Edited and written by David Gordon, senior fellow of the Mises Institute and author of four books and thousands of essays.

The Great Treatise at 50

Winter 1999

Ludwig von Mises
Ludwig von Mises Institute, [1949] 1998, xxxvii + 912 pgs.

There are two ways to read Mises's great treatise. Most readers will, I fear, find the book too much to attempt to grasp systematically. Not everyone feels like reading a nine-hundred-page book straight through. If you shrink from a full confrontation with the book, you will, as I hope to show, miss out on a great deal. But all is not lost. You can open the book almost anywhere and come away with new insights.

As an example, Mises demolishes the central core of Marxist economics in a few brilliant pages. Marx famously claimed to have discovered the "laws of motion" of capitalism. How does the capitalist transform his initial monetary investment into a larger sum of money at the close of production? For Marx, the answer did not lie in trickery.

Quite the contrary, Marx claimed to show that the capitalist could extract profit even if all commodities exchanged at their value. The capitalist buys labor and raw materials at their value and sells the product manufactured with their aid at its value. Why does it turn out that the second sum is greater than the first? Why, in other words, are not the prices of the factors of production bid up to absorb anticipated profits?

The answer, Marx thought, lies in the exploitation of labor. By the labor theory of value, which Marx professed, all goods exchange at the value of the labor required to produce them. Labor, then, obtains as wages what is required to produce the laborer. In brief, labor earns a subsistence wage.

Once the capitalist has purchased labor, his fortune is made. He now gets whatever value the labor he has purchased adds to his raw materials. (Remember, in Marx's theory labor is the source of economic value.) In the usual case, this value exceeds the subsistence costs of labor. The result of this surplus, which Marx terms the rate of exploitation, is profit, and our pretended Newton on economics has here unveiled his new scientific law.

I have gone on at some length about labor exploitation, as this notion is vital to Marxism. Destroy it, and the whole of Marxist economics collapses. And this is just what Mises proceeds to do. He at once locates the central fallacy in Marx's argument.

Even if one accepts the labor theory of value, Marx's explanation of wages fails. Except under special conditions, the price of labor is not determined by the costs of subsistence. "The `iron law of wages' and the essentially identical Marxian doctrine of the determination of `the value of labor power' by `the working time necessary for its production'...are the least tenable of all that has ever been taught in the field of catallactics .... [I]f one sees in the wage earner merely a chattel and believes that he plays no other role in society, if one assume that he aims at no other satisfaction than feeding and proliferation ...one may consider the iron law as a theory of the determination of wage rates" (p. 602).

The conditions required for Marx's view to hold practically never obtain, as Marx himself had to admit. Workers' wages under capitalism rise far above subsistence. Rather than acknowledge that his theory failed, Marx changed its terms. He now contended that what constitutes subsistence is a question of history: for workers in a given society, "subsistence" may mean relative luxury. As Mises mordantly notes, this is to abandon completely the attempt at a theory of wages. "What he [Marx] has in mind is no longer the `indispensable necessaries,' but the things considered indispensable from a tradition point of view.... The recourse to such an explanation means virtually the renunciation of any economic or catallactic elucidation of the determination of wage rates" (p. 603).

Let us turn from Marx to the fall of the Roman Empire. (As we shall later see, the topics are linked.) Why did the Roman Empire, long able to contain barbarian assaults, eventually fall victim to them? Mises finds the answer in an unexpected place: economics. By the second century A.D., the Roman Empire had developed into a complex economy. "The various parts of the empire were no longer economically self-sufficient. They were mutually interdependent" (p. 761).

Unfortunately, governmental interference crippled the economy, thus opening the way for invaders. Price control and currency debasement were the chief culprits: "The Roman Empire crumbled to dust because it lacked the spirit of liberalism and free enterprise. The policy of interventionism ...decomposed the mighty empire as it will by necessity always disintegrate and destroy any social entity" (p. 763). Mises's account extends the analysis of Michael Rostovtzeff, whom he cites.

I have so far imagined a reader who dips into the book sporadically and tried to show how he can expect to find insight after insight. But such a reader will miss much. Human Action is unified by a central theme, which Mises always bears in mind.

Mises saw human beings as faced with a fundamental choice. Nature provides man with no automatic sustenance; and, if confined to living in small groups, human beings will find life hardly worth living. But the situation is not entirely bleak.

To escape from Darwinian struggle, man must take advantage of social cooperation through the division of labor. Here, in Mises's view, lies the veritable key to civilization. But how can human societies best take advantage of the division of labor?

In the answer to this question lies Mises's central point. Only if a method of calculation exists can human beings in a complex society take full advantage of the division of labor. Alternatives must be compared with one another, if people are to know how best to fulfill their desires for goods and services; and this can be done only if the alternatives can be reduced to a common denominator for assessment. This, in turn, can be accomplished only through market prices.

Now it is apparent that the two insights discussed above, far from being random remarks, fit exactly into Mises's central strategy. The Marxist system proposes the destruction of capitalism-hence it must be rooted out and destroyed. Even more directly, Mises's comments on the Roman history illustrate his principal thesis-interfere with economic calculation, and you are sunk.

Once you have grasped Mises's leitmotif, everything falls into place, and the book takes on a relentless quality as Mises hammers home his case. Another illustration of the way in which Mises elaborates his theme of capitalism and calculation must here suffice.

Controversy over the effects of the Industrial Revolution on the standard of living of the working class has been a staple of modern historiography. Such eminences as E.P. Thompson and Eric Hobsbawm paint the plight of the working class in somber hues. (I do not think it altogether a coincidence that both of these writers once found a welcome haven in the British Communist Party.)

Mises refuted these supposed authorities in advance, with a simple but devastating point. Population in eighteenth-century Britain increased greatly. Unless the new industrial system was indeed more able than its predecessor to supply the wants of the workers, no such increase in numbers could have taken place. "But let us not forget that in 1770...England had 8.5 million inhabitants, while in 1831...the figure was 16 million. This conspicuous increase was mainly conditioned by the Industrial Revolution" (p. 617).

The Scholar's Edition of Human Action reprints the first edition of Mises's great work. As Jeffrey Herbener, Hans Hoppe, and Joseph Salerno make clear in their excellent introduction, this edition is superior to the later redactions-second thoughts are not always best. Its treatment of monopoly price includes important passages later dropped, and only this edition contains Mises's brilliant account of the Nazi barter agreements (pp. 796-99). The Scholar's Edition is even better than the original 1949 printing since it includes the aforementioned introduction comparing the various editions. Further, the book has been beautifully printed, as befits a work of this stature.


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