the hope of more favorable times, for instance, in the expectation that the official order will soon be rescinded. If the authorities do not want their command to result in the product in question completely disappearing from the market, they cannot limit themselves to fixing the price; at the same time, they must also order that all existing stocks be sold at the prescribed price.

But even that does not suffice; at the ideal market price, supply and demand would have matched each other. Now, since the price has been set lower by official decree, the quantity demanded has increased while the supply remains unchanged. The available supplies are not enough to satisfy fully all who are ready to pay the prescribed price. The market mechanism that normally brings supply and demand into balance by changes in price no longer operates. Now people who would be ready to pay the price prescribed by the authorities must leave the market without having achieved what they want. Those who got there earlier or who know how to exploit some personal relationship with the sellers have already acquired the entire supply; the others are left empty-handed. If the authorities want to avoid this consequence of their intervention, which goes directly counter to their intentions, they must go further and add rationing to the price controls and the mandatory selling of the existing stock. An official regulation determines how much of the product can be allotted to each applicant at the prescribed price.

But once the supply is used up that was on hand at the time the intervention was introduced, a very difficult problem then arises. Since selling at the price prescribed by the authorities is no longer profitable, its production is either cut back or completely stopped. If the authorities want to have production continued, they must oblige the producers to produce, and for this purpose they must also set the prices of raw materials and semifinished goods, as well as workers’ wages. These commands, however, cannot be limited to the one or the few branches of production that the authorities want to regulate because they consider these products to be especially important. They must extend the commands to encompass all branches of production; they must regulate the prices of all goods and every labor cost, and the conduct of all entrepreneurs, capitalists, landowners, and workers.

If they were to leave some branches of production free, then capital and labor would flow into them, and the goal that the authorities wanted to reach with their first intervention would completely fail. But the authorities imposed price controls on this particular line of production precisely because of the importance they attached to there being an ample supply of this particular good. It runs completely against their intention if precisely because of the intervention there is now less of this good than before.

Thus, one sees that the isolated intervention—in our case the maximum price—imposed on the working of an economic order based on private ownership of the means of production fails to achieve the purpose that its advocates want to attain; it is—from the point of view of its advocates—not merely useless but really counterproductive, because it dramatically makes worse the “evil” that the intervention was supposed to fight. Before the price control was enacted, the commodity was—in the opinion of the authorities—too expensive; now it disappears from the market. But this was not the intention of the authorities, who wanted to make the item available to the consumer at a lower price. From their own viewpoint, the impossibility, now, of obtaining the article must appear as the greater, the far greater evil. In this sense, one can say that isolated interventions are useless and counterproductive, and such an interventionist economic system is unworkable and inconceivable, in that it contradicts economic logic.

If the authorities do not want to get things back on track by reversing the first isolated intervention—revoking the price control—then they must follow this first intervention with others. The command to sell at no price higher than the one prescribed must be followed not only by the command to sell existing stocks at this price and to introduce rationing; it is also necessary to impose price controls for higher-order goods and wage rates, and finally to impose compulsory labor on both entrepreneurs and workers. Furthermore, these regulations cannot be limited to one or a few branches of production, but must include all branches of production. There is simply no other choice: either desist from isolated interventions in the workings of the market or instead turn over the entire management of production and distribution to the authorities. Either capitalism or socialism; there is no middle way.

It is the recognition of this fact that leads liberalism to reject interventionist intrusions in the arena of economics. Liberalism opposes authoritarian interventions not out of hostility to the state, not because of any insistence on natural law, but out of a sober recognition of the facts. It rejects direct commands by the state and the municipalities in economic affairs because it is convinced that unhampered entrepreneurial activity leads to greater productivity, that is, to a better provision of the consumers; and it rejects governmental interventions into the activities of entrepreneurs because it is of the opinion that the authorities cannot reach the goals that they wish to attain through this method.

CHAPTER 28

Economic Order and the Political System1

Economic and political liberalism go hand in hand, and appeared in history at the same time. Only in the second half of the nineteenth century did political parties begin to believe that in the long run it was possible to successfully combine liberalism and democracy with interventionist, statist, and socialist economic policies. This view is still firmly held in Western Europe and the United States. It is the source of the prevailing confusion that surrounds all political and economic policy ideas and concepts. In recent decades—and this can hardly be contested—the abandonment of economic liberalism has gone hand in hand with the retreat from parliamentarianism and with imposed restrictions on the political freedom of the citizenry.

Soviet Russia, which leads in the flight from economic liberalism, has been the first to proclaim dictatorship, to declare parliamentary government and freedom to be “bourgeois prejudices,” and to eliminate all the institutions that ought to protect the individual against the arbitrary power of government.2 No other state has gone so far in either abolishing private ownership or in establishing the unrestrained despotism of the political authorities.

But the Russian example has been followed by many other countries, even if less radically and especially with less cruelty and bloodshed. Year by year dictatorship advances and parliamentary government and democracy lose ground.3 Only yesterday many Englishmen expressed the idea that Western Europe and the states founded by Western Europeans around the world were immune from all dictatorial ventures. The nations that had created modern culture, they thought, would never abandon such essential elements of their culture as representative government and the citizens’ right to political freedom. Today the parliamentary constitution of France is already seriously threatened; in England itself, the land of habeas corpus, a party advocating dictatorship is raising its head;4 and in the United States a great writer believes he must warn his countrymen about the danger of losing their freedoms.5

Especially in the last few years there has been an uninterrupted and triumphant advance of interventionism on the one hand and of dictatorship on the other. Is this an accidental coincidence, or is there a real connection between the two?

