Too Good for the Comments: Ebeling on Mises the Applied Economist

[This was simply too good to leave in the comments, so I've reposted it here - SH]

Richard Ebeling

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.

Comments

[Pietro M.]

Which Mises? The original one or Prof. Ebeling's dog? (I read about this on a mises.org daily article and ROTFL). :-)

Excellent post. I think those books will be on my desk soon. Thanks!

[Student]

Two thumbs up. Posts like these are refreshing. As a regular reader, I must admit that the blog would feel less repetitive if you posted more things like this and less of the rah-rah "Go Austrian Economists!" stuff.

[Richard Ebeling]

In reference to Pietro M.'s comment, unfortunately, my "Ludwig von Mises" (my chocolate Lab) is a total welfare bum.

He does not work, expects to be taken out for a walk several times a day, and demands plenty of treats.

He also has guaranteed health insurance -- yes, there is doggy health insurance and I do have a "premium" policy for him.

Plus, he very much has an "entitlement" mentality -- he thinks he has an entitlement to everything in the house, including sleeping on my side of the bed!!

Richard Ebeling

[Mario Rizzo]

Very interesting post. What will the Mises Institute devotees say when they see this volume of Mises's writings? It will be fun to see.

[DG Lesvic]

Prof. Ebeling's new book, Political Economy, Public Policy and Monetary Economics/Ludwig von Mises and the Austrian Tradition, available from Amazon for $128, is worth every penny, a must read for any real Misesian and serious student of economics.

[Lee Kelly]

Fascinating. I also wonder what those associated with the Mises Institute will think of this.

[FC]

Splittists!

[Richard Ebeling]

I would just mention that two of the volumes in the "Selected Writings of Ludwig von Mises" series have been available from Liberty Fund for several years.

Volume 2 on, "Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression (2002) includes many of Mises' policy articles, essays, and Chamber of Commerce memorandums and speeches from the 1920s and 1930s.

Volume 3 on, "The Political Economy of International Reform and Reconstruction" (2000) includes Mises' specific policy ideas on monetary and detailed fiscal and regulatory matters that were written between 1940 and 1945.

These volumes include many of the discussions that I summarized in my posted piece, above.

Volume 1 on, "Monetary, Fiscal and Economic Policy Problems Before, During, and After the Great War" especially focuses on many of Mises' earliest writings on these themes.

To give one more indication of Mises' thinking on specific policy alternatives and choices, in he 1916 delivered a lecture that was subsequently published on paying for the costs of the war.

He reminds his listeners and readers of what today is often referred to as the Ricardian Equivalence Theorem concerning taxing or borrowing to finance the war.

But he then goes on to say that under certain circumstances it may be more cost-efficient from the taxpayer/income earners' point of view to have the government fund a portion of its war expenditures through borrowing rather than lump-sum tax burdens on the population.

In other words, government deficit spending may be more desirable (from the taxpayers' perspective) than a fully tax-funded balanced budget!!

Welcome to a different world of Ludwig von Mises! And if it be thought that this is a "younger" Mises at a "weak moment," there is a a brief passage in "Human Action" in which he says, in passing, that there may be good reasons under certain circumstances to fund government spending through short-term borrowing. But it is very cryptic, and only becomes understandable in the context of this wartime paper on government funding during the Great War.

If I may also mention, I discuss many of these aspects of Mises' writings from before the First World War, then during the interwar period, and during the Second World War, in my recent book, "Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition" (Routledge, 2010).

Richard Ebeling

[Daniel Klein]

Very interesting and important. Thanks Richard and Steve.

It all fits with the following from Kirzner's 2001 bio of Mises:

“Mises’ distinctiveness had not yet been firmly established by 1930” (p. 54)

As I see it, when Europe went utterly meshuggeh, and sent Mises into a desperate situation in the US, Mises did, too, in his own way.

[Steven Peterson]

Being partial to Mises Institute, but not affiliated, I think these works are extremely valuable (I'm a Misesian/Hayekian/Garrisonian economic geographer). I also think they'll be open to it, even the die-hard Rothbardians, who I'm also partial to. A year or so ago, they posted some notes from one of his seminars where Mises provided some potential research topics and questions that could unfold as theses or dissertation topics or a series of papers. In reviewing this article, it seems that many of those topics grew directly out of Mises practical experience and that the potential "projects" would advance the notion of laying out the theoretical best case and then outlining the real world implications. That has always been my take - a wonderful theoretical world is outlined in Mises, but how does one begin the transition process from the world as it now exists?

[Current]

Interesting.

