The free market road show of the Austrian School of Economics proposes free market alternatives to policymakers, businesspeople, academics, and students in different parts of the world. George Mason University in the US is the premier place for the study of Austrian Economics by faculty, alumni, and graduate students. In the developing world, the Centre for Market Education (CME) in Malaysia is a boutique think tank which wants you to understand market forces not by textbook mainstream economics, but by Austrian School of Economics and the associated Experimental Economics. Austrian economics is part and parcel of pluralist and multidisciplinary economic education encouraged for study by the World Economics Association. It is said to be the free-market economics of the real world as against the ‘pure’ or imaginary free-market neoclassical economics of the textbooks. Here is CME’s summary of how an economics student must think like an Austrian economist and, thereby, pick up ten big ideas in economics. Economics is about real-world people, meanings, and actions/interactions. Human action is purposeful behaviour.
It is the ego’s meaningful response to stimuli and to the condition of its environment. Human action needs to be understood and interpreted. The focus on actions emphasizes economizing and trade-offs (sacrifice). There are also interactions between people, by way of a multiplicity of diverse and even incompatible individual projects. There arises, thus, the problem of how to deal with the fact that we require the cooperation of millions of other people whom we do not even know. Individuals choose their actions on the basis of the net advantages they expect. Their actions alter the relative benefits and costs of the options that others perceive. When the ratio of expected benefit to expected cost for any action increases, people do more of it. Social coordination between people pursuing their own separate interests emerges as an unintended consequence through two lubricants, viz. prices and institutions (rules of the game). Market-formed prices communicate useful information to participants in the economy. They help people figure out what to produce, how to produce, and for whom to produce.
It is the ego’s meaningful response to stimuli and to the condition of its environment. Human action needs to be understood and interpreted. The focus on actions emphasizes economizing and trade-offs (sacrifice). There are also interactions between people, by way of a multiplicity of diverse and even incompatible individual projects. There arises, thus, the problem of how to deal with the fact that we require the cooperation of millions of other people whom we do not even know. Individuals choose their actions on the basis of the net advantages they expect. Their actions alter the relative benefits and costs of the options that others perceive. When the ratio of expected benefit to expected cost for any action increases, people do more of it. Social coordination between people pursuing their own separate interests emerges as an unintended consequence through two lubricants, viz. prices and institutions (rules of the game). Market-formed prices communicate useful information to participants in the economy. They help people figure out what to produce, how to produce, and for whom to produce.
They help clarify people’s options and trade-offs. Rules of the game or institutions (customs and practices through which citizens pursue and coordinate their projects and plans) shape the economic system. Each player has to know, at least roughly, what the rules are and people have to generally agree to follow them. Rules must be relatively stable. Most social interaction is directed and coordinated by the rules that participants know and follow. When the rules are in dispute or inconsistent or simply not clear, the economic game tends to break down. Property rights form a large and important part of the rules governing most of the social interactions in which people regularly engage. The economic system is a market-exchange economy based on private property rights—rights assigned to specific individuals in the form of legal ownership. Private property rights can be voluntarily traded or exchanged. By deciding exactly what belongs to whom under which circumstances private property rights provide the members of society with dependable information and incentives.
A system of satisfactorily clear property rights is the product of an evolution over time, in which law, custom, morality, technology, and daily practice interact to establish reliable patterns. Clear property rights also spark efforts to discover new resources, to innovate by introducing new cost-cutting technologies, and to develop new talents and skills. The voluntary exchange of property rights can also expand the opportunities and wealth of the trading partners. All this constitutes the starting gospel of Austrian Economics. What is built on it is a catechism of ten big ideas. First, incentives matter. This means that people respond in predictable ways to incentives of all kinds. Fame, power, reputation, sex, and love are all important incentives. Incentives as rewards and penalties motivate behaviour. Secondly, good institutions align self-interest with social interest. When markets work well, individuals pursuing their own interest also promote social interest. When markets do not work well, government can change incentives with taxes, subsidies, or regulation. Thirdly, trade-offs are everywhere. For example, in drug testing, more testing means that approved drugs will have fewer side effects. But this benefit needs to be balanced with other trade-offs: drug lag (people are harmed when approval of a safe drug is delayed) and drug loss (higher testing costs may mean a safe drug is never developed). Fourthly, thinking is on the margin. This means that we make choices by considering the benefits and costs of a little more or a little less. Marginal choices include marginal cost, marginal revenue and marginal tax rates. Fifthly, trade is powerful. The benefits of trade go beyond the benefits of exchange. Trade leads to increased production through specialisation. It also allows us to take advantages of economies of scale. Sixthly, economic growth creates wealth.
Wealthier economies enable richer and healthier lives. Seventhly, institutions do matter. The right institutions foster growth. These include property rights, political stability, honest government, a dependable legal system, and competitive and open markets. They provide incentives to save and invest in physical capital, human capital, innovation, and efficient organisation. Eigthly, economic booms and busts cannot be avoided but can be moderated. Economies do not grow at a constant pace. Booms and busts are a normal response to changing economic conditions. In a downturn, GDP drop and unemployment increases. The government can use fiscal and monetary policy to reduce the swings in output and employment. If used improperly, these tools can make the economy more volatile. Ninthly, prices rise when the government prints too much money. A country’s central bank regulates the money supply. A sustained increase in the supply of money, without an increase in the supply of goods, causes prices to rise. This inflation can make people poorer. Unpredictable inflation makes it harder for people to figure out the real values of goods, services, and investments. Excessive inflation can lead to economic disruption. Lastly, central banking is a hard job. It is often called on to combat recessions. But there may be a long lag between a decision and the effects of the decision. While too much money leads to inflation, not enough money can lead to economic slowdown or recession.
By Annavajhula J C Bose,
PhD Department of Economics, SRCC
References:
https://weapedagogy.wordpress.com/2020/10/27/is-the-crisis-of-economics-a-crisis-of-vision
https://marketedu.org/edu-papers
https://marketedu.org/history-of-economics-and-methodology
https://www.investopedia.com/articles/economics/09/austrian-school-of-economics.asp