The democratic system rests on the market economy with private ownership of the means of production. Each penny represents a ballot. Consumers, by their conduct in buying and abstaining from buying, control the market system. Entrepreneurs and capitalists are forced to follow the instructions that the consumers give them on the market. If they are unable to fulfill the desires of the market in the best and least expensive way, they experience losses; finally, if they do not change their conduct in time, they are removed from their favored position into other roles where they no longer have control over some of the means of production, and therefore can no longer do harm.

The market selects the entrepreneurs and capitalists—it makes them rich; the market can also make them poor again and remove them from their position, if they fail to satisfy consumer wants. It is true that on the market there are universal but not equal voting rights. Voting power increases with the size of income. But this greater voting power is itself the result of the voting of the market. It can be won and held only by the test of the market, by the successful use of the means of production that is in compliance with the wishes of consumers. In a capitalist economy that is not restrained by government intervention, ownership is the result of a daily plebiscite of the consumers, who have a sovereign and revocable mandate. Even though landownership has its origin in precapitalist times, the wealth of the landowners must meet this test if it is to be preserved; therefore, real estate, too, is subject to the law of the market.

The structure of political democracy corresponds to the democratic structure of the market. The citizen as well as the consumer decides who should direct production according to his desires; just as he replaces the entrepreneur and the capitalist who does not satisfy his consumption wants with other men, so it is granted to the hands of the electorate to replace political leaders who do not lead where the voter wants to go. Just as the market sees to it that production is directed according to the desires of the consumers, so a democratic constitution makes sure that governmental power is exercised in agreement with the political ideals of the electorate.

Now political democracy has decided against the economic democracy of the market. Whether one welcomes this or deplores it, it is an incontestable fact that public opinion today wants to replace the capitalist economy with a system in which it is the government that manages production and distribution rather than the market. No longer will people put up with, as a universally employed slogan coined by the Marxists says, the “anarchy of production”—that is, the absence of coercion and the freedom of the market. People want interventionism, statism, the planned economy, and socialism. The outcome of every election confirms anew that the masses do not want capitalism but want a controlled economy. Even in the dictatorial states where there are no elections, this, too, is the will of the masses.

One may argue that if there were free elections in Germany they would produce a different outcome than those that resulted in the last several votes.6 But no one supposes that any German opposition to the current government is striving for the return to capitalism. It, too, wants a planned and controlled economy, although under the direction of a different leader and for other foreign and domestic purposes. The insoluble conflict in the policies of the “Left parties” of England, France, and the United States is that they advocate a planned economy while refusing to realize that they are preparing the way for dictatorship and the abolition of civil liberties.7 Their conceptual confusion is so great that they wish to fight for the preservation of democracy in cooperation with Soviet Russia.8

The adherents of those dictatorships that are called “fascist” have clearly acknowledged and expressed the fact that in a state in which the economy is directed by the government it is meaningless to talk about democratic constitutions and the freedom of the individual. The National Socialists argue as follows: if the farmer is no longer free to cultivate his field as he wishes and to dispose of the produce of his soil, and if the entrepreneur is no longer allowed to manage his company according to his own ideas, then writers, artists, and scholars will not be allowed to create as they wish, either.9

If the economy rests entirely in the hands of the authorities, then those authorities can prevent the publication of all unacceptable intellectual writings and suppress the activities of all groups of which they disapprove. Even any claimed right to freedom of conscience, freedom of inquiry, and of expression of opinion will not help. The power of the totalitarian state is so great that it can take control over every conceivable activity without arousing resistance. Schiller was able to evade the tyranny of the twelve dukes of Württemberg by fleeing to the nearby “abroad.”10 Where will a sanctuary be open for a persecuted genius if all states become totalitarian?

The paradox of modern times is the fact that the democratic era that was created by liberalism led to the rise of both economic freedom and political democracy. William E. Rappard presents this development in a masterly way based on the example of his native Switzerland. No other man could have created such a work. Originally from the French-speaking part of Switzerland, culturally a citizen of all three ethnic regions of his homeland, and connected with the Anglo-Saxon tradition by scholarship at the oldest and most eminent university of the New World, Rappard has been active not only as a researcher and teacher.11

As a Swiss statesman and a brilliant representative of that Geneva internationalism that is working for the pacification of our weapons-choked world, he has experienced the history of our times as an active participant. Succinctly and factually, Rappard sketches out in his new book L’individu et l’état dans l’évolution constitutionnelle de la Suisse [The Individual and the State in the Constitutional Evolution of Switzerland] the path that Switzerland has followed from the patriciate of the eighteenth century through wars, revolutions, and party struggle to the liberalism and democracy of the constitutions of 1848 and 1874.

His analysis clearly shows how the mobilization of the citizenry in exercise of their political rights was the outgrowth of the development of political democracy; it was also the starting point for the new economic interventionism, which has now become a threat to political democracy.12 Rappard always speaks only as a historian who follows Ranke’s principle of simply presenting things as they were. Only in the final chapter does he articulate the problem with which Switzerland today is confronted. It is necessary to choose. “Should our liberal and democratic achievements be sacrificed to our statism?” Rappard asks. “Or do we wish to sacrifice our statism for our love of liberty and our desire for self-government?”

