The Role of the Economist in a Free Society: Mises to Knight

Ludwig von Mises and intellectual engagement with controversy

Ludwig von Mises was embroiled in controversial disputes in economics from almost the beginning of his career. His work on monetary theory also addressed questions of monetary policy (1912). He not only debated fine points of theory with his application to monetary economics of the advancements in microeconomics achieved by the earlier generation of Austrian School economists, but he also strove to counter the pet theories and policies of various monetary cranks. In the process, he demonstrated the intellectual flaws and bankruptcy of ideas such as state theories of money, underconsumption theories of the business cycle, and overproduction theories of industrial fluctuations.

Investment decisions, employment decisions, and consumption decisions all, in Mises’s hand, were a consequence of subjective evaluations by individuals and the choices they make on the margin based on those evaluations. Money does not disturb the individual decision calculus, though it does both complicate and resolve the situation. Money complicates matters because it introduces a link into all exchanges. Money is one-half of all exchanges and thus if the monetary system is distorted all exchanges will be distorted. The classical dichotomy still holds—real variables only affect real variables, and nominal variables only affect nominal variables—but there is now a demand to explain the process by which the economic forces at work reveal themselves throughout the system due to the “loose jointedness” of money in analysis. Mechanical interpretations of the quantity theory of money distort our understanding every bit as much as denials of the quantity theory distort such understanding. And, finally, money must also be recognized for its role as an aid to the human mind in the complex coordination of economic activity through time. Monetary prices on the market enable decision makers both to economize on the details they must process in investment, production, and consumption decisions, and to ease the assessment of alternative decision paths. The ability to engage in monetary economic calculation enables decision makers to assess alternative plans, and the system selects from the array of technologically feasible plans those that are economically viable.

Studying this market process of calculation and coordination would define Mises’s career as an economist—both on the negative side (the inability of socialism to engage in rational economic calculation) and the positive side (the ability of capitalism to do so and how that engenders a process of entrepreneurial discovery and creativity).

The conundrum in these discussions is to determine from the start what is science and what is one’s personal moral assessment of a social arrangement. Max Weber, who had to grapple with the ongoing debates from what were referred to in his time as “socialists of the chair”, thought he provided rules of intellectual engagement that would solve the problem. The critical analyst, Weber argued, must restrict analysis to the examination of the effectiveness of chosen means in achieving given ends. There would be no disputing over the ends sought. Thus, even if the analyst found the ends deplorable, if those ends were satisfied by the chosen means then the analyst’s critique would be neutered. But, if the analyst could show that the means chosen would not produce the ends sought, and even more so that they would produce results that worsened the social ills that were to be eradicated by the policy choices under examination the critique would stand.

Mises was fully persuaded by Weber’s rules of intellectual engagement. His critical analysis of monetary policy, his analysis of socialism, and of interventionism were grounded in this “value-freedom” method. Moreover, his argument was that the history of political economy traced back to Adam Smith. A quick example in support of Mises’s point is Adam Smith and David Hume’s debate over the state sponsorship of religion, where their analysis of the logic of choice, organizational logic, and situational logic was shared, but their normative assessment of the consequences of the policy choices differed. Political economy, in this sense, is a value-relevant discipline only to the extent that the economic analysis undergirding it was as value-neutral as humanly possible.

Controversy and Mises were not limited to the “big question” of the viability of the socialist system. He was clear: Socialism, by definition, sought to eliminate private ownership of the means of production, and in so doing, socialism condemned its own project from achieving its stated ends of rationalizing the process of production. Rather than rationalizing economic processes, socialism would produce economic chaos due to the inability to engage in rational economic calculation. Nothing in Mises’s analysis of socialism was predicated on differences in the aspirations of socialism—whether we consider those aspirations economically, politically, or morally. Socialism could promise fraternity, equality, and solidarity because the rationalization of production was supposed to lead to such a burst of productivity that, following the revolution, mankind would be delivered from the Kingdom of Necessity to the Kingdom of Freedom. Alas, such high-minded aspirations, once subjected to the sober analysis of economics, would collapse under the weight of the impossibility of the chosen means to realize the given ends of socialism.

But what was true for Mises’s analysis of socialism, is also true for his analysis of the market process and the problem of monopoly. His focus was the role of prices and profit and the arguments for interventionism; and the monetary system and the consequences of the manipulation of money and credit on the economic system. Mises is engaged in Means/Ends analysis, not moral posturing; such sober analysis isn’t always appreciated by those who would prefer it never be offered as a challenge to their policy preferences.

