Austrian Economics in Real Life

By Jason Hughey, Capitalism Institute staff writer

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As I noted in my last article, Austrian economics begins with the axiom of human action.  From this, it derives its analytical approach of methodological action.  When applied to the actual study of economics, this means that Austrians like to get at the root of the matter by understanding the impact of economic phenomena upon the individual and the impact that the individual has on economic phenomena.

In this article, I will present some more applicable concepts within Austrian economics that you can apply to the way you look at the world.  These concepts may affect your political viewpoint or even reconsider certain assumptions you have about business and finance.   The concepts will cover:

1. Hazlitt’s One Lesson of Economics

2. Austrian Economics and Entreprenuership

3. Austrian Economics and Monopoly

Henry Hazlitt: The One Lesson of Economics

 An Austrian economist named Henry Hazlitt articulated this principle by saying that economics could be boiled down to one very simple lesson.  In his book, Economics in One Lesson, he stated that the one basic lesson of economics “consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

Therefore, it is only rational to consider how economic realities will affect all groups of individuals within a given society for the long-term if we want to come to valid deductions about true economic principles.  Otherwise, we run the risk of ignoring the “Forgotten Man” that the sociologist, William Graham Sumner, once described in his essay by that name.  Hazlitt accepts the concept of the “Forgotten Man” as well, noting that it refers to all individuals that are taken for granted by economic policymakers, including those in the short and long-term.  If a bank man requests a stimulus, then it must come from someone else in society who has the money to give it to him.

In modern political terms, Hazlitt’s concept of analyzing economic policy solely by its long-term effects on the interests of all is a revolutionary, but mostly ignored, notion.  Understanding Hazlitt’s lesson gives us the tools to analyze the inefficiencies and economic dangers hiding behind many economic policies.  Hazlitt’s lesson challenges the established wisdom of mainstream economists and politicians who believe that there is such a thing as “corporations that are too big to fail.”  If this is true, it assumes that something must be done now to serve the economic interests of a group of society, regardless of the cost to the rest of society.

Likewise, it challenges the belief that stimulus spending is a good idea.  Other, more complex arguments in Austrian economics also challenge this notion, such as the theory of capital structure and the Austrian business cycle theory, but the simple logic of Hazlitt’s lesson provides a compelling reason to consider deficit spending a risky danger.  This is because deficit spending, particularly in times of crisis, is motivated by the needs of the present and the interests of select groups.  Central banks, politicians, and financial institutions cry out for deficit spending to save the economy, but they almost never consider the long-term effect of deficit spending upon current and future members of society.

Hazlitt’s lesson also requires us to come to grips with the scarcity of conditions.  If capital, time, and money can only be used toward any one end at any specific time, use them wisely with a long-term vision in mind.  Think to yourself constantly about maximizing the output of your input.  This might seem too arduous for some, but it’s absolutely necessary.  Being frivolous and carefree is extolled in our cultural entertainment and it’s practically the linchpin of most economic policy in the United States, but it’s the death knell of wisdom and sound financial management.

Austrian Economics and Entrepreneurship

One of the most wonderful insights that the Austrians have gifted us with is the Austrian explanation of the phenomenon of entrepreneurship.  If you are interested in learning more about the actual scholarship behind the Austrian theory of entrepreneurship, Israel Kirzner and Joseph Schumpeter are considered to be two of the most important Austrians who contributed to its development—although Kirzner does not always agree with Schumpeter.  Therefore, for the purposes of clarity, let’s keep to a simple summary of what Austrian economics generally teaches us about the entrepreneur.

Have you ever wondered why we have businesses, products, and advertising in the first place?  Austrian economics, with its emphasis on methodological individualism, reminds us that the entrepreneur is the true driver of these endeavors.  Whether he is the CEO of a booming corporation or a self-employed small business owner, such an individual is an entrepreneur.  This means that, absent government intervention, he has a gift (or a talent) for discerning a need in society and producing something that helps other people meet that need at such a value that he gains a profit in order to sustain himself and his operation.

This means that he can also adjust to the fact that the value of his products change over time.  According to the Austrians, this is one of the most miraculous aspects of the entrepreneur.  Although admittedly imperfect, entrepreneurs can react almost instantaneously to adjustments in demand, to excesses or shortages in supply, and to the competitive effects of other companies.  Certainly, this entrepreneurial process has a few flaws, but the Austrians effectively show that it is, by far, the most efficient means of achieving healthy output in correlation with demand at true market value.

There is one essential caveat to the efficiency of the entrepreneur: he cannot be insulated from either the rewards or punishments of the market by an external force if he is to sustain efficient and profitable production.  This means, by extension, that government protections, bailouts, subsidies, fines, price regulations, etc. act to distort the incentives of the business owners who are intended recipients of these policies as well as entrepreneurs that are affected by their unforeseen consequences.

Thus, CEO’s and business owners who lobby the government for more regulation in the market, by definition, cannot be considered true entrepreneurs.  Instead, they are rent seekers who are simply facades that rely upon corrupt corporatism to keep their operations successful.  They do not earn the respect of consumers by producing quality products and working to satisfy consumer desires.  Instead, they demand and rely upon the support of the taxpayer, regardless of whether or not the taxpayer even wants their product.  This is the opposite effect of what the entrepreneur provides to society, according to the Austrians.

