Birth of an Economist

Around Christmas of 1903, Mises had just received his officer's commission and had recently returned to his studies when he first read Menger's Principles. It was an intellectual encounter that would forever change his outlook on science and the world.

Mises later emphasized that the book “made an ‘economist’ of me”⁴³—that is, practically speaking, it made him skeptical of the benefits of government action. To be an economist is in fact to understand the limitations of government. It is to have grasped that the state is not omnipotent, and that it cannot do all it claims it can do. Today most professional economists would probably reject this definition, but that is because the economics profession underwent such dramatic changes after World War II that present-day economists share only the title with their pre-war predecessors. At any rate, Mises understood the practical essence of economic science to be the insight that free enterprise and the voluntary association of individuals is superior to the coercive schemes of the state. In this understanding he continued the tradition of the British classical economists and of the great eighteenth- and nineteenth-century French économistes.

In 1904 Vienna, Mises was quite alone in his new orientation. Reading Menger's Principles alienated him from his fellow students, from his professors, and then later from his colleagues. His discovery made him richer intellectually and spiritually, but it also made him a very lonely man. Twenty-five years later, Franz Weiss remembered vividly how Mises had suddenly turned away from the ideals he had shared with Weiss and other peers. Weiss warned young Friedrich August von Hayek not to follow Mises in his betrayal of “social values” for the old doctrine of liberalism. Hayek surmised:

If Carl Menger had not aged at such a relatively early date, and if Böhm-Bawerk had not died so early, Mises probably would have found support in them. But the only survivor of the earlier Austrian School, my very dear teacher Friedrich von Wieser, was himself rather a Fabian, proud, as he thought, to have delivered with his development of marginal-utility theory a scientific justification of the progressive income tax.⁴⁴

Reading Carl Menger did not immediately produce the author of Human Action. Mises's own statism was too deep-rooted: he had absorbed it from the earliest days of his childhood, and he unconsciously applied it in his research for the Grünberg and Philippovich seminars. Everyone he knew shared the fundamental conviction that government intervention is inherently beneficial while the free market is only accidentally so at best.

What Menger's Principles did was to change fundamentally Mises's outlook on the analysis of social problems. Menger's book showed that individual consumer values are paramount on the market because they not only determine the values of all consumers' goods, but also the values of all factors of production. It is consumers who steer the entire market system through their spending decisions; capitalist-entrepreneurs merely carry out (or anticipate) their wishes. The market is not beneficial by accident but is inherently so. It is eminently just and it is elegant. All government intervention must therefore be considered carefully before it is allowed to disrupt the order of the market.

It took Mises a while to digest the Mengerian message, to analyze its weaknesses and strengths, and to think through its political implications. He could not jump directly from his former statist convictions to embrace complete laissez-faire liberalism. This was the main challenge of Menger's book. Mises did not have to be convinced of the merits of Menger's theory. From his childhood days, he had had doubts about the purely historical approach. He had a passionate interest in deriving practical lessons from the study of history, but did not know how to do it. The writings of the Historical School that he digested while at the gymnasium did not seem to solve the problem either.⁴⁵ His years in the Grünberg seminar finally convinced him that the champions of the Historical School had indeed failed to solve this problem. He later summarized their failure:

Historicism was right in stressing the fact that in order to know something in the field of human affairs one has to familiarize oneself with the way in which it developed. The historicists' fateful error consisted in the belief that this analysis of the past in itself conveys information about the course future action has to take. What the historical account provides is the description of the situation; the reaction depends on the meaning the actor gives it, on the ends he wants to attain, and on the means he chooses for their attainment. In 1860 there was slavery in many states of the Union. The most careful and faithful record of the history of this institution in general and in the United States in particular did not map out the future policies of the nation with regard to slavery. The situation in the manufacturing and marketing of motorcars that Ford found on the eve of his embarking upon mass production did not indicate what had to be done in this field of business.⁴⁶

