Years with a Master

The decisive boost to Mises's intellectual development came when Eugen Ritter von Böhm-Bawerk opened his seminar at the University of Vienna in the summer semester of 1905—“a great day in the history of the University and the development of economics.”⁵⁴ Böhm-Bawerk was Carl Menger's most important follower and had gained international fame as an economic theorist with his Kapital und Kapitalzins (Capital and Interest), a two-volume treatise on economics and the history of economic ideas. After a brilliant career as a professor of political economy in Innsbruck and as a four-time Minister of Finance, fifty-four year old Böhm-Bawerk returned to his alma mater, where a special position was created for him in the department of government science. For the next nine years, the University of Vienna would host the three best economic theoreticians in the German-speaking world: Böhm-Bawerk, Wieser, and Philippovich. It remains the high point in the teaching of Austrian economics.

Böhm-Bawerk was a towering presence as a teacher and a master of clear thinking and clear speech. His fame attracted outstanding students from all parts of Austria and abroad. But what made these students stay (often for years after graduation) was the razor-sharp mind that could cut through the knottiest problems of economics. Many of his students were critical of the Austrian School, and of his writings in particular, but fearless and thorough, Böhm-Bawerk accepted, examined, and discussed all arguments brought before him, and demonstrated again and again the usefulness of the Austrian approach.

The very first summer set the tone. Böhm-Bawerk spent the entire semester discussing the shortcomings of Karl Marx's labor theory of value, engaging in extended debate with the brilliant Austro-Marxist, Otto Bauer. Young Bauer was the secretary of the parliamentary delegation of the socialist party and was well-versed in both Austrian and Marxist theory. His main duty as secretary was to explain and justify the socialist party's current line. He was an experienced and impressive debater who had defended Marx's views in countless discussions in and out of academia. He was also the editor of the socialist journal, Der Kampf, and was on his way to winning great acclaim with a scholarly work on one of the pressing issues of Austrian politics: the coexistence of national communities within the Danubian state.⁵⁵ Bauer was a worthy sparring partner for Böhm-Bawerk, but he was no more than that. He found it impossible to raise a point the old master had not thought of. The spectacle of their encounter left the other seminar members with the distinct feeling that they had had the privilege of studying under a true master.

Eugen von Böhm-Bawerk

Ludwig von Mises was one of those who continued attending the seminar after graduation. Critical though he was in all things, he could not help but feel awe in Böhm-Bawerk's presence. More than half a century later, the celebrated author of Human Action had this to say on the occasion of a new English translation of Böhm-Bawerk's Capital and Interest:

There is no doubt that Böhm-Bawerk's book is the most eminent contribution to modern economic theory. For every economist it is a must to study it most carefully and to scrutinize its content with the utmost care.... Although Böhm-Bawerk's great opus is “mere theory” and abstains from any practical applications, it is the most powerful intellectual weapon in the great struggle of the Western way of life against the destructionism of Soviet barbarism.⁵⁶

Böhm-Bawerk's seminar decisively reinforced the impact of Menger's Principles. Under Böhm-Bawerk's guidance, Mises began to delve more systematically into the literature of economic theory. He began the research that led to his first great book, a treatise on money and banking.⁵⁷

These were years of apprenticeship. Mises continued to liberate himself step by step from his statist prejudices and to become acquainted with the great tradition of monetary analysis in nineteenth-century British and French thought. He started publishing papers on questions related to money and banking, articles that reveal his changing views on the role of government in this field. Some of these early opinions are likely to surprise the reader who knows Mises only as the author of Human Action or of the Theory of Money and Credit. For example, in a 1907 paper on the motivations of Austrian exchange-rate regulations, Mises hailed the policy of suspending cash redemptions so that the central bank could “separate the so-called legitimate demand for gold from the illegitimate one” because it “thereby became possible to keep Vienna inter-bank interest rates lower than in Berlin and London.”⁵⁸

He still had a long way to go to become the famously intransigent opponent of all government interventionism. As his earlier writing shows, he did not adopt his later views capriciously or out of ignorance of other perspectives. Ludwig von Mises became the most radical free-market economist of his time only by overcoming the part of himself that was still hostage to the dominant worldview. The Zeitgeist had a firm grip on his feelings and instincts, but it could not subdue his will to follow reason wherever it led him.

In his last months as a student, Mises witnessed a great political earthquake, which forebode even more fateful events to come.

Far from Vienna, at the easternmost end of the Eurasian landmass, Russia unexpectedly lost a war against Japan. In one stroke the war smashed Moscow's Far Eastern ambitions, and it was suddenly clear to all of Europe that Russia's energies would be redirected to its western borders. Even more unexpectedly, however, the loss revealed the precarious condition of the Russian monarchy. Insurrection was in the streets of Saint Petersburg and Moscow, and on October 31, 1905 the Tsar capitulated. In a spectacular October Manifesto, Nicolas II promised Russia a constitution and the election of a parliament.

Vienna and the rest of Europe were shocked to see how far socialist agitation had undermined the Russian power structure, which had been considered the greatest bulwark of reactionary politics in the world. On November 1, Nicolas's October Manifesto was read in the Austrian parliament and the social democrats began singing the Marseillaise. Viennese workers took to the streets. On November 2, Mises watched thousands march down the Vienna Ringstrasse. There were bloody encounters with the police. One day later, Emperor Franz Joseph introduced universal male suffrage in both Austria and Hungary.

The turmoil did not subside and was not limited to the capitals of Europe. In the coming years, new revolutions shook old regimes in Turkey, Persia, and China. A contemporary citizen of Vienna later recalled the revolutionary atmosphere:

The next generation can hardly imagine the depth to which the general consciousness of European society was, at that time, altered and transformed by these events. Until then, the monarchical, statist, and bourgeois order had not been subject to any doubt. They were indestructible. But with one stroke, everything had become problematic.⁵⁹

One positive effect of the new situation was that it finally compelled the emperor to confront the Hungarian problem head-on. For years, the ruling clique of Hungarian landowners had pressed for a revision of the Ausgleich agreement of 1867. They demanded in particular that the Hungarian army be allowed to give up German as the language of command, that Hungary should obtain its own central bank, and that it should be severed economically from the rest of the empire through an internal tariff line. When Franz Joseph allowed equal voting rights in all parts of the empire, the Hungarian establishment was doomed. On January 30, 1907 the Austrian estates-based parliament (Kurienparlament), which guaranteed a majority of seats to the establishment, was abolished forty-six years after its creation. The first general elections under the new law on May 11, 1907 brought 86 socialist deputies (out of 516) into the Abgeordnetenhaus, the lower chamber of parliament.

The Mises family, left to right, Ludwig, his father Arthur, Richard, his mother Adele, and Karl