A Treatise on Economics

HUMAN ACTION

LUDWIG VON MISES

LUDWIG VON MISES INSTITUTE

AUBURN, ALABAMA

The Ludwig von Mises Institute gratefully dedicates this

restored Human Action to all its Members who aided in this

historic project, and in particular to the following Patrons:

Mark M. Adamo

Thomas K Armstrong

Tne Ammng Foundation

Richard B. Bleiberg

Dr. John Bratland

Jerome V. Bmni

The Bwni Foundation

Sir John and Lady Dalhoff

John W. Deming

John A. Halter

Mary and George Dewitt Jacob

The Kealiher Family

William Lowndes, 111

Ronald Mandle

Ellice McDonald, Jr., CBE, and Rosa Laird McDonald, CBE

W i i m W. Massey, Jr.

Joseph Edward Paul Melville

Roger Miliken

Richard W. Pooley, MD

Sheldon Rose

Gary G. Schlarbaum

Conrad Schneiker

Loronzo H. and Margaret C. Thornson

Quinten E. and Marian L. Ward

Keith S. Wood

The Ludwig von Mises Institute thanks Bettina Bien Greaves for permission to reissue

the first edition of Human Action.

Copyright O 1998 by Bettina Bien Greaves

Introduction Copyright O 1998 by The Ludwig von Mies Institute

Produced and published by The Ludwig von Mises Institute, 518 West Magnolia

Avenue, Auburn, Alabama 36832, (334) 844-2500; fax (334) 844-2583;

; www.mises.org

ISBN 0-94546624-2

INTRODUCTION^

TO THE SCHOLAR'S EDITION

0 NCE in a great while, a book appears that both embodies and

dramatically extends centuries of accumulated wisdom in a

particular discipline, and, at the same time, radically challenges the

intellectual and political consensus of the day. Human Action by

Ludwigvon ~Mises(1 881-1973) is such a book, and more: a comprehensive

treatise on economic science that would lay the foundation

for a massive shift in intellectual opinion that is still working itself

out fifty years after publication. Not even such milestones in the

history of economic thought as Adam Smith's Wealth ofNations,

Alfred Marshall's Principles, Karl Marx's Capital, or John Maynard

Keynes's General The09 can be said to have such enduring significance

and embody such persuasive power that today's students and

scholars, as much as those who read it when it first appeared, are

so fully drawn into the author's way of thinking. For this reason,

and others discussed below, this Scholar's Edition is the original

1949 magnum opus that represents such a critical turning point in

the history of ideas, reproduced (with a 1954 index produced by

Vernelia Crawford) for the fiftieth anniversary of its initial appearance.

When Human Action first appeared, its distinctive Austrian

SchooI approach was already considered a closed chapter in the

history of thought. First, its monetary and business cycle theory,

pioneered by Mises in 19 12' and extended and applied in the 1920s

and 193O S,~h ad been buried by the appearance of Keynes's General

1. The archives at Yale University Press, Grove City College, and the

Ludwig von Mises Institute provided source material.

2. The Theory ofMonqand Credit, trans. by H.E. Batson (Indianapolis, Ind.:

Liberty Classics, [19 121 1980).

3. Essays can be found in On the Manipulation ofMonq and Credit, trans.

by Bettina Bien Greaves (Dobbs Ferry, N.Y.: Free Market Books, 1978).

vi Human Action

Theory, which gave a facile but appealing explanation of the lingering

global depression. Second, Mises's 1920 demonstration that a socialist

economy was incapable of rational economic calculation4 sparked a

long debate in which the "market socialists" had been widely

perceived to be the eventual victors5 (in part because it became a

debate among Walrasians6). Third, and fatal for the theoretical core

of the Austrian School, was the displacement of its theory of price,

as originated by Carl Menger in 187 1' and elaborated upon by Eugen

von Bohm-Bawerk, John Bates Clark, Philip H. Wicksteed, Frankk

Fetter, and Herbert J. D a ~ e n ~ o rAtn.o~t her strain had begun to

develop along the lines spelled out by Menger's other student

Friedrich von Wieser, who followed the Walrasian path of developing

price theory within the framework of general equilibrium.

Wieser was the primary influence on two members of the third

generation of the Austrian School, Hans Mayer and Joseph A.

~chum~eter.'

Members of the fourth generation, including Oskar Lhlorgenstern,

Gottfi-ied von Haberler, Fritz Machlup, and Friedrich k von Hayek,

also tended to follow the Wieserian approach. The crucial influence

on this generation had been Schurnpeter's treatise Das Wesen

und der Hauptinhalt dm Theoretischen Nationalokonomie, published in

4. Economic Cakulation in the Socialist Commonwealth, trans. by S. Adler

(Auburn, Ala.: Ludwig von Mises Institute, [I9201 1990).

5. Trygve J.B. Hoff, E c m i c Cahhtion in the Socialist Sociq, trans. by M A

Michael (Indianapolis, Ind.: Liberty Press, [I9491 1981).

