The Transformation of Economic Science

By early 1926, Mises had worked out four elements of a general theory of interventionism: two case studies, in the fields of international trade and price controls, a critique of the spurious anti-Marxist socialism prevalent in Germany, and a critique of the social liberals. Now he had to pull these elements together into one unified theory of interventionism. The occasion came when he delivered two lectures in Rotterdam and Utrecht in October 1926. The manuscript of these lectures was subsequently published as an article for the Archiv für Sozialwissenschaften und Sozialpolitik.⁴¹ The article generalized the thesis contained in the piece on price controls, and placed great emphasis on the continuity between Mises's work and that of previous generations of economists.

One of the objections that Mises sought to counter was that his theory made it seem that virtually all government activities were necessarily contrary to their professed purpose. Was he some sort of anarchist? Replying to this objection, Mises sought to delineate precisely which government actions constituted “intervention” and which did not. His answer in a nutshell was that government does not “intervene” if it respects the will of private owners to use their own property as they please. Interventions are only those public actions meant to determine the use of property in deviation with the will of the owner.

Intervention is a limited order by a social authority forcing the owners of the means of production and entrepreneurs to employ their means in a different way than they otherwise would.⁴²

Mises stressed that interventionism is a larger phenomenon than the ill-suited actions of governments. The characteristic feature of interventionism is an “authorized” violation of private property. If committed by anyone other than the “social authorities,” invasions of private property would be considered a crime. So what are these social authorities? Their characteristic feature is that their actions are legitimated by an “intellectual power” (geistige Macht). Thus their interventions are deemed to be legitimate violations of property. Intellectual power can give a monopoly over property rights violations to a particular agent; such is the case with all statist theories, which justify violations of property only by a special body of persons (the “state” or the “government”). But intellectual power can also be such as to enable violations of property without a central agent. This is so, for example, when religious doctrine prohibits payment of “high” prices as usury.⁴³

The characteristic feature of intervention is that it brings about unwanted co-ownership. The government (or whoever else intervenes) claims a level of control over the property, but otherwise leaves it in the hands of its owner. Even outright expropriations do not count as interventions according to Mises, because they involve a clear-cut change of ownership.

Most important, measures that serve to protect the physical integrity of private property are not interventions. Since this protection is the proper function of government in the classical-liberal vision of society, Mises's theory of interventionism cannot be interpreted as making the case for anarchism.⁴⁴ However, Mises stressed that “protection of property” should not be interpreted too loosely. In response to the particular notion, increasingly popular among economists of the 1920s, that a free market essentially resembled a Walrasian model of “perfect competition,” Mises warned:

Regulations for the preservation of competition do not at all belong to those measures preserving the private property order. It is a popular mistake to view competition between several producers of the same product as the substance of the ideal liberal order. In reality, the central notion of classical liberalism is private property, and not a certain misunderstood concept of free competition. It does not matter that there are many recording studios, but it does matter that the means of record production are owned privately rather than by government. This misunderstanding, together with an interpretation of freedom that is influenced by the natural rights philosophy, has led to attempts at preventing the development of large enterprises through laws against cartels and trusts.⁴⁵

Here Mises addressed for the first time a fallacy that he would have to confront on many occasions and for the rest of his life—especially after World War II, when the neoclassical movement swept the academic world, and perfect-competition models were taken to be ideal representations of a market economy.⁴⁶ The political implications were disastrous. The new approach opened an endless agenda for government agencies which, through endless novel interventions, sought to shape the real world to their impossible model.

Mises sensed this danger. Economic science had been the intellectual foundation of the nineteenth century's liberty. It was a science that dealt with real human life, not with the fictitious constructions that were at the heart of the rising neoclassical movement. Moreover, it was a science with clear political implications, not a mere intellectual exercise. The very nature of the science made it odious to the powers that be. Its results violated the political correctness of the day, which suddenly found itself exposed to the cold light of rational criticism. Mises knew he was making no friends when, at the height of the debate on the introduction of a national unemployment-relief program in Germany (established 1927), he stated:

In the capitalist social order unemployment is merely a transition and frictional phenomen. Various conditions that impede the free flow of labor from place to place, from country to country, may render the equalization of wage rates more difficult. They may also lead to differences in compensation of the various types of labor. But with freedom for entrepreneurs and capitalists they could never lead to large-scale and permanent unemployment. Workers seeking employment could always find work by adjusting their wage demands to market conditions.