Switzerland, Rappard thinks, cannot evade the need to make this decision. The direction of current policies cannot be continued. Statism, today, lives by consuming the wealth created by the capitalist economy. Statism has extraordinarily raised the cost of living, created an extravagant administrative apparatus, pursued a protective tariff policy, practiced deficit spending in funding federal highways, and used its alcohol monopoly to lavishly distribute subsidies to now one and then another special interest, but always to agriculture. Either statism must be given up due to its financial shortcomings, or the economy must be restructured along the lines of the example of Russia, Germany, and Italy. That, however, cannot be done without some sort of dictatorship, Rappard says, since the Swiss people will not be inclined to freely choose to have their standard of living decreased.

No one has previously formulated the political and economic policy problems of our time so clearly and with such relentless consistency as Rappard. In the face of this formulation the dogmas and illusions collapse that for decades have ruled the politics of the civilized nations. The conditions in England, France, and the United States are not unlike those in Switzerland. Thus Rappard’s book acquires universal significance beyond the geographic, historical, and material borders of the country in question. It will direct the political thinking of all those who in the current generation possess a mature sense of civic responsibility.

CHAPTER 29

Remarks Concerning the Ideological Roots of the Monetary Catastrophe of 19231

The ideas that shape the policies of nations do not drop from the sky. They are conceived by thinkers. Whoever wants to write the history of an age must first study the writings that have shaped public opinion. The ideas that guided German policies in the twentieth century were those created by German political philosophy and economists during the Second Reich.2 That is no less true of monetary policy. In the writings of Lexis,3 Knapp,4 and Bendixen5 one finds all the ideas whose practical application led to the collapse of 1923.

The future historian of these events will be forced to ask a question for which he will not easily find an answer. The age of Gustav Schmoller,6 Adolf Wagner,7 and Lujo Brentano8 was also the age of Helmholtz,9 Hertz,10 Frege,11 Georg Cantor,12 and Planck.13 How can we explain the fact that the flourishing of mathematics and physics coincided with a nadir in the sciences of human action? How was it that out of a population of seventy million people no one came forward to oppose the dogmas that reigned over monetary policy?

To understand this we must refer back to that “ethical pathos” out of which there emerged the exhortations leading to the founding of the Verein für Sozialpolitik (Society for Social Policy) in 1872.14 Economic questions were to be treated as moral problems, and not as logical ones. It was all a matter of good intentions, not of knowledge and ability. The pursuit of truth was not considered to be of ethical or practical value in and of itself. It was morally suspect to deviate from the doctrines espoused by the state-appointed university professors. It was considered unnecessary to go into the philosophical foundations of their ideas or to make any attempt to refute them. In this regard Imperial Germany already contained the ideas to which not much later communism and nationalism tried to give international respectability.

It was to Max Weber’s15 credit that he took up the fight against the politically biased dogmas that at that time passed for economics and sociology in Germany. The Verein für Sozialpolitik was certainly not the most appropriate place for discussing the problems of “value freedom.” However, in the German-speaking world, there was no other organization at whose meetings questions of economics could be discussed. Since what Schmoller and his friends talked about they called “science,” they could not object when the question was raised whether or not science was expected to make value judgments.16

In those years I did not yet belong to the board of directors of the Verein für Sozialpolitik, and therefore I did not participate in the closed board meeting of January 5, 1914, at which the question of value judgments was discussed, but from which the public was excluded. However, I did have exhaustive discussions with several prominent members of the society about this issue.

Before the publication of my book The Theory of Money and Credit in the spring of 1912,17 the discussions were mainly about the theories of Carl Menger and Böhm-Bawerk,18 as well as my own contributions. I was in the habit of taking notes about these conversations, in which I tried to record the ideas of my conversation partners. I preserved these notes in my Vienna apartment, which I kept after my move to Geneva (1934). In March 1938 they disappeared with everything else in my apartment when the National Socialists plundered it.19 What I have on hand is only a summary of the objections raised against Böhm-Bawerk and myself, which I wrote down at Böhm-Bawerk’s request in the spring of 1914. Since in this manuscript I omitted the names of the individuals who made specific comments, and my memory could easily deceive me after more than 45 years, I will also omit mentioning any names in what follows.

Böhm-Bawerk, my conversation partners remarked, is without a doubt an honorable man searching after truth. Nevertheless, his dreadful mistakes resulted in an unacceptable justification of the worst form of unearned income—interest on capital. According to them, it was the moral duty of the state to use governmental measures to bring down any high market rates of interest. The most absurd book in economic literature, they said, is Bentham’s Defense of Usury.20 An unbiased scholar, Wilhelm Lexis, they said, had clearly proven that the employers’ income should be viewed as being in the same economic category as the income received by a slave owner.21 They claimed that Böhm-Bawerk’s arguments against Marx’s exploitation theory were foolish.22 No matter how much Marx may have been mistaken in his criticisms of modern society, he nevertheless had the merit of having revealed the motives behind the ideas of the British economists. Compared with the contributions of the German Historical School, Böhm-Bawerk was a stubborn reactionary.

The same thing was claimed to be true about my theory of money. The regular appearance of economic crises was a phenomenon inherent in the nature of capitalism, they said. Marx was, of course, wrong when he assumed that only the destruction of capitalism and the establishment of socialism could prevent the recurrence of these crises. Strict oversight and skillful regulation of market activities by a super-party government would free the economy from economic crises. It was pointless, they thought, to try to explain economic fluctuations on the basis of monetary and credit policies. The real causes had to be found at a deeper level, they said.

