9-4-24: A 1949 Book Provides a Key to Puncturing Political Panaceas

by Gary Alexander

September 4, 2024

Seventy-five years ago next week, on September 14, 1949, Yale University Press published Ludwig von Mises’ magnum opus, “Human Action: A Treatise on Economics.” That first edition ran a daunting 900 pages, but it entered a second printing within two weeks, with plans for a third printing, and it is now recognized as one of the major works of economic thought, in parallel with Adam Smith’s “Wealth of Nations” (1776), Karl Marx’ “Das Kapital” (1867) and John Maynard Keynes’ “General Theory” (1936).

I first read it around 1980, when I was introduced to the Austrian School of Economics by several of its modern champions, including Robert D. Kephart, Mark Skousen, Doug Casey, Leonard Liggio, Walter Grinder and scholars at the Institute for Humane Studies at George Mason University. “Human Action” gave me what I now call the “decoding key” for predicting the outcome (puncturing) the promises of political panaceas, both right and left. Briefly, Human Action says humans act based on subjective choice, not as programmed robots. If the government raises taxes or benefits, we predictably change our behavior.

Human beings are not animals, or machines. We have consciousness. We alter our behavior based on our personal preferences, due to shifting realities. These choices can be in defiance of what our rulers expect.

None of this has any connection with the mathematical models of central planners – such as “raising tax rates will raise more money,” or “drafting new benefits will not raise price levels or increase indolence.”

Back in 1949, this was academic heresy. Economic orthodoxy was represented by Paul Samuelson’s new economics textbook, first published in 1948, representing the clearest distillation of Keynesianism – the virtues of top-down economic planning. There were few Mises fans, led by Newsweek columnist Henry Hazlitt, author of “Economics in One Lesson,” who reviewed “Human Action” in these glowing words:

“[This] book is destined to become a landmark in the progress of economics… Human Action is, in short, the most uncompromising and the most rigorously reasoned statement of the case for capitalism that has yet appeared…. It should become the leading text of everyone who believes in freedom, in individualism, and the ability of a free-market economy not only to outdistance any government-planned system in the production of goods and services for the masses, but to promote and safeguard, as no collectivist tyranny can ever do, those intellectual, cultural, and moral values upon which all civilization ultimately rests.” – Henry Hazlitt in Newsweek, 1949.

Von Mises was stunned by this reaction, since his German language first edition of the book, which took six years to write, mostly in exile in Switzerland during the lead-up to the Nazi Anschluss of Austria, was almost totally ignored. Then, it took almost four years to negotiate and publish this American version.

After reading Human Action in 1980, I enlisted Henry Hazlitt to write the opening editorial in the first edition of our new magazine, Wealth, published by fellow von Mises fan, James U. Blanchard III. In that maiden effort, Hazlitt showed our readers why “wealth” is not a dirty word. I also enlisted Mises-friendly writers Skousen, Casey, Art Laffer, Larry Reed and others to decode various economic myths of the day.

But that’s now ancient history. The national debt was then crossing $1 trillion. Now, it’s near $35 trillion.

“Human Action” Decodes the Current Election Season Nonsense

Where to start – the pickings are so lush. First, let’s take the housing shortage and the fact that buying a home is virtually impossible for most young couples. The political solution, of course, is to give first-time buyers $25,000. Brilliant! The “human action” response is that the sellers of homes will then raise the price $25,000 to meet rising demand and we’ve loosened the inflation (and debt) monsters once again.

The real problem is that the U.S. needs over seven million more homes built, yesterday, and no candidate is offering any fresh ideas on how to get homebuilders off their duff. That’s because of a wide range of crippling and time-consuming regulations, zoning, high interest rates and fresh memories of the housing collapse of 2005-08. The answer is to cut regulations deeply, lower interest rates, cut back zoning, allow some smaller homes, micro-units, triplexes, some creative thinking, and less roadblocks for homebuilders.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Here’s a new doozy: Kamala Harris has said that she wants to cancel medical debts, a winning populist plan, similar to Joe Biden’s forgiveness of college debts. Both of those high-debt situations came about from what von Mises would call “transference of risk” to a disinterested third party. Nobody watches over their own money like the owner of that money. When the government offered loan guarantees to college students, universities (all of a sudden!) recognized a golden opportunity to raise tuition (and other fees) to the sky, with no corresponding need to deliver better services. College costs grew two or three times the rate of inflation and students ended up with $50,000 to $100,000 in debt and non-marketable degrees.

The same thing happened when insurance companies took over our entire range of health costs, from a stubbed toe to cancer hospitalization. There was no cost control. We were no longer able to make trade-offs for office visits, tests or services, so costs skyrocketed and now we treat the effect – “cancelling the debt.” In both cases – college debt or health debt – this involves violation of contract and insulting those who paid for their own services, at great sacrifice, without asking for a bailout, a clear double standard.

Two weeks ago, I went into detail about the silly plan to micro-manage grocery store prices, in what our economics-challenged Vice-President called “price-gauging,” so I won’t go into that any further here. No decent economist of either Party likes this idea or thinks it will work, so it will likely evaporate soon.Harris has also proposed $5 trillion in tax increases over the next 10 years, which will take us back to the pre-Trump Obama world of many corporations sequestering their profits overseas instead of declaring them for taxation in the United States. When Trump lowered the business tax rate from 35% to 21%, part of the benefit was when corporations brought overseas profits back to American and paid taxes on them.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Harris is also proposing the highest capital gains tax rate since the inception of that tax in 1922: 44.6 percent. The previous high was Jimmy Carter’s 40% rate. (China’s top capital gains tax rate is 20%). Under her proposal, the combined federal-state capital gains tax rate would exceed 50% in many states, such as California, 57.9%, New Jersey 55.3%, Oregon 54.5%, Minnesota 54.4%, and New York 53.4%.

Capital gains are not indexed to inflation, so in many cases these gains are not gains at all, but inflation — especially in the Biden era. And she has also proposed a capital gains tax on “unrealized” (unsold) gains for the richest Americans, which history tells us will eventually be expanded to hit many or most of us.

This would be a life-killing, economy-killing tax, since it would force the sale of a big part of those assets at “fire sale” prices, thereby reducing the value of those assets and fueling an overall market crash and likely a recession. Any reader of Ludwig von Mises or other Austrian-based economist could tell you that. (A $5 Kindle version of the 1998 scholar’s edition of Human Action will get you your own decoder key).