Tag: Great Economists

By Richard Ebeling

Originally published in the August 2023 edition of Future of Freedom

The counterrevolution against the classical liberalism of the nineteenth century has been at work for more than 150 years. In the 1840s, 1850s, and 1860s, the triumph of a philosophy of individual rights and liberty, impartial rule of law, private property, freedom of trade and enterprise domestically and in international relations, and attempts to mitigate, if not end, wars between nations had seen great progress, not only in Great Britain and the United States but in other, especially European, countries.

The slave trade had been abolished between Africa and the Americas in the early decades of the nineteenth century, followed by the abolition of slavery in the British Empire in 1834 and in the United States as part of the outcome of a costly and destructive civil war in the first half of the 1860s. Equality before the law was an ideal increasingly practiced in a growing number of countries, though bigotries and restrictions against ethnic and cultural groups still lingered in many places well into the twentieth century, including in Europe and the United States, often with disastrous consequences.

Mercantilism, the eighteenth-century version of the centrally planned economy, was challenged and abolished or greatly reduced in the middle decades of the nineteenth century in many of the European countries. The practice of free trade not only in Great Britain but throughout the British Empire meant that free movement of goods, investment, and men was a widely practiced ideal that helped globalize the social system of division of labor, benefiting all those participating in international trade. While the United States had alternating periods of free trade versus protectionism, nonetheless, within the continental sweep of the country, from the Atlantic to the Pacific, freedom of trade, movement of people, and investment were the practiced ideals.

Real standards of living increased dramatically in Europe and, most certainly, in the United States in the nineteenth century. In the period between the end of the Civil War in 1865 and 1900, the time of America’s industrial revolution, the real income of Americans rose, on average, by 75 percent. This is even more impressive in that the country’s population increased from 31.4 million people in 1860 to 76.3 million in 1900, or a 243 percent increase over a 40-year period. Out of that 44.9 million–person increase between 1870 and 1900, 12 million, or about 27 percent, were immigrants from other parts of the world.

But despite these dramatic changes and improvements in the political, social, and economic lives of a growing number of people in Europe and the United States, there emerged that counterrevolution against social and economic liberty and limited government. Particularly interesting is the fact that the central tenets, reasons, and rationales for this counterrevolution have remained essentially the same right up to our own time.

George Goschen: economist,

businessman, and liberal politician

A guide for understanding their reasons and rationales, along with their emerging influence, may be found in some of the essays written by George Joachim Goschen (1831–1907). If any economists know his name at all today, it would be as the author of The Theory of the Foreign Exchanges (1863), a highly readable and clear exposition of the workings of the foreign-exchange market, with a strong emphasis on the importance of leaving the currency markets to the free and competitive international interaction of supply and demand. It was translated into several languages.

Goschen was the son of a German merchant immigrant who had come to Britain from Leipzig. Born in Great Britain, George ended up taking over and successfully running his father’s business. He believed that markets, not central banks, should determine interest rates. He also served as a director of the Bank of England for several years, beginning in 1858.

His father was a free-trade liberal, and he passed on these views to his son. As Thomas Spinner says in, George Joachim Goschen; the Transformation of a Victorian Liberal (1973):

Goschen had been in the vanguard of the struggle to destroy aristocratic privilege and to create a liberal state in which each individual would have equality of opportunity and all careers would be open to talent. His belief in a self-regulating market and free trade forced him to reject most proposals for social legislation.

Goschen’s “financial liberalism” was soon overshadowed by his “liberal realism.” He was repelled by the idea of [unrestricted] democracy, for he had no faith in the lower classes to govern the country and expected to be plundered when they obtained the vote. Democracy, he feared, would lead to [redistributed income] equality and equality would destroy the liberty for which the middle class had fought.

Elected to Parliament as a member of the Liberal Party in 1863, he held various ministerial positions over the years, including as Chancellor of the Exchequer, during which time he reduced the interest expense on the British national debt through effective refinancing, and ran six years of budget surpluses to further bring down the national debt. Goschen forcefully spoke out against religious discrimination and for civil liberties in general. He left the Liberal Party later in his life due to differences with William Gladstone over Home Rule for Ireland, finally aligning with the Conservative Party.

However, he never stepped back in any meaningful way from his long-standing defense of individual liberty, free trade, and limited government. In particular, he considered the liberal ideal to be one that focused on the rights of, and free market opportunities for, the individual. He opposed all attempts to politically homogenize people into social or economic “classes” that would be pitted against each other, a theme he warned against in many of his Parliamentary campaign speeches.

The dangers to liberty in

majoritarian democracy

As another biographer, Arthur D. Elliot, explained in his book Life of George Joachim Goschen, First Viscount Goschen (1911), “George Goschen was an ardent Liberal as Liberalism was understood in those days…. Yet in everything that he wrote or uttered there rang the note of an individualism amply sufficient to prove that he could never be accounted a mere ‘item’ … in Party reckoning.” In other words, political conviction took precedence over unreflective party loyalty, when push came to shove.

This was seen in Goshen’s suspicion of the growing acceptance of unlimited democracy, including among members of the British Liberal Party. Deciding what the courses of action the government should follow purely based on electoral majorities should be feared, since that would undermine the sound economic principles and policies of personal liberty and free enterprise. As he expressed it in the late 1870s, “It was the teaching of history that the reign of numbers [political majoritarianism] endangered not the Throne, not the Constitution, not Property — these are all bugbears — but Political Economy and the teaching that made Englishmen self-reliant.” Goschen was increasingly concerned that, as Elliot puts it, “There was … far too much government interference with everything, and every new bill [before Parliament] seemed to create an inspector and a [new tax] rate.”

Unlimited majoritarian democracy was the wrong path the British political system was now moving down, including in the Liberal Party. Said Goschen on another occasion in the mid-1880s:

I believe there is no greater temptation, no more seductive influence, to which we in these days ought ever to close our ears than the siren voice which says – “Swim with the stream; let the boat glide; statecraft is no more than the clever use of the pole to keep it from the bank.” That is not my view…. My party seem to breathe an atmosphere of Utopia, and to feel a confidence I cannot share.”

Government intervention replacing

natural liberty

When invited to deliver some lectures, Goshen used the opportunities to discuss the new collectivist direction Great Britain had begun to follow, and he included several of them in his book Essays and Addresses on Economic Questions, 1865–1893 (1905). Speaking before the British Philosophical Society in 1883, he chose to discuss, “Laissez-faire and Government Interference.” He pointed out to his audience that with every passing day, the arena of individual autonomy and self-responsibility was becoming narrower, as “the sphere of Government control and interference is expanding in ever widening circles.” It was seen in a variety of areas, including communications and finance. But this was only part of it, said Goschen:

What is of far deeper import is its growing interference with the relations between classes, its increased control over vast categories of transactions between individuals, and the substitution in many of the dealings of trade and manufacture, of the aggregate conscience and moral sense of the nation, for the conscience and moral sense of men as units. The parent in dealing with his child, the employer in dealing with his workmen, the shipbuilder in the construction of his ships, the ship-owner in the treatment of his sailors, the house-owner in the management of his house property, the land-owner in his contracts with his tenants, have been notified by public opinion or by actual law that the time is gone by when the cry of “Laissez-nous faire” would be answered in the affirmative. The State has determined what is right and wrong, which is expedient and inexpedient, and has appointed its agents to enforce its conclusions.

“Some of the highest obligations of humanity, some of the smallest businesses of everyday life, some of the most complicated transactions of our industrial and agricultural organizations have been taken in hand by the State. Individual responsibility has been lessoned. National responsibility has been heightened…. The attitude of the public towards “Laissez-faire” on the one hand and State action on the other has entirely changed.

Replacing individual self-interest

with collectivist altruism

The question was why these attitudes and views about the individual and the state had changed so dramatically from the not-so-distant past, when the ideal and goal of many in Great Britain was the liberal one of decreased or abolished government involvement in personal, social, and economic affairs. That earlier view, that government paternalism was considered misdirected and damaging to the betterment of most of the people, had changed to a presumption that government knew best and ended up serving special landed and aristocratic interests as the expense of most others in society.

Foremost, Goshen argued, was the growing appeal of

the assertion of the claims of other than material interests … the public imagination [was] touched by appeals to our higher nature — which supplied the tremendous motive power necessary for passing laws, and put the State and its inspectors in the place of father and mother as guardians of a child’s education, labor, and health…. What I wish first to insist on is that the victory of the principle of compulsion over the principle of natural liberty could never have been gained except by a moral force.

In his lecture on “Laissez-faire and Government Interference,” Goschen never clearly elaborates on what was behind this urge for the presumption of a higher moral force than that of freedom of the individual under the principle of natural liberty. However, he tried to clarify this in a presidential address that he delivered before the British Economic Association 10 years later, in June 1893, entitled “Ethics and Economics.”

The critics of classical political economy and laissez-faire, who were behind much of the growth in government intervention, opposed and ridiculed the presumption of “self-interest” in human conduct and its asserted beneficial effects for the wider social good. Goshen did not deny that some of the classical economists may have formulated the presumption of an “economic man” as guided by material self-interest in ways that easily could be caricaturized and satirized.

But the critics had failed to appreciate that for some analytical exercises, it was postulated for purposes of the mental experiment of deducing theorical conclusions under hypothesized circumstances for better understanding of real-world situations in which many factors are at work all at the same time. In addition, most of these classical economists had pointed out that “self-interest” meant anything that the human actor considered of
value or importance to himself in using means to achieve his ends. Self-interest, therefore, included concern for or consideration of family, friends, and the fostering of valued purposes other than simply material or financial gain.

The misunderstandings and ambiguities sometimes found in the economists’ exposition of the self-interested individual resulted in people “who were only too ready to denounce motives which in themselves did not appear noble.” In its place, Goschen said, “a strong development of genuine altruism set in. The reaction was against selfishness.” Businessmen, merchants, and manufacturers needed to be reined in, “for the sake of reforming social abuses and securing social benefits.”

Thus, the revolt against political economy and the principle of natural liberty was fundamentally the demand that the interests of the individual be sacrificed for the good of the collective. “It is this development of the [altruist] ethical side of public opinion,” Goschen stated, that “has contributed very unfortunately and unjustly to discredit
political economy because of its supposed collision with more considerations.”

The reality and ethics of economics

These critics and opponents of the liberal market society little understood that it was precisely the recognition and respect for the individual and his liberty that resulted in the unintended outcomes of the wider social betterments that they condemned “capitalism” for neglecting. Said Goschen:

Economics will have to be classed amongst the moral and social sciences…. Thus, from a broad point-of-view, economics are not to be cried down as a non-moral science moving on a lower plane and with lower motives. They work towards civilization and morality…. Enlightened self-interest may be so utilized as to be found to go hand and hand with motives from which it is believed to be entirely absent.

How might these critics of economic liberalism be classified or labeled? Goschen suggested:

Neither sentimentalist nor philanthropist altogether answers the purpose; let me therefore use the term “emotionalist.” The emotionalist is influenced by the impression made on him by what he sees and feels — the visible, the palpable, the direct. The economist looks beyond — not at the present only, but at the future — and is swayed not only by the visible and the direct, but by the invisible, the more remote. The one is mainly impressed by the fact, the other by the consequences of the fact….

The emotionalist is moved by an immediate impulse at the sight of poverty to indulge in charitable relief, and that charity is often exercised without discrimination…. But it is the duty of the economist to point out the indirect and invisible effects of such action; and this information is needed in the interests of a wider community than that to which the charity is extended…. The ultimate result of the uncalculated generosity of the emotionalist may be infinitely more disastrous than the evil which in his generosity he tries to cure…. But it is the stern duty of the economist to point out the indirect, invisible effects of the generous charitable impulses.

If the tender treatment of the Poor-Law [Great Britain’s nineteenth century welfare program], founded on ethical considerations alone, should diminish the efforts of self-help, a whole class may suffer ultimately from action taken towards individuals. The many — the community as a whole — may be hurt and damaged by faults in the treatment of the few…. Mark that the attitude of the economist is no less ethical than that of the emotionalist — it is more farseeing, more social. It looks to the good of the community. It is called hard, but it is wise, and it serves the general interest.

The same applied no less to such matters as the determination of workers’ wages in the marketplace, Goschen argued. Based on a supposed higher “altruistic” ethic, “the standard of higgling in the market is given up,” and instead, trade union compulsion and the state will interfere. While couched in the rhetoric of the improving the wages and work conditions of laborers in general, trade unions can influence wages in a segment of the market only by limiting the number of potential workers entering a particular corner of the economy. Said Goschen: “Altruism may thus take up an antagonistic position to the too exclusive association of skilled labor, and protest against the laborers outside its charmed circle being neglected.”

The false view that democratic

government is us

In his address on “Laissez-faire and Government Interference,” Goschen argued that there were other factors influencing the growth in government interference in the marketplace and society in general. With the widening democratic participation in political decision-making through an extension of the voting franchise, the general attitude toward who and what the government is changed in people’s minds. When the political regime was the rule of the few (monarchy and aristocracy) over the many, “Government interference could be regarded simply as paternal legislation, it excited, not confidence, but distrust,” that is, an imposing of the dictates of the king and those around him over how everyone else should live and work and earn, regardless of the wishes of those imposed upon.

However, when those holding political office came to be viewed as “representatives” of those ruled, government was no longer considered as an unwanted “parent” or a “beneficent master” telling all the children-subjects how to live. Instead, “It is invoked as the agent, aye, as the servant, of the people’s will. From this point of view the movement is essentially democratic. Society wants its representatives to act on its behalf. Society demands to control the individual. The movement is distinctly Socialistic.”

Once the state is expected to intervene in one corner of the market, others soon appear insisting that if the government can modify the outcome of the unfettered market for the improvement of one group or “social problem,” then it should equally use its compulsory powers on behalf of others, as well. Soon, government intervention appears as “the only Deus ex Machina for the immediate solution of some political or other difficulty, of which the instant termination is demanded by high reasons of State.”

Bureaucrats are happy to extend

their powers

As agents of the wishes of “the people,” Goschen warned, those in government departments and agencies find it easy in their own interests to offer to extend or introduce their regulations, redistributions, and controls over a wider swath of social and economic life. “The successful performance of a certain set of duties by a public department inspires its administrators with the natural desire to extend their sphere of acknowledged usefulness,” Goschen explained, “No country gentleman covets more earnestly bits of land lying outside of, but adjoining, his estate, than the energetic heads of [government] departments, whose work had succeeded, covet an extension of the limits of their activities.”

A worse part of this process is that often it is not only a matter of acquiring greater power and authority over people’s affairs but also that those bureaucrats actually think they are wise and knowledgeable enough to do better than leaving it to individuals to take care of and solve these issues. “The more the public puts upon civil servants, the more will servants offer to do for the public.”

People want more government but

hate the effects on themselves

The more the government intervenes and interferes with the personal, social, and economic affairs of the citizenry, the more many of those people may exhibit what might be called a form of Tourette Syndrome, the wanting and the not wanting of something at the same time. A call is made for government intervention or prohibition of some conduct or market outcome, but when confronted with the actual actions of government in these areas, many of the very same people object and dislike the policies they themselves have called for. As Goschen explained:

The public demands inspection, but too often denounces the inspectors; the public demands regulations, but chafes at the red tape employed in carrying them out; it legislates for watchfulness on the part of the State over the shortcomings of local authorities, but nothing is more unpopular than the activity of central agents; it demands organizations which require the appointment of vast numbers of clerks, yet the deficiencies of Government clerks, and the expense of their salaries and pension, furnish endless food for popular declamation.

Part of this, Goschen argued, was due to the peculiar assignment of almost divine or superhuman status and capability to “the state.” He asked, what is the state, what is government, into “whose hands such vast interference with natural liberty is to be confided?” Ultimately, it is merely a group of individuals elected as the representatives of the voters during a certain year and reflecting the views of that electorate on a particular day when the voting ballots were marked. “And this is the body which, stripped of conventional expressions, is to fix new relations between classes, and give a fresh direction to and control the currents of our lives.”

Many presume that individuals pursuing their, respective, self-interests in the exchanges of the marketplace cannot be trusted in terms of their effects on society as a whole, “but while we thus proceed on the policy of distrust [concerning individuals in the private sector], we are to have unbounded confidence in successive decisions of Parliamentary majorities…. But the homely reminder that the active force of society in its ultimate action is nothing more than the result of heated electoral contest drags us down again to earth,” that those in government are mere imperfect mortals like us, with their own interests usually in mind.

This should make us stop before going further in this direction, Goschen warned:

And if a grave mistake should be made, if when the era of State Socialism is further developed, we should find that the legislative and executive bodies are not infinitely freer from the imperfections and shortcomings of our common nature than history gives us any right to anticipate, the nation may regret having exacted almost superhuman duties and superhuman virtues from bodies essentially human. Again, even if we grant an admirable central government, do we not run a serious risk, in a vast number of cases, of weakening individual responsibility to such a degree that what we gain on the one side we lose on the other?”

The further we travel down this road, Goschen feared, the more difficult it becomes to reverse course, and return to a path to liberty: “Once pass a moral condemnation on ‘Laissez-faire’ in any particular case, and its rehabilitation becomes an almost hopeless task,” he despaired. This meant that all attempts to extend the size and scope of government activity had to be challenged and opposed:

Abstract principles are more and more being abandoned in favor of whatever may at a given moment seem to answer a given purpose, and eternal truths have ceased to command any practical faith. Believe me, there is a danger in the excess to which this skepticism is carried….

Hence it is no less important in democratic than in any other Government that all tendency on the part of public authorities to stretch their interference and assume a power of any sort which can easily be dispensed with, should be regarded with unremitting jealousy….

This habit of mind [of focusing on the immediate and the emotional] appears more than ever dangerous at a time when the nation is embarking on new social questions, and when, if ever, we have need of the steady aid of principles and of the knowledge gained in the world’s history as to the bearing of certain tendencies on the ultimate shape of events….

The dangers in the road of social reconstruction under Government control are so grave that they can scarcely be exaggerated; dangers arising, not only from the serious chance of inefficiency in the methods chosen, but from the transfer of responsibilities, from the establishment of national law in the place of individual duty, from the withdrawal of confidence in the quality of men in order to bestow it on the merits of administrations, from the growing tendency to invoke the aid of the State, and the declining belief in individual power…. We cannot see universal State action enthroned as a new principle of government without grave misgivings.

When George Goschen delivered this address on “Laissez-faire and Government Interference,” almost a century and a half ago, these tendencies in the direction of ever larger and more intrusive government were only starting after the high watermarks of classical liberalism’s successes and triumphs in the early and middle decades of the nineteenth century. But he saw the implications of where they were leading with a clarity and insight matched only by a few others during that time.

The same criticisms leveled against the liberal, free-market society at Goschen’s time are still heard today, though they are cloaked in slightly different rhetoric and emphasis: the materialistic immorality of self-interested conduct and the resulting supposed injustice of market-based incomes; the need to subordinate the selfish desires and actions of the individual for the “higher” altruistic good of the collective society, based on “the will of the people” as expressed through increasingly unrestricted majoritarian democracy; the emotionalism of the moment when undesirable circumstances demand government intervention “now” to solve “social problems,” with little or no thought of the negative or counterproductive longer-term consequences of rushing head-long with political control, regulation, or redistribution through governmental coercive means; and finally, the shunting aside of the value or importance of the individual’s liberty and freedom of choice and voluntary association, without which a good, prosperous, and ethical society is impossible in the long run.

All our current political problems exist due to the disregard for the warnings given by those like George Goschen a century and a half ago against a liberalism that is eating away at the remnants of the free society.

By Richard Ebeling

Originally published on April 7, 2018 for the Mises Institute

One day in 1927 Austrian economist, Ludwig von Mises, stood at the window of his office at the Vienna Chamber of Commerce, and looked out over the Ringstrasse (the main grand boulevard that encircles the center of Vienna). He said to his young friend and former student, Fritz Machlup, “Maybe grass will grow there, because our civilization will end.” He also wondered what would become of many of the Austrian School economists in Austria. He suggested to Machlup that, clearly, they would have to immigrate, perhaps, to Argentina, where they might find work in a Buenos Aires nightclub. Friedrich A. Hayek could be employed as the headwaiter, Mises said, while Machlup, no doubt, would be the nightclub’s resident gigolo. But what about Mises? He would have to look for work as the doorman, for what else, Mises asked, would he be qualified to do?

It is worth recalling that in the mid-1920s, Mises had warned of the rise of “national socialism” in Germany, with many Germans, he said, “setting their hopes on the coming of the ‘strong man’ — the tyrant who will think for them and care for them.” He also predicted that if a national socialist regime did come to power in Germany and was determined to reassert German dominance over Europe, it would likely have only one important ally with whom to initially conspire in this new struggle — Soviet Russia. Thus, years before Adolph Hitler came to power, Mises anticipated the Nazi-Soviet Pact to divide up Eastern Europe that set in motion the start of the Second World War in 1939.

Ten years after Mises’s playful 1927 prediction to Fritz Machlup, reality was not that far from what he said. By 1938, many of the Austrian economists had, indeed, emigrated and left their native country. To name just a few, Paul Rosenstein-Rodan, who had written a comprehensive exposition of the theory of marginal utility in 1927, moved to Great Britain in 1930. In the autumn of 1931, Hayek, who was the director of the Austrian Institute for Business Cycle Research, took up a visiting position at the London School of Economics, which became a permanent one after 1933.

Gottfried Haberler, who also worked at the Chamber of Commerce, accepted a two-year research position at the League of Nations in Geneva, Switzerland in early 1934, and then immigrated to the United States in 1936 with a professorship at Harvard University. Fritz Machlup, who ran a family-owned corrugated box business in Austria, went to the United States in 1934 on a research tour of American universities and stayed in the U.S. after landing a teaching position at the University of Buffalo.

