Too Good for the Comments: Ebeling on Mises the Applied Economist

[This was simply too good to leave in the comments, so I've reposted it here - SH]Richard EbelingSince
Peter began with some quotes, including one by Ludwig von Mises, may I
offer a little "doctrinal" interpretation about how Mises actually acted
as a economic theorist and policy analyst?

First, too many of us (and this included me for many years) viewed
and considered Mises as primarily the grand "armchair" theorist
considering the sweeping issues of economic institutional orders; the
workings of the monetary system and market process; the nature and
interconnections between time, money, production, and business cycles;
and the logic and structure of human action and choice.

And this is certainly the of side of Mises’ thought and writings that
often carry a timeless quality to them because they deal with and are
articulated in terms of the general and universal aspects of man, mind,
markets, and society.

But Mises made did not make his living as a grand theorist. For
almost a quarter of a century, from 1909 to 1934 (except for most the
years of the Great War), Mises worked as economic policy analyst and
advisor to the Vienna Chamber of Commerce. From the age of 28 to 53 (at
which time he moved to Geneva, Switzerland to accept his first full-time
academic position as the Graduate Institute of International Studies)
he spent his working day as a “policy wonk.” And I mean a “policy wonk” –
someone immersed in the factual details and economic policy specifics
of, first, the old Austro-Hungarian government and, then, the Austrian
Republic between the two World Wars. His statistical knowledge of “the
facts” of fiscal policy, regulatory legislation, and Austrian monetary
institutions and policy was precise and minute.

This became very clear to me while I have worked through those “lost
papers” of Ludwig von Mises that were recovered by my wife and myself
from a formerly secret KGB archive in Moscow. And, I might add, that the
last of the three volumes of the “Selected Writings of Ludwig von
Mises” based on these papers and which Liberty Fund has been publishing
has, now – finally!! – been finished and will be out in the not too
distant future. (This last volume, which I have prepared, actually
covers his earliest period, that is, Mises’ writings on monetary and
fiscal policy problems from before, during, and just after the First
World War.)

Indeed, it has become clear to me that much of Mises’ conception of
the general economic order, its workings and requirements, and the
institutional and policy “rules” that would help establish and maintain
freedom and prosperity did not arise from a pure “a priori” deductive
spinning out of implications from the “action axiom.”

They are, in many cases, the general theoretical insights and the
social institutional and economic policy “wisdoms” derived from living
through, acting within, and learned lessons from those momentous and
often catastrophic events that shook Europe in the first half of the
twentieth century, and particularly as experienced in the everyday
reality of Austrian political and economic life during this time.
What is also clear from reading Mises’ policy writings from this period
of his European career, is that if you had asked him a fiscal, or
monetary, or regulatory policy question in the context of his role as
analyst at the Chamber of Commerce, he would not have said, and did not
simply say, “laissez-faire” – abolish the central bank, deregulate the
economy, and eliminate taxes.

He accepts that there are certain institutional “givens” that must be
taken for granted, and in the context of which policy options and
decisions must be worked out.

He seemed to usually think with three policy “horizons” in his mind.
The first, and the more distant, “horizon,” concerned the most optimal
institutional and policy arrangement in society for the fostering of the
(classical) liberal ideal of freedom and prosperity?

This is captured most frequently in the books and articles he was
writing outside of his narrow role as Chamber economist. That is, those
works from which most of us know many of his ideas – “The Theory of
Money and Credit,” “Socialism,” “Liberalism,” “Monetary Stabilization
and Cyclical Policy,” and “Critique of Interventionism” – from before
the Second World War.

The second “horizon,” was closer to the actual circumstances of the
present, but focused on the intermediary goals that would be leading in
the direction of that more distant, “optimal” horizon. For example,
ending a paper money inflation and reestablishing a gold-based monetary
system, for general economic stability without which the market order
and economic calculation cannot properly function. Or concerned with
fiscal policy, and reducing the burden and incidence of the tax
structure to end capital consumption and foster capital formation.

