In the Philippovich Seminar

At the onset of the twentieth century, most German economists held the teaching of economic theory in disdain. They thought that political economy, insofar as it was a science at all, was a historical discipline (“historicism”). Mises recalled, certainly with his teacher Grünberg in mind:

At that time, around 1900, historicism was at the zenith of its career. The historical method was believed to be the only scientific method for the sciences of human action. From the height of his historical clarity, the “historical political economist” was looking with unspeakable disgust on the “orthodox dogmatist.”²⁷

Many members of this school of thought had strong socialist leanings and openly called for more government intervention. Some even advocated the complete abolition of private property. This attitude had earned them the epithet Kathedersozialisten (Socialists of the Chair).²⁸ The Kathedersozialisten had risen to dominance at the universities of the German Reich in the wake of the creation of a German central state under Prussian leadership. Their political ascension seemed unstoppable and contributed to their reputation as the avant-garde of their discipline.²⁹ By the turn of the century, they had virtually monopolized the chairs in political economy in the German Reich and were on the verge of becoming dominant in Austria too. Carl Grünberg, Mises's main teacher during the first two years, was one of them; in fact, he had been brought to the University of Vienna precisely in order to bring research and teaching of government science up to date—that is, up to the historicist standards of the other German-language universities.

Grünberg's call to the University of Vienna had been a terrible mistake. In the case of new appointments, the other faculty members—all lawyers except for two economists—had to select the new incumbent. These men were unlikely to give the position to an “Austrian economist.” Mises explained:

They had to choose between two opposed schools of thought, the “Austrian School” on the one hand, and the allegedly “modern” historical school as taught at the universities of the German Reich on the other hand. Even if no political and nationalistic prepossessions had disturbed their judgment, they could not help becoming somewhat suspicious of a line of thought which the professors of the universities of the German Reich dubbed specifically Austrian. Never before had any new mode of thinking originated in Austria. The Austrian universities had been sterile until—after the revolution of 1848—they had been reorganized according to the model of the German universities. For people who were not familiar with economics, the predicate “Austrian” as applied to a doctrine carried strong overtones of the dark days of the Counter-Reformation and of Metternich. To an Austrian intellectual, nothing could appear more disastrous than a relapse of his country into the spiritual inanity of the good old days.³⁰

The Grünberg seminar had reinforced for Mises the world-view of his adolescence, a vision of a glorified government as the prime mover in the enlightened management of the economy and of society. Mises grew up in an atmosphere of almost unlimited confidence in the state's ability to make human society safe for its constant improvement. This faith in the state went along with a distrust of private individuals and associations to match the good deeds of government. He later recalled:

By 1900 practically everyone in the German-speaking countries was either a statist (interventionist) or a state socialist. Capitalism was seen as a bad episode which fortunately had ended forever. The future belonged to the “State.” All enterprises suitable for expropriation were to be taken over by the state. All others were to be regulated in a way that would prevent businessmen from exploiting workers and consumers.... When I entered the university, I, too, was a thorough statist.³¹

Most objections to this statist view were moral objections, defending the individual's rights against bureaucratic encroachments. These arguments fell on deaf ears. They could not withstand the appeal of the utilitarian case for government intervention—especially since so many nineteenth-century liberals had themselves promoted utilitarianism as the basis for social policy. Surely, the improvement of the vast majority could not be sacrificed to selfish interests. Thus, when he started his legal studies, Mises was a champion of interventionist statism. He believed that government was able to fix a wide variety of social problems, and he was eager to engage in the scientific discovery of the dangerous consequences of unhampered capitalism.

It so happened, however, that the department of law and government science at the University of Vienna was home to some of the most outspoken opponents of historicism and thus by implication of the Kathedersozialist program. These scholars denied that economic affairs could only be studied by historical methods and they made the case for a rational economic theory which, they held, was indispensable for the understanding of certain economic phenomena such as value, interest, money, income, and so on. The most important theorist of this group was a man by the name of Carl Menger.

In 1871, Menger had published a book with the title Grundsdtze der Volkswirtschaftslehre (Principles of Economics), in which he co-pioneered the marginalist approach to the theory of value—the standard analysis still in use today. This book had earned him a chair in political economy at the University of Vienna, where he taught until the spring of 1903. In the 1880s, Menger had become famous throughout the academic world because of a highly polemical dispute with Gustav Schmoller on the respective merits of the historical and theoretical methods. The Methodenstreit (dispute on method), as their debate came to be known, polarized German economists between the historicists and what would come to be known as the Austrian School.

At the turn of the century, Menger had about twenty followers among the Austrian professors of political economy, which was a considerable number in those days.³² The most significant theorists were two brothers-in-law: Eugen von Böhm-Bawerk, Austria's four-time Minister of Finance and holder of a chair of political economy at the University of Innsbruck, and Friedrich von Wieser, who held a chair of political economy at the German University of Prague and would succeed Menger at the University of Vienna in 1903. Another follower, Eugen von Philippovich, was a full professor at the University of Vienna, and although he was not an important theoretician of the Austrian School, he excelled as a pedagogue. His textbook, which was at that time the most successful German-language textbook on economics, almost single-handedly ensured that the avalanche of historicism would not wipe out the teaching of economic theory in the German-speaking world.³³

Mises's first years at the university overlapped with Menger's last, but during the first phase of his studies, Mises did not attend Menger's last lectures. When he began the second phase, after returning from military service, Menger had retired to live the life of a private scholar. It is likely, however, that Mises attended Friedrich von Wieser's inaugural lecture as Menger's successor on October 26, 1903. In this lecture, Wieser attempted to expand on Menger's monetary writings with an original analysis of the value of money and its changes through time.³⁴ The lecture was different in style and content from what the students of government science were used to in Grünberg's seminars. Wieser was a pure theorist, in the sense that his ideas were removed from the hard data studied under Grünberg. But Wieser was an impressive speaker, and his lecture might have been the event that prompted Mises to become acquainted with Menger's Principles, which he started reading about two months later. In any case, the lecture was in many ways the basis and starting point for Mises's later work on the theory of money, as we will see in more detail in a later chapter.

