Mises and Keynes: A 20th-Century Puzzle


Nation, State, and Economy, by Ludwig von Mises, New York: New York University Press, 1983, 221 pp., $30.00.

The editors have supplemented Mr. Hazlitt's review with some background material on both Keynes and Mises.

The translator of Ludwig von Mises's Nation, State, and Economy, Leland B. Yeager, reminds us in his introduction that this volume, newly available in English, was published in the same year, 1919, and only a few months earlier than John Maynard Keynes's The Economic Consequences of the Peace. This leads him to compare the two books and two economists. Such a comparison poses a sad puzzle of history: Why did the better economist of the two—better by far—live out his professional life in relative obscurity, while the inconsistent and often superficial economist swayed presidents and parliaments and, ultimately, affected the life of every citizen?

Born in 1883 in England, Keynes studied economics at King's College, Cambridge, under the tutelage of the renowned Alfred Marshall. Upon graduating from Cambridge, Keynes embarked on a career in the civil service, first with the India Office and later with the Treasury. As a high-ranking official with the Treasury, Keynes took part in the Versailles peace conference. But, adamantly disagreeing with the direction the negotiations were taking, Keynes resigned and penned his controversial, highly critical Economic Consequences of the Peace, in which he not only denounced the peace negotiations but painted caustic portraitures of the statesmen involved.

Keynes never again held as high an official post as he had during the First World War, but his influence didn't wane. Indeed, it grew—in academic circles because he became an economic fellow at the preeminent King's College, Cambridge, and in public circles because of his continuing interaction with influential statesmen. Above all, of course, Keynes's General Theory of Employment, Interest, and Money, published in 1936 in the midst of the Great Depression, ushered in the Age of Keynes. His General Theory became the bible of the New Deal; and Keynes, the most famous economist of the 20th century.

Not all economists were swept up by Keynes's justification of public expenditures, deficit spending, and so on as a means of reducing unemployment. Among one of the most profound was Ludwig von Mises (1881–1973), the expositor of the Austrian School of economics that has consistently championed free-market capitalism. Mises enrolled at the University of Vienna in 1900 and studied under the path-breaking Eugen von Boehm-Bawerk, who was developing the marginal utility theory of economics. During his 25 years as professor of economics at the University of Vienna, and then at the Graduate Institute of International Studies in Geneva, Mises built his reputation as a systematic scholar of economics in the marginal utility, or subjective-value, tradition.

Anticipating Hitler's arrival in Austria, Mises went first to Switzerland, then to the United States in 1940. Though he had already published half a dozen books prior to his arrival in the United States, only one, Socialism: An Economic and Sociological Analysis, had been translated into English. This relative obscurity, coupled with his iconoclastic views given the widespread appeal of Keynesianism, made it difficult for Mises to obtain an academic position. Five years lapsed before he became visiting-professor at the Graduate School of Business Administration of New York University, where he taught until 1969.

Though the "new economics" devised by Keynes quickly took firm hold among Western economists, Mises continued relentlessly to pursue a radically different economics, publishing in 1949 his monumental work Human Action. It "should become the leading text," I wrote at the time, "of everyone who believes in freedom, in individualism, and in the ability of a free-market economy not only to out-distance any government-planned system in the production of goods and services for the masses, but to promote and safeguard, as no collectivist tyranny can ever do, those intellectual, cultural, and moral values upon which all civilization ultimately rests."

Mises's earlier work on socialism is surely the most devastating analysis of that illusory system ever written. "Even angels, if they were endowed only with human reason, could not form a socialistic community," he wrote. Socialism must fail, he noted, because it is incapable by its very nature of solving "the problem of economic calculation"—the problem of how much to produce of what, when—which information capitalism collects and conveys through money prices and money costs of goods fixed by competition in the free market.

Despite his stature as a scholar, however, Mises only belatedly achieved recognition for his work. And this recognition has consisted primarily of a handful of honorary degrees and academic awards: hardly honors proportionate to his depth and brilliance. Keynes, on the other hand, with his General Theory, attained unprecedented influence, especially on practical economic policy. Yet, I concluded many years ago, the Keynesian bible contains not "a single important doctrine that is both true and original. What is original in the book is not true; and what is true is not original."

One cannot understand the relative influence of these two men by virtue of their respective merits as thinkers. Instead, one has to look at their temperaments and, in the end, the implications of their arguments. Though considered a brilliant thinker by many, Keynes was first and foremost a man of action who sought to change the course of events in the world. And his views provided, as has been frequently noted, an academic rationale for the inflationary policies that had long been attractive to politicians. "There is no doubt Keynesian economics has served governments well," notes economist W.H. Hutt. But what about the governed?

Unlike Keynes, Mises was primarily a scholar. He rested his case on a logic that could not be easily popularized. Nor could his individualist views possibly have appealed to policymakers eager to engineer economic activity for the collective. But decades of Keynesianism have not rid us of unemployment, and Ludwig von Mises's following is growing. This interest is partly responsible for a resurrection of some of his earlier works. Thus, we finally have an English translation of Nation, State, and Economy, Mises's counterpart to Keynes's The Economic Consequences of the Peace.

