Ludwig von Mises

Who Was Ludwig von Mises?

Ludwig von Mises, one of the most influential Austrian economists of his era, was an advocate of laissez-faire economics and a staunch opponent of all forms of socialism and interventionism. He also wrote extensively on monetary economics and inflation. Mises taught at the University of Vienna and later New York University and published his most renowned work, Human Action, in 1940.

Investopedia / Bailey Mariner

Understanding Ludwig von Mises

Ludwig von Mises was born in the Eastern-Europe region of Galicia, then part of Austria-Hungary, in 1881 to Jewish parents who were part of the Austro-Hungarian nobility, and he was a distant relative to a Liberal Party deputy to the Austrian Parliament. Von Mises showed scholastic gifts early on through the fluent use of German, Polish, French, and Latin.

But politics would not be his field of study when von Mises entered the University of Vienna. It was there that he would learn from economist Carl Menger, one of the founders of the Austrian School of Economics. Menger had developed a theory called "the subjective side of economics," whereby the value of goods derives from their use-value to individuals and all participants in a trade exchange benefit, to the extent that they value the use of the good they receive in trade more than what they give up.

In 1906, von Mises graduated with a Juris Doctorate in law and began a career as a civil servant, but between 1904 and 1914 he began to be influenced by well-known Austrian economist Eugen von Böhm-Bawerk. He took a trainee position in a law firm but remained interested in economics and began to lecture on the topic; he later became a member of the Vienna Chamber of Commerce and Industry as well.

Von Mises served in World War I as a front officer and an economist to the War Department of Austria, but through his association with the Chamber, he began to come in contact with others interested in his passion for economics and its effect on human behavior. He soon became chief economist for the organization, and through this position became an economic adviser to Austrian Chancellor Engelbert Dollfuss, who believed in Austrian fascism but was strongly anti-Nazi.

Von Mises considered options outside of Austria or Germany as the National Socialists began to influence those nations. In 1934, he was able to secure a position as a professor at the Graduate Institute of International Studies in Geneva, Switzerland, where he worked until 1940.

In 1940, von Mises came to the U.S. with the help of a Rockefeller Foundation grant and became a visiting professor at New York University in 1945, remaining there until his retirement in 1969. A libertarian academic organization, the Ludwig von Mises Institute, is named in his honor and seeks to celebrate and extend his writings and teachings, particularly those related to praxeology, a study of human behavior as related to economics. 

Ludwig von Mises Contributions

As an economist, von Mises was known for his consistent, and, at times, strident adherence to the principles of free markets and opposition to government intervention into economic matters. He was also famous for his insistence on the use of logical, deductive reasoning as the primary tool of the science of economics (which he called "praxeology") as opposed to the collection and mathematical analysis of statistical data to form and test hypotheses. 

Monetary Theory

In his first book, The Theory of Money and Credit, von Mises integrated monetary theory into the basic framework of microeconomics as developed by Menger and other Austrians. Following Menger, his theory first describes money as a medium of exchange that is valuable for its marginal utility as a tool for indirect exchange; he then explains the origin of money and the present purchasing power of money as developing out of a commodity that comes to be valued on the market primarily for this use as a medium of exchange (his "regression theorem"). Finally, he classifies various subtypes of money (currency, money substitutes, and fiduciary media of exchange) with varying economic properties.

By doing so, von Mises' integration of money into the supply and demand framework bridges the gap between microeconomic analysis and what would later be separated out (wrongly in his view) as the distinct study of macroeconomics. Because money is the one economic good against which all other economic goods in a modern exchange economy are traded, in this view, macroeconomics is nothing more than the exploration of the microeconomic processes and consequences involved with the supply and demand for money, as well as changes in the quantity and quality and price of money (i.e., its purchasing power).

Business Cycle Theory

Growing out of his monetary theory, von Mises developed the Austrian Business Cycle Theory. This theory traces the cause of recurrent economic or business cycles to the microeconomic effects that change in the quantity and quality of money on the structure of capital goods and investment. In particular, it explains the cycle of expansion and recession observable in modern economies as a result of the expansion of the supply of fiduciary media to business through the process of fractional reserve banking facilitated by central banks.

In this theory, the initial expansion of fiduciary media encourages a boom in investment in certain lines of business and industries that are especially sensitive to the availability of savings in the form of money to finance long-term production processes. However, without continued (and eventually accelerating) injections of credit, these projects would prove unprofitable and unsustainable due to the dearth of real savings. They then lose value and must be liquidated, a necessary process of correcting the distortions introduced in the pattern of capital investment.

This liquidation process, and the temporary elevation of unemployment of labor and resources that it would necessarily induce, constitute the recession phase of a business cycle. Alternatively, a central bank could continue to inject new fiduciary media into the economy, at the risk of inducing hyperinflation and a crack-up boom. 

Political Economy

Based on the implications of microeconomics, capital theory, and price theory, von Mises argued that a free-market economy, where the choices of consumers and entrepreneurs operate through the laws of supply and demand for consumer goods, capital goods, and labor, would be the most effective tool to produce and distribute the economic goods and services desired by the people in an economy.

Von Mises argued that when the government intervenes in the economy to interfere with the operation of supply and demand or to set prices and quantities in markets, it will produce unintended consequences that often harm the very people the government claims it intends to help.

He believed that government intervention in the economy could never replace or reproduce the results of the voluntary interaction of private owners buying, selling, producing, and using economic goods and that doing so would result in economic damage. By undermining the price system (supply and demand through monetary exchange), policymakers would have no rational means to set prices and quantities of goods and services in markets and would either resort to relying on pseudoscientific guesswork or simply imposing their own preferences on the population.

In the extreme example of a socialist or other centrally planned economies — those with no functioning price system in any markets — he argued that complete economic chaos would ensue, resulting in the consumption of a society's accumulated wealth and capital, and a decline in the standard of living over time.