by Mario Rizzo
Tuesday, September 29th is the birthday of one of the great economists of our time, Ludwig von Mises. He was responsible for one of the two greatest accomplishments of twentieth-century economics. This is the demonstration that rational economic calculation is impossible under socialism, that is, in a world without market prices. For a long time economists believed that his argument had been defeated by Oskar Lange and Abba Lerner. But when the socialist economies of Eastern Europe and the Soviet Union collapsed, a re-evaluation occurred. Many former socialists conceded that Mises had been right all along.
I had the good fortune to meet Ludwig von Mises in 1969 when I was an undergraduate student. He gave a lecture at Fordham University. The lecture was chaired by my friend Jerry O’Driscoll who was also a Fordham student at the time. I remember Jerry struggling to keep the microphone close to Mises as he lectured. Mises had a way of moving back and forth in his chair as he spoke. Mises autographed my copy of Human Action that day.
We had asked him to speak on the epistemological problems of economics. He said he would rather speak on inflation. We compromised. He said he would speak on the epistemological problems of money. The day arrived, and he spoke on inflation. We were happy anyway.
I did not really know Mises but he seemed like a kindly and gentle man. Murray Rothbard used to refer to him as “sweet old Mises.”
He carried the torch of classical liberalism during many dark decades. He also resisted the Keynesian fever of his time. We are in his debt.
(For those who care, the other great accomplishment of twentieth-century economics is due to F.A. Hayek. This is the argument that knowledge in society is decentralized and that market prices enable us to make use of knowledge that we do not and cannot possess as individuals.)
ThinkMarkets 
A real giant whose name should be familiar to every student and adult, like Einstein or Adam Smith.
Greg Ransom,
And sadly, so few have even heard of Mises and Hayek. I was stunned a couple of years ago when I mentioned Hayek to a friend of mine, a friend with a degree in history and graduate degree in communications, who had never heard of Hayek, Mises nor any other classical liberal thinker I could name.
Never has von Mises’ writings on inflation been more relevant. Mises and Hayek showed how monetary policy could distort economic activity even in the absence of measured price inflation. It’s an idea almost totally lost from economics today.
I attended NYU for my grad degree in finance and never, not once, heard of the man my entire time there. I learned of him a few years after graduation.
“I was stunned a couple of years ago when I mentioned Hayek to a friend of mine, a friend with a degree in history and graduate degree in communications, who had never heard of Hayek, Mises nor any other classical liberal thinker I could name.”
Well, once I mentioned Adam Smith to a friend, he is a undergraduate student of engineering, and he didn’t know who he was, so…
Economists are on average, less famous than other scientists. Even a giant of modern mainstream/mathematical economics, Kenneth Arrow, is not widely know.
Maloney, do you ever heard of people like Debreu, Han, Harsany, Selten, in your course?
I have heard of Mises a few times in my undergraduate course of economics. They usually refer as a primitive neoclassical or as an “libertarian economist”.
I use Mises’ ideas in the classroom fairly often, and even teach a seminar where we go carefully through Human Action. One thing I’ve noticed is how many of the “puzzles” of behavioral economics he anticipates and shows compatible with rational behavior… important insights for today, when Alan Greenspan, Paul Krugman, Richard Posner, and all the rest are blaming “irrationality” for the financial debacle, and ignoring the institutional causes.
Roman Frydman just took on what he calls the “bogus irrationality” of the EMH theorists, and the behavioral economists’ jettisoning of rationality altogether, and favorably cites Hayek in doing so. Not to slight Hayek, but I think on this issue & the relation w. capital theory Mises has even more to offer.
http://www.rgemonitor.com/us-monitor/author_name/_rfrydman_mdgoldberg_/Roman-Frydman-and-Michael-D-Goldberg
I’ve heard of all the famous men mentioned in this thread and I was a grad student in Political Science not Economics. Of course, that around 1957 or so, when the past thinkers were still thought to be relevant.
Social science is under the sway of scientism. Who needs the history of thought? I was lucky and had professors at the undergraduate level at Fordham (Lou Spadaro), and at the graduate level at UCLA (Axel Leijonhufvud and Thomas Sowell) who thought otherwise. Leland Yeager wrote a wonderful piece years ago on why we need to study the history of economic thought. Knowledge gets lost, as I suggested above.
Mario,
i’ve often wondered about Lange’s theory of Market Socialism and how he was able to lift Neoclassical micro theory from it presumed setting of Capitalism and place it in a Socialist context, virtually untouched.
What i wonder specifically is what socio-economic/political system is presumed by Neoclassical thinking – especially with regard to the perfect competition model Seriously.
Zero economic profits is a Socialist ideal, not a Capitalist one.