Oskar Morgenstern, who replaced Hayek as director of the business cycle institute in 1931, found himself exiled in America while on a lecture tour at the time of the German invasion of Austria in March 1938, and stayed on at Princeton University. And the noted Austrian School-trained sociologist, Alfred Schutz, who was employed as a lawyer in Vienna, made his way to Paris in 1938, followed by a move to America in 1939 and a part-time teaching position at the New School for Social Research in New York City.

Ludwig von Mises and the End of the Austrian School

What of Ludwig von Mises? He had graduated from the University of Vienna with a doctoral degree in 1906. However, university positions in Austria were few and far between, both before and after the First World War. And Mises had to earn a living. So, beginning in 1909, he was employed with the Vienna Chamber of Commerce, Crafts and Industry, and served as a senior policy analyst with the Chamber in the years between the two World Wars.

His close friends, like Hayek, were amazed by his intellectual energy and prolific output of both theoretical and economic policy writings, which won him international recognition and renown, while also performing his time consuming duties and responsibilities at the Chamber of Commerce in the 1920s and early 1930s, duties concerning regulatory and fiscal matters constantly coming before the Austrian Parliament and the bureaucratic agencies of the government. Hayek and the others wondered how long Mises could keep up this pace, seeming to be burning the candle at both ends.

After all, these were the years during which he wrote Nation, State, and Economy (1919), Socialism: An Economic and Sociological Analysis (1922), a revised edition of his 1912 treatise, The Theory of Money and Credit (1924), his summary restatement of the case for classical Liberalism (1927), a monograph on Monetary Stabilization and Cyclical Policy (1928), and his collection of essays devoted to A Critique of Interventionism(1929). This was followed in 1933 with a volume of his methodological writings on the Epistemological Problems of Economics.

Then in March 1934, William E. Rappard, the co-founder and director of the Graduate Institute of International Studies in Geneva, Switzerland offered Mises a visiting position in International Economic Relations, a position that Mises readily accepted and which he took up in the autumn of 1934, while still formally retaining his ties with the Vienna Chamber of Commerce on a partial leave-of-absence. But, as it turned out, Mises’s position at the Graduate Institute was annually renewed and he remained in Geneva until July 1940, when he and his wife, Margit, immigrated to the United States in the shadow of the German occupation of neighboring France.

Mises had jumped at the chance to escape the tiring and mind-numbing responsibilities at the Chamber of Commerce that concerned the daily twists and turns of Austrian government policy on every economic issue under the sun. As Mises expressed it in his Memories: “For me it was a liberation to be removed from the political tasks I could not have escaped in Vienna, and from the daily routine in the Chamber. Finally [at the Graduate Institute in Geneva], I could devote myself completely and almost exclusively to scientific problems.”

In the first edition of Human Action, Mises explained, “In the serene atmosphere of this seat of learning . . . I set about executing an old plan of mine, to write a comprehensive treatise on economics,” his 1940 German-language treatise, Nationalökonomie, which was the forerunner of Human Action.

It is not an exaggeration to say that with the German invasion of Austria in March of 1938 and the country’s formal annexation into Nazi Germany shortly after that, the Austrian School of Economics, for all intents and purposes, died in the country of its birth. Mises’s prevision of the fate of his native Austria and the need for most of the Austrian economists to scatter themselves to the four winds virtually came true. In the rubble and ruins of war-ravaged Vienna in 1945, grass did seem to grow, with the city’s earlier fame for a unique and civilized culture of art, music, science, literature and learning a thing of the past. And most of the Austrian economists, especially those in Mises’s circle during the interwar years, had departed their homeland in the face of the darkening clouds of Nazi barbarism over Central Europe, never to permanently return.

The Nazi Plundering of Mises’s “Lost Papers”

Fortunately, for the future of the Austrian School of Economics, Mises was not in Vienna when the German Army invaded Austria on March 12, 1938. He was safe in Geneva. On March 15th, Adolph Hitler triumphantly entered the Austrian capital, and in the center of Vienna proclaimed before a cheering crowd of an estimated two hundred thousand Viennese that their country was being united with the German fatherland.

Within days, tens of thousands of people were arrested for being actual or suspected enemies of the Nazi regime. Austrian Jews, in particular, were harassed, humiliated and brutally beaten up or murdered on the streets of Vienna. Within months, as well, the “Aryanization” of Austrian businesses and enterprises was rapidly being accomplished, with especially Jewish properties vandalized and confiscated.

No doubt, if Mises had been in Vienna eighty years ago this month, at the time of the arrival of the Nazi and Gestapo thugs, he would have been among those arrested, tortured and killed, either from beatings or with a bullet to the back of the head; or if not then, then in the gas chambers later used by the Nazis in their drive for a “Jew free,” German-dominated Europe. Among his persecutors and tormentors most assuredly would have been some of his own colleagues at the Vienna Chamber of Commerce. Mises’s former assistant at the Chamber, Therese Wolf-Thieberger, later reported that the day after Hitler arrived in the city, employees at the Chamber were greeting each other with “Heil Hitler,” and with several of them turning out already to be Nazi Party members.

But if the Nazis could not get their hands on Ludwig von Mises, they could at least deprive him of that which was among the things most precious to him: his books and his personal and professional papers and correspondence. Shortly after the German invasion the Gestapo went to the Vienna apartment in which Mises had lived since 1911 with his mother before his departure for Geneva in 1934 and her death in 1937. After his mother’s passing he had returned the apartment to the landlord and sublet what been his room from the new tenants.

The Gestapo agents broke into the room, hauled away the portion of his library he had not taken to Geneva with him, and boxed up his personal and family papers and documents, his correspondence with family, colleagues and friends, the copies of his scholarly and popular articles on economic theory and policy, and the memoranda and position papers and speeches he prepared for internal use at the Vienna Chamber of Commerce during his quarter of a century of working at that institution. Also among his looted papers were materials relating to his part-time teaching at the University of Vienna, and his famous private seminar that he ran on a regular basis for many years in his Chamber of Commerce offices with a selected group of Viennese scholars and invited guests from around the world.

About a year after the Nazis had carted away all of these and other family items, Mises sent out a letter of “Information” to friends and associates in Europe telling them what the Gestapo had done. He also explained that people in Vienna who interceded on his behalf with the Nazi authorities in an attempt to get his property back were told that the Gestapo had no idea what had happened to it all.

In 1977, I had the good fortune to meet Margit von Mises through Murray and Joey Rothbard. I had written a review of Margit’s book, My Years with Ludwig von Mises, which Murray had published his old publication, Libertarian Forum. Margit liked my review and asked the Rothbard’s to introduce her to me. We met at Murray and Joey’s Manhattan apartment, and I still remember that Joey prepared a delightful quiche for lunch.

For next seven years, while I was living in New York City most of the time, Margit would invite me over once or twice a month for tea and tasty little sandwiches that she would prepare at the apartment at 777 West End Avenue where she and Ludwig had lived since shortly after their arrival in America during the war.

Mises’s “Lost Papers” in Soviet Hands, And Their Rediscovery

Anyone interested in Mises and the Austrian School had heard some version of the story about how the Gestapo had plundered Mises’s papers. Margit told me that for the rest of his life, Mises believed that either the Nazis had destroyed it all or that they were perhaps lost in the destruction of the war.

In fact, however, Mises’s “lost papers” had survived the war. They had been transported to a small town in the Czech region of Bohemia and stored with all the many other looted collections of personal and official papers and documents seized by the Nazis as the German Army conquered one country after another during the war.

It all fell into the hands of the Soviet Army as the war was drawing to a close in May of 1945. After the Soviet secret police did a cursory examination of the literally millions of pages of documents that the Nazis had plundered from one end of Europe to another, they informed Stalin what had landed into their hands. The Soviet dictator ordered everything to be brought back to the Soviet Union, and a secret archival building was constructed in Moscow under Stalin’s orders to house all this booty. There it remained, and among it all were those papers of Ludwig von Mises. During the postwar decades until the end of the Soviet Union in 1991, only employees of the KGB and the Soviet foreign ministry had access to anything in this vast collection.

In a separate story all its own, how in 1996, my wife, Anna, and I found out the about the location of these “lost papers” of Ludwig von Mises in Moscow. We travelled to Russia in October of 1996 and spent ten days in that formerly secret archive carefully looking through and arranging for the photocopying of almost everything out of the nearly 10,000 pages of material from Mises’s papers. I must emphasize that all this would have been impossible at the time if not for my wife, Anna, and her friends in Moscow, who helped arrange our visa invitations for us to go to Russia, and for their intercession on our behalf to facilitate our access to and use of that archive.

Shortly after our return to Hillsdale College, where I was then teaching as the Ludwig von Mises Professor of Economics, Liberty Fund of Indianapolis heard of our find, and asked me to serve as the editor and translation coordinator of a large selection of these papers to be published by them. Over the next several years, three volumes appeared under the general title, Selected Writings of Ludwig von Mises. Combined, the three printed volumes offer 1,000 additional pages of essays, articles and policy memoranda written by Mises from before the First World War to the 1940s. A huge addition, if I may say, to our understanding and appreciation of Ludwig von Mises as both economic and social theorist, and as an active policy analyst and proponent on a wide variety of economic issues, especially during those historically momentous years between the two World Wars.

Mises’s Principled Consistency on Economics and Public Policy

What can be learned about “Mises the Man” from these “lost papers”? What do they tell us about how he thought, the policy perspective from which he confronted the economic issues facing the Austria of his time, and how he saw the application of Austrian Economics to public policy, to which he, himself, contributed so much during those same years that he had to work as a policy analyst at the Vienna Chamber of Commerce?

What especially stands out is what a consistent a worldview he had formed in his mind from a relatively young age. Mises tells us in his Memories that it was around Christmas time in 1903, when he was 22 years old, that he read Carl Menger’s Principles of Economics for the first time and that this made him a economist. This is not surprising, since all of the core concepts that have marked off the Austrian School from other schools of economic thought were all clearly outlined in Menger’s work: methodological individualism, methodological subjectivism, the inescapability of time and uncertainty in all human action, the market has a coordinating process of prices and human plans, and the spontaneous order of social institutions such as the emergence and evolution of money.

The other great influence on Mises while he was in his 20s were the writings and the personality of Eugen von Böhm-Bawerk, who returned to teaching at the University of Vienna in 1905 after serving as finance minister of the Austro-Hungarian Empire. From his Memories and his 1924 commemorative essay, marking ten years since Böhm-Bawerk’s death, it is clear to see the impact Böhm-Bawerk left on Mises, both as a scholar and as a human being. Böhm-Bawerk’s principled stance on fiscal matters during his years as finance minister, including his disagreeing with Emperor Franz-Joseph in cabinet meetings over government spending, and his stepping down from that high office rather than look the other way at corruption in the military budget, must have left a strong impression on Mises. This was, no doubt, reinforced by the generous and serious attention that Böhm-Bawerk gave in his university seminar to Mises’s Theory of Money and Credit shortly after it appeared in 1912.

Again, Mises tells us in his Memories that it was his student researches and investigations into the housing policies of the Austrian government, especially the socially undesirable effects of public housing and the impact of tax disincentives on the building of private-sector housing, that began to make him aware of the negative consequences arising from various forms of government intervention. This, combined with his obvious intense reading of the classical economists and their critique of government controls and regulations over both domestic and international trade, was leading him to the laissez-faire policy views of which he became, no doubt, the most consistent and well-known proponent in the Europe of between the World Wars.

But Mises also had come to understand that historical or contemporary “facts” were of no use by themselves to determine the why or the how of the workings of markets or the failures of government intervention. Economic understanding could only successfully emerge and assist in making informed analyses and decisions based on a properly grounded foundation in economic theory, an economic theory, as Carl Menger had enlightened him, started with the logic of individual human action and then was extended to the social arena of many individuals interacting in various institutional settings.

Mises’s Memories, written shortly after arriving in the United States in 1940, often convey a tone of despair and despondency about an Austria that he clearly loved and deeply cared about that now seemed to be gone. Looking back over his more than a quarter of a century of policy work at the Vienna Chamber of Commerce, at one point he said:

Occasionally I entertained the hope that my writings would bear practical fruit and show the way for policy . . . I have to come realize that my theories explain the degeneration of a great civilization; they do not prevent it. I set out to be a reformer, but only became the historian of decline.

But Mises also insisted that as far has he was concerned, he had no regrets in fighting for freedom-oriented economic policies during all those years. “I could not act otherwise,” he said. “I fought because I could do no other.”

Mises’s Three Horizons of Economic Policy Analysis

I would like to suggest that when having to deal with the various issues with which he was confronted at the Vienna Chamber of Commerce, Ludwig von Mises seemed to have thought in the context of three policy horizons. He nowhere articulates it in this fashion, but I believe that interpretively his writings can be understood in this way.

The first, and the more distant, horizon concerned the most optimal institutional and policy arrangements in society for fostering the classical liberal ideal of freedom and free market prosperity, on the basis of the knowledge that he thought sound economic theory provided. These are found in the books and monographs that he wrote outside of his duties at the Chamber of Commerce; if you will, as the independent, free agent who could offer his most professional views as an economist and as a proponent of classical liberalism. This is reflected in the fact that in all such articles and on the title pages on his books, if an affiliation is given it is as a professor at the University of Vienna, not his status as a policy analyst at the Chamber.

The second horizon was closer to the actual circumstances of the present, but focused on the intermediate goals that could lead in the direction of that more distant, optimal horizon, for example, the need for ending paper money inflation and reestablishing a gold-based monetary system for general economic stability, without which the market order and economic calculation cannot properly function; or the need to shift Austrian fiscal policy in a direction that would reduce the burden and incidence of the tax structure to end the danger of capital consumption, and instead foster private-sector investment and capital formation for general economic betterment for all in society.

And the third horizon in the context of which Mises analyzed and proposed economic policies, was the actual current situation and the immediate future. In other words, how you design the concrete bylaws and rules for a central bank to prevent it from following an inflationary monetary policy, including the transition to and implementation of specie (i.e., gold) redemption; and what policy tools it should then use to maintain the foreign exchange rate and currency convertibility.

Mises’s Proposal for Privately Supplied Money vs. Hyperinflation

There are several economic policy contexts from Mises’s time working at the Chamber of Commerce that might be used to illustrate this. But given the time available, let me offer a few examples of how I see Mises’s mind at work in the arena of monetary policy in the years following the First World War. The hope that many had in Austria of negotiated peace that would have enabled some form of a return to political and economic normalcy at the end of the First World War was shattered with the signing of the armistice on November 11, 1918, and which was followed by the political disintegration of the Austro-Hungarian Empire, and an emerging economic chaos in the early months of 1919 in the new, much smaller Republic of German-Austria, as it was first called.

The Democratic Socialist and the Christian Socialist parties formed a coalition government following the end to the Habsburg Monarchy.  They soon embarked on costly social welfare programs, introducing food subsidies for municipal populations, especially in Vienna, and resorting to the monetary printing press to fund the growing budget deficit to pay for it all. The new Austrian Republic was threatened with revolution, civil war, and an increasingly worse price inflation.

Mises returned to his duties at the Vienna Chamber of Commerce very shortly after the war ended. In May 1919 Mises prepared a confidential memorandum for Austrian businessmen and bankers affiliated with the Chamber, “On the Actions to Be Undertaken in the Face of Progressive Currency Depreciation.”

He said that it would fall on the shoulders of the private sector — banks and businesses — to devise the mechanism to bridge the gap between any dramatic and rapid collapse of the old currency and the spontaneous shift to the use of alternative monies by the citizens of the society:

It is up to us citizens to try to do on our own what the government is failing to do for us. All we can hope from the government is that it will not stymie the endeavors of its private citizens. In their own interest and in the interest of the community, the banks as well as large industrial and commercial enterprises must take the necessary preparatory steps to avert the catastrophic consequences that will follow from the collapse of the currency.

Mises then outlined a plan for these elements in the private sector to use export revenues and sales of assets to accumulate cash reserves of small-denomination units of Swiss money to use as the temporary, emergency medium of exchange. It would be used to pay salaries and pensions and to loan to the government and other employers in the market so that the population would have access to a medium of exchange they could have confidence in accepting and us for material survival.

This only would be necessary, Mises went on, until normal export sales and capital transfers supplied over time the required quantities of gold or foreign currencies to be used as the permanent substitute monies in a post-inflationary Austrian economy. Mises also explained the process by which private banks could form an informal consortium to jointly cover the costs and clearings of providing this emergency alternative currency. Said Mises:

As soon as government interference in the monetary system is eliminated by the collapse of the currency, free market forces will automatically come into play that will supply the economy with the exact amount of money it needs. Sales to other countries will build up at that moment, and will attract the requisite money into the country.

The Need to End Disastrous Foreign Exchange Controls

He also told a meeting of Vienna Chamber members a few months later that the monetary and business circumstance was made intolerably worse due to the Austrian government’s implementation of foreign exchange controls that required all foreign currency export earnings by Austrian businesses to be sold at a below-market rate of exchange to the central bank. Every Austrian importer of foreign manufacturing inputs and consumer goods then had to apply for special permissions to receive an allocation of foreign currency to pay for their required imports.

Mises was adamant that foreign exchange controls had to be ended immediately. “Modern-day commerce cannot be made to function on the basis of every business transaction being dependent on the arbitrarily applicable rules of government agencies. The businessman has to know what he may or may not do . . . Commerce requires a more solid and reliable legal basis; it does not want to depend on the arbitrariness of officialdom.”

As Mises explained at a later occasion, “The agents of the National Bank responsible for forming authoritative judgements about various trade-policy problems appear to be totally incompetent, whether due to their educational background or their lack of prior experience. Yet these people, who most certainly cannot be considered qualified experts, have the discretionary power to decide finally whether particular export firms will be ‘favored’ with permission” to have access to hard currency exchange without which they cannot operate their businesses and pay salaries to their employees.

The only answer was an end to the government controls, Mises insisted in one of the leading Viennese newspapers in December 1919. “The foreign exchange agency must be suspended, and a real and proper stock market for futures transactions, as well as cash transactions and transactions in foreign currency and foreign exchange must be reintroduced.”

Price Indexation as a Temporary Bridge to Ending Inflation

Unfortunately, neither the controls nor the inflation were ended. As 1919 became 1920, 1921, 1922 and, then, 1923, the depreciation of the Austrian currency accelerated more and more due to hyperinflation rates of monetary expansion to feed the government’s budget deficits. In 1919, alone, the Austrian currency increased from 831 million to 12.1 billion. At the end of 1920, it had grown to 30.6 billion; at the end of 1921 this had expanded to 174. Billion. By December 1922 it stood at 4 trillion, and at the end of 1923 it had ballooned to over 7 trillion. At the beginning of 1919 one U.S. dollar bought 16.1 Austrian crowns; in 1923, that same American dollar traded for 70,800 crowns. Measured by a cost of living index, a basket of goods that could be purchased in Vienna for a little over 28 Austrian crowns in January of 1919, cost almost 12,000 crowns in 1923.

The Austrian economy was facing disaster and collapse. Rational economic calculation had become albeit impossible due to the rapid and erratic and non-neutral manner in which prices for both inputs and outputs were rising in the early 1920s in Austria. Real wages for many segments of the middle and working classes in the country were falling, lagging far behind the increasing cost of living. Social unrest and street violence were constant threats. Viennese man and women would trek out to the neighboring Vienna Woods to cut down the famed trees to have fuel to heat their homes in the city. Hundreds of sickly and starving children were seen everyday in the doorways of leading Vienna hotels begging for food and money. The Austrian provinces were in open rebellion against the central government in Vienna, and set up provincial border controls to prevent the export of scarce food from their own regions to Vienna and other cities in the country.

As the situation worsened, Mises put together a proposal on behalf of the Vienna Chamber of Commerce in August 1922 for “The Restoration of Austria’s Economic Situation,” which was submitted to other trade and labor union associations in the country to devise a way to bring an end to the government budget deficits as a prelude to stopping the inflation. In a nutshell, Mises recommended the establishment of price indexation throughout the economy. Already government expenditure levels were automatically adjusted in line with a cost-of-living index. Now the same arrangement had to be set up for government revenues.

Otherwise nominal expenditures would keep growing while nominal tax revenues would always lag behind, never leading to an end to the government’s budget deficits. Incomes, profits, and wages and prices all had to be indexed to the market value of gold. This would continually adjust government tax revenues to government expenditures. It would mean that government nationalized sectors, such as the railway system, would have their prices rise in tandem with the average rate of depreciation of the currency reflected in its link to the price of gold, which would help to reduce their losses and maybe even earn a profit from transit fees for cargos passing through Austria. At the same time, gold indexation would assist in keeping the wages and salaries of many workers rising to maintain a certain real value of their income.

Mises emphasized that such an indexation policy was desirable not only due to questions of equity in a period of rapid depreciation and the need to bring the government’s budget better into balance. It was also needed because inflation distorted the very essence of a money-using economy: the ability for economic calculation to reasonably estimate profit and loss, and relative profitability of alternative lines of production.

Price and wage indexation linked to the price of gold would help to reduce the miscalculations that inflation caused, and which often resulted in capital consumption. This measure, Mises stated, was meant to be a transition method to bring stability to the Austrian economy, or, as he concluded, “We must make up our minds to return from the extravagant intoxication of spending ‘billions’ to the sober, more modest financial figures of a smaller state. The object of the proposed plan is to avoid a sudden and disastrous collapse.”

