Economics for Real People An Introduction to the Austrian School 2nd Edition Economics for Real People An Introduction to the Austrian School 2nd Edition Gene Callahan Copyright 2002, 2004 by Gene Callahan All rights reserved. Written permission must be secured from the publisher to use or reproduce any part of this book, except for brief quotations in critical reviews or articles. Published by the Ludwig von Mises Institute, 518 West Magnolia Avenue, Auburn, Alabama 36832-4528. ISBN: 0-945466-41-2 ACKNOWLEDGMENTS Dedicated to Professor Israel Kirzner, on the occasion of his retirement from economics. My deepest gratitude to my wife, Elen, for her support and forbearance during the many hours it took to complete this book. Special thanks to Lew Rockwell, president of the Ludwig von Mises Institute, for conceiving of this project, and having enough faith in me to put it in my hands. Thanks to Jonathan Erickson of Dr. Dobb’s Journal for per- mission to use my Dr. Dobb’s online op-eds, “Just What Is Superior Technology?” as the basis for Chapter 16, and “Those Damned Bugs!” as the basis for part of Chapter 14. Thanks to Michael Novak of the American Enterprise Insti- tute for permission to use his phrase, “social justice, rightly understood,” as the title for Part 4 of the book. Thanks to Professor Mario Rizzo for kindly inviting me to attend the NYU Colloquium on Market Institutions and Eco- nomic Processes. Thanks to Robert Murphy of Hillsdale College for his fre- quent collaboration, including on two parts of this book, and for many fruitful discussions. Thanks to the many commentators on the book (and sections of it as they appeared in article form), whose efforts improved this book tremendously and drove me to greater precision and clarity of expression. These include Walter Block (Loyola 5 University), Peter Boettke (George Mason University), Sam Bostaph (University of Dallas), Colin Colenso (Shanghai, China), Harry David (New Haven, Conn.), Brian Doherty (Reason), Richard Ebeling (Hillsdale College), Roger Garrison (Auburn University), Jeffrey Herbener (Grove City College), Sanford Ikeda (SUNY Purchase), Stephan Kinsella (Houston, Texas), Peter Lewin (University of Texas at Dallas), Stan Liebowitz (University of Texas at Dallas), Jeanne Locklair (Laboratory Institute of Merchandising), Marcel Popescu (Romania), Joseph Salerno (Pace University), Jeff Scott (Wells Fargo), Glen Tenney (Great Basin College), Jeff Tucker (Mises Institute), Christopher Westley (Jacksonville State University), Rich Wilcke (University of Louisville), Marco de Wit (Univer- sity of Turku), James Yohe (University of West Florida), Sean Callahan (my brother), and my parents, Eugene and Patricia Callahan. Any errors that remain are, of course, entirely mine. Thanks to Pete Kavall, for teaching me what science is, and to Chogyam Trungpu and Tarthang Tulku, for continuing inspiration. 6 ECONOMICS FOR REAL PEOPLE CONTENTS The harm done . . . was that they removed economics from reality. The task of economics, as many [successors] of the classical economists practiced it, was to deal not with events as they really happened, but only with forces that contributed in some not clearly defined manner to the emergence of what really happened. Economics did not actually aim at explaining the formation of market prices, but at the description of something that together with other factors played a certain, not clearly described role in this process. Virtually it did not deal with real living beings, but with a phantom, “economic man,” a creature essentially dif- ferent from real man. —Ludwig von Mises The Ultimate Foundation of Economic Science Introduction Stayin’ Alive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 PART I : THE SCIENCE OF HUMAN ACTION CHAPTER 1 What’s Going On? On the nature of economics . . . . . . . . . . . . . . . . . . . . . . . . 17 CHAPTER 2 Alone Again, Unnaturally On the economic circumstances of the isolated individual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 7 CHAPTER 3 As Time Goes By On the factor of time in human action . . . . . . . . . . . . . . . 47 PART II : THE MARKET PROCESS CHAPTER 4 Let’s Stay Together On direct exchange and the social order . . . . . . . . . . . . . . 59 CHAPTER 5 Money Changes Everything On indirect exchange and economic calculation . . . . . . . . 81 CHAPTER 6 A Place Where Nothing Ever Happens On the employment of imaginary constructs in economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 CHAPTER 7 Butcher, Baker, Candlestick Maker On economic roles and the theory of distribution . . . . . . 101 CHAPTER 8 Make a New Plan, Stan On the place of capital in the economy . . . . . . . . . . . . . . 121 CHAPTER 9 What Goes Up, Must Come Down On the effect of fluctuations in the money supply . . . . . 137 8 ECONOMICS FOR REAL PEOPLE PART III : INTERFERENCE WITH THE MARKET CHAPTER 10 A World Become One On the difficulties of the socialist commonwealth . . . . . . 157 CHAPTER 11 The Third Way On government interference in the market process . . . . . 177 CHAPTER 12 Fiddling with Prices While the Market Burns On price floors and price ceilings and other interferences with market prices . . . . . . . . . . . . . . . . . . . 189 CHAPTER 13 Times Are Hard On the causes of the business cycle . . . . . . . . . . . . . . . . . 