Ludwig von Mises

A good's value is not a property of the good or of the labor in it, but the importance a person attaches to it for satisfying a want.

Menger's break with the classical labor theory of value. Exchange happens because two people value the same goods in opposite order; costs matter only because the inputs have other valued uses.

Carl Menger, Principles of Economics (1871)

The value of one unit of a stock equals the importance of the least urgent use that unit serves, since that is what you'd give up if you lost it.

Menger's farmer with sacks of grain: lose one sack and he drops the parrots, not his bread. Value is decided for units at the margin, never for whole classes of goods.

Carl Menger, Principles of Economics (1871)

Water is vital and cheap; diamonds are frivolous and dear. The marginal view resolves it: we never choose between all water and all diamonds, only between one more unit of each.

Where water is plentiful one more liter matters little; stranded in a desert, a liter outranks any diamond. Prices follow the marginal unit.

Carl Menger, Principles of Economics (1871)

Mises's name for the general theory of human action, deduced from the axiom that humans act: they use means to pursue chosen ends.

Mises held that the core laws of economics (e.g. that people prefer more of a good to less, that all action takes time) are known a priori rather than tested statistically. This method is the most disputed part of his work; most economists treat economic laws as empirical hypotheses.

Human Action (1949)

Other things equal, a person prefers a satisfaction sooner to the same satisfaction later.

Mises treats it as a universal feature of action. It is why saving and waiting must be rewarded, and how far it falls decides how long the production processes a society can sustain.

Human Action (1949), ch. 18

The discount of future goods against present goods that follows from time preference; it exists even without money or loans.

For Mises interest is not the price of money or the reward for productivity but the expression of time preference. Market loan rates are this originary rate plus risk and expected inflation.

Human Action (1949), ch. 19

Producing tools and intermediate goods first, and consumer goods later, yields more output per hour but takes longer.

Böhm-Bawerk's idea, taken up by Mises: lengthening the structure of production needs savings to live on while waiting. Lower time preference makes longer detours worthwhile.

Böhm-Bawerk, Capital and Interest (1884–89); Human Action (1949)

Money arises without a decree: traders accept the most saleable good in indirect exchange, which makes it more saleable still, until it becomes the general medium of exchange.

Menger's account shows how a key social institution can emerge from individual choices that no one designed. The state can later adopt or monopolize money, but it didn't invent it.

Carl Menger, "On the Origins of Money" (1892)

How easily a good can be sold at a fair price at any time: helped by durability, divisibility, portability and wide demand.

Barter needs a double coincidence of wants. Holding a more saleable good is a way around that, which is the first step toward money.

Carl Menger, "On the Origins of Money" (1892)

Today's demand for money depends on yesterday's purchasing power, which depends on the day before's, back to the last day the good was valued only for non-monetary uses.

Mises's answer to the circularity of explaining money's value by its value. It implies every money must have started as a commodity with its own use value (a claim debated now that fiat currencies and Bitcoin exist).

The Theory of Money and Credit (1912)

A change in the money supply doesn't raise all prices together; it changes relative prices and redistributes wealth along the way.

Mises rejected the idea of money as a neutral veil. Even if the price level eventually rises in proportion, the path matters: who got the money first is richer and who got it last is poorer.

The Theory of Money and Credit (1912)

New money benefits those who receive and spend it first, before prices rise, at the expense of those it reaches last and of people on fixed incomes.

Named after Richard Cantillon (1755), whose analysis Mises built on. It is why the channel of monetary expansion (bank credit, government spending, transfers) decides who gains.

Cantillon, Essai (1755); The Theory of Money and Credit (1912)

Without market prices for the means of production, a socialist planner cannot compare the costs of alternative ways to produce, so cannot tell efficient from wasteful plans.

Mises's 1920 argument: a railway can be built with countless mixes of steel, labor, timber and machines, and only money prices reduce them to one comparable unit. It launched the socialist calculation debate (Lange and Lerner replied that planners could simulate prices; Hayek extended Mises's case).

"Economic Calculation in the Socialist Commonwealth" (1920); Socialism (1922)

The money prices of factories, machines and raw materials, which exist only where they can be privately owned and traded.

Mises stressed that even a socialist economy with prices for consumer goods would lack these. Profit and loss from buying and selling inputs is what moves resources to their most valued uses.

Socialism (1922)

Credit expansion pushes interest rates below the rate that real savings would set, which starts more and longer projects than savings can complete; the boom ends in a bust when they are abandoned.

Mises (1912) and Hayek (1931) located the cause of the cycle in money and credit rather than in markets themselves. Critics question why entrepreneurs repeatedly make the same mistake and argue the theory fits some booms (housing 2000s) better than others.

The Theory of Money and Credit (1912); Human Action (1949), ch. 20

The interest rate that would balance real saving and investment, set by people's time preference.

Taken from Wicksell. When banks lend at a rate below it, investment exceeds the saving that could fund it, and the gap is bridged by new money rather than by real resources.

Wicksell, Interest and Prices (1898); The Theory of Money and Credit (1912)

Investment in the wrong lines and the wrong lengths of production, made in response to a false interest-rate signal, which shows up all at once when credit stops.

Explains why many firms in capital-goods industries fail at the same time, rather than random individual failures. For Mises the bust is the painful correction, and further credit only postpones it.

Human Action (1949), ch. 20

A 'middle way' of a market economy steered by government orders such as price controls, which Mises argued is unstable.

Each control produces results its sponsors didn't want (shortages, diverted production), which invites a further control. The government must eventually either repeal or extend control to everything.

A Critique of Interventionism (1929); Human Action (1949), ch. 27–30

Mises's example: a cap on milk prices leads farmers to make butter and cheese, so those are capped; then herds shrink, so feed is capped, and so on up the chain.

Shows how a single well-meant control pushes the shortage upstream into the inputs, ending with less milk than before the first control.

Human Action (1949), ch. 30; Planning for Freedom (1952)

A system in which private ownership remains in name but the state dictates prices, wages, output and who works where.

Mises's term (from Zwangswirtschaft, 'compulsory economy') for where the interventionist spiral ends: the endpoint looks like the market economy on paper, but decisions are made by command.

Socialism (1922); Omnipotent Government (1944)