Forward To Liberalism

It was a great pleasure and a privilege to be asked by Jeff Tucker of Laissez Faire Books to write this foreword to Liberalism, the timeless classic written by Ludwig von Mises in 1927. This edition of Liberalism is available through the Laissez Faire Club. Foreword by Toby Baxendale This is a timeless book. It is a book of political thought. In fact, it is Mises’s only book fully dedicated to this subject. As he mentions in his own opening remarks, he has kept it brief so as to appeal to the widest audience he can without dumbing down his message. For those readers new to Mises — you may have heard, for example, that this genius created the foundations of economics from using the epistemology of Kant with shades of Aristotle to set the logical deductive foundations of economics, and you find this a bit too heavy going for your opening introduction to the thoughts of arguably the greatest economist ever — then I submit, you have your great starter book. By opening your account of this man here, you will embark on a fascinating discovery of more than just the economic program of liberalism. But as you then progress to other works by Mises, you will encompass the whole philosophical corpus of liberalism. I read this book as a counterblast against the direction in which John Stuart Mill took liberalism in his post–On Liberty writings, down the route of socialism and in defense of a truly positive conception of liberalism. This quote is tucked away in the appendix.

John Stuart Mill is an epigone of classical liberalism and, especially in his later years, under the influence of his wife, full of feeble compromises. He slips slowly into socialism and is the originator of the thoughtless confounding of liberal and socialist ideas that led to the decline of English liberalism and to the undermining of the living standards of the English people. Nevertheless — or perhaps precisely because of this — one must become acquainted with Mill’s principal writings: Principles of Political Economy (1848) On Liberty (1859) Utilitarianism. (1862) Without a thorough study of Mill it is impossible to understand the events of the last two generations. For Mill is the great advocate of socialism. All the arguments that could be advanced in favor of socialism are elaborated by him with loving care. In comparison with Mill all other socialist writers — even Marx, Engels, and Lassalle — are scarcely of any importance. One cannot understand liberalism without a knowledge of economics. For liberalism is applied economics; it is social and political policy based on a scientific foundation.

Mises’s greatest student, F.A. von Hayek, some 17 years later wrote his more famous The Road to Serfdom in a similar vein to Mises’s 1927 Liberalismus (the original title and date of issue). [1] As with all Mises’s works, there are no compromises; where Hayek throws compromise to interlocutors, Mises does not. J.S. Mill in On Liberty was indeed the first to bring to the modern reader the distinction between the negative and positive conceptions of liberty. Negative liberty is total and unconditional freedom from acts of intervention on the part of the state and its enforcers. Positive liberty, in contrast, is the freedom to participate in the various activities of life, which may involve some compromise of negative liberty in order to empower individuals to fulfill their lives, such as the provision (via coercion of you and others) of a nicer house for a poor person so he can participate in the peaceful enjoyment of life. According to Mill’s distinction, the book you are about to read is formally in the negative tradition. However, I would encourage the view that this book is actually a very empowering and positive outline of the political theory of liberalism — and should be viewed that way. There is nothing negative about justifying the existence of the sovereign to have the sole duty to protect your private property so you can have the quiet and peaceful enjoyment of it. (The lay reader will please observe that private property is not just items like your house and other chattels; it is the entire possession of your own mind, your own body, both spiritual and temporal.) This is truly a magnificent and positive conception of liberty. Mises confirms this point and illustrates with an example in chapter 3, part 8, “Freedom of Movement”:

Liberalism has sometimes been reproached on the ground that its program is predominantly negative. This follows necessarily, it is asserted, from the very nature of freedom, which can be conceived only as freedom from something, for the demand for freedom consists essentially in the rejection of some sort of claim. On the other hand, it is thought, the program of the authoritarian parties is positive. Since a very definite value judgement is generally connoted by the terms “negative” and “positive,” this way of speaking already involves a surreptitious attempt to discredit the political program of liberalism. There is no need to repeat here once again that the liberal program — a society based on private ownership of the means of production — is no less positive than any other conceivable political program. What is negative in the liberal program is the denial, the rejection, and the combating of everything that stands in opposition to this positive program. In this defensive posture, the program of liberalism — and, for that matter, that of every movement — is dependent on the position that its opponents assume towards it. Where the opposition is strongest, the assault of liberalism must also be strongest; where it is relatively weak or even completely lacking, a few brief words, under the circumstances, are sufficient. And since the opposition that liberalism has had to confront has changed during the course of history, the defensive aspect of the liberal program has also undergone many changes. This becomes most clearly evident in the stand that it takes in regard to the question of freedom of movement. The liberal demands that every person have the right to live wherever he wants. This is not a “negative” demand. It belongs to the very essence of a society based on private ownership of the means of production that every man may work and dispose of his earnings where he thinks best. This principle takes on a negative character only if it encounters forces aiming at a restriction of freedom of movement.

