Economics for Real People: An Introduction to the Austrian School
by Gene Callahan (Auburn, Ala.: Mises Institute, 2002); 349 pages; $19.95.
Back in 1932 an economist named Broadus Mitchell wrote an introductory principles textbook entitled A Preface to Economics. When he came to the discussion of supply and demand, he stated,
“I hate graphs, anyhow. They are the only pictures economics books have in them, and they are mighty poor substitutes for comic strips. And the letters and symbols with which they are generally encumbered get me all mixed up. You see things like this: ‘Drawing a straight line from the point k on the vertical axis OY, to the point of intersection P, and dropping a line from P to the horizontal axis OX, we clearly perceive that the quantity demanded, etc., etc.’ I clearly perceive nothing except that the author has failed to realize that I have something better to do than to look up his old big letter and little letters and big italics and little italics. As though this were not enough, he often uses not only ‘the line DD,’ but ‘the line D’D’’ and ‘D’‘D’’.’ That last is beyond human endurance.”
It’s become a lot worse since 1932. Increasingly, mainstream economics has become a third-rate branch of advanced mathematics.
Even at the undergraduate level, economics texts often seem more like a course in applied geometry than a study of human actors attempting to improve their circumstances with the use of resources and the potential benefits of trade.
All too often students are turned off on economics because of its apparent “mathiness” and seeming lack of any connection with reality and real-world problems.
It only gets worse at the graduate level. Here the student is trained and drilled in the rarefied techniques of abstract theoretical models and complex statistical methods that seem to be ends in themselves. The developer of Public Choice theory, Nobel laureate James Buchanan, once bemoaned the fact that economics is a science without ultimate purpose or meaning. It has allowed itself to become captive of the technical tools that it employs without keeping track of just what it is that the tools are to be used for. In a very real sense, the economists of [today] are illiterate in basic principles of their own discipline…. Their interest lies in the purely intellectual properties of the models with which they work, and they seem to get their kicks from the discovery of proofs of propositions relevant only to their own fantasy lands…. Our graduate schools are producing highly trained, highly intelligent technicians who are blissfully ignorant of the whole purpose of their alleged discipline.
The Austrian school
The one school of economics that has traditionally not followed the mathematical and quantitative path is the Austrian school of economics. It was founded in 1871 by Carl Menger, whose ideas were refined and developed by Eugen von Böhm-Bawerk and Friedrich von Wieser in the last two decades of the 19th century. In the first half of the 20th century, the Austrian school made important contributions to human understanding and gained international renown in the process.
Two leading figures during that period were Ludwig von Mises and Friedrich A. Hayek (who received the Nobel Prize in economics in 1974). In the second half of the 20th century, the two most prominent Austrian economists were Murray N. Rothbard and Israel M. Kirzner.
The unique perspective of the Austrians during the last 130 years has been their emphasis that economics is the study of human action rather than to view man as a quantitative variable in the set of simultaneous equations, the mathematical interaction of which is supposed to determine when a hypothetical economic system is in a perfect and complete equilibrium. Man is an intentional being who has purposes, who creatively applies means to bring desired goals and purposes into existence, and in the process discovers various mutually beneficial transaction opportunities with his fellow men that generate the network of relationships that we call human society.
Explaining what Austrian economics is about, how it develops an intricate theory of the complex workings of the social order, and in what ways it is different and distinct from mainstream or contemporary textbook economics has not always been an easy task. That is what makes Gene Callahan’s new book, Economics for Real People: An Introduction to the Austrian School, a valuable contribution. He has taken the ideas of Menger and Böhm-Bawerk, Mises and Hayek, and Rothbard and Kirzner and distilled them into a book slightly over 300 pages that is clear, entertaining, and down to earth with many real-world examples and applications.
Choosing, trading, and valuing
In the first part of the book, Callahan explains in a common-sense way that it is acting man that is the center of study in economics. And it is acting man as we realistically find him, with imperfect knowledge in a world of uncertainty. Man cannot always have things the way he wants them because the means to serve his ends are scarce and to transform any of the means available to him takes time.
Gene Callahan has taken the ideas of Menger and Böhm-Bawerk, Mises and Hayek, and Rothbard and Kirzner and distilled them into a book slightly over 300 pages.
Man must, therefore, choose. He must choose between competing ends and goals for which the means are insufficient, and he must choose between what ends will be satisfied now or later. This puts all of us in the position of having to weigh alternatives and rank them in order of importance and to make choices as to whether a “little bit more of this” will be given up or traded away to obtain a “little bit more of that.”
These marginal choices not only constrain what we can do, they also open up opportunities, Callahan argues. We may find that we possess something that we value less highly than what is in the possession of another, and the other person may feel the reverse. There emerges the potential for gain from trade. Trades among individual persons will continue as long as each participant considers that the little bit more of what he gets in one more transaction is of greater value to him than the little more he has to exchange away to get it.
Men soon see the further benefits from specialization and division of labor. They each become more dependent upon their neighbors but they also now have dramatically increased the opportunities to acquire through trade varieties of things they could produce for themselves — if at all — only at a cost higher than they are being offered by their neighbors. But complex trading and production decisions in this more- developed social system of division of labor would lack essential rationality and efficiency if there were not some means to determine the relative profitability and cost of alternative lines of production and exchange.
The role of money
Luckily, with trade there developed the necessity for and emergence of media of exchange to facilitate the otherwise cumbersome difficulties of barter. Often one good over time became used for this purpose, and it became the money good.
With money on one side of every exchange, all exchange ratios could be expressed in terms of a common denominator, their money prices. This enables market participants to compare and evaluate all the goods and resources in the market and to estimate whether any good or resource for any particular use would be more or less costly than some other good or resource used in its place. Market participants now have the potential for economic calculation.
Callahan neatly explains why socialist central planning must inevitably result in failure. After developing these ideas simply and lucidly, including the nature of capital and interest, and the process of production through time on the basis of savings to fund desired investment, Callahan then turns to the relationship between the free, competitive market and government.
Free markets versus socialism
Here he neatly explains why socialist central planning must inevitably result in failure because the abolition of private property, market competition, and money prices eliminates the institutional prerequisites for economic calculation, without which the central planner is left with no rational method to determine whether or not the resources under his control are being applied in an efficient manner.
Then Callahan takes the reader through the contradictions and inconsistencies that inevitably arise from all forms of government intervention and regulation in the marketplace. Included in this discussion are chapters devoted to price and production controls; the business cycle and how government monetary mismanagement causes the waves of inflation and depression; the problems of externalities and pollution and their source in government’s failure to recognize and enforce private property rights; the supposed problem of “path dependency” that claims that private market innovations may lock an economy into inefficient technologies depending on which businessman’s product gets marketed first; the rationale for “industrial planning” to ensure “optimal” investment in new technologies so one’s own country can stay ahead of innovations in other nations; and the claim that markets are inherently unjust and exploitive, requiring government remedies and preventive medicines.
He ends the book with a concise history of the Austrian school and discusses the Austrian approach in comparison with the mathematical method of mainstream economics.
For the uninformed laymen, Gene Callahan has written an excellent entry to understanding the nature of human action and choice, and the workings of the market process. For the student who has already had some economics, it clears up many of the confusions, errors, and omissions from which a standard college economics class is likely to suffer. And for the trained economist, it not only freshly restates first principles, it explains why the way the Austrians think about economic and market problems offers a sounder and richer foundation for understanding how the real world works.