If the market determination of wage rates had not been disrupted, the effects of the World War and the destructive economic policies of the last decades would have led to a decline in wage rates, but not to unemployment. The scope and duration of unemployment, interpreted today as proof of the failure of capitalism, results from the fact that labor unions and unemployment compensation are keeping wage rates higher than the unhampered market would set them.⁴⁷

Mises knew that by insisting on these truths he was making life difficult for the vast majority of his colleagues. He also understood why so few of them dared to articulate even the most elementary lessons of their science: most of them depended on government support. Opposing their employer or benefactor would have been both impolite and impolitic.

He who timidly dares to doubt the justifications of the restrictions on capitalists and entrepreneurs is scorned as a hireling of injurious special interests or is, at best, treated with silent contempt. One can easily fall under the suspicion of serving “capital.” Anyone using economic arguments cannot escape this suspicion.⁴⁸

Because of this ostracism of genuine economists, those who held (or hoped to hold) academic positions in political economy became eager to avoid any behavior that could offend the powers that be. The most innocent strategy was to understate one's findings when they risked upsetting certain powerful social groups. Thus Mises observed about Richard Strigl's book Angeivandte Lohntheorie (1926), which essentially confirmed the old insight that labor unions cannot increase wages rates for all workers: “All Strigl's statements are carefully worded in the same manner that authors of previous centuries worded theirs in order to escape inquisition or censure.”⁴⁹

In a similar vein, an increasing number of young economists turned their attention to abstract and technical problems that did not have any political implications unwelcome to their employers. This helps explain the success of mathematical economics, econometrics, Keynesian economics, and game theory after World War II.

Mises observed that this retreat from traditional economic inquiry was in part the result of a perverse interpretation of value-freedom in the social sciences. According to this view, any critique of practical politics, by the very fact that it deals with a political problem, cannot possibly be scientific. Such was the strongly held opinion of Friedrich von Wieser and others.⁵⁰ Mises did not concur. Economic analysis is suitability analysis; it examines whether a proposed means is fit to attain a purported end. This is a factual question and thus subject to a scientific answer.⁵¹,⁵² Economists can invoke the authority of their science when they reject a policy that does not achieve what its proponents say it will. Mises concluded by pointing out that erroneous notions of value-freedom threatened to make the research of the rising generation sterile:

We destroy economics if all its investigations are rejected as inadmissible. We can observe today how many young minds, who under other circumstances would have turned to economic problems, spend themselves on research that does not suit their talents and, therefore, adds little to science. Enmeshed in the errors described above, they shun significant scientific tasks.⁵³

What Mises was describing was the beginning of the process through which economic science was being redefined—altered to suit the needs of the young and the ambitious, who in their mercenary way were willing to elevate certain comfortable errors to the level of principle. Mises was only a bystander in this process and did not see it as clearly then as he would see it in the 1950s and 1960s. In 1926, he did perceive that the replacement of economic science—which had shaped the modern world because of its practical implications for public policy—would entail grave danger for civilization. The transformation of economics into a self-absorbed technical discipline made it politically toothless. A mere “theory” based on fictitious stipulations and therefore without scientifically valid implications for public policy was no threat to vested interests, and the champions of this theory did not have to fear reprisals. Clearly, this state of affairs suited the majority in the economics profession, both employers and employees. But it was disastrous for science, human liberty, and economic progress.

The transformation of economics amounted to the abandoning of the authority that previous generations of economists had gained for their science. But even those who championed real economic science could still destroy through their self-promotion what remained of its credibility. These men—good writers and speakers, authors of very successful textbooks—claimed that there was no economic science prior to them. Robert Lief-mann, Franz Oppenheimer, and Friedrich von Gottl-Ottlilienfeld had inherited the rhetorical strategy of Karl Marx, who thought he could enhance the respectability of his own arguments by belittling the efforts of his predecessors and contemporaries.⁵⁴ Owing to the eloquence of these authors, their condemnations of all previous accounts of economic law reached a broad audience.⁵⁵ The average lay reader almost inevitably came away with the impression that at its best economic science relied on the work of a single author.

