Libertarians have two fundamentalist ideas that they plug constantly. One is the notion of “objectivism” which was spelled forth in Ayn Rand’s novels. The other is the ideas of the Austrian School, by which they mean Frederick Hayek, Von Mises and their successors, specifically Murray Rothbard who practically iconicized him. Their core ideas were formed by Von Mises, who built on Carl Menger’s ideas, (added and subtracted) which is why I had to read about him. In my previous post I gave a summary of his life and ideas. In this one I just want to document some history and context to give my opinions their historical context.
Constituting the First Republic
Now I like some of Von Mises ideas, and have no problem following his logic, since he uses almost no mathematics. This is not a feature of the Austrian School unless one limits its membership to his disciples and colleagues such as Frederick Hayek. On the contrary the son of his mentor Carl Menger (Karl Menger) and his own brother were first rate mathematicians. They each contributed to both mathematics and economics. And some of Menger’s theories and even Von Mises’ theories sparked concepts employed by everyone from Keynesians to Monetarians. Friedman used to say that he wasn’t a Monetarist, and most of the ideas ascribed to Keynes were developed at the same Chicago school where the Monetarists ruled for a time. Economics is known as the dismal science because it has a dismal history with ideologues.
Unfortunately I have lots of problems with Von Mises ideas, logic, application; and thus ultimately with the integrity of his entire foundation: His unwillingness to use mathematics and effort to re-establish Aristotle as the foundation of all his logic proceed from the same root cause. Any critique of him starts with critiques of his premises, follows his logic, and then zeros in on the lack of real world applicability. But in this post I’m going from the other direction. I see his behavior and the consequences in Austria as historical evidence that his ideas don’t work, for the masses, anywhere they are tried. They work fine if one is well heeled — which is why they are being so well funded by a few massively wealthy families.
You see, Von Mises is an economist, who unlike Keynes, got to apply his theories while he was alive. With disastrous consequences.
Von Mises appears to have started his career in corporate politics around 1918:
“he joined the Lower Austria Chamber of Commerce. This started a career that spanned 25 years. As a member of the Chamber, Mises could comment on policy issues by speaking directly to members of Parliament and by writing for scholarly and popular outlets.”
He also served in World War I, only to come back to even more power and influence when it was over.
He became:
“….the chief economic adviser to the Austrian government in the 1920s, Mises was single-handedly able to slow down Austrian inflation; and he developed his own “private seminar” which attracted the outstanding young economists, social scientists, and philosophers throughout Europe.”
From 1918 until he left Vienna in 1934 for the teaching position in Geneva, Mises was in charge of the Chamber’s finance department, which was responsible for banking and insurance questions, currency problems, foreign exchange regulations, and public finance and taxation. He was also frequently consulted on matters pertaining to civil, administrative, and constitutional law.
http://www.heritage.org/Research/PoliticalPhilosophy/hl754.cfm
So this is a man who has no excuses about his role in Austria. His hagiographers make excuses and spin, but they don’t deny.
The end of World War I not only marked an end to the hitherto deadliest war in history of mankind, the once most powerful Austro-Hungarian monarchy, which ruled over great parts of Europe for hundreds of years, also ceased to exist. Shrunk to a mere fraction of its erstwhile dimensions, Austria soon opted for the establishment of the Republic of Deutsch-Oesterreich (“German-Austria”).
The end of World War II led to revolts all over Europe. These revolts were driven by the absolute incompetence of the Financially wealthy Aristocrats of Europe to conduct their political affairs without killing millions of people and wrecking every economy under their thumb.
The German, the Austrian, and indeed most of Europe’s economies were wrecked by World War II. The only economies left un-wrecked were those of the Anglo diaspora. It would have taken a man with godlike powers to restore any of these countries to perfect health, however, there were long lists of what not to do both from a moral/ethical perspective, and an economic one. Some European Countries avoided making things worse. Some made things much worse.
The French and the Germans were in the later category. The Weimar Governments continued to privatize money creation with the effect that the banks made herculean efforts to make money by making money and refused to take any “hits” to their own managerial incomes. Weimar had huge problems with unemployment. They had the occupation of German Coal fields, which sparked spontaneous strikes and non-violent resistance against the French; and with hunger, poverty, and buildings damaged by the war. The Government tried to deal with this by printing money. The banks created a massive inflation. Eventually Germany had to replace its original Mark with new Marks and discontinue the old money.
Unfortunately Austria was in the same category. Things went differently in Austria. The outcome for the banks and the wealthy was better, but the outcome for ordinary citizens was worse. Where Von Mises drove policy! If the Germans endured hyper-inflation. The Austrians endured economic and social policies that created a civil war! But not according to his hagiographies!
