Ludwig von Mises is the founding father of the Austrian School for Business Cycle theory. He created the theory of praxeology that was influenced by Immanuel Kant’s notion on deductive logic and purposefulness. Praxeology is based on the study of human action that rejects the empirical methods of natural sciences, because observations made on how human beings act in simple situations cannot determine how they will act in complex situations. Mises believed that markets are determined through human action, the behavior of individuals satisfying their needs. The observations made on human action are thought to be axiomatic (the falsifiability proves the statements to be true) and that these truths appear to be self-evident. The opposing economic viewpoints made by F.A. Hayek and John Maynard Keynes resulted in the US financial monetary issues we are experiencing today. First, I will explain the history behind the Austrian School of Economics and the Mises Institute.
The History of Austrian Economics
The earliest scholastic tradition of the Austrian Theory began in the 15th century with the works of St. Thomas Aquinas, teaching at the University of Salamanca in Spain. He sought to explain human action and social organization. The latest scholastic tradition of what became to be called the Austrian School starts with Carl Menger (1840-1921) who wrote an introduction to classical economic theory called, Principles of Economics. The following paragraph will describe the life of Carl Menger and how he developed the Austrian theory that restored economics as the science of human action and prepared the way for later theorists like Ludwig von Mises and F.A. Hayek.
Carl Menger was born in the Republic of Austria from a wealthy family of the nobility. He studied Law at the University of Prague and Vienna and later received his doctorate in Law. Working as a journalist analyzing the markets or news of the markets, Menger noticed discrepancies between what the classical economists taught about price determination and what the real world market individual participants believed or experienced. He later showed how money originates in a free market when the most marketable commodity is desired not for consumption, but for use in trading of other goods.
Menger rejected the economics of wealth accumulation based on mathematic or scientific data in service of the State. As a professor of economics at the University of Vienna teaching finance and political economy, he tutored the ill-fated Crown Prince Rudolf of the House of Habsburg. In 1978, Menger became the chair of political economy in Vienna, and then later revolutionized monetary theory in his publications “Capital” and “Money”. Menger headed a commission to reform the Austrian Monetary system.
Carl Menger developed the marginal utility theory (the greater the number of units of good that an individual possesses, the less he will value any given unit), which argued the cost of production theory of value developed by the classical economist Adam Smith. The marginal utility theory recognized the subjective labor-productivity theory that argues the cost of production changes based on the satisfaction one gets from consuming the unit of a commodity.
At the Mises Institute, I learned another aspect of the marginal utility theory based on time preference that was further developed at a later date, where people priced services or commodities for the satisfaction of having it now, as compared to its purchase later at a much lower cost (in my own opinion, that is similar to the ethical theory of Jeremy Bentham’s utilitarianism). Because, the value of a good is not determined by how much labor was put into it but by its usefulness in satisfying a want and its scarcity. In other words, we have unlimited wants and limited resources.
But the current economic system is not governed by such a notion as scarcity. The British Tradition of economics became the dominant idea for political reasons. The economics of today is based on objective costs and labor productivity theory of value (price of the commodity equals to the cost of the production); which lead to the rise of the Marxist doctrine of capitalist exploitation (inequality birthed from the Industrial Revolution and the division of labor based on the growth of total output for mass consumption).
The Development of the Mises Institute
In December 1981, Ludwig von Mises widow, Margit gave her approval to Lew Rockwell, Jr. to found the Mises Institute. It was formally established in October 1982. The Mises Institute is the research and educational center for the Austrian School of Economics, and is also recognized as the leading libertarian academic organization. The Institute does not consider itself a traditional think tank. While it has working relationships with individuals such as US Representative Ron Paul, the Institute for Humane Studies, and the CATO Institute (a think tank), and the Foundation for Economic Education, it does not seek to implement public policy, affiliate itself with any political party (the Libertarian party), nor does it receive funding from any. The Institute has a formal policy of not accepting contract work from corporations or other organizations. There are established independent Mises Institutes in Belgium, Poland, Argentina, Mexico, Romania, Slovakia, and many other countries.
The Mises Institute namesake is dedicated to the Mises family coat of arms and Ludwig von Mises life-long motto; tu ne cede malis, sed contra audentior ito (“do not give in to evil, but proceed ever more boldly against it”). The following paragraphs will explain the life of Ludwig von Mises and how the Mises Institute was founded (its original beginnings in the 1920s).
