Thursday 22 April 2010

Ludwig von Mises – A Primer

A new book by Eamonn Butler from the IEA.
Mises brought new life and insights into the Austrian School of economics, and cultivated many of the leading Austrians today. He developed and systematised the Austrian view that, to understand economics, we must trace it back to the actions and motives of individuals as they make choices. The “aggregates” of the mainstream economists are merely statistical totals. But one total does not affect another: what actually drives things is the specific actions of the individuals who face the specific choices. Different people react differently to events – and the same person may react differently to the same choice at different times. Statistical formulae tell us nothing. To understand economics, we have to understand human values.

Mises applied this insight to a particularly important economic phenomenon, namely money. It is not some lifeless medium of exchange, nor even some objective measure of value, he insisted. It is an economic good like any other – the more of it that people value what it does for them (facilitating exchange), the more they demand (to keep in their wallets or bank accounts), and so the more its price (what we call its purchasing power) rises. Again, the behaviour of money is not mechanical but depends entirely on how individuals value it.

From there, Mises (along with Hayek) explained that booms and busts, like the crash we have just suffered, stem from governments and banks creating too much money and too cheap credit. That makes people feel wealthier and they spend more freely. Encouraged by this and by low interest rates, entrepreneurs invest more in new plant and equipment. But when the money and credit boom subsides, reality reasserts itself, and those investments are exposed as over-optimistic malinvestments that cannot be sustained. Factories are closed, plant scrapped, and workers fired. Only strict limits on the creation of money – such as a gold standard – can prevent such monetary booms and their inevitable, real, human consequences.

Mises also exposed the fact that socialism had no rational way of working out what to invest in, making malinvestment inherent in its system. Under socialism, the means of production are collectively owned, so never bought and sold. There is therefore no way to price them. We cannot know which of the millions of possible production processes are the cheapest – and effort and resources are wasted. The market economy, by contrast, places producers under daily pressure to deliver the highest-valued outputs for the cheapest feasible mix of inputs.
Ludwig von Mises – A Primer can be purchased here and downloaded here. While you are buying this book you should also purchase a copy of another Eamonn Butler book, Adam Smith - A Primer. Both well worth the money.

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