Murphy on Mises

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Murphy on Mises

September 29, 2015

Roberty Murphy writes at American Thinker:

September 29 marks the 134th anniversary of the birth of Ludwig von Mises, the tallest giant of the “Austrian School” of economics. Although Mises is not a household name, Nobel laureate Friedrich Hayek once referred to him as “the master of us all.” To this day, professional economists and laypeople alike learn from the writings of a man I consider to be the most important economist of the twentieth century.

One of Mises’s earliest achievements was to bridge the two fields we now call microeconomics and macroeconomics.Originally, the classical economists of the eighteenth and nineteenth centuries had embraced variants of a labor theory of value in their teachings. Then, during the so-called Marginal Revolution of the 1870s, economists replaced the labor theory with the modern subjective theory of value, which sees all market prices as determined ultimately by the underlying preferences of consumers. It doesn’t matter how many labor-hours it takes to manufacture a product, according to subjectivism; if nobody really wants it, it will fetch a low price.

Economists gradually recognized the superiority of the new “subjective marginal utility” approach, but by the dawn of the twentieth century they still thought this worked only for “micro” explanations. The theory could explain, for example, how many bananas traded for how many apples, but economists still thought they needed an entirely different, “macro” framework to explain the money prices of goods.

Enter Ludwig von Mises. In his 1912 book, translated with the title The Theory of Money and Credit, he showed how to apply the theory of marginal utility to explain all market values — even the value of money itself. In so doing, Mises put individual money prices, and the purchasing power of money, under the umbrella of a unified theory of value.

In the same book, Mises also unveiled what is nowadays called Austrian business cycle theory. Contrary even to some other free-market thinkers, he did not think that the typical boom-bust pattern in market economies was an intrinsic feature of capitalism. Instead, Mises argued that they originated in unsound banking practices, often instigated by a nation’s central bank. When banks expand credit in order to provide “cheap” loans, this artificially lowers interest rates to below their natural level, sending businesses and entrepreneurs a false signal that encourages unsustainable activity throughout the economy.

In particular, investment projects that are not justified by market fundamentals now appear profitable at the lower interest rates. The illusion created by the increased investment and spending can generate a period of apparent prosperity, but the economic boom rests on quicksand and eventually leads to a bust. According to Mises, rather than trying to restore the economy by engaging in deficit spending and monetary “stimulus,” the government should prevent the business cycle from getting started in the first place, by abstaining from central bank policies that make credit unnaturally cheap and induce the unsustainable boom.

Read the full article.


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