Philosophy Weekend: The Eternal Battle Between Ludwig von Mises and John Maynard Keynes

Last weekend we searched for common ground on economic ideology between the Tea Party and Occupy Wall Street by examining the separate narratives each movement has developed to explain the banking system crash of 2007/2008, and the emotional contexts each narrative brings. Let’s spend this weekend looking at the intellectual roots of each protest movement’s economic ideology.

The most explosively influential economist of the modern era was Karl Marx, though his dramatic prescriptions for a better society had at least one gigantic problem: they were too stark to result in peaceful change, and instead fed into an atmosphere of global war, counter-reaction and suspicion that has plagued the planet for the last 150 years. Though Marxism turned monstrous in the 20th century, the practical question Karl Marx asked remains vital, and it has been the primary work of 20th century and 21st century economists to formulate better answers to the same question: how should a government manage its economy? Two famous economists, Ludwig von Mises and John Maynard Keynes, have led schools of thought that roughly define the positions of economic protest movements such as the Tea Party and Occupy Wall Street, though not always in simple ways.

The Austrian economist Ludwig von Mises has been cited by Ron Paul, Michelle Bachmann, Glenn Beck and others as a powerful influence on current libertarian thought, and is widely celebrated among the intellectual branches of the Tea Party movement. Born in 1881 in the center of a turbulent continent, Mises soaked up the fervent political debates swirling around the University of Vienna as a student and then as a professor, and produced a unique defense of free market capitalism that would please any analytic philosopher. A socially progressive (broadly, socialist) government must fail, he argued, because only free market capitalism can provide the basic language with which we can discuss the value of goods and services. The free market does not only serve producers and consumers, but also provides a self-improving mechanism that a centrally-managed economy can never replicate. The success or failure of any commercial venture provides information about what individuals want to buy, and this information will always be accurate and relevant. No matter how well-intentioned a socialist government might be towards its citizens, it will be struck dumb once its citizens lose their freedom to evaluate goods and services in an open market; under socialism, economic progress “would involve operations the value of which could neither be predicted beforehand nor ascertained after they had taken place. Everything would be a leap in the dark.”

It’s easy to feel the power behind these words, and von Mises’s classic 1922 book Socialism influenced later economists like Friedrich von Hayek, whose 1944 book The Road to Serfdom is also considered a canonical text by literary-minded Tea Partiers. Ayn Rand and Milton Friedman have also cited Ludwig von Mises as a key influence.

Small-government libertarianism as represented by Ludwig von Mises and Friedriech Hayek has had a renaissance in the last thirty years, especially after Milton Friedman’s expression of the same idea became a part of Ronald Reagan’s key message during his successful presidential campaign in 1980: “get the government off our backs”. Still, Austrian-school economics has mostly stood in opposition to actual government policies around the world during the 20th century. Small-government libertarian ideology is now at a popular peak in the USA and elsewhere, but the global economy is still best characterized as a Keynesian system, referring to the ideology of the British author and political advisor John Maynard Keynes, who argued for progressive economic planning by a strong and highly active government.

Keynesian economics aims to actively improve and stabilize national economies within a free market through central government planning. Keynes’s 1936 book The General Theory of Employment, Interest, and Money encourages governments to tackle the problem of unemployment and poverty by manipulating the money supply, providing stimulus funds and passing laws that improve the earning power of the lower and middle classes, thus increasing demand for goods and services and providing a level of general prosperity that would avoid the violent and oppressive excesses of either Marxist revolution or oligarchic exploitation of the masses. This amounts to a moderate position: a free market is essential, but the freedom must be tempered and regulated by government policy to ensure the best possible results for all classes of society. When Keynesian economics works correctly, the investment in the well-being and education of the middle and lower classes feeds back into the economy in the form of healthy spending and available skilled labor. Deficit spending can occur, but should not outpace the rate of growth. This overall concept is familiar to most people in the world today, because almost every non-Communist government in the world operates on roughly Keynesian terms.

While today’s Tea Party protest movement is clearly influenced by the Austrian School of Ludwig von Mises and Friedrich Hayek, it’s impossible to identify the Occupy Wall Street protest movement as clearly with any of these economic schools of thought. Many Occupiers are separatists or anarchists, and they are certainly not overtly Keynesian by any majority, since Keynesian economics is the USA’s status quo (though the USA has moved closer to small-government libertarianism since the presidency of Ronald Reagan).

