In our first issue, on October 2, 1950, we published an editorial called “The Faith of the Freeman,” in which we outlined our fundamental economic, political and moral philosophy.  In the fifteen months since then our articles and editorials, we trust, have made that basic philosophy and its practical application increasingly clear.

Now, at the completion of our first full calendar year of existence, we think it appropriate to say something about our function.  That function is in one respect obvious.  It is to propagate our announced philosophy, and to apply it, as we have been doing, to current issues as they arise.  On the constructive and positive side, in other words, our function is to expound and apply the principles of traditional liberalism and individual freedom. On the negative side, it is to expose the errors of collectivism of all shades – of statism, “planning,” controllism, socialism, fascism and communism.  One of our central aims is, on the one hand, to hearten and strengthen those who already accept most of the philosophy of individual freedom and to help them to clarify their own thinking; and, on the other hand, to convert open-minded collectivists to the philosophy of freedom.

The mere announcement of such an aim is likely to be followed by immediate expressions of skepticism or incredulity.  Some of our correspondents tell us, for example, that a magazine like the Freeman is read only by those who already believe in its aims, and therefore we are doing nothing more than “talking to ourselves.”  But even if this were true, which we do not believe, we would still be performing a very important function.  It is imperative that those who already believe in a market economy, limited government and individual freedom should have the constant encouragement of knowing that they do not stand alone, that there is high hope for their cause.  It is imperative that all such people keep abreast of current developments and know their correct interpretation, and that, through constant restatement and mutual criticism of each other’s ideas; they continue to clarify, improve and perfect their understanding. Only if they do this can they be counted upon to remain true to a libertarian philosophy, and be proof against collectivist fallacies.  Only if those on “our side” do this can we even hope to hold our ranks together and cease constantly to lose converts, as in the past, to collectivism.

Making Converts

But the function of a journal of opinion like the Freeman only begins here; it does not stop here.  It is necessary for the believers in a free system to do far more than hold their present thin ranks together.  If they hope to see their ideas triumph, it is imperative that they make converts themselves from the philosophy of collectivism, “security” and serfdom that dominates the world today.

They can do this only if they themselves have a deeper understanding than the collectivists, and are able not only to recognize the collectivist errors, but to refute them in such a way that the more intelligent and well-meaning collectivists themselves will recognize, acknowledge and renounce them as errors.  And those on “our side” cannot do this, cannot live up to their responsibilities, unless they have troubled to keep themselves informed to make their ideas clearer and their understanding deeper than those of the collectivists.  For our side can hope to grow only if it attracts and keeps adherents who in turn will become, not blind or one-eyed partisans, but enlightened and able expositors, teachers, disseminators, proselytizers.

To make this possible, it is essential that there should exist a prospering periodical with the aims of the Freeman.

(Sheldon Richman is on vacation. TGIF will resume next week.)

There has just been published by the Yale University Press a book that is destined to become a landmark in the progress of economies. Its title is Human Action, and its author is Ludwig von Mises. It is the consummation of half a century of experience, study, and rigorous thought.

No living writer has a more thorough knowledge of the history and literature of economies than Mises, and yet no living writer has been to more pains to take no solution of any problem on faith, but to think out each solution, step by verified step, for himself. The result is a work of great originality written in a great tradition. Although it builds on what was sound in the classical economists and on the revolutionary revision of Menger, Böhm-Bawerk, Jevons, Clark, and Wicksteed, it extends beyond any previous work the logical unity and precision of modern economic analysis.

I know of no other work, in fact, which conveys to the reader so clear an insight into the intimate interconnectedness of all economic phenomena. It makes us recognize why it is impossible to study or understand “collective bargaining” or “labor problems” in isolation; or to understand wages apart from prices or from interest rates or from profits and losses, or to understand any of these apart from all the rest, or the price of any one thing apart from the prices of other things.

It makes us see why those who specialize merely in “monetary economies” or “agricultural economies” or “labor economies” or “business forecasting” so often go astray.

So far is Mises’s approach from that of the specialist that he treats economics itself as merely part (though the hitherto best-elaborated part) of a more universal science, “praxeology,” or “the science of every kind of human action.” This is the key to his title and to his 889 comprehensive pages.

Mises is so concerned to lay foundations of his work with unassailable solidity that he devotes the first 142 pages to a discussion of “epistemological” problems alone. This is apt to discourage all but the most serious students of the subject. Yet there is nothing pretentious or pedantic in Mises’s writing. His sentences and vocabulary are as simple and clear as his profundity and closely woven logic will permit. Once his more abstract theoretical foundations have been laid his chapters are models of lucidity and vigor.

Outstanding among his many original contributions are his “circulation credit” theory of business cycles, which emphasizes the harm of cheap-money policies, and his demonstration that partial socialism is parasitic on capitalism and that a complete socialism would not even know how to solve the problem of economic calculation.

This book is in fact, as the publishers declare, the counterweight of Marx’s Das Kapital, of Lord Keynes’s General Theory, and of countless other books recommending socialization, collectivist planning, credit expansion, and similar panaceas. Mises recognizes inflationism under its most sophisticated disguises. He demonstrates repeatedly how statist interventions in the market economy bring about consequences which, even from the standpoint of those who originally advocated the interventions, are worse than the state of affairs they were designed to improve.

Human Action is, in short, at once the most uncompromising and the most rigorously reasoned statement of the case for capitalism that has yet appeared. If any single book can turn the ideological tide that has been running in recent years so heavily toward statism, socialism, and totalitarianism, Human Action is that book. It should become the leading text of everyone who believes in freedom, in individualism, and in the ability of a free-market economy not only to outdistance any government planned system in the production of goods and services for the masses, but to promote and safeguard, as no collectivist tyranny can ever do, those intellectual, cultural, and moral values upon which all civilization ultimately rests.

I’ve been invited to share some recollections about the early days of the Foundation for Economic Education. It must have been sometime in 1944 or 1945 that a handsome man dropped in to see me at the New York Times, where I was then writing the economic edi­torials, and introduced himself as Leonard Read, gener­al manager of the Los Angeles Chamber of Commerce.

The free-enterprise philosophy had already become almost a religion with him. He told me he was looking for a wider audience to which to explain that philosophy, and was thinking of setting up a libertarian foundation of his own.

In 1946 Leonard had raised the money, set up the Foundation for Economic Edu­cation here at Irvington, and invited me to become one of his original trustees and officers.

It is astonishing how soon Leonard’s action began to produce important results. Friedrich Hayek, in London, impressed by Read’s initiative, raised the money the next year, 1947, to call a conference at Vevey, Switzerland, of 43 libertarian writers, mainly economists, from half a dozen nations.The group of ten of us from the United States included such figures as Ludwig von Mises, Milton Friedman, George Stigler—and Leonard Read. That was the beginning of the still flourishing and immensely influential Mont Pelerin Society, now with several hundred members from dozens of countries.

Another effect of Leonard’s initiative soon followed. Other libertarian foundations were set up in emulation. “Baldy” Harper, who had been working as an economist for FEE from its first year, left in 1958 and started his Institute for Humane Studies in 1963 in California. Soon Antony Fisher set up like organizations in England, Canada, and eventually here. I recently learned from Antony that he is now watching over eighteen institutions in eleven countries. Manuel Ayau in Guatemala established his libertarian Universidad Francisco Marroquín. Groups in other Latin American countries have set up their own equivalents of FEE. It would take too long to name all the present institutions here and abroad, even if I knew of them all, that owe their origin directly to Leonard Read’s example.