What was especially and violently attacked was what I said about the development of “fiduciary media” and the efforts to concentrate the entire gold reserves of the country in the central bank. The monetary system, they said, is not an end in itself. Its purpose is to serve the state and the people. Financial preparations for war must continue to be the ultimate and highest goal of monetary policy, as of all policy. How could the state conduct war, after all, if every self-interested citizen possessed the right to demand redemption of banknotes into gold? It was blindness not to recognize that only full preparedness for war—not only in the military sense but also with regard to the economy—could ensure the maintenance of peace. It was admitted that the Historical School has long neglected the treatment of monetary problems. Yet with Knapp’s State Theory of Money, they said, the German spirit has finally rejected the destructive theories of the English economists.

The gold standard, they alleged, made Germany permanently dependent on the gold-producing countries. The merit of having first recognized this belonged to the German Agrarians. It was a vital necessity for the German nation to have a monetary system independent of foreign powers, they claimed.

There was only one excuse for my “errors,” namely, that they were the logical outcome of the subversive ideas that the “Austrian School” had taken over from the doctrines of the Manchester men. Thinking in a vacuum was characteristic of Menger, Wieser, and Böhm-Bawerk, and this was my mistake, too. What would the monetary system be like if the state did not put all of its power behind it? It was fortunate, they alleged, that even in Austria only a small group of naïve authors shared the views of the “Austrian School.”

Such were the opinions of my interlocutors during the five years that preceded the outbreak of the First World War. They were willing to grant me that I wrote in good faith. But they were convinced that my book only served the interests of unpatriotic and subversive speculators. They never entered into any kind of theoretical discussion. The quantity theory of money and the theories of the Currency School23 were, in their eyes, nothing but curiosities in the historical literature. One of these gentlemen remarked that a colleague of his had asked whether I was not also an adherent of the phlogiston theory.24 Another gentleman suggested that he considered my “Austrianness” to be a mitigating circumstance; with a citizen of Germany he wouldn’t even discuss such questions.

Much later, at the time of the Regensburg meeting of the Verein für Sozialpolitik (1919), several of the participants said in conversation that they considered “simply ridiculous” and “not discussible” the view that the increase in the quantity of banknotes had brought about the devaluation of the mark.25

Errors have always been made and also will be made in the future. Men are not infallible. The historian’s task is not to point out errors, an undertaking that in retrospect is never difficult. It is his duty to identify the causal connections between things. Perhaps the foregoing remarks will be of some use in this regard.

When Max Weber was teaching at the University of Vienna in the summer of 1918, he said to me one day, “You do not like the Verein für Sozialpolitik ; I don’t like it much either. But the only remedy is for us to take an active part in the work of the society.” I followed his advice. Beginning in 1919, I was on the board of directors, and from 1930 I also served on the board of governors. I promoted the discussion of problems relating to the theory of value; in cooperation with Arthur Spiethoff, I prepared and published the volume of the society’s writings devoted to this topic; and I opened the discussion of this subject at the Dresden meeting (autumn 1932),26 which the old guard of the society allowed to be called only a working committee report, an “epilog”27 of the meeting. As was soon to be seen, it was the “epilog” of the Verein für Sozialpolitik, its last report.28 A new age containing the worst economic policies had begun.

[1. ][This article originally appeared in German in Mitteilungen des Deutschen Hauptverbandes der Industrie, vol. 11, no. 31 (July 31, 1930).—Ed.]

[2. ][On Mises’s general critique of the “impossibility” of comprehensive socialist central planning in replacing a functioning, competitive market economy due to the former’s inability to undertake efficient “economic calculation” for allocating scarce factors of production among competing uses in a complex system of division of labor, see Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth,” (1920) in F. A. von Hayek, Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism (London: George Routledge, 1935), pp. 87-130, and Socialism: An Economic and Sociological Analysis (Indianapolis: Liberty Fund, [1951] 1981), especially pp. 95-194, also, Bureaucracy (Indianapolis: Liberty Fund, [1944] 2007), especially pp. 17-46, and Human Action: A Treatise on Economics (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 4th rev. ed., 1996), pp. 689-715. In addition, see Richard M. Ebeling, “Economic Calculation Under Socialism: Ludwig von Mises and His Predecessors,” in Austrian Economics and the Political Economy of Freedom (Northampton, Mass.: Edward Elgar, 2003), pp. 101-35, and “Why Socialism is ‘Impossible,’” The Freeman: Ideas on Liberty (October 2004), pp. 8-12.—Ed.]

[3. ][On the “Austrian” theory on the nature, workings, and limits of interventionism as an economic system in place of the competitive market economy, also see Ludwig von Mises, Liberalism: The Classical Tradition (Indianapolis: Liberty Fund, [1927] 2005), pp. 37-75, Critique of Interventionism (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, [1929] 1996), Interventionism: An Economic Analysis (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, [1940] 1998), Human Action, pp. 716-79, and Planning for Freedom: How the Market System Works (Indianapolis: Liberty Fund, [1980] 2008). Also, Murray N. Rothbard, Power and Market: The Government and the Economy (Menlo Park, Calif.: Institute for Humane Studies, 1970); Israel M. Kirzner, “The Perils of Regulation: A Market-Process Approach,” in Discovery and the Capitalist Process (Chicago: University of Chicago Press, 1985), pp. 119-49; Sanford Ikeda, Dynamics of the Mixed Economy: Toward a Theory of Interventionism (London: Routledge, 1997); and Richard M. Ebeling, “The Free Market and the Interventionist State: The Political Economy of Public Policy,” in Austrian Economics and the Political Economy of Freedom, pp. 203-30.—Ed.]