Still, to the extent that Keynesian economics is consistent with government intervention against Wall Street crimes and abuses, the Occupy movement might be seen as broadly Keynesian. The call for better funding of education and universal health care is also Keynesian, as is the rage against the Bush tax cuts for the wealthy and the idea that the richest 1% of Americans need to pay enough taxes to sustain the society that sustains them. However, even if many Occupy positions are idealistically Keynesian, it’s absolutely clear that these protesters do not trust the current USA government to honestly operate any Keynesian economy.

It’s tempting to let the opposing ideas of Mises/Hayek and Keynes define the battle lines between the Tea Party and Occupy Wall Street, even though both movements have amorphous ideological boundaries (I would not be surprised to find that even some Tea Partiers would prefer a smartly managed economy to small government libertarianism, if they could only believe that such a choice existed). But the lack of clear ideological definition this should not discourage us in the search for common ground between both important protest movements; rather, it presents us with the beginnings of a dialogue that should be taking place and isn’t. How can intelligent and well-read Tea Partiers and Occupiers begin to debate the relative merits of Austrian-school vs. Keynesian economics without the heat rising immediately up to 300 degrees? This would be a fascinating conversation, if we could begin to have it on civil terms.

I’ll start it off with my own opinion, and I invite you to respond with yours.

I understand the appeal of Ludwig von Mises’s rigid small-government libertarianism, but I am suspicious of any economic program based on ideological principles rather than practical results. The reason every non-Communist government in the world today operates on a Keynesian basis is that Keynesian economics seeks to balance the needs of a free market with the needs of broad economic opportunity, while the Austrian-school speaks eloquently in terms of principles, but has no record of successful implementation to show. The turn towards “Reaganomics” in the USA in the last thirty years was a turn towards Austrian-school libertarianism, and the result has been a depressing string of scandals and shocking failures: the Savings and Loan debacle and the Keating Five, Enron, Bernie Madoff, AIG, Lehman Brothers.

Ludwig von Mises presents equations that purport to prove that any centrally managed economy will fail. But it’s easier to criticize than to construct. Where is von Mises’s real world success model? The best a small government libertarian can come up with, unfortunately, is Ronald Reagan. Reagan’s achievements in foreign policy appear impressive to some, but I think even an open-minded Tea Partier will have to agree that Reagan’s small-government/low-tax economic policies (which have been largely sustained since the 1980s) have not provided the long-term economic stability and growth they promised. (Instead, as any Occupier will point out, the main beneficiaries of the Reagan revolution turned out to be the wealthiest 1%, while the other 99% has fared badly by the bargain.)

The debate between small and big government economic management was not invented by Ludwig von Mises and John Maynard Keynes, and in fact appears to be innate in modern society. In the late 18th Century, a comparable debate roiled the newly formed United States of America, with Thomas Jefferson advocating a libertarian position that broadly anticipates that of the Austrian school, while Alexander Hamilton promoted the creation of an activist United States Bank to centrally manage the economy, anticipating the Keynesian position. This controversy nearly split the new nation apart. Hamilton’s position eventually prevailed, and his new First Bank of the United States eventually evolved into today Federal Reserve Bank (which remains, of course, highly controversial). Some of the animosity that erupted into the American Civil War 70 years later can be traced back to the failure of Jefferson’s position (which was seen as harmonious with the financial interests of the Southern states). It’s fascinating to realize that the same arguments that define the Tea Party and Occupy movements today were active during the first decade of this country’s existence.

Today’s quick glance at Austrian-school vs. Keynesian economics has not yielded any common ground — yet. But it points to a new way of discussing contemporary issues that might provide surprising and rewarding for protesters on both sides of current American politics. When common ground is too far a reach, we can uplift our dialogue by examining the terms of our argument. It would be a great improvement over today’s insipid, hysterical and often plainly childish public dialogue about the economy if Tea Party and Occupy protesters would begin discussing their opinions in terms of the competing ideologies of classical economists Ludwig von Mises and John Maynard Keynes. We might even get somewhere.

6 Responses

  1. Bah to them both and imported
    Bah to them both and imported ideologies! Bring back Henry George and the National System, I say!

  2. Hi Levi,
    Like yourself, I

    Hi Levi,

    Like yourself, I distrust those who claim to offer practical solutions based on “first principles’. I think they most often rely on a utopian hope that we can return to some original state of grace and then proceed from there. The problem is, there never was a state of grace to return to, or a clean slate from which to begin. Their theories present an overly optimistic model which can only do violence to the facts (and the people) to make themselves applicable.