Let me return to the early days of the Foundation. The original officers were David M. Goodrich, chairman of the Board (he was then also chairman of the board of the B. F. Goodrich Company); Leonard Read, president; myself, vice-president; Fred R. Fairchild, professor of economics at Yale University, secretary; and Claude Robinson, president of the Opinion Research Institute, treasurer. There were sixteen trustees. They included H. W. Luhnow, president of William Volker & Company; A. C. Mattei, president of Honolulu Oil Corporation; William A. Paton of the University of Michigan; Charles White, president of the Republic Steel Corporation; Leo Wolman, professor of economics at Columbia; Donaldson Brown, former vice-president of General Motors; Jasper Crane, former vice-president of Du Pont; B. E. Hutchin­son, chairman of the finance committee of Chrysler Corporation; Bill Matthews, publisher of the Arizona Star; W. C. Mullendore, president of the Southern Cali­fornia Edison Company; and the officers of FEE.

You can see from this list what Leonard Read’s per­suasive powers must have been.

FEE opened its doors on March 16, 1946. Most of the spring and summer was spent in the library, as reno­vation continued on the main building. The staff, as of September 1946, consisted of Leonard Read as Presi­dent, Herbert Cornuelle as assistant to the President, W. M. Curtiss as Executive Secretary, Baldy Harper as Economist, Orval Watts as Editorial Director, and A. D. Williams, Jr. as director of public relations.

Leonard’s first move was to publish an outline of the aims of the Foundation and its proposed activities. He listed no fewer than fourteen of these that would be “among those to be consid­ered for program inclusion” as the resources of the Foun­dation would permit. I condense them here: (1) encouragement, including financial assistance, to schol­ars, (2) special studies of cur­rent economic or political issues, (3) pamphlets applica­ble to “hundreds of economic problems,” (4) leaflets for mass distribution, (5) a journal (this was realized in mid-1954 when FEE took over The Freeman), (6) books: the abridgment, publica­tion, and distribution of classical works such as, for instance, The Wealth of Nations and The Federalist Papers, (7) the promotion and publication of satisfactory text­books, (8) a “pamphlet-of-the-month club,” (9) a radio program, nationwide, (10) organize advisory and study groups in every state and in every community in Amer­ica—not political action groups, (11) analysis of collec­tivistic trends so that new interventionist proposals can be examined and refuted before they have been adopt­ed, (12) a lecture institute, (13) arranging for graduate students in economics and potential instructors to accept short-term positions in industry to acquaint them with actual production problems. And finally, (14) a study of the methods of financing and integrating all these activities. And then in an amazingly short time a stream of publications began to pour forth. There were more than a hundred in the first few years. Some of these were one-page leaflets, some small folders, some moderate‑length pamphlets, and some were in effect short books. I must confine myself to mentioning only a few of these, in their order of publication. The earliest I find is Profits and the Ability to Pay Wages, by Professor Fred Fairchild of Yale. This came out in August, 1946; it ran to 64 pages. A month later came a 22-page pamphlet called Roofs or Ceilings?, an attack on rent control, sent in by two young fellows from the University of Chicago, Milton Friedman and George J. Stigler, both destined to become future recipients of the Nobel prize in economics. FEE distributed 36,000 of these, plus a special condensed version of 500,000 copies for the National Association of Real Estate Boards.

Next, still in 1946, came a 74-page reprint of Andrew Dickson White’s famous monograph, originally writ­ten in 1876, on Fiat Money Inflation in France. FEE even­tually distributed 52,000 copies of this. In January, 1947, FEE published an 88-page study called Wages and Prices by Professor Jules Bachman of New York University.

Planned Chaos

Next, in 1947, came Planned Chaos, a 90-page pamphlet by Ludwig von Mises. Lu had been put on the payroll by Leonard from the first year of the Foun­dation. Next in 1947 FEE began to publish Henry Grady Weaver’s Mainspring of Human Progress, and to date has distributed 670,000 copies of it. The edition I have runs to 287 pages.

Late in 1947 a short book of mine—95 pages—was published called Will Dollars Save the World? in paperback and hardcover. Appleton-Century printed the hardback edition at $1.50.

I’d like to say a few words about it, because it illus­trates a disheartening consequence—or lack of conse­quence. By pre-arrangement with Appleton, Leonard ran off a first printing in paperback of 80,000 copies. (This was over my protest, because I thought he would get stuck with them. But he sold out practically the whole edition.) Then in January, 1948, the Reader’s Digest reprinted a 6,500-word condensation of the book not only in its American but in all twenty of its foreign edi­tions, a total circulation then of about 13 million copies. One immediate consequence is that FEE’s own sales of the paperback came to a halt. Another was that I was asked to testify first before a Senate and then before the corresponding House committee on the then-pending foreign-aid bill. But with all this undreamed-of publicity, I haven’t a shred of hard evidence that my book or the Reader’s Digest condensation of it saved the American taxpayer one slim dime in our foreign-aid outlays.

For that matter, I see no evidence that the Friedman-Stigler pamphlet did anything to slow down rent control. Nor can I think of any other of FEE’s publications that had any direct effect on actual legislation.

On the surface, as I have said, this seems dreadfully disheartening. But it must be acknowledged that the American ideological situation is much better than if FEE had never come into being. Our institution has inspired the formation of dozens of others. Increasing numbers of people now know what is wrong. True, we have inflation everywhere, but few countries now try to combat it with general price controls. FEE has provided precisely what its title promised—economic education. Even Adam Smith’s Wealth of Nations, let us remember, did not begin to change actual legislation until many years after its original appearance.

Let me resume our history. In 1948 FEE published F. A. Harper’s 71-page pamphlet on High Prices, and in 1949 Harper’s 159-page book Liberty:A Path to its Recov­ery. Frédéric Bastiat’s 75-page pamphlet, The Law, was translated by Dean Russell and published by FEE in 1950. So far, the Foundation has distributed 344,000 copies.

I come to one final item. It was in December, 1958, that Leonard first published his essay entitled “I, Pencil.” The theme of that article, as most of you will remember, is that “no single person on the face of this earth knows how to make a pencil.” It is a little classic—the essay of Leonard’s that is certain to be long, long remembered….

We seek, in other words, not only to hearten and strengthen those who already accept the principles of individual freedom, but to convert honestly confused collectivists to those principles.

A few of our friends sometimes tell us that a periodical like The Freeman is read only by those who already believe in its aims, and that therefore we believers in liberty are merely “talking to ourselves.” But even if this were true, which it isn’t, we would still be performing a vital function. It is imperative that those who already believe in a market economy, limited government, and individual freedom should have the constant encouragement of knowing that they do not stand alone, that there is high hope for their cause. It is imperative that all such men and women keep abreast of current developments and know their meaning in relation to the cause of freedom. It is imperative that, through constant criticism of each other’s ideas, they continue to clarify, increase, and perfect their understanding. Only to the extent that they do this can they be counted upon to remain true to a libertarian philosophy, and to recognize collectivist fallacies. Only if they do this can the believers in freedom and individualism hope even to hold their ranks together, and cease constantly to lose converts, as in the past, to collectivism.

