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Powerful Concepts in Austrian Economics

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Powerful Concepts in Austrian Economics

 

The Austrian School of economics differs from most of the mainstream economic theories taught in universities. Most people imagine complex equations, esoteric verbiage, and mind-numbing algorithms in regard to economics; however, the Austrian School takes the a priori approach that eschews the unnecessary and downright harmful complexity of modern economic practices. Austrian economics places emphasis on creating hypotheses using logic and thought-experiments with human action as the foundation upon which all economic principles must be built.

Here are some powerful concepts in Austrian Economics:

 

Human Action

human action

The study of economics is much more than the widely-accepted definition of production, distribution, and consumption of products and services; rather, it is the study of human action and cooperation. The Austrian approach provides the supporting argumentation for free, unregulated markets with participants exchanging goods and services voluntarily. Ludwig von Mises used the term praxeology as the foundation for his magnum opus Human Action. Praxeology is the study of human action. More specifically, praxeology refers to the study of purposeful behavior in how people decide to compare and contrast certain means in order to best attain preferable ends, or inversely, how preferable ends determine the requisite means. Mises suggested that economic problems could not be properly analyzed without first considering the variable of individuals making unique choices toward purposeful ends.

 

Subjective Theory of Value

Value is subjective. A man with no heat will value a coat differently than someone living in Ecuador. Conversely, the man with no heat will value his air conditioner differently than the Ecuadorian. If the heatless man traded his air conditioner for the Ecuadorian’s coat, they would both have exercised a preference which indicates their differing valuations of each item. Economists Carl Menger, William Stanley Jevons, and Leon Walras first presented the subjective theory of value.

Imagine you started a business selling 60″ big-screen GPS navigation devices. The cost to produce each device including labor is $100. Thus you might determine that the value of each unit is $100. This approach to valuation is called the labor theory of value. However, since a 60″ device will not fit easily in someone’s car for its intended purpose of navigating, you find that your product cannot be sold at that price. Nor can any units be sold at $50. Nor at $1. Thus the market—that is, the individual choices of market actors determines that the device, which costs $100 to produce, has no value. The point is that just because a product costs x to produce does not mean that the value thereafter is necessarily equal to or greater than x. Value, after all, is subjective.

 

Marginal Utility

marginal utility austrian economics

Utility, in economics, is the total satisfaction gained from consuming a product or service; whereas, marginal utility is the satisfaction gained in individual units from consuming a product or service. To better understand this, consider Adam Smith’s perplexing problem with the diamond-water paradox. In The Wealth of Nations, Smith could not resolve why people place a higher value on diamonds (which are not essential for life) than on water. Menger, Jevons, and Walras finally resolved the paradox with the idea that people make decisions based on marginal benefit rather than total benefit; therefore, people are not choosing all of the diamonds instead of all of the water. A man stranded on a desert island will certainly value fresh water higher than a diamond. Yet, a man with a year’s supply of water may value a diamond over any additional units of fresh water.

Jeffrey Tucker wrote an excellent essay on marginal utility entitled “To Be a Happy Person, Understand Marginal Utility.”

 

Opportunity Costs

broken window theory austrian economics

The broken window fallacy provides an excellent starting point for those who want to understand Austrian economics. Frédéric Bastiat, in 1850, wrote the parable in his book The Law, where a boy throws a rock through a shopkeeper’s window. The townspeople eventually conclude that this is great for their economy because the shopkeeper is giving the window glazier business, and the glazier will spend that money elsewhere; ergo, everybody wins because a boy destroyed a window. The townspeople neglected the shopkeeper’s loss—and further, all of the merchants who would have benefited from the shopkeeper’s spending, are now deprived. It’s easy for the townspeople to see the window repairs; nevertheless, they don’t see the unseen loss of growth. The number of windows remains static. Less capital circulates for better products and services. Henry Hazlitt wrote the brilliant book, Economics in One Lesson, in which he extrapolates the broken window fallacy into modern economies.

 

Why Should You Care About This?

All of the aforementioned terms and concepts support individualism. When governmental edicts obstruct individualism, what’s actually happening is that a small group of people manipulate your preference hierarchy by obfuscating the voluntary market. If you want to be a successful entrepreneur in a free market, you must first understand what people want and find creative ways to give it to them. If you want to be a successful entrepreneur in a fascist economy, create any product or service and impose a system of regulations, permits, and licenses that protect your product from competition. All that taxation, regulations, tariffs, and price-controls do is to disrupt the process of people mutually and voluntarily giving each other what they want.

 

Intelligent Decisions

Austrian economics takes an individualistic approach to the fascinating world of human beings making choices. The individualistic approach may best be exemplified in Acapulco, Mexico at The Dollar Vigilante (TDV) Summit. Come see Jeff Berwick and other economic experts give brilliant presentations on Austrian economics, as well as on how you can survive and prosper during and after the upcoming dollar collapse.

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After the TDV Summit, thousands of us will be at Anarchapulco. Come find out why Austrian economics matters, and how you can benefit from understanding the distortions in the market on the Advocacy Stage.

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Financial freedom proceeds from financial education. Come learn what they won’t teach you in government schools.