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1. Austrian Sociology, Lecture 2
Human Action by Ludwig von Mises
Chapter VIII, pp.153-165
David Gordon
Mises Academy
March 19, 2013

2. Liberalism
• Mises is strongly committed to the free market.
He also says that praxeology is value free. Is this a
contradiction?
• Mises says no. Economics does not imply
liberalism, or any other ethical or political system.
• Economics can say, if you want material
prosperity, establish the free market. This is not a
normative statement. It doesn’t say that people
should favor the free market.

3. Liberalism Continued
• Mises goes further. Most people do in fact
want material prosperity.
• Objection: what about values “higher” than
money? Why should these values be
subordinated to the pursuit of material gain?

4. Mises’s Response
• Mises has two responses.
• Under what conditions do the higher values
flourish? What if they flourish to a greater
extent in wealthy societies than in poor ones?
• Mises also notes that supporters of the higher
values don’t “sell” them as harmful to
prosperity. His concern is what people do
value, not with what they ought from an
external perspective to value.

5. Religion and Liberalism
• Liberalism is based entirely on reason, not faith. It
says it is objectively true that the free market will
lead to greater productivity than rival systems.
• Mises calls doctrines of society that appeal to
non-rational sources theocratic. These theocratic
doctrines aren’t confined to religions. Any appeal
to special non-rational knowledge counts as
theocratic, e.g., claims that some person or group
discerns the trend of history.

6. More Religion
• Theocracy is not the same as religion. So long
as religion says nothing about social
institutions or teaches views in accord with
liberalism, there is no opposition between
liberalism and religion.
• Mises is sympathetic to William James’s
individualist view of religion.

7. Social Cooperation
• We know that people benefit from social
cooperation rather than living in isolation.
• One reason for this is that there are some
tasks that only a group of people can perform.
• Mises does not think this is the main reason
society developed. In primitive
conditions, these tasks come up only
occasionally.

8. Division of Labor
• The main reason people form societies is the
division of labor. People gain from specializing
in production and exchanging. This generates
permanent relations.
• Recognizing the gains from trade took place
very early in history.

9. Conditions for Division of Labor
• The division of labor takes place because people
aren’t equal in their abilities.
• Also, areas of the earth are different.
• There is another view of the division of labor
taken by Adam Smith that does not start from
inequality. Even equal people would find it
beneficial to specialize. Whether this is right
seems to depend on what we mean by “equality.”
But it’s clear that inequality makes the division of
labor much greater.

10. Law of Association
• We can see how trade is beneficial to two
people if each person is better at producing
something than the other one. If I am better
than you in growing apples and you are better
in growing oranges, then we will have more
apples + oranges if we each produce what we
are best at making.

11. Law of Association Continued
• What happens if you are better than
producing everything than I am? Will it still be
beneficial for us to trade?
• Trade is beneficial even under this condition.
You should specialize in the good where your
absolute advantage is greatest and I should
specialize where my absolute disadvantage is
least. This is my comparative advantage. This
expression is often misunderstood.

12. How Do We Know the Law is True?
• The easiest way to understand why the law is
true is to consider some examples. A baseball
player who was skilled in making baseball bats
may find it more beneficial to buy a bat from
someone less skilled, because he can concentrate
on playing baseball , where he will earn more
money.
• Notice that the difficult part is to explain why
trade helps the person with the absolute
advantage in all areas.

13. Exception to the Law
• There is one case where trade between
people where one has an absolute advantage
in all areas is not better for all.
• This case occurs when someone’s absolute
advantage isn’t greater in one area than
another.
• This doesn’t arise very often in practice.

14. Ricardo
• David Ricardo showed that the law held in
international trade. His model holds fixed the
capital and labor in the two countries. Capital and
labor can’t be moved from one country to the
other.
• Some people have objected that Ricardo showed
that trade is beneficial only under restricted
conditions. There isn’t a general argument for
free trade. But this is a misunderstanding. Trade
is always beneficial, from the point of view of
those engaged in it.

15. Generalizing the Law
• The law doesn’t just apply to Ricardo’s case of
trade between two countries.
• It applies to any exchange between
people, with the exception noted. It is a
general law of association.
• This Law of Association is basic to Mises’s
theory of society.

16. Mises’s Proof of the Law
• Mises’s proof of the law makes no reference
to value. It is based on the cost of the
alternatives, taken as physical quantities
produced in a certain amount of time.
• You can also prove the law by money
calculations.
• You can’t calculate directly in values. This is a
fundamental point in HA.