Most present-day readers, having in mind the subsequent work of the two authors, might be surprised by a comparison of the two books. Instead of the sharp contrast that they may expect, they will find striking similarities. This is because the Keynes who wrote The Economic Consequences in 1919 was quite different from the Keynes who produced the General Theory in 1936. Though he could not restrain himself from a few sarcastic jabs at capitalism, the Keynes of 1919 was a nearly "classical" economist of the Cambridge school and a disciple of his "revered master," Alfred Marshall. In The Economic Consequences he wrote one of the most eloquent denunciations of inflation that has ever been penned. I quote only a few sentences:

"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.…All permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

"Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

There is one further important point of agreement between the Mises and Keynes books of 1919. Keynes thought that the reparations demanded by the Allies from the Central Powers were vindictive and far too burdensome. And so did Mises. The outcome of the war, he wrote, "brings hundreds of thousands, even millions, of Germans under foreign rule and imposes tribute payments of unheard-of size on the rest of Germany.…Need and misery for the German people will emerge from this peace."

Yet these areas of agreement between Keynes and Mises were not to last long. In A Revision of the Treaty (1922), and in later writings, Keynes kept pursuing his demands for successive reductions in the amount of reparations; and for various reasons such successive reductions were actually made. Mises, on the other hand, changed his mind—just when, I do not know; but he remarked to me frequently that, at least partly because of Keynes's influence, reparations were eventually reduced to a point where Hitler was able to rearm and launch World War II 20 years later (the very "war of revenge" that Mises warned Germany against in this 1919 book).

Mises's Nation, State, and Economy is a wide-ranging book. In addition to the issue of German reparations after World War I, it discusses such subjects as the nature of "nationality," an economy in wartime, socialism, imperialism, and utilitarianism. Though it is a mature work—Mises was 37 when he wrote it—it does not compare in scope or quality with any of his three masterpieces: The Theory of Money and Credit, Socialism, and Human Action. Readers of his other works will be familiar with many of its leading ideas.

But those who have read Mises extensively have also come to know that when he writes on a subject that he has discussed elsewhere, he seldom merely repeats himself. He nearly always manages to throw some additional light on it. Here, in examining the 1914–18 wartime economic controls of the Central Powers, for example, he reminds us that these were at least as stupid as the wartime controls of the Allies. He dismisses them briefly: "It was dilettantism of the worst sort to set maximum prices for these goods [that could have been produced domestically]. Production could have been stimulated only by high prices; the limitation of price increases throttled it."

A substantial section of the book—some 45 pages in all—is devoted to a discussion of socialism. Readers of Mises's full book on the subject will want to know how this earlier analysis compares with it. One would have to do considerable rereading of that great 599-page classic (originally published in German in 1922, translated into English in 1936) to make a more confident comparison, but my impression is that this 1919 discussion is much more elementary. Perhaps Mises had just begun to turn prolonged attention to the subject. Yet there is nothing superficial about his analysis. He goes directly to central issues. For example, he notes that "in the socialist society the distinction between rich and poor would fall away; no one would any longer possess more than another, but every individual would be poorer than the poorest today, since the communistic system would work to impede production and progress."

Of private ownership, he remarks that it "fulfills its social function by converting the means of production into the hands of those who best understand how to use them.…What is missing [under socialism] is the incentive of the owner's self-interest.…The result of social production must therefore remain behind that of private production…[under which] free enterprise pitilessly culls out all the less productive enterprises and firms."

In his final chapter Mises deals with such ultimate questions as the goals of human life. Here, he sets forth his own philosophy of "rationalist utilitarianism" and defends it against the criticism of being merely materialistic:

"The utilitarian policy has…been reproached for aiming at the satisfaction of material interests and neglecting the higher goals of human striving. The utilitarian supposedly thinks of coffee and cotton and on that accounts forgets the true values of life. Under the reign of such a policy all would have to be caught up in precipitous striving for the lower earthly pleasures, and that world would sink into crass materialism. Nothing is more absurd than this criticism. It is true that utilitarianism and liberalism postulate the attainment of the greatest possible productivity of labor as the first and most important goal of policy. But they in no way do this out of misunderstanding of the fact that human existence does not exhaust itself in material pleasures. They strive for welfare and for wealth not because they see the highest value in them but because they know that all higher and inner culture presuppose outward welfare." And so, Mises concludes, "The reproach of a materialistic way of thinking applies not to individualistic utilitarianism but to collectivistic imperialism."

When Mises finished Nation, State, and Economy in July 1919, the German hyperinflation of 1920–23 had barely begun. Average commodity prices in July 1919 were only a bit more than three times as high as in 1913. But Mises presents a masterly analysis of the inflation that had already taken place, and of the consequences of inflation at all times.

He remained throughout his life a critic of inflation. Its effect "is always to redistribute wealth and income in ways that distort incentives and production, create obvious injustice, and enkindle social discontent."

On the other hand, Keynes, the eloquent fulminator of 1919 against inflation, in effect proposed inflation as the great remedy for unemployment in his General Theory. True, he probably did not even recognize that it was inflation he was recommending. His proposal was merely that the government run a budget deficit and borrow, and the consequent increased purchasing power was to provide jobs. But if government borrowing and credit expansion must increase employment, the same reasoning must imply that repaying the debt and contracting the credit must correspondingly reduce it.

The irony is that the unstable and mercurial Keynes was widely hailed in his own lifetime as the greatest living economist, while Ludwig von Mises, who really deserved the title, labored for most of his life in comparative obscurity. Even now a true recognition of his contributions is confined to a small "Austrian" coterie. But it will grow.

Henry Hazlitt started his career in economic journalism in 1913 as a reporter for the Wall Street Journal. After several intervening positions, in 1934 he joined the New York Times, where he wrote economic editorials. His column appeared in Newsweek from 1946 to 1966. Among his many books are Economics in One Lesson and The Failure of the "New Economics."