Why, according to Mises, is the liberal program only about the protection of private property? Let us read Mises’s own words from chapter 1, part 1, “Property,” as he can encapsulate the answer far better than I can:

Human society is an association of persons for cooperative action. As against the isolated action of individuals, cooperative action on the basis of the principle of the division of labor has the advantage of greater productivity. If a number of men work in cooperation in accordance with the principle of the division of labor, they will produce (other things being equal) not only as much as the sum of what they would have produced by working as self-sufficient individuals, but considerably more. All human civilization is founded on this fact. It is by virtue of the division of labor that man is distinguished from the animals. It is the division of labor that has made feeble man, far inferior to most animals in physical strength, the lord of the earth and the creator of the marvels of technology. In the absence of the division of labor, we would not be in any respect further advanced today than our ancestors of a thousand or ten thousand years ago. Human labor by itself is not capable of increasing our well-being. In order to be fruitful, it must be applied to the materials and resources of the earth that Nature has placed at our disposal. Land, with all the substances and powers resident within it, and human labor constitute the two factors of production from whose purposeful cooperation proceed all the commodities that serve for the satisfaction of our outer needs. In order to produce, one must deploy labor and the material factors of production, including not only the raw materials and resources placed at our disposal by Nature and mostly found in the earth, but also the intermediate products already fabricated of these primary natural factors of production by previously performed human labor. In the language of economics we distinguish, accordingly, three factors of production: labor, land, and capital. By land is to be understood everything that Nature places at our disposal in the way of substances and powers on, under, and above the surface of the earth, in the water, and in the air; by capital goods, all the intermediate goods produced from land with the help of human labor that are made to serve further production, such as machines, tools, half-manufactured articles of all kinds, etc. Now we wish to consider two different systems of human cooperation under the division of labor-one based on private ownership of the means of production, and the other based on communal ownership of the means of production. The latter is called socialism or communism; the former, liberalism or also (ever since it created in the nineteenth century a division of labor encompassing the whole world) capitalism. The liberals maintain that the only workable system of human cooperation in a society based on the division of labor is private ownership of the means of production. They contend that socialism as a completely comprehensive system encompassing all the means of production is unworkable and that the application of the socialist principle to a part of the means of production, though not, of course, impossible, leads to a reduction in the productivity of labor, so that, far from creating greater wealth, it must, on the contrary, have the effect of diminishing wealth. The program of liberalism, therefore, if condensed into a single word, would have to read: property, that is, private ownership of the means of production (for in regard to commodities ready for consumption, private ownership is a matter of course and is not disputed even by the socialists and communists). All the other demands of liberalism result from this fundamental demand.

From chapter 1, part 8, “Democracy”:

For the liberal, the state is an absolute necessity, since the most important tasks are incumbent upon it: the protection not only of private property, but also of peace, for in the absence of the latter the full benefits of private property cannot be reaped. These considerations alone suffice to determine the conditions that a state must fulfil in order to correspond to the liberal ideal. It must not only be able to protect private property; it must also be so constituted that the smooth and peaceful course of its development is never interrupted by civil wars, revolutions, or insurrections.… Here is where the social function performed by democracy finds its point of application. Democracy is that form of political constitution which makes possible the adaptation of the government to the wishes of the governed without violent struggles. If in a democratic state the government is no longer being conducted as the majority of the population would have it, no civil war is necessary to put into office those who are willing to work to suit the majority. By means of elections and parliamentary arrangements, the change of government is executed smoothly and without friction, violence, or bloodshed.