Practical guidance could not be obtained at all through historical inquiry. Only theory of the Mengerian sort could do this. But to go from theory to endorsing the political program that seemed to follow from the Mengerian premises was quite a step. It took Mises years to gradually overcome his prejudices. His ongoing political radicalization shows that the process continued late into his life. He recalled its very beginning:

My first doubts about the excellence of interventionism came to me when, in my fifth semester, Professor Philippovich induced me to research housing conditions and when, in the following semester in the Seminar on Criminal Law, Professor Löffler asked me to research the changes in law regarding domestic servants, who at that time were still subject to corporal punishment by their employers. It then dawned on me that all real improvements in the conditions of the working classes were the result of capitalism; and that social laws frequently brought about the very opposite of what the legislation was intended to achieve.

It was only after further study of economics that the true nature of interventionism was revealed to me.⁴⁷

Two years later, he was already fairly critical of the benefits of organized labor. On November 28, 1905 he watched 250,000 labor union members defy the law that prohibited demonstrations before the parliament while the MPs were in session. That night, his friend Otto Bauer rejoiced over the triumph of the proletarian masses. Mises saw it as anarchy. What if another mass organization arose and similarly defied the law? Would that not lead to civil war? Bauer scorned Mises for this question, which he thought betrayed a petty bourgeois mindset. The future belonged to social democracy.⁴⁸

Mises's early transition period from statism to liberalism is well documented in a lengthy study he wrote for the Philippovich seminar on “The History of Austrian Factory Legislation.” Mises presented the paper in 1904 or early 1905 and subsequently published it in Böhm-Bawerk's Zeitschrift.⁴⁹ In it Mises pointed out that in Austria organized child labor was a creation of the state. Under Empress Maria Theresa, coercive child labor had been instituted in an effort to combat “laziness, misery, and sin [sexual activities].” Thus the state could pursue several goals through a single measure: it got the children off the streets—ostensibly in their own interest—and as a beneficial side effect it promoted large-scale industry and reduced public welfare expenditures.

Not surprisingly, many factory owners abused the situation. In 1785, Emperor Joseph II visited a factory in the town of Traiskirchen and, shocked by what he saw, ordered legislation to remedy the children's misery. Mises proudly noted that the emperor's order preceded the British Morals and Health Act by sixteen years, but he also emphasized that the market was not the cause of the problem. The root of the children's misery lay not in the factory owners' entrepreneurial function but in the lack of a contractual relationship. Commenting on the eventual suppression of the Kinderhäuser where the children were kept after work, he said:

The children's houses might have offered better room and board to the adolescent worker than his parents' home, but they delivered him entirely into the power of the factory owner. This legal relationship could be interpreted as a wage contract only from a formal point of view; in its essence, it was more similar to slavery⁵⁰

While these facts did not fit the mainstream view of government's role in child labor, Mises was not yet ready to deny the Austrian government a role in improving the children's situation. He ferociously criticized a favorable report on free-market child labor as “tendentious” and “exaggerated” though he did not provide a single counter-argument.⁵¹ In his conclusion he hailed the “progressive” Emperor Joseph II for instigating the epoch of social-policy:

The double insight that we first encounter in this law [Joseph II's bill dated November 20, 1785]—that factory work involves grave disadvantages for children from a hygienic and moral point of view, and that these ills can only be eliminated through the intervention of the state and through continuous control by the state—has become the point of departure of modern social policy⁵²

We can see the remnants of unquestioned suppositions in young Mises's thought. But he had learned the first step: how to think as an economist. This shift was reflected in his increasingly critical analysis of the limits of government action. Such an attitude did not find approval from established academia. When Mises presented himself for Staatsexamen numbers two and three, he passed with distinction in law, but not in government science—enough to slow his ambitions in his main field of academic interest. By February 20, 1906, he had passed his juridical, political science, and general law exams. This gained him the title of doctor juris utriusque (doctor of canon and secular law).

His mother was proud and his friends probably poked fun at “Dr. Mises”—the pseudonym under which Gustav Theodor Fechner had published satirical pieces attacking early nineteenth-century German materialism.⁵³