But the function of a journal of opinion like The Freeman only begins here. The defenders of freedom must do far more than hold their present ranks together. If their ideas are to triumph, they must make converts themselves from the philosophy of collectivism that dominates the world today.

A Lesson from the Enemy

They can do this only if they themselves have a deeper and clearer understanding than the collectivists, and are able not only to recognize the collectivist errors, but to refute them in such a way that the more candid collectivists will themselves recognize, acknowledge, and renounce them as errors. A friend of free enterprise is hardly worth having if he can only fume and sputter. He must know the facts; he must think; he must be articulate; he must be able to convince. On the strategy of conversion, our side can take at least one lesson from the enemy. The task of the Bolsheviks, Lenin once wrote, is “to present a patient, systematic and persistent analysis.” And our own cause, the cause of freedom, can grow in strength and numbers only if it attracts and keeps adherents who in turn will become, not blind or one-eyed partisans, but enlightened and able expositors, teachers, disseminators, proselytizers.

To make this possible, it is essential that there should exist a prospering periodical with the aims of The Freeman. We must restore “conservatism” and the cause of economic freedom to intellectual repute. They have not enjoyed that repute, in the eyes of most “intellectuals,” for many years—perhaps since the beginning of the twentieth century.

“We are all Socialists now,” said Sir William Harcourt in 1894, and he was not joking as much as his listeners, or he himself, supposed. We must never forget that, in the long perspective of human history, “capitalism” — i.e., individualism and a free-market economy — is the newest form of economic organization. Communism is the most primitive form; it is as old as primordial man. Feudalism, a regime of status; rigid State and guild control; mercantilism; all these preceded the emergence of economic liberty. Socialism as a self-conscious “intellectual” movement came into being a century and a half ago with such writers as Saint-Simon, Owen, and Fourier. In its Marxian form it made its official debut, so to speak, in the revolutions of 1848 and in the Communist Manifesto of the same year.

And it was not, contrary to popular myth, the proletarian masses or the starving millions who were responsible for either originating or propagating socialist ideas. It was well-fed middle-class intellectuals. This description applies not only to Marx and Engels themselves, but to the epigoni, and to the literati who were chiefly responsible for parroting and popularizing the socialist doctrines. Intellectual hostility to capitalism was made fashionable by the Carlyles and Ruskins of the nineteenth century, and later by the Fabians. Since the beginning of the twentieth century it has been difficult to find an outstanding novelist or playwright, from Bernard Shaw to H. G. Wells, or from Anatole France to André Gide, who did not proudly proclaim himself a Socialist.

The late Lord Keynes, in the last pages of The General Theory of Employment, Interest, and Money, a book not always distinguished for wisdom or sense, pointed out one fact that is profoundly true.

The ideas of economists and political philosophers [he wrote] both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

The irony and tragedy of the present is that Keynes himself has become the chief “academic scribbler” and “defunct economist” whose ideas dominate the “madmen in authority” and the intellectuals today. The restoration of economic, fiscal, or monetary sanity will not be possible until these intellectuals have been converted or (to use a word coined by Keynes himself) debamboozled.

The Influence of Intellectuals

Who are the intellectuals? They include not merely the professional economists, but novelists, playwrights and screen writers, literary and music critics, and readers in publishing houses. They include chemists and physicists, who are fond of sounding off on political and economic issues and using the prestige gained in their own specialty to pontificate on subjects of which they are even more ignorant than the laymen they presume to address. They include college professors, not merely of economics but of literature, history, astronomy, poetry. They include clergymen, lecturers, radio commentators, editorial writers, columnists, reporters, teachers, union leaders, psychoanalysts, painters, composers, Broadway and Hollywood actors—anybody and everybody who has gained an audience beyond that of his immediate family and friends, and whose opinions carry kudos and influence either with other intellectuals or with the man on the street.

To consider this group of intellectuals is to recognize that it sets the fashion in political, economic, and moral ideas, and that the masses follow the intellectual leadership — good or bad — that it supplies. Clearly also there is a hierarchy within this hierarchy. The ballet dancer, say, gets his ideas from the pages of The New Yorker, and The New Yorker from some vague memory of Veblen; the popular leftist novelist gets his notions from The Nation or the New Republic, and these in turn from the Webbs, the Harold Laskis, or the John Deweys.

The hopeful aspect of this process is that it can also be used to revise or reverse ideas. If the intellectual leaders, when they go wrong, can have a great influence for harm, so, when they are right, they can have a great influence for good. When we consider the immense practical influence for evil that has been exercised by Karl Marx’s Das Kapital, we should also recall the immense practical influence for good exercised by Adam Smith’s The Wealth of Nations. If the intellectual leaders can themselves be converted or reconverted, they can be counted on, in turn, to take care of the task of mass conversion. For the masses do respect and follow intellectual leadership.

Above all, we must keep in mind the rising generation, which will comprise both the future masses and the future intellectual leaders, and whose ideas and actions will be heavily determined by what they are taught today.

Few practical businessmen realize how economic and social ideas originate and spread, because they are not usually themselves students or readers. It is perhaps unrealistic to expect them to be. There is a necessary division of labor in society, and most businessmen have enough to do in improving their particular product to satisfy consumers, in reducing costs and in meeting competition. But one result of the pre-occupation of business leaders with their own immediate problems is that they hardly become aware of the existence and power of ideas—conservative or radical—until some legislative proposal that would destroy their business is put before Congress, or until the labor union in their own plant makes some ruinous demand. Then they are apt to think that this demand comes from the rank-and-file of the workers, and that it can be answered by some statistics showing the smallness of profits compared with wages.

But usually neither the assumed origin nor the assumed cure is correct. The demands come, not from the working rank-and-file, but from labor leaders following a suggestion thrown out in some college classroom, or by some radical writer; and the practical businessman, even though he knows the immediate facts of his own business, finds himself at a heavy disadvantage in these controversies because he cannot answer, and perhaps is even unaware of, the general premises on which the contentions of those hostile to business really rest.

These general premises, seldom explicitly stated or even clearly formulated by those who reason from them, form part of the climate of opinion in which particular radical proposals come to growth. Even competent experts in their special fields are usually not aware that some proposal they are combatting is merely part of a whole system of thought. That is why their arguments against it, often unanswerable in detail, are as often ineffective. It is a comprehensive though confused philosophy that we have to meet, and we must answer it by an equally comprehensive philosophy. Above all we must combat the superstitious belief that the coming of socialism is inevitable.

It is the aim of The Freeman to address itself specifically to the leaders and molders of public opinion and to thinking people everywhere, in order to help create a healthier climate for the preservation of free enterprise and the liberty and moral autonomy of the individual. It is our aim to point out the fallacies in the basic premises of the collectivists of all degrees up to the totalitarian. It is our aim, above all, to expound the foundations of a philosophy of freedom.

2. The most frequent reason for printing more money is the existence of an unbalanced budget. Unbalanced budgets are caused by extravagant expenditures which the government is unwilling or unable to pay for by raising corresponding tax revenues. The excessive expenditures are mainly the result of government efforts to redistribute wealth and income — in short, to force the productive to support the unproductive. This erodes the working incentives of both the productive and the unproductive.

