Ludwig von Mises and the Real Meaning of Liberalism

Liberalism has become one of the most widely misused and abused words in the American political lexicon. It represents, some say, politically “progressive thought,” based on the goal of “social justice” through greater “distributive justice” for all. Others declare that it represents moral relativism, political paternalism, governmental license, and just another word for “socialism.” Lost in all of this is the fact that historically, “liberalism” originally meant, and continues to mean for some, individual freedom, private property, free enterprise and impartial rule of law under constitutionally limited government.

One of the greatest voices during the last hundred years supporting the original meaning of liberalism was the Austrian economist, Ludwig von Mises (1881-1973). This year marks the ninetieth anniversary of the publication of his concise, clear, and compelling case for this understanding of the truly liberal society, his 1927 book, Liberalism: The Classical Tradition.

When penned by Mises in 1927, the aftermath of the First World War had seen the triumph of communism in Russia, the rise of fascism in Italy and an emerging nationalist and racialist movement in Germany that would come to power in 1933 in the form of Adolph Hitler and his National Socialist (Nazi) Party.

Classical Liberalism vs. Socialism and Nationalism

Communism, fascism, and Nazism were all the culmination of the political and economic collectivist trends that had taken hold in the decades before World War I. They were set loose on the world in the political chaos and social cataclysms that engulfed much of Europe during and after the “Great War,” as it came to be called.

The socialist rejected the “bourgeois” freedoms of classical liberalism – freedom of speech, press, voluntary association – as “false” freedoms.

The middle decades of the nineteenth century were generally a time of the rise and triumphs of “classical” liberalism, as it has come to be called. It was the time of the replacement of absolute kings by either constitutionally constrained monarchs or republication forms of government. Of the end to human slavery and a growing movement for an equality of rights and treatment for all before an impartial rule of law. Of the freeing of economic activity from the heavy-handedness of extensive and intrusive government regulations, controls or prohibitions on manufacturing, marketing and sale of almost all goods and services, and its replacement with a relatively wide latitude for freedom of enterprise and trade. It was also a growing attempt to prevent or limit the starting of wars and their degree of harm and destruction if and when they occurred.

But in the last decades of the nineteenth century and the first decade of the twentieth, new political and economic ideas rose to the fore in the form of socialism and nationalism. The socialist rejected the “bourgeois” freedoms of classical liberalism – freedom of speech, the press, voluntary association, private enterprise and citizenry participation in democratic electoral processes – as “false” freedoms.

“Real” freedom required “the workers” as a “social class” to overthrow the exploiting “capitalist owners” of the means of production and substitute government centralized planning and redistributed income equality.

The nationalists also rejected philosophical and economic liberalism. They said liberalism’s emphasis on the uniqueness and freedom of the individual was misplaced. Individuals only existed as part of, and could only have a meaningful identity in terms of, the national ethnic,  linguistic, or racial group to which they belonged.

Socialists insisted that the history of the world had been an inescapable conflict between social classes that could only end with the victory of “the workers” over the private property-owning capitalists. The nationalists said that “nations” were the real things and individuals merely the passing elements of them. The eternal conflicts of life were between nation-states fighting for political and economic supremacy in the world, for which the individual was to sacrifice. (See my article, “Before Modern Collectivism: the Rise and Fall of Classical Liberalism”.)

Liberalism as a System of Peaceful Trade and Human Cooperation

This was the historical context in which Mises published in 1927 his defense of classical liberalism and its emphasis on individualism, free markets and social betterment. In place of the collectivists’ starting premises of inescapable conflicts among men in terms of “social class,” nationality, race, or narrow group interest, Mises insisted that reason and experience demonstrated that all men could associate in peace for their mutual material and cultural betterment.

The key to this was an understanding and appreciation of the benefits of a division of labor. Through specialization and trade, the human race has the capacity to lift itself up from both poverty and war. Men become associates in a common process of social cooperation instead of antagonists, with each attempting to rule over and plunder the others. Indeed, all that we mean by modern civilization and the material and cultural comforts and opportunities that it offers man, is due to the highly productive benefits and advantages made possible by a division of labor. Men have learned to peacefully collaborate in the arena of competitive market exchange.

