Money and the Individual

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foreword to The
Theory of Money and Credit
by Mises (1912) was originally
published in the 1981 Liberty Fund Edition of Mises’s book.

Ludwig von
Mises’s The Theory of Money and Credit is, quite simply,
one of the outstanding contributions to economic thought in the
twentieth century. It came as the culmination and fulfillment of
the "Austrian School" of economics, and yet, in so doing,
founded a new school of thought of its own.

The Austrian
School came as a burst of light in the world of economics in the
1870s and 1880s, serving to overthrow the classical, or Ricardian,
system which had arrived at a dead end. This overthrow has often
been termed the "marginal revolution," but this is a highly
inadequate label for the new mode of economic thinking. The essence
of the new Austrian paradigm was analyzing the individual and his
actions and choices as the fundamental building block of the economy.

Classical economics
thought in terms of broad classes, and hence could not provide satisfactory
explanations for value, price, or earnings in the market economy.
The Austrians began with the actions of the individual. Economic
value, for example, consisted of the valuations made by choosing
individuals, and prices resulted from market interactions based
on these valuations.

The Austrian
School was launched by Carl Menger, professor of economics at the
University of Vienna, with the publication of his Principles
of Economics
(Grundsätze der Volkswirtschaftstehre)
in 1871.1 It was further developed
and systematized by Menger’s student and successor at Vienna, Eugen
von Böhm-Bawerk, in writings from the 1880s on, especially
in various editions of his multivolume Capital
and Interest
. Between them, and building on their fundamental
analysis of individual valuation, action, and choice, Menger and
Böhm-Bawerk explained all the aspects of what is today called
"micro-economics": utility, price, exchange, production,
wages, interest, and capital.

Ludwig von
Mises was a "third-generation" Austrian, a brilliant student
in Böhm-Bawerk’s famous graduate seminar at the University
of Vienna in the first decade of the twentieth century. Mises’s
great achievement in The Theory of Money and Credit (published
in 1912) was to take the Austrian method and apply it to the one
glaring and vital lacuna in Austrian theory: the broad "macro"
area of money and general prices.

For monetary
theory was still languishing in the Ricardian mold. Whereas general
"micro" theory was founded in analysis of individual action,
and constructed market phenomena from these building blocks of individual
choice, monetary theory was still "holistic," dealing
in aggregates far removed from real choice. Hence, the total separation
of the micro and macro spheres. While all other economic phenomena
were explained as emerging from individual action, the supply of
money was taken as a given external to the market, and supply was
thought to impinge mechanistically on an abstraction called "the
price level." Gone was the analysis of individual choice that
illuminated the "micro" area. The two spheres were analyzed
totally separately, and on very different foundations. This book
performed the mighty feat of integrating monetary with micro theory,
of building monetary theory upon the individualistic foundations
of general economic analysis.

Eugen von Böhm-Bawerk
died soon after the publication of The Theory of Money and Credit,
and the orthodox Böhm-Bawerkians, locked in their old paradigm,
refused to accept Mises’s new breakthrough in the theory of money
and business cycles. Mises therefore had to set about the arduous
task of founding his own neo-Austrian, or Misesian, school of thought.
He was handicapped by the fact that his post at the University of
Vienna was not salaried; yet, all during the 1920s, many brilliant
students flocked to his Privatseminar.

In the English-speaking
world, acceptance of Misesian ideas was gravely hampered by the
simple but significant fact that few economists read any language
other than English. Mises’s The Theory of Money and Credit
was not translated into English until 1934, and the result was two
decades of neglect of the Misesian insights. Cash balance analysis
was developed in the late 1920s in England by Sir Dennis H. Robertson,
but his approach was holistic and aggregative, and not built out
of individual action.

The purchasing
power parity theory came to England and the United States only through
the flawed and diluted form propounded by the Swedish economist
Gustav Cassel. And neglect of the Cuhel-Mises theory of ordinal
marginal utility allowed Western economists, led by Hicks and Allen
in the mid-1930s, to throw out marginal utility altogether in favor
of the fallacious "indifference curve" approach, now familiar
in micro textbooks,

Mises’s integration
of micro and macro theory, his developed theory of money and the
regression theorem, as well as his sophisticated analysis of inflation,
were all totally neglected by later economists. The idea of integrating
macro theory on micro foundations is further away from current economic
practice than ever before.

Only Mises’s
business cycle theory penetrated the English-speaking world, and
this feat was accomplished by personal rather than literary means.
Mises’s outstanding follower, Friedrich A. von Hayek, immigrated
to London in 1931 to assume a teaching post at the London School
of Economics. Hayek, who had concentrated on developing Mises’s
insights into a systematic business cycle theory, managed quickly
to convert the best of the younger generation of English economists,
and one of the brightest of the group, Lionel Robbins, was responsible
for the English translation of The Theory of Money and Credit.

For a few glorious
years in the early 1930s, such youthful luminaries of English economics
as Robbins, Nicholas Kaldor, John R. Hicks, Abba P. Lerner, and
Frederic Benham fell under the strong influence of Hayek. In the
meanwhile, Austrian followers of Mises’s business cycle theory —
notably Fritz Machlup and Gottfried von Haberler — began to
be translated or published in the United States. Also in the United
States, young Alvin H. Hansen was becoming the leading proponent
of the Mises-Hayek cycle theory.

Mises’s business
cycle theory was being adopted precisely as a cogent explanation
of the Great Depression, a depression which Mises anticipated in
the late 1920s. But just as it was being spread through England
and the United States, the Keynesian revolution swept the economic
world, converting even those who knew better. The conversion process
won, not by patiently rebutting Misesian or other views, but simply
by ignoring them, and leading the economic world into old and unsound
inflationist views dressed up in superficially impressive new jargon.

By the end
of the 1930s only Hayek, and none of the other students of himself
or Mises, had remained true to the Misesian view of business cycles.
Mises’s The Theory of Money and Credit, in its English version,
barely had time to be read before the Keynesian revolution of 1936
rendered pre-Keynesian thought, particularly on business cycles,
psychologically inaccessible to the next generation of economists.

Mises added
part four to the 1953 English-language edition of The Theory
of Money and Credit. But Keynesian economics was riding high,
and the world of economics was scarcely ready to resume attention
to the Misesian insights. Now, however, and particularly since his
death in 1973, Misesian economics has experienced a remarkable resurgence,
especially in the United States. There are conferences, symposia,
books, articles, and dissertations abounding in Austrian and Misesian

the Keynesian system in total disarray, reeling from chronic and
accelerating inflation punctuated by periods of inflationary recession,
economists are more receptive to Misesian cycle theory than they
have been in four decades. Let us hope that this new edition will
stimulate economists to reexamine the other sparkling insights in
this grievously neglected masterpiece, and that Mises’s integration
of money and banking with micro theory will serve as the basis for
future advances in monetary thought.


  1. The English
    translation of Menger’s Grundstze did not appear until
    1950. See Carl Menger, Principles
    of Economics
    (Glencoe, Ill.: The Free Press, 1950).

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