Mises joined the government science seminar of Philippovich, where he met and befriended Emil Lederer, who later became Germany's top Marxist economist. The seminar was a rallying ground for the most fervent social reformers, with the possible exception of Philippovich's assistant, Felix Somary, who already held radical free-market views.³⁵ Professor Philippovich was a very influential public figure, known equally for his Mengerian inclinations in economic science and his interventionist position on politics. Of all academics with Kathedersozialist inclinations, his writings had the most thorough grounding in economic theory, and Mises later praised him as the most thorough theorist ever of third-way policies. “History,” Mises wrote without irony, “will see in Philippovich the most outstanding advocate of the ideology of statism, the characteristic representative of the spirit of social reform.”³⁶

Eugen Philippovich von Philippsberg (1858–1917) was the product of an old Austrian family of military officers. After studies in Graz, Vienna, Berlin, and London, he received his Habilitation diploma under Menger, then quickly became a tenured professor at the University of Freiburg im Breisgau. In 1893, he returned to Vienna as a full professor of political economy and public finance. Philippovich was active in various political associations and over the years gained great influence at the University and in Austrian politics. As a young man, he had been an enthusiastic champion of the Schmollerite program, advocating historicism in economics and heavy government interventionism in politics. Under the influence of Menger and Böhm-Bawerk, however, he began to reconsider the case for economic theory and economic liberalism during his years in Freiburg. The result of this research on economic theory became visible in the first of the three volumes of his Grundriss der politischen Oekonomie, which dealt with general economic theory. Here Philippovich showed great aptitude in putting economic theory in the service of political views that, while less statist than the official line of the Kathedersozialisten, still called for far-reaching government control.

Eugen von Philippovich

When he returned to Vienna, he immediately joined the Vienna Fabians.³⁷ The group organized public conferences and discussions to promote the idea of government intervention in the service of a “social” agenda, which primarily concerned the support of the working-class poor. Philippovich's personal and intellectual qualities made him the center of the Vienna Fabians and helped spread their influence among academics and businessmen. These activities were so successful that Fabian ideas eventually were incorporated into the programs of all Austrian political parties.

Philippovich also left a deep impression on his seminar students. In the classroom, matters of social policy took center stage. While the students usually jumped head-on into championing various practical welfare schemes, Philippovich again and again drew them into discussions of the theoretical foundations of government intervention. He clearly perceived that emotional appeals or references to we-all-know convictions were not enough to justify the use of the public organization of coercion and compulsion. He urged his students to make a scientific case for interventionism and constantly raised problems that they had not considered—problems for which he himself had not found adequate solutions.³⁸ It was in these exchanges that he was most impressive, especially in the eyes of his most critical students. Mises recalled the atmosphere in the Philippovich seminar:

Here he could utter his doubts without being misunderstood. Here he was not the famous writer who presented his reader with something that was finished, complete, and apparently unshakable. Here he showed himself in his true nature, as the critical thinker and explorer who wrestled laboriously (mühsam) in his quest for knowledge.³⁹

Philippovich was in fact only too conscious of the existence of unintended consequences that result from government intervention. In a speech delivered in his capacity as a university president, he warned:

May none of you have the painful experience, at times not even spared the man of the best intentions, of having to say of one's activities: I drew pure fire from the altar, but what I ignited is not a pure flame.⁴⁰

But such experiences did not shake his conviction that government interventions were necessary. They were needed despite all the economic achievements of liberalism that Philippovich praised in his seminar and in other public appearances. He stressed that liberalism made it possible for Europe's population to grow during the nineteenth century from 187 to 393 million, while simultaneously increasing the living standards of the masses—a development unprecedented in history. He even claimed that no previous era had done as much for humanity as liberalism, with the possible exception of Christianity's acknowledgment of human dignity. Celebrating the liberating and creative powers of liberalism in political and economic affairs, he argued that the only relevant question was whether one could avoid full-blown individual liberty:

The economic forces that the liberal system called forth—capitalistic large-scale organization of production and exchange—as well as the personal values and energies that it brought into being, form a component of social life that we can no longer do without.

The present and future cannot be based on forgoing the products of economic liberty: the power of fruitful initiative and economic organization. The question that must be asked is whether the acknowledgment of the basic ideas of the liberal system necessarily implies the acceptance of the ultimate consequences of its unrestricted application, that is, whether clinging to the principle of economic liberty is identical with accepting the social system of individualism.⁴¹

Philippovich argued that one could enjoy all the blessings of individual liberty and remedy its shortcomings on an ad-hoc basis. Pointing to specific fields where such remedial action was required, he argued that unrestricted individualism leads to the dissolution of communities, that the interests of the individual are not always identical with the interests of the social whole, and that unrestricted economic liberty might destroy its own foundations through the formation of monopolies. Government interventions were necessary to counteract these shortcomings.⁴²

The Philippovich seminar was an important training ground for Vienna's fervent young social reformers—of whom Mises was one. Philippovich did not deny the validity of the traditional case for economic freedom and he made sure his students were familiar with the theory and history of classical liberalism. This was probably as much liberalism as most of them could take. But for Mises, the seminar proved to be his first step in an unexpected direction—one that would ultimately change his path radically and for his entire life.