This understanding of real entrepreneurship has relevance for both the way that we think and the way we act.  The next time you take the chance to consider all the stuff that you own, think about how it got there.  It didn’t get there because a very nice man thought that someday you personally would like to have a bunch of stuff, so he took the time to make everything you now own and give it to you.  Nor was it a group of very nice men who each made one of the things that you own and gave it to you.   And it certainly wasn’t because the government stole your money and gave it to well-connected lobbyists.

The reason that you own most of the stuff you do is because thousands of entrepreneurs all over the world who don’t know your name realized that you (and a lot of other people) really wanted something that they were very good at making.  They started a company, and whether it is large or small, they did not ever think about you personally.  Using their talent and skill, they worked hard to determine what price they could sell their product so as to keep producing and innovating it in order to sustain a profitable enterprise.  One day, you decided you wanted a product that these entrepreneurs were making and you bought it.  That same process has continued until the very moment that you are reading this article.

That’s how entrepreneurship works.  In the realm of social cooperation under a free market, entrepreneurs function as agents of change who overcome obstacles for the benefit of others.  In a sense, they are both geniuses and heroes, who make the world a better place for us, often without knowing anything about the people that they are helping.  If we can think about entrepreneurship like this, it will help us better understand and reject those policies that stifle entrepreneurship, especially if we can see through the crony corporatism that lies at the heart of many such policies.  Unfortunately, as Jeffrey Tucker shows, it is becoming harder to look at mainstream products and not see how they have been either propped up or made worse by government interventions.

Austrian economics and Monopoly

No, this is not an explanation as to why Austrian economics finds fault with the rules of the board game, “Monopoly.”  Economist, Ben Powell, has already succeeded in pointing out the game’s flaws here.  What we’re really here to consider is the true definition of monopoly powers while we decide what that means for us.

The Austrians contend that the fear of a market-based monopoly power in a free market is unwarranted.  This is for a host of reasons, but I’ll boil it down to the basic argument.  Austrians believe that having one company own 90% of a given market is not a harmful problem to society.  In fact, it’s an efficient solution to many social problems because it means that some entrepreneur has figured out how to make lots of people pleased with his product at a price they are willing to pay for it.  This enhances social cooperation, and therefore, it should not really be considered a monopoly.

If you think about it, this makes sense.  Just because a company owns the vast majority of the market in the production of a certain good, they can only maintain their dominant share (in a free market) by continuing to excel in the provision of that product.  If they slip up or another company figures out a better way to produce a similar product, then they lose their advantage in the eyes of consumers.  The key principle is that such falsely called “monopolies” are still subject to the principles of competition, market price changes, and consumer sovereignty.

It’s important to note that Austrians don’t contend that monopolies can’t exist.  Instead, they believe that government power is the source of monopoly power because it insulates companies from market forces, allowing such companies to exist regardless if they are truly a good company.  This protects inefficiency and subsidizes poor service.  In short, it completely distorts the incentives of the free market mechanism, granting companies a social reward in the form of taxpayer dollars that they would not have received had they been subject to market forces.

What does this understanding of monopoly power mean to us?  Although this is a complete deviation from the actual theory of Austrian economics, I see in this definition of monopoly power a warning against envy.  Whether in sports or in business, when the same people win over and over again, people tend to get very jealous of their victories.  Now, if those victories come because of corruption, then there may be basis for some righteous indignation.  However, when companies truly succeed because their skill is great, our legal system has created anti-trust laws to break them up.  It’s become expected that we should tear down the best just because they are the best.

 It’s a perfect shame, really.  If we were students of Austrian methodology, we might better understand that using coercive authority to break up successful companies does nothing except hurt the people that those companies are serving.  Moreover, it satisfies our envious passions.  Either way, it seems a little odd to believe that we should amputate Tom Brady’s arm or make Kobe Bryant play blindfolded just because we are tired of their success.  Likewise, it should seem odd to desire that successful companies that have emerged through the competitive process of the market should be legally punished for their success at serving us.

The only time we should criticize monopolies is when we find those that are propped up by government through laws, protections, and subsidies.  We should seek to remove those protections and allow the company to compete with the rest of the market.

Conclusion

Ultimately, what matters most in regard to applying what we know about Austrian economics is that you take the time to research and consider the important issues yourself.  One of the greatest reasons for the economic mess that we are in is because individuals no longer want to think about the hard stuff and hold others accountable to rigorous standards of critical thinking.  This has to change on both personal and societal levels if there is to be a successful reform of this country’s economic system.  Therefore, even if Austrian economics simply challenges the way we think about certain issues—and nothing more—it will have been successful at making a significant personal impact.

Additional Resources:

“Entrepreneurship,” by Russell S. Sobel (Online version accessible at: http://www.econlib.org/library/Enc/Entrepreneurship.html)

“The Forgotten Man,” by William G. Sumner (Online version accessible at: http://mises.org/daily/2485)

Economics in One Lesson by Henry Hazlitt (Online version accessible at: http://www.fee.org/library/books/economics-in-one-lesson/)

“Kirzner, Entrepreneurship, and the Market Approach to Development,” by Israel Kirzner (Online version accessible at: http://oll.libertyfund.org/index.php?option=com_content&task=view&id=504&Itemid=282)

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