Mises Economic Program for Austrian Prosperity

In February 1921, at the request of an Austrian politician, Mises published 15-point comprehensive, “Economics Policy Program for Austria.” The first order of business, he said, was to stop the monetary printing presses. But this could be done only if the costly food subsidies were eliminated and the nationalized industries were reprivatized to end the huge expenses to cover their deficits, so the national budget once again could be brought into balance. Foreign exchange controls had to be abolished with a free market in all currency dealings.

At the same time, the value of the Austrian crown had to be stabilized once the central bank had stopped issuing paper money and the depreciation of the currency was brought to a halt. All domestic regulations and controls inhibiting free commerce among the various provinces of Austria had to be lifted, and free trade had to be reintroduced in all forms of foreign trade. This was the path to a revitalized and prosperous Austria. “I scarcely believe that there is a party in the country today that would be inclined to carry out this program. Nevertheless, I hope that that which is sensible and necessary will prevail.

What brought Austria back from the precipice was the appointment of Monsignor Ignaz Seipel as Chancellor of Austria in May 1922. In his Memories, Mises described his interactions with “this noble priest whose worldview and conception of life remained alien to me,” but whom Mises considered “a great personality.” Seipel’s “ignorance in economic affairs was that which only a cleric could have,” Mises said. “He saw inflation as an evil, but otherwise was rather unacquainted with financial policy.” Mises explained to the Monsignor that following the end of the inflation there would come an unavoidable “stabilization crisis” that no doubt would be blamed on Seipel’s Christian Socialist Party, with the inevitable short-run negative effects for his party. The Chancellor replied that a policy that was necessary had to be undertaken even if it injured his party’s standing. “There were not many politicians in Austria who thought that way,” Mises declared.

Seipel did bear severe criticism, both from outside and inside his Christian Socialist Party, for following this economic policy. The Social Democrats ridiculed his “conversion” to “Manchester liberalism,” with an underlying anti-Semitic tone by suggesting a Jewish element at work behind him — in other words, advisors such as Ludwig von Mises. His own Christian Socialists accused him of moving from a socialist course to “a consciously and deliberately capitalistic” one. In reply, Seipel said, “A people does not just perish, however, desperate its economic situation.” “Spend less and save more” was the remedy for Austria’s economic ills, Seipel told the citizens of the country.

Mises’s Warnings of Capital Consumption from Tax Burdens on Business

Thus, ended Austria’s immediate postwar monetary and fiscal madness. Under supervision of the League of Nations in Geneva, Austria’s finances were gotten back in order. Government spending was slashed, with an end to the government’s costly and disastrous food subsidies and with over 70,000 government employees let go. The Austrian central bank was reconstituted with a gold-exchange standard, and with new bylaws (partly written by Ludwig von Mises) that attempted to restrain any future monetary madness by the central bank authorities.

Of course, this respite from monetary and fiscal irresponsibility was short lived. Once the League of Nations’ supervisorial role was ended in the mid-1920s, budget deficits returned due to the losses suffered in government-mismanaged sectors of Austrian economy, whose expenses had to be covered out of general tax revenues. Business and other taxes were raised in an attempt to cover these losses.

But as Mises showed in a study he co-authored in 1930, rising labor costs and increasing tax burdens had resulted in actual capital consumption in some private manufacturing sectors of the Austrian economy. And, then, these economic problems were all exacerbated by the arrival of the Great Depression of the 1930s.

But as we saw, in the second half of 1934, Mises was able to escape from having to fight unending rearguard actions against economic policies leading Austria to economic disaster, which finally culminated in an outside force — Hitler’s invasion and annexation of Austria — determining the country’s fate in a wholly different way.

Seeing Mises’s Three Horizons of Economic Policy at Work

How might we see Mises’s three-horizon policy perspective at work in these events that I have suggested was the implicit context in which he seemed to think about and analyze economic problems? His writings on monetary theory both before and after the First World War had led him to consider that only a functioning gold standard under which monetary expansion was restrained by specie redemption by a central bank could assure a general economic and business environment not plagued by inflations that generated the ups and downs of the business cycle, and that did not disrupt the capacity for rational economic calculation.  The wider social institutional setting required respect for property rights, and free and unregulated market-based prices not only for domestic commerce, but also in international trade and in the foreign exchange market.

But more immediate steps to stop the possibility of more imminent threats, we saw, might require using such devices as wage and price indexation to moderate the damaging effects arising from the non-neutrality of money in a worsening inflation. Not that Mises considered such methods of price and wage indexation to be a panacea for solving the problems caused by serious monetary expansions, especially since in other writings in the 1920s he made a point of emphasizing the inherent limits and possible abuses in all attempts to measure changes in “the price level” and the purchasing power of the monetary unit for policy purposes. But extreme circumstances may require the use of imperfect policy tools to reduce some of the more egregious effects of a hyperinflation that was threatening even more serious economic chaos.

The same was reflected in Mises’s proposal to members of the business and financial communities in 1919 that they might be called upon to organize the provision of a substitute currency through their international trading arrangements in the face of a possible monetary collapse due to the government fiscal irresponsibility and hyperinflation.

Such policies and actions might have to be the expedients to prevent a full destruction of the market economy. They were the more immediate means to a more distant end: ending inflation so that institutional reforms could be introduced so such monetary debasement would be more difficult to introduce in the future. Thus, the importance of restricting the monetary discretion of a restructured Austrian Central Bank by requiring the issuance of any bank notes and other forms of media of exchange to be backed by gold and some form of specie payment.

By the time Austria’s postwar episode with monetary mismanagement and hyperinflation had come to an end in 1923–1924, Mises had come to the conclusion that in the longer-run the only real institutional reform that might most effectively prevent the possibilities for paper money inflations and business cycles was the full separation of money from the state. Thus, in the second edition of The Theory of Money and Credit in 1924 and in his 1928 monograph, Monetary Stabilization and Cyclical Policy, Ludwig von Mises offered the argument for private, competitive free banking. That is, the removal of the government’s hand from the handle of the monetary printing presses, and not simply by tying the hands of a central bank by requiring it to follow the “rules of the game” under a central bank-managed gold standard. What was really necessary was to end government monetary policy all together, of any type. Money should be returned to the marketplace of consumer and producer choice and to the competitive forces of supply and demand for gold in determining the available quantities of a medium of exchange and its purchasing power or value in the social arena of market-based transactions.

Looking over and above the battleground terrain of the economic conflicts and cataclysms of those years between the two World Wars, it is possible to trace out the logic, consistency, determination and principles of one of the giants of classical liberalism, free markets and Austrian economics though during the last hundred years.

Friedrich A. Hayek once pointed, “That they had one of the great thinkers of our own time in their midst, the Viennese have never understood.” Fortunately, for us, 45 years after Mises’s death in 1973 at the age of 92, we have the opportunity to discover and learn from his enduring wisdom and insights. And the leaning of that wisdom and those insights is made that much easier do to the outstanding efforts and activities of the Ludwig von Mises Institute here in Auburn, Alabama.

By Richard Ebeling

Originally published on June 20, 2023 for The Future of Freedom Foundation

Three hundred years ago, on June 5, 1723, one of the most important and influential thinkers in modern history, Adam Smith, was born in the small Scottish village of Kirkcaldy. There are few individuals who it can be said have left as lasting and as positive a legacy on humankind as Adam Smith.

He authored only two books, The Theory of Moral Sentiments (1759) and An Inquiry in the Nature and Causes of the Wealth of Nations (1776). Both works, especially the latter, helped transform humanity from a state of almost universal poverty to one of amazing prosperity and human betterment. It might be thought that such lofty rhetoric about Adam Smith is merely an exaggerated instance of poetic license, but if there is any instance of the role and the power of ideas in human events, it is exemplified by the impact of The Wealth of Nations. As economist Thomas Sowell once emphasized:

Adam Smith’s The Wealth of Nations was a revolutionary event in 1776 — an intellectual shot heard around the world. It attacked an economic system prevalent throughout European civilization, both in Europe itself and in the Western Hemisphere colonies. The pervasive and minute economic regulations that encrusted the British economy in the eighteenth century were widely disliked and evaded, as were similar “mercantilist” schemes of economic control in other countries. But while many people chafed and complained it was Adam Smith who first convincingly demolished the whole conception behind these regulations and in the process established the new field of economics.

Not that this outcome was assured. There is the often-told story of how at the age of four, Adam Smith was kidnapped by a band of gypsies while he and his mother were visiting relatives in a neighboring town. Good fortune had it that a posse was formed that successfully caught up with the “party of vagrant tinkers,” as they were called, and thus saved him from a life of reading tarot cards and picking pockets as a means of earning a living! On such strange events does the fate of humankind twist and turn.

Smith attended the University of Glasgow and Oxford University, after which he taught at the University of Edinburgh for a period of time, followed by 13 years at the University of Glasgow (1751–1763) as a professor of moral philosophy. It was during his time at the University of Glasgow that he wrote and published The Theory of Moral Sentiments.

For three years (1763–1766), he served as the private tutor of a young British noblemen, during which he traveled to various parts of Europe with his intellectual ward, including two years in France, which enabled him to get to know many of the leading French Physiocrats in Paris.

One of the attractions in accepting this position as tutor was that it earned him a lifetime pension from the father of his young student. This enabled him to return to Scotland and devote his time to private study and the writing of The Wealth of Nations, which was published on March 9, 1776. In later years, Adam Smith was a commissioner of customs in Edinburgh and rector of the University of Glasgow. He died on July 17, 1790, at the age of 67.

Adam Smith’s World-Changing Influence

When Adam Smith died, Great Britain was beginning to be embroiled in what turned out to be a nearly 25-year war with first revolutionary France and then Napoleon’s France, which came to a final end only in 1815 with the French dictator’s defeat at the Battle of Waterloo and exile on the island of Elba. As part of Britain’s war effort, economic controls on domestic and foreign trade were intensified more than they already had been, and accompanying the controls were government budget deficits and paper-money expansion to cover the costs of the conflict.

Yet, even with all this, the ideas of one man in the remote Scottish corner of Europe changed the world. Said Hector Macpherson (1851–1924) in Adam Smith (1899):

When Adam Smith began to meditate upon economic problems the world was wedded to the great delusion of protection. What could a solitary thinker do singlehanded to overthrow a system which for centuries held the foremost intellects of the world in thralldom? Only an intellectual Don Quixote could hope by philosophic tilting to destroy a world-wide delusion. And yet the modest, retiring philosopher of Kirkcaldy, from his obscure study, sent forth ideas which, by molding afresh the minds of statesmen, have changed the economic history of the world.

While the British and other governments were regulating, controlling, and restricting in the name of winning a war between 1790 and 1815, beneath the surface, an intellectual and ideological transformation was occurring, especially in Great Britain. While the winds of war blew over the European continent, others were reading The Wealth of Nations. By the time the war finally ended, a growing body of liberal thinkers had become increasingly influenced by Adam Smith’s ideas. Not that actual government policies immediately reflected this growing interest and appreciation of the ideas of economic liberty. Indeed, protectionism became even more restrictive, particularly in the British agricultural sector in the form of the Corn Laws, which severely limited the importation of foreign wheat in the name of shielding the interests of the landed aristocracy.

But beginning in the 1820s and 1830s, a group of free-trade advocates formed what became known as the Anti-Corn Law League. With determination, drive, and direction greatly inspired by Adam Smith’s ideas, they succeeded in 1846 in ending virtually all the protectionist restrictions on agriculture by an act of the British Parliament, and this was soon followed by reduction and removal of the remaining restrictions on industrial products and resources.

In the 1850s, 1860s, 1870s, and into the 1880s, the trend toward greater economic freedom at home and free trade abroad made amazing headway in other parts of Europe and in North America. Due to the global scope of the British Empire in the nineteenth century, the principles and fairly wide practice of freedom of trade, investment, and migration made much of the “civilized world” an open arena of commercial liberty and increasing economic prosperity. Indeed, toward the end of the nineteenth century, political economists were hallmarking the growing internationalization of commerce and culture due to the freeing of people to trade, associate, and travel for personal and peaceful purposes and mutual gain.

Protectionist, interventionist, and militarist ideas and policies began to make their reactionary comeback in the late nineteenth and early twentieth centuries, particularly under the sway of increasing paternalist and welfare-statist programs introduced in Imperial Germany. Nevertheless, the underlying insights and truth of Adam Smith’s ideas and his vision of what he called in The Wealth of Nations “a system of natural liberty” has time and again over the last 100 years inspired people and policies to retain or even restore policies of greater, if not perfect, economic liberty.

Adam Smith’s System of Natural Liberty

What was this vision of freedom that Adam Smith offered in The Wealth of Nations?

All [government-created] systems either of preference or of restraint, therefore, being thus taken completely away the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.

The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society.

The role and responsibility of government in such a system of natural liberty, Smith went on, were national defense and domestic peace and justice through police and courts of law. He saw a variety of other tasks for the political authority that often today would go under the heading of “public goods” of various sorts. He also believed that it was the government’s responsibility to fund and provide basic education for purposes of a literate and informed citizenry.

But certainly, by the standards of our own time, when governments intrude and interfere with virtually everything we do in our social and economic lives, Adam Smith’s list of governmental functions was very limited in number and in scope. His was a vision of a fundamentally free society in which each individual was to be left alone to guide and direct his own life according to his own purposes and plans, in voluntary and peaceful association with others.

Self-Interest and Social Institutions

If individuals are to be considered at “natural liberty” to live their lives as they choose, without government command or control, then what ensures coordinated harmony among multitudes of people who rely and are dependent upon each other for most of the necessities, amenities, and luxuries of everyday life? Adam Smith explained the process by which this is made possible on the basis of individual incentives and social institutions.

Individuals constantly need the assistance of their fellow man, Smith said:

He will be more likely to prevail if he can interest their self-love in his favor, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers another a bargain of any kind, proposes to do this. Give me that which I want and you shall have this which you want is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

It is in the nature of human beings that they have “interests.” Anyone who also reads Adam Smith’s The Theory of Moral Sentiments soon discovers that he understands and emphasizes the ethical senses and the empathic ties that bind people together, out of which arises the moral codes and benchmarks that come to guide one’s actions. There is nothing in Adam Smith to justify the misrepresentations that portray him as a preacher of “selfishness” or “greed,” taken to mean a disregard for the existence or rights of others. Smith’s entire outlook was entirely the opposite.

Individual Freedom and Voluntary Exchange

What he did believe was that only individuals can really know their own circumstances, the value other people and things may have for them, and what actions they consider best to advance the betterment of themselves and those others they care about.

One man may want a pair of shoes for himself or his children. Another person may want to acquire a set of clothes for his own use or to assist a friend or relative who has fallen upon hard times and who could use something new to wear. A shoemaker sells a pair of shoes to the tailor who wants the shoes, while the tailor trades to the shoemaker the clothes desired by the shoemaker.

Each of them has given up what they value less highly, in the circumstances, for what they value more highly. Each has gained from the trade, and each has had an incentive to produce something that another wants as the means of acquiring what they desire from the other.

What makes this possible are a set of moral and legal institutions that guide and direct the incentivized actions of each. First, the individual is taken to have a right to his own life, thus freely choosing his own ends and the decisions concerning the best means to attain them. Second, human relations are based on the principle and practice of voluntary association and exchange. That is, individuals are prohibited, both in the moral and legal sense, from killing, stealing, or defrauding each other in acquiring from others any and all things that may be desired.

This leaves only one avenue remaining to those unable to produce and supply for themselves all that they want. They must turn their abilities, skills, and knowledge to devoting themselves to finding some niche in the social system of division of labor in which they can specialize in the provision and sale of what their fellow human beings may value enough to purchase, so through this exchange the means may be acquired to buy all that is wanted and desired.

The fact that exchange is voluntary and requires the mutual agreement among the participants means that any other individual may attempt to compete in trying to obtain the business of others in society. This is what Smith meant when he said, in his explanation of the system of natural liberty, that anyone is free to apply his industry and capital in competition with others.

This means that the self-interest of each is also directed to always attempting to make the better product, the new product, the less-expensive product as the means of the gaining customers in rivalry with one’s competitors. Hence, that same motive of self-interest and the institutional setting of nonviolence act as the engines for general human betterment, in that one’s own success and fortune is bound up with improving the lives of others.

Society as an Evolving Spontaneous Order

Adam Smith did not believe that society, with its ethics and institutions, was the product of government planning or design. He was part of a body of Scottish scholarship in the eighteenth century that focused on the evolutionary and “spontaneous” development of much of the social order. Few things were as profoundly important to the material improvement of humankind than the system of division of labor, by which each tends to specialize in what he can do better than other members of the community, from which emerges an interdependent system of global trade.

Already in 1776, Smith was able to point to the international network of resource supplies and production when looking at how the simple and coarse woolen coat worn by a common day laborer is made. From the shepherd with his flock, to the spinners and dye makers, to the ship builders and seamen who bring from far flung corners of the world other materials and ingredients that go into manufacture of that coat, the interconnectedness of human care and comfort was already pronounced. Smith concluded:

The woolen coat, for example, which covers the day-laborer, as coarse and rough as it may appear, is the produce of the joint labor of a great multitude of workmen…. If we examine, I say, all these things and consider what a variety of labor is employed about each of them, we shall be sensible that without the assistance and cooperation of many thousands, the very meanest person in a civilized country could not be provided, even according to, what we very falsely imagine, the easy and simple manner in which he is commonly accommodated.

A division of labor, and similar to language, custom, mores, rules of conduct, and a variety of other social institutions, had not been created by political decree or government imposition. It had started to emerge long ago in human history as people discovered and saw advantages in making things in greater number than they could use themselves, precisely because of a realization that others would take parts of this surplus production in trade for what they wanted and could not fully or effectively provide for themselves.

The generalized conclusion from this is found in one of the most famous passages in The Wealth of Nations, in which Adam Smith explains that it is in everyone’s personal interest to try to apply his labor, resources, and capital in those ways that he believes will bring forth the greatest possible return. But in doing so, he not only may further his own interest but also that of all those he is attempting to supply and serve in the marketplace, since he is directing his efforts into those avenues in which he thinks his fellow men find them of the greatest value in advancing their own purposes:

Every individual who employs his capital in the support of domestic industry necessarily endeavors so to direct that industry, that its produce may be of the greatest possible value…. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it…. By directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention…. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

Individuals Know Far Better their Own Interests and Circumstances

The last point — that Smith had never known much good from trade in which people intentionally try to promote the “public good” — highlights his insistence that individuals know far better their own circumstances and discovered opportunities than those in political power who always know little or nothing about the actual individual human beings over whom they rule:

What is the specie of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his own situation, judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which can safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

Smith was warning, in other words, of a most particular danger from the government having control and command over the economic affairs of the citizenry. Those who most frequently gravitate to positions of regulatory and planning authority are the very ones possessing the greatest hubris and arrogance in believing so highly in their own wisdom and ability that they will practice little hesitancy in imposing their designs on the rest of humanity; they give no thought that they may not know enough to presume to do so, and may be completely wrong in thinking that their “plan” for society would or could be superior to simply leaving people alone to design their own lives and associative relationships.

This point was emphasized even more forcefully in The Theory of Moral Sentiments when he discussed the social engineer and the central planner, who Adam Smith called “the man of system”:

The man of system, on the contrary, is apt to be very wise in his own conceit, and is often so enamored with the supposed beauty of his own ideal plan of government that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests or to the strong prejudices which may oppose it; he seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.

If these two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder…. To insist upon establishing, and upon establishing all at once, and in spite of all opposition, everything which that idea may require, must often be the highest degree of arrogance. It is to erect his own judgment into the supreme standard of right and wrong. It is to fancy himself the only wise and worthy man in the commonwealth, and that his fellow citizens should accommodate themselves to him, and not him to them.

Greater Prosperity through Free Trade

His warnings of the dangers from overbearing and intrusive government were, perhaps, most famous in his criticisms of government trade restrictions in the form of tariffs and import prohibitions. No one makes for himself, he said, what he can buy less expensively from another. He pays for it by specializing in some line of production in which he has a greater cost advantage than some trading partner. If this is true for any one of us, then it is no less true for all of us as the citizens of a country. Why make at home what will cost more than if purchased from some supplier in another country and pay for it with one of our products that we can make for a more attractive price than if our foreign trading partner made it for himself at home?

What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better to buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. It is certainly not employed to the greatest advantage when it is directed towards an object which it can buy cheaper than it can make it…. The industry of a country, therefore, is thus turned away from a more, to a less advantageous employment, and the exchangeable value of its annual produce, instead of being increased, according to the intention of the lawgiver, must necessarily be diminished by every such regulation.

All that was necessary, Adam Smith argued, was to leave men free to follow their own self-interests: Production and prosperity will then be forthcoming in the directions and forms most advantageous to the members of the society as a whole, whether that trade is geared toward domestic or foreign demand and supply.

Prejudices of the Public and the Power of the Interests

In The Wealth of Nations, Adam Smith expresses little optimism that the case for economic liberty or his criticism of government intervention would succeed in bringing about the needed reforms for the establishment of a free society. He believed that two forces were at work to make it unlikely. He referred to them as “the prejudices of the public” and “the power of the interests.” By the prejudices of the public, Smith meant the difficulty of getting the ordinary citizen to follow the economist’s logic of how markets work without the directing hand of government, and why government restrictions and regulations only succeed in standing in the way of the economic prosperity and general human betterment that freedom makes possible.

The power of the interests referred to the various special-interest groups in society that live off government favors and privileges of various and sundry sorts at the expense of the larger majority in society. They will do all in their ability to prevent their privileges and favors from being reduced or abolished, and they will attempt in any and all ways to have them increased at the expense of potential competitors and the general consuming public. The critic of government interventions who challenges their trade barriers, domestic monopolies, and financial subsidies are often subject to “infamous abuse” and “sometimes real danger” due to the furious outrage of those who would lose from the establishment of a freer and more open market society.