Ludwig von Mises (1881-1973) was a notable Economist of the 20th Century in the Austrian School. He developed methodological dualism, the deductive science of economics based on the fundamental axiom that individual human beings act to achieve desired goals. The basic premise of methodological dualism is that one method works in the natural sciences, another works in economics.
In the natural sciences, we appeal to data for all practical purposes. However, this is not true for a field like Economics. The fundamental problem is that the natural science doesn’t have a complete understanding of how the physical world is impacted by the human need to satisfy wants. So, even if we accept the physical world is all that exist and therefore our goals must come ultimately from physiological causes, we have to confess that our knowledge of these connections is inadequate.
Some people in economics suggest people should be allowed to make choices without legal restrictions, and that redistribution is harmful to production. So, others may attack these conclusions on methodological grounds that the results aren’t scientific because they are based on aprioristic reasoning, rather than empirical science. Empirical science only works if there are underlying constants. However, human choices are devoid of constants. We can’t really say that human choices can stay the same, because change is pervasive in everything related to society.
Ludwig von Mises was barred from academic posts in Austria, so he migrated to the United States in the 1920s and founded the Austrian Institute for the Business Cycle. He developed the business-cycle theory (economic boom & busts that also creates bubbles), which blamed inflation and depression on inflationary measures made by bank credit (the credit expansion by inflationary measures encouraged by the Central Banks). His student. F.A. Hayek (1899-1992) authored numerous publications on the dangers of the credit expansion, and predicted the economic Great Depression. Mises believed that government intervention crippled the markets and proved counter productive.
It was much later in the 1970s that F.A. Hayek received the Nobel Peace Prize and delivered his speech called the Pretense of Knowledge. What Mises believed about government intervention was validated by F.A. Hayek claimed that we made a mess of things in the financial markets. The economic policies and theories of demand and supply based on quantitative and scientific data proved false, because it did not take into account the ebb and flow of the markets. Hayek pointed out there are uncertain empirical forces by the unseen eyes; the increase in interest rates, the mal-investments, and over-consumption are all independent variables leading to inflation in the money supply and economic downturn. The economic policies of John Maynard Keynes and Keynesian Economics became the foundation for neo-classical liberalism (recognized today as the Chicago School of Economics). It became the dominant economic philosophy birthed from the Great Depression and then the establishment of the Breton Woods System (for political reasons).
The Great Depression experienced great economic decline. John Maynard Keynes (1883-1946), a British Economist, theory of deficit spending was based on the idea of consumption to stimulate the growth of an economy during an economic downturn. However, it is not working for the current economy due to changes in the global market. The US is spending money they do not have, which is not originating from the free markets or trading of commodities. The US consumers have lost confidence in spending the American dollar and the US no longer has a strong consumer base, manufacturing base, and export base to bolster the domestic markets, and to monetize the international markets. I’m elucidating in reference to the consequences of the 2007-2008 US financial crises and the growing popularity of the Austrian School of Economics.
Outside of the classroom taught lectures, research, and experiential learning, I gained hands-on knowledge through observations. I asked the other Mises University students (from different countries around the world) why they were so interested attending Mises University, and their response was automatically the admiration for Ron Paul and Libertarian ideals (individual liberty and freedom); which popularized the Austrian School study on the business cycle.
My views as a Socialist Liberal tended to change as I interacted with those individuals. Before attending Mises University, I had no knowledge about Anarcho-capitalists, Anarchists, and Anarcho-Syndicalists, and those who belonged with the extreme right of the Tea Party Libertarians. The Anarcho-capitalist yelled “down with the state” and believed in the elimination of the state in favor of sovereignty for a freer society. However, I thought they were misguided, if not counterrevolutionaries.
I recalled the quote from Emma Goldman, “Anarchism positions itself in libertarian resistance to authoritarian Marxism, opposing its call for post revolutionary centralized state, even what is depicted as a transitional necessity.” I wondered if our future transitional necessity was a post-revolutionary state. I was reminded of the students during Stalin’s Russia and Lenin’s Italy who wanted to overturn the status quo, but ended up with Communism based on authoritarian Marxism, instead of a real socialist-capitalist system. The Anarcho-capitalists hated the word “capitalism” due to its connotations to Corporate Statism tainted by capitalisms labor exploitation. They wanted a humane form of capitalism. So, the Anarcho-capitalist believed that governing bodies should be concerned with the nation’s defense and security through the use of private enterprises. They demanded the right to private ownership and private property, no government intervention/oversight, and the legalization of taboo industries such as prostitution and marijuana. I wondered what Ludwig von Mises would have thought about the students who claimed to be Anarcho-capitalists, and would’ve warned them about the dangers of socialism.
