A Treatise on Economics

HUMAN ACTIONA Treatise on EconomicsBYLUDWIG VON MISESLUDWIG VON MISES INSTITUTEAUBURN, ALABAMA The Ludwig von Mises Institute gratefully dedicates thisrestored Human Action to all its Members who aided in thishistoric project, and in particular to the following Patrons:Mark M. AdamoThomas K ArmstrongTne Ammng FoundationRichard B. BleibergDr. John BratlandJerome V. BmniThe Bwni FoundationSir John and Lady DalhoffJohn W. DemingJohn A. HalterMary and George Dewitt JacobThe Kealiher FamilyWilliam Lowndes, 111Ronald MandleEllice McDonald, Jr., CBE, and Rosa Laird McDonald, CBEW i i m W. Massey, Jr.Joseph Edward Paul MelvilleRoger MilikenRichard W. Pooley, MDSheldon RoseGary G. SchlarbaumConrad SchneikerLoronzo H. and Margaret C. ThornsonQuinten E. and Marian L. WardKeith S. WoodThe Ludwig von Mises Institute thanks Bettina Bien Greaves for permission to reissuethe first edition of Human Action.Copyright O 1998 by Bettina Bien GreavesIntroduction Copyright O 1998 by The Ludwig von Mies InstituteProduced and published by The Ludwig von Mises Institute, 518 West MagnoliaAvenue, Auburn, Alabama 36832, (334) 844-2500; fax (334) 844-2583;; www.mises.orgAll rights reserved.ISBN 0-94546624-2INTRODUCTION^TO THE SCHOLAR'S EDITION0 NCE in a great while, a book appears that both embodies anddramatically extends centuries of accumulated wisdom in aparticular discipline, and, at the same time, radically challenges theintellectual and political consensus of the day. Human Action byLudwigvon ~Mises(1 881-1973) is such a book, and more: a comprehensivetreatise on economic science that would lay the foundationfor a massive shift in intellectual opinion that is still working itselfout fifty years after publication. Not even such milestones in thehistory of economic thought as Adam Smith's Wealth ofNations,Alfred Marshall's Principles, Karl Marx's Capital, or John MaynardKeynes's General The09 can be said to have such enduring significanceand embody such persuasive power that today's students andscholars, as much as those who read it when it first appeared, areso fully drawn into the author's way of thinking. For this reason,and others discussed below, this Scholar's Edition is the original1949 magnum opus that represents such a critical turning point inthe history of ideas, reproduced (with a 1954 index produced byVernelia Crawford) for the fiftieth anniversary of its initial appearance.When Human Action first appeared, its distinctive AustrianSchooI approach was already considered a closed chapter in thehistory of thought. First, its monetary and business cycle theory,pioneered by Mises in 19 12' and extended and applied in the 1920sand 193O S,~h ad been buried by the appearance of Keynes's General1. The archives at Yale University Press, Grove City College, and theLudwig 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 ActionTheory, which gave a facile but appealing explanation of the lingeringglobal depression. Second, Mises's 1920 demonstration that a socialisteconomy was incapable of rational economic calculation4 sparked along debate in which the "market socialists" had been widelyperceived to be the eventual victors5 (in part because it became adebate among Walrasians6). Third, and fatal for the theoretical coreof the Austrian School, was the displacement of its theory of price,as originated by Carl Menger in 187 1' and elaborated upon by Eugenvon Bohm-Bawerk, John Bates Clark, Philip H. Wicksteed, FrankkFetter, and Herbert J. D a ~ e n ~ o rAtn.o~t her strain had begun todevelop along the lines spelled out by Menger's other studentFriedrich von Wieser, who followed the Walrasian path of developingprice theory within the framework of general equilibrium.Wieser was the primary influence on two members of the thirdgeneration 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 influenceon this generation had been Schurnpeter's treatise Das Wesenund der Hauptinhalt dm Theoretischen Nationalokonomie, published in4. 