[1. ][This article originally appeared in German in Wiener Wirtschaftswoche, vol. 5 (1936) as a review of William E. Rappard, L’individu et l’état dans l’évolution constitutionnelle de la Suisse [The Individual and the State in the Constitutional Evolution of Switzerland] (Zurich, 1936).—Ed.]

[2. ][The Russian Czar, Nicolas II, abdicated in March 1917 during the First World War. A provisional government was formed of Left-oriented political parties. This government was overthrown in the Bolshevik coup d’état of November 7, 1917. A free election for a Constituent Assembly was held on November 25, 1917, which resulted in the Socialist-Revolutionary Party winning 40.1 percent of the vote, the Bolsheviks 24 percent, and a variety of other parties, including the Constitutional Democratic Party (4.7 percent) and the Mensheviks (1.5 percent), winning the rest. The Constituent Assembly met once on January 5-6, 1918. Vladimir Lenin, the leader of the Bolsheviks, declared that his party would not accept any decisions of the Assembly, and the Assembly was prevented from meeting again by Red Guard units under Bolshevik command. A three-year civil war soon broke out that resulted in the victory of Lenin’s Bolshevik (Communist) Party, which then dictatorially ruled over what became the Soviet Union until December 1991. Marxists argued that the liberal idea of freedom—including freedom of speech, the press, religion, association, the voting franchise, and freedom of enterprise and trade—was a “bourgeois” illusion to make “the masses” believe they were free when in fact they were the victims of “wage slavery” and exploitation by the ruling capitalist class, who used the power of the state to maintain their private control over the means of production. Only socialism would provide “real freedom” for people through collective ownership of the means of production, along with central planning that would assure “production for use” rather than “production for profit.”—Ed.]

[3. ][When Mises wrote this article in 1936, virtually the only functioning democracy in Central and Eastern Europe was Czechoslovakia. All the other nations in this part of Europe had totalitarian political regimes (Fascist Italy and Nazi Germany) or authoritarian regimes with political dictatorship, restrictions on civil liberties, and economic systems of control and intervention. See William E. Rappard, “Nationalism and the League of Nations Today,” in Problems of Peace,Eighth Series:Lectures Delivered at the Geneva Institute of International Relations (Freeport, N.Y.: Books for Libraries, [1934] 1968), pp. 17-19:For generations and, in some cases, for centuries, all nations within the orbit of our Western civilization have, through wars and revolutions, been striving to secure for all their members, greater physical and moral security, greater political equality, greater individual freedom. Greater security, that is, more assured protection against the violence of their fellow-citizens and against the arbitrary oppression of their Governments. Greater equality, that is, less discrimination on grounds of race, or sex, or religious and philosophical creed, and social position. Greater freedom, that is, more latitude for the self-expression and self-assertion of the individual in the face of the authority of tradition, and of the State. Guarantees for the protection of the fundamental rights of man; the abolition of arrest without trial and imprisonment for debt; the suppression of slavery; the extension of the suffrage to all and thereby the subordination of the Government to the will of the people, that is, of the majority of the people; parliamentary control of the budget, that is, no taxation without representation; the recognition of the freedom of thought, of speech, of assembly, of the Press, the independence of the Judiciary, and the autonomy of the university; such are some of the ideals for which our fathers, grandfathers, and great-grandfathers fought, bled, and died. Such are some of the conquests of human dignity over barbarism, of knowledge over ignorance, of right over might, which they triumphantly achieved and which they proudly bequeathed to us.And such are some of the ideals which, after the greatest struggles in human history, we, their children of the twentieth century, through stupidity and cowardice are, sometimes with the blind enthusiasm of mad fanaticism and sometimes with the dull resignation of impotence, disavowing, renouncing, abandoning. The individual, the family, the local or regional community, everything and everybody are being sacrificed to the State. The State, itself, once held to be the protector and the servant of the people, is in several countries of our Western civilization being turned into a weapon for oppressing its own citizens and threatening its neighbors, according to the capricious will of one or of a few self-appointed individuals. These individuals, whether they style themselves chiefs, leaders, or dictators, are all what free men of all times, under all climes, have combated as tyrants. They are today acclaimed as heroes by hundreds of thousands of European youths, welcomed as saviors by millions of European bourgeois, and accepted by tens of millions of European senile cowards of all ages.—Ed.]

[4. ][Mises is referring to the British Union of Fascists (BUF), founded by Sir Oswald Mosley (1896-1980), who had served in the Labor Party government in 1929, but broke away in 1931. After visiting Italy, he was inspired to form the BUF in 1932 on the model and ideology of Mussolini’s Italian fascist movement. The BUF was banned in 1940 and Mosley was first interned and then placed under house arrest for the remainder of the Second World War.—Ed.]

[5. ][Mises is referring to an article by American journalist and political analyst Walter Lippmann, “The Permanent New Deals,” Yale Review (June 1935); Lippmann extended the core elements of his argument in his book An Inquiry into the Principles of the Good Society (Boston: Little, Brown, 1937), which in its critique of the planned society and the regulated economy relies heavily on Mises’s and Friedrich A. Hayek’s analyses of the economic unworkability of the state-managed economy and the dangers to political and personal freedom with the elimination of the market order.—Ed.]