Without private ownership in the means of production, the coordination of multitudes of individual activities in the division of labor is impossible.

Of course, collectivist political force can be substituted for the “reward” of market-based and earned profits and the “punishment” of financial losses in guiding people in their peaceful competitive cooperation. However, the costs of this substitution are extremely high, Mises argued. First, men are less motivated to apply themselves with intelligence and industry when forced to work under the lash of servitude and compulsion. Thus society loses what their free efforts and invention might have produced. 

Second, men are forced to conform to the values and goals of those in command Thus they lose the liberty of pursuing their own purposes, with no certainty that those who rule them know what may give them happiness and meaning in life any better.

And, third, socialist central planning and political intervention in the market, respectively, abolish or distort the functioning of social cooperation. A sustained and extended system of specialization for mutual improvement is only possible under a unique set of social and economic institutions.

Economic Calculation Under Liberal Capitalism

Without private ownership in the means of production, the coordination of multitudes of individual activities in the division of labor is impossible. Indeed, Mises’s analysis of the “impossibility” of a socialist order being able to match the efficiency and productivity of a free-market economy was the basis for his international stature and reputation as one of the most original economists of his time. It was also the centerpiece of his earlier book on Socialism (1922).

In Liberalism, Mises once more clearly and persuasively explained that private ownership and competitive market exchange enable the formation of prices for both consumer goods and the factors of production, expressed in the common denominator of a medium of exchange – money. On the basis of these money prices, entrepreneurs can engage in economic calculation to determine the relative costs and profitability of alternative lines of production.

Without the ability to buy and sell, there will be no bids and offers, and therefore no haggling over terms of trade.

Without these market-generated prices, there would be no rational way to allocate resources among their competing uses, to assure that the goods most highly valued by the buying public were produced in the least costly, and therefore most economical manner. Economic calculation, Mises demonstrated, guarantees that the scarce means available best serve the members of society.

Such rationality in the use of means to satisfy ends is impossible in a comprehensive system of socialist central planning. How, Mises asked, will the socialist planners know the best uses of their resources under their central control should be applied without such market-generated prices? Without private ownership of the means of production, there would be nothing (legally) to buy and sell. Without the ability to buy and sell, there will be no bids and offers, and therefore no haggling over terms of trade among competing buyers and sellers.

Without the haggling of market competition, there would be no agreed-on terms of exchange. Without agreed-on terms of exchange, there are no market prices. And without market prices, how will the central planners know the opportunity costs and therefore the most highly-valued uses for which those resources could or should be applied? With the abolition of private property, and therefore market exchange and prices, the central planners would lack the necessary institutional and informational tools to determine what to produce and how in order to minimize waste and inefficiency.

Government Interventionism Is No Substitute for Competitive Capitalism

At the same time, Mises demonstrated the inherent inconsistencies in any system of piecemeal political intervention in the market economy. Price controls and production restrictions on entrepreneurial decision-making bring about distortions and imbalances in the relationships of supply and demand. They also constrain the most efficient use of resources in the service of consumers.

Interventionism consistently applied could lead to socialism on an incremental basis.

The political intervener is left with the choice of either introducing new controls and regulations in an attempt to compensate for these distortions and imbalances or repealing the interventionist controls and regulations already in place and allowing the market once again to be free and competitive. The path of one set after another of piecemeal interventions entails a logic of the growth of government intrusion into the market; it eventually would result in the entire economy coming under state management. Hence, interventionism consistently applied could lead to socialism on an incremental basis.

Both socialism and interventionism are, respectively, unworkable and unstable substitutes for capitalism. The classical liberal defends private property and the free-market economy precisely because it is the only system of social cooperation that provides wide latitude for freedom and personal choice to all members of society while generating the institutional means for coordinating the actions of billions of people in the most economically rational manner.

Classical Liberalism, Freedom, and Democracy

Mises’s defense of classical liberalism against these various forms of collectivism, however, was not limited “merely” to the economic benefits from private property. Property also provides man with personal freedom. Property gives the individual an arena of autonomy in which he may cultivate and live out his own conception of a good and meaningful life.