3. The causes of inflation are not, as so often said, “multiple and complex,” but simply the result of printing too much money. There is no such thing as “cost-push” inflation. If, without an increase in the stock of money, wages or other costs are forced up, and producers try to pass these costs along by raising their selling prices, most of them will merely sell fewer goods. The result will be reduced output and loss of jobs. Higher costs can only be passed along in higher sell- ing prices when consumers have more money to pay the higher prices.

4. Price controls cannot stop or slow down inflation. They always do harm. Price con- trols simply squeeze or wipe out profit mar- gins, disrupt production, and lead to bottle- necks and shortages. All government price and wage control, or even “monitoring,” is merely an attempt by the politicians to shift the blame for inflation on to producers and sellers instead of their own monetary policies.

5. Prolonged inflation never “stimulates” the economy. On the contrary, it unbalances, disrupts, and misdirects production and employment. Unemployment is mainly caused by excessive wage rates in some industries, brought about either by extortionate union demands, by minimum-wage laws (which keep teenagers and the unskilled out of jobs), or by prolonged and over- generous unemployment insurance.

6. To avoid irreparable damage, the budget must be balanced at the earliest possible moment, and not in some sweet by-and-by. Balance must be brought about by slashing reckless spending, and not by increasing the tax burden that is already undermining incentives and production.

“Now international intellectual cooperation,” he was saying, “consists in this: that one man writes a book, and another man reads it.”

His description was, of course, correct — but not all-inclusive. Face-to-face meetings, in addition, can be very important. And this was something that Rappard himself recognized when he seconded and supported the initiative of Professor F. A. Hayek, then of the London School of Economics, in calling together a group of 36 economists, political scientists, journalists, and three observers, altogether from ten different countries — Belgium, Denmark, England, France, Germany, Italy, Norway, Sweden, Switzerland, and the United States. . .

It speaks volumes for Hayek’s scholarship that this list of 36 participants was picked solely by him, so far as I am aware, and out of his personal knowledge of what each had done and written.

The inclusion of myself may need some special explanation. I was then an editorial writer on the New York Times. In 1944 John Chamberlain, who was then book editor of the Times and writing a three-times-aweek column, dropped into my office to let me know that he had written an introduction to a book by F. A. Hayek, then in England, called The Road to Serfdom, that was appearing a few weeks from then, and that he thought I might be interested in reviewing it. I told Donald Adams, who was then editor of the Sunday book section, of my interest, and he turned the book over to me.

I was deeply impressed by it, and wrote that “Frederick [sic] A. Hayek has written one of the most important books of our generation. It states for our time the issue between liberty and authority. It is an arresting call to all well-intentioned planners and socialists, to all those who are sincere democrats and liberals at heart, to stop, look, and listen.”

When Donald Adams gave me the book for review, he had probably planned on publishing what I wrote somewhere on the back pages. When it arrived, he decided to run it on page one. As a result, as I remember, the book appeared immediately on the list of the ten bestsellers among nonfiction volumes.

A slightly later consequence was that Reader’s Digest of April 1945 printed a condensation of the book preceded by comments from my review.

But before I say anything about what went on at Mont Pelerin itself, I must tell of the ocean trip that took some of us there.

I have already pointed out that the largest national contingent present consisted of sixteen Americans. I do not think this was necessarily because Dr. Hayek thought that the largest number of qualified philosophical “liberals” were to be found there. But this may in fact have been so, because the list of “Americans” contained the names of such immigrants as Mises and [Fritz] Machlup. Probably, however, the American contingent was as large as it was because Hayek personally knew of that number.

Passage was booked for some of us on the Queen Elizabeth. At the table to which I was assigned there were also Professors Milton Friedman, Frank H. Knight, George J. Stigler, and V. Orval Watts. I’ve forgotten the exact seating arrangement, but I remember that Milton Friedman and I got into a friendly argument every night, and it was always about the same subject — Milton’s strict quantity theory of money, which he seemed to have taken over from Irving Fisher.

I cannot remember why this argument was so persistent, which one of us most often initiated it, or which of us was more disputatious. What I do remember is that neither of us ever convinced the other of anything. We always ended precisely where we began. But the argument never became bitter or personal. The others at the table took very little part in it and seemed to be bored by it.

So far as I can recall now, this is the only major theoretical or policy issue in which I differ from Milton except that I take the subjective view characteristic of Austrian economics, while Milton still seems to find this as alien as it sounds.

The Mont Pelerin meeting lasted from April 1 to 10, 1947. On the opening day Dr. Hayek made a lengthy address telling his reasons for calling the conference. Briefly, they were to bring together a group of economic and political “liberals” (using the word in its traditional sense) from as many countries in the world as could be found and form a permanent society where they could mutually clarify and purify their ideas and ideals and help increase their individual and collective influence. In his words:

“The immediate purpose of this conference is . . . to provide an opportunity for a comparatively small group of those who in different parts of the world are striving for the same ideals, to get personally acquainted, to profit from each other’s experiences and perhaps also to give encouragement to each other.” . . .

Dr. Hayek’s speech was followed by a talk from Professor Rappard. . . . His talk was mainly devoted to supporting and supplementing Hayek’s own remarks, but he wandered into a discussion of “the economic man” as conceived by Adam Smith, and how far this concept could be stretched. . . .

It was at this meeting, I believe, that Hayek made the proposal that the permanent organization he had in mind should be called The Acton-Tocqueville Society, after Lord Acton of England and Alexis de Tocqueville of France. Immediately Ludwig von Mises stood up and argued against this. I do not believe that he, any more than any of the rest of us, knew that this particular proposal would be made. But out of his amazing range of knowledge he began to list the mistakes that he thought both Lord Acton and Tocqueville had made in their lives and the criticism that might be made of them and therefore of the society. He went on to point out that we were meeting at a place called Mont Pelerin, and that if we called ourselves the Mont Pelerin Society the name would be quite neutral and not open to attack. It had, in addition, a positive value. “Pèlerin” was the French word for “pilgrim.” “Pilgrim” had a good name, especially in United States history.

Mises’s suggestion was adopted, and we became “The Mont Pelerin Society.” I found the meeting immensely stimulating, as I am sure most of the others did also. I formed friendships that lasted through life; and in my subsequent trips abroad, I made a point of visiting these foreign friends. I attended the next two or three annual meetings of the Society as it met in various places in Europe. But nothing equaled the stimulation of the first meeting, in discovering people in many nations who shared the same economic and political ideas and ideals.

I am not going to quarrel with the comparisons of men’s and women’s actual wages, but with the contention about productivity. In a market in which competition is permitted between employers and between workers, the situation ascribed could not long exist. What would prevent it, what does prevent it, is the selfishness of employers.

Let us suppose that there was an industry in which both male and female workers were producing enough to bring the employer an ascertainable added profit of just over $10 an hour, but in which the men workers were receiving $10 an hour, and the equally productive women workers only $7 an hour.

It would soon occur to an unscrupulously selfish employer that he should henceforth employ only women workers from which he could make a net $3 more an hour than from his male workers. He would let his men workers go. Other employers would follow his example, and for the same reason. But this would mean that the female workers would start demanding higher individual wages until their pay was on an equality with that previously received by males.