[6. ][In the German national election of July 1932, the National Socialist German Workers (Nazi) Party won 37.8 percent of the vote, the Social Democratic Party won 21.9 percent, and the Communist Party won 14.6 percent. In the national election of November 1932, the Nazis lost votes, winning 33.1 percent, the Social Democrats, 20.4 percent, and the Communists, 16.9 percent. The German president, Paul von Hindenburg, appointed Adolf Hitler as chancellor on January 30, 1933. Following the Reichstag fire in March 1933, Hitler consolidated powers in a way that shortly resulted in his becoming absolute dictator—the Führer—in Germany until the Allied victory over Nazi Germany in May 1945.—Ed.]

[7. ][This general theme on the relationship between economic liberty and political freedom was one developed by a number of writers in the 1930s, along the lines of Mises’s argument. Of note among them were Gustav Cassel, From Protectionism Through Planned Economy to Dictatorship, the sixth Richard Cobden Lecture (London: Cobden-Sanderson, 1934); Francis W. Hirst, Liberty and Tyranny (London: Duckworth, 1935) and Economic Freedom and Private Property (London: Duckworth, 1935); William Henry Chamberlin, Collectivism: A False Utopia (New York: Macmillan, 1936); Walter Lippmann, An Inquiry into the Principles of the Good Society. This was also the central theme of F. A. Hayek, The Road to Serfdom (Chicago: University of Chicago Press, [1944] 2007). See also Ludwig von Mises, Omnipotent Government: The Rise of the Total State and Total War (New Haven: Yale University Press, 1944) and “Socialism Versus European Democracy,” The American Scholar (Spring 1943), pp. 220-31.—Ed.]

[8. ][Mises is referring to the “popular front” movement of the mid and late 1930s. In May 1934, the Communist Party of the Soviet Union inaugurated what became called the “popular front” of all those parties united in their opposition to fascist governments and ideas. This replaced Soviet opposition to all cooperation with socialist parties and movements not controlled by Moscow. In June 1934, the socialist government in France made an alliance with the French Communist Party, and the French government entered into a defense treaty with the Soviet Union in 1935. The Soviet government also used the popular front movement to violently gain control of the antifascist movement in Spain during the Spanish Civil War (1936-39). The popular front movement collapsed in August 1939, with the Soviet-Nazi nonaggression pact, which included a secret protocol between Moscow and Berlin to divide Poland between Nazi Germany and the Soviet Union in case of war, and for the Baltic Republics to be recognized as part of the Soviet sphere of influence.—Ed.]

[9. ][On the structure and workings of the Nazi planned economy, see Gunter Reimann, The Vampire Economy: Doing Business Under Fascism (Auburn, Ala.: Ludwig von Mises Institute, [1939] 2007); and Walter Eucken, “On the Theory of the Centrally Administered Economy: An Analysis of the German Experiment,” Economica, Part I (May 1948), pp. 79-100, and Part II (August 1948), pp. 173-93.—Ed.]

[10. ][Friedrich von Schiller (1759-1805) was one of Germany’s most famous poets and playwrights. He fell out of favor with the Duke of Württemberg in 1782 due to the Duke’s displeasure over the themes in several of his plays. After being placed under a fortnight’s arrest, and an order written by the duke commanding him to write no more comedies and not to interact with anyone outside the principality of Württemberg, Schiller escaped during the dead of night. After first living in Mannheim and then Leipzig, he finally settled in Weimar in 1787, where he soon formed an enduring and close friendship with Johann Wolfgang von Goethe.—Ed.]

[11. ][William E. Rappard (1883-1958) was the cofounder of the Graduate Institute of International Studies in Geneva, Switzerland, and one of the leading classical liberals in Europe in the interwar period. Born in New York of Swiss parents, he studied economics at Harvard University and at the University of Vienna before the First World War. He supposedly influenced Woodrow Wilson in arranging for the League of Nations to have its headquarters in Geneva, and was an active advocate of international peace and free trade; he served on the League of Nations Mandates Committee, and was a member of the Swiss delegation at League of Nations Assembly meetings. Rappard developed the themes discussed in this review in his University of Chicago Harris Lectures, The Crisis of Democracy (Chicago: University of Chicago Press, 1938). For a brief biography of Rappard’s life and work, see Richard M. Ebeling, “William E. Rappard: An International Man in an Age of Nationalism,” Ideas on Liberty (January 2000), pp. 33-41.—Ed.]

[12. ][See William E. Rappard, “The Relation of the Individual to the State,” Annals of the American Academy of Political and Social Science (January 1937), pp. 215-18:The revolutions at the end of the eighteenth century . . . were essentially revolts of the individual against the traditional state—expressions of his desire to emancipate himself from the ties and inhibitions which the traditional state had imposed on him. . . . After the rise of individualism, which one may define as the emancipation of the individual from the state, we had the rise of democracy, which one may define as the subjection of the state to the will of the individual. In the latter half of the nineteenth century and up to the present, the individual, having emancipated himself from the state and having subjected the state to his will, has furthermore demanded of the state that it serve his material needs. Thereby he has complicated the machinery of the state to such a degree that he has again fallen under the subjection of it and he has been threatened with losing control over it. . . . The individual has increasingly demanded of the state services which the state is willing to render. Thereby, however, he has been led to return to the state an authority over himself which it was the main purpose of the revolutions in the beginning of the nineteenth century to shake and break. . . . The individual demanding that the state provide him with every security has thereby jeopardized his possession of that freedom for which his ancestors fought and bled.—Ed.]

[1. ][This essay was originally published in German in Freundesgabe zum 12. Oktober 1959 für Albert Hahn [Homage by Friends for Albert Hahn on October 12, 1959] (Frankfurt am Main: Fritz Knapp, 1959).—Ed.]

