September 29 marks the 134th anniversary of the birth of Ludwig von Mises, a renowned leader in the “Austrian School” of economics. Mises made many important contributions to technical economics, but he also was a champion of individual liberty. It is because of this dual focus in his work that so many revere Mises to this day.
Mises’s most important contribution to economics was his critique of socialism, which he first published in 1920. Even many professional economists at that time thought that socialism might suffer from problems of corruption and incentives, but that it surely could work “in theory.”
However, Mises demonstrated that because a socialist government would monopolize ownership of important factors of production — such as factories, raw materials, and farmland — there would be no genuine market prices for these inputs. Therefore, even after the fact, it would be impossible for the socialist central planners to tell whether or not their orders made economic sense. They would see the benefits of their production plans — so many cars, diapers, apple pies, and so on — but they would have no way of judging the costs.
Such difficulties pose no problem for a society that embraces private property and the use of money. Here, thousands of individuals own the various parcels of land, deposits of crude oil, and shares in major corporations. They buy and sell them moment to moment on organized exchanges, and in the process they generate prices that accountants can rely on when reckoning profit-and-loss statements. Although such bookkeeping strikes the typical socialist as useless, this mental device is essential to provide feedback to entrepreneurs. They need to know whether or not their ventures are making good use of scarce resources. In effect, profits are a green light telling them, “the consumers approve!” while losses are the market’s way of saying, “You need to change something, fast.”
Here we see the link between technical economics and Mises’s concern for human welfare. Mises didn’t study the mechanics of a capitalist society simply out of intellectual curiosity, the way a physicist might investigate how the sun generates solar flares. No, Mises recognized that human society itself rests on a foundation of private property and the rule of law. Only to the degree that individual rights are respected would people enjoy access to the life-enhancing benefits of a division-of-labor economy, in which some people focus on growing food while others specialize in building houses. In a world of self-sufficiency, individuals could not reap the advantages of cooperation and output would plummet.
To give another example of Mises’s blend of technical economics with a passion for liberty, consider the realm of monetary policy. Here Mises was a champion of the classical gold standard, under which governments had to redeem their national paper currencies (the dollar, franc, pound, and so on) against definite weights of gold. The usual “economic” case for such a system is that it restrains inflation and allows people to plan their affairs with confidence, knowing that the government won’t debase the currency in five years.
Mises, however, went beyond this argument. He claimed that the classical gold standard should be respected as faithfully as a bill of rights. In other words, the people needed to be protected from arbitrary government interference with their money, just as surely as they needed protection from government meddling with free speech or the exercise of religion.
Ludwig von Mises was a genius in the realm of economic theory, but he was also a passionate advocate of human freedom. He devoted his career not only to the development economic science, but also to teaching its core lessons to the broader public. To this day, those who strive for liberty should read the classic works of this benefactor of humanity.
Robert P. Murphy is a Research Fellow with Independent Institute and Research Assistant Professor with the Free Market Institute at Texas Tech University. His new book Choice: Cooperation, Enterprise, and Human Action crystallizes the key insights of Mises’s greatest treatise.