Alienation from Former Associates

The 1930s witnessed the first phase in a process that distanced Mises from some of his closest associates. The most dramatic cases were those of Fritz Machlup and Lionel Robbins, both of whom would in the course of the years change their views on a number of important issues, particularly on money and the gold standard. In Machlup's case, Mises eventually broke off all contact for a few years. The issue for him was integrity. It was one thing to disagree on the importance of the gold standard, but he believed Machlup's change of heart to be unprincipled.³⁰

In the 1930s, the seeds of this alienation were newly sown, and only hindsight allows us to see where the process began. In 1934, Machlup left Vienna for the United States on a Rockefeller stipend. From February to June 1935, he lectured at Harvard, and then moved on to a full professorship at a new Rockefeller creation: the University of Buffalo. Rather than a stalwart of the Austrian School, however, Machlup became part of the new economics movement. Mises must have sensed the shift in his former student. In January 1936 he appealed to him:

I hope that you will not become American over there, but, to the contrary, that you convert the Americans to liberalism and Austrianism. They need it indeed.³¹

Seventeen months later, he asked rhetorically what the Austrian economists could learn from the new theory of monopolistic competition. Machlup wrote on Mises's letter: “That's not the issue—but if we raised the question anyway, the answer would be: quite a lot.”³²

The break with Lionel Robbins was less severe. At the end of Mises's first academic year in Geneva, Robbins had come to the Institute to give one of the prestigious week-long short courses that attracted not only the entire faculty of the Institute, but also “representatives of the local authorities, the diplomatic missions and the international organisations.”³³ Robbins delivered a series of lectures in the summer of 1935 on problems of international economic organization.³⁴ He had brought his family and took them mountain climbing with Mises. The Robbins children would later recall how after a day of climbing Mises had filled their rucksacks with Swiss chocolate. But correspondence between the two men stopped after December 1935, and was resumed—somewhat reluctantly on Robbins's part—only in 1943, when Mises made a last attempt to win Robbins back to the side of liberty.³⁵

Robbins later distanced himself very clearly from the ideas he had cherished in the early 1930s. He said in his autobiography that he wished he had never written his book The Great Depression (1934). Economic Planning and International Order (1937), the book in which he published his Geneva lectures, was to be his last “Austrian” work. In The Economic Basis of Class Conflict (1939), Robbins started having second thoughts about “idle resources” the presence of which, he felt, undermined the applicability of the Austrian business cycle theory. From then on, the Austrian influence on Robbins's thought receded more and more into the background. Although he remained on friendly personal terms with Mises, they were no longer intellectual comrades in arms.³⁶

In contrast to Machlup and Robbins, Mises's friendship with Hayek grew stronger during these years, especially during the war. It was Hayek who managed Mises's bank accounts in London. He paid Mises's subscriptions for Economica and the Review of Economic Studies, and bought books for him—a sign of the great trust Mises put in his former Vienna associate. Apart from his bankers and Gustav Fischer (a quasi-banker for Mises in the early years of German credit controls), the hyper-cautious Mises never let anybody peek into his financial records.³⁷

The crucial factors in their friendship were Hayek's integrity and appreciation for free markets, not any one point-by-point correspondence in outlook on politics or economics—although Hayek felt it necessary to assure his former mentor that he “need have no fear about my becoming converted to Keynesianism.”³⁸ Their friendship grew despite rather significant disagreements. While they did not affect the personal and professional relations between the two men, these disagreements would come to play a role in the rebirth of the Austrian School after 1974.

What were these disagreements? Wieser's impact on Hayek's economic thought made itself felt in Hayek's theories of monetary equilibrium and of “neutral” money—both theories that Mises would explicitly reject. Other points of contention appeared when Hayek turned to capital theory. In the spring of 1934, Fritz Machlup queried the inner circle of Austrian economists—Mises, Hayek, Strigl, Haberler, Machlup—about capital theory in general and the concept of the period of production in particular. Mises had answered Machlup's five questions in May, stating that three of them seemed to be based on an untenable interpretation of the period-of-production concept. Machlup replied with some astonishment:

I should be very grateful for you to write to me whether you totally maintain your fundamental objections against my (and Hayek's) conceptions. Hayek's new book on capital would from A to Z be subject to your objections, if strictly interpreted.³⁹

Another difference emerged when Hayek turned his attention to the theory of socialism. In 1935, Hayek edited a volume of essays making the case for the impossibility of socialist economic calculation. The volume contained an introductory essay by Hayek, the two classic pieces by Pierson and Mises, and two concluding essays discussing the current state of the debate in the continental literature (Halm) and in English-language publications (Hayek).⁴⁰

In his introduction, Hayek pointed out that Mises had been the first writer to emphasize that the “pricing process” must cover intermediate products and factors of production lest economic calculation be impossible. Yet by “pricing process” Hayek seemed to mean the mere expression of prices in terms of money—in other words, his argument seems to be based on the Wieserian assumption that money prices were just one convenient way of expressing values and performing value calculations.⁴¹ In his discussion of the proposal to use mathematical equation systems as economic planning tools, Hayek then admits that this proposal is “not an impossibility in the sense that it is logically contradictory.” Rather, the true problem of central planning was, according to Hayek, a result of the type and quantity of information required.⁴²