[2. ][The “Second Reich” refers to the German Empire from its formal founding in 1871, under Prussian leadership during the Franco-Prussian War (1870-71), until the abdication of Kaiser Wilhelm II at the end of the First World War in 1918.—Ed.]

[3. ][Wilhelm Lexis (1837-1914) was a German statistician, economist, and social scientist, as well as a founder of the interdisciplinary study of insurance. He is primarily known today as a statistician due to his creation of the Lexis ratio.—Ed.]

[4. ][See Chapter 2, “The Problem of Legal Resumption of Specie Payments in Austria-Hungary,” footnote 10.—Ed.]

[5. ][Friedrich Bendixen (1864-1920) was a leading follower of Knapp’s state theory of money. He served as director of the Hythekenbank in Hamburg until his death in 1920.—Ed.]

[6. ][Gustav von Schmoller (1838-1917) was a prominent University of Berlin economist in Imperial Germany who led the “Socialists of the Chair” and who defended and glorified Prussian military power. He was a leading member of the German Historical School, which rejected abstract deductive theorizing in economics in favor of detailed historical studies from which it was hoped empirical laws of economics might be discovered. He was also a strong advocate of the German welfare state and regulation of industry and trade in the name of the national interest. He was a founding member of the Verein für Sozialpolitik .—Ed.]

[7. ][Adolph Wagner (1859-1917) was another well-known University of Berlin economist in Imperial Germany. He was an advocate of “state socialism,” which called for the transformation of liberal capitalism into a state interventionist welfare state.—Ed.]

[8. ][See Chapter 8, “On Rising Prices and Purchasing Power Policies,” footnote 8.—Ed.]

[9. ][Hermann Ludwig Ferdinand von Helmholtz (1821-94) was a prominent German medical doctor and physicist known for his theory of the eye and vision, and his work on electrodynamics and thermodynamics.—Ed.]

[10. ][Heinrich Rudolf Hertz (1857-94) was well known for his work on the electromagnetic theory of light, and for demonstrating the existence of electromagnetic waves in the form of VHF and UHF radio waves.—Ed.]

[11. ][Gottlob Frege (1848-1925) was a German mathematician who is often called the father of analytical philosophy. He attempted to develop a formally exact and unambiguous logic.—Ed.]

[12. ][Georg Ferdinand Ludwig Philipp Cantor (1845-1918) was a famous German mathematician best known for his development of set theory.—Ed.]

[13. ][Max Planck (1858-1947) was a leading German physicist who is considered to be the founder of quantum theory. He was awarded the Nobel Prize in Physics in 1918.—Ed.]

[14. ][The Verein für Sozialpolitik was founded in 1872 as an association of historians, economists, political scientists, and sociologists devoted to the reconstruction of the social sciences on historical-empirical lines, in opposition to the logical, deductive methods of the British Classical economists, and then later the Austrian School of economics. The society was also dedicated to an active governmental role in the areas of social welfare and regulation of private enterprise. It was the inspiration for like-minded American economists who established the American Economic Association in 1885. See Eugen von Philippovich, “The Verein für Sozialpolitik,” Quarterly Journal of Economics (January 1891), pp. 220-37, and “The Infusion of Socio-Political Ideas into the Literature of German Economics,” The American Journal of Sociology (September 1912), pp. 145-99.—Ed.]

[15. ][Max Weber (1864-1920) is considered one of the greatest contributors to sociological theory in the last one hundred years. He developed the concept of the “ideal type” for sociological and historical analysis, and emphasized the importance of subjective meaning—the meaning of an action from the individual actor’s point of view—in social theory. He also argued that professors in the social fields, including economics, history, and political science, should not take advantage of the influence that an academic position gave to their lectures and writings to infuse their normative values and beliefs in discussions of theory and fact. Weber’s essays on the importance of a value-free social science are contained in Max Weber, The Methodology of the Social Sciences (New York: The Free Press, 1949).—Ed.]

[16. ][See Ludwig von Mises, Critique of Interventionism (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, [1929] 1996), pp. 19, 43-70, and Memoirs (Auburn, Ala.: Ludwig von Mises Institute, [1940] 2009), pp. 85-89, for Mises’s impressions of the political and economic ideas expressed at the professional associations in Germany during this time, and a discussion of Max Weber’s role in defending “value-freedom” in the social sciences. Mises adamantly insisted that economics was and should be a “value-free” science whose primary task at any policy level was to demonstrate whether the means chosen were or were not appropriate for attaining the end in mind. He once forcefully expressed this point about his own role as an economist; see Ludwig von Mises, “Interventionism as the Cause of the Economic Crisis,” (1932) in Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises, vol. 2, Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression (Indianapolis: Liberty Fund, 2002) p. 201:

I am an economist, not a preacher of morality who wishes to judge, avenge, and punish. I do not look for guilty parties but for causal connections. And if I speak of interventionism, I am not making accusations against the “state” or against “labor.” I only attempt to point out to what consequences a system, a policy, an ideology must necessarily lead.Also see Ludwig von Mises, “The Treatment of ‘Irrationality’ in the Social Sciences,” (1944) in Richard M. Ebeling, ed., Money, Method, and the Market Process: Essays by Ludwig von Mises (Norwell, Mass.: Kluwer Academic Press, 1990), pp. 16-36.—Ed.]

[17. ][Ludwig von Mises, The Theory of Money and Credit (Indianapolis: Liberty Fund, 3rd rev. ed., [1924; 1951] 1981).—Ed.]