Smith Transformed the World

Yet, in spite of Adam Smith’s pessimism, within one lifetime after his death in 1790, his ideas of natural liberty widely existed in practice, especially in Great Britain and the United States, and other countries were moving in the same direction, even if not as thoroughly. That is not to say that a world of laissez-faire freedom of trade triumphed completely anywhere. But it nonetheless transformed much of the Western world and beyond into the direction of personal and economic liberty, lifting humanity out of poverty. In his History of Civilization in England (1857), British historian Henry Thomas Buckle declared:

In the year 1776, Adam Smith published his Wealth of Nations; which, looking at its ultimate results, is probably the most important book that has ever been written, and is certainly the most valuable contribution ever made by a single man towards establishing the principles on which government should be based. In this great work, the old theory of protection applied to commerce, was destroyed in nearly all its parts … and innumerable absurdities, which had been accumulating for ages, were suddenly swept away…. At the present day [1857], eighty years after the publication of Smith’s Wealth of Nations, there is not to be found anyone of tolerable education who is not ashamed of holding opinions which, before the time of Adam Smith, were universally received.

The insights and truth that Adam Smith dedicated his life to articulating and sharing with the rest of humankind stand out, as various commentators have stated, as one of the great contributions to human understanding and betterment. It is only appropriate, therefore, that we pay homage to Adam Smith on, this, his 300th birthday.

By Richard Ebeling

Originally published on May 21, 2020 for the Quarterly Journal of Austrian Economics

In this article in our “Remembering” series, we commemorate the well-known economist Oskar Morgenstern. Born on January 24, 1902 in Görlitz, on the modern border of Germany and Poland, he died on July 26, 1977, at the age of 75. He is best known as the codeveloper of modern game theory with John von Neumann in their 1944 book, “The Theory of Games and Economic Behavior.”

Morgenstern had been educated at the University of Vienna, studying with one of the early leaders of the Austrian school of economics, Friedrich von Wieser. But his main “Austrian” mentor was Hans Mayer, who replaced Wieser at the time of the latter’s retirement in 1923. (Hans Mayer was the author in 1932 of a 100-page monograph offering an “Austrian” critique of mathematical general equilibrium theory.)

Morgenstern’s first book was on economic forecasting (1928), in which he argued that precise predictions in the realm of economics was inherently impossible due to the unique qualities of the social sciences arising from human beings as intentional, thinking men whose very expectations about the future can frustrate the projections the forecaster attempts to make about their anticipated conduct. In addition, the events in the human arena have sufficiently distinct and unique characteristics that many of the assumptions underlying probability theory could not be easily applied to economic and market processes.

His 1934 book, The Limits of Economics, was meant to bring out the difficulties inherent in policy making because of the complexity in the interactive events of the market, which are wrapped up in time and causal sequences that hampers what the economic policy maker could successfully manage and control. He also warned of those who approach policy issues with predetermined ideological biases that could influence the logic of the policy maker’s analyses and conclusions.

Shortly after the founding of the Austrian Institute for Business Cycle Research in 1928 under the directorship of a young Friedrich A. Hayek, Morgenstern was hired as his assistant. Morgenstern replaced Hayek as the Institute’s director when Hayek accepted an appointment at the London School of Economics in the autumn of 1931. He held this position until March 1938. Morgenstern was on a lecture tour in the United States when Austria was invaded and annexed by Nazi Germany. Exiled in America, he ended up with a position at Princeton University, until his retirement, at which point he took up a professorship at New York University.

It was in this capacity at NYU that I came to know Morgenstern. Indeed, I (and Don Lavoie and Jack High) took Morgenstern for his last class at NYU on the History of Economic Thought before his death from cancer.

A few years ago, I wrote a review of Robert Leonard’s excellent book, “Von Neumann, Morgenstern and the Creation of Game Theory” (2010). The book presented a different side of Morgenstern, based on Leonard’s researches, including the entries in Morgenstern’s private diary. We find someone partly envious and resentful of other members of the Austrian school in that interwar period of the 1920s and 1930s, and willing to collaborate with the fascist-type government that ruled Austria before the annexation of the country in March 1938 by the Nazis. And he was certainly very much the “junior partner” in the development of game theory, often finding it hard to keep up with von Neumann’s mathematical formulations and demonstrations.

One aspect of his “Austrian” roots that Morgenstern retained was his healthy suspicions about the limits of macroeconomic aggregates and averages as a meaningful approach for understanding the dynamics of money’s influence on the market process. Indeed, he always emphasized the need for microeconomic process analyses of money’s “nonneutrality” on the structure of relative prices and wages, profit margins, and resulting potential misallocations of capital and labor.

Thus, for instance, in his 1972 article, “Thirteen Critical Points in Contemporary Economic Theory,” he insisted:

The concentration on undifferentiated aggregates as, say, that of the total quantity of money, is a step backward into a more primitive world of thought. It runs counter to what must be done….

Consider an inflationary, or as a matter of fact, any increase in the total quantity of money. If no account is given where this additional money originates from, where it is injected, with what different magnitudes and how it penetrates (through which paths and channels, and with what speed), into the body economic, very little information is given.

The same total addition will have very different consequences if it is injected via consumers’ loans, or via producers’ borrowing, via the Defense Department, or via unemployment subsidies, etc. Depending on the existing condition of the economy, each point of injection will produce different consequences for the same aggregate amount of money, so that the monetary analysis will have to be combined with an equally detailed analysis of changing flows of commodities and services.

I found Morganstern to be a most approachable and friendly person, who happily spent time with me answering my questions about the “old Vienna days” in the years between the wars and his interactions with Wieser, Mayer, Hayek, and other Austrians. Though he had an unflattering, dark side, he was a fascinating economist having early connections with some of the brightest lights in the Austrian school.

By Richard Ebeling

Originally published on September 6, 2014 for the Mises Institute

We live at a time when politicians and bureaucrats only know one public policy: more and bigger government. Yet, there was a time when even those who served in government defended limited and smaller government. One of the greatest of these died one hundred years ago on August 27, 1914, the Austrian economist Eugen von Böhm-Bawerk.

Böhm-Bawerk is most famous as one of the leading critics of Marxism and socialism in the years before the First World War. He is equally famous as one of the developers of “marginal utility” theory as the basis of showing the logic and workings of the competitive market price system.

But he also served three times as the finance minister of the old Austro-Hungarian Empire, during which he staunchly fought for lower government spending and taxing, balanced budgets, and a sound monetary system based on the gold standard.

Danger of Out-of-Control Government Spending

Even after Böhm-Bawerk had left public office he continued to warn of the dangers of uncontrolled government spending and borrowing as the road to ruin in his native Austria-Hungary, and in words that ring as true today as when he wrote them a century ago.

In January 1914, just a little more than a half a year before the start of the First World War, Böhm-Bawerk said in a series of articles in one of the most prominent Vienna newspapers that the Austrian government was following a policy of fiscal irresponsibility. During the preceding three years, government expenditures had increased by 60 percent, and for each of these years the government’s deficit had equaled approximately 15 percent of total spending.

The reason, Böhm-Bawerk said, was that the Austrian parliament and government were enveloped in a spider’s web of special-interest politics. Made up of a large number of different linguistic and national groups, the Austro-Hungarian Empire was being corrupted through abuse of the democratic process, with each interest group using the political system to gain privileges and favors at the expense of others.

Böhm-Bawerk explained:

We have seen innumerable variations of the vexing game of trying to generate political contentment through material concessions. If formerly the Parliaments were the guardians of thrift, they are today far more like its sworn enemies.

Nowadays the political and nationalist parties … are in the habit of cultivating a greed of all kinds of benefits for their co-nationals or constituencies that they regard as a veritable duty, and should the political situation be correspondingly favorable, that is to say correspondingly unfavorable for the Government, then political pressure will produce what is wanted. Often enough, though, because of the carefully calculated rivalry and jealousy between parties, what has been granted to one [group] has also to be conceded to others—from a single costly concession springs a whole bundle of costly concessions.

He accused the Austrian government of having “squandered amidst our good fortune [of economic prosperity] everything, but everything, down to the last penny, that could be grabbed by tightening the tax-screw and anticipating future sources of income to the upper limit” by borrowing in the present at the expense of the future.

For some time, he said, “a very large number of our public authorities have been living beyond their means.” Such a fiscal policy, Böhm-Bawerk feared, was threatening the long-run financial stability and soundness of the entire country.

Eight months later, in August 1914, Austria-Hungary and the rest of Europe stumbled into the cataclysm that became World War I. And far more than merely the finances of the Austro-Hungarian Empire were in ruins when that war ended four years later, since the Empire itself disappeared from the map of Europe.

A Man of Honesty and Integrity

Eugen von Böhm-Bawerk was born on February 12, 1851 in Brno, capital of the Austrian province of Moravia (now the eastern portion of the Czech Republic). He died on August 27, 1914, at the age of 63, just as the First World War was beginning.

Ten years after Böhm-Bawerk’s death, one of his students, the Austrian economist Ludwig von Mises, wrote a memorial essay about his teacher. Mises said:

Eugen von Böhm-Bawerk will remain unforgettable to all who have known him. The students who were fortunate enough to be members of his seminar [at the University of Vienna] will never lose what they have gained from the contact with this great mind. To the politicians who have come into contact with the statesman, his extreme honesty, selflessness and dedication to duty will forever remain a shining example.

And no citizen of this country [Austria] should ever forget the last Austrian minister offinance who, in spite of all obstacles, was seriously trying to maintain order of the public finances and to prevent the approaching financial catastrophe. Even when all those who have been personally close to Böhm-Bawerk will have left this life, his scientific work will continue to live and bear fruit.

Another of Böhm-Bawerk’s students, Joseph A. Schumpeter, spoke in the same glowing terms of his teacher, saying, “he was not only one of the most brilliant figures in the scientific life of his time, but also an example of that rarest of statesmen, a great minister of finance…. As a public servant, he stood up to the most difficult and thankless task of politics, the task of defending sound financial principles.”

The scientific contributions to which both Mises and Schumpeter referred were Böhm-Bawerk’s writings on what has become known as the Austrian theory of capital and interest, and his equally insightful formulation of the Austrian theory of value and price.

The Austrian Theory of Subjective Value

The Austrian school of economics began 1871 with the publication of Carl Menger’s Principles of Economics. In this work, Menger challenged the fundamental premises of the classical economists, from Adam Smith through David Ricardo to John Stuart Mill. Menger argued that the labor theory of value was flawed in presuming that the value of goods was determined by the relative quantities of labor that had been expended in their manufacture.

Instead, Menger formulated a subjective theory of value, reasoning that value originates in the mind of an evaluator. The value of means reflects the value of the ends they might enable the evaluator to obtain. Labor, therefore, like raw materials and other resources, derives value from the value of the goods it can produce. From this starting point Menger outlined a theory of the value of goods and factors of production, and a theory of the limits of exchange and the formation of prices.

Böhm-Bawerk and his future brother-in-law and also later-to-be-famous contributor to the Austrian school, Friedrich von Wieser, came across Menger’s book shortly after its publication. Both immediately saw the significance of the new subjective approach for the development of economic theory.

In the mid-1870s, Böhm-Bawerk entered the Austrian civil service, soon rising in rank in the Ministry of Finance working on reforming the Austrian tax system. But in 1880, with Menger’s assistance, Böhm-Bawerk was appointed a professor at the University of Innsbruck, a position he held until 1889.

Böhm-Bawerk’s Writings on Value and Price

During this period he wrote the two books that were to establish his reputation as one of the leading economists of his time, Capital and Interest, vol. I, History and Critique of Interest Theories (1884), and vol. II, Positive Theory of Capital (1889). A third volume, Further Essays on Capital and Interest, appeared in 1914 shortly before his death.

In the first volume of Capital and Interest, Böhm-Bawerk presented a wide and detailed critical study of theories of the origin of and basis for interest from the ancient world to his own time. But it was in the second work, in which he offered a Positive Theory of Capital, that Böhm-Bawerk’s major contribution to the body of Austrian economics may be found. In the middle of the volume is a 135-page digression in which he presents a refined statement of the Austrian subjective theory of value and price. He develops in meticulous detail the theory of marginal utility, showing the logic of how individuals come to evaluate and weigh alternatives among which they may choose and the process that leads to decisions to select certain preferred combinations guided by the marginal principle. And he shows how the same concept of marginal utility explains the origin and significance of cost and the assigned valuations to the factors of production.

In the section on price formation, Böhm-Bawerk develops a theory of how the subjective valuations of buyers and sellers create incentives for the parties on both sides of the market to initiate pricing bids and offers. He explains how the logic of price creation by the market participants also determines the range in which any market-clearing, or equilibrium, price must finally settle, given the maximum demand prices and the minimum supply prices, respectively, of the competing buyers and sellers.

Capital and Time Investment as the Sources of Prosperity

It is impossible to do full justice to Böhm-Bawerk’s theory of capital and interest. But in the barest of outlines, he argued that for man to attain his various desired ends he must discover the causal processes through which labor and resources at his disposal may be used for his purposes. Central to this discovery process is the insight that often the most effective path to a desired goal is through “roundabout” methods of production. A man will be able to catch more fish in a shorter amount of time if he first devotes the time to constructing a fishing net out of vines, hollowing out a tree trunk as a canoe, and carving a tree branch into a paddle.

Greater productivity will often be forthcoming in the future if the individual is willing to undertake, therefore, a certain “period of production,” during which resources and labor are set to work to manufacture the capital—the fishing net, canoe, and paddle—that is then employed to paddle out into the lagoon where larger and more fish may be available.

But the time involved to undertake and implement these more roundabout methods of production involve a cost. The individual must be willing to forgo (often less productive) production activities in the more immediate future (wading into the lagoon using a tree branch as a spear) because that labor and those resources are tied up in a more time-consuming method of production, the more productive results from which will only be forthcoming later.

Interest on a Loan Reflects the Value of Time

This led Böhm-Bawerk to his theory of interest. Obviously, individuals evaluating the production possibilities just discussed must weigh ends available sooner versus other (perhaps more productive) ends that might be obtainable later. As a rule, Böhm-Bawerk argued, individuals prefer goods sooner rather than later.

Each individual places a premium on goods available in the present and discounts to some degree goods that can only be achieved further in the future. Since individuals have different premiums and discounts (time-preferences), there are potential mutual gains from trade. That is the source of the rate of interest: it is the price of trading consumption and production goods across time.

Böhm-Bawerk Refutes Marx’s Critique of Capitalism

One of Böhm-Bawerk’s most important applications of his theory was the refutation of the Marxian exploitation theory that employers make profits by depriving workers of the full value of what their labor produces. He presented his critique of Marx’s theory in the first volume of Capital and Interest and in a long essay originally published in 1896 on the “Unresolved Contradictions in the Marxian Economic System.” In essence, Böhm-Bawerk argued that Marx had confused interest with profit. In the long run no profits can continue to be earned in a competitive market because entrepreneurs will bid up the prices of factors of production and compete down the prices of consumer goods.

But all production takes time. If that period is of any significant length, the workers must be able to sustain themselves until the product is ready for sale. If they are unwilling or unable to sustain themselves, someone else must advance the money (wages) to enable them to consume in the meantime.

This, Böhm-Bawerk explained, is what the capitalist does. He saves, forgoing consumption or other uses of his wealth, and those savings are the source of the workers’ wages during the production process. What Marx called the capitalists’ “exploitative profits” Böhm-Bawerk showed to be the implicit interest payment for advancing money to workers during the time-consuming, roundabout processes of production.

Defending Fiscal Restraint in the Austrian Finance Ministry

In 1889, Böhm-Bawerk was called back from the academic world to the Austrian Ministry of Finance, where he worked on reforming the systems of direct and indirect taxation. He was promoted to head of the tax department in 1891. A year later he was vice president of the national commission that proposed putting Austria-Hungary on a gold standard as a means of establishing a sound monetary system free from direct government manipulation of the monetary printing press.

Three times he served as minister of finance, briefly in 1895, again in 1896–1897, and then from 1900 to 1904. During the last four-year term Böhm-Bawerk demonstrated his commitment to fiscal conservatism, with government spending and taxing kept strictly under control.

However, Ernest von Koerber, the Austrian prime minister in whose government Böhm-Bawerk served, devised a grandiose and vastly expensive public works scheme in the name of economic development. An extensive network of railway lines and canals were to be constructed to connect various parts of the Austro-Hungarian Empire—subsidizing in the process a wide variety of special-interest groups in what today would be described as a “stimulus” program for supposed “jobs-creation.”

Böhm-Bawerk tirelessly fought against what he considered fiscal extravagance that would require higher taxes and greater debt when there was no persuasive evidence that the industrial benefits would justify the expense. At Council of Ministers meetings Böhm-Bawerk even boldly argued against spending proposals presented by the Austrian Emperor, Franz Josef, who presided over the sessions.

When finally he resigned from the Ministry of Finance in October 1904, Böhm-Bawerk had succeeded in preventing most of Prime Minister Koerber’s giant spending project. But he chose to step down because of what he considered to be corrupt financial “irregularities” in the defense budget of the Austrian military.

However, Böhm-Bawerk’s 1914 articles on government finance indicate that the wave of government spending he had battled so hard against broke through once he was no longer there to fight it.

Political Control or Economic Law

A few months after his passing, in December 1914, his last essay appeared in print, a lengthy piece on “Control or Economic Law?” He explained that various interest groups in society, most especially trade unions, suffer from a false conception that through their use or the threat of force, they are able to raise wages permanently above the market’s estimate of the value of various types of labor.

Arbitrarily setting wages and prices higher than what employers and buyers think labor and goods are worth—such as with a government-mandated minimum wage law—merely prices some labor and goods out of the market.

Furthermore, when unions impose high nonmarket wages on the employers in an industry, the unions succeed only in temporarily eating into the employers’ profit margins and creating the incentive for those employers to leave that sector of the economy and take with them those workers’ jobs.

What makes the real wages of workers rise in the long run, Böhm-Bawerk argued, was capital formation and investment in those more roundabout methods of production that increase the productivity of workers and therefore make their labor services more valuable in the long run, while also increasing the quantity of goods and services they can buy with their market wages.

To his last, Eugen von Böhm-Bawerk defended reason and the logic of the market against the emotional appeals and faulty reasoning of those who wished to use power and the government to acquire from others what they could not obtain through free competition. His contributions to economic theory and economic policy show him as one of the greatest economists of all time, as well as his example as a principled man of uncompromising integrity who in the political arena unswervingly fought for the free market and limited government.

By Richard Ebeling

Originally published in April, 2023 for the monthly edition of Future of Freedom

The British economist Philip H. Wicksteed began his most important work, The Common Sense of Political Economy (1910), with a motto taken from the famous German poet Johann Wolfgang von Goethe (1749–1832): “We all live it, but few of us know what we are living.

Contrary to the classical economists, who had argued that the market value of things was ultimately based on the objective quantity of human labor that had gone into their manufacture, Wicksteed argued that the value of things begins in the human mind, and from there brings about the prices of things bought and sold in the marketplace. At the same time, Wicksteed went on to explain in his Common Sense that the logic by which we value things is not something that needs to be learned and consciously adopted but rather is the way our own minds just work in a world in which scarcity exists. That is, a world in which the means that we discover and decide might be useful to apply in attempting to attain our desired ends are insufficient to achieve all the purposes we may have in mind. Hence, we all do it, but most of us are not consciously aware of what we are doing.

From Unitarian Minister to Market Economist

Philip Henry Wicksteed was born in October 1844 and died on March 18, 1927, at the age of 82. He followed in his father’s footsteps and became a Unitarian minister and served in that capacity for over 20 years. But his other interests, and his somewhat unorthodox theological views, led him to resign his position in 1897. This enabled him to more fully devote his time to Medieval scholarship, especially the writings of Dante, about whom he was considered an expert, as well as to writing and lecturing on economics.

The inspiration and greatest influence on Wicksteed’s own thinking on the fundamentals of economics was William Stanley Jevons, who (separately, though almost simultaneously, with the appearance of Carl Menger’s Grundsätze der Volkswirtschaftslehre) formulated his theory of the concept of marginal utility in Theory of Political Economy (1871). Based on that theory, one of Wicksteed’s earliest writings on economics, in 1884, was a critique of Karl Marx’s labor theory of value, which led to an exchange with George Bernard Shaw, who attempted to defend the Marxian approach.

While often considered a “Jevonian,” Wicksteed’s “subjectivist” approach to the logic of economics, its universal applicability, and his theory of the market process have come to be identified more with the Austrian School, especially as developed in the twentieth century by Ludwig von Mises and Friedrich A. Hayek. Also, while not a strict economic liberal, the implications of his analysis of market processes usually led him to free-market conclusions on a good number of economic policy issues.

Wicksteed’s first books were The Alphabet of Economic Science (1888) and The Coordination of the Laws of Distribution (1894). They were meant to articulate and clarify the principles of marginal utility and decision-making and to demonstrate that in a competitive free market, the market value of what is received for a product is “distributed” as income shares to the factors of production in a manner proportional to their respective marginal contributions.

The Logic of Choice as the Logic of Life

But it is in The Common Sense of Political Economy that Wicksteed’s most developed ideas on economics and the market economy are to be found. He wished to explain the common sense logic underlying all that men do in making evaluations, selections, and choices. An essential part of this was an analysis of the dynamic process of market coordination on the basis of individual subjective valuations under conditions of imperfect and limited knowledge.