Although Hobbes is never mentioned in Liberalism, I see much of Hobbes in Mises. I read Leviathan as the great British philosopher Michael Oakeshott did in his famous introduction to the 1946 edition of that book, as being the founder of the British Enlightenment tradition. Mises sits full square in that tradition. Tearing up the ancient natural-law tradition and setting up the sovereign state as the master protector of the private property of all individuals, thus guaranteeing the fullest possible freedom to live ones life in peace. In addition he was undoubtedly a committed democrat with regard to his favoured method of choosing who runs the sovereign. If you have come to this book to find out a little bit about Mises the economist — and no, not just any economist, but as I mentioned before, arguably the greatest economist ever — you will be pleased to find some great insights that you should savor until you read his full epistemological and economic treatise, Human Action. One of my favorite university debates as a student at the London School of Economics (LSE) was with socialist students, foaming at the mouth with great indignation regarding all they perceived as injustice in the world, riven with jealousy and envy, concerning why we should not be bothered about the wealth displayed by “the rich.” When confronted by a rabid debater suggesting that all Rolls Royce cars should be scrapped and all production stopped because with millions starving in the world the money should be spent on feeding these people, I would typically respond with this: “What have you got against the hard-working people of Crewe [a town in Cheshire, UK, where the famous car is a major employer] and the honest money they earn making these things and then spend freely on other goods and services? Why should they not be allowed to earn a living providing things people want instead of being put out of work to satisfy your political objectives?” As I reread Liberalism to write this foreword, I discovery from Mises, with his laser-like logical precision, I am totally wrong! The buying of the Rolls Royce car by the rich should not be defended on those grounds but by a far sounder chain of economic reasoning. I quote from the section called “The Inequality of Wealth and Income“:

Our defence of luxury consumption is not, of course, the argument that one occasionally hears, that is, that it spreads money among the people. If the rich did not indulge themselves in luxuries, it is said, the poor would have no income. This is simply nonsense. For if there were no luxury consumption, the capital and labor that would otherwise have been applied to the production of luxury goods would produce other goods: articles of mass consumption, necessary articles, instead of “superfluous” ones.

Mises’s rejoinder:

The luxury of today is the necessity of tomorrow. Every advance first comes into being as the luxury of a few rich people, only to become, after a time, the indispensable necessity taken for granted by everyone. Luxury consumption provides industry with the stimulus to discover and introduce new things. It is one of the dynamic factors in our economy. To it we owe the progressive innovations by which the standard of living of all strata of the population has been gradually raised.

It is a pleasure to have one’s reasoning corrected by the great master. There is plenty of good economic reasoning packed into this short book. I will leave you with one final analogy that I hope will stay in your mind between the diligent doctor who advises the right, slow, and brick-by-brick economic way to prosperity and the impatient politician who wants to bring jam today and jam tomorrow with endless sunshine forever, as readers of this book who fall into the former camp along with Mises may find this a useful way of describing the liberal predicament to others:

If a doctor shows a patient, who craves food detrimental to his health the perversity of his desire, no one will be so foolish as to say: “The doctor does not care for the good of the patient; whoever wishes the patient well must not grudge him the enjoyment of relishing such delicious food.” Everyone will understand that the doctor advises the patient to forgo the pleasure that the enjoyment of the harmful food affords solely in order to avoid injuring his health. But as soon as the matter concerns social policy, one is prone to consider it quite differently. When the liberal advises against certain popular measures because he expects harmful consequences from them, he is censured as an enemy of the people, and praise is heaped on the demagogues who, without consideration of the harm that will follow, recommend what seems to be expedient for the moment.[2]

For lovers of the liberal program, our task is thus hard, but one thing is for sure: reason is on our side, and Mises is one of its finest servants. I hope you enjoy the book. Thank you, LFB, for bringing this book back to life for a new audience. Toby Baxendale Ayot St. Peter, Hertfordshire, UK June 10, 2012 [1] When, in the section titled “The Impracticability of Socialism,” Mises discusses the “calculation problem” — that is, the impossibility of economic calculation under socialism — we can see that what became the more famous Hayekian “knowledge problem” is touched upon here. The leadership of a socialist society would thus be confronted by a problem that it could not possibly solve. It would not be able to decide which of the innumerable possible modes of procedure is the most rational. The resulting chaos in the economy would culminate quickly and irresistibly in universal impoverishment and a retrogression to the primitive conditions under which our ancestors once lived. I mention this not to in any way denigrate the masterful work of Hayek — just to underscore the true primacy of his teacher, Mises. [2] Mises mentioned the traditional factors of production in this quote but does not mention that it is the entrepreneur who combines these factors to make useful things for his fellow man in a constantly dynamic and moving economy. Rest assured, all of Mises’s other works are replete with this valuable insight that makes economics relevant to the real world. I can only assume that this is missed out here as it is covered off so well elsewhere.