[18. ][See “On Carl Menger’s Eightieth Birthday,” Chapter 16 in the present volume, especially footnote 6 (on Menger) and footnote 11 (on Böhm-Bawerk).—Ed.]

[19. ][Mises’s papers were captured by the Soviet Army at the end of the Second World War from a Nazi repository of looted documents in Czechoslovakia, and kept in a secret Soviet archive in Moscow. For an account of how they were discovered in the 1990s, see Richard M. Ebeling, “Mission to Moscow: The Mystery of the ‘Lost Papers’ of Ludwig von Mises,” Notes from FEE (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, July 2004), http://www .fee.org/pdf/notes/NFF_0704.pdf. Also see my introduction to Selected Writings of Ludwig von Mises, vol. 2, pp. xvi-xx, for an account of Mises’s “lost papers” and their recovery.—Ed.]

[20. ][Jeremy Bentham, “Defense of Usury,” (1797) in Werner Stark, ed., Jeremy Bentham’s Economic Writings, vol. 1 (London: George Allan & Unwin, 1952), pp. 121-207. Bentham called for the end to all restrictions on market-determined rates of interest.—Ed.]

[21. ]For a criticism of Lexis’s theory, see my Socialism: An Economic and Sociological Analysis (Indianapolis: Liberty Fund, [1951] 1981), pp. 298-99.

[22. ][Eugen von Böhm-Bawerk, Capital and Interest, vol. 1, History and Critique of Interest Theories (South Holland, Ill.: Libertarian Press, [1884] 1959), pp. 241-321, and “Unresolved Contradiction in the Marxian Economic System” (1896) in Shorter Classics of Böhm-Bawerk (South Holland, Ill.: Libertarian Press, 1962), pp. 201-302; see also H. W. B. Joseph, The Labour Theory of Value in Karl Marx (London: Oxford University Press, 1923).—Ed.]

[23. ][In the 1820s through the 1860s, there was a heated and highly sophisticated debate between two groups of British monetary theorists known as the Currency School and the Banking School. The Currency School argued: (a) note currency should vary precisely with changes in the specie currency on deposit in the banking system; (b) the note currency should be fully convertible into specie; (c) the rate of interest was a significant influence on the volume of notes in circulation; (d) the foreign exchange rate was a good guide for controlling the volume of notes in circulation. The Banking School argued that (a) the “needs of business” should regulate the quantity of banknotes issued, and the banks should not “force” notes into circulation in excess of the needs of business; (b) the Currency School was correct that banknotes should be fully convertible; but (c) any drain of specie on the banking system might be counteracted by a decrease in the “hoards” of money held by the public, and an increase in specie or notes put into circulation might have no influence on spending and prices, because it might be absorbed into people’s “hoards.” On the controversy between the Currency and Banking schools, see Jacob Viner, Studies in the Theory of International Trade (New York: Augustus M. Kelly, [1937] 1965), pp. 218-89; Charles Rist, History of Monetary and Credit Theory: From John Law to the Present (New York: Augustus M. Kelly, [1940] 1966), pp. 202-36; and Lloyd Mints, A History of Banking Theory, in Great Britain and the United States (Chicago: University of Chicago Press, 1945), pp. 74-114.—Ed.]

[24. ][The phlogiston theory originated in 1667 with Johann Joachim Becher; it posited that inside flammable substances was a special element without odor, color, taste, or mass that is freed by the burning process, and is what caused the burning process. It was refuted in the eighteenth century through a variety of quantitative experiments.—Ed.]

[25. ][For Mises’s analysis of the Great Inflation in Germany during and then after the First World War, see Ludwig von Mises, “Stabilization of the Monetary Unit—from the Viewpoint of Theory,” (1923) in The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression (Auburn, Ala.: Ludwig von Mises Institute, 2006), pp. 1-51; also, Richard M. Ebeling, “The Great German Inflation,” The Freeman: Ideas on Liberty (November 2003), pp. 2-3, and “The Lasting Legacies of World War I: Big Government, Paper Money, and Inflation,” Economic Education Bulletin, vol. 58, no. 11, 8 pp.

[26. ][See Ludwig von Mises, “The Controversy over the Theory of Value,” (1932) reprinted in Epistemological Problems of Economics (New York: New York University Press, [1933] 1981), pp. 204-16.—Ed.]

[27. ]See Franz Boese, Geschichte des Verein für Sozialpolitik,1872-1932 [History of the Society for Social Policy, 1872-1932] (Berlin: Duncker & Humblot, 1939), p. 236.

[28. ][The 1932 meeting of the Verein für Sozialpolitik in Dresden was the last meeting of the society until after the Second World War. See Peter G. Klein, ed., The Collected Works of F. A. Hayek, vol. 4, The Fortunes of Liberalism: Essays on Austrian Economics and the Ideal of Freedom (Chicago: University of Chicago Press, 1992), pp. 145-46, where Hayek says thatin September 1932, during a committee meeting of the Verein für Sozialpolitik in Bad Kissingen, a rather large group of professional colleagues was sitting together at tea in a garden, when Mises suddenly asked whether we were aware that we were sitting together for the last time. The remark at first aroused only astonishment and later laughter, when Mises explained that after twelve months Hitler would be in power. That appeared to the other members too improbable, but more than anything they asked why the Verein für Sozialpolitik should not meet again after Hitler had come to power. Of course, it did not meet again until after the end of the Second World War!—Ed.]