[This was simply too good to leave in the comments, so I've reposted it here - SH]
Since Peter began with some quotes, including one by Ludwig von Mises, may I offer a little "doctrinal" interpretation about how Mises actually acted as a economic theorist and policy analyst?
First, too many of us (and this included me for many years) viewed and considered Mises as primarily the grand "armchair" theorist considering the sweeping issues of economic institutional orders; the workings of the monetary system and market process; the nature and interconnections between time, money, production, and business cycles; and the logic and structure of human action and choice.
And this is certainly the of side of Mises’ thought and writings that often carry a timeless quality to them because they deal with and are articulated in terms of the general and universal aspects of man, mind, markets, and society.
But Mises made did not make his living as a grand theorist. For almost a quarter of a century, from 1909 to 1934 (except for most the years of the Great War), Mises worked as economic policy analyst and advisor to the Vienna Chamber of Commerce. From the age of 28 to 53 (at which time he moved to Geneva, Switzerland to accept his first full-time academic position as the Graduate Institute of International Studies) he spent his working day as a “policy wonk.” And I mean a “policy wonk” – someone immersed in the factual details and economic policy specifics of, first, the old Austro-Hungarian government and, then, the Austrian Republic between the two World Wars. His statistical knowledge of “the facts” of fiscal policy, regulatory legislation, and Austrian monetary institutions and policy was precise and minute.
This became very clear to me while I have worked through those “lost papers” of Ludwig von Mises that were recovered by my wife and myself from a formerly secret KGB archive in Moscow. And, I might add, that the last of the three volumes of the “Selected Writings of Ludwig von Mises” based on these papers and which Liberty Fund has been publishing has, now – finally!! – been finished and will be out in the not too distant future. (This last volume, which I have prepared, actually covers his earliest period, that is, Mises’ writings on monetary and fiscal policy problems from before, during, and just after the First World War.)
Indeed, it has become clear to me that much of Mises’ conception of the general economic order, its workings and requirements, and the institutional and policy “rules” that would help establish and maintain freedom and prosperity did not arise from a pure “a priori” deductive spinning out of implications from the “action axiom.”
They are, in many cases, the general theoretical insights and the
social institutional and economic policy “wisdoms” derived from living
through, acting within, and learned lessons from those momentous and
often catastrophic events that shook Europe in the first half of the
twentieth century, and particularly as experienced in the everyday
reality of Austrian political and economic life during this time.
What is also clear from reading Mises’ policy writings from this period of his European career, is that if you had asked him a fiscal, or monetary, or regulatory policy question in the context of his role as analyst at the Chamber of Commerce, he would not have said, and did not simply say, “laissez-faire” – abolish the central bank, deregulate the economy, and eliminate taxes.
He accepts that there are certain institutional “givens” that must be taken for granted, and in the context of which policy options and decisions must be worked out.
He seemed to usually think with three policy “horizons” in his mind. The first, and the more distant, “horizon,” concerned the most optimal institutional and policy arrangement in society for the fostering of the (classical) liberal ideal of freedom and prosperity?
This is captured most frequently in the books and articles he was writing outside of his narrow role as Chamber economist. That is, those works from which most of us know many of his ideas – “The Theory of Money and Credit,” “Socialism,” “Liberalism,” “Monetary Stabilization and Cyclical Policy,” and “Critique of Interventionism” – from before the Second World War.
The second “horizon,” was closer to the actual circumstances of the present, but focused on the intermediary goals that would be leading in the direction of that more distant, “optimal” horizon. For example, ending a 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 concerned with fiscal policy, and reducing the burden and incidence of the tax structure to end capital consumption and foster capital formation.
(And, I should mention, that as a policy analyst thinking in terms of classical liberal normative “preferences,” Mises does not advocate, “tax neutrality.” That is, a low tax structure that would fund those minimal limited government functions, but would not attempt, outside of this, to “influence” the behavior or choices of the market participants. He believes that such a low tax system should be structured in such a way that IT DOES foster and generate incentives for investment and capital formation. The tax structure, in his view, should be designed to stimulate production, not current consumption.)
And the third “horizon” in the context of which Mises analyzes and proposes economic policies, is the current situation and the immediate future. In other words, how do 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 redemption, and the policy “tools” it should then use to maintain the exchange rate and convertibility?
While in the 1970s Murray Rothbard may have once criticized Milton Friedman for advocating “indexation” as a method to reduce some of the negative effects from an on-going inflation, in 1922, during the worsening Great Austrian Inflation, Mises actually proposed “indexation” of wages and prices, and government revenues and expenditures to reduce deficit fiscal pressures, maintain real standards of living for many in the society, and eliminate some of the inflationary distortions on economic calculation – as a part of a specific policy agenda to bring the inflation to an end. And he explained how the indexation should be implemented.
Mises did not just say, “Cut bureaucracy and their spider’s web of regulatory controls.” He first explained what was inefficient and unnecessary in the three-tiered Austrian bureaucratic system of federal, provincial and municipal regulators and taxing authorities. Then he explained what reforms should be introduced, how they could be “experimented” with in some of the smaller regions of Austria to see how they worked before extending them to the rest of the country, and how best to overcome the resistance of those in the bureaucracy fearful of losing their jobs.
In designing a new fiscal order for Austria, Mises proposed eliminating all income taxes and many – but not all – corporate and business taxes. But how, then, do you finance the costs of government? He presents an agenda for implementing indirect taxes on a wide variety of consumption items, and especially what today would be called “sin taxes” and “luxury taxes.” And government welfare state expenditures were not going to just “disappear.” So, employers would be taxed to cover existing social insurance expenditures. This was all meant to foster capital formation through predominately consumption taxation to cover fiscal costs.
And in a lengthy monograph that he wrote during the Second World War devoted to economic reform in an underdeveloped country like Mexico, he took as “given” that the politics of the society was not ready to fully privatize, say, the national railway system or the oil industry. So as a “second best,” Mises proposed transforming the railway system into a government owned but privately managed corporation with strict rules and procedures to assure it was run in a relatively “business-like” manner with the least likelihood of political interference. He even supported limited and temporary subsidies to assist poor farmers to establish themselves as more successful private enterprisers.
And on tariffs, he did not propose immediate abolition. He accepted that there were many industries that had grown up behind the trade barriers, and that they would resist immediate repeal of trade protectionism. So, instead, he advocated “incrementalism,” i.e., a gradual reduction of the tariff barriers over several years.
And he even supported a limited degree “trade retaliation” in the face of a trading partner raising its tariffs against the goods of one’s own nation, as a means of nudging that trading partner back to a freer trade policy.
Now, in explaining all of these things, it is not my purpose to argue whether Mises’ specific policy proposals were “right” or “wrong,” or more or less “reasonable” or “realistic.”
But it is to point out that there is a very interesting “other side” to Ludwig von Mises as practicing economist, and how surely the most famous and thorough-going “Austrian” economist of the 20th century saw the nature of policy evaluation and policy implementation in the “real world.”
There is often no alternative but thinking in terms of a “second” or “third” best. But that thinking is more soundly directed if done in terms of an image of what the “first” best would be, and how the “second” and “third” bests might be designed to move in the direction of that “first” best, or at least not to be in contradiction with it.
This is certainly the way that Mises attempted to think about and propose economic policy options in the world in which he lived in Austria, where many ideological and political ideas and practices had to be taken as “given” in the short-run.