Prices & Production and Other Works

My Foreword to Prices & Production and Other Works, published by the Ludwig von Mises Institute in 2008. An old Polish soldier who had settled in London after World War II exposed me to the teachings of Hayek when I was sixteen years old. He had fought the Nazi machine as a member of the Royal Air Force. An equally nasty totalitarian force subsequently occupied his country: the Stalinist Communists. After the war, he settled in my neighborhood, and I got talking to him. He was adamant that I read Hayek as Hayek could show me all that was wrong with totalitarianism. The book offered was The Road to Serfdom. I did. I dedicate this reproduction to all those people who have suffered untold hardship under various totalitarian regimes. Setting my sights on the London School of Economics, where Hayek had taught for twenty-plus years in the 1930s through the 1950s, as a place to study, to my great pleasure, we could study, as part of our political theory course, The Constitution of Liberty. Although Hayek had taught at the LSE in the economics department, none of his economic works were taught. Indeed, I was totally ignorant, up until my mid-twenties (i.e., post-university) of his economic works, which needless to say were the works cited in the awarding of his Nobel Prize. Further, it was Hayek who led me to the works of Ludwig von Mises, about whom I am certain that I would have otherwise known nothing. Just as my Polish friend sparked my social and political interest in Hayek, I hope this volume can do the same for others concerning his economic work. This volume intends to revitalize Hayek’s contribution to the study of economic fluctuations (more commonly now called business cycles) and monetary theory. Hayek demonstrated an entrepreneurial and empirical attitude toward his work. Just as his social, political, and legal work is rich with warning about too much well-meaning government interference, so too are his neglected economic works. After his time at the Institute for Business Cycle Research in Vienna, he funded his own trip to the United States to interview economists and develop his work. Hayek understood the importance of statistical verification but was also committed to getting the theory right rather than counting on empirics to generate their whole result. His legacy should be to complement theoretical quibbles with hard facts, and these essays contain rich avenues to pursue. One particular area I would like to draw the reader to is his works contained here on the business cycle, which was the work that grew from Mises’s initial work on the matter in 1912, which has become known as the Austrian theory of the business cycle. Most contemporary economists have dismissed this work as not being in accordance with the observable facts and thus not worthy of being taught; hence, perhaps why I never saw sight nor sound of his teachings as an undergraduate. In brief Hayek contends that an artificial manipulation by government of the interest rate creates a subsidy of credit that causes entrepreneurs to bring forth projects that were hitherto marginal. In reality, the consumers do not want the goods of these projects, so there is a misallocation (malinvestment) of resources. A careful reading of these early Hayek essays preempts the modern debate over rational expectations and shows that the cluster of errors can be avoided by his steadfast commitment to methodological individualism. Entrepreneurs are neither lemmings nor computers because they are heterogeneous. If we extend the assumption of heterogeneity from capital to entrepreneurs, the question is, which type of entrepreneur is creating the cyclical activity of interest? Standard economic theory suggests that it is the marginal entrepreneur who moves the market, and Hayek points us in a direction that very few scholars have acted upon. I would find great value in subjecting this point to empirical evidence, to see who these marginal entrepreneurs are (the ones who are exposed when their credit subsidy is removed in a monetary contraction), and the conditions of their entry and exit. Perhaps moral hazard is not the greatest problem created by subsidized credit, and the effects of adverse selection create even larger inefficiencies. Hayek stressed the role of relative price movements and focused attention on the interest rate. But he also provided a rich and accomplished critique of the use of abstract, aggregate variables. This presents a temptation for theorists to overemphasize interest rate changes, despite the fact that they only affect the risk of highly leveraged firms. In many cases the volume of credit, raw money creation by the Central Bank, seems a more realistic variable than the rate of interest. Hayek’s faculty position at the LSE (1931–1950) not only raised the profile of the Austrian School, but also elevated capital theory to one of the key economic issues, by highlighting (and translating) the key Swedish and Austrian insights for the English-speaking orthodoxy. During this period the LSE was the frontier of the continental tradition, and Hayek, Keynes, Robinson, Sraffa, Shackle, Robbins, et al. were at the peak of their discipline. This volume reminds us of a time when Austrian theory sat at the top of the table of debate, and offers us the way to return there. Hayek was writing in a tradition where economists were conscious of the practical relevance of their work. To be sure, Hayek utilized grand thought experiments and abstraction, but his theoretical work always sought to understand the real world. Since then a divergence has occurred between self-referential academics and a generation of business consultants who lack the rigor of price theory. I am sure that a reassessment of the likes of Hayek is of fundamental importance to any young economist seeking to bridge these two spheres and return to a science of commerce. In fact, the critical problem of how individuals coordinate is the thread that runs throughout Hayek’s work, and the monetary aspect returns with his late attention to the nationalization of money. In these works we see Hayek as a price theorist, and as a facilitator of economic inquiry. As an entrepreneur I recognize deep insights throughout Hayek’s work, but also several points that have to be expanded and verified. This volume should not be seen as an example of preservation, but an engine of discovery.