You would swear from his hagiographies that Austria became a paradise under his wise economic theory! But no, that is the purpose of hagiography. This was spin:
Widespread political consenus between the three parties of the parliament, the German Nationals, the Social Democrats and the Christian Socialists, eased the new republic’s way into existence. However, new Austria’s countless problems (starvation, reparation, social unrest, unsafe borders) caused the politicians to declare it as a part of the democratic Weimar Republic of Germany at the same time.
The outcome of the 1919 Paris Peace Conference, held to agree on reparation settlement between the fighting countries of the First World War, was extremely disappointing for Austria. Besides painful territory losses to Italy, any union with Germany was henceforth forbidden, so the new state’s name had to be changed from German Austria to Republic of Austria, nowadays referred to the First Republic. Austria’s first constitution was established by Hans Kelsen in 1920. Parts of this constitution are still in use today.
Mises had a profound influence on policy from his position as an “extraordinary” — i.e., adjunct — professor at the University of Vienna. Through his theoretical, popular, and policy writings, he helped save Austria from a Bolshevik takeover and from the kind of hyperinflation that occurred in Germany in 1923. He was offered a position with the Kredit-Anstalt, which was one of the world’s great banks, in the 1920s, but he refused on the grounds that the world was on the verge of a great crisis to which he did not want to lend his good name.
Yet he wrote that banks charter:
At the war’s end, he was also put in charge of the section of the Austrian Reparations Commission for the League of Nations concerned with the settlement of outstanding pre-war debts. And in 1922 and 1923, when the League of Nations stepped in to restructure the country’s monetary and banking system following the end of the Austrian Great Inflation, Mises had a senior responsibility for the writing of the charter and by-laws of the reorganized Austrian National Bank.
http://www.heritage.org/Research/PoliticalPhilosophy/hl754.cfm
The official history of Austria puts it this way:
The expenses of the voracious war machinery of WWI, inflation as well as huge reparation payments quickly drove new Austria’s economy to the brink of bankruptcy. A huge loan provided by the League of Nations, the predecessor of the UN, thwarted this threat.
In other words, Von Mises had very little effect on avoiding inflation in Austria or in avoiding debt. However, he did institute a gold standard:
By 1923, the inflation had been brought to an end and in 1924 Austria officially went on a gold-exchange standard, with legal gold redemption in 1925. But once the direct supervision of the League was terminated, taxing, spending, and the budget deficits all once again increased throughout the rest of the 1920s. The deficits were mostly covered by foreign loans.
If the Gold standard was a panacea for Austria, ordinary Austrians didn’t see the benefits.
The Great Depression finally severely hit Austria in 1931 following a major banking crisis. To avoid the loss of gold and hard currency reserves, the Austrian government imposed foreign exchange controls that greatly restricted trade, with the government allocating scarce foreign exchange according to pressures of various interest groups.
http://www.heritage.org/Research/PoliticalPhilosophy/hl754.cfm
If you keep reading the just cited source, it would seem to exonerate Von Mises of any role in the labor unrest that broke out from the beginning of his Gold policies until he fled the country.
The Rise of the Fascists
Increasing political cleavage between the two reigning parties, the Social Democrats and the Christian Socialists, led to proliferation of several paramilitary organizations corresponding to the two ideological positions. Daily mass demonstrations, partly disintegrated by deadly police force, as well as a general strike deeply disrupted the coalition to the point of mutual animosity.
Now this is important, because at this moment Von Mises was the senior advisor to Dolfuss. His official hagiographies backdate these demonstrations from 1931 to 1934 to make it look like the cause was Naziism or that Von Mises was innocent.
After the parliamentary elections of April 1932, former Minister of Agriculture Engelbert Dollfuss, took over as head of the Cabinet. He formed his government with the help of two right wing parties from the agrarian classes. By a majority of just one vote in Parliament, a resolution was adopted to take another loan from the League of Nations . This failed to produce any immediate consequences since the unemployment figures of 600,000 were too high.
And this was the man, and policies, that Von Mises supported. Indeed by this time Von Mises was economic Minister. Pretty much the Czar of the Austrian Economy. These policies that made a bad situation worse were his. Borrowing money from banks to keep the banking system afloat was okay. But paying wages to workers, or feeding the poor was not. His putting Austria on a Gold standard during this period, turned the 1920′s inflation to a deflation — and for ordinary Austrians it was intolerable.
The Break with Democracy
Given this scenario, it is hardly surprising that similar to other European countries, corporatist social systems and authoritarian forms of government were discussed and became implanted in the minds of the people as a remedy. A minor impasse in parliamentary procedure, which in less critical times would have passed by unnoticed, provided Dollfuss the cause for dismissing the whole Parliament as an institution.
“For this purpose, the government resorted to the Kriegswirtschaftliches Ermächtigungsgesetz (“War Economy Empowering Act”), a relic of WWI, issuing numerous ordinances and finally accusing the parliament of having “dissolved itself.” The actual breach of the constitution, however, came with the liquidation of the Constitutional Court. In 1933 Dollfuss abolished all existing political parties in order to unite the conservative forces in Austria. A relatively small incident in Linz finally triggered civil war between the now forbidden Social Democrats and the Fascists.”
