No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter One: Introduction to Economics 30 GREAT ECONOMISTS IN HISTORY LUDWIG VON MISES 1881-1973 Ludwig Von Mises is an appropriate figure to recognize in our first chapter. We have reviewed the basic assumptions that will guide our understanding of acting man operating in a world that flows through time and is clouded by uncertainty. We have reviewed some of the common fallacies that cause economic confusion, and we have briefly reviewed comparative systems such as Socialism and capitalism. Ludwig Von Mises, more than any other economist, addressed all of these issues and more. We can (and will) rightly recognize other economists such as Adam Smith, but Von Mises wrote the most comprehensive treatise on economic theory ever. Human Action was Von Mises’ magnum opus (greatest work). With a few undeniable axioms and deductive logic, Mises fashioned a comprehensive theory of economic behavior. He called this study of human action praxeology; market exchange was a subset of that, called catallactics. Human Action is a somewhat difficult read, although once past the first few chapters it becomes clearer. First published in 1949, it is still being published and read today. While Human Action is appropriately venerated among free market scholars, it was not Mises’ only contribution. He was the first scholar to integrate monetary theory with microeconomics; successfully demonstrating how microeconomic behavior in the monetary arena could lead to macroeconomic consequences in his book, The Theory of Money and Credit. He outlined how central banks could start a boom/bust business cycle (booms followed by recessions) by keeping interest rates too low. His student, (Nobel laureate) Friedrich August Hayek, subsequently developed this outline into a comprehensive business cycle theory and accurately predicted the 1929 stock market crash. Von Mises’ work on Socialism challenged the then conventional wisdom that Socialism was the way of the future and would replace capitalism. Von Mises showed that without markets, there would be no prices of capital goods (goods used to produce consumer goods, such as tooling and machinery). And without prices of capital goods, there would be no way to determine how goods should be produced—there would be no economic calculation. How would you know whether you should use two laborers and one machine to produce a good, or two machines and one laborer when you had no prices for machinery or labor? Without economic calculation, there would be no rational way to plan. For Von Mises, Socialism was not simply a 2nd best choice, but it was irrational and therefore impossible in practice. While some scholars thought he was wrong, history has certainly vindicated Von Mises. We’ll review the concepts of business cycles and capital later in the book. Interestingly, Von Mises, as an Austrian Jew, had to flee the Nazis prior to the outbreak of WWII, finally settling in America. His libertarian thinking was never popular with governments, as highlighted in this 1998 Batman comic book! Photograph of Ludwig von Mises 2