In other words, selfish employers would prefer to make only $2 an hour net by employing female labor at $8 an hour rather than see competing employers make $3 net out of them. They would even choose to make only $1 an hour net by paying them $9 an hour rather than stand by and watch other employers making $2 net out of them. This would continue until prevailing female wages in that industry were very close to female labor productivity in dollar terms. (In the long run, of course, there would be no drop in the prevailing men’s pay, because their productivity would still make it profitable to employ them at that rate.)

To state this more briefly and bluntly, any employer would be a fool to hire male workers for $10 an hour when he could hire equally productive women workers for $7 an hour. There are, it is true, special conditions, temporary and localized, in which labor productivity might not be the dominant factor in determining wage levels. In a small mill town, for example, in which there was only one mill, not large enough to employ the entire working population, the wages paid by that mill might fall below the worker productivity level. But this would tend to prove only a temporary situation. Two developments would be likely to change it. The unemployed surplus workers would start to leave for other towns. And the mill owners would be tempted to reinvest their profits and expand their operations.

So far, I have been writing about the factors that tend to eliminate wage discrimination on sexual grounds where it exists. But the same considerations would also tend to eliminate wage discrimination on grounds of color, race, nationality, or other reasons. Where such wage differences persist, they tend to reflect real differences in productivity.

Let me now carry my contention a giant step further. The selfishness of individual employers is the force that, under competitive capitalism, brings the level of wages up close to the full value of the productivity of the workers.

Of course, there are never conditions of perfect competition; of full knowledge on both sides, employer and employed, of their respective opportunities. There are individual accidents, immobilities, prejudices, and other factors that prevent everybody’s wage or salary from corresponding with the approximate value of his or her contribution or output. But this correspondence is the dominant long-run tendency.

There is nothing original in this explanation. I have simply been stating, in fact, in an unusual form, what is known as the marginal-productivity theory of wages. This is the theory held by the overwhelming majority of serious economists today.

The Marginal Productivity Theory of Value

This theory was astonishingly late in its development. It did not make its appearance until the very end of the nineteenth century, in the principal works of the Austrian economists Carl Menger (1871), Friedrich von Wieser (1884), and Eugen von Böhm-Bawerk (1884), and of the American economist John Bates Clark (1899).

Why did its development take so long? It took so long partly because the field was already occupied by other theories—wrong theories. And how did they in turn get started? They got started partly through the errors of writers that were in some respects acute and even profound thinkers. The first of these was the economist David Ricardo (1772–1823), who, by abstract reasoning, developed a labor theory of value in which the contributions of capital investment, initiative, invention, and management somehow got buried.

Then, along came Karl Marx. Ostensibly taking off from Ricardo, he presented a pure “exploitation” theory of wages, and declared outright that as long as the “capitalist system” continued in existence there could be no real improvement in the condition of workers.

This assertion was made in the face of some very noticeable improvement in the economic condition of the “masses” before 1848, when the Communist Manifesto was published, and certainly in the remaining 35 years of Marx’s life.

Doubtless there was some excuse for Marx’s failure to notice this improvement. In the early years of his life some relics of the medieval system were still around. Great tracts of land were still held by princes, dukes, and barons, and the men who tilled the soil were often forced to pay excessive rents. Production was by our present standards incredibly low. Capital goods — tools, implements, machinery, vehicles, and other equipment — were still rare, crude, and primitive. There was a scarcity of donkeys, horses, and other farm animals. On the farms, human beings were forced to carry great burdens on their own backs, as they still do in China today. Only very slowly were more capital goods produced. The great bulk of labor went into producing tomorrow’s food and other necessities.

But let us now turn to the actual text of the Communist Manifesto. That document, of approximately 40 pages, was written by Karl Marx and Friedrich Engels partly as a call for civil war — “Working men of all countries, unite!” — partly as propaganda, and partly to explain the economic theories of Communism to the workers. But the reader will look in vain to find those theories spelled out in any reasoned form.

We are told that there are two main classes in society — the “proletariat,” which consists of the “workers,” employed and unemployed, and forms allegedly about nine – tenths of the population, and the “bourgeoisie,” which consists of the employers and a few other groups who are comfortably well off. The bourgeoisie rule. They hire the proletariat; and because they do, they necessarily “exploit” them. The only way this dreadful situation can be changed is by revolution, in which the proletariat must seize all the property of the bourgeoisie, and, if they object, kill them.

The Marxist Exploitation Dogma

No explanation is offered in the Manifesto of how this “exploitation” is possible, or what is its exact extent. The word implies that the employers pay their workers only a fraction of what they are worth — of what they add to production or profits. The fraction is not mentioned. Let us say it is only 50 percent. As individual employers would be making such a big profit at that rate, and would obviously want to hire workers away from other employers, what stops them? The exploitation theory implies that the employers must all be in some secret agreement to keep wages down to this existing nearstarvation level, and maintain it through the most drastic penalties against humane employers, if any, who attempt to offer more. “The average price of wage-labor is the minimum wage, i.e., that quantum of the means of subsistence which is absolutely requisite to keep the laborer in bare existence as a laborer.”

All this is pure fiction. The exploitation theory implies that the wage level cannot rise. In trying to maintain this, the Manifesto quickly falls into inconsistencies and self contradictions. We are told that: “The bourgeoisie, by the rapid improvement of all instruments of production . . . draws even the most barbarian nations into civilization. The cheap prices of its commodities are the heavy artillery with which it batters down all Chinese walls. . . . The bourgeoisie, during its rule of scarce one-hundred years, has created more massive and more colossal productive forces than have all preceding generations together,” with “whole populations conjured out of the ground.”

But this enormously increased production could not have been possible without equally increased consumption. The increased population that the increased production made possible must have consisted mainly of the proletarians, and the increased production itself could only have taken place in response to an increased demand. This demand must have been made possible by increased purchasing power, and that in turn either by increased wages or lower prices. But nowhere in the Manifesto is this necessary chain of causation acknowledged. The exploitation dogma blinded Marx to the obvious.

The Manifesto keeps compounding its economic errors. Obviously capital — which is most usefully thought of as capital goods — is used because it increases production. And because it increases production, it must increase the income of the owner or user. The carpenter would get nowhere without the use of hammers, saws, chisels, and even more elaborate machinery. And so for all other artisans. These tools and machines must at least promise to “pay for themselves” before they are acquired.

Yet we find the authors of the Manifesto writing: “In proportion as the use of machinery and division of labor increases, in the same proportion the burden of toil increases, whether by prolongation of the working hours, by increase in the work exacted in a given time, or by increased speed of the machinery, etc.” (My italics.) Even if the reduction in weekly working hours recorded through the years did not show this Manifesto statement to be false, it was nonsense on its face. Yet Marx and Engels go on: “Machinery obliterates all distinctions of labor, and reduces wages to the same level!” (My italics.)

The Historical Record

From the 1830s on, however, the historic record shows a reduction of hours and an increase of wages from the introduction of machinery. Prof. W. H. Hutt, in his essay on The Factory System of the Early Nineteenth Century, writes: “That the apparent benefits wrought by the early Factory Acts are largely illusory is suggested by the steady improvement which was undoubtedly taking place before 1833, partly as a result of the development of the factory system itself” (Capitalism and the Historians, edited by F. A. Hayek, p. 181).

