Mises on the solution

December 6, 2010 07:59

Ludwig von Mises on February 28, 1931 provides a better understanding of what is happening today than most contemporary explanations.

By Monty Pelerin

Ludwig von Mises

Contrary to what many think, newer is not necessarily better. Change is not always progress or improvement. This caution seems to apply especially in the field of economics where theory, aided by political reinforcement, took a wrong turn about 75 years ago. To gain an understanding of current events, it is often useful to read economics prior to its politicization. Generally that means reading text that is over 50 years old. While such text does not deal with the exact particulars or details of current events, there is little unique in the behavior of men. Names, dates and places change but human nature does not. Its constancy ensures that history repeats, with only characters and sub-plots different.

I thought the following extract from a speech given by Ludwig von Mises on February 28, 1931 (presented at Teplitz-Schönau, Czechoslovakia, before an assembly of German industrialists (Deutscher Hauptverband der Industrie) provides a better understanding of what is happening today than most contemporary explanations. Given the date of its delivery, it was prescient regarding the Great Depression.

In the US, the policies that Mises warned against continued, and we sank deeper into economic misery. While entry into WWII siphoned off much of our unemployment, our economy never truly recovered until these policies were abandoned after the war (17 years after the start of the depression).

Good economics is timeless and universal. Mises’ admonitions are as applicable to what is happening today as they were back in early 1931. (The emphasis added is mine.)



The severe convulsions of the economy are the inevitable result
of policies which hamper market activity, the regulator of capitalistic
production. If everything possible is done to prevent the
market from fulfilling its function of bringing supply and demand
into balance, it should come as no surprise that a serious disproportionality
between supply and demand persists, that
commodities remain unsold, factories stand idle, many millions
are unemployed, destitution and misery are growing and that
finally, in the wake of all these, destructive radicalism is rampant
in politics.

The periodically returning crises of cyclical changes in business
conditions are the effect of attempts, undertaken repeatedly,
to underbid the interest rates
which develop on the unhampered
market. These attempts to underbid unhampered market interest
rates are made through the intervention of banking policy—by
credit expansion through the additional creation of uncovered
notes and checking deposits
—in order to bring about a boom.
The crisis under which we are now suffering is of this type, too.
However, it goes beyond the typical business cycle depression,
not only in scale but also in character—because the interventions
with market processes which evoked the crisis were not limited
only to influencing the rate of interest. The interventions have
directly affected wage rates and commodity prices, too.
With the economic crisis, the breakdown of interventionist
economic policy—the policy being followed today by all governments,
irrespective of whether they are responsible to
parliaments or rule openly as dictatorships—becomes apparent.
This catastrophe obviously comes as no surprise. Economic theory
has long been predicting such an outcome to interventionism.
The capitalistic economic system, that is the social system
based on private ownership of the means of production, is
rejected unanimously today by all political parties and governments.
No similar agreement may be found with respect to what
economic system should replace it in the future. Many, although
not all, look to socialism as the goal.
They stubbornly reject the
result of the scientific examination of the socialistic ideology,
which has demonstrated the unworkability of socialism. They
refuse to learn anything from the experiences of the Russian and
other European experiments with socialism.


Concerning the task of present economic policy, however,
complete agreement prevails. The goal is an economic arrangement
which is assumed to represent a compromise solution, the
“middle-of-the-road” between socialism and capitalism. To be
sure, there is no intent to abolish private ownership of the means
of production. Private property will be permitted to continue,
although directed, regulated and controlled by government and
by other agents of society’s coercive apparatus.
With respect to
this system of interventionism, the science of economics points
out, with incontrovertible logic, that it is contrary to reason, that
the interventions, which go to make up the system, can never
accomplish the goals their advocates hope to attain, and that
every intervention will have consequences no one wanted.

The capitalistic social order acquires meaning and purpose
through the market. Hampering the functions of the market and
the formation of prices does not create order. Instead it leads to
chaos, to economic crisis.

All attempts to emerge from the crisis by new interventionist
measures are completely misguided. There is only one way out of
the crisis: Forgo every attempt to prevent the impact of market
prices on production. Give up the pursuit of policies which seek
to establish interest rates, wage rates and commodity prices different
from those the market indicates.
This may contradict the
prevailing view. It certainly is not popular. Today all governments
and political parties have full confidence in
and it is not likely that they will abandon their
program. However, it is perhaps not too optimistic to assume
that those governments and parties whose policies have led to
this crisis will some day disappear from the stage and make way
for men whose economic program leads, not to destruction and
chaos, but to economic development and progress.”

First published at Monty Pelerin’s World 12-5-2010

Monty Pelerin is a pseudonym based on the Mont Pelerin Society.

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