Setting price equal to marginal cost – since the economic planners subsidized the original capital costs of the firm, so sunk costs can be ignored – unlike the behaviour of actual Capitalistic firms, who do not ignore sunk costs when calculating their target rate of return.
Homogeneous goods. Makes me think of Travants or AK47s, not the product differentiation common to most Capitalist firms.
Perfect knowledge of the future – courtesy of the economic planners roadmap.
I’m convinced that Neoclassical economics is implicitly as much about centralized planning as it is about Capitalism. Maybe the reason Mises (and Hayek) are ignored by mainstream economics, is because they have described the Capitalistic market much more accurately than the stylized depiction found in microeconomic textbooks, that do not even make clear what social system their cartoon models are applicable to.
The rise of Neoclassical thinking in the 1930’s (and the marginalization of Austrianism at the same time) occured when collectivist thinking was at the begining of its 1890-1990 peak, and Capitalism was at its lowest ebb, both in terms of economics and political popularity. It is important to realise that the weird assumptions of the perfectly competitive model were very necessary at the time, since Capitalism was so unacceptable to so many. Unfortunately this model left little or no room for thinking about the economic importance of profits, losses, entrepeneurship, risk, distributed information and the evolutionary tendencies of the market process.
Now that Capitalism is so much more acceptable that it is was in the 1930’s, we are seeing what is really a predictable (and welcome) revival of Austrian thought.
Drewfus, the most important (influential) free market economists of the last 40 years were all mathematical/neoclassical economists. What happened was that the interpretation of perfect competition shifted from: “Since real markets are never identical do the model of perfect competition the state should intervene.” to: “The model of perfect competition is not the most realistic, but it explains a loot of reality and it reaches free market conclusions, plus, even if the market does not reach pareto optimal allocations what guarantees that the state will reach that idealized state?”.
The revival of Austrian economics surely is important, but the Austrian economists are not a large enough proportion of the profession to explain the across the board change in ideology that occurred in the last 50 years.
Rafael,
i agree with what you say.
However, what i’m more interested in than the historical specifics is the current marketability of Capitalism. It is now very fashionable to dimiss free market thinking (any flavor) on the basis that the models assume complete rationality and foresight, and that therefore the models proponents believe these characteristics accurately describe human beings. Irrationality and short-sightedness as descriptions of human behavior are all the rage, and poking fun at ‘free market fundamentalists’ has become common (especially in the blogging world). This is hugely undermining the support for Capitalism and free markets – ‘killing it’ might only be a slight exageration.
What i’m suggesting is that the way forward might be to reassociate the Neoclassical model as quasi-Socialist, rather than specifically Capitalist, and historically as being part of the ‘rational planning’ thinking that was in vogue from the 1930’s to the 1960’s. The baggage of Neoclassical assumptions has to be jettisoned, including by Austrians, regardless of its validity to them.
[…] is the economics equivalent of the giants of all the other disciplines (e.g., Einstein). And as Mario Rizzo notes over at ThinkMarkets, he is responsible for what is probably the most important single economic idea of the last […]
Drewfus,
“The baggage of Neoclassical assumptions has to be jettisoned, including by Austrians, regardless of its validity to them.”
Well, it is true that the neoclassical assumptions are unrealistic, but that’s because the people that criticize neoclassical economics (the ones you talked about) don’t really understand it. You should note that one of themost important jobs that austrian economics did was to fundament and explain when the neoclassical assumptions hold.
Mises, for example, showed that without a price system to utilize dispersed knowledge there is no tendency in the direction of the rational allocation of resources. His critic of socialism is that the perfect competition model only has the capacity to explain reality when entrepreneur are exploiting the discrepancies of the price system.
Rafael,
again, i agree with you. I’m not suggesting that Neoclassical economics is completely wrong, or even mostly wrong, or that Mises was mostly in opposition to it. I’m saying that Neoclassical economics is becoming a liability, and that one way of dealing with this would be to point out how compatible Neoclassical economics was as a solution (according to its proponents) to the Socialist calculation problem.
The calculation debate was/is really one of the great debates in all of the social sciences, perhaps the greatest, as it concerns the fundamental issues of political economy and social organization. That Neoclassical texts contain no trace of this debate, let alone taking a position on it, is truly revealing in my opinion. This is the central issue of 20th century political economy, and what do the Neoclassicals have to say about it? Nothing.
[…] Ludwig von Mises (1881 – 1973) Tuesday, September 29th is the birthday of one of the great economists of our time, Ludwig von Mises. He was responsible for one of the two greatest accomplishments of twentieth-century economics. This is the demonstration that rational economic calculation is impossible under socialism. […]
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