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 AMichael (Indianapolis, Ind.: Liberty Press, [I9491 1981).6. Murray N. Rothbard, "The End of Socialism and the CalculationDebate Revisited," Review ofAustrian Economics, 5, no. 2 (1991), 51-76.7. Carl Menger. Principles ofEconmics. trans. by James Dinpall NewYork: New York University Press, [I8711 1976).8. Eugen von Bohm-Bawerk, "Grundziige der Theorie des winschaftlichenGiiterwertes," 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 Valueor Worth (London: Macmillan, 1888); Frank A. Fetter, Eonomic Principler(New York: The Century Co., 19 15); Herbert J. Davenport, The Economics ofEnterprise (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'sEconomic Methodology," in idem., Methodology of Economics and Other SocialSciences (New York: Academic Press, 1978), p. 462.Introduction to the Scholar's Edition vii1908."This bookwas a general treatment ofthe methodological andtheoretical issues of price theory from a Walrasian perspective. Apartfrom Wieser's writings, it was the only "Austrian" workofpure theoryto appear prior to Mises's Nationalokonomie, the German-languagepredecessor to Human Action. For the young economists studyingin Vienna, and despite criticisms by Bohrn-Bawerk, Schumpeter'sbook became a guide to the future of the science. As Morgenstern said,"the work was read avidly in Vienna even long after the First WorldWar, and its youthful freshness and vigor appealed to the youngstuden ts.... [Llike many others in my generation I resolved to readeverything Schumpeter had written and would ever write.""After Bohm-Bawerk's death in 19 14, no full-time faculty memberat the University of Vienna was working stricdy within a Mengerianframework, while Mises's status as a Privatdozent diminished hisacademic standing. Prior to the geographical dispersal of the schoolin the mid-1930s,12 moreover, none of the members of these lattergenerations had achieved international recognition, particularlyamong English-speaking economists, on the order of Bohm-Bawerk.After the retirement of Clark, Wicksteed, Fetter, and Davenportfrom the debate on pure theory by 1920, the School's influence onthe mainstream of Anglo-American economics declined precipitously.This left the field of high theory, particularly in the UnitedStates, completely open to a Marshallian ascendancy.In Germany, the long night of domination by the anti-theoreticalGerman Historical School was coming to an end, but the bookthat reawakened the theoretical curiosity of German economists afterthe First World War was Gustav Cassel's Theoretische Sozialokonomie,which offered a verbal rendition of Walrasian price theory.13 In theRomance countries of France and Italy, Mengerian price theory never10. Schumpeter's translation of the title: The hTatzlrea nd bmce of TheoreticalEconumics(Munich and Leipzig: Duncker & Humblot, 1908). This book coinsthe phrase "methodological individualism."1 1. SelectedEconomic Writingsof OskarMmgenstern, ed. Andrew Schotter (NewYork: New York University Press, 1 976), p. 196.12. Earlene Craver, "The Emigration of ,4ustrian Economists," Histoly ofPolitical 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 oftheoretical studies had led to the remarkable result that the German public...... vlu Human Actionachieved a firm foothold and, by the 1920s, it had been shuntedaside by the Lausanne School and Marshallian-style neoclassicism.By the rnid- 193Os, the Austrian School had melted away in Ausma asmore attractive prospects abroad or the looming National Socialistthreat drove the leading Austrian economists to emigrate to GreatBritain (Hayek), the United States (Machlup, Haberler, and LMorgenstern),and Switzerland (Mises). Hayek was well positioned to sparka revival of Mengerian theory in Great Britain, but having been astudent of Wieser rather than ~iihm-~awerk,h'e~ saw the core ofeconomics as the "pure logic of choice," which could be representedby the timeless equations of general equilibrium.15 In the end,Walrasian general equilibrium theory was imported into GreatBritain by John R. Hicks under Hayek's influence.'"In addition, analytical deficiencies internal to the pre-Misesianapproach contributed to the sharp decline of the Austrian Schoolafter the First World War. The Austrians themselves lacked theanalyucal wherewithal to demonstrate that the timeless and moneylessgeneral equilibrium approach and the one-at-a-time Marshallianapproach-the analytical pyrotechnics of the 1930snotwithstanding-are both plainly and profoundly irrelevant to amust look to a foreigner, the Swede Gustav Cassel, for a principled explanationof the problems of economic life." Ludwig von Mises, "Carl Menger and theAustrian School of Economics," Azmian Economire An Antholo , ed. BettinaBien Greaves Qrvington-on-EIudsoi~, N.Y.: