Hayek v Mises

Sinclair’s post and the John Papola video on Mises v Marx was a really interesting presentation but I doubt will have the same penetration as did his early video on Keynes v Hayek. This continues to provide some kind of ground for understanding the economic policies of our time, and the disasters of a demand-side approach to managing an economy. Central banks are now the major carriers of the disease.

As it happens I am in the last stages of completing my manuscript on Classical Economics and what is needed for a modern economist to follow the classics, which studying modern theory makes virtually impossible. This is the draft opening to the chapter on Austrian economic theory for your interest. Comments welcome.

Although Carl Menger initiated the Marginal Revolution with the intent to find a unified theory of value, the names now most closely associated with the Austrian School are Friedrich Hayek and Ludwig von Mises. And while both are seen from a distance as almost one and the same, up close they were quite different from each other. There are many ways to highlight their differences, but here their approaches will be compared through their attitudes to John Stuart Mill, since both specifically identified themselves with the classical liberal tradition.

Where it matters is in the social aims an economist might hold. The essence of Mill’s approach to economic theory was to attempt to answer the question, what ought to be done to create the greatest amount of good for the greatest number of people? Uppermost in his mind was the question of what can be done to raise the living standards and economic wellbeing of the individual members of the community. Yet while he called himself a “socialist”, it was the kind of socialism that by today’s standards would have had him grouped among the most market-oriented political theorists of the present day. In particular, he would find modern macroeconomic theory, and the policy matrix that accompanies its Keynesian basis, completely false. While he saw a definite role for government involvement in the economy, the basic framework was that everything that can be left to the market should be, while also understanding that not everything can be left to the market. He saw a clear but limited role for government regulation.

Hayek’s approach is similar to Mill’s (and I would say my own). Hayek discusses the economics prior to the publication of Menger’s Principles of Economics in 1871, noting that this was only “a mere twenty-three years since the great restatement of classical economics by John Stuart Mill (Hayek 1992: 96-97). He continues:

“It is important for proper appreciation of Menger, that we do not underestimate what had been achieved before. It is misleading to think of the preceding period, 1820-1870, as simply dominated by Ricardian orthodoxy. At least in the first generation after Ricardo there had been plenty of new ideas. Both within the body of classical economics as finally expounded by John Stuart Mill and even more outside it there had been accumulated an array of tools of analysis from which later generations were able to build an elaborate and coherent structure of theory after the concept of marginal utility provided the basis of the unification. If ever there was a time in which a quasi-Ricardian orthodoxy was dominant, it was after John Stuart Mill had so persuasively restated it. Yet even his Principles contain very important developments which go far beyond Ricardo. (ibid.: 97)

The point was that Mill had provided much of the raw material that the marginalists had been able to consolidate into a more unified whole. Hayek stops to state that

“It is indeed quite difficult to understand how a scholar of the penetration and transparent intellectual honesty of John Stuart Mill could have singled out what was so soon felt to be the weakest part of his system for the confident assertion that ‘there is nothing in the laws of value which remain for the present or any future writer to clear up; the theory of the subject is complete.” (ibid.: 98)

That Mill, the greatest utilitarian scholar of his generation, had no interest in making utility the core of his own theory of value may have been a conundrum to Hayek, although it might also have suggested that utility had been considered by Mill but then rejected. Yet the core point here is that there is no question that Hayek had a profound and extremely high regard for the economics of Mill, self-proclaimed “socialist” though he may have been. This is opposite to the attitude taken by Mises.

The economics of Mises is astonishingly detailed and profound. But what makes his approach so austere is its narrow focus on economic issues almost entirely outside the social and political arena. Hayek, like Mill, was continuously thinking through how economic conditions could be improved using as many arms as policy as possible, while always understanding the limits that are placed on the various possibilities available by the laws of gravity of economic theory which forbid various approaches to be adopted. Mises, on the other hand, thought that only an absolutely rigid adoption of market-based economic theory was acceptable. And unlike Mill, who even in 1848 could see how economic policies would be constrained by popular pressures to alleviate economic pressures and to use governments to temper economic outcomes, Mises accepts no compromise with the hard-edge views of how a market economy must operate. Here he discusses his views of John Stuart Mill in his Liberalism in the Classical Tradition (Mises 1985).

“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 ˆ(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, Engles and Lassalle – are scarcely of any importance.” (Mises 1985: 195)

An indication of how adamantine Mises’s political judgements are may be recognised in the following comment from the preface he wrote for Liberalism in 1962.

“In England the term ‘liberal’ is mostly used to signify a program that only in details differs from the totalitarianism of the socialists.” (ibid.: xvi)

At any rate, no actual socialists have ever cited Mill as the source of their views on how an economy ought to be managed. Yet Mises’s concerns over the drift of economic theory and government policy remain a vivid warning of how dangerous economic theory has become, both economically and politically.

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4 Responses to Hayek v Mises

  1. Tezza

    Thanks Steve. Very tantalising and generally very clear. However I found the metaphor “the laws of gravity of economic theory” rather clumsy and opaque, unless you identify and define previously what you consider those laws to be .

  2. Sinclair Davidson

    Fascinating.

  3. I_am_not_a_robot

    Sidney Webb (of Sidney & Beatrice founders of the LSE) in The Historic Basis of Socialism 1889:

    … This new scientific conception of the social organism has put completely out of countenance the cherished principles of the political economist and the philosophic radical. We left them sailing gaily into anarchy on the stream of laissez faire. Since then the tide has turned. The publication of John Stuart Mill’s Political Economy in 1848 marks conveniently the boundary of the old individualist economics. Every edition of Mill’s book became more and more socialistic. After his death the world learnt the personal history, penned by his own hand, of his [Mill’s] development from a mere political democrat to a convinced socialist …

    Both Mill and Webb were influenced by their respective wives.
    Beatrice Webb in particular became a great admirer of Stalin and with Sidney visited USSR in 1932, subsequently extolling the virtues of the USSR in ‘Soviet Communism: a New Civilisation?’, removing the question mark in the 1937 second edition.
    Somewhere, (maybe in that book mentioned by Robert Conquest in ‘The Great Terror’), is a quote from the Webbs commenting on the Holodomor along the lines that the apparatchiks (actually Moscow thugs) who carried out the produce and livestock confiscations were to be admired — a statement comparable to Himmler’s speech extolling the ‘decency’ of the SS in the face of thousands of the corpses of non-combatants.

  4. Louis Hissink

    A Misean or unhampered market system is not in need of economists since such markets are not managed or planned.

    On the other hand economists are indeed needed for planned economies, central or otherwise.

    Which raises the question whether the profession of free-market economist is an oxymoron.

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