I'm reading "The Causes of Economic Crises" at present. Coincidentally The few pages I read yesterday illustrate what Richard is talking about.

p.140: "It has already been pointed out that events would have turned out very differently if there had been no deviation from the principle of complete freedom in banking and if the issue of fiduciary media had been in no way exempted from the rules of commercial law. It may be that a final solution of the problem can be arrived at only through the establishment of completely free banking. However, the credit structure which has been developed by the continued effort of many generations cannot be transformed with one blow. Future generations, who will have recognized the basic absurdity of all interventionist attempts, will have to deal with this question also. However, the time is not yet ripe--not now nor in the immediate future."

[Philo]

"He [Mises] 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." That's reassuringly "realistic"; but what, exactly, are the "givens"?

Presumably not *everything* is given--*all* the behavior of *all* the agents involved; that would leave no room for policy advice. If *one person* is asking for advice, all the behavioral dispositions of all the *other* agents may be taken as given, with the behavior of the one supplicant (and only that) to be determined by your advice. If a group--a collection of people--is asking for advice, *everyone else's* dispositions to behave are to be considered fixed and given, with only the behavior of members of the group to be determined by your advice. If no one in particular is asking for your advice--if you are just doing "political philosophy"--it is not at all clear *what* you are doing--*at whom* your advice is aimed--*for whom* your advice is tailored. You might consider yourself to be advising *all mankind*, but that would generate policy prescriptions that would strike us as "utopian"; for example, you would probably prescribe that no one steal another's property, and as a consequence also advocate that police, locks, burglar alarms, etc., be dispensed with.

In the first half of his career Mises had a definite client, the Vienna Chamber of Commerce. But it is probably an oversimplification to say that he was prescribing for the *whole group*. He was probably aware that some members of the Chamber would not follow some of his prescriptions, either because they thought ill of him (and found the prescriptions burdensome or implausible) or because they simply were not paying attention (suggesting that they did not think *well enough* of him). So he was really prescribing for the subset of members of the Chamber who would follow his advice, a subset that, no doubt, was shifting its composition over time and in response to the particular issue he was advising on and the nature of the advice he was giving.

Later in his career, and in his theoretical writings, he was more given to "political philosophy." As noted above, the makeup of his target audience is unclear, and the results he produced do seem "utopian." Even his advocacy of "second- and third-best" policies may be criticized as *semi-utopian*; perhaps only a fourth-best, or a thirty-seventh best, policy would have been "realistic."

[Mario Rizzo]

I am a fan of labeling. As I said elsewhere on this blog, you can give advice ("the art of political economy" in Neville Keynes's words)that deviates from what one believes is the first-best solution. Or one can give advice that takes certain institutional or political practicalities into account ("the givens"). Just make it clear. Apparently Mises did so. BUT the main thing is not to deceive ones self that one is in a position to have his advice taken. Mises may have been in such a position that people would listen and possibly take his advice.

But what of us (me, you, the vast majority of bloggers)? Are WE in a position to give advice that has a ghost of a chance to be accepted? I really think not. So why not continue to talk about the first-best? (Or, at least, the close second-best).

When the president appoints me Fed Chairman I will come up with lots of good third-best policies. Now since I am not angling for such a job, I do not need to spend my life proving that I can come up with good "poltically feasible" policies. There are many such economists out there who are in this market. Perhaps we can grade their suggestions according to our first-best "delusions."

Let us work in accordance with comparative advantage.

Is everyone happy now?

[Tom Dougherty]

Mario Rizzo writes, "Very interesting post. What will the Mises Institute devotees say when they see this volume of Mises's writings? It will be fun to see."

They will probably change their name from the Mises Institute to the Rothbard Institute.

[Rafe Champion]

A nice reminder of the story that he told in "Notes and Recollections". Don't forget the time he spent in the artillery!
Given the way he used "social engineer" as a term of abuse, it is amusing to be reminded that we was a working Popperian "piecemeal social engineer".
Another parallel with Popper, both pursued what they regarded as the fundamental problems in their respective fields as an "after hours" activity, and their early, seminal thinking was done as a sideline to their day jobs.

[Rafe Champion]

An afterthought, perhaps his time in the artillery was not wasted. One of the first things you learn is to check where your shot is falling. If the social engineers of the 20th century had practiced that simple discipline...

[Richard Ebeling]

It might be relevant in the context of some of these comments about focusing on "first" bests, "second" bests, etc., to also know what someone like Mises viewed as the role of the economist, even if there was no likelihood of his advise being fully taken.

He gave his view on this in a June 1946 letter to Paul Mantoux, the famous economic historian and co-founder of the Graduate Institute of International Studies in Geneva, where Mises had taught before coming to the United States in 1940:

"I am fully aware of the fact that under present ideological conditions no statesman could venture to resort to a policy of outright liberalism (in the 19th century connotation of the term, not in the sense in which the term is used in present-day America). Given the state of public opinion, a certain amount of interventionism cannot be avoided, at the present juncture.