In Human Action Mises writes:

It is impossible to understand the history of economic thought if one does not pay attention to the fact that economics as such is a challenge to the conceit of those in power. An economist can never be a favorite of autocrats and demagogues. With them he is always the mischief-maker, and the more they are inwardly convinced that his objections are well founded, the more they hate him.

Thus, as he would state in Economic Freedom and Interventionism:

The social function of economic science consists precisely in developing sound economic theories and in exploding the fallacies of vicious reasoning. In the pursuit of this task the economist incurs the deadly enmity of all mountebanks and charlatans whose shortcuts to an earthly paradise he debunks.

Frank Knight and confronting intellectual attacks

Frank Knight was just as blunt in his assessment of the situation. In his 1950, AEA Presidential address entitled “The Role of Principles in Economics and Politics” he states:

my interest has of late tended to shift from the problems of economic theory, or what seem to be its proper concerns, to the question of why people so generally, and the learned elite in particular, as they express themselves in various ways, choose nonsense instead of sense and shake the dust from their feet at us. And also, why the theorist is so commonly ‘in the dog-house’ among economists, as classified by academic faculty lists and books and articles in learned journals carrying the word ‘economic’ in their titles.

Intellectual shifts of thinking during the first half of the 20th century, Knight argued, had produced a literature in the discipline

• consisting largely of attacks on traditional views of the nature and function of economics, in which the term ‘orthodoxy’ commonly appears as a ‘cuss-word,’ an epithet of reproach. The critics, aggressors, have more or less explicitly advocated the abolition of an economics of economic principles and its replacement by almost anything or everything else, other principles if they can be found-psychological, historical, statistical, political, or ethical, or no principles at all but factual description of some sector of social human phenomena called ‘economic’ for reasons not clear to me. I cannot comment in detail on these fashions in thinking. The latest ‘new economics’ and in my opinion rather the worst, for fallacious doctrine and pernicious consequences, is that launched by the late John Maynard (Lord) Keynes, who for a decade succeeded in carrying economic thinking well back to the dark age, but of late this wave of the future has happily been passing.[Selected Essays by Frank H. Knight, Volume 2: Laissez Faire: Pro and Con, p. 362-363.]

One of the major issues with this move is that the economist is transformed from a scientist, student of society, and social critic into a would-be advisor to those in positions of power and privilege. But those in power have no use for serious economic science and social criticism. Economics so conceived is a nuisance, and little more. As Knight continued telling his colleagues at the AEA meetings: “The serious fact is that the bulk of the really important things that economics has to teach are things that people would see for themselves if they were willing to see. And it is hard to believe in the utility of trying to teach what men refuse to learn or even seriously listen to.”

And this fate is all the more true because of the changes in expectations among the elite and the population concerning the role of government in society. As Knight pointed out, challenges to the teachings of economics have significant impact on the body politic because the denial of economic principles changes politics.

• This same period of history has also seen a growing disregard for free economic institutions in public policy—increasing resort to legislative and bureaucratic interference and control, the growth of pressure groups employing both political and “direct” action to get what they want, and with all this the debasement of the state itself, completely in much of the European world, from free forms to ruthless despotism. It is surely legitimate to ask whether there is some connection between the movement of economic thinking and that of political change. [Selected Essays by Frank H. Knight, Volume 2: Laissez Faire: Pro and Con, p. 363.]

Those in the resistance, which is of course what the Mont Pelerin Society was built to cultivate and sustain, must be willing to engage in the futile crusade for economic literacy in the general population, to continually refine our understanding of basic economics, and to persuade our peers in the discipline that there isn’t anything boring about working with the persistent and consistent application of economic principles to understanding the way the world works in all its given diversity. Simple economics is not simpleminded, and clarity of exposition of the principles of economics is to be valued over quickness of mind and cleverness in presentation.

Conclusion

This commitment to sound economics, and to the role of the economist in society as a student of society, and as a social critic, but never as an advisor and social engineer is what united Mises and Knight. They were both true radical liberals, but not progressive era intellectuals. It was, after all, the progressive era shift in intellectual temperament that was transforming the discipline of economics before their eyes.

Knight and Mises provide foundational arguments on the question of the role of the economist in a free society. The next masters to take on this challenge include Nobel laureates George Stigler, James M. Buchanan, and Ronald Coase. But this is an exploration for another day.