In Wicksteed’s view, the existence and necessity of human choice was seen in everything that was done by the individual. The housewife buying the weekly food on the market and her allocation of the supply among her family members were activities all cut from the same fabric:

Her doings in the marketplace and her doings at home are … parts of one continuous process of administration of resources, guided by the same fundamental principle, whether she is spending money, helping the potatoes, pouring out the cream, or exercising a more general vigilance over the bread and milk…. She is trying to make everything go as far as it will, or, in other words, serve the most important purpose that it can. She will consider that she has been successful if, in the end, no want which she has left unsatisfied appears, in her deliberate judgment, to have really been more important than some other want to which she attended in place of it.

The same applies to the man shivering in bed deciding whether to get up and secure another blanket that would relieve the cold, when the trade-off is a few moments of greater discomfort from the cold when he is out of bed getting the extra blanket versus the greater warmth for the rest of the night when he is trying to sleep. Or even a man faced with the trade-off of honor or disgrace, depending upon whether he decides to talk under torture.

What is critical in all of these circumstances was not the motive behind any decision but the “economic relation,” as Wicksteed called it, that required a decision be made. All of them, he said, involved the necessity of “making a selection and choosing between alternatives.” Therefore, he saw economics as “a study of the principle of administration of resources and selection between alternatives conceived without any formal or convention limitation.”

Marginal Choice at the Center of All We Do

Flowing from this view of choice was the concept of the margin.

The principle of marginal adjustment … runs through all the administration of our resources. Terms at which alternatives are offered and declining marginal significance as supply increases are the universal regulators of all our choices between alternatives. …. from first to last … the laws of economics are the laws of life, and consequently if a law declares itself to be paramount on the economic field, it proclaims itself by implication as a general law of life and conduct.

Thus, all of human life is comprised of comparisons and trade-offs between marginal benefits and marginal costs:

An ardent lover may decline a business interview in order to keep an appointment with his lady-love, but there will be a point at which its estimated bearing upon his prospects of an early settlement will make him break his appointment with the lady in favor of the business interview. A man of leisure with a taste for literature and a taste for gardening will have to apportion time, money, and attention between them, and consciously or unconsciously will balance against each other the differential significances involved. All these, therefore, are making selections and choosing between alternatives on precisely the same principle and under precisely the same law as those which dominate the transactions of the housewife in the market, or the management of a great factory or ironworks, or the business of a bill-broker.

Time and Uncertainty Envelope All Our Choices

Unlike a variety of the more mathematically focused economists, in Wicksteed’s analysis of the on-going, ever-present choice process, there were no assumptions of any rigid quantitative precision, or exact and perfect marginal comparisons, or the absence of error or miscalculation. On the contrary, the lack of such perfections was part of the real world in which actual choices are made.

A person’s scale of preferences (his ranking of desired ends) would take form and shape only within the actual process of choosing among possible alternatives at various relevant margins of choice. Even as these selections and choices are made, said Wicksteed, the individual “does not generally realize exactly what the consequences of buying [an item] will be, but has a vague sense of future inconvenience, privation, and possible regrets.”

What beclouded “the margin” and created its rough and imprecise form was the pervasive uncertainty under which decisions are always made. The expected value of various choices never seemed far from Wicksteed’s thoughts. “Action … will always be determined by anticipated results,” he said.

The purchase and allocation of services to serve human ends, therefore, were always guided by their anticipated importance and value to the consumer. Yet, potential for error abounded. Unexpected requirements could materialize, actual uses for goods could turn out to be smaller than planned, or the usefulness of a commodity might be found to be different from what was originally hoped for.

If within the individual mind revisions and reevaluations were constantly occurring, then even more so was this true and necessary in what Wicksteed called the “economic nexus” of interpersonal exchange and trade. Here, too, as circumstances changed, demand for commodities would rise or fall, and supplies would have to be revalued and reallocated among different uses.

Entrepreneurs Represent All Consumers in Pricing their Goods

The Austrian economist Eugen von Böhm-Bawerk, in his exposition of the market process of price formation, had suggested a dynamic analysis of buyer decision-making in which buyers formed expectations concerning the anticipated importance of goods to themselves and the minimum prices at which sellers might be willing to relinquish their supplies for sale. Based on these subjective estimates of their own wants and the market conditions under which sellers might sell, the buyers would initially offer and then modify, if necessary, their pricing bids to would-be sellers. But in almost all modern market settings, buyers find prices already set by sellers; they respond in the face of these given prices by deciding the relative quantities of purchasable goods they will buy.

Wicksteed’s particular contribution to an understanding of the market-pricing process was an analysis of the factors on the seller’s side of the market and role of “cost” as a foregone alternative in the choices we make. Markets are the arena in which potential gains from trade can be consummated by transactors. But, Wicksteed emphasized, “this process will always and necessarily occupy time. The persons potentially constituting the market will not all be present at the same time.” As a result, total market demands for alternative goods were “a matter of estimate and conjecture” at any moment in time. In Wicksteed’s eyes, it falls upon the shoulders of the entrepreneurs and sellers to form such estimates and conjectures.

Expecting “a constant flow of potential customers throughout the day,” the sellers “have a reserve price, not on their own account but in anticipation of the wants of others.” Anticipating the demand for this good by future buyers who will enter his market later in the trading day, the seller prices the good so that the quantity at his disposal will tend to balance the entire stream of buyers over the entire selling period. The seller, therefore, is acting as the “reader of the public mind, anticipator of future wants, or the speculator as to the wants of the portion of the public not present in person.”

As the owner of the existing supply of a good, the seller forms expectations for the product by potential consumers who might enter the market at a later time. “What the purchaser meets in the market,” as Wicksteed expressed it, “is but a reflection of her own mind and that of her compeers thrown back from the mind of the seller. It is the collective mind of all the purchasers, then, as estimated by the sellers, that determines the prices set by the latter” that any one or group of buyers find when they enter the market. Thus, a “primary function” of the sellers is “to represent the whole body of consumers in his dealings with each individual consumer.”

The Dynamic Pricing of Goods and Resources Serving Consumer Demand

Potential for error abounds here as well. Each day, the sellers “form a general estimate, based partly on actual inspection of the market, partly on a variety of sources of information and grounds of conjecture which they commanded before entering” the market. But all the resulting prices remain speculative. When the buyers actually begin appearing in the market over the trading period, reality will confront anticipation. Traders who err on the downside and price their product too low in relation to the stream of buyers will see their stock too rapidly diminishing, while those who price their product too high would see sluggish demand relative to their available supply. Each seller will rectify his mistake by raising or lowering his price, respectively, with total demand tending toward a balance with the available stock.

An additional dynamic ingredient in Wicksteed’s analysis was its full appreciation that error, itself, disrupts and modifies the equilibrium target toward which the economic system is gravitating. “Any actual transactions made in consequence of a mistake in estimating the equilibrium price at any given moment will theoretically alter the equilibrium price itself,” Wicksteed said, by altering people’s preferences and their endowments at each step of the economic sequence of trades. In other words, market outcomes are “path dependent,” that is, the patterns of actual trades and the related buyer and seller reevaluations along the way influence the hypothetical longer-run end-state toward which the market is moving at any moment in time.

But the stocks of goods available at the retail stage need to be replenished. What applies to the given quantities on hand — that their value reflects the existing entrepreneurial expectations of the importance of the consumer ends they can serve — equally applies to the means of production. “No raw materials, no machine, no specialized talent, nor natural or artificial combination of things has any value,” Wicksteed said, “except the derived value which it draws from its anticipated contribution to the ultimate service that shall be placed on the scale, tried, compared and appraised before the empirical throne of Human Demand.”

What Wicksteed was saying is that as retail entrepreneurs discover errors they have made concerning the anticipated demand for their respect wares, they will reappraise the relative quantities of the goods they wish to restock on their shelves and the prices at which they might sell in the next trading period. This modifies their demands for these goods at the wholesale level, with the wholesalers adjusting the amounts of the goods they will want from their suppliers in the next rounds of business and the prices they are willing to offer to those suppliers in later stages of production. This, in turn, brings about changes in the demand for the various factors of production, including labor, at each of the production stages, all the way back to the raw materials stage and at the retail level, where the final goods will be sold.

In the process, the relative price and wage structures interconnecting all markets will adjust to the never-ending changing conditions of ultimate and final demand for and supply of those goods consumers want. But these constant adaptations in prices, wages, resource use, and allocations in the interrelated web of multitudes of markets is what ensures that the market system as a whole is always tending to move in the direction of overall coordination, even though the hypothetical end-states at which markets would be in balance (general equilibrium) are, themselves, constantly moving targets.

Costs and the Supplies are Really Alternative Demands

In this ongoing process, Wicksteed was also interested in clarifying what is the meaning of “costs” within the market process. Cost is the next best alternative that might have been pursued and attained with some of the scarce means that were used for a different purpose by the chooser, who ranked it of greater value or importance. The cost of any of our choices is the “pull” of an alternative demand that might have been satisfied if the means had been used to do something differently.

In a presidential address that Wicksteed delivered before the British Association in 1913 on “The Scope and Method of Political Economy,” he “boldly and baldly declared” that the “supply curve” that is drawn on the blackboard and juxtaposed to a “demand curve,” does not exist — “There is no such thing.” The supply curve is, in fact, the demand curve(s) of whatever alternative would have to be sacrificed to meet some other particular demand. A demand curve is downward sloping to the right, because as additional units of any good are acquired by someone, the marginal utility or benefit of each one is less than the preceding ones acquired.

Likewise, a “supply curve” slopes upward to the right, because as more scarce means are shifted to increase the quantity of the first good, there are fewer resources remaining to continue to meet the demands of other goods, so as their quantities decrease, the marginal utility of each additional unit that has to be foregone is greater than the preceding ones no longer available. Thus, a supply curve is merely the demand curves of other goods diminishing in supply to satisfy a greater demand for something else.

Ultimately, therefore, both demand and supply are reflections of the subjective marginal valuations of market actors concerning the marginal utility or benefits from having more or less of one desired good compared to some other. For Wicksteed, this reinforced the insight that from beginning to end, it is the subjective (marginal) valuations of all those participating in the market that determine the prices and the “costs” of everything in that “economic nexus.”

Specialization and the Temptations to use Government

In Wicksteed’s view, the market constitutes that vast and intricate “economic nexus” in which individuals participate in an increasingly complex and interdependent system of division of labor. Any person living in such a system is able to benefit from everything that others can do that he may not be able to do or which they can do better and less expensively than if he attempted to satisfy his wants through his own limited abilities. To the extent others devise ways to innovatively produce more or better or less expensive goods that he desires to acquire from them in trade, the greater the opportunity for improvements in his own life and circumstances. This represents the general betterment that all may receive from a system of specialization and exchange.

However, Wicksteed also highlighted how this system of interdependent specialization creates the conditions for some to turn to political means to benefit themselves at the expense of others. While we are the consumers of many goods, the better and less expensive provision of which we all gain from, we are also individually the producer of one or at most a small number of things. Unless we are successful in producing and selling what others want, we cannot earn the revenues we need and desire to reenter the market as a consumer with income to spend. Thus, our role as a producer of a particular good tends to be of more importance to us than our role as consumer of many other goods.

Thus, any decrease in the demand for our particular product or service, or anything competitively done by others that increases the supply of it and lowers its price is frequently dreaded and opposed by the individuals negatively affected in this way. Explained Wicksteed:

If the thing I supply becomes relatively more abundant, and ministers to a relatively less urgent need, my command of what I want declines just because your command of what I give increases. Hence the paradoxical situation that the advance in wellbeing, which we all desire and are pursuing becomes an object of dread to each one of us in that particular department in which it is our business to promote it….

Where there is an open competitive market, this desire for scarcity may remain a pious (or impious) wish, to which those who entertain it can give little or no effect…. But when we turn from the individualism of the open competitive market to the deliberate and concerted action of organized trades, or legislative assemblies, or to the general atmosphere of social ideals and aspirations by which they are supported or prompted, we see at once how fatally perverse this whole way of looking at things must be.

The perpetual danger, Wicksteed warned, is that any time economic progress brings about new, better, more, and less expensive goods from which many in society gain diffused benefits over time, there are likely to be some established producers and suppliers who will experience concentrated reduced market shares, lower revenues, and even losses due to the supply-wide successes of their innovative and successful market rivals.

The temptation will be for those negatively affected in this way to turn to political means through government to restrict markets, hamper their competitors, and artificially keep prices higher than they otherwise would be at the expense of consumers and those enterprisers who are prevented or hampered in their ability to better supply and serve the consuming public. It becomes a constant battle, Wicksteed emphasized, to oppose such special-interest politicking if the innovations and discoveries from which we all gain in the longer run are not to be hindered by politics at the expense of market freedom and rising standards of living.

Individual Choice and the Market Process

For Philip Wicksteed, economics was not an analysis of a particular side of human activity but was the defining characteristic of all human activity where alternatives need to be weighed and choices made. In Wicksteed’s analysis, people act and choose in a world of change, time, and uncertainty. Nowhere was this seen more than in his theory of the market process. Exchanges occur in sequential patterns through time. Expectations have to be formed on the part of entrepreneurs and sellers as to the volume and pricing of goods desired by consumers and the resources through which they may be manufactured. Errors and miscalculations can result in trades at incorrect, or “false,” prices. Corrections and revisions of those prices send ripples of reevaluation throughout the production process.

In open and competitive markets, these adaptions and the resulting coordination of all that people can and may be doing freely and “spontaneously” is both possible and superior to any attempts to directly plan or regulate the market process through government intervention.

Wicksteed wished that everyone could just take the time to reflect on how amazing the market process is in placing at everyone’s disposal the knowledge and abilities of multitudes of people that any one individual can and will never know, but whose market-guided cooperation makes all of our lives so much better:

It might be a valuable exercise for anyone who is “earning a living” to attempt to go through a few hours or even a few minutes of his daily life and consider all the exchangeable things which he requires as they pass, and the network of cooperation, extending all over the globe, by which the clothes he put on, the food he eats, the book containing the poems or expounding the science that he is studying, or the pen, ink, and paper with which he writes a letter, a poem, or an appeal, have been placed at his service, by persons for the furtherance of whose purpose in life he has not exercised any one of his faculties or powers.

Such an attempt would help us to realize the vast system of organized cooperation between persons who have no knowledge of each other’s existence, no concern in each other’s affairs, and no direct power of furthering each other’s purposes, by which the most ordinary processes of life are carried on. By the organization of industrial society, we can secure the cooperation of countless individuals of whom we know nothing, in directing the resources of the world toward objects in which we have no interest. And the nexus that thus unites and organizes us is the [open market] business nexus.

But for its continuing success, it is necessary to have constant vigilance against those who would want to use political means for their short-run interests at the overall longer-run benefits and betterment of everyone, Wicksteed warned. This is a task we have still not yet successfully mastered.

By Richard Ebeling

Originally published on September 22, 2020 for the American Institute for Economic Research

We are in the midst of an open counterrevolution against liberty and limited government in the United States. This may sound like strong language for dramatic affect. But it is really not an exaggeration in the current climate of political discord and antagonism, admittedly amplified by it being a presidential election year when political parties make hyperbole the norm. An example of this counterrevolution may be seen in a recent attack on the classical liberal, free market economist, the late Milton Friedman, in the pages of The New York Times.

Through a good part of the post-World War II era, Milton Friedman (1912-2006) was a leading voice for personal freedom and economic liberty, as well as one of the most internationally prominent economic scholars of his time. His stature as a serious contributor to economic theory and policy discourse was recognized with the awarding of a Nobel Prize in Economics in 1976. 

Friedman’s A Theory of the Consumption Function (1957) and A Monetary History of the United States (1963), the latter co-authored with Anna Schwartz, established his position as a leading critic of mainstream Keynesian Economics, while remaining within the generally accepted modern macroeconomic analytical framework. He helped bring about a “rediscovery” of the quantity theory of money, after “money” had been relegated into being a variable of secondary importance in the “new economics” that had emerged out of John Maynard Keynes’s The General Theory of Employment, Interest, and Money (1936). 

Milton Friedman’s Voice for Liberty

Besides his scholarly writings primarily addressed to others in the economics profession, Friedman early on, in the 1950s, demonstrated a clarity and often an eloquence in making the case for freedom and the free society, at a time when all the trends seemed to be in the direction of bigger and more intrusive government. He reawakened an understanding of and an appreciation for the power of the free market in Capitalism and Freedom (1962) and Free to Choose (1980), with the latter not only being a successful book but the title of a widely watched television series on personal and economic liberty versus political paternalism and government regulation and planning. 

For nearly 20 years from 1966 to 1984, Friedman wrote a regular column for Newsweek magazine, with many of his articles being anthologized as the years went by. Through this venue and occasional policy pieces in other places such as the Wall Street Journal, his practical policy influence on economic and related social themes (including school choice, ending military conscription, and the decriminalization of various “victimless crimes”) was significantly felt far beyond simply conservative and classical liberal/libertarian circles. 

Friedman Criticisms of the “Social Responsibility” of Business

One such instance was an article that he wrote fifty years ago, which appeared in The New York Times Magazine (September 13, 1970) on “The Social Responsibility of Business.” Friedman’s argument was that businesses, especially corporations, should focus on profit maximization for shareholders rather than increasingly playing social welfare agent, and, secondly, that by taking on such tasks the marketplace was threatened with a dangerous politicization that would negatively transform and potentially corrupt both the private sector and government.

Those who directed and managed shareholder-owned companies were the hired agents of those who had appointed them to such positions. Their primary task was to oversee the effective use of the invested resources placed in their care, which was to make products and provide services that generated the largest net profits possible to be earned for their employers, the shareholders. 

For government or others in society to assert that the responsibility of businessmen was to manage the private enterprises under their trust for “social goals” was to expect those business executives to act in ways different from or contrary to the interest of their shareholder employers. 

Free to Spend Our Own Income as We See Fit on Good Causes

Nowhere in the article did Friedman say or suggest that social or community issues and problems were not important or worth supporting. He was quite clear that in their roles as income-earning citizens and “good neighbors,” shareholders were at liberty to spend their dividends and other corporate receipts in any manner they thought fit, appropriate and deserving. Friedman also emphasized that a proprietor of a private enterprise was certainly free to not pursue a maximum of profits. He is spending and investing his own money, and he can choose to forego the profits that might have been his because of other goals in the management of his own company that he considers to be more important. 

We are all at liberty in a free society to use the resources at our disposal in any way we consider desirable in our own eyes; and often to far better effect than when determined and directed by government. As a classical liberal, Friedman, not too surprisingly, considered private charitable and voluntary associative activities not only more ethical as matters of individual freedom of choice, but was confident that the outcomes would be more successful than when left to the bureaucratic hands of government agencies. (Though he did say that if citizens, in their role as voters, decided to shift part of their personal responsibility and taxed away resources on to government to perform certain welfare state functions, that was part of the democratic process, which should not be foisted on to private enterprises to perform in society.)

Social Responsibility Politicizes Business Decision-Making

Secondly, Friedman feared the politicizing of the private market once businesses were expected to take on the task of social welfare workers. Once corporations and other such businesses were to do so, the profit-oriented efficiency is threatened that normally increases productivity, brings about cost savings, and generates product improvements that, in the long run, raise wages, increase consumer standards of living, and bring about a general betterment in the social circumstances of all. 

The profit and loss system, guided by competitive prices, assures rationality to all that happens in the marketplace of supply and demand. Firms can fairly easily evaluate success and failure, and whether, at the margin, resources, capital and labor might be better used in different, more profitable and cost-effective ways; and whether workers and other employed inputs are or are not providing value-added contributions to the enterprise relative to the opportunity costs of their hire and purchase.

But once private enterprises are expected, indeed pressured, to pursue with their financial and other resources different tasks other than profit maximization, what standards, measurements, or benchmarks are to serve with the same clarity and objectivity as the market price signals of profit and loss? 

The New Attack on Friedman and Profit-Maximizing

This, now, gets us to the recent criticisms of Friedman and his arguments in “The Social Responsibility of Business” article, which is marking its half-century anniversary. The New York Times brought together a symposium of contributors made up of almost two dozen prominent corporate executives, think tank analysts and high profile “politically correct” economists, practically all of whom condemn, ridicule, and reject most if not all of Friedman’s case. 

One chief executive, Marc Benioff, accused Friedman of “brainwashing” an entire generation of businessmen to ignore their responsibilities to the wider society in which they do their business. He calls for a “stakeholder” capitalism that encompasses not only the company’s shareholders but also “employees, customers, communities, and the planet.” 

What does that mean in the concrete? Well, as far as Starbucks’ emeritus chairman, Howard Schultz, is concerned that means company-provided health care for part-time workers, tuition-free college education for employees, requiring workers to do neighborhood volunteering, and providing jobs to “impoverished youths” regardless of skills, experience or the company’s requirements. He insists on companies pursuing a “moral purpose” rather than profits. 

Harvard University economist Oliver Hart asks what if a shareholder does not like that a company into which he is invested makes and sells “military-style rifles,” and he cannot persuade enough of his fellow shareholders to change what the firm produces? It does not seem to enter his mind that the shareholder in question could choose to sell his shares and not be financially involved with such an enterprise rather than social bullying to get this and other companies to stop making firearms instead of what he considers to be the pursuit of desirable “environmental and social goals.”   

Erika Karp, chief executive of Cornerstone Capital Group wants companies to follow a “holistic” approach rather than simply profit maximization. Businesses should follow the guidelines of “Environmental, Social and Governance” (E.S.G.) standards. If you are wondering what that is, an answer is given in a different article that appeared about the same time as the New York Times symposium, this one in Fortune magazine (September 13, 2020) on, “50 years later, Milton Friedman’s shareholder doctrine is dead ,” by Colin Mayer, Leo Strine, and Jaap Winter.