Central planners would first need precise information about the location and the physical characteristics of every single economic good. Second, they would need to centralize all available technical knowledge as well as knowledge about how to gain new technical knowledge (“techniques of thought”). And third, they would need “data relative to importance of the different kinds and quantities of consumers' goods.” Given these requirements, socialist economic calculation was clearly impracticable, even though it was not—as Mises had contended—impossible. Hayek emphasized:

all the difficulties which have been raised are “only” due to the imperfections of the human mind. But while this makes it illegitimate to say that these proposals are impossible in any absolute sense, it remains not the less true that these very serious obstacles to the achievement of the desired end exist and that there seems to be no way in which they can be overcome.⁴³

Hayek's conclusion was that socialist calculation posed insuperable practical difficulties. For him the formidable cognitive problem of economic calculation without money prices was the beginning and end of his economic argument against central planning. Mises too recognized the existence and importance of knowledge problems.⁴⁴ But he had also perceived a deeper problem of an altogether different nature. For Mises, the “pricing process” was not just the solution to an intellectual puzzle—it did not merely “express” the knowable reality of value in terms of some other knowable reality of money prices. Rather, the pricing process created a reality that could not possibly be known otherwise. Hayek would contend—following Wieser—that if the fundamental knowledge problems could be solved, one could calculate the correct prices for factors of production. Mises denied this as even a theoretical possibility. Socialist calculation was for him a conceptual impossibility.

In 1938, Mises published an article on using the equations of mathematical economics as the tools of a socialist planning board.⁴⁵Here he argued that Hayek had underrated the significance of the assumption that the socialist planning board knows future consumer preferences. Hayek had pointed out that the quest for such knowledge encounters great practical problems. Mises concurred. But there was also a logical riddle, one that subsists even with foreknowledge of the future. One cannot simply plug such known future consumer preferences into a system of equations and obtain a solution of the resource allocation problem. The equations of Walras, Pareto, and Barone merely describe how the economy would look in a state of general equilibrium. They describe an economy in equilibrium, not an economy tending toward equilibrium. The real-world economy is always in a state of flux; it is continually in disequilibrium. The fundamental economic problem is to choose the best actions to approach the equilibrium state, and to do this in the most efficient way. For a person confronted with real-world decisions in the present—whether an entrepreneur or a socialist dictator—it is therefore no help whatsoever to know the hypothetical future consumer preferences according to some theoretical construct. His crucial problem is to decide the next step to get closer to equilibrium. The general equilibrium equations themselves offer no information for solving this problem.

Mises argued that the decisive advantage the market economy has over socialism is in the use of present experience. For a socialist dictator, the knowledge of present conditions can be no more than a starting point for speculations about the ultimate equilibrium state of the economy; but these speculations are overthrown every day by unforeseen changes. In contrast, the entrepreneurs of a market economy can apply present-day experiences in present-day decision-making. They can use their knowledge of current conditions (supply side) and current entrepreneurial opinions about conditions in the future (demand side) to bring about piecemeal improvements of the existing structure of the economy.

Apparently Mises had presented several versions of the paper to Hayek without gaining his approval. Even the version that was eventually published in the Revue d'économie politique did not convince Hayek. He wrote to Mises in private correspondence:

There would be much to say about the paper, but the problem it raises is so broad that it is very difficult to deal with it adequately in a letter. As I mentioned in Paris I am not yet entirely satisfied even with the new version of the last section. Suppose all knowledge of the individual entrepreneurs about the future had come together in the head of the economic dictator, and suppose it were conceivable that he solve the countless equations into which these data were to fit. Would then really only one other problem remain, a difference between the position of the entrepreneur and of the dictator? I do not quite see it.⁴⁶

At that point, Hayek had already published his now-famous paper on “Economics and Knowledge,” in which he had argued that general equilibrium economics à la Walras, Pareto, and Wieser was a system of tautological propositions—a “pure logic of choice” as it were—and as such unassailable. It did not give an adequate explanation of how real economies work because it assumed from the outset that a fundamental problem has already been solved, namely, the problem of knowledge acquisition. Hayek argued that the market could solve this problem because market prices act as a mechanism of communication, and that the great deficiency of socialism was precisely that it lacked such a mechanism.

Thus Hayek had found his way out of the general-equilibrium box. The views he adopted on the theoretical and practical importance of information and the acquisition of knowledge were part and parcel of his attempt to reconcile his Walrasian outlook with the facts of life. The problem was, however, that he projected these problems onto all other theorists and in particular onto Mises. His 1937 essay on “Economics and Knowledge” was directed against what he believed to be the apriorism of Mises.⁴⁷ In fact it was at best a criticism of the unwarranted a priori suppositions of Walrasian general equilibrium theory, which Hayek himself was instrumental in spreading.

Hayek's speculations about the importance of knowledge and information did not change Mises's views about the a priori nature of economic science. Hayek attributed this fact to the intellectual inflexibility of his 66-year-old mentor. Yet it was the young Hayek who lacked openness to new ideas. When Mises published his first pioneering essays on the nature of value and the relationship between economic theory and the real world, Hayek and his fellow students had already made up their minds on these questions.⁴⁸

Despite all this, Hayek did continue to be Mises's favorite student and closest ally. He visited Geneva in the spring of 1937 to conduct a brilliant and successful cours temporaire. The lectures were published a year later in one of his best books ever: Monetary Nationalism and International Stability. Unfortunately, Mises could not attend the entire course. Soon after Hayek's arrival, he received terribly bad news about his mother and immediately left for Vienna.⁴⁹ Adele von Mises suffered only for a few days. She died on April 18, 1937 and was buried four days later in the presence of her sons.

Ludwig had been very close to her—so close that she was an obstacle to marriage with Margit. Now the gates were open for this union.