6. Murray N. Rothbard, "The End of Socialism and the Calculation

Debate Revisited," Review ofAustrian Economics, 5, no. 2 (1991), 51-76.

7. Carl Menger. Principles ofEconmics. trans. by James Dinpall New

York: New York University Press, [I8711 1976).

8. Eugen von Bohm-Bawerk, "Grundziige der Theorie des winschaftlichen

Giiterwertes," Jahrhiichw @r Nationaliikonmie und Statistik 13 (1 886), 1-82,

477-541; John Bates Clark, The Dirtribution of Wealth: A Theory of Wages,

Interest, and Profits (New York: Augustus M. Kelley, [I8991 1965); Philip H.

Wicksteed, The Alphabet ofEconmic Sense, Pt. I: Elements of the Theory of Value

or Worth (London: Macmillan, 1888); Frank A. Fetter, Eonomic Principler

(New York: The Century Co., 19 15); Herbert J. Davenport, The Economics of

Enterprise (New York: Augustus M. Kelley, [I91 31 1968).

9. The two economists for whom Schumpeter felt the "closest affinity"

were Walras and Wieser; see Fritz Machlup, "Joseph Schumpeter's

Economic Methodology," in idem., Methodology of Economics and Other Social

Sciences (New York: Academic Press, 1978), p. 462.

Introduction to the Scholar's Edition vii

1908."This bookwas a general treatment ofthe methodological and

theoretical issues of price theory from a Walrasian perspective. Apart

from Wieser's writings, it was the only "Austrian" workofpure theory

to appear prior to Mises's Nationalokonomie, the German-language

predecessor to Human Action. For the young economists studying

in Vienna, and despite criticisms by Bohrn-Bawerk, Schumpeter's

book became a guide to the future of the science. As Morgenstern said,

"the work was read avidly in Vienna even long after the First World

War, and its youthful freshness and vigor appealed to the young

studen ts.... [Llike many others in my generation I resolved to read

everything Schumpeter had written and would ever write.""

After Bohm-Bawerk's death in 19 14, no full-time faculty member

at the University of Vienna was working stricdy within a Mengerian

framework, while Mises's status as a Privatdozent diminished his

academic standing. Prior to the geographical dispersal of the school

in the mid-1930s,12 moreover, none of the members of these latter

generations had achieved international recognition, particularly

among English-speaking economists, on the order of Bohm-Bawerk.

After the retirement of Clark, Wicksteed, Fetter, and Davenport

from the debate on pure theory by 1920, the School's influence on

the mainstream of Anglo-American economics declined precipitously.

This left the field of high theory, particularly in the United

States, completely open to a Marshallian ascendancy.

In Germany, the long night of domination by the anti-theoretical

German Historical School was coming to an end, but the book

that reawakened the theoretical curiosity of German economists after

the First World War was Gustav Cassel's Theoretische Sozialokonomie,

which offered a verbal rendition of Walrasian price theory.13 In the

Romance countries of France and Italy, Mengerian price theory never

10. Schumpeter's translation of the title: The hTatzlrea nd bmce of Theoretical

Econumics(Munich and Leipzig: Duncker & Humblot, 1908). This book coins

the phrase "methodological individualism."

1 1. SelectedEconomic Writingsof OskarMmgenstern, ed. Andrew Schotter (New

York: New York University Press, 1 976), p. 196.

12. Earlene Craver, "The Emigration of ,4ustrian Economists," Histoly of

Political Economy, 1 8 (Spring 1987), 1-3 0.

13. Gustav Cassel, The Theory ofsocial Economy (2d ed. New York Harcourt,

Bracc and Company, 1932). As Mises wrote, "The decade-long neglect of

theoretical studies had led to the remarkable result that the German public

...... vlu Human Action

achieved a firm foothold and, by the 1920s, it had been shunted

aside by the Lausanne School and Marshallian-style neoclassicism.

By the rnid- 193Os, the Austrian School had melted away in Ausma as

more attractive prospects abroad or the looming National Socialist

threat drove the leading Austrian economists to emigrate to Great

Britain (Hayek), the United States (Machlup, Haberler, and LMorgenstern),

and Switzerland (Mises). Hayek was well positioned to spark

a revival of Mengerian theory in Great Britain, but having been a

student of Wieser rather than ~iihm-~awerk,h'e~ saw the core of

economics as the "pure logic of choice," which could be represented

by the timeless equations of general equilibrium.15 In the end,

Walrasian general equilibrium theory was imported into Great

Britain by John R. Hicks under Hayek's influence.'"