Mandating Social Responsibility by Political Pressure and Power

The authors tell us that what is needed is a “renewal” of “the promise of the New Deal,” with “protections for workers, the environment,” and with America moving closer to the “Scandinavian” model of a more intensive social welfare state. Corporate internal rules and regulations must be transformed “to give fair consideration to stakeholders and to temper the need to put profit above all other values.” 

Corporate structures should be rewritten to make them into “public benefit corporations” (as Elizabeth Warren has proposed); that is, companies should be mandated to serve purposes and interests other than mere “profits.” Failure to do so would allow “courts to issue orders, such as injunctions, holding corporations to their stakeholder and societal obligations.” The authors insist that they advocate all this “to save our capitalist system.” Cumulatively what the New York Times and Fortune contributors are calling for is nothing less than the demise of what remains of any freedom for us to choose as consumers, investors and enterprisers. 

The Important Role of Market-Oriented Corporate Enterprise

In the narratives of these critics, the American corporation is too big and too powerful a villain in their tale. Lost and hardly mentioned is that individuals form voluntary business associations under the corporate heading to pool investable resources as well as the risk from doing so through limited liability. It has facilitated the formation of capital and production that has benefited all in society in terms of the quantities, qualities and cost competitiveness of much that is taken for granted by us as consumers in the marketplace. 

As economist Robert Hessen said in In Defense of the Corporation (1979):

“Combining the capital of millions of investors and the talents of millions of workers, giant corporations are a testament to the ability of free men, motivated by self-interest, to engage in sustained, large-scale, peaceful cooperation for their mutual benefit and enrichment. As a result, Americans today enjoy a standard of living – of luxury, leisure, and longevity – that is unprecedented in world history . . .  

“A business, no matter how large, cannot force anyone to work for it, to buy its products, or to invest in it; it cannot conscript capital and manpower or tax a person to pay for a service he neither wants nor uses . . .

“Many companies are shielded from both domestic and foreign competition by means of subsidies, loan guarantees, protective tariffs, import quotas, and arbitrary licensing requirements. These restrictions can be created and sustained only by political power – by invoking the threat of governmental intervention to forbid or penalize various forms of production and trade . . . Corporate power is to be feared only when it involves attempts to secure favors and achieve results that could never be obtained in a free market.” (pp. xi and 109-111)

Corporate Social Responsibility Equals Socialization of Business

What the corporate social responsibility proponents, especially in the E.S.G. framework, threaten is the full and complete “socialization” of business under the supervision and ultimate control of government. It is pertinent that in his 1970 article Milton Friedman referred to the social responsibility of business models as “socialism.” It is no longer individuals voluntarily and peacefully coming together to form and work within private enterprises, and deciding what products or services to produce and supply as the market means of honestly earning profits through the successful provisioning of their fellow human beings in their role as consumers within the arena of competitive and cooperative exchange.  

No, it is “stakeholders,” meaning ideological busybodies, special interest groups with political axes to grind, and those who simply want to make others do under intimidation and force what they cannot get them to do – as consumers or producers – through reason and persuasion in the free marketplace, who will determine what, why and how things are produced. Investment decision-making, production, employment, marketing and sales all become political matters of pull and plunder between competing groups wanting to coercively make others act in ways differently than those others would if not compelled or prohibited from doing so. 

Should more of the private enterprise’s resources be invested in hiring unqualified workers at wages no longer reflecting the market-based supply and demand for that type of employee? “At the margin,” should the corporation devote more financial expenditures to sensitivity training about race and gender discrimination or on community outreach concerning climate change education along with monies dispensed for the widening of bicycle paths? There are no market-guiding correct or more objective answers to these questions. There is only political power in the changing currents of ideological fashion and fancy in the ongoing game of “democratic” politics.

Throwing Overboard the Rationality of Profit and Loss

In the market arena of profit and loss and competitive prices, the answers to business decision-making still have degrees of prospective uncertainties concerning the future. But it is easier to evaluate whether an advertising strategy is meeting revenue expectations; whether one department or division of the company is financially doing better than another; and whether investments should be expanded in one part of the company and reduced in some other due to the profit earning potentials; and whether workers hired seem to be supplying value-added relative to the market wage that must be paid to them given their competitively determined opportunity costs of employment.

Once a market-based profit-maximization approach is discarded for the “social responsibility” paradigm of business decision-making, all such rational economic calculations increasingly disappear. They are replaced with power, political pull and social pressures in influencing and dictating how the scarce resources of such private enterprises are used in directing their activities. This, in fact, represents the abolition of the market system and its replacement with forms of pressure group political planning of economic affairs. To use a phrase that Ludwig von Mises employed as the title to one of his shorter works, we are left with, de facto, “Planned Chaos,” in the name of political correctness in the business world. 

Production is no longer directed to producing and supplying what private enterprisers anticipate being the more highly valued and demanded goods by the consuming public. Production is no longer guided by the goal of minimizing expenses to get the most out of the scarce means of production, so as to satisfy as many of the wants and desires of all of us in society as seems possible through the actions of profit-pursuing entrepreneurs and executives steering corporate enterprise activities. 

The consuming public, which means all of us, become captives to whatever segments of the society in their role as ideological busybodies and political power lusters can successfully impose on the supply-sides of the marketplace to fulfill their collectivist and coercing dreams of what the world should look like, if only everyone thought like them.  

Joseph Stiglitz’s Rejection of a Free Market System

The worst of these voices among the participants in that New York Times symposium of critics of Milton Friedman’s 1970 article is, without a doubt, Columbia University economist and Nobel Prize recipient, Joseph Stiglitz. Not only does he disagree with Friedman’s argument for profit-maximizing as a primary goal in business (and in the process calling Friedman a mere “conservative ideologue”), he rejects the very idea that markets work! He insists that everything that economists have said since Adam Smith about the “invisible hand” of self-regulating and self-coordinating markets is false. If people have imperfect knowledge and if less than perfect markets for risk exist in society, then markets will fail because people will make mistakes and be able to take advantage of situations that may not assure perfect “social welfare” outcomes benefiting everyone.

Stiglitz is a captive of what is known as the “perfect competition” model of a market economy, in which everyone is presumed to possess perfect or sufficient knowledge to never make mistakes in their roles as consumers and producers, and in which every conceivable market fully and perfectly exists to cover any and all forms of uncertainty and contingency. Stiglitz looks around the world and is clearly “shocked” to discover that people do not possess perfect knowledge, and either do not or cannot guard themselves against every conceivable contingency in their contractual arrangements. He proceeds, therefore, to shout, “market failure.” 

Stiglitz’s immediate response then follows: Government must regulate, restrict, direct, prohibit or guarantee seemingly almost everything. Why? Because in ways that he never fully explains or justifies, he has absolute confidence that those in government – of course, advised by people like himself – can successfully make all the right decisions on “fair” wages, “optimal” productions, “rational” uses of resources to satisfy “socially necessary” needs, while “saving” the planet and overcoming all the injustices of everyday life. 

How it is that those in political power somehow overcome the “knowledge problems” that the rest of humanity seems unable to solve and sufficiently handle is something that Stiglitz chooses to glaze over. Of course, government can do harm, but that is reserved for those instances in which government fails to do what Joseph Stiglitz considers best for all of humanity. Thank goodness that we have at least one person among us with such magnanimous generosity in his heart, combined with the extraordinary wisdom to know what is right for all of us. 

Stiglitz as Adam Smith’s “Man of System” Who Wants to Plan Society  

Perhaps Stiglitz’s slighting of Adam Smith is due to seeing too much of himself in Smith’s warning observation in The Wealth of Nations ( Canaan ed., [1776] 1937) that,

“The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which can safely to trusted, not only to no single person, but to no council or senate whatever, and which would never be so dangerous as in the hands of a man who had the folly and presumption enough to fancy himself fit to exercise it.” (p. 423)

We see in Joseph Stiglitz’s mindset what Adam Smith referred to in his earlier work, The Theory of Moral Sentiments ([1759] 1853) as “the man of system,” or what today we would call the social engineer or the political paternalist who believes he knows how society should be arranged:

“The man of system, on the contrary, is apt to be very wise in his own conceit, and is often so enamored with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it . . . He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon the chess-board; he does not consider that the pieces on the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it . . . It is to fancy himself the only wise and worthy man in the commonwealth, and that his fellow-citizens should accommodate themselves to him, and not he to them.” (pp. 342-343)

Markets and Prices Overcome Human Imperfections

The fact is, as Friedrich A. Hayek (1899-1992), also a Nobel Prize recipient, demonstrated 75 years ago in his famous article, “The Use of Knowledge is Society,” (1945), it is precisely the fact that each of us inescapably has imperfect knowledge about so many others and their activities in the wide world, including what they might want as consumers and their potentials as producers, that competitive market prices serve as the communication device that summarizes the minimum amount of information about relevant demands and supplies that enables each of us to have a reasonable and often successful chance to coordinate all that we might do with the plans and actions of all the billions of others participating in the, now, world-encompassing market system of division of labor. (See my articles, “Capitalism and Asymmetric Information” and “Capitalism and the Misunderstanding of Monopoly” and “Capitalism and How Expectations Coordinate Markets”.)

With amazing effectiveness and efficiency markets “do their job,” in bringing the talents, abilities, knowledge, and creative discovery and innovative imagination of humanity into the service of all of us each and every day – at least as long as those markets are sufficiently left free of government’s intervening and disrupting hand. When markets seem to “fail,” better understanding can be had if one looks around and sees that almost always it has been due to the regulating, manipulating and redistributing policies of the government. The financial crisis of 2008-2009 and the recent government lockdown-decreed response to the coronavirus with the resulting recession are among the damaging examples of this. (See my articles, “Ten Years On: Recession, Recovery, and the Regulatory State” and “Tragedies of Our Time: Pandemic, Planning and Racial Politics”.) 

If the paternalistic policies and the ideological arrogance and intolerance behind these counterrevolutionaries against freedom and the free market fully prevail, the liberty that we still possess will be even more greatly curtailed than at present, as those who call for the “social responsibility” of business restrict our remaining freedom to choose. This is not just a renewed attack against corporate or business decision-making guided by the profit motive. It is an onslaught against the liberty of each and every one of us to direct and manage our own lives as we think best in peaceful and voluntary cooperation with all others inside and outside of the marketplace.

By Richard Ebeling

Originally published on May 11, 2021 for the American Institute for Economic Research

Among many American “progressives,” there is a heady euphoria that their day has again come, that there is an opportunity to establish and implement their dream of a far more comprehensive and commanding government presence over the society.  

Given the spider’s web of additional or intensified government intrusions into almost every corner of personal, social and economic life that is desired by the political paternalists, it would be far easier to count on one hand the various aspects of our lives that would remain free of governmental regulation and redistribution, command and control, and planning and plunder.

Not a Corner the Paternalists Do Not Want to Plan

There is a near religious self-righteousness and faith-based confidence that if government is given sufficient authority, with all the needed funding, with the “right people” placed into political office and bureaucratic oversight, all the problems of the world can be overcome and corrected. The earth is dangerously warming? No problem, government central planning under the heading of a Green New Deal both in America and around the world can keep the planet climate stable, or whatever it is that the global paternalists mean by that. 

The wrong types and amounts of goods and services are being produced and unjustly “distributed” by the market? No problem, government regulatory and fiscal policy can see to it that the right goods, in the right amounts, are produced and then redistributed into the hands of those segments of the society the paternalists know are more and most deserving.

They just know the type of health care we each should have; how much our old age pensions should be; what wages we should earn and with what accompanying work conditions; the qualities and forms of foods and drinks we should be allowed to consume; the words we may use in conversation, the associations we should be allowed to form and participate in, and with what racial, ethnic, and gender numerical proportions in the memberships. They know how our children should be educated, and with what “anti-racist” and “gender-sensitive” content of ideas and understandings.

In other words, they basically claim to know everything about everyone in terms of how we should all go about our lives, with what purposes, for which ends, and with what outcomes for every one of us, based on how they have classified us on the basis of sex, gender, race ethnicity, social status, and “entitlement” deservedness. (See my articles, “The Nightmare Fairyland of the Green New Dealers” and “The Case for a Coercive Green New Deal?” and “The New Totalitarians”.)

The Paternalist’s Unbounded Arrogance

There is an almost unbounded arrogance and hubris in how they think about themselves in terms of what they should do to us in the name of doing for us. What they seem, absolutely and positively, unable to bring themselves to do, or even imagine themselves doing, is to simply leave us alone! They are obsessed with policing our use of words and our peaceful, nonviolent deeds. They seem incapable of letting us make our own decisions, and arrange our own personal and social and economic affairs.

If we are fat, it is because profit-motivated businessmen bombard us with too much of the wrong types of food, and the paternalists know the diets we should follow. If we are not eating enough, it is because those greedy private enterprisers won’t pay us a “fair” wage, or won’t give more to the needy who deserve it, out of the plentitude they “unjustly” have and control, and those paternalists will redistribute what others have produced. If members of racial and ethnic and gender minorities do not hold places and positions in various walks of life equal to their group statistical percentage in a community, it must be due to racism and “white male privilege,” and the paternalists will fix it through planned employment and occupation group quotas. 

If only the right people are in power, with the needed and seemingly unlimited funding, and in possession of the required government authority and control, then all the problems of the world could and would be solved. Listening to or reading such people, you would think that none of the planning and paternalism they are proposing had ever been tried, or had even ever been criticized (other than by self-serving and illegitimate “apologists for capitalism,” of course).

It is all a new dawn, of a new day, filled with dreams of daringly doing over the human circumstance. Anyone with a bit of an historical perspective knows that there have been many disastrous attempts, especially over the last one hundred years, to remake society according to government design, with abysmal failure for hundreds of millions of people who were made the victims of the planners and paternalists. (See my articles, “Socialism: Marking a Century of Death and Destruction” and “Socialism, Like Dracula, Rises Again from the Grave” and “Socialism-in-Practice was a Nightmare, Not Utopia”.)

F. A. Hayek and the Dangers from Planning

In fact, there is little or nothing that the paternalists and planners do not presume and argue for that has not been challenged and criticized with great cogency in the past. One of the most important of these critical voices against political paternalism and government planning was that of the Austrian economist and Nobel Laureate, Friedrich A. Hayek (1899-1992).  

In recent years, he has been the target of sometimes vicious attacks by those on the political “left,” who have misrepresented and even distorted what his views were on a wide variety of topics and policy issues, rather than straightforwardly answering his criticisms of their collectivist dreams. May 8^th marked what would have been Hayek’s 122^nd birthday, and it seems appropriate to recall his responses to the socialist ideas of his time, especially given their continuing relevance today. (See my article, “Quinn Slobodian and the Academic Attack on Mises and Hayek”.)

Hayek had early on made his international reputation as a leading monetary theorist who developed the Austrian theory of money and the business cycle, which had been first formulated by Ludwig von Mises. In this role, Hayek became one of the leading critics of and challengers to the emerging Keynesian Revolution in the 1930s and 1940s. (See my eBook, Monetary Central Planning and the State.)

During the war years, Hayek’s interests increasingly turned to answering the question, why was it that collectivism and totalitarianism had been intellectually and politically so successful in the first half of the 20th century, given the earlier successes of free market liberalism in the 19th century in ending monarchical tyranny and fostering widening and rising material betterment for growing numbers of people in Western societies? 

Hayek’s explanation was offered in The Road to Serfdom (1944), a work that soon won him popular recognition and notoriety in the wider community of public opinion in both Europe and the United States. He offered an interpretation as to how and why a civilized and advanced nation like Germany could succumb to the demagoguery of Adolf Hitler and his National Socialist (Nazi) movement. Hayek’s warning was that there was nothing culturally or politically unique in the German people that made them susceptible to all this. 

It was the attraction to the same collectivist and socialist ideas that were also increasingly common in countries like Great Britain and the United States. The appeal and hold of these ideas on the German people were just a few decades ahead of their impact in these other countries. And if any people did not wake up to their danger, economic control in a society can easily lead to political command over all aspects of life, if not stopped in time. (See my article, “Is America Still on F. A. Hayek’s ‘Road to Serfdom’?”.)

The Importance of Liberty and its Institutions

In the 1950s, Hayek’s interest centered on the political and social ideas and ideals upon which a free society is based, and without which such a free society is not easily maintained in the long run. This culminated in his 1960 grand book, The Constitution of Liberty. Here Hayek inquired into the nature and aspects of individual freedom, the meaning of the rule of law and the role of constitutions, and the rationales and limits to the welfare state in a free society. 

But soon his mind turned to a new project that built on the arguments in The Constitution of Liberty, but which he believed deepened and extended them in ways that this recently published work had not. After working on this new book through the 1960s, he began to publish it in the 1970s in three separate volumes, under the general title, Law, Legislation, and Liberty: A Restatement of the Liberal Principles of Justice and Political Economy, they were: Volume 1: “Rules and Order” (1973); Volume 2: “The Mirage of Social Justice” (1976); and, Volume 3: “The Political Order of a Free People” (1979). 

Given the recent revival of the socialist ideas of planning and paternalism, it seems appropriate to turn our attention to these volumes to better understand the presumptions and pretenses in this latest call for a return to a greater government direction of human society. 

Social Institutions Not the Result of Human Design

Central to much of Hayek’s thinking beginning in the 1930s, and especially focused on in Volume 1 devoted to “Rules and Order,” is his emphasis that many if not most of the social institutions that serve human purposes and improvement are not the creation of human intention and design. A little reflection on the nature of language, custom, tradition, rules of everyday ethics, etiquette, manners and mores, and the related rules of human interaction in various social settings including those of commerce and enterprise, as well as aspects of the common law, all show that they are for the most part what the 18^th century Scottish philosopher, Adam Ferguson, referred to as “the results of human action, but not of human design.” Almost all of these are the products of social evolution through the interactions of multitudes of people over many generations as they have grappled with and stumbled upon ways of effectively and successfully associating with each other for mutual gain. 

Most of us can recall being assigned to read some play by William Shakespeare when in high school or college, and often finding it difficult to follow the use of words and the turn of phrases in the Bard’s famous works. Yet, only a little over four hundred years separate us from Shakespeare’s death in 1616. His use of the English language from ours has changed in many ways, but none of it was planned, designed or commanded by government edict or decree. Every day, in many little ways, all the users of English over these four centuries have spoken words, written sentences, modified some spelling, forgotten or added some punctuation, or connoted some different meaning in a phrase that have cumulatively changed how the language is spoken, written, and how ideas are conveyed through it. 

Nor could anyone in 1616, or 1716, or 1816, or 1916 or 2016 have been able to know or anticipate the changes in English that have resulted in the language we speak and take for granted today in 2021. And none of us can have any real inkling of what changes await the English language in, say, the one hundred years to come.

No one can doubt that whether it is the language we speak or the customs and traditions we follow, or the manners, etiquette, or everyday ethics we practice in our dealings with others, that they all form parts of the essential societal glue without which complex and continuous human association would be nearly impossible. If their structures and the changes in them had been dependent upon a handful of minds that were guiding legislatures and bureaucracies on how and for what purposes they were used, society would be poorer in every imaginable way. 

Choice and the Institutions of a Free Society

Central to Hayek’s argument on social institutions and their evolution is that only freedom allows all the minds of all the people in the world to participate in the forms and types of interactions that individuals choose to initiate and associate within, the end result of which is that we all gain from what all those others can contribute to the global community of humankind, within which we attempt to better fulfill our own personal ends and purposes. 

Another element in the nature and structure of many social institutions is that they have evolved as procedural rules in the context of which each of us can go about our own ends while respecting the courses of action chosen by others. An example of such procedural rules is the rules of the road. They specify at what speed a car may be driven, that red lights must be stopped for at intersections, and that drivers must pull over when an emergency or police car is racing by with lights on and sirens blasting. But as long as these procedural rules of the road are followed, everyone is free to go where they want, when they want, for any purpose of their own choosing when behind the wheel of their automobile.

This contrasts, Hayek points out, with government regulations, controls, commands and prohibitions that dictate when people may act or interact, with whom, for what purposes, and under what terms and conditions. When this is done, not only are people limited in their liberty to what governments tell them, but their opportunities are limited to what the planners and regulators can know or imagine as possible and desirable. The actions of all of us are confined within what the limited minds of the planners and paternalists can conceive. Human progress, as well as everyone’s liberty, is straightjacketed to the decisions and knowledge of the few in political authority and power. 

The Mirage of Social Justice

The political planners and paternalists frequently insist that among their ultimate goals in redesigning society and its institutions is to establish “social justice.” This is said to be different from older or more traditional notions of justice, in the sense of merely respecting another’s life, liberty and private property, or abiding by and fulfilling contracts and agreements into which a person has voluntarily and freely entered.

Social justice, its proponents argue, calls for each receiving what they “justly” deserve or to which they have a distributive “right” or entitlement. But what are each person’s just desserts in society, other than what he or she may have earned in the free exchanges of an open and competitive market? 

In Volume 2 of Law, Legislation, and Liberty, Hayek’s theme is to demonstrate that social justice is a “mirage;” that is, something that when thought about from “afar” seems definite and clear, but when looked at up close loses all reality and objective meaning. What is a “fair wage,” or a “reasonable” standard of living, or a “just reward” for services rendered, or giving each their redistributive due for an “equitable” society? 

Hayek argues that there is no meaning to “social justice,” in the sense that “society” has been unfair. The reason being is that “society” does not act and “benefit” or “harm” anyone. Society is merely the covering term for all the individual actions, interactions, and associative trades and exchanges in the marketplace made by and between individuals. Each earns income from services rendered to others based on their chosen role and participation in the social system of division of labor. 

