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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 permission 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 Institute 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 Economic Processes.
Thanks to Robert Murphy of Hillsdale College for his frequent 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 (University 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 different 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
1 0 ECONOMICS FOR REAL PEOPLE
INTRODUCTION
Stayin’ Alive
WHY READ THIS BOOK?
P
ERHAPS, AT 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 human activity we see around us
every day. The textbook humans seem robotic, rigidly obeying a set of equations that “maximizes their utility” based on
a set of parameters. The equations themselves are said to
“cause” supply and demand to meet at an equilibrium price—
one that sets the quantity demanded equal to the quantity
supplied. What place do humans have in such a system of
equations? It seems difficult to relate those mathematical constructs to the world in which we live. How is the idea of man
as a utility equation solver relevant to an Islamic revolution,
to Mother Teresa, to Jimi Hendrix, or to your own decision to
take a vacation that you “really can’t afford,” but really need?
1 1
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 sound, human
basis. It avoids the traps that plague most of modern economics: the assumption of selfishness as the basic human motivation, a narrow definition of rational behavior, and the overuse
of unrealistic models. This book is an attempt to introduce
you to the main ideas of the school.
The Austrian School is so-named because most of its early
members hailed from—you’ve probably guessed by now—
Austria. The Nazi occupation of that country, however, scattered the practitioners. Today we can find prominent Austrian
School economists all over the world. I will use “Austrian
economist” to mean a member of the Austrian School,
whether or not the person in question ever lived in Austria.
My focus will not be on the history of the school, although
I have included an appendix with a brief overview of that history. Nor is my goal to convince professional economists of
other schools to “convert.” It is instead intended to be the
proverbial “guide for the intelligent layman.” While I have
always tried to be precise, I have tried to avoid entering into
the fine details of esoteric debates from the economics profession, which would only create a schizophrenic book.
Because of the nature of this book, it cannot explore Austrian economics in the same depth as do systematic treatises
such as Murray Rothbard’s Man, Economy, and State or Ludwig von Mises’s Human Action. If this book succeeds in interesting you in this subject, it will have done its job; I urge you
to then pick up one of these masterworks on the topic. (There
is also a bibliography at the end of the book recommending
further reading.)
1 2 ECONOMICS FOR REAL PEOPLE
But there are advantages to the approach taken by this
book. First of all, Rothbard’s and Mises’s tomes are huge: you
don’t really want to be hauling a book like that to the beach,
now, do you? Second, most people are not attempting to
become professional economists. You probably have a very
limited amount of time and effort you are willing to put into
the subject, at least until you sense of how it might benefit you
to know more. Last, neither of those great works has anything
about the hit TV show Survivor 1 in it, nor does either of them
so much as mention the actress Helena Bonham-Carter. I guarantee that this book will be free of both of those flaws.
Speaking of Survivor (see, you didn’t even have to wait
long before I took care of the first problem!), I’m going to ask
you to imagine a slightly different conclusion to the series. In
the original television show, the winner—the fellow who “survived” the longest—was a guy named Rich. In our alternate
universe Rich is still the winner, but, as the film crew packs
up, they decide that they are fed up with his antics. Instead of
transporting him home, they quietly slip off of the island while
Rich is getting in a last session of nude sunbathing.
Rich arises to find that he is alone. He is now facing the
most elementary human problem, how to survive, in the most
INTRODUCTION 1 3
1
For those who don't follow what's on TV, or who might be
reading this book twenty years after its publication: Survivor was a
show where a number of contestants were placed, by a TV network,
on a desert island. Then they were presented with a series of “survival” challenges. A voting process eliminated contestants until only
the winner was left. This turned out to be a fellow named Rich. The
particular details of the show are unimportant to this book, as Rich
is merely used as an example of an isolated individual and the economic problems he faces. (Hey, using Robinson Crusoe has become
a cliché, so I had to think of something else.)
basic of settings. What can economics say about his situation?
Is our science rooted in man’s nature, or is it just a creation of
certain social arrangements that we can change at will? If
someone isn’t concerned with becoming as wealthy as possible, or rejects consumerism, is economics still relevant to
them? These are some of the questions that this book will
attempt to answer.
We will come back to Rich in Chapter 2, but first, we will
examine the question of what, exactly, economics is.
1 4 ECONOMICS FOR REAL PEOPLE
PART I
THE SCIENCE OF HUMAN ACTION