209 CHAPTER 14 Unsafe at Any Speed On improving the market through regulation . . . . . . . . . 237 CHAPTER 15 One Man Gathers What Another Man Spills On externalities, positive and negative . . . . . . . . . . . . . . 249 CHAPTER 16 Stuck on You On the theory of path dependence . . . . . . . . . . . . . . . . . . 259 CHAPTER 17 See the Pyramids Along the Nile On government efforts to promote industry . . . . . . . . . . . 271 CONTENTS 9 PART IV : SOCIAL JUSTICE , RIGHTLY UNDERSTOOD CHAPTER 18 Where Do We Go from Here? On the political economy of the Austrian School . . . . . . . . . 291 APPENDICES APPENDIX A A Brief History of the Austrian School . . . . . . . . . . . . . . 307 APPENDIX B Praxeological Economics and Mathematical Economics . . 321 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343 About the Author . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 10 ECONOMICS FOR REAL PEOPLE [...]... vacation that you “really can’t afford,” but really need? 11 12 E C O N O M I C S F O R R E A L P E O P L E Yet, you feel that economics ought to be relevant to real life Doesn’t it deal with jobs, money, taxes, prices, and industry: stuff of everyday existence? Why should the subject seem so obscure? The Austrian School of economics is an alternative to the mainstream approach It places economics on a... unsatisfactory treatment that the economists applied to their problems (Human Action) For many, the feeling of stupefaction was soon replaced by one of frustration They had ideas for reforming society, and now they discovered that the emerging science of economics stood in their way Economics advised these reformers that some plans for social organization would fail regardless of how well they were carried out,... SOME point, you have heard about the Austrian School of economics and are curious as to what it is Or you may be discouraged by the economics you have encountered in textbooks and newspapers, and are searching for a more realistic view of economic life The dominant school of economics, often referred to as the Neoclassical School, seems to describe people behaving in ways that are hard to relate to the... their variety.” The primary reason for this confusion is that economics is one of the youngest sciences known to man Certainly there has been a proliferation of new branches of existing sciences in the several centuries since economics came to be recognized as a distinct subject But molecular biology, for example, is a division of biology, not a brand-new science Economics, however, is different The... of what it is all about Before buying a book on biology, you determine that you will be reading about living organisms At the beginning of a chemistry course, you learn that you can expect to study the ways in which matter combines in different forms HEN WE FIRST Many people feel that they are generally familiar with economics However, if you ask around, you will find that people have difficulty in... humans For instance, people often fail to properly account for the cost of their choices Once we understand that our costs are measured in terms of our foregone alternatives, we might have a very different view of some common choices Let’s look at a mundane example We all know someone who has spent a great deal of time on some home improvement project Perhaps this person undertook the project for sheer... economics still apply to him? Furthermore, what is the point of studying the situation of an isolated human being? Isn’t man a social animal? And isn’t our interest in economics based on its applicability to our real situation, where we live in interaction with countless others? E CLOSED THE While it is true that man is a social being, contemplating the situation of an isolated individual is, for economics, ... finally reconstructed economics “upon the solid foundation of a general theory of human action.” For some purposes it might be important to differentiate between the general science of human action, which Mises called praxeology, and economics as the branch of that science that deals with exchange However, since the term praxeology has not gained widespread use, and a sharp delineation of economics from the... in which case economics can turn the problem over to ethics and religion But all too often, people take account of the immediately visible profit from an action and fail to account for the less visible, more distant costs Bastiat referred to this as the problem of what is seen 28 E C O N O M I C S F O R R E A L P E O P L E and what is not seen He felt that it was an important task of economics to teach... that the three angles of a triangle add up to 180 degrees, we don’t measure thousands of real triangles In fact, the triangle of geometry is an idealized figure that we could not find in reality Or take the following syllogism: “All men are mortal John is a man Therefore, John is mortal.” We do not have to wait around for John to kick the bucket to see that this is true Should we discover that John is, . Economics for Real People An Introduction to the Austrian School 2nd Edition Economics for Real People An Introduction to. exactly, economics is. 14 ECONOMICS FOR REAL PEOPLE PART I HE SCIENCE OF HUMAN ACTION T CHAPTER 1 What’s Going On? ON THE NATURE OF ECONOMICS [Economics]