When I do my shopping in the supermarket and take a box of breakfast cereal off one of the shelves and put it in my shopping cart, I do not ask who are the individuals who have participated at different points in the multi-staged processes of production, the end result of which is the cereal box that is in front of me. Nor have I asked what each of those participants “really” deserve or what their personal merit and circumstances warrant in deciding what price to pay for the product I’m interested in buying. In fact, it is impossible for any of us to do so. 

Shall Markets or Politics Determine Your Fate?

If government were to take on the role of ladler of deservedness and merit to each member of the society we would have to presume that those people in government know enough about each and every one of us in that society to objectively and correctly distribute to each what they justly should have, no more and no less, according to some knowable and unanimously or widely accepted standard or benchmark. Not only would it require a God-like knowledge of all of humanity, but it would involve a degree of totalitarian control and determination of every human being’s material and social fate that few of us would want to live under, if we but reflected a moment on what its consistent application would entail. 

In the free marketplace, I need neither the approval nor agreement of all my fellow human beings or the government about what I “really” deserve or should have. My life is my own, lived by me, as I consider best, guided by the values and purposes I decide will give happiness and meaning to my existence. 

Yes, how much I may earn and therefore the standard and quality of my life is dependent upon what others consider the worth of what I can do for them in the marketplace in the pursuit of their own purposes. But in that marketplace, there are actual and potential chances and opportunities for me to try to improve my talents, abilities, and skills in various ways that may enable me to enhance my value in the eyes of those who might purchase something I have for sale. 

But once my “just rewards” are to be determined by those in political power, it is far more outside of and beyond my control or influence. In the free marketplace, I am free to try to find avenues on my own through which I can improve my income-earning abilities. But once this is politicized under a regime of redistributive “social justice,” it is out of my hands, with my only avenue being participation in political pressure groups attempting to get government to give more to the social group to which I have been assigned based on “class,” race, gender, or sexual orientation. My individual fate is tied to that of a collective, my membership in which will most likely have been imposed on me by others, whether I’ve wanted it or not.

For this reason, Hayek says at one point: 

“The near-universal acceptance of a belief does not prove that it is valid or even meaningful any more than the general belief in witches or ghosts proved the validity of these concepts . . . I believe that ‘social justice’ will ultimately be recognized as a will-o’-the wisp which has lured men to abandon many of the values which in the past have inspired the development of civilization . . .

“Like most attempts to pursue an unattainable goal, the striving for it [social justice] will also produce highly undesirable consequences, and in particular lead to the destruction of the indispensable environment in which the traditional values alone can flourish, namely personal freedom.”

Liberty Requires Limited Government

In Volume 3, which is concerned with “The Political Order of a Free Society,” Hayek warns that a free society is also endangered by the attempt to have a purer and more unrestrained system of political democracy. Democracy is an enemy of liberty when it is not appreciated that many of the historical freedoms that emerged along with the democratic ideal – freedom of speech and the press, freedom of association, freedom of religion, wide ranges of personal freedom of choice – can only be secured when majorities are limited in what and how they may make decisions affecting others in society. This includes the case for economic liberty. 

Majorities can be as intolerant and tyrannical as the worst absolute monarchs of the past, if not even more so. What has failed, in Hayek’s view, has not been the idea of democracy as such, but the particular form of democracy that developed over the last two hundred years, under which fewer and fewer corners of individual life are safe from what coalitions of special interest groups that form majorities on Election Day can impose on the rest of society. (See my articles, “John Stuart Mill and the Three Dangers to Liberty” and “To End Budget Deficits, Restrict Political Pickpockets”.)

Hayek hoped that there could be found forms of “free government,” under which those who are ruled may “democratically” select those holding political office, but which at the same time leave the individual citizen free in most matters to live his own life as he sees best in free associations with others. 

A very thoroughgoing classical liberal or libertarian, will, no doubt, find a noticeable number of inconsistencies and even contradictions in Hayek’s arguments concerning the role and limits of government in society. But this in no way detracts, in my view, from the underlying and essential insights that Hayek developed on the importance of freedom and the nature of a free society.

I would suggest that the spirit of all that Hayek argues in Law, Legislation, and Liberty is captured in the following passage in Volume 1 devoted to a discussion of “Principles and Expediency:”

“A successful defense of freedom must therefore be dogmatic and make no concessions to expediency, even where it is not possible to show that, besides the known beneficial effects, some particular harmful result would also follow from its infringement. 

“Freedom will prevail only if it is accepted as a general principle whose application to particular instances requires no justification. It is thus a misunderstanding to blame classical liberalism for having been too doctrinaire. Its defect was not that it adhered too stubbornly to principles, but rather that it lacked principles sufficiently definite to provide clear guidance . . . 

“People will not refrain from those restrictions on individual liberty that appear to them the simplest and most direct remedy of a recognized evil, if there does not prevail a strong belief in definite principles.”

At a time when freedom is once more directly under attack by those who wish to return to the failed system of government planning and paternalism, renewing our understanding of and appreciation for Friedrich A. Hayek’s contributions can only strengthen our arguments for a society of liberty.

By Richard Ebeling

Originally published on August 6, 2021 for the Future of Freedom Foundation

One hundred years ago, the countries of Europe were trying to recover from the consequences of the First World War. It was not only the cost in human life (estimated to be more than 20 million people) and the military expenditures of nearly $5 trillion in today’s dollars. It was the political and ideological legacies of the war, as well.

The relatively classical liberal institutions that had generally prevailed in many of the Western nations before the war had been weakened by the wave of wartime controls and central planning introduced by the belligerent governments. Socialists were calling for the end to capitalism and its permanent replacement with government peacetime central planning. Others called for a new “social liberalism” of extensive and intrusive government interventions and welfare state redistributions.

Few were the voices still emphasizing the importance of a free-market order and the value of personal liberty from overbearing government. One of those voices was the British economist Edwin Cannan (1861–1935), who taught at the London School of Economics from 1895 to 1926 and continued to lecture and publish until his death in the mid 1930s. He influenced an entire new generation of British economists to be critical of any unreflective advocacy of socialism, nationalism, and interventionism. While not an advocate of laissez faire, he strongly emphasized the importance and superiority of the competitive free market, and he drew attention to the power of markets to bring about a global system of peace and prosperity.

A master of the history of economic ideas

Cannan was a master of the history of economic thought. His two major works, A History of the Theories of Production and Distribution in English Political Economy from 1776 to 1848 and A Review of Economic Theory, have long been considered penetrating critical studies of the “classical” labor theory of value and its implications, from Adam Smith through John Stuart Mill. His 1904 edition of Adam Smith’s Wealth of Nations, with detailed annotated footnotes and references, has long been considered to be an outstanding version of that work for the interested and scholarly reader. It is still widely used today.

Most of Cannan’s analysis of the classical economists in those works focused on questions of “pure theory” concerning the value and role of labor, land, and capital in the economy. He insisted that whatever may be the shortcomings in their writings, the classical economists offered a penetrating analysis of the dynamic and competitive workings of the market system that served well in the nineteenth century. They helped to bring about invaluable political changes with the end to many domestic government interventions and the victory of the free-trade movement in place of the long-prevailing forms of trade protectionism.

If politicians often criticized the classical economists and some of those who came after them for not showing how government controls and regulations could be practicable and effective, Cannan insisted that: “The truth is in reality that the economist refuses to take a side when both sides are wrong, and declines to say Yes or No to a question when both the affirmative and the negative answer would make him admit what he knows to be untrue.” In other words, the proper role of the economist is to tell the truth about how markets work and not to serve as rationalizer and apologist for the purposes of those in political power.

Teaching the “miracle” of the market

What stands out in Edwin Cannan’s writings is a simplicity and clarity in explaining the “miracle” of the market in a world-encompassing division of labor that connects multitudes of people for mutual improvement and peaceful cultural gains. His style, therefore, makes his volume, Wealth, for instance, an entertaining pleasure to read as he takes the reader through the various facets of the working and elements of the market order. While he did not presume to assign to the state only a minimalist place in society, he emphasized the power and productivity of free and creative initiative and incentive that comes only when people have a wide latitude of economic liberty.

He warned against some of those who called for laissez faire, not because the case for free markets did not have a reasonable rationale, but because too often, “To the practical men, the precept ‘Laissez-faire,’ never really meant ‘Leave everything alone’ … but simply ‘Leave alone certain things which I think ought to be left alone’.” That is, some said, let’s have economic liberty when I want it, and some government intervention when I’ll benefit from it. The case for free markets should not be judged by the inconsistencies and hypocrisies of some, but it should be judged on its own logical and historical grounds.

Protesting against planning and inflation

Cannan was also an early con­tributor to applying the logic of marginal analysis to the theory of money in his books — Money: Its Con­nection to Rising and Falling Prices and Modern Currency and the Regulation of Its Value — and espe­cially in his article, “The Applica­tion of the Theoretical Apparatus of Supply and Demand to Units of Currency” in the Economic Journal.

He was scathing in his criticisms of the British government in going off the gold standard during the First World War. Rather than telling people the truth about what the actual financial cost was to fund the war by simply taxing the citizenry the full amount needed for military expenditures, it was so much easier to resort to the monetary printing press.

To issue more paper currency is an easier expedient for securing increased spending power than borrowing and very much quicker than taxation…. But no less important, it is supposed that if money incomes increase, the people will be less discontented with a diminished amount of material well-being which seems to them to come from high prices, than they would be with that diminished amount of material well-being if it seemed to come from diminution of spendable money income.

Indeed, throughout the war years of 1914 to 1918, Cannan wrote articles, delivered talks, and submitted letters to the editor deploring government planning of production, controls over prices and wages, restrictions on personal freedom, and budget deficits covered by what he once referred to as a “diarrhea” of British pound notes created by the Bank of England to finance war expenditures and the resulting price inflation. Many of his writings from this period were collected in a volume titled An Economist’s Protest. In the preface, he said, “What should I answer if anyone had the impertinence to ask me, ‘What did you do in the Great War?’ … The best answer I can think of is ‘I protested’…. The greater part of my effort was directed to combating some extraordinary delusions which took possession of the minds of the people and their governors.”

Cannan also had a biting wit, as was shown in a 1925 review that he wrote of The State Theory of Money, by the German professor George Knapp. In it he amusingly hammers away at the ignorance, errors, and logical absurdities of the author in thinking that anything a government declares to be money will be passively accepted by the citizens and that regardless of the quantity of such a paper money created by that government, the political authority may arbitrarily set its value at any level and market buyers and sellers will just accept and use it on that basis. Or as Cannan says, “This book may fairly claim to the most obsolete work ever published by a scientific association during the lifetime of its author.”

Emphasizing the prosperity and peace from the free market

Before the war, Cannan had already considered it his duty as an economist and a citizen of a free country to challenge the growing collectivist delusions creeping into the public mind. One of my favorites of his many works is a collection of essays published in 1912, The Economic Outlook. In a presidential address delivered before the British Association in 1902 entitled “The Practical Utility of Economic Science,” Cannan said that the first and most important lesson a professor can give “is to try to open the eyes of his pupils to the wonderful way in which people of the whole civilized world now cooperate in the production of wealth.”

He will ask them to consider the daily feeding of London. There are, he will point out, six millions of people in and about London, so closely packed together that they cannot grow anything for their own consumption, and yet every morning their food arrives with unfailing regularity, so that all but an infinitesimal fraction of them would be extremely surprised if they did not find their breakfast ready to hand.

All of this comes about through the incentives and opportunities of free-market exchange in a system of division of labor that covers the world, with each participant guided by his own self-interest and the hope of personal gain in this global arena of voluntary association. Or as he expressed it in another place, “Modern civilization, nearly all civilization, is based on the principle of making things pleasant for those who please the market and unpleasant for those who fail to do so, and whatever defects this principle may have, it is better than none.”

Among the benefits from a knowledge of economics, Cannan stated, is that the unfettered market creates the profit opportunities and incentives to produce those things wanted more urgently by the consumers and to offer them for sale. Government subsidies and other types of interventions, on the other hand, only wastefully misdirect the use of the scarce resources on which all of our well-being is dependent.

Likewise, an understanding of the basic principles and insights of economics “has great practical utility in promoting peace and goodwill between classes and nations.” How very important it is to appreciate that all of humanity benefits from the peaceful processes of specialization and division of labor, so all may benefit from the productive possibilities of their fellow human beings through the processes of market exchange. “What jealousies, heart-burnings, and unfounded terrors leading to hatred would be extinguished if only these elementary facts were generally understood,” he said.

Socialism and nationalism reduce wealth and create conflict

Another essay in the same volume is “The Incompatibility of Socialism and Nationalism.” The idea here was to bring out the fact that socialists talked about betterment for all humanity, but the world is divided up into nation-states. In a global free-market order, economic cosmopolitanism prevails, in that human association and production and exchange are private matters of the citizens of the world. Political borders do not prevent a global cooperative integration of the economic activities of everyone anywhere in the world.

But socialism within nation-states means national central planning. Each socialist government would claim control and use over the resources and labor force under its own political jurisdiction. The only goods and resources allowed to be traded between national socialist regimes would be those that the respective national central planners were willing to part with or accept as part of their respective central plans. The worldwide gains from international specialization and trade that are taken for granted under private enterprise in a global free market would be lost, since the only allowed transactions would be those agreed to by the socialist governments of each country.

That would also mean that if the government of one socialist nation wanted and could not get the resources or finished goods that were available in a different socialist country, the only recourse would be to go to war or permanently be less well off than wanted by the authorities in the frustrated centrally planned nation. Thus, looking over mankind as a whole, a world of national socialist regimes would mean either accepting reduced standards of living or constantly facing the threat of international conflicts leading to warfare, with one socialist state trying to gain the collectivized property of another socialist country.

Explaining economic complexity in understandable terms

The great power of economic ideas in clarifying the nature, logic, and working of the market order within which we all live and benefit can get lost within the economics profession. Cannan lamented, with an overdevelopment and excessive reliance on narrow technical tools of economic analysis that obscure the real-world application of economic reasoning, in his presidential address before the Royal Economic Society, “The Need for Simpler Economics,” published in the Economic Journal.

He said that too often the simple and common-sense truths of economics “are not expressed in plain language understood by the people,” but, instead, they “have been treated as a classroom plaything to be illustrated by lines and curves on a blackboard, which like the stone and wooden idols of the more degraded religions, come to be revered for themselves rather than for the things they were originally intended only to represent.”

Cannan bemoaned the economic stupidity of too many in society who considered the exporting of goods a good thing in protecting domestic employments, while considering imports a bad thing that benefits only the foreign sellers. Here, too, a clear and convincing presentation of basic economic truths needed to be offered:

What is required is a much more simple, vigorous, and convincing exposition of the fact that employment is only a means to the attainment of an end, which is the acquisition of goods and services, and that we trade with foreigners, as we trade with those whom we serve and those who serve us at home, not to give ourselves employment, but in order to get the things and services we want more easily
— cheaper, if you like — than if we produced them for ourselves.

Why members of the voting public failed to fully understand such basic economic truths rested not only on the citizens’ “feeble mind, but in large measure on the unnecessarily complicated expositions offered by the economists.” They should not shun developing ways of making such things clear and intelligible by, instead, trying “to find peace and contentment in neat equations and elegant equilibria.”

Say’s law and free markets for full employment

Cannan was a strong and articulate defender of Say’s law of markets, and that if idle resources and unemployed workers widely exist in society it is not because of a deficiency in “aggregate demand,” but because of wrong (or disequilibrium) pricing of goods and factors of production. His analysis of the problem of economy-wide unemployment is found in his 1932 presidential address, “The Demand for Labor,” before the Royal Economic Society, published in the Economic Journal, and reprinted in his collection of essays Economic Scares under the changed title of “Not Enough Work for All.” He proves it is never the case for labor and other factors of production to be unemployed when they are rightly priced in the market.

There is always work to be done, since the wants and desires of human beings are never completely fulfilled, since the achievement of some goals soon sets men’s mind moving in new directions, and shifting any point of satiation further out to new points of a never-reachable horizon of human well-being.

If we start with Robinson Crusoe alone on his island, it is clear that his labor, time, and efforts are never redundant, with plenty of work to still attend to, if not in one direction than in another to satisfy his own wants. It is no different when Friday comes along on his island. Crusoe may now be able to get some things from Friday that he cannot produce at all for himself or not as cheaply in terms of his own labor, time, and resource use as he can get them from his new companion. By devoting more of his own efforts to make things he can do better or less expensively than Friday, he can offer them in trade.

The same applies within the greater complexity of a modern, money-using economy, in which many people offer their labor services to employers who pay them salaries for work that the entrepreneur directs into lines of production he believes will result in the manufacture of products that can be profitability sold to consumers. If demands shift or supplies change, some workers may have to change what they do, and where they do it, and possibly at a lower wage than they previously earned. But if the needed adjustments are made in terms of work and wages, everyone wanting employment may successfully find it with no idle hands left unemployed.

Cannan delivered this address during the depth of the Great Depression, when it seemed that there were plenty of hands looking for employment but too little demand for all those wanting employment. But even in a situation like that in the early 1930s, Cannan insisted, “General unemployment appears when asking too much is a general phenomenon….” And if employment was to be restored, “Money-wages and salaries should be allowed to be reduced without resistance,” if employers are to once again find it profitable to increase hiring. In other words, a competitive market needed to determine prices and wages to successfully restore full employment.

Cannan also pointed out the perverse effects from unemployment insurance in creating disincentives for the unemployed to search for new and available employments by reducing the cost of being out of work, an argument that he offered in his article “The Post-War Unemployment Problem” in the Economic Journal.

Cannan as influential teacher for economic liberalism

Finally, one of his students and later colleagues at the London School of Economics, the monetary theorist Theodore E. Gregory (1890–1970), recalled Cannan, the man and the teacher, in a recollection shortly after Cannan’s death, in his article “Edwin Cannan: A Personal Impression” in Economica,

I first heard Edwin Cannan lecture in the Autumn term of 1910…. Cannan was then already nearly fifty…. My main recollection, since I have lost what must have been exceedingly bad notes, is that of a small stocky man with a black beard, a habit of propping up a leg upon the large chair which stood upon the platform, a very difficult delivery and a habit of looking over our heads into a distant corner of the room, so that much of what he said was altogether missed by us, in both senses of the word….

However that may be, by the end of the two years we were all — specialists and non-specialists alike — sworn disciples…. I doubt if any teacher of the last few decades has performed a greater service than did Cannan in all the years that he was at the [London] School [of Economics] in “debunking” vague language and vaguer ideas by his use of the Socratic method. The question was put without the slightest arrogance of voice or manner: we felt we were being “put through it” because we were young and ignorant: indeed, I doubt whether any great scholar has ever shown himself more willing and eager to encourage the slightest sign of originality on the part of his students.

Austrian economist Friedrich A. Hayek once praised Cannan’s writings in his article “The Transmission of the Ideals of Economic Freedom,” because of their pointed “simplicity, clarity and sound common sense [which] make them models for the treatment of economic problems, and even some that were written before 1914 are still astonishingly topical.” Because of his writings and his influence on that generation of British economists at the London School of Economics, he helped to create an “important center of the new [classical] liberalism” in the English-speaking world.

That is what makes reading and learning from an economic “protester” such as Edwin Cannan as relevant and useful today in the cause of economic liberty as when he first wrote his books and articles, and influenced that earlier generation.

By Richard Ebeling

Originally published on April 13, 2021 for the American Institute for Economic Research

This year marks the 150^th anniversary of a radical change in the way economists came to understand the logic of human decision-making and the formation of prices in society. There occurred what is often referred to as the “marginalist revolution” in place of the classical economists’ notion of a “labor theory of value,” which was generally accepted from the time of Adam Smith.

In 1871, there appeared two books, Carl Menger’s (1840-1921) Grundsätze der Volkswirtschaftsliche, (or, Principles of Economics as it was translated into English), and William Stanley Jevons’ (1835-1882), Theory of Political Economy. This was followed shortly after by Leon Walras’ (1834-1910) Elements of Pure Economics in 1874. Menger, Jevons, and Walras each made their contribution independent of even knowing about the others’ existence. Yet, the focus, very often, has been on the common elements to be found in their respective expositions. 

The Classical Economists on the Market Process

All three of them, each in his own way, challenged the idea that the exchange value of goods in the marketplace was based on some version of the quantity of labor that had gone into their respective manufactures. Consumer demand was generally taken merely as “given,” as something that any tradable good had to possess if any good were to be bought, but it was viewed as a more “passive” than “active” element in influencing the working or structures of market activities. 

The classical economists had developed a fairly clear and cogent analysis of how private enterprise, guided by the profit motive, organizes and directs production to where the “given” consumer demand suggests the most profitable gains may be made; that competition among private enterprises will compete profits away where they are found to exist, and to shift production out of those areas in which losses are being experienced. The end result of which is that supplies are tending to match demands, and no more than “normal” profit is earned by business firms in those areas of the market where entry is unrestricted and resources may be freely reallocated from one part of the market to another. 

While virtually every classical economist emphasized that if any good were to be demanded and purchased in the market, it must possess “utility;” that is, qualities and characteristics desired for some consumption use by consumers, they said very little beyond that, other than the common sense understanding that consumers tend to buy more of the good as its price decreases and less when its price goes up.

It is easy enough to find a handful of economists in the 19^th century who can be shown to have more subtle understandings and analysis of utility and demand than has just been suggested, but I do not think it is an unfair statement that, generally, the logic of consumer choice was not fully and successfully analyzed. 