(And, I should mention, that as a policy analyst thinking in terms of
classical liberal normative “preferences,” Mises does not advocate,
“tax neutrality.” That is, a low tax structure that would fund those
minimal limited government functions, but would not attempt, outside of
this, to “influence” the behavior or choices of the market participants.
He believes that such a low tax system should be structured in such a
way that IT DOES foster and generate incentives for investment and
capital formation. The tax structure, in his view, should be designed to
stimulate production, not current consumption.)

And the third “horizon” in the context of which Mises analyzes and
proposes economic policies, is the current situation and the immediate
future. In other words, how do you design the concrete bylaws and rules
for a central bank to prevent it from following an inflationary monetary
policy, including the transition to and implementation of specie
redemption, and the policy “tools” it should then use to maintain the
exchange rate and convertibility?

While in the 1970s Murray Rothbard may have once criticized Milton
Friedman for advocating “indexation” as a method to reduce some of the
negative effects from an on-going inflation, in 1922, during the
worsening Great Austrian Inflation, Mises actually proposed “indexation”
of wages and prices, and government revenues and expenditures to reduce
deficit fiscal pressures, maintain real standards of living for many in
the society, and eliminate some of the inflationary distortions on
economic calculation – as a part of a specific policy agenda to bring
the inflation to an end. And he explained how the indexation should be
implemented.

Mises did not just say, “Cut bureaucracy and their spider’s web of
regulatory controls.” He first explained what was inefficient and
unnecessary in the three-tiered Austrian bureaucratic system of federal,
provincial and municipal regulators and taxing authorities. Then he
explained what reforms should be introduced, how they could be
“experimented” with in some of the smaller regions of Austria to see how
they worked before extending them to the rest of the country, and how
best to overcome the resistance of those in the bureaucracy fearful of
losing their jobs.

In designing a new fiscal order for Austria, Mises proposed
eliminating all income taxes and many – but not all – corporate and
business taxes. But how, then, do you finance the costs of government?
He presents an agenda for implementing indirect taxes on a wide variety
of consumption items, and especially what today would be called “sin
taxes” and “luxury taxes.” And government welfare state expenditures
were not going to just “disappear.” So, employers would be taxed to
cover existing social insurance expenditures. This was all meant to
foster capital formation through predominately consumption taxation to
cover fiscal costs.

And in a lengthy monograph that he wrote during the Second World War
devoted to economic reform in an underdeveloped country like Mexico, he
took as “given” that the politics of the society was not ready to fully
privatize, say, the national railway system or the oil industry. So as a
“second best,” Mises proposed transforming the railway system into a
government owned but privately managed corporation with strict rules and
procedures to assure it was run in a relatively “business-like” manner
with the least likelihood of political interference. He even supported
limited and temporary subsidies to assist poor farmers to establish
themselves as more successful private enterprisers.

And on tariffs, he did not propose immediate abolition. He accepted
that there were many industries that had grown up behind the trade
barriers, and that they would resist immediate repeal of trade
protectionism. So, instead, he advocated “incrementalism,” i.e., a
gradual reduction of the tariff barriers over several years.

And he even supported a limited degree “trade retaliation” in the
face of a trading partner raising its tariffs against the goods of one’s
own nation, as a means of nudging that trading partner back to a freer
trade policy.

Now, in explaining all of these things, it is not my purpose to argue
whether Mises’ specific policy proposals were “right” or “wrong,” or
more or less “reasonable” or “realistic.”

But it is to point out that there is a very interesting “other side”
to Ludwig von Mises as practicing economist, and how surely the most
famous and thorough-going “Austrian” economist of the 20th century saw
the nature of policy evaluation and policy implementation in the “real
world.”

There is often no alternative but thinking in terms of a “second” or
“third” best. But that thinking is more soundly directed if done in
terms of an image of what the “first” best would be, and how the
“second” and “third” bests might be designed to move in the direction of
that “first” best, or at least not to be in contradiction with it.

This is certainly the way that Mises attempted to think about and
propose economic policy options in the world in which he lived in
Austria, where many ideological and political ideas and practices had to
be taken as “given” in the short-run.