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Source link: http://archive.mises.org/12891/a-primer-on-austrian-economics/

A Primer on Austrian Economics

June 4, 2010 by

Austrian economists poster

There are some basic questions that most beginners ask when first delving into Austrian theory. What is Austrian economics? Who are these Austrian economists? Why is Austrian economics relevant in today’s world? FULL ARTICLE by Jonathan M. Finegold Catalan

{ 15 comments }

George June 4, 2010 at 1:19 pm

This should be pinned to the front page.

Next, I would like to see a healthy debate between the Austrian school of economics and the proponents of Modern Monetary Theory (MMT) a la http://bilbo.economicoutlook.net/blog/

Thanks for the primer!

Allen Weingarten June 5, 2010 at 7:14 am

This may be a digression, but it appears to me that Austrian Economics says that the optimal growth of an economy is the unfolding of the free market. That is, given the costs of land, labor, resources, etc., that go into a product, any intervention upon those costs worsens the overall consequences. I do not know if that is the position of the Austrians, or if it has been stated as the refutation of interventionist policies, but would appreciate any clarity on this matter.

Daniel June 5, 2010 at 10:44 am

Actually, Austrian economics is “value-free” so it doesn’t describe “what should be,” that is, it is not normative.However, given the theory of value, the fact that it is subjective, and voluntary trade means two parties gaining in value (at least expected value) and involuntary trade resulting in one party being coercively deprived of value to give to another, most scholars of the Austrian School are (personally) free-market supporters.

Edit: Tom Woods’ lecture “Why Free Markets Matter” is an even better answer to your question
http://mises.org/media/4841

Jonathan Finegold Catalán June 5, 2010 at 12:38 pm

Allen,

Optimality is a concept which is broadly unobtainable, because the definition of “optimality” varies from person to person. What is efficient for a person with a lower wealth base might not be efficient, or optimal, for a person with a higher wealth base. This broad concept of optimality, or efficiency, is rejected by the Austrians—see Jesús Huerta de Soto’s The Austrian School: Market Order and Entrepreneurial Creativity (a bit on the expensive side; sometimes I wish that these scholars were more aware of the financial limitations of their fan base!).

What the Austrian School can tell you is that the free market is relatively more efficient than an interventionist economy. This insight is value-free in the sense that it doesn’t suggest that relatively higher efficiency is better than less efficiency. For example, there are a number of politicians in Europe who believe that while the free market is more efficient, this efficiency has to be curbed in order to protect the environment (what they are now calling “sustainable economics”)—whether this is true or not is besides the point. That is applying value to economics.

I think that this doesn’t answer your question completely, and is a bit pedantic. But, I think it’s important to consider the idea that efficiency is not an objective of economics, nor should it be made into an objection—when efficiency becomes a goal it leads to interventionism, as people believe that by intervening they can increase efficiency.

Otherwise, yes, I think that economics tells us that interventionism is less efficient than the free-market. Interventionism distorts individual subjective evaluations of different actions, by aggregating them and forming them into policy. This is why I like to stress the idea that markets are nothing more than the cumulative efforts of individuals, and should not be aggregated. Aggregates can make great statistics, but should not drive policy. Markets are at their best when these individuals can choose actions based on what they perceive to be most efficient. Yes, this does not lead to “optimality”—optimality is impossible—, but it leads to healthier markets than what could be achieved through interventionism.

Allen Weingarten June 5, 2010 at 1:42 pm

To Jonathan Catalán & Daniel: I accept the subjective theory of value, and that what is of ultimate value is not measured be specie. Still, my question derives from what appears to be objective, whose best enhancement was referred to as “optimal”. It arises against the argument that our average income is improved by giving higher wages than would arise from the market. This is an objective consideration, unless one claims that we cannot measure the difference in average income between say the depression and the roaring 20’s or say the post WWII period. Can one deny that some periods are wealthier than others? Thomas Woods, in “Why Free Markets Matter” states periods in which poverty and wealth change. His whole talk deals with obtaining improved outcomes, such as supporting a larger population. It admonishes interference as causing impoverishment, and hampering wealth creation. It is in terms of such considerations that I employ the term “optimality” (which is not what is meant by “efficiency”) and is Wertfrei.

I reason that transferring wealth from one component of industry to another, by intervention, will result in diminished total wealth. This is because a business rewards the most productive component of industry, such as when choosing between investing in more workers, or in higher skilled workers, or using machines, or using better planners. If that business chooses poorly, it would be less competitive with other business. In this sense, it seems to me that the allocation of resources by the market is optimal.

Now I may very well be unclear in my reasoning (and if so, please correct me). But kindly tell me whether there is an objective notion of the average income of a population, and in particular whether we can say that a country increases or decreases it. And if there is, can anything do a better job of allocation than is done by the market.

Bala June 5, 2010 at 10:44 pm

Im trying to address just the last part of your post (which to me appears to be the the reason you are posting)

” But kindly tell me whether there is an objective notion of the average income of a population, and in particular whether we can say that a country increases or decreases it. And if there is, can anything do a better job of allocation than is done by the market. ”

Firstly, as I understand it, average income of a population is a fact once you define your “population” clearly. Hence, there appears no reason to call it subjective.

