‘Mises Is a Fake Austrian Economist’?

by Thomas E. Woods, Jr.

by Thomas E. Woods, Jr.: How
Big Should the Banks Be?

it ain’t Menger or his direct student Eugene [sic] Von BB, it ain’t
Austrian. Sorry #Mises : respectfully, too many mistakes were made.”
August 10 tweet by Sandeep Jaitly

Last week the
Keiser Report, hosted by Max Keiser, featured a
segment with Sandeep Jaitly
, a follower of Antal Fekete and
the author of the above tweet. Now Jaitly doesn’t seem like the
worst fellow in the world, so I don’t relish criticizing him, but
saying Mises made too many deviations to be considered an Austrian
economist is really too much.

Jaitly’s tweet
evidently piqued Keiser’s curiosity. What, he asked, are these Misesian

“His mistakes
were too great to elaborate on on the show,” Jaitly replied,
and proceeded to list a few (see below). But after saying Mises’
mistakes “were too great to elaborate on,” he went on
to say, “It’s not insulting or denigrating what von Mises has
done. He was certainly the greatest economist of the twentieth century.
It’s just that he made a slight few errors of observation. That’s

So were Mises’
alleged errors too great even to be able to discuss, or were they
“a slight few errors of observation”? If the latter, how
could such slight errors justify expelling Mises from the Austrian
canon? And if, as Jaitly concedes, Mises really was “the greatest
economist of the twentieth century,” what does it say about
the Austrian School to which Jaitly claims to belong that the century’s
greatest economist didn’t qualify as an Austrian?

Keiser went
ahead and promoted this episode as discussing the “real
Austrian economics of Carl Menger versus the fake Austrian economics
of Ludwig von Mises.”

to Jaitly, Mises’ first error was that he “didn’t look back
to Menger’s original axiom, which is that value is not outside your
own consciousness [i.e., value is subjective].” Jaitly, then,
is saying that Menger embraced the concept of subjective value,
and that Mises rejected, or “didn’t look back to” it.

Exactly the
opposite is true. If anything, so many times does Mises insist that
value is subjective that he may have feared he was trying the reader’s
patience. Robert Wenzel, in his own critique
of Jaitly, chose an illustrative quotation from Mises perhaps at
random: “Value is not intrinsic, it is not in things. It is
within us; it is the way in which man reacts to the conditions of
his environment.”

like this could be multiplied many times over. I cannot fathom what
Jaitly could have had in mind.

In fact, while
Jaitly claims Menger as the believer in subjective value as against
the deviationist Mises, the truth is the very opposite: in chapter
five of Epistemological
Problems of Economics
, Mises actually criticized Menger
for being insufficiently subjectivist.

Jaitly further
contends that “Mises didn’t like to admit that interest was
a market phenomenon. He sort of wanted to imply that it’s a natural
consequence of not having a present good.”

This claim
is so at odds with Mises’ words that one is left breathless at its
sheer daring. Mises never denied that interest is a market phenomenon.
The whole point of his business-cycle theory is that deviation
from market rates of interest
by means of artificial credit
expansion leads to malinvestments that culminate in a bust.

Mises does
not say interest is “a natural consequence of not having a
present good.” Merely not having something yields no natural
consequence. Mises says people prefer a good in the present to the
same good in the future, such that they would opt for the future
good only at a premium. This premium reflects their time preference,
or their discount of the future. Interest rates that arise on the
market reflect these time preferences of individuals in society.

To say that
Mises did not believe interest was a market phenomenon because its
origins lay in individuals’ time preferences is like saying he didn’t
believe prices were a market phenomenon because their origins lay
in individuals’ subjective valuations. In each case, the market
takes a subjective factor (individuals’ value scales in the case
of prices, and individuals’ time preferences in the case of interest)
and gives it objective expression – market prices in the former
case, and the interest rate in the latter case.

Jaitly claims that Mises confuses “the thing that occupies
an object with the object itself,” and gives as an example:
“Mises thinks that a promise to gold is the same as the object
of a promise to gold.”

Finding this
point rather opaque, I ran it by a friend, who came back to me with,
“As near as I can make out, Jaitly thinks that Mises believed
that gold is valued intrinsically instead of as a means to an end.
This appears to be what he has in mind by saying that a ‘promise
to gold,’ i.e., a commitment to provide gold, is the same as the
object, or end, for which this commitment is made.”

I find no evidence
that Mises ever said or believed such a thing, and Keiser, doubtless
as confused as his audience over this claim, doesn’t follow up on
it either of the times Jaitly tries to raise it.

Keiser then
wanders far from his comfort zone with what he believes to be a
smackdown of libertarianism itself:

This idea
of “value does not exist outside of mankind’s consciousness”
– this is pretty much the opposite of Objectivism, which is Ayn
Rand’s philosophy, to which many American libertarians adhere,
and they cite von Mises as their justification. So this idea of
Objectivism is diametrically opposed to the true Austrian School
of economics. So that would be a fundamental flaw in any so-called
libertarian’s philosophy.