"But one should know, that in resorting to such measures one elects an evil, although an unavoidable one. If this insight is lacking, one continues in the application of these short-run makeshifts until their undesired and undesirable long-run effects bring about chaos and general unrest . . .

"Therefore, I think that my analysis of the necessary consequences of all kinds of interventionism is of use also for these statesmen who believe that, as the wind blows now, another policy cannot be adopted. It is not merely a secluded doctrinaire's pastime."

I interpret this to mean that the first task of the economist is to tell the truth, in terms of what he concludes logic and economic analysis suggest are the consequences likely to be forthcoming from various government policies.

And to outline what alternative policies would avoid those "undesired and undesirable" longer-run effects.

Mario Rizzo is in the same position as Ludwig von Mises in 1946. He is not in a position of responsibility where he is expected to devise and offer short-run policy options within the constraints of the current "politically possible."

He can take the longer-run view of explaining where current policies may necessarily lead, and what economic arrangement of the society would avoid these consequences from bad policies, and why this alternative arrangement is superior from a variety of "positive" and "normative" perspectives to the current situation and where it seems to be heading.

I might add that is is basically the same way that W.H. Hutt viewed the role of the economist, as formulated in his monograph, "Politically Impossible . . .?" published by the Institute of Economic Affairs in London in the 1970s.

Richard Ebeling

[Jerry O'Driscoll]

Kudos to Steve for making this a new post and starting a great debate. The Vienna Chamber of Commerce sounds like it was think tank before its time.

We should distinguish between internal and external advice. Good organizations (for-profit and not-for- profit) want the unvarnished truth for internal purposes. Once an institutional position is taken, they want their experts to provide their best representation of that position. In the former role, the economist is acting as a Misesian policy advisor. In the latter role, he is acting much like an attorney.

[Albagubrath]

Perhaps Mises unwillingness to compromise his beliefs later in life CAME from his practical experiences...IOW, he had seen first hand that incrementalism and other "worldly" tactics DID. NOT. WORK. ?

[Roger Koppl]

Mario,

I realize I'm coming to this discussion way late for today's blog-speed world, but I'd like to question your comment about whether your advice will be followed. In what seems to be the nub of it, you say,
"Are WE in a position to give advice that has a ghost of a chance to be accepted? I really think not. So why not continue to talk about the first-best? "

That remark suggests that it is exogenous whether your advice will be followed. But it is in some degree at least endogenous. If you just hold up the desired long-run end state, you do not have a policy agenda at all and it is certain that your policy advice will not be followed. After all, ex hypothesi you have not given policy advice! But if you immerse yourself in the particulars, master the relevant facts, and craft real proposals for real change, THEN you may be heard.

A few years ago I knew zip about forensic science. But I immersed myself in the particulars, mastered (to the best of my limited abilities) the relevant facts, and crafted real proposals for real change. We still do not have the sort of system I prefer. Nevertheless:

1) my voice is recognized as one to listen to, including by the NAS which took my testimony before crafting its big report on forensic science published in February 2009,

and

2) I have had a small but positive role in promoting "sequential unmasking," which is a vital reform that seems likely to prevail in the not-too-distant future.

Moreover, I have been at for only a few years and hope to make more progress over the next 20 years or so.

Each of us must choose his audience and we need works addressing only rarified topics and academic audiences. Let a hundred flowers bloom. But your actions help decide whether your voice is heard. Many of us should be rolling up our sleeves and providing policy advice based not only on general considerations, but also particular facts and practices. (Theory and history both matter as Mises would have reminded us.) We should not shrink from the effort of providing practical advice that matters on the mistaken grounds that nobody would pay any attention anyway.

[Pat Peterson]

Who knows what the Mises Inst. folks will say - but the honest ones who have read Hülsmann's bio of Mises will know that Mises did not shirk from advocating 3rd best (horizon) policies, especially during the desperate times right after WWI in Vienna, when things were even harrier than they are here now.

[FWS]

I'm actually much more intrigued by what these papers will show about Mises' historical involvement in the Austrian government, including the Seipel and Dollfuss chancellories. In terms of general direction, neither was particularly known as a libertarian regime. Yet Mises was indisputably a part of them, and even responsible for some of their economic policies.

While this may prove difficult to reconcile for some of the "big picture" ideological purists at the Mises Institute, I suspect its real implications will be far more unsettling for the Tom Palmer types who have been incorrectly claiming for years that the "real" Mises would have no part in the House of Hapsburg and its un-libertarian successors. In fact, the opposite seems to have been true.

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