The Marginalist’s Challenge the Labor Theory of Value

Enter our three “marginalists,” Menger, Jevons, and Walras, in the early 1870s. At one level, the difference between the classical economists and the marginalists was the issue of categorical versus incremental. The “classical’ paradox of value arose precisely because from Adam Smith on there was the “why is it” that things of great “objective” value often have significantly lower “exchange” value than objects of nonessential importance – water versus diamonds. Their answer was that while water was essential to human life it generally was widely and abundantly available with little or no human effort to bring it to man’s use. While a diamond, though a mere ornamental bobble, usually required a far greater human effort to bring any amount to market. Hence, an essential item was had at a very low market price, while a nonessential one traded for a much higher price. 

As historians of economic thought have almost unanimously pointed out, it all came down to the faulty insistence of thinking in “either/or” terms; that is, all water versus all diamonds. Think, instead, in incremental terms of having singular units of each good in succession, and the paradox melts away. Precisely because water is relatively plentiful in comparison to all uses people may have for it, and with each additional available unit of water assigned in descending order of importance to uses for which a person may have for it, the “marginal” or “final” unit is assigned to the rather low, least most important use for which water is capable of serving.

With the supply of water hypothetically approaching the satiation point for which the “marginal unit” can be applied, the price that the consumer likely would be willing to pay for that last unit is far, far less than if it the available supply was only able to satisfy the first, second, or third most important uses for which units of water might be used. The available supply of diamonds “cuts” people’s respective marginally ranked value scale for them much, much higher up and away from any comparable satiation point. Thus, the price a person might be willing to pay to acquire his desired marginal unit of a diamond is significantly above the price he is willing to pay for the marginal unit of water.  

Demand Guides Markets, and Costs as Opportunities Foregone

Rather than it being the relative labor costs of bringing alternative goods to market that determines their relative prices, it is the demand curves, and the respective (marginal) utility ranking scales underlying them, that guides and determines which goods are more profitable for which to undertake production, and therefore the “costs” worth incurring in terms of scarce resources and labor to bring them to market. 

It would be a few years later with, especially, the “second generation” of “marginalist” economists – Friedrich von Wieser and David Green and Herbert Davenport for instance – that cost was more clearly reinterpreted not as a physical quantity of labor devoted to the manufacture of a good, but the (marginal) utility or worth of the alternative “opportunity” foregone in devoting scarce means to the use of one desired consumer good rather than some other. Thus, cost, too, was a matter of an evaluating mind deciding the more or less importance of a desired alternative end and not a measured amount of some “objective” quantity of labor. It was the “marginal” value of competing ends that determined the worth of useful means employed in different ways, and not the other way around with the relative labor inputs determining the relative value of the ends in the form of the prices of finished goods. 

This was considered part of the common intellectual heritage of Mengers, Jevons and Walras’ contributions that were most frequently emphasized by historians of economic thought over a good part of the 20^th century. If a distinction was made between them, it usually was that Menger had not reached the analytical heights of his two marginalist colleagues due to his (and his followers’) reluctance or inability to appreciate and apply mathematics for a more precise and deterministic analysis of the logic of the margin.

Menger’s Distinct Approach to Economic Thinking

Only later in the 20^th century did a number of economists, and others including Carl’s son, the noted mathematician, Karl Menger, Jr. (1902-1985), begin to make the case that in Menger’s nonmathematical approach could be found a subtle analysis of things much closer to the reality of human decision-making and choice than that offered by an approach that narrowly focused on the first derivative of a function and a series of simultaneous equations. Menger not only explained marginal decision-making in terms of the discrete units of goods (rather than the hypothetical infinitesimal of a continuous mathematical function) as real choices are made by real people in the real world, but a choice making that is enveloped by and inescapable from the presence and relevancy of market and social processes in time, with uncertainty and people’s imperfect expectations concerning the future.

Another distinction between Menger’s analysis and those of Jevons and Walras was that Menger was far more conscious and incorporating of the historicity of economic processes and the evolutionary character of the institutions through which men make their choices and interact with each other in the market process. For Menger, the “complex phenomena” of the market and the larger society cannot be simply taken as “given.” In his view, a successful analysis of human affairs must be able to explain how the institutions of the market have emerged and taken form through the often-unintended self-interested interactions of multitudes of individuals, whose activities generate social arrangements and outcomes that none of the participants had planned as part of their own, respective, actions in attempting to achieve their personal purposes and ends. 

Money and the Unintended Consequences of Human Action

His theory of the origin of money became his stereotypical instance of such processes. People desiring to better their circumstances through gains from trade sometimes find that a barter transaction cannot be consummated due to a failure of, say, a double coincidence of wants between the potential traders. Rather than leave the arena of exchange disappointed, individuals may imagine or see the existing success of others in first trading away their own less marketable good for one that is more highly demanded by many in the marketplace. Even if this individual has no particular use for this good, himself, he sees that once a quantity of it is in his possession, he will find it much easier to acquire from others what he wants because he now has something more readily accepted in exchange by potential trading partners. 

Slowly this discovery and practice will spread from one individual to another, and another, and another, until finally someone or some small handful of commodities, having especially useful qualities and characteristics for trading purposes, will be “institutionalized” through routine, habit, custom and tradition as the “money-good(s)” of the market. Who can deny that a little reflection makes it clear that without the emergence of such a medium of exchange, the complex systems of division of labor and the various forms of direct and indirect trade that we take for granted would have been nearly impossible to have developed in the way they have?

Many Useful Institutions are Unintended Social Outcomes 

Menger, by the way, never denied that while many institutions of society have their origins in just such “spontaneous,” unplanned and unintended processes of human interaction, once they are established, they can be open to more intentional and planned reform, improvement, and change, as well as continue to evolve and transform through time through the same “spontaneous” processes that had brought them into existence. Commonly they end up being the product of both, being changed “unintendedly” in various and sundry ways that people in their everyday interactions are not aware of and being modified by social and political “designs” of various sorts. A mixture of the “intended” and the “unintended.” 

For Menger, a whole array of social institutions have demonstrated their origin in this “spontaneous” process, including language, religion, law, political organizations and arrangements, money, markets, “all these social structures in their various empirical forms and in their constant change are to no small extent the unintended result of social development,” Menger said. “The prices of goods, interest rates, ground rents, wages, and a thousand other phenomena of social life in general and of economy in particular exhibit the same peculiarity.” 

One finds little or none of this type of analysis in either Jevons or Walras. In Jevons’ case, markets and their institutional forms are not only simply taken as existing, but to reach the equilibrium market conditions he desires to demonstrate on the basis of the “pleasure-pain” of marginal benefit and marginal cost, he presumes without explaining or even suggesting how, that markets are “perfect,” with agents possessing near full knowledge about themselves, others and all circumstances that might otherwise result in any of them making a wrong decision and a false exchange that would prevent precisely the balanced maximizing of utility at the refined mathematical margins of choice. 

Walras’ Artificial Auctioneer to Make Markets Work

Walras is famous for presuming that the existence of an auctioneer, a “crier,” who shouts out alternative bid and ask prices on the basis of which the auctioneer proceeds to tabulate the quantities of demand and the quantities of supply at these alternative possible prices, until he lands upon that set of relative prices at which the supplies and demands for each and every good will be correctly matched, at which point, and only at such a point, are transactors allowed to consummate their trades with each other. How such auctions would have emerged, and why in the forms and rules that participants let the “crier” know their truthful answers about how much they would be willing to buy or sell at the different prices he cries out, and have come to agree among themselves not to trade at any prices other than the ones the auctioneer says are those that will simultaneously “clear” all markets, is never explained. The most Walras ever said was that the actual processes of the real ongoing markets “empirically” do and achieve what he posits his imaginary “crier” to be doing in his make-believe market.

It might be said that Menger does not get much further than his comarginalist founders in terms of explaining the logic of markets and the coordination of supply and demand on the basis of marginal decision-making. He, too, attempts to show how marginal evaluations of a group of buyers and sellers result in a relatively narrow range within which a market-clearing price would have to fall, rather than a pinpoint equilibrium determined price such as Jevons and Walras attempted to postulate, based on how they, respectively, specified market conditions and what is either known or given as information for the actors to make no mistakes. 

For Menger the Market Process of Price Formation is Important 

But there is this important difference in emphasis and concern in Menger: a precise determination of any and all equilibrium prices do not matter to him, other than as illustrations of the nature and logic of market processes. Jevons and Walras, on the other hand, consider it imperative to be able to demonstrate what the set of equilibrium prices would have to be, given the underlying market circumstances. This is essential to their analysis, but for Menger it is peripheral. Said Menger:

“However much prices, or in other words, the quantities of goods actually exchanged, may impress themselves on our sense, and on this account form the usual object of scientific investigation, they are by no means the most fundamental feature of the economic phenomena of exchange. This central feature lies rather in the better provision two persons can make for the satisfaction of their needs by means of trade . . .

“Prices are only incidental manifestations of these activities, symptoms of an economic equilibrium between the economies of individuals, and consequently are of secondary interest for the economic actors . . . The force that drives them to the surface is the ultimate and general cause of all economic activity, the endeavor of men to satisfy their needs as completely as possible, to better their economic positions.”  

Hence, it is the logic and process of price formation in general, and in differing situations, that is crucial for Menger. With ever-changing circumstances through time, the underlying supply and demand conditions embedded in the valuational judgments of market participants will not remain the same. As a result, the market generated prices of yesterday are likely to be different than those of today, just as tomorrow’s prices will vary from those in the present. What was important, therefore, in Menger’s view, was the general “laws” of prices and price formation that could make any emerging and observed prices intelligible in terms of an analytical understanding of their causal origin in the individuals’ subjective (personal) valuations and the interactive competitive process that results in the transitory price relationships of the changing moments. 

Böhm-Bawerk’s Market Process of Price Formation

It is from this beginning in Carl Menger that it may be said that the “Austrian” focus on market processes instead of equilibrium states has its origin. It is of note, for instance, that when Menger’s follower, Eugen von Böhm-Bawerk (1851-1914), offered his own exposition of value and price in a long “digression” in his Positive Theory of Capital (1889), which builds on that of his mentor, he assumed neither that market transactors possessed perfect knowledge of all relevant exchange circumstances nor interjected a magical “crier” telling people when it was appropriate to trade at equilibrium prices. 

Instead, market participants enter Böhm-Bawerk’s market knowing their own supply of the good they wish to sell, a general idea of the minimum price at which they may be willing to sell it and a general idea of some price they might be willing to bid for some other good they are interested in buying. But it is only in the actual competition of other sellers offering a good similar to his own and rival buyers also making bids to buy the same good he is interested in purchasing, that each particular individual must make up his mind whether to offer to sell his own good for less to win customers and how high he might be willing to go to outbid those closest to his initial bid to buy. 

Thus, it is only in the process of competing as seller or buyer that the individual market participant “discovers,” if you will, his own value scales as a seller and buyer, and has it open to revision, as some of his supply rivals and demand competitors offer to sell for less than him or bid more to buy than him. In other words, in Böhm-Bawerk’s market, the participants themselves initiate and make bids and offers, actively compete against one another in the “endogenous” process of creating and forming prices until enough demand-side bidders and supply-side sellers have, respectively, dropped out and left the market, that a price is found at which supplies are brought into balance with demand. 

Even in the case of Böhm-Bawerk’s simple market setting, bids and offers and market prices emerge and then form out of the subjective valuations and purposeful actions of the participants themselves. Here is a conception of actual price formation from within the market, rather than through the magic of set up assumptions or imaginary marketwide auctioneers giving prices to people to which they passively respond until they are told to trade. 

Menger on the “Spontaneous” Development of Communities

Now, the same applies to Menger’s analysis of the origin of monopoly and the emergence of market competition. It is true that in his Principles, Menger attempts to logically demonstrate the range in which a market price has to fall when there is, say, one seller and several buyers bidding for what he has for sale. But Menger is also interested in placing his conception of a monopoly price in the larger context of the historical origins and reasons for there to be a monopoly situation of a single seller in the market. 

Menger pointed out that it has not been uncommon for monopoly to have arisen and been maintained due to the interventions of the political authority; that is, government. But his wider focus is how competition “naturally” emerges from situations of a single seller in the market. The setting for understanding this, once again, is Menger’s attention to the spontaneous and unintended development of social and economic institutions. In his Investigations into the Methods of the Social Sciences, with Special Reference to Economics(1883), he explained that new towns and cities historically may sometimes have been the intentional creation of a political authority or some designing, collaborative group. But, in general, he suggested, 

“As a rule, however, new localities arise ‘unintentionally,’ i.e., by the mere activation of individual interests which of themselves lead to the above result furthering the common interest, i.e., without any intention really directed toward this. The first farmers who take possession of a territory, the first craftsman who settles in their midst, have as a rule only their individual interest in view. Likewise, the first innkeeper, the first shopkeeper, the first teacher, etc. 

“With the increasing needs of the members of the society still other economic subjects find it advantageous to enter new professions in the gradually growing community to practice the old ones in a more comprehensive way. Thus, there gradually comes into being an economic organization which is to a high degree of benefit to the interests of the members of a community . . . Yet this organization is by no means the result of the activation of the common will directed toward its establishment.” 

The American West as An Example of Menger’s Thinking

The imagery that most easily comes to mind, especially for an American, is the settling of the American West across the continent. Settlers arriving as immigrants landed at established port cities, but soon, wave after wave, moved west into unsettled places and on to unclaimed land. A farm is laid out, a house and a barn are built and the planting field is prepared. Not far is another farming family doing the same. With enough such family farming enterprises, another immigrant moving west sees an opportunity to open a general store as a means of earning a livelihood rather than taking up farming himself, maybe because he worked in a store in the “old country,” making him feel more comfortable doing a type of work to earn a living with which he is already familiar. 

Soon a livery stable is established, a barber shop, and a hotel and saloon. A medical doctor, moving west, is passing through this town and realizes that here is a chance to open a practice, since there seems to be no other doctor anywhere near this area. With farms and shops and enterprises growing the community, some lawyer looking for a place to hang out his shingle to handle deeds, disputes, and related documents builds or rents an office. A traveling minister preaching the word of God, decides that this town might be somewhere to settle down himself with enough potential parishioners to support a church and its pastor. The young ones in the town and surrounding farms may need some “book learning,” and a committee of the town’s folk advertise for a ‘schoolmarm” to join their community. The townspeople may find it worthwhile, at some point, to hire a sheriff, as well, to keep the peace. 

Menger on Why Monopoly Comes Before Competition

In this social process of emerging towns, Menger suggests that monopoly, meaning an initial single seller of a good or service, is the “natural” starting point of such an emerging community system of division of labor. In other words, monopoly comes first and competition arises out of it, over time, when there are no legal or similar impediments to supply-side rivalry. He makes this very clear in his Principles: 

“We would interpret the concept of the monopolist too narrowly if we limited it to persons who are protected from the competition of other economizing individuals by the state or some other organ of society . . . Every artisan who establishes himself in a locality in which there is no other person of his particular occupation, and every merchant, physician, or attorney, who settles in a locality where no one previously exercised his trade or calling, is a monopolist in a certain sense, since the goods he offers to society in trade can, at least in numerous instances, be had only from him. The chronicles of many a flourishing town tell of the first weaver to settle there when the place was still small and poorly populated . . . Monopoly, interpreted as an actual condition and not as a social restriction on free competition, is therefore, as a rule, the earlier and more primitive phenomenon, and competition the phenomenon coming later in time . . . [being] closely connected with the economic progress of civilization.”

It is only with the development of more intense and extensive economic development, Menger argued, that competition emerges out of monopoly. The growing number of people needing the product or services of the, up until now, single supplier in this community becomes more than he is able to fully provide or satisfy. The market outgrows what he is able to do for his fellows in this town and developing city. At first, the increasing demand for such a single-seller’s services enables him to raise his price and “ration” the availability of what he can supply as either a good or service by this means, and reap the financial benefit. 

But allow time to pass, along with the frustrations of the buyers in this growing community due to the greater cost of getting what the monopolist supplies, and the limited amount of what he can actually provide to his increasing number of customers, given his own limitations, and the door is “naturally” opened to the arrival of rivals and the emergence of competition in place of there being only “one” on the supply side. Again, as Menger explained it:

“A first artisan of any particular kind, a first physician, or a first lawyer, is a welcome man in every locality. But if he encounters no competition and the locality flourishes, he will, almost without exception, after some time acquire the reputation of a hard and self-seeking man among the less wealthy classes of the population, and even among the wealthier inhabitants of the place he will be regarded as selfish.

“The monopolist cannot always comply with the growing requirements of society for his commodities (or labor services) . . .The economic situation just described is usually such that the need for competition itself calls forth competition, provided there are no social and other barriers in the way.”

Adam Smith on the Limit of the Market

It is interesting to note that at no point in this discussion does Menger even footnote Adam Smith’s discussion, “That the Division of Labor is Limited by the Extent of the Market,” in The Wealth of Nations (1776). Smith’s point was that there would be no purpose to any individual totally specializing in a production of any one good, if the market is not large enough to absorb all increased output that specialization would enable him to offer in trade. Only as the general society in which he lives slowly grows sufficiently large that the greater wares of each specialist in the division of labor can be profitably, and mutually, absorbed can the full benefit of specializations and the rising productivity that it permits, be fully taken advantage of.

Even if a farmer would do far better for himself being a blacksmith, instead, he would be better off not fully giving up growing much of the food he and his family need to live, and doing only a bit of blacksmithing on the side if he has only a few neighbors who need their horses fitted with horseshoes. But as the community grows and a greater number of residents also have an increasing number of horses that need to be shod, a point may be reached when he can fully specialize in blacksmithing and earn significantly more by filling this niche in the intensifying division of labor and buy all the food he needs from others who, in turn, can afford to expand their efforts completely into food production and purchase everything else they need by feeding their neighbors. 

Monopoly and Competition Reflect the Size of Markets

A similar logic applies to Menger’s analysis of the emergence of competition out of monopoly. Invariably, in early societal development, the need for any occupation, profession, and many production activities will be relatively limited due to the few customers for such services or products to make it impossible or unprofitable for more than one supplier and seller to occupy some specialized corner in this still small market arena.  

The arrival of the single supplier, where none had been present before, as Menger says, may be cheerfully appreciated by the townsfolk he has joined. But over time, as the town expands, he may find himself only able to handle so much of the growing business for his services. People needing the lawyer’s skills for deeds, wills, contract preparations, etc., find that he does not have, or is unwilling, to provide all the hours in the day needed to fulfill their demands. The same with the medical doctor, or the town blacksmith, or the hotel owner in terms of rooms he has available for those looking for a place to temporarily stay. 

Separate from the grumbling others may make about the monopolist, as Menger mentions, due to his not being about to satisfy their need for his services, or that to ration his available output or services, he raises the price he charges his neighbors to bring his supply into balance with their demand, the division of labor can now successfully incorporate more than a monopoly supplier due to a wider extent of the market. 

As markets grow, monopoly begets competition, Menger is saying. And notice, he did add the caveat, assuming no legal or related barriers to entry that shelters the single seller from the emerging winds of competitive profitability that attracts others into his corner of the division of labor. Extending Menger’s logic to innovation as well as market size, we can see how his chain of reasoning can easily lead to Joseph Schumpeter’s (1883-1950) idea that real entrepreneurship is partly reflected in the marketing of new or radically different versions of some existing products. But invariably at the start, this innovator is the only producer, supplier and marketer of this new and/or improved product. He may be for a time “the” seller of the good, a “monopolist.” 

But if time is allowed to pass, and if the product does demonstrate a demand for it that offers significant profitability, the monopolist’s very success will attract and bring about the competition that undermines and eliminates his monopoly status in the future. Successful monopoly in open markets begets the competition that replaces it. 

The Unintended Process from Monopoly to Competition

Though Menger does not express this from monopoly to competition process in the explicit words of “unintended” development with which he discusses a number of other market and social phenomena, the logic is the same. The artisan, or lawyer, or medical doctor, or even blacksmith may have not intended to create a “monopoly” position for himself. He merely discovers a niche in a small but growing market within which he can successfully earn a living. But his usefulness to those in the community attracts more business for him over time, partly from more existing residents seeing the value of his services and partly from new customers due to an increasing number of people living in this community. 

It is not that he means to appear “selfish” or “greedy,” in the eyes of some of his neighbors whose wants he is not able to fully satisfy, it’s just that he can only produce so much of his product or supply only so many hours in the day to those wanting his services. Rather than arbitrarily picking and choosing whose demands we will fulfill, he raises his price. Some in the community purchase less of what he offers or cannot afford it at all. Either way, the demand is limited to what he is able to or is willing to supply. His market is outgrowing his monopoly status.

Over time, rivals will appear. The market is now large enough to profitably sustain two sellers, three sellers, a dozen sellers of the same good or service. Newcomers on the supply side offer their services or products for less or with better features, qualities or characteristics to that of the former single seller. Price decreases, output increases, diversity of types and availability of services widen. The “primitive” conditions, as Menger expressed it, of monopoly, grow into competition with the market’s progressive “civilization” of rivalrous and vibrant competition.  

Rethinking Economics in Light of Carl Menger

How very different many aspects of economic theory and policy judgments might have been if the analytical paths proposed by Carl Menger concerning the logic of individual choice, rivalrous price formation, the meaning and nature of monopoly, and the “naturalness” of emergent competition as part of the unintended consequences of human action had been followed instead of the directions that were taken in the economics profession. 

While time only moves in one direction, an understanding of Menger’s unique contributions can still influence readers when they think about social and market processes; ideas and approaches can be rethought and redirected. Let us hope that the 150th anniversary of both the “marginalist” revolution, and Menger’s distinct development of it along with his ideas about the surrounding social and market processes, can serve as the inspiration for such a rethink when thinking about man, markets and the institutions in which we live.