Keiser evidently
thinks that because Austrian economists use the word “subjective”
a lot, while Randian philosophers call themselves “Objectivists,”
there is a fatal contradiction at the heart of the whole libertarian

Before getting
to the substantial reply to this particular piece of confusion,
here are its most obvious difficulties:

(1) Rand herself
emphatically rejected the libertarian label.

(2) Most libertarians
are not Objectivists. (So if Objectivism were flawed, libertarianism
would be left untouched.)

(3) Libertarianism
is committed at root to only one principle: nonaggression. Theories
of value, important as they are, are extraneous to libertarianism.
So again, no problem.

(4) Rand was
not speaking about technical economics, or about economics at all,
when she called her philosophy Objectivism.

When economists
say they believe in subjective value, they are not saying anything
particularly controversial. If we are going to understand how the
prices of classical music CDs are formed, for example, it is fruitless
to engage in debates over whether Beethoven was objectively superior
to Mozart. This would tell us nothing at all about why their recordings
sell at the prices they do. What matters for price theory are people’s
subjective preferences for one or the other; after all, it
is individuals, not disembodied standards of musical quality, who
actually buy the CDs and thereby contribute to making their prices
what they are.

Likewise, someone
may well believe that the Confessions
of St. Augustine or Ayn Rand’s Introduction
to Objectivist Epistemology
would be more worthwhile reading
than a book by Tom Clancy. But such a judgment does not help us
understand the prices of these goods, unless the St. Augustine
admirer thinks the quality of his book means its price deserves
to be $1 million. Prices aren’t formed this way, thank goodness.

I cannot imagine
a sensible Objectivist, understanding the sense in which economists
mean the term “subjective value,” objecting to the idea.

Now returning
to Jaitly: “Gold does not have intrinsic value per se. It has
value because it satisfies human ends…. It doesn’t have value
in and of itself.”

This is certainly
true, but any knowledgeable libertarian, and certainly any Austrian
economist one might name, already knows this.

Keiser then
raises the subject of externalities, pollution in particular. The
failure to incorporate such external costs of production into market
prices, he says, is “a major failure by libertarianism.”

It isn’t a
failure of libertarianism, actually. For one thing, “Mr. Libertarian,”
Murray Rothbard, made quite
an important contribution
to our understanding of externalities
of that sort. For another, one of the central themes of Austrian
economics is economic calculation, which lies at the heart of Keiser’s

Economic calculation
is the means by which we attain higher-valued ends with lower-valued
means, within the division of labor. Prices freely arrived at through
market exchange help us, by means of profit-and-loss calculation,
determine whether the value of our output exceeds the value of our
input. More specifically, economic calculation makes it possible
for our production activities to be carried out at the lowest cost
in terms of opportunities foregone – i.e., all those other processes,
producing a different pattern of consumer goods, in which the factors
of production might otherwise have been employed.

Economic calculation
is falsified to the extent that the state involves itself in the
economy. Because the state acquires its resources through coercion
rather than voluntary exchange, its expenditures and revenues lack
the economizing feedback of profit and loss. As a result, its economic
decisions – what to produce, in what amount, where, on what terms,
using what inputs, etc. – are necessarily arbitrary.

The state can
obscure economic calculation in other ways as well: when it owns
and operates a business firm, when it owns a natural resource, or
when it fails to enforce property rights and thereby falsifies costs.
The latter two cases are examples of what Keiser has in mind.

But the problem
here is the hampering of the market, not the alleged blindness of
Austrian economists. Private ownership, which is precluded by state
intervention, would encourage the preservation of the capital value
of resources, as opposed to their immediate consumption or destruction.
Furthermore, polluters in a genuine market economy would be held
liable for their activity, not “regulated” according to
some arbitrary level of acceptable emissions.

That does not
mean a world of zero pollution, by the way, an outcome not even
Keiser himself would favor: the ambulance rushing him to the hospital,
heaven forbid, would be stopped in its tracks by the authorities.
But it does mean a configuration of resources that takes all costs,
including environmental ones, more explicitly into account. The
Austrian literature is replete with discussion of the significance
for human welfare of extending the unhampered market and its corollary,
economic calculation, into as much of the world of exchange as possible.
Austrians do not simply throw up their hands and claim that environmental
damage ought to be ignored.

satisfied with the segment, Keiser concludes: “I hope the so-called
libertarians like Lew Rockwell watch and learn.”

I’m not sure
why Keiser considers himself qualified to evaluate people’s claims
to be libertarians, but I am sure that Lew wouldn’t have
a whole lot to learn from this muddle of confusion. In the meantime,
rest assured that Mises really was an Austrian economist after all,
and immerse yourself in his work by visiting the Mises
and my self-study program at LearnAustrianEconomics.com.

23, 2012

E. Woods, Jr. [
send him
; visit his
], a senior fellow of the Ludwig von Mises Institute,
is the creator of
Woods’s Liberty Classroom
, a libertarian educational
resource. He is the author of eleven books, including the
York Times bestsellers Meltdown
(on the financial crisis; read Ron Paul’s
Politically Incorrect Guide to American History
, and most

© 2012 Thomas

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