The public, unfortunately, is led to believe that in economics everything is uncertain and problematic, and that economic theory merely consists of the personal opinions of various scholars. The excitement created by these authors in German-speaking countries succeeded in obscuring the fact that there is a science of theoretical economics which, despite differences in detail and especially in terminology, is enjoying a good reputation with all friends of science.⁵⁶

The result was that government interventionism was no longer subject to scrutiny. Clearly, if there is no such thing as an economic science in the first place—if all views on the real impact of economic policy are just personal opinions—then it is pointless to change policy because of them.

Mises not only believed that there was such a thing as economic science, but also and in particular, that its core analysis of government economic policies had survived all changes of fashion and schools of thought. In other words, economic science was most constant and most unshakable precisely in that field where it mattered most: in economic-policy analysis. There was an unbroken line of continuity in economic thought on this question. It ran from the eighteenth century Physiocrats, via the classical economists and the nineteenth century French Laissez-Faire School, and via the marginal revolution with its different schools, up to Mises's own work in the 1920s.

Mises recognized of course that there were often profound differences between the various schools of thought, but he stressed that these differences had never affected the practical results. When it came to stating the impact of government intervention on the economy, there were no relevant differences of opinion between the schools. By and large, economists agreed on the practical issues. Notable disagreement existed only between economists and those who denied that there was such a thing as economic science at all.

We need not here deal with the deeper epistemological question of conflicting systems. Nor need we discuss a multiplicity of opposing systems. To investigate the problems of interventionism there are, on the one hand, modern economics together with classical theory and, on the other hand, the deniers of system and theory, no matter how carefully they word their denial of the possibility of theoretical knowledge. Our answer to them is simple: try to create a system of theoretical knowledge that pleases you more than ours. Then we can talk again.

Concluding the essay he drove home this essential message:

But surely it is as futile today as it was in the past to defend interventionism as meaningful and purposeful from the point of view of economic theory. In fact, it is neither meaningful nor purposeful from any point of view. There is no road from economics to interventionism.⁵⁷

At the beginning of the twenty-first century, Mises's emphasis on the continuity of economic thought in practical matters and the characterization he made of “economists” no longer seems true. But this is because the transformation whose beginnings he noticed in the mid-1920s has since been completed. Present-day mainstream economics is heavily focused on purely technical problems of modeling reality with mathematics, econometrics, and game theory.⁵⁸ As a consequence, the professional economists of today are not really economists in the sense in which Mises used the word—the same sense in which it was used throughout the nineteenth century. The Austrian School of Mises and Hayek (after the latter had repudiated his early neoclassical views) was in fact the only twentieth-century school of economic thought in the classical sense. Significantly, John R. Hicks said many years later about the Austrian School:

I am writing in their tradition; yet I have realised, as my work has continued, that it is a wider and bigger tradition than it at first appeared. The “Austrians” were not a peculiar sect, out of the mainstream; they were in the mainstream; it was the others who were out of it.⁵⁹

But Mises's ecumenical stress on the homogeneity of the different schools of economic thought (in regard to the necessity of economic theory in general, and the analysis of government interventionism in particular) has turned out to be problematic. Present-day historians of economic thought, well acquainted with Mises's work, have claimed that until the early 1930s, Mises and virtually all other Austrian economists were unaware of the profound differences between the Mengerian approach to economic analysis and that of the other marginal-utility schools. These historians claim that it was the socialist-calculation debate of the 1930s that radicalized Mises and Hayek, spurred them to reflect on the uniqueness of their approach, and to distinguish themselves more sharply from the followers of William Stanley Jevons and Léon Walras.⁶⁰

But Mises's ecumenism was not meant to cover all problems or branches of economic theory. The message he sought to convey was that there was such a thing as economic science relevant to policymaking, and he thought the best evidence for this claim was that there were some economic laws on which all schools agreed. The disciples of Carl Menger could not subscribe to Ricardo's theory of value, but they could endorse almost everything he had written on political economy.⁶¹ Mises stressed these common points, not because he believed that the remaining disagreements were unimportant, but because he sought to drive home the fact that the practical implications of economics were not just a matter of personal opinion. Interventionism does not work. All economic theory agreed on this point.