It also protects him from dependency on the state for his existence; through his own efforts and voluntary exchange with other free men, he is not beholden to any absolute political authority that would dictate the conditions of his life. Freedom and property, if they are to be secure, require peace. Violence and fraud must be outlawed if each man is to take full advantage of what his interests and talents suggest would be the most profitable avenues to achieve his goals in consensual association with others.

Freedom and property, if they are to be secure, require peace.

The classical-liberal ideal also emphasizes the importance of equality before the law, Mises explained. Only when political privilege and favoritism are eliminated can each man have the latitude to use his own knowledge and talents in ways that benefit himself and also rebound, through the voluntary transactions of the market, to the betterment of society as a whole.

This means that a liberal society is one that accepts that inequality of income and wealth is inseparable from individual freedom. Given the diversity of men’s natural and acquired abilities and volitional inclinations, the rewards earned by people in the marketplace will inevitably be uneven. It cannot be otherwise if we are not to diminish or even suffocate the incentives that move men to apply themselves in creative and productive ways.

Therefore the role of government in the classical-liberal society is to respect and protect each individual’s right to his life, liberty, and property. The significance of democracy, in Mises’s view, is not that majorities are always right or should be unrestrained in what they may do to minorities through the use of political power. Elected and representative government is a means of changing who holds political office without resort to revolution or civil war. It is an institutional device for maintaining social peace.

Mises argued that laws and institutions should be judged by how they further the goal of peaceful social cooperation.

It was clear to Mises from the experience of communism and fascism as well as from the many tyrannies of past ages, that without democracy the questions of who shall rule, for how long, and for what purpose would be reduced to brute force and dictatorial power. Reason and persuasion should be the methods that men use in their dealings with one another – both in the marketplace and the social and political arenas – and not the bullet and the bayonet.

In his book on classical liberalism, Mises bemoaned the fact that people are all too willing to resort to state power to impose their views of personal conduct and morality whenever their fellow human beings veer from their own conception of the “good,” the “virtuous,” and the “right.” He despaired,

The propensity of our contemporaries to demand authoritarian prohibition as soon as something does not please them . . . shows how deeply ingrained the spirit of servility still remains in them . . . A free man must be able to endure it when his fellow men act and live otherwise than he considers proper. He must free himself from the habit, just as soon as something does not please him, of calling for the police.”

What, then, should guide social policy in determining the limits of government action? Mises was a utilitarian who argued that laws and institutions should be judged by the standard of whether, and to what extent they further the goal of peaceful social cooperation. Society is the most important means through which men are able to pursue the ends that give meaning to their lives.

His defense of democracy and constitutional limits on the powers of government was based on the reasoned judgment that history has demonstrated far too many times that the resort to nondemocratic and “extra-constitutional” means had led to violence, repression, abrogation of civil and economic liberties, and a breakdown of respect for law and the legal order, which destroys the long-run stability of society.

The apparent gains and benefits from “strong men” and “emergency measures” in times of seeming crisis have always tended to generate costs and losses of liberty and prosperity in the longer run that more than exceed the supposed “short-run” stability, order, and security promised by such methods.

Classical Liberalism and International Peace

The benefits from social cooperation through a market-based division of labor, Mises argued, are not limited to a country’s borders. The gains from trade through specialization extend to all corners of the globe. Hence, the classical-liberal ideal is inherently cosmopolitan.

Aggressive nationalism, in Mises’s view, not only threatens to bring death and destruction through war and conquest, but it also denies all men the opportunity to benefit from productive intercourse by imposing trade barriers and various other restrictions on the free movement of goods, capital, and people from one country to another. Prosperity and progress are artificially constrained within national boundaries.

Eliminate all trade barriers and limit governments to the securing of life, liberty, and property, and most tensions that lead to war will have been removed.

This perversely can create the conditions for war and conquest as some nations conclude that the only way to obtain the goods and resources available in another country is through invasion and violence. Eliminate all trade barriers and restrictions on the free movement of goods, capital, and men, and limit governments to the securing of each individual’s life, liberty, and property, and most of the motives and tensions that can lead to war will have been removed.