I was able to agree more with the Minarchists, and those who claimed to be Ron Paul enthusiasts and moderate Libertarians. They believed in laissez-faire capitalism (limited government intervention in the markets according to Adam Smith’s invisible hand), which maintains that the state is necessary in its legitimate function to protect individuals against aggression and fraud. The Minarchists favored the labor movement, but not all of them were into anarcho-syndicalism. The adherents of syndicalism view the labor movement as a potential force for revolutionary social change, replacing capitalism (capitalist exploitation) and Corporate Statism, with a democratically self-manage system managed by the workers (unions). They seek to abolish the wage system, regarding it as wage slavery. However, the Tea Party Libertarians seemed like the conservatives of the far right.
The Tea Party movement (TPM) is not a political party, and it is disorganized with various views. TPM is another name for the American populist movement born out of the dissatisfaction of the current US financial crisis. Inspired by the Boston Tea Party, the members are opposed to taxation in varying degrees, reduction of the national debt and federal budget deficit, and reduced government spending, and adherence to the original interpretations of the United States Constitution. I was reminded about the failure of the Libertarian movement and the New York Times expose on “The Billionaire Koch Brothers’ War Against Obama.“ The Koch Brothers are long time Libertarians, who believe in drastically lower personal and corporate taxes, minimal social services for the needy, and much less oversight of industry—especially environmental regulation.
It is impossible to imagine the likes of Sarah Palin or the Koch Brothers as Libertarians representing the populist movement here inside the United States (the support of the labor movement and Marxist ideology with the ideal for individual liberty and freedom against the centralized authority of the State for their own political or corporatist agendas). Not everyone can claim to be Libertarians. Today, Ludwig von Mises might be appalled to see Austrian Economics used as a political means to an end. After attending Mises University, I realized the relevance of the Austrian Theory on the Business Cycle and the role it had to play shedding light on the Libertarian movement.
Conclusion: Assessing the Appropriateness of the Mises Institute
In the past, the Economists were recognized as Marginalists who believed in the utility theory. There is nothing uniquely Austrian about the marginal utility theory based on time preference that discounts future consumption relative to current consumption (having it now instead of later); that is utterly standard in the field of Economics. Self-interest, the human action to satisfy needs and wants is a given. The power of such a framework allows one to construct theories of how agents behave under various circumstances, but if we assume that the agents are irrational, there is a tough time constructing useful theories and hence, economic models doesn’t have clear and sharp predictions.
Perhaps, this is the premise behind the Austrian methodology. It would be difficult to convince a mainstream Economists over to the Austrian methodology use of empirical results. There are unseen factors in the US financial markets that include: too much government/public spending (healthcare expenditure and economic bailouts), lack of competitiveness, misuse of capital inflows (excessive domestic investments during an economic boom, creating a “bubble”), too much borrowed money spend of the wrong things, accrued losses on loans, changes in consumption (more savings), relative (inflated) price changes of goods/commodities, and outsourcing (low exports due to decline in manufacturing), overseas competition and the labor-productivity decreases.
In regards to the utility theory, Austrian Economists are firmly rooted in the mainstream economic thought. What is confusing about the Austrian theory is that it is compared to older school of thought (not a contemporary school of thought). I think Austrian thought might be compatible to behavioral psychology or behavioral economics or neuroscience as in neuroeconomics, and it can make clear sharp predictions based on irrational people matched with empirical results.
The only agent-based modeling that I noticed used by the Austrian School is supply and demand. I am also under the impression that the label “Austrian” is not useful … it is more of an ideological and political label in favor of limited government intervention in the markets, but separate from the Economic methodology of today (and marginal utility theory). At Mises University (even now), I had little understanding of the basic microeconomics, the standard axiomatic approach of the utility theory (how they came to this approach with contributions from the people in the Austrian School). What is even more problematic for the Austrian School of Economics is what their contributions to society are today. Richard Ebeling mentions, “they [the Austrians] somehow failed to fully and consciously clarify both to themselves and to others ‘how and why’ what they were doing was different, distinct, and uniquely insightful.”
The Mises Institute is a great program for the study of Austrian Economics that is libertarian in nature, as well as to gain a basic understanding of the monetary economics behind the US financial system. In other words, the Austrian School methodological reasoning are distinguished by their potential for its market based solutions. They focus on the cause and effect relationships in the boom that results in the downturn of the business cycle. The Austrian theory has always been compared to the old school of thought and even ignored! It can stand as a contemporary theory…. on its own.