Tooke and Newmarch, in their book A History of Prices From 1792 to 1856, publish extracts from a report issued by the City Chamberlain of Glasgow in 1856. This records that in 1856 wages of skilled labor in the building trades (masons, carpenters, and joiners) increased 20 percent from the level of 1850–1, and wages of unskilled labor 48 percent in the same period. He attributes this principally to “increased production in consequence of improvements in machinery.”

“It must also be borne in mind,” he adds, “that weavers and spinners worked 69 hours per week in 1841 and only 60 hours in 1851–6, and hence received in 1851–6 more money for less labor.” He also notes at another point that in 1850: “The number of hours per week worked by masons, carpenters and other artisans employed in the building trades was 60 hours, or six days of 10 hours each, with a deduction of 11⁄2 hours for meals. Since 1853, the weekly time has been reduced to 57 hours.”

For the United States (which seems to have lagged greatly behind England), the official publication, Historical Statistics of the U.S.: Colonial Times to 1957, reports (p. 90) that in 1860, the weighted average of working hours in all industries was 11 hours a day (Monday through Saturday inclusive), and that by 1891 this had fallen to 10 hours. In 1890, the working week was 60 hours (6 times 10 daily) and by 1926 had fallen to 50.3.

Recent issues of government publications, the annual Statistical Abstract and the current monthly Economic Indicators, show that the average of manufacturing hours fell from 51 a week in 1909 to 39.8 in 1957 and to 35 in 1985. Thus average working hours per week under capitalism, in other words, show a steady fall for nearly a century and a half.

In the Manifesto, our two authors mention frequently how “the competition between the workers” undermines solidarity and reduces wages. But they never once acknowledge the existence of competition among employers for workers. It is precisely this that brings wages up to the value of the workers’ specific contribution to output. And this is not because the employers have or need to have any altruistic motives, but simply the motive of maximizing their own individual profits.

The Ominous Appeal of Hatred

Karl Marx must himself later have felt a great deal of misgiving about the lack of any real explanation of the maleficent workings of the existing economic system that he had portrayed in the Manifesto. For in 1867 he published (in Germany) a volume entitled Das Kapital. This was apparently intended to be the first of further volumes, but though Marx lived to 1883, nothing more appeared. Some commentators have surmised that Marx had reached an impasse, and could not decide how to continue. After Marx died, Engels undertook to “complete” the work in three volumes by supplementing his friend’s unfinished manuscripts. The Austrian economist Eugen von Böhm-Bawerk thoroughly demolished the argument of the finished work in his Karl Marx and the Close of His System (1896), a masterful refutation that does not have to be done again.

Let me remind the reader once more that the thesis with which I began this piece — that the assumption of pure selfish competition on the part of the employers would be enough to explain how workers on the average receive practically the full value of their productive contribution — is only a novel way of presenting the marginal-productivity theory of wages, now accepted by the overwhelming majority of present-day economists. The factual substantiation of that theory is particularly impressive in the United States. The annual reports of nonfinancial corporation earnings, going back for more than thirty years, show that the employees today receive an average of about 90 percent of corporate gross earnings in their wages and the stockholders only about 10 percent in their profits. In fact, a man’s personal income often seems to have little to do with whether he is technically an employee or an employer. A baseball, football, basketball, or prize-fighting star may receive an income in the million-dollar range, far above that of the promoter who technically employs him. It is a result of the star’s “productivity” — his box-office appeal. It is the competition among promoters, employers, that brings this about.

Selfish Capitalists vs. the Communist Manifesto

From the standpoint of common sense, the appeal of the Manifesto to violence and class war seems entirely needless. If the proletariat (supposedly some nine-tenths of the population) would be better off under a Communist economy, all that was necessary was to make this clear to them, and they could be trusted to vote themselves into power and such an economy into being. (Democracy was emerging in Britain in 1848, and, forwhites, already functioning in America.)

But such an appeal gave little promise of starting a “movement” or leading to early political action. Marx and Engels were agitators, activists — and shrewd psychologists. They knew that most people who find themselves at the bottom of the economic ladder are tempted to put the blame, not on themselves, but mainly on somebody else. The exploitation theory, however weak as an economic doctrine, was tremendously persuasive psychologically and as a call for action. It was an essential part of their propaganda.

So, though the Communist Manifesto, even in its own time, failed completely as an economic guidebook, it did succeed thoroughly in instilling class hatred. This hatred, unfortunately, has been its most permanent contribution. It was originally directed ostensibly against a special class, the bourgeoisie — the employers, and all those comparatively well off — in revenge for “exploiting” the workers.

But, with the passing years, the target of this hatred has been quietly changed. As the employing class in Russia was liquidated by various means, a still existing group had to be substituted. To stay in command, a dictatorship must continue to point to a powerful enemy to be feared and destroyed. Fortunately, such an enemy can still be pointed to. It is the “capitalist” nations as a whole, especially the United States. Sixty-eight years after the Bolshevik Revolution, most of the American population is notably better off than the population in the Soviet Union. Though Russian school children are taught that we are an “imperialist” nation, the American “proletariat” are now tacitly included, as the Russian “bourgeoisie” once explicitly were, among the people to be envied and somehow blamed for the plight of the Communist-ruled countries.

This newly directed fear and hatred are ominous. They have led to an enormous armament buildup in Russia, and to the development and storage of multiple nuclear weapons which are forcing the West to try to keep uneasy pace. None of us can foresee the ultimate outcome.

Most of us have forgotten that when the Pilgrim Fathers landed on the shores of Massachusetts they established a communist system. Out of their common product and storehouse they set up a system of rationing, though it came to “but a quarter of a pound of bread a day to each person.” Even when harvest came, “it arose to but a little.” A vicious circle seemed to set in. The people complained that they were too weak from want of food to tend the crops as they should. Deeply religious though they were, they took to stealing from each other. “So as it well appeared,” writes Governor Bradford, “that famine must still ensue the next year also, if not some way prevented.”

So the colonists, he continues, “began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length [in 1623] after much debate of things, the Gov. (with the advice of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves. . . .

“And so assigned to every family a parcel of land. . . .

A Great Success

“This had very good success; for it made all hands very industrious, so as much more corn was planted than otherwise would have been by any means the Gov. or any other could use, and saved him a great deal of trouble, and gave far better content.

“The women now went willingly into the field, and took their little ones with them to set corn, which before would allege weakness, and inability; whom to have compelled would have been thought great tyranny and oppression.

“The experience that was had in this common course and condition, tried sundry years, and that among godly and sober men, may well evince the vanity of that conceit of Plato’s and other ancients, applauded by some of later times; — that the taking away of property, and bringing in community into a commonwealth, would make them happy and flourishing; as if they were wiser than God. For this community (so far as it was) was found to breed much confusion and discontent, and retard much employment that would have been to their benefit and comfort.

“For the young men that were most able and fit for labor and service did repine that they should spend their time and strength to work for other men’s wives and children, without any recompense. The strong, or man of parts, had no more in division of victuals and clothes, than he that was weak and not able to do a quarter the other could; this was thought injustice. . . .

“And for men’s wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc., they deemed it a kind of slavery, neither could many husbands well brook it. . . .

