What it means
Mises studied in Vienna and later taught and advised there before leaving Europe in the years before the Second World War. He moved to the United States, where he taught at a university and wrote prolifically.
His early book The Theory of Money and Credit applied the idea of marginal utility to the question of what gives money its value. His most famous argument is the economic calculation problem, set out in 1920.
He claimed that without market prices for capital goods, which arise only when people can own and trade property, a planner cannot know whether resources are being used well. For businesspeople the point is that prices carry information, so interfering with them makes it harder to judge profit and loss.
Mises also developed an Austrian explanation of the business cycle. In his view, when banks create credit and hold interest rates artificially low, businesses are misled into long-term projects that cannot be sustained, which later leads to a bust.
Mainstream economists dispute parts of this account, but the focus on how credit conditions affect investment is widely discussed. His major work, Human Action, published in 1949, set out a general theory of economics based on the idea that people act purposefully.
The method, called praxeology, is deductive and reasons from basic axioms rather than from statistical data. This sets it apart from the empirical approach of most modern economics.
For a non-economist, Mises matters as a source of arguments you will hear in discussions of inflation, central banks, government spending and the role of markets. It is fair to read him as a major voice in one tradition, while remembering that other schools disagree with him on important points.
A final point is that his influence runs through people as much as through books. Students and admirers carried the Austrian approach into think tanks, universities and policy debates, which is why you may hear his name cited by people who have never read him directly.
In practice
Real-world examples.
Example
A fund manager reads Mises when thinking about why prolonged low interest rates might lead companies to take on too much debt. She uses the idea as a prompt to stress-test her holdings for rising rates, even though she does not accept the whole theory.
Example
A university teacher assigns an extract on the calculation problem when covering the difference between market and planned economies. Students are asked to explain why a planner might struggle to price a steel mill without a market for steel.
Example
A business journalist cites Mises in an article on cryptocurrency, noting that supporters of fixed-supply digital money often draw on Austrian arguments about the dangers of expanding the money supply.
Case study
Seen in the real world.
Calder and Finch Advisory is an illustrative, fictional consultancy that runs a reading group for its analysts. One month, the group studied the economic calculation problem. A junior analyst pointed out that the firm's internal pricing of shared services seemed to be arbitrary, with no link to what other divisions would pay in an open market.
The partners agreed and introduced internal charging that mirrored external market rates. Within a year, two underused services were closed because divisions were no longer willing to pay for them. The fictional story shows how an abstract idea about prices and information can have a practical effect inside a company.
At the next meeting the group compared that experience with an opposing view, so that the analysts understood both the Austrian argument and the mainstream response. The fictional partners felt that exposing staff to rival theories improved the quality of the firm's advice.
Watch out
Common mistakes.
- Treating Mises as the voice of all economists, when he represents the Austrian School and many mainstream economists disagree with his methods and conclusions.
- Confusing the economic calculation problem with a claim that planned economies cannot produce anything, when the argument is that they cannot allocate resources efficiently without market prices.
- Attributing every free-market argument to him, when others such as Hayek, Friedman and Smith each contributed different ideas.
Questions
People also ask.
When was Human Action published?
It was published in 1949 and is regarded as his major statement of the Austrian approach to economics.
What is praxeology?
It is the study of human action as purposeful behaviour, using logical deduction from basic assumptions, and it is the method Mises preferred over statistical testing.
How is he connected to Friedrich Hayek?
Hayek was a student and colleague of Mises in Vienna and extended the arguments about prices and knowledge, though the two differed in some of their views.
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