Secondly, based on my understanding of HA, a country does not and cannot act. Only humans can. Anything that we label as “country acting” is nothing more than individuals acting. It all boils down to which individuals act. Since the “market” is nothing more than a whole lot of individuals acting to maximise their perceived well-being, any call for something outside the market to do the job of resource allocation is a call for intervention, typically by government. The best refutation of interventionism and central planning that I have seen is Human Action. The best that reply that I can therefore give is a suggestion to read that masterpiece.

newson June 5, 2010 at 11:00 pm

to jfc:
btw, there’s a good megaupload of austrian classics in spanish here. you’ve probably read most…
http://www.vagos.es/showthread.php?p=1053605287

newson June 5, 2010 at 11:01 pm

to jfc:
btw, there’s a good megaupload of austrian classics in spanish here. you’ve probably read most…
http://www.vagos.es/showthread.php?p=1053605287

Allen Weingarten June 6, 2010 at 6:10 am

Bala, thanks for your response, and for noting that “average income of a population is a fact once you define your “population” clearly. Hence, there appears no reason to call it subjective.”

As to writing that only individuals act, that is answered by Mises. He writes “It is uncontested that in the sphere of human action social entities have real existence. Nobody ventures to deny that nations, states, municipalities, parties, religious communities, are real factors determining the course of human events” ‘Human Action’ p. 42.

This does not deny that action is reduced to individuals, but there is also government policy, supported by the public, which calls for economic intervention such as wealth distribution. I presume you agree that we can refer to such policies (without deriving them by listing all of the contributing individuals).

Bala June 6, 2010 at 10:54 pm

” I presume you agree that we can refer to such policies (without deriving them by listing all of the contributing individuals). ”

The idea is not about listing the contributing individuals but about recognising that even these so-called “government policies” are the “policies” of those individuals who are considered to be “representatives” of the “institution” of government. Further, at the end of the day, it is specific individuals acting on behalf of the “institution” of government that constitutes “policy implementation”. It is in this context that I referred to Mises’ refutation of interventionism.

Finally, I am just completing the Mises quote that you picked up to show that I am interpreting Mises right and that his statement is the answer to your original question.

“….Methodological individualism, far from contesting the significance of such collective wholes, considers it as one of its main tasks to describe and to analyze their becoming and their disappearing, their changing structures, and their operation. And it chooses the only method fitted to solve this problem satisfactorily.

First we must realize that all actions are performed by individuals. A collective operates always through the intermediary of one or several individuals whose actions are related to the collective as the secondary source. It is the meaning which the acting individuals and all those who are touched by their action attribute to an action, that determines its character. It is the meaning that marks one action as the action of an individual and another action as the action of the state or of the municipality. The hangman, not the state, executes a criminal. It is the meaning of those concerned that discerns in the hangman’s action an action of the state. A group of armed men occupies a place. It is the meaning of those concerned which imputes this occupation not to the officers and soldiers on the spot, but to their nation. If we scrutinize the meaning of the various actions performed by individuals we must necessarily learn everything about the actions of collective wholes. For a social collective has no existence and reality outside of the individual members’ actions. The life of a collective is lived in the actions of the individuals constituting its body. There is no social collective conceivable which is not operative in the actions of some individuals. The reality of a social integer consists in its directing and releasing definite actions on the part of individuals. Thus the way to a cognition of collective wholes is through an analysis of the individuals’ actions.” – Human Action, p 42

In effect, it is because the individuals implementing the so-called “government policies” need knowledge of the valuations of the entire population while such knowledge is impossible that no such policy can result in an outcome more beneficial for the well-being of every individual in the society than can the corresponding actions that occur in a free market.

Thanks.

George June 6, 2010 at 3:20 pm

The “Comment on the blog” link for this article is broken.

Jake_nonphixion June 6, 2010 at 9:46 pm

I like the term autarchism over anarchism due to the negative connotations associated with the latter. Anarchy is thought of as fringe culture lunacy to the average person.

Allen Weingarten June 7, 2010 at 5:40 am

Bala, I agree that action can be reduced to individual behavior. Does that mean we cannot say that a country has gone to war with another country, but that we must refer to the pertinent individuals?

You write “It is the meaning that marks one action as the action of an individual and another action as *the action of the state* or of the municipality.” Aren’t you recognizing that one can speak of “the action of the state” rather than referring to the individuals who engaged in it?

Bala June 7, 2010 at 9:21 am

” Does that mean we cannot say that a country has gone to war with another country, but that we must refer to the pertinent individuals? ”

If you and I have a scrap on the street, we call it a scrap. But if we have the same scrap on the same street and you and I are soldiers of the armies of two “nations” whose leaders have declared “war” on each other, observers who see our scrap interpret the scrap as “war”. It’s all in the meaning you attribute to it. The fact, however, is that it is still you and I having a scrap. That we may both be carrying weapons with which we could kill each other does not affect this judgement.

” You write “It is the meaning that marks one action as the action of an individual and another action as *the action of the state* or of the municipality.” ”

I did not. Mises did. I just did a copy-paste job.

” Aren’t you recognizing that one can speak of “the action of the state” rather than referring to the individuals who engaged in it? ”

No. I am saying that when certain individuals act, we understand it as acting as an agent of the “institution” called “government” or “the State”. However, it is still the individuals who act. So, even if you can speak of an “action of the state”, it is only an expression of your understanding that the specified action is that of an individual acting in his role as an agent of that State.

The concept “State” itself is nothing more than the choice of a lot of people (the subjects) to treat the actions of specific people who carry the label of agents of the State differently from the way they treat the actions of other subjects like themselves. In simple terms, certain actions, when executed by ordinary subjects, are criminal. When the same actions are executed by those who are agents of the State, people (the subjects and the agents) do not treat those as criminal. It’s all in the meaning we attribute to it.

In any case, I think all this is a major digression from the topic. I hope I have been clear.

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