“By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many, for which they blessed God. And the effect of their particular [private] planting was well seen, for all had, one way and other, pretty well to bring the year about, and some of the abler sort and more industrious had to spare, and sell to others, so as any general want or famine has not been among them since to this day.”

The moral is too obvious to need elaboration.

This may perhaps be made clearer by a concrete figure. John Ally is a rich man who lives in a magnificent mansion, and I, Uncle Sam, am a well-to-do farmer living adjacent. I sell him produce; sometimes I make articles for him; and I also keep a general store, in which I sell house furnishings.

Now John Ally gets into a feud with Bill Germany across the way. They send raiding parties against each other; they attack each other’s castles — for two or three years. It is all very expensive. John Ally’s needs are desperate; his raiding parties must be armed; he asks me to help him make weapons; and I stay up late at nights making weapons, and selling them to Mr. Ally at extravagant prices; and I am growing scandalously rich. Meanwhile John Ally, in his desperation, is spending not only his income; he is digging into his capital savings. Moreover, his income is less, for he is neglecting his business to equip raiding parties and to join in them.

Finally it is all over. Now I, Uncle Sam, knew that it is all up with the weapons business; but I am not nearly so discouraged as I might be expected to be. I may even imagine at times that I am going to get more business now that the feud is over than I did while it was going on. I note that Bill Germany’s raiding parties have smashed many of Mr. Ally’s handsome casement windows; I know he will have to replace them, and I suspect that he will come to me to do it. And I reason also that for more than two years John Ally has not been able to buy any furniture, and that the furnishings in his house must be pretty dilapidated by this time.

But what do I find? John Ally does indeed replace his broken windows, and he puts up a new barn where his old one was burned down and he calls on me to some extent for materials. But he replaces his magnificent windows with a much cheaper window wherever possible, and he puts up a much less pretentious barn. Moreover, the expected orders for furniture do not come, or come only in the most disgustingly small amounts. Furthermore, I find that he is setting a less elaborate table; my orders from him for foodstuffs cannot compare with what they were before the feud broke out.

What is the trouble? John Ally’s furniture is in a worse condition than before the feud; but so is his pocketbook. He is more in need of furniture than before the feud; but he can less afford to buy it. He simply lets it go as it is for the time, and makes only the most urgent repairs and replacements. John Ally is a poorer man than he was before the feud; for a long time he is going to give me less business; and consequently I am going to be a poorer man too.

After the passing of its three founders—Carl Menger, Friedrich von Wieser, and Eugen von Böhm-Bawerk—Austrian economics fell for a long time into eclipse. It was not so much refuted as neglected. English-speaking economists began devoting themselves to such matters as mathematical treatment of problems of “general equilibrium.” The Austrian view was revived mainly by one man, an Austrian by birth as well as an “Austrian” by conviction—Ludwig von Mises (1881–1973). He made his influence felt both by his written works and by his oral teachings. Among his early distinguished students and followers were Gottfried Haberler, Fritz Machlup, Oskar Morgenstern, Lionel (subsequently Lord) Robbins, and, most influential of all, F. A. Hayek.

Ludwig von Mises was prolific, but his principal contributions were made in three masterpieces. These were The Theory of Money and Credit, first published in German in 1912, Socialism: An Economic and Sociological Analysis, also first published in German in 1922, and Human Action, which grew out of a first German version appearing in 1940, but was not published in Mises’s own rewritten English version until 1949.

Mises on Human Action

Though there is now a gratifying number of able young American economists writing in the Austrian tradition, Human Action still stands as the most complete, powerful, and unified presentation of Austrian economics in any single volume. Mises always generously acknowledged his indebtedness to his predecessors. He recalled in a short autobiography Notes and Recollections, 1978) that around Christmas 1903 he read Menger’s Principles of Economics for the first time. “It was the reading of this book,” he wrote, “that made an ‘economist’ of me.”

It would carry me to too great length to itemize and explain all the contributions to economics that Mises made, and I will content myself with mentioning only two. He was the first to prove that it was impossible for socialism to undertake “economic calculation”; and he made one of the most important contributions of any economist toward solving the problem of “the trade cycle.”

Because Mises so uncompromisingly rejected government interventionism in all its forms, he acquired the reputation of a “laissez-faire extremist” during most of his lifetime, and was scandalously neglected by the majority of academic economists. But because Hayek elaborated his own ideas in a more conciliatory form, his writings attracted more attention from the academic world, and he leapt into prominence in 1931 with his own contribution to the theory of the trade cycle, Prices and Production, along lines similar to Mises’s. The result is entitled to be called the “Mises-Hayek” theory.

Hayek is also a prolific writer, but though he has written volumes on money, on the trade cycle, on inflation, and on The Pure Theory of Capital (1941), he has never attempted a comprehensive book on economic principles. Of late years he has turned his attention mainly to the realms of politics, ethics, and law, and has written profound and widely discussed treatises on The Constitution of Liberty (1960) and a three-volume work on Law, Legislation and Liberty, completed in 1979. He has been more widely influential in his own lifetime than was Mises, and was awarded the Nobel Prize in Economics in 1974.

Today’s zealous group of younger “Austrian” economists, though all acknowledging their great debt to Mises, do not treat his Human Action as the final word on the subject, but are exploring a whole range of economic problems with a new vigor. Murray Rothbard [1926–1995], a student of Mises, produced a two-volume treatise, Man, Economy, and State (1962), along Misesian lines, with notable clarity of exposition, and making important contributions of his own, pointing out the fallacies, for example, in the prevailing theories of “monopoly price.”

Israel M. Kirzner (b. 1930), professor of economics at New York University, another former Mises student, although he has not undertaken a comprehensive book of “principles,” has explored individual problems in five separate volumes: The Economic Point of View (1960), Market Theory and the Price System (1963), An Essay on Capital (1966), Competition and Entrepreneurship (1973), and Perception, Opportunity, and Profit (1979). His work is distinguished by great scholarship, systematic thoroughness, and precision of statement. He has brought further illumination to every problem he has dealt with.

Finally, no reference to individual writers would be adequate that did not include Professor Ludwig M. Lachmann [1906–1990]. Though he is one of the most original and profound among living Austrian economists, his work has not yet nearly achieved the recognition it merits. Among his principal books are Capital and Its Structure (1956; republished in 1978), The Legacy of Max Weber (1971) and Capital, Expectations, and the Market Process (1977). His writings are notable for their emphasis on the role of expectations and for their thoroughgoing application of a “radical subjectivism.”

Restrictions of space permit me merely to list the names of half a dozen of the now- increasing group of important “Austrian” economists: S. C. Littlechild, Gerald P. O’Driscoll, Jr., Mario J. Rizzo, Hans Sennholz, Sudha R. Shenoy, and Lawrence H. White. But so arbitrarily short a list must omit a number of names unjustly.

The “Austrian” economists, more consistently than those of any other school, have criticized nearly all forms of government intervention in the market—especially inflation, price controls, and schemes for redistribution of wealth or incomes—because they recognize that these always lead to erosions of incentives, to distortions of production, to shortages, to demoralization, and to similar consequences deplored even by the originators of the schemes. But personal value judgments of government policy are of course not an essential part of Austrian theory.