Foundation or EconomicEducation, 1996), p. 52.P14. Hayek himself explicitly distinguished between "the two originalbranches 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 theIdeal of Freedom, ed. Peter Klein (Chicago: University of Chicago Press,1992), p. 157.cf1 5. See FA Hayek, "Economics and Knowledge," in idem, Individmlljrn andLGonmic 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 perceptivedescription of Hayek's crucial role in the early development of theAnglo-American version of general equilibrium theory (pp. 232-235). Hayekhimself regarded the analysis of value theory in Hick's Value and Capital in termsof marginal rates of substitution and indifference curves as "the ultimatestatement of more than a half a century's discussion in the tradition of theAustrian School." The Fortunes of LiberalIjm, pp. 53-54.Introduction to the Scholar-'s Edition ixcentral problem of economic theory: explaining how monetaryexchange gives rise to the processes of economic calculation that areessential to rational resource allocation in a dynamic world." Thus,after a period of remarkable development and influence from 187 1to 1914, by the early 1930s the Austrian School was on the edge ofextinction.Mises was fully cognizant of this unfortunate state of affairswhen he emigrated to Switzerland in 1934. Ensconced at theGraduate Institute of International Studies in Geneva, for the firsttime he could fully focus his attention on academic research. Misesused this opportunity to write Nntionalokonmie, a book that intendedto revive the Mengerian approach and elaborate it into acomplete and unified system. As evidence of the importance thatMises attached to this book, and of the time and energy he pouredinto it, he wrote very little else in the years leading up to itspublication in 1940. Previously an enormously prolific writer, theextent of his output from 1934 to 1939 was comparatively meager:in addition to book reviews, short memos, newspaper and magazinearticles, notes, and introductions, there was only one substantialarticle for an academic audience.18Retrospectively describing his purpose in writing XatimaZokonomie,Mises left no doubt that he sought to address the two burningissues left unresolved by the founders of the Austrian School: thestatus of the equilibrium construct and the bifurcation of monetaryand value theory. "I try in my treatise," Mises wrote, "to considerthe concept of static equilibrium as instrumental only and to makeuse of this purely hypothetical abstraction only as a means of approachingan understanding of a continuously changing world.""Regarding his effort to incorporate money into the older Austriantheoretical system, -ises identified his immediate inspiration as his17. See Joseph T. Salerno, "The Place of Human Action in the History ofEconomic 'Thought," Quarterly3oumal ofAwtrian Economics, 2, no. I (1999).18. See Bettina Bien Greaves and Robert W. McGee, comps., Mises: AnAnnotated Biblio apby (Inington-on-Hudson, N.Y.: Foundation for EconomicEducation, 1 9 6 , pp. 4141, for a listing of Mires's published andunpublished writings in these years.19. Y/Iv Contributions to Economic Theory," in Mises, Planning furFreedom and Sixteen Other fisays and Addruses (4th cd. South Holland, 111.:Libertarian Press, 1980), pp. 2 3 0-23 1.x Human Actionopponents in the socialist calculation debate of the 1930s. Theseeconomic theorists, under the influence of the general equilibriumapproach, advocated the mathematical solution to the problem ofsocialist calculation. As Mises argued: "They failed to see the veryfirst challenge: How can economic action that always consists ofpreferring and setting aside, that is, of making unequal valuations,be transformed into equal valuations, and the use of equations?'doBut without an adequate theory of monetary calculation, whichultimately rests upon a unified theory of a money-exchange economy,Mises realized that there could be no definitive refutation ofthe socialist position. Accordingly, Mises revealed: "LVationalokonomiefinally afforded me the opportunity to present the problemsof economic calculation in their full significance .... I had mergedthe theory of indirect exchange with that of direct exchange intoa coherent system of human a~tion."~'Thus, Nationalb2onomie marked the culmination of the Austrian

A Treatise on Economics

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