    We have to start somewhere down the road, by first accepting that neither theory has ever held sway over our economy. Although the politicians talk like Keynesians, and/or like von Miseseans, they have just been talking, mostly. Yes, an individual momentary decision (like Reagan’s firing the air traffic controllers who broke the law, or Clinton’s reform of welfare) can seem like instituting a theory, but the rest of the economy was still moving very much under the impulse of an alternative theory –a hybrid theory, partly conservative, partly liberal; partly free market, partly government regulated, if not controlled. It is precisely this reason that we argue endlessly and foolishly about the OVERALL effectiveness of the economic policies of a particular administration. We have never known where so-and-so’s policy effects ended and the rest of the story begins. To this day, many will argue – with some cause – that the Clinton boom was the result of “Reaganomics”, while others blame the recent disaster, also with some cause, on liberal policies of the Clinton years. Notice the ten-year window of opportunity!

    I’m afraid that my vote would be rather to suspend talk about first principles all together than to entangle us further in this morass. You may be right to focus on theories as a way of explaining to activists and supporters on each side what they other guy is thinking. This could be helpful, if only in changing the terms of the debate from the name-calling and character assassination that is now too often employed. By saying to the OWS protester, “He is not just a greedy bastard who wants birds to fly into cheaply cleaned high-rise windows, and children to go to bed hungry” and to Tea Party protesters, “they are not just hippies who want to get high off the federal bong and dis America”, you may have progress. But I don’t see common ground.

    I think we should focus instead on this issue: though theories can be used as beards to mask more nefarious purposes, we cannot and should not assume it, especially as this applies to individuals. Similarly, though theories can be corrupted by being diluted with antithetical admixtures, or by gross misapplications and even mis-understanding by supporters – in other words, though people screw up – there is still an honest desire in the hearts of most people to see their theory serve ALL interests.

    Admittedly, this imposes limits on the protesters: each side is going to have to do a better job of focusing their demand. Outrage is not a policy or an answer.

    It is an interesting case study in outrage. Neither side seems to want to make demands, as such, but only to express outrage. I, a supporter of both protest movements, am beginning to think that the time has come to shit or get off the pot.

  3. i know where the “unfocused
    i know where the “unfocused outrage” criticism comes from, yet i’m also a little tired of hearing that the “occupy” movement is NOTHING BUT “unfocused outrage.” specific institutions are being targeted, and specific “demands” and/or grievances are being expressed— though you perhaps have to dig a little to find them, since the main movement has chosen a “leaderless” open-source approach, operating mainly through the wiki system, with various well-known spokespersons such as noam chomsky posting their takes on their own sites and various “alternative” (to major media) sites.

    perhaps criticism is more fairly directed at this “leaderless” approach, and not any perceived “total lack of message.” okay, fair enough. i actually wish a more complete official summary of goals and policy positions was available, but i think it also may be a bit unrealistic to expect a comprehensive, unified message to cohere after 8 weeks or so in addressing numerous systemic, structural problems that have been years in the making. or even decades.

  4. Nardo, your comment prompted
    Nardo, your comment prompted me to read about Henry George, a very interesting man. I’m not much into politics and the economy, but thanks for pointing out some good reading!

  5. Re: Ludwig von Mises – “A
    Re: Ludwig von Mises – “A socially progressive (broadly, socialist) government must fail, he argued, because only free market capitalism can provide the basic language with which we can discuss the value of goods and services. The free market does not only serve producers and consumers, but also provides a self-improving mechanism that a centrally-managed economy can never replicate.”

    From my viewpoint, I would generally agree with Ludwig up to a point – a society needs a functioning and fair economic system. Our present economy as close to a collapse as it is, certainly is unable to entertain the luxury of a free market that insists and even relies on a profit form the sellers which in turn causes the item in question to rise in prices… each price rising as the product passes from hand to hand. If the money is difficult to attain, or at worst example, unattainable at all, the product that may be necessary for the survival of the society remains out of reach. Is that not the death knell for a free market or even capitalism as we know it?

    However, no matter which economic system a society adheres to, it is inevitable that any system will eventually no longer fairly serve the society. Times necessitate change to fit the growth and needs of the society which do not remain stagnant. If not allowed change by those in charge of the economy, will result in revolutionary means that will produce that needed change. Keep the society entertained, educated and enlightened and that society will thrive. The best we have been able to do in our past is a fair education, a powerful entertainment base but far short on enlightenment (‘wisdom’).

    Perhaps the 21st Century will be but yet another stepping stone for our hu’manity in attaining the lives we value in our philosophical/religious lives.

  6. The unfortunate and ironic
    The unfortunate and ironic thing is that the battle between big and small government in this country is waged on both sides by corporations with money. I’ll admit that big government is bad when the Miseseans admit that they are being duped by the wealthy. Then we’ll find a reasonable compromise that de-leverages corporate money, and we’ll go back to our gardens and our magazines and live happily ever after.

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