Max Keiser: Ludwig von Mises Is a Fake Austrian Economist

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

"If 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 mistakes?

"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 all."

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."

According 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."

Quotations 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.

Finally, 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 u2018promise 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 project.

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 objection.

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.

Quite 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 Institute and my self-study program at