Hey everyone. Just thought I’d stop by again and see what’s going on. I figured it was high time, now that we’ve examined some of the more well-known economists with moderate to poor economic policy that we might want to say hello to some of the more traditional conservative schools of thought. This of course brings us to the champions of the Free Market, none other than the Austrian Economists.

Before going to far, we might want to help bring back what they are really called. In today’s all-to-imperfect world, the term “liberal” has come to mean a host of really bad things, and the mere thought of that term has become almost a dirty word among conservatives. An Austrian Economist prefers to be mentioned by the title, “traditional Liberal”, as this means he is interested in the freedom of the individual and limited government. This is not to say a true Austrian or classical economist never factors in the morality of a particular action; on the contrary, many early Austrians considered and advised rulers according to the principles of natural law. The basic idea here is local/individual management of one’s own work and productivity, very similar in fact to the Founding Father’s principle of the “pursuit of happiness.” At the time of the inception of the Constitution, individuals were guaranteed the right by government to direct their own affairs, as long as it did not infringe on the right of another to do the same or threaten the common good/common morality. Of course today, the pursuit of happiness means do whatever you wish. NO, not according the Founders. So just watch out if anyone tries to say the same about the Austrian limited government principles. Remember, freedom is distinct from “license”.

Anyway, back to the Austrians. What is the main tenant or most important part of their philosophy? Well, they view all things in the realm of human choice. The science of human action or human choice is known as praxeology. Of particular interest to Austrian scholars is the study of one particular branch of praxeology, namely, that of cattalactics, or the study of human action in a specifically economic context. This branch of the science answers such questions as why a particular product is valued over another, and what makes people buy certain items while others are left shelved and in the “sale” bins.

At the heart of cattalactics is the study of human valuation, or what people’s value system is. A persons value will always impact their economic decisions. This is a key point to remember and get down before we proceed. A person who values the accumulation of wealth and tries to get as much as he can is no different from a nun in a cloister who forsakes all worldly possessions (economically speaking), because both the investment banker and the nun both value different things and both individuals value system must be taken into account to evaluate the decision. Fiscally, it appears that the investment banker is making the economically correct decision, but not necessarily when we are studying the bare bones of human valuation. He is simply following what he values as is the nun, and both make the correct economic decision. Specifically in the economic realm, Austrians aren’t going to tell you who’s value system is better; just that both are and need to be accounted for. (note: this does not prevent the Austrian himself from acting morally or even making moral judgments upon a particular pattern of behavior. It is simply necessary for him to accept and understand what makes different human actors value different things and factor that into his examination of the economy).

Woah! I used the word “human actor” without defining it. It’s basically a person who acts in the market, according to his value system. Let’s say there is a large surge in people buying i-Pods. (Hope I’m spelling that right and no, I don’t have one yet…although I do value music…) What caused this sudden surge? Well, something changed many human actors values to desire small, portable music players. If we examine the individuals who purchased the i-Pods, we find they all got summer jobs and all had excess money to burn. Rather than save or buy DVD’s or go to the amusement park, they instead used their money according to their value system and bought an i-Pod. Do you get the underlying principle? To understand any economic phenomenon, one must look at the values of people to understand why they do things, and that can only be achieved by noting that all people are what von Mises, one of the foremost Austrian Economists, call rational actors. All men act purposefully, and every human action is geared toward an end. This is key to understanding economics because once you know what a particular demographic group tends toward (what end there are “acting” towards), you can begin to look one, two and even three steps ahead to see how changes in the economy will effect the group and the market as a whole.[1]

What people want or value of course depends on their preference. An example is a person who eats a lot of hamburgers, but really likes or prefers steaks. He is making a decent salary and can afford to eat hamburgers, so he is grudgingly accepts the second choice. What does he do when he gets a pay-raise. “Honey!”, he shouts, “We’re having steaks!!!” He is exited because what he really wanted all along he can now afford, and now goes and buys it. Explaining why a man chooses to eat steaks over hamburgers isn’t all that intriguing, but the reasons why we can come to this conclusion are fascinating. We learn that economics are not all about charts and graphs (Classical or Austrian economists rarely use them, and then only on the micro-economic level. They view macro-economic conglomeration of data to be use-less as it tells you nothing of the individual actors and data can be easily skewed). If we have a grasp of basic economics and this conception of what people value and how this impacts the market, we can begin to see why high gas prices make people stop using cars and further, before people had even stopped using cars we will know what will happen. If one examines US policy towards oil and gas production, one would have seen that tax measures, increased demand in foreign countries and decreased production in the US would all lead to one thing: A rise in gas prices and consumer anxiety over gas. There were 11 million less miles traveled by US drivers in March. Austrian Economics will teach you how to see it, predict it and explain it. It’s just common sense applied to the market.