Now note, his hagiographies put the start of troubles in 1934 when Dolfuss was assassinated, however, other sources show that the troubles started during (and before) the Great depression. Von Mises advocated anti-labor, anti-worker policies before the great depression. Pretty much the same policies he advocated once he’d emigrated to the USA and the heat was off of him. And it is true, prior to Hitler having Dolfuss assassinated, Dolfuss had already upped the ante on state terror and internecine warfare.
http://www.austria.org/content/view/66/92/
During the 1920s and 1930s Vienna was a bastion of socialism, it became the “stage to the Austrian Civil War of 1934, when Chancellor Engelbert Dollfuss sent the Army to shell civilian housing occupied by the socialist militia.”
Nationalist Reach for Power
The civil war was multipartied, and it attracted the attention of Hitler, who after all was from Austria too. The Nazis even threatened invasion in 1933, but Mussolini stopped the invasion by sending troops to the border. Dolfuss was Mussolini’s protege (which means that so was Von Mises). Mussolini was, at that time considering creating a Danubian Empire, and Dolfuss was willing to be part of that empire if it protected him from Hitler. The Germans had other plans, and during the negotiations over Austria’s future he came under Hitler’s spell. Prior to about 1933 Mussolini’s Fascism was relatively devoid of anti-semitism. He saw the Italian race in family and nationalist terms, was on friendly terms with Jews, and even had a Jewish mistress. Were it not for Hitler he’d probably have enjoyed the “Dolce Vita” until much later in life.
However, in 1934, the intense violence in Austria was being perpetrated by one of the three main factions of a civil war and Dolfuss had lost control of the country. The upshot is that Dolfuss lost his patron and a year later lost his life. Mussolini was bedazzled by Hitler’s displays of adoring fans. Dolfuss’s time had run out.
The rift caused by this civil war divided the political camps for decades. Through its unnecessarily brutal treatment of a clearly weaker opponent, the Austrian government suffered an enormous loss of prestige abroad. Just a few months later the Cabinet decreed the establishment of a new authoritarian constitution. Despite rigorous measures taken against the growing threat of National Socialism, the Nazis attempted a coup d’état on July 25, 1934, in the course of which Engelbert Dollfuss was murdered.
Von Mises Economic policies had failed. His attempt to hitch himself to Fascism was a failure. He knew better than to stay where he was a wanted man. It was time to reinvent himself.
Dolfuss died rather dramatically facing off some Nazi gunmen. He had some inkling of what was about to happen and sent his wife to Italy. She was under Mussolini’s protection when the hit occurred.
I love the way the hagiographers describe what happened next:
In 1934, Mises took advantage of the opportunity to take an early retirement from the Chamber of Commerce and moved to the Graduate Institute for International Studies in Geneva. The Institute had offered him a one-year position, but he stayed in Geneva for six years. While in residence in Vienna, he wrote Nationalokonomie, which was the German-language predecessor to Human Action.
I think I would have left Germany too. Von Mises was on Hitler’s hit list, because he was a Jew and because he was a backer of Dolfuss
But Von Mises was on the hit list of a lot of people. The Democratic Socialists, whom his economic policies energized and hurt. The Nazis (of course) and even his former Christian Socialists were only too willing to scapegoat him and Dolfuss for the countries problems and welcome their new savior.
Following the National Socialists’ unsuccessful coup, President of the Republic Wilhelm Miklas asked the former Minister of Justice, Christian Socialist Kurt Schuschnigg, to form a government. Whatever Schuschnigg tried to fight off the vastly-expanding Nazis, a number of factors – like Italy allying with Nazi Germany, England’s policy of appeasement and a fiercely aggressive Hitler – finally hauled the Nazis up into the Cabinet. Schuschnigg’s last desperate attempt to ward off Germany’s strategy of annexing Austria was to announce a plebiscite, which, however, only served to accelerate German aggression.
The more I read about Austrian Economics the more disgusted I get. However, this is a big topic, and economics is so boring most people prefer believing in someone who sounds like he knows what he or she is talking about to delving into the subject themselves. That is the role that Von Mises, Rothbard and the others play. It’s mythology over reality.
Further Reading:
- Hagiography:
- http://mises.org/resources/3081
- This source actually goes into depth to show just how influential Von Mises was in Austrian Economics in the 1920′s and 1930′s. If you didn’t do a little cross checking you’d swear the guy saved the world, and would have saved Austria if it weren’t for that mean old Hitler:
- http://www.heritage.org/Research/PoliticalPhilosophy/hl754.cfm
- http://www.fraughtwithperil.com/blogs/holte/archives/006417.html
What bothers me is that this garbage is being sold as if it were real economics.