Huerta de Soto Pays Tribute To Hayek

We were pleased to see this thoughtful and enthusiastic write-up of Huerta de Soto’s Hayek lecture by Andreas Kuersten for the LSE student paper, The Beaver. We reproduce it here by kind permission of the editor.

Last Friday Professor Jesús Huerta de Soto, of the King Juan Carlos University of Madrid, delivered a lecture at the LSE on the recent financial crisis and economic recession.  The event, hosted by Professor Tim Besley of the LSE Economics Department,  was held in honor of the work of former LSE Professor and 1974 Nobel laureate Friedrich von Hayek. Professor de Soto holds doctorates in both Economics and Law from the Complutense University of Madrid and an MBA from Stanford University.  He is considered by many to be one of the principal exponents of the Austrian School of Economics, which is largely influenced by Hayek’s ideas, and some of his notable publications include the books Money, Bank Credit, and Economic Cycles and Socialism, Economic Calculation, and Entrepreneurship. Professor de Soto began his analysis by attributing a great deal of responsibility for modern financial problems to the Bank Charter Act passed on July 19th, 1844 in the United Kingdom.  This was a landmark act that sought to eliminate the boom and bust cycle of markets caused by artificial credit expansions induced by private banks which were financed not by savings but by fiduciary media issued in large amounts.  In essence, credit granted without reserve backing.  The Bank Charter Act required 100 per cent reserve backing for banknotes issued.  Yet it did not address demand deposits, which is money created just on the books of banks but which are still part of the money supply.  Banks therefore diverted their business from issuing banknotes to demand deposits and thus circumvented the act’s requirement for total reserve backing. This sort of financial business has continued, unaddressed, since then and resulted in a six-step process which led to the recent financial crisis. Firstly, consumers are not encouraged to save because banks can issue credit without significant reserve backing. De Soto commented that the lack of savings means that demand for consumer products remains high which causes producers of these products to compete with one another for the means of production. This, according to de Soto, causes a rise in prices of these means. The second step results from an increase in the price of consumer goods at a faster rate than that of the means of production due to consumer producers having to compete so vastly for them. De Soto identified the third step as accounting profits rise in the companies closest to final consumption of products by consumers due to the rising prices. The fourth step occurs as the Ricardo Effect takes hold, an effect meant to occur in an environment of savings and reserve backing to allow production to shift from consumer to capital goods to keep jobs and wages and consumer goods production becomes more expensive.  Instead real wages decrease so companies hire cheap labour rather than investing in capital to replace labour.  Price of capital decreases and further decreases profits of firms further from consumption. The fifth step is an increase in the interest rate as growth stagnates.  Step six then comes as companies farther from consumption incur mounting accounting losses and investment projects are liquidated. After identifying these six critical steps, de Soto commented that their growth ceases and the receivers of banks loans are seen to not be able to pay them back in which case the banks are discovered not to have the reserve backing to absorb and handle the losses.  The banks are shown to be bankrupt and the central bank must step in to stop the collapse of the financial system. In response to this situation Professor de Soto suggests austerity measures to decrease government need for money and then a reduction of taxes on firms which need to concentrate on paying down debt.  All levels of the market also need to be liberalised in order to facilitate easier transition by companies between different sectors depending on profitability. De Soto also outlined a three step process for recovery and prevention.  To begin with, the demands of the Bank Charter Act must be put into law but this time applying to demand deposits and all transactions.  100 per cent reserve backing must be required in all banks dealings.  The next step is to get rid of the inherent socialism of our current financial system by getting rid of central banks.  They succumb to all of the inherent problems of a socialist system noted by Austrian School of Economics scholars. De Soto acknowledged that they are too large and unable to keep track of myriad dealings and types of dealings done by financial actors, follow changes in supply and demand, and are based on an enormous amount of privilege being given to private bankers who engage in fractional reserve dealings.  They cannot coordinate the system. The final step involves privatizing the source of money and replacing modern paper money with the classical gold standard which would ensure 100 per cent reserve backing. One of the more interesting questions put forth by the audience was a challenge to the reversion of the financial system to once again being based on the gold standard despite its links with the Great Depression.  Professor de Soto responded that it was not the gold standard which led to this crisis but the actions of private bankers in seeking to subvert this system by ignoring it and undertaking fractional reserve transactions.  The gold standard system was simply blamed when it failed due to these actions by bankers because it was the system officially recognized, even though it was not being followed. Through his lecture Professor de Soto offered some very radical changes as solutions to the current financial crisis which were quite well received, the audience applauded them loudly.  This was exemplified by spontaneous applause for the suggestion of returning to the classical gold standard.  De Soto presented his arguments very passionately and, overall, they were received very positively by the audience.