Mises also suggested that many of the bases for civil wars and ethnic violence would be removed if the right of self-determination were recognized in defining the borders between countries. Mises took great care to explain that by “self-determination,” he did not mean that all those belonging to a particular racial, ethnic, linguistic, or religious group are to be forced into the same nation-state. He clearly stated that he meant the right of individual self-determination through plebiscite. That is, if the individuals in a town or region or district vote to join another nation, or wish to form their own independent country, they should have the freedom to do so.

There still may be minorities within these towns, regions, or districts, of course, that would have preferred to remain part of the country to which they originally belonged, or would have preferred to join a different country. But however imperfect self-determination may be, it would at least potentially reduce a good amount of the ethnic, religious, or linguistic tensions. The only lasting solution, Mises said, is the reduction of government involvement to those limited classical-liberal functions so that the state may not be used to impose harm or disadvantage on any individual or group in society for the benefit of others. (See my article, “Self-Determination and Individual Choice in a Post-Brexit World”.)

Classical Liberalism and the Social Good

Finally, Mises also discussed the question: for whose benefit does the classical liberal speak in society? Unlike virtually all other political and ideological movements, liberalism is a social philosophy of the common good. Both at the time when Mises wrote Liberalism and now, political movements and parties often resort to the rhetoric of the common good and the general welfare, but in fact their goals are to use the power of government to benefit some groups at the expense of others.

Classical liberalism wants the elimination of government intervention in human affairs so political power is not abusively applied at the expense of anyone in society.

Government regulations, redistributive welfare programs, trade restrictions and subsidies, tax policies, and monetary manipulation are employed to grant profit and employment privileges to special-interest groups that desire positions in society they are unable to attain on the open, competitive market. Corruption, hypocrisy, and disrespect for the law, as well as abridgments on the freedom of others, naturally follow.

What liberalism offers as an ideal and as a goal of public policy, Mises declared, is an equality of individual rights for all under the rule of law, with privileges and favors for none. It speaks for and defends the freedom of each individual and therefore is the voice of liberty for all. It wants every person to be free to apply himself in the pursuit of his own goals and purposes, so he and others can benefit from his talents and abilities through peaceful market transactions. Classical liberalism wants elimination of government intervention in human affairs so political power is not abusively applied at the expense of anyone in society.

Mises was not unaware of the power of special-interest-group politics and the difficulty of opposing the concentrated influence of such groups in the halls of political power. But he insisted that the ultimate power in society resides in the power of ideas. It is ideas that move men to action, that make them bare their chests at barricades, or that embolden them to oppose wrongheaded policies and resist even the strongest of vested interests. It is ideas that have achieved all the victories that have been won by freedom over the centuries.

Neither political deception nor ideological compromise can win liberty. Only the power of ideas, clearly stated and forthrightly presented, can do so. That is what stands out in the pages of Mises’s book on Liberalism, and makes it one of the enduring sources of the case for freedom.

The Enduring Value of Mises’s Liberalism

When Mises published Liberalism in 1927, communism and fascism seemed to be irresistible forces in the world. Since then, their ideological fire has been extinguished in the reality of what they created and the unwillingness of tens of millions to live under their yoke. Nonetheless, many of their criticisms of the free market continue to serve as the rationales for the intrusions of the interventionist welfare state in every corner of society. And many of the contemporary arguments against individual liberty and free enterprise often resemble the criticisms leveled against free markets and free trade by European nationalists and socialists in those years between the two World Wars.

Mises’s arguments for individual freedom and the market economy in Liberalism, from ninety years ago as well as in his many other writings, including Socialism (1922), Critique of Interventionism (1929), Human Action (1949), Planning for Freedom (1952), and his dozens of other articles and essays on the theme of political and economic liberty, continue to ring true and remain relevant to our own times in the twenty-first century. It is what makes a classic of his brilliant book on Liberalism, one that is as important now as when he originally wrote it nine decades ago.