Ludwig Von Mises: Early Life, Economic Views, Theories

Ludwig von Mises was an influential Austrian economist. He is known as an advocate of free-market capitalism and a staunch opponent of socialism and interventionism.

Von Mises taught at the University of Vienna and New York University and published his most renowned work, Human Action, in 1940. Ludwig von Mises died on Oct. 10, 1973.

Early Life and Education

Ludwig von Mises was born in 1881 in Galicia, a region of Austria-Hungary. Raised by Jewish parents who were part of the Austro-Hungarian nobility, he was fluent in German, Polish, French, and Latin.

In 1906, Ludwig von Mises graduated with a Juris Doctorate in law and economics from the University of Vienna and began a career as an economist, author, and educator.

Views on Economy

Ludwig Von Mises served in World War I as a front officer and an economist to the War Department of Austria, where he served as economic adviser to Austrian Chancellor Engelbert Dollfuss, a strong opponent of Nazism.

As an economist, Ludwig von Mises was known for his consistent adherence to the principles of laissez-faire and strong resistance to government intervention in economic matters. He closely followed the teachings of Carl Menger, founder of the Austrian School of Economics. Menger's “subjective theory of value" is one of the most influential insights in economics, citing that people will exchange something they value less for something they value more.

As the National Socialists began to influence Austria and Germany, Ludwig von Mises secured a position as a professor at the Graduate Institute of International Studies in Geneva, Switzerland in 1934.

With the help of a grant from the Rockefeller Foundation, Ludwig von Mises arrived in the U.S. in 1940 and became a visiting professor at New York University in 1945, remaining there until his retirement in 1969.

Monetary Theory

Ludwig von Mises's first book, The Theory of Money and Credit, published in 1912, was used as a money and banking textbook for two decades and introduces the foundation of monetary theory and the first integration of microeconomics and macroeconomics. He defined how money had its origin in the market, its power as a means of bartering, and how its value is based on its usefulness as a commodity.

Von Mises argued that the purchasing power of money exercises its influence beyond the period of a current transaction. According to his regression theorem, the value of money today depends on the value of money yesterday, just as the value of money yesterday was dependent on a previous day's value.

During the Keynesian revolution in American economic thinking from the mid-1930s to the 1960s, the ideas of Ludwig von Mises waned in popularity.

Business Cycle Theory

From his monetary theory, Ludwig von Mises developed the Austrian Business Cycle Theory. His theory traces the cause of recurrent business cycles and resulting expansion and recession observable in modern economies.

Ludwig von Mises noted that the inflationary expansion of money by a government banking system encourages a boom in investment in certain lines of business and industries to finance long-term production processes. However, without continued injections of credit, these projects prove unprofitable and unsustainable. With lost value, investments must be liquidated, correcting the distortions introduced in the pattern of capital investment.

This liquidation process is the recession phase of the business cycle, creating the temporary elevation of unemployment of labor and resources. A central bank could intervene and continue to inject new fiduciary media into the economy, but at the risk of inducing hyperinflation and a crack-up boom. 

The Bottom Line

Based on the implications of microeconomics, his Monetary Theory, and Business Cycle Theory, Ludwig von Mises argued that a free market economy, using laws of supply and demand, is the most effective tool to produce and distribute the goods and services desired by the people in a society.