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KEY LESSONS OF AUSTRIAN ECONOMICS

So far we have reviewed what Austrian Economics theory is and how it works. Now it is time to review their primary lessons. Some of these lessons will sound familiar since we have discussed them before. This is not a mistake, but by design. The Austrian Economics theory is so powerful indeed, that many of its key lessons are actually its principles! In this section, we will also summarize our differences with classic economic theories, so that you are better prepared to a choice. Let’s begin.

 

Key Lesson #1: Choices are made by individuals

Us: We have discussed this before. Groups do not make choices simply because they don’t have a mind of its own. Individual people do. There is no magic and mystical “group brain”. Austrian Economics attempts to describe how an economy works based on the choices that individuals make. These choices produce two consequences: intended and unintended. Both are important. We will explore how these consequences operate in the following Key Lessons.

They: Classic economic theories, on the other hand, assume that groups chose. They don’t explicitly say that groups have minds, presumably because they would be laughed out of every University if they would to declare so, but they treat groups as if they actually had brains. They wrap this assumption in scientifically-acceptable disciplines, such as Statistics, but this is only a coat of paint. In the end, they treat groups as thinking entities. Does this make any sense to you? Thinking groups?

 

Key Lesson #2: Exchanges between people create markets

Us: Markets do not appear from thin air. They are not a given. Markets are created when people exchange things. Exchanging things implies that people are driven to markets and also that new people are included in markets all the time. This is plain common sense. New people are born and as they grow-up, they exchange things. It is only natural. Austrian Economics studies how these exchanges operate, what drives them and how different market participants relate to each other through exchanges. This naturally leads to bargaining. Also, because people wish to make exchanging more efficient (nobody wants to waste time or money), it leads to the creation and adoption of rules. These rules eventually evolve into institutions or organizations. This is how markets are created.

Them: classic economics assumes that markets are “just there”. They do not concern themselves with how or where markets were created or came from. For any intent and purpose, markets appeared from thin air. Then, they proceed to treat markets as living, breathing organisms, capable of making decisions on their own. We again see the same theme repeating: markets have brains! In order to study these brains, they make use of Statistics and sometimes they actually get it right. They do not bother to study how the people that comprise markets actually behave individually. Because of this limitation, their methods are prone to errors of interpretation and forecast. It’s like trying to understand how the universe operates using only statistics and ignoring its basic engine (gravity) altogether. Does this seem like a good idea to you?

 

Key Lesson #3: People are subjective therefore markets are subjective

Us: We discussed this theme before. What drives people, and therefore markets, are their individual beliefs. As individual people create markets, it is important to understand how they make exchange decisions. Why are they willing to pay a certain price for a product but no more. The answer to these questions is simple: subjective choices. Every person is driven by and makes decisions through its own interpretation of reality. As no two people experience reality in exactly the same manner, it is impossible to define what an “objective” reality is. Austrian Economics is not trying to forecast what a person will do, this is impossible. Austrian Economics is simply trying to understand why a person does what it does. And so, subjectivity is the key to economics because is what drives how people behave and therefore through this behavior they create “economic facts”. Of course, we are interested in such “economic facts”, but we are much more interested in the mechanisms that made them. If we understand such mechanisms, we can then forecast other “economic facts”.

Them:  They believe markets are objective. Markets are a natural process and as such, they can be dissected and studied. People can be separated in groups and their group behavior statistically analyzed. What people think is not important. What is important is what the group does, not their motivations. Economic facts are discovered through statistics by looking at what happened. All groups behave in the same manner all the time. It is just a matter to discover and classify their behavior. Consider this example: we can observe children arriving at leaving at school. We can determine statistically at which time they arrive and at which time they leave. We can even forecast when this will happen. However, without knowing why children go to school, our understanding of the process “going to school” will forever be limited. This is exactly how classic economic theories treat people and markets. Do you believe that perhaps they may be missing something? We most certainly do!

Note: please see the Glossary if you are unfamiliar with certain words.

Continue to Austrian Economics In Theory - Part 5

 

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