Now that there is a sense of how the Austrians view individual actors, let’s look at how they view the market they interact in. Austrians are really concerned with making sure the market is free. Free from government interference, preferential treatment of one sector of society over another, and rules and restrictions that hamper the entrepreneurial spirit of the business man. The idea of the free market stems from the idea of human action. As we learned, Mises and other Austrians see all men as human actors. Moreover we know that they act in accordance with their value system, or what is valuable to them. This explains what drives the free Market. Individual human actors take their money or capital and spend it in the way it benefits them. They will hunt out the best product at the best prices according to what they value, according to the principle of self-interest. This works for both consumers of goods and suppliers of goods. The consumer seeks out the lowest price good and the supplier sells at the highest rate that the individual will pay. Factoring in supply of products by sellers and demand on the part of consumers, the two reach a price. If the consumer feels it is too high he will not purchase the good as it is not in his best interest. The supplier likewise will never (unless facing a major liquidity crisis), “sell at a loss”, and can only afford to bring his products to bear on the market if he makes a profit (nothing wrong with that, he receives a recompense for risking his money on new products, hoping people will buy them. The supplier is a true entrepreneur and a “risk-taker”)

Now, some will argue that people acting in this way are somehow selfish. Greedy companies are selling to maximize profits and are only interested in themselves, and consumers are tacky and penny-pinching. That’s not the case. By acting according to self-interest and allowing competition and free trade, prices tend to go down for people. Here’s why: Suppliers in a free market always have to think (out of self-preservation) of how to undersell the other companies to make a profit. The only way to break into a market sometimes is to sell and item cheaper and better. How is this done? The entrepreneur takes an existing product and figures out how to improve upon it and the way it is produced, utilizing new technology and new ideas to make his product somehow better. The consumer recognizes this and sees it is better to buy one product over the other, and will go over to the cheaper and better one. This new product is better by default, as the seller was forced to make it better or else could not break into the market. Factoring in human action and self-interest, we see why competition is a healthy thing.

Now it is of course true that companies will go out of business due to this reason. This means that for one reason or another producer could not bring his products to the market as well as another and he wasn’t using his creative talents to the fullest. This is okay as we can see that he should be working in another sector. If we can’t produce as a farmer, perhaps he should retool and become a mechanic. This is what is called the Market “sorting itself out”, and maximizes productive capacity of all society. True there is some time in between jobs, but the alternative of a free market is far worse.

The Austrian school allows for people to make up their own minds and succeed or fail on their own merits. However, a neo-socialistic state which seeks to control the minor ups and downs which do occur in the free market makes life worse (this can be seen historically by the long Bread Lines in the U.S.S.R.) Keynes as we have said in previous posts believed the market needed to be controlled. Rather than allow people to choose what sector of the market they wanted to support, the government would. If i-Pods somehow stopped selling because a better product came out, the government in a socialist state would ask the question, “what of the i-Pod producer?” We can’t let all these people go without jobs! We’ll buy the i-Pod’s (with taxpayer money), and save the day. Not thinking even one step ahead here, this common fiscal fallacy shows the ineptitude of this type of policy. Macro control of the economy and redistribution of wealth is bad for several reasons. It takes money away from one group and gives it to another. It’s great that i-Pod can keep producing, but what of all the taxes that the citizens across the board had to pay to fund that? The government uses many such “subsidy” programs that benefit a particular sector of the market to the detriment of all the rest of the country. With enough tax measures, this seriously impairs the power of the consumer. He is not free with his money; the government is in a sense investing it for him in places he doesn’t even know exist. Earmarks that benefit certain select groups, corporate welfare to keep business afloat, subsidized housing, state grants from the Federal Treasury, even grants from the Federal Reserve Bank (see column about Fed), all are paid out of the pocket of the citizen.

Accompanied with the taxes on the consumer, businesses suffer from all kinds of terrible regulations. Complying with complicated federal rules and safety measures which rarely make sense (such as OSHA), taxes on profits (to name just a very few), make the incentive to start up a company less appealing and make it less likely that competitors will enter the market and compete, trying to undersell and improve on current products to make a living. This means less improvements on current products and les creative energy spent by entrepreneurs.

The bottom line is that the market makes more sense when it is free. It is true there are ups and downs, but at least they are determined by the majority of the people and not through legislation and taxation of a few elected officials. Macro-control arbitrarily hurts certain sectors and makes the economy dependent on the government and weakens it substantially. Base a market on what people find valuable and let them buy what they wish, not force them to pay for that which they neither need nor want.

There is a long list of Austrian scholars you should get to know. I would recommend three of the great free-market and limited government thinkers that have had a huge economic impact on the Austrian school: Ludwig von Mises, Murray Rothbard and Friedrich Hayek. Rather than give a long list of books, go instead to http://mises.org/, the definitive resource of Austrian literature. They have several FREE online material by each of the above authors as well as many more. Also check out the history of the Austrian School to further get you interested in the pursuit of greater economic understanding.

In light of recent moves by the Federal Reserve and murmurings that the government will take over Freddie Mac and Fannie Mae mortgage conglomerates (that are facing major liquidity problems due to preferential treatment and special rules applying only to them by the Federal Government), we really need to learn the inns and out of the Austrian School. We no longer have a truly free market in America. Regulations on industry and individual consumer activity in the market has led to higher gas prices, mortgage liquidity problems, rising food costs and a host of other economic woes. The ironic thing is that the people who first proposed interventionist government practices thought they would avert what they actually caused. Federal control of the economy so that NO bad outcomes EVER occur sounds wonderful in theory and I wish it were true. But in practice time and time again, the free market and human self-interest pitted against itself in the market has always come out as the best possible system in a flawed world. I urge you as young college students to learn all you can about economics and especially the Austrian school, in order to understand how the market functions and to make sound fiscal choices and avoid financial failure.