The present vigorous Austrian School is not content merely to keep re-expounding the principles developed by Menger and Mises, but is addressing itself constantly to new problems, or a more thorough probing of old ones. This is dramatically evident in a recent volume, New Directions in Austrian Economics (1978), edited by Louis M. Spadaro, with contributions from eleven writers. Professor Spadaro himself, in his concluding essay, outlines some of the still unresolved problems that Austrians ought to explore. In some sense, however, practically all eleven contributions do the same thing.

I have heard it said (by an economist of another school) that there is no such thing as Austrian economics; there is only good economics or bad. But in the same way we could say that there is no such thing as Ricardian economics, Marxist economics, Keynesian economics, and so on. This sort of statement, though true in one sense, is false in another. It is fallacious in implying that if anything is classified in accordance with one characteristic, it cannot be classified in accordance with any other. It is like saying that there are no such persons as Americans or Japanese; there are only men and women. Those who call themselves “Austrian” economists give themselves this label because of its historic origins; but they happen also to believe that its fundamental theses are true, and offer more promise than any other for further progress in economic science.

Perhaps something should be said about the chief differences today between Austrian economics and what we may call “orthodox” or “mainstream” economics. The difficulty here is that “mainstream” economics itself would be hard to define. Economists are still divided into a number of recognizable “schools”—neoclassicists, Keynesians, the Chicago school, the Lausanne school, and so on. The limits of space forbid me to go into the distinguishing doctrines of each of these schools. But one outstanding difference of the Austrians from all of these lies in their method of reasoning. The Austrians emphasize methodological individualism. That is, they not only begin by emphasizing human actions, preferences, and decisions, but individual actions, preferences, and initiatives. Mainstream economists are concerned with “macroeconomics,” with averages and aggregates; and those of the Lausanne school, trying to reduce economics to an “exact” science, and therefore seeking to quantify everything, are obsessed with complicated mathematical equations that try to stipulate the conditions of “general equilibrium.”

Equilibrium a Useful Concept, Though Never a Reality

Now “general equilibrium” is defined by these economists (when it ever is) in highly abstract and obscure phrases; but for laymen it might be defined as a condition in which all the tens of thousands or millions of commodities and services are being turned out in the exact quantities and proportions in which they are relatively wanted by producers or consumers, so that there are no “shortages” or “surpluses.” All prices reflect costs, and there is no more profit in making one commodity than any other. (In fact, there is no “pure” profit at all.) These economists admit that at any moment this condition does not exist, but they contend that there is a constant long-run tendency toward equilibrium, because when there is an unusual profit in turning out some one product, producers will turn out more of it, and when there is a loss in turning out some other product, producers will make less of it, or transfer to making something else.

Now the concept of equilibrium (or much better, the Mises concept of an “evenly rotating economy”) can have great usefulness as a tool of thought. We are often better able to analyze the problems of change if we begin with the fictitious assumption of a state of affairs in which certain changes are hypothetically eliminated. But this is a purely imaginary construction, a useful fiction. It should never be confused with reality.

While a true “equilibrium” between the marginal cost of production and the market price of any one commodity is a condition that is seldom reached, even momentarily, a “general equilibrium” in the relative production, supply price, and demand price of all commodities and services is a condition that is never reached, even for an instant of time.

The concept itself is extremely nebulous. Neoclassical economists seem obsessed today with setting up complicated algebraic equations stipulating the conditions of equilibrium or functional relations under “perfect competition” and the like, but it is difficult to specify precisely what their x’s and y’s stand for. They cannot refer to physical quantities, because you cannot add apples to horses, or a ton of gold watches to a ton of sand. One might add or compare quantities times prices, but what would be the meaning of the total, or any of the parts that make it up? The price, even of one commodity, differs from hour to hour, place to place, and transaction to transaction. The value of the currency itself fluctuates and constantly changes its exchange ratio with commodities. If we simply add or compare “values,” then we must recognize that values are purely subjective. They are impossible to measure or to total because they differ with each individual.

If we pass over these fundamental difficulties, where do we arrive? Even if we assume that there may be a persistent long-run tendency toward general equilibrium, we must admit that there is also a persistent short-run and long-run tendency toward the persistence of disequilibrium.

This is not only because there is a tendency of entrepreneurs, in increasing or reducing production in response to market and profit signals, to overshoot the mark, but because individual entrepreneurs, so far from making merely automatic responses, are constantly gaining new knowledge, alert to new opportunities, changing methods and reducing production costs, improving products, innovating—turning out entirely new products or inventions. And consumers too are constantly learning, changing tastes, and demanding new products to meet new wants. So Austrian economists seldom speak of market equilibrium, but of the market process.

My own suspicion is that the enormous attention now being devoted to stipulating the mathematical conditions of “general equilibrium” is a pursuit of a will-o’-the-wisp, of questionable help in solving any real economic problem.

But space forbids me to go into too many detailed contrasts. Let me sum up briefly the main Austrian theses once again, this time not in my own words or in Menger’s, but in those of two prominent living [1981] “Austrians.”

“Beginning in the 1870′s in Vienna, Austria,” writes Professor Kirzner, “the school was distinguished by its emphasis on the subjective elements in economic analysis, on the significance of time in production processes, and on the role of error and uncertainty in economic phenomena” (his italics).

The summarization by Professor Lachmann is remarkably similar: “The first, and most prominent, feature in Austrian economics is a radical subjectivism, today no longer confined to human preferences but extended to expectations. . . . Secondly, Austrian economics displays an acute awareness of the many facets of time that are involved in the complex network of interindividual relations. . . . In the subjective revolution of the 1870′s the first step in the direction of subjectivism was taken when it was realized that value, so far from being inherent in goods, constitutes a relationship between an appraising mind and the object of its appraisal” (New Directions in Austrian Economics, pp. 1–3).

All the rest of Austrian economics follows from these basic insights. Let me conclude with my own opinion that any economic analysis that fails to embody such insights cannot be entirely sound.

Recommended Reading

Those who have no previous acquaintance with Austrian economics, and would like a short and simple text written along Austrian lines, might begin with Essentials of Economics by Faustino Ballvé (126 pages; Irvington-on-Hudson, N.Y.: Foundation for Economic Education). A more advanced . . . introduction (1979), specifically explaining the Austrian point of view, is The Fallacy of the Mixed Economy, by Stephen C. Littlechild [out of print].

Surprisingly, the original Principles of Economics, first published in 1871 by Carl Menger, the founder of Austrian economics (328 pages), still makes an excellent, very readable, and not too technical introduction to the school’s basic principles.

Of course, the authoritative and most complete work on modern Austrian theory is Human Action, by Ludwig von Mises (907 pages, first published in 1949 [fourth edition, FEE, 1996]). Some may find this difficult reading. A very clear two-volume work written thirteen years after Human Action by a student of Mises is Murray N. Rothbard’s Man, Economy, and State [Ludwig von Mises Institute, 987 pages].

For the reader interested in the latest developments in Austrian economics I can highly recommend two books: One is The Foundations of Modern Austrian Economics, edited by Edwin G. Dolan, which contains contributions by half a dozen writers [1976, 238 pages, out of print]. The other is New Directions in Austrian Economics, edited by Louis M. Spadaro (1978), 239 pages, with contributions by eleven writers [out of print].

Most of these foregoing books have already been mentioned in the text. The reader may also profitably consult others mentioned there, especially the volumes by Kirzner and Lachmann.