In addition, analytical deficiencies internal to the pre-Misesian

approach contributed to the sharp decline of the Austrian School

after the First World War. The Austrians themselves lacked the

analyucal wherewithal to demonstrate that the timeless and moneyless

general equilibrium approach and the one-at-a-time Marshallian

approach-the analytical pyrotechnics of the 1930s

notwithstanding-are both plainly and profoundly irrelevant to a

must look to a foreigner, the Swede Gustav Cassel, for a principled explanation

of the problems of economic life." Ludwig von Mises, "Carl Menger and the

Austrian School of Economics," Azmian Economire An Antholo , ed. Bettina

Bien Greaves Qrvington-on-EIudsoi~, N.Y.: Foundation or Economic

Education, 1996), p. 52.

14. Hayek himself explicitly distinguished between "the two original

branches of the Austrian School," the Bohm-Bawerkian and the Wieserian,

and characterized himself as an adherent of the latter branch. See F.A. Hayek,

"Coping with Ignorance" in idem, Knowledge, Evolution, and Society (London:

Adam Smith Institute, 1983), pp. 17-18; and The Collected Works of F.A.

Hayek, vol. 4: The Fortunes o Liberalism: Ersays on Awwian Economics and the

Ideal of Freedom, ed. Peter Klein (Chicago: University of Chicago Press,

1992), p. 157.

1 5. See FA Hayek, "Economics and Knowledge," in idem, Individmlljrn and

LGonmic Ordw (Chicago: Henry Regnery Company, [I9481 1972), pp. 3 3-56.

16. See Bruna Ingrao and Giorgio Israel, The Invkible Hand: Economic

&ilibrium in the Hhory $Science (Boston: MIT Press, 1990), for a perceptive

description of Hayek's crucial role in the early development of the

Anglo-American version of general equilibrium theory (pp. 232-235). Hayek

himself regarded the analysis of value theory in Hick's Value and Capital in terms

of marginal rates of substitution and indifference curves as "the ultimate

statement of more than a half a century's discussion in the tradition of the

Austrian School." The Fortunes of LiberalIjm, pp. 53-54.

Introduction to the Scholar-'s Edition ix

central problem of economic theory: explaining how monetary

exchange gives rise to the processes of economic calculation that are

essential to rational resource allocation in a dynamic world." Thus,

after a period of remarkable development and influence from 187 1

to 1914, by the early 1930s the Austrian School was on the edge of

extinction.

Mises was fully cognizant of this unfortunate state of affairs

when he emigrated to Switzerland in 1934. Ensconced at the

Graduate Institute of International Studies in Geneva, for the first

time he could fully focus his attention on academic research. Mises

used this opportunity to write Nntionalokonmie, a book that intended

to revive the Mengerian approach and elaborate it into a

complete and unified system. As evidence of the importance that

Mises attached to this book, and of the time and energy he poured

into it, he wrote very little else in the years leading up to its

publication in 1940. Previously an enormously prolific writer, the

extent of his output from 1934 to 1939 was comparatively meager:

in addition to book reviews, short memos, newspaper and magazine

articles, notes, and introductions, there was only one substantial

article for an academic audience.18

Retrospectively describing his purpose in writing XatimaZokonomie,

Mises left no doubt that he sought to address the two burning

issues left unresolved by the founders of the Austrian School: the

status of the equilibrium construct and the bifurcation of monetary

and value theory. "I try in my treatise," Mises wrote, "to consider

the concept of static equilibrium as instrumental only and to make

use of this purely hypothetical abstraction only as a means of approaching

an understanding of a continuously changing world.""

Regarding his effort to incorporate money into the older Austrian

theoretical system, -ises identified his immediate inspiration as his

17. See Joseph T. Salerno, "The Place of Human Action in the History of

Economic 'Thought," Quarterly3oumal ofAwtrian Economics, 2, no. I (1999).

18. See Bettina Bien Greaves and Robert W. McGee, comps., Mises: An

Annotated Biblio apby (Inington-on-Hudson, N.Y.: Foundation for Economic

Education, 1 9 6 , pp. 4141, for a listing of Mires's published and

unpublished writings in these years.

19. Y/Iv Contributions to Economic Theory," in Mises, Planning fur

Freedom and Sixteen Other fisays and Addruses (4th cd. South Holland, 111.:

Libertarian Press, 1980), pp. 2 3 0-23 1.

x Human Action

opponents in the socialist calculation debate of the 1930s. These

economic theorists, under the influence of the general equilibrium

approach, advocated the mathematical solution to the problem of

socialist calculation. As Mises argued: "They failed to see the very

first challenge: How can economic action that always consists of

preferring and setting aside, that is, of making unequal valuations,

be transformed into equal valuations, and the use of equations?'do

But without an adequate theory of monetary calculation, which

ultimately rests upon a unified theory of a money-exchange economy,

Mises realized that there could be no definitive refutation of

the socialist position. Accordingly, Mises revealed: "LVationalokonomie

finally afforded me the opportunity to present the problems

of economic calculation in their full significance .... I had merged

the theory of indirect exchange with that of direct exchange into

a coherent system of human a~tion."~'

Thus, Nationalb2onomie marked the culmination of the Austrian