Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence.
Mises: The Last Knight of Liberalism.” In this book review I will focus on Hayek and Mises, mainly their differences.
Hulsmann’s book, though clocking in at 1,050 pages, is a very fast and fascinating read. There are parts that are dense with theory and academic conflicts (the explanation of many splits in the Austrian School), but there are other parts that are exciting and even intense. Did you know Mises was sent to the front lines of WWI after having written against the war? How about that Mises was hunted by the Nazis and on more than one occasion they attempted capture him during clandestine operations in Switzerland? Hulsmann uncovers all of this by systematically searching through the Mises Archive housed at Grove City College.
The main value of this book comes from Hulsmann’s utter competence in the science of economics and his seemingly limitless understanding of Austrian Economics and every other brand of economics that came into contention with Austrian Economics since its founding with Carl Menger. But there is an additional value for fans of the Austrian School of economics. Hulsmann describes the interactions and relationships Mises had with legends of Sociology like Max Weber, the current generation of thinkers like George Reisman and Ralph Raico, and even a correspondence between Mises and Sigmund Frued (which was unfortunately destroyed by the Nazis among many other unpublished writings Mises was working on).
In economics, the major differentiating feature of schools of thought is mostly methodology and mainly value theory. The labor theory of value is one theory that influenced many schools of thought from David Ricardo and Adam Smith to Karl Marx and currently thinkers like Kevin Carson. As in the purview of the labor theory of value, there is quite a bit of diversity of thought in the subjective theory of value schools of thought from Carl Menger to Stanley Jevons and Leon Walras. This initial split is similar to the split of Plato and Aristotle and currently has major ramifications in “doing” economics today.
The reason I bring this up is to illustrate Guido Hulsmann’s take on how Mises influenced F.A. Hayek but also how they differed. Within the Mengerian framework of subjective value there was one Austrian economist, Freiderich von Weiser, who purported the theory that there was a “natural value” of economic goods that is objective to all people given certain circumstances. Hulsman says, “According to Wieser, only if all members of society are perfectly equal in their wealth and income position do the values of a monetary economy coincide with natural values” (p. 384). The policy and theoretical implications of this was that a communist state was possible and furthermore that it was desirable (or that heavy intervention to reach “natural value” was desirable). According to Weiser, value is imputed backwards from consumer goods to capital goods. F.A. Hayek took up this line of thinking and followed the "Wieserian" tradition of economic thought.
Mises, on the other hand, didn’t believe in value calculation whatsoever (nor that "value" could be imputed backwards) but only price calculation and only in a system of private property and free enterprise. Economic calculation is a historically contingent event (contingent on private property). Hulsmann writes: “A rational economic order is not a fact of nature but depends entirely on fragile institutions that need to be cultivated through a sustained cultural and political effort.” (p. 387).
Later Hulsmann goes on, “Mises rejected socialism because factors of production could only be appraised in a market economy. Hayek didn’t endorse this argument because it contradicted the fundamental framework of his economic thought” (p. 473) Furthermore, “As a Wiesarian value theorist, Hayek could not endorse Mises argument that a rational socialist economy was impossible because there was no such thing as value imputation. What then were the real reasons for the empirically far better performance of market economies?” (p. 474). Of course Hayek’s “The Use of Knowledge inSociety” explains this thoroughly (and you’ll have to read Hulsmann’s if you want a detailed talk over this). According to Hayek, markets had better “communicative” abilities.
Mises economic calculation argument against socialism was based on the fact that prices wouldn’t be able to generate in the capital goods market because these goods would not be bought and sold. Since no prices could be generated (buying and selling generates prices) there could be no rational distribution of raw materials to produce capital goods (how many tractors should be produced vs. how many widget making machines should be produced). Profit margins wouldn’t exist in a socialist society so profit motive wouldn’t allocate resources in the way they do, items would be allocated arbitrarily by planners to the best of their limited abilities. Furthermore, interest rates couldn’t coordinate production through time under socialism.
The topic of Hayek vs. Mises comes up again when Hulsmann writes about “Mises Isolation” in the late 1930’s. This period of time was when Keynesian economics found its stride and economists from Fritz Machlup to Lionel Robbins started moving away from Mises ideologically. Though Hayek and Mises friendship remained strong, Hulsman writes: “What were these disagreements? Wieser’s impact on Hayek’s economic thought made itself felt in Hayek’s theories of monetary equilibrium and of ‘nuetral’ money- both theories that Mises would explicitly reject. Other points of contention appeared when Hayek turned to capital theory” (p. 701). Etc etc. Guido then goes on to mention how Hayek took the Weiserian approach when interpreting Mises “pricing process” term in the context of the calculation debate (how exchange generates prices). “Yet by ‘pricing process’ Hayek seemed to mean the mere expression of prices in terms of money-in other words, his argument seems to be based on the Wieserian assumption that money prices were just one convenient way of expressing values and performing value calculations” (p. 702).
Mises, of course, held that prices were not “value,” and that value was not comparable between different people in any objective way (certainly not monetarily). This Misesian view is a view Rothbard takes when he defeated Roald Coase and his theory of free market bargaining in “Law, Property Rights, and Air Pollution" (Coase purporting an anti-Mises utilitarian theory, whereas Rothbards deontological “rights” theory approach was pro-Misesian, utilitarian wise, though clothed in deontological language).
So Hayek was led to believe that socialism was not impossible but simply extremely difficult. Hulsmann explains, according to Hayek, “Central planners would first need precise information about the location and the physical characteristics of every single economic good. Second, they would need to centralize all available technical knowedge as well as knowledge about how to gain new technical knowledge (‘techniques of though’). And third, they would need ‘data relative to importance of the different kinds and quantities of consumers’ goods’” (p. 703).
In contrast, “For Mises, the ‘pricing process’ was not just the solution to an intellectual puzzle-it did not merely ‘express’ the knowable reality of value in terms of some other knowable reality of money prices. Rather, the pricing process created a reality that could not possibly be known otherwise. Hayek would contend- following Wieser-that if the fundamental knowledge problem could be solved, one could calculate the correct prices for factors of production. Mises denied this as even a theoretical possibility. Socialist calculation was for him a conceptual impossibility.” Mises didn’t disagree with Hayek’s “knowledge problem” economics but encompassed it within a greater and deeper theory.
Hulsmann attributes Hayek’s reformulation of the calculation debate, in Wieserian terms, to Mises not having pinned down his systematic view of the economy and some early works that contradicted his later works. For example Mises said in the 1920’s “Under capitalism, capital and labor move until marginal utilities are everywhere equal” (p. 402 also Socialism p. 203). Hulsmann continues, “In none of these early writings could he bring himself to the categorical judgment that economic calculation ‘always deals with prices, never with values’” (p. 403). In fact, Hulsmann attributes the early fleeting success of Mises to not having yet written “Human Action” and its German counterpart. The true “Misesian” tradition, that of Israel Kirzner, Murray Rothbard, Hans Sennholz, and Ludwig Lachman, was made possible because of “Human Action.” Dr. Hulsmann suggests that if it was written earlier it may have stemmed the Keynesian tide but it was too late for the likes of Hayek and Robbins (I’m not downing Hayek, but Robbins be downed!).