The Free Market and its Enemies

This is a series of lectures von Mises delivered in 1951 on economics, the philosophy behind it, and topics like money, the gold standard, trade cycles and inflation. You can get it from FEE (pdf). Mises was a philosopher as well as an economist, and that’s why he can criticize Comte and Marx’s philosophy and then move on to Marxist economic theory. I would strongly recommend that everyone read it. The first few chapters deal with philosophy and the later ones with economics. One thing of note in the first part of the book is his repeated warnings on understanding the difference between economic history and economic theory.

An excerpt from the first chapter-

As far as the political problem is concerned, some people who supported sound economics did so in order to justify, or to defend, the bourgeois civilization. But these defenders didn’t know the whole story.They limited their fighting to a very small territory, similar to the situation today in Korea where one army is forbidden to attack the strongholds of the other army. In the intellectual struggle, the same situation exists; the defenders are fighting without attacking the real foundation of their adversaries. We must not be content to deal with the external paraphernalia of a doctrine; we must attack the basic philosophical problem.

The distinction between “left” and “right” in politics is absolutely worthless. This distinction has been inadequate from the very beginning and has brought about a lot of misunderstanding. Even objections to the basic philosophy are classified from that point of view.

Auguste Comte [1798–1857] was one of the most influential philosophers of the nineteenth century, and probably one of the most influential men of the last hundred years. In my own private opinion, he was a lunatic as well. Although the ideas he expounded were not even his own, we must deal with his writings because he was influential and especially because he was hostile to the Christian church. He invented his own church, with its own holidays. He advocated “real freedom,” more freedom, he said, than was offered by the bourgeoisie. According to his books, he had no use for metaphysics, for freedom of science, for freedom of the press, or for freedom of thought. All these were very important in the past because they gave him the opportunity to write his books, but in the future there would be no need for such freedom because his books had already been written. So the police must repress these freedoms.

This opposition to freedom, the Marxian attitude, is typical of those on the “left” or “progressive” side. People are surprised to learn that the so-called “liberals” are not in favor of freedom. Georg Wilhelm Friedrich Hegel [1770–1831], the famous German philosopher, gave rise to two schools—the “left” Hegelians and the “right” Hegelians. Karl Marx [1818–1883] was the most important of the “left” Hegelians. The Nazis came from the “right” Hegelians.

The problem is to study basic philosophy. One good question is why have the Marxists been to a certain extent familiar with the great philosophical struggle, while the defenders of freedom were not? The failure of the defenders of freedom to recognize the basic philosophical issue explains why they have not been successful. We must first understand the basis for the disagreement; if we do, then the answers will come.

The ET published Robert Samuelson’s Newsweek column today. Samuelson writes about a book that analyzes the Great Depression. He says-

In this well-researched and elegantly written book, Ahamed—a professional money manager—attributes the Depression to two central causes: the misguided restoration of the gold standard in the 1920s and the massive intergovernmental debts, including German reparations, resulting from World War I.

[…]

Still, striking differences separate now from then. The biggest is the response of governments, which—unencumbered by the gold standard—have eased credit, propped up financial institutions and increased spending to arrest an economic free fall.

[…]

The mistakes of the Depression were largely rooted in prevailing economic orthodoxies, which had been overtaken by new and misunderstood realities. The present policies likewise reflect today’s economic orthodoxies. But what if they, too, turn out to be misguided because the world economy has moved on in ways that become obvious mostly in retrospect?

While he’s not taking a stand that returning to the gold standard (Mises’ term, the more accurate one, is the “gold exchange standard”) caused the Depression, his conclusion is strange to say the least. He’s essentially saying that we can only know what would have happened after it has happened and that any action taken before the “happening” are due to “economic orthodoxies” which cannot be prevented – there may not be anything else to do. He’s thus dismissing economic theory altogether. Maybe he should read the above Mises book, particularly the chapters on “money and inflation” and the gold standard-

During the first World War, the British government again embarked on an inflation.The pound was devalued against its gold equivalent.Then after the war the government wanted to return to the gold standard. But again they didn’t realize that to return to the gold standard at the pre-war parity of the pound would bring a sequence of events similar to that which occurred after the Napoleonic Wars. It was inexcusable that the great British Empire did not know how to go about it.They didn’t understand the theory, nor did they know the history. They had had the experience but didn’t recognize it.The situation was once aptly described by a Swedish man [Count Oxenstierna] who said, “Dost thou not know, my son, with how little wisdom the world is ruled.”

In 1922, Lord Keynes had already written a book in which he pointed out that domestic stability is more important than the stability of foreign exchange rates. I remember when I had a talk several years before this occurred with a British banker, not a socialist agitator, who told me, “Never again will the British people have to pay a higher rate of interest to the usurers of the world market for gold in order to keep a British currency at parity.” These were the ideas that prevailed, you know. And it was the same in this country.

When Britain returned to the gold standard after World War I, the Chancellor of the Exchequer at the time [1925], Mr. Winston Churchill, returned to the pre – war parity of the pound. He didn’t know that conditions were different in Great Britain than in other countries. London was the banking center of the world before the first World War, and for this reason foreign nations kept considerable amounts of deposits with the British banks. When war comes, these foreign deposits are called “hot money,” because depositors fear inflation and devaluation of the pound. They are anxious to withdraw their money but will wait if they believe that Great Britain will return to the pre-war parity.

[…]

Great Britain made a bad mistake by returning to the pre-war parity of the pound in 1925. This added to the income of persons who had bought bonds or otherwise lent money in “light” pounds.The government had to collect more taxes to repay those bonds in “heavy” pounds. A catastrophe resulted.

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Comments

  • Elizabeth  On April 24, 2009 at 9:58 pm

    My head has been swimming from trying to understand current economic conditions. I read Robert Samuelson — think he’s great — but so much of this stuff is above my head. Enter a great book that’s simplified the terminology and thus, the economy, to where I get it. It’s “The 21st Century Economy — A Beginner’s Guide,” by Randy Charles Epping. I have gained enough knowledge to make sense out of the headlines. His everyday examples make things easy to visualize — by relating things to the small things in my own daily life, I can understand the complex global economy. The book even has a section of great free tips.

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