How to Learn EconomicsOctober 5, 2011
A lot of people are easily confused about economics. I talked about some of the misconceptions that produce such confusion in my previous article, “This is Not the Study of Economics.”
However, the good news is that economics does not have to be as hard as it seems. In fact, once one becomes exposed to economics as it was meant to be understood, it can be the most explicitly clear and intellectually invigorating of all of the social sciences.
Why? Because economics just makes sense. My mentor in high school often told me that economics provides us with the razor-sharp knife that cuts through the pseudo-intellectualism of modern day academics. At the time, I thought he was just being biased due to his academic background in economics.
Yet, I have since learned just how right he was as I have progressed in my education. Often, when reading through my textbooks or sitting through lectures, I’ve noticed just how absurd and illegitimate many “intellectual” notions are simply because I know things like, “there’s no such thing as a free lunch” or “real savings and production create wealth.”
Yet, where does one begin? Economics, although fairly basic, still requires some effort and diligence in order to be rightly understood. Mainly, this is because modern academics and the media purport many ideas as “economic,” but these ideas are really nothing more than pseudo-intellectualism or highly flawed models. Thus, the importance of understanding economics is not that one has a knowledge of concepts, but rather that one can distinguish between good economics and bad economics.
Different Schools of Economics
There are three main schools of economics that fight for mainstream attention: the Keynesian school (most identified with John Maynard Keynes and Paul Krugman), the Chicago school (most identified with Milton Friedman), and the Austrian school (most identified with Friedrich Hayek and Ludwig von Mises). This article will proceed with the intent of giving you some basic resources for learning about Austrian economics. Although this will be the focus of the article, a general—albeit imperfect—distinction should be drawn between the three schools.
Although no school of economics is infallible, the Austrian school of economics generally is the most rational and realistic. It is premised upon the notion of studying economics as a part of the axiom of human action.
For the Austrian, economic growth and prosperity are based on sound money, real savings, and production. The value of goods and services is subjective, thus the best way to ration goods and services is through a free and flexible price system that constantly adapts to the changing realities of the market. Generally, currency should be the result of market competition and not be a fiat paper currency that is printed by the central bank.
In contrast, the Keynesian school of economics is much more mathematically based, although it too has prior assumptions that inform its methodology. Keynesian economists believe that markets are generally decent, but that they also need significant amounts of restraint and regulation in order to produce an optimal result. Wealth is generally measured by cumulative macroeconomic totals, such as a nation’s GDP, among other things. Depressions and recessions result from failures in the market that need to be corrected and stimulated by government spending. Money should be a matter of fiat paper currency that is controlled and regulated by a central bank.
The Chicago school generally agrees with much of the Austrian analysis regarding competition, flexible pricing, and reduced regulation, however, it agrees with the Keynesian school particularly on monetary policy. The Chicago school economist generally is more prone to allowing the government the authority to regulate the money supply by the use of paper fiat currency. Furthermore, the Chicago school favors the scientific approach to economics. They simply believe their models can, on the whole, defend free market concepts while refuting Keynesian models.
The reason I tend to side with the Austrian school is because I believe they are the most methodologically rigorous and practically realistic. Additionally, Austrian economists understand that much of modern economics has turned into a math contest rather than a legitimate study of human action. Thus, one does not have to be a whiz at calculus in order to understand and defend Austrian economics. This does not imply that the Austrian school is lazy or un-academic. Rather, it is more grounded in common sense and philosophical rigidity than its counterparts.
Yet, despite the clear and simple nature of Austrian economic principles, one still needs to be able to defend them in this day and age. To do that requires more in-depth knowledge than being able to recognize the name, “Hayek.” Therefore, what resources can we look to provide the cornerstone of a good education in proper economic methodology?
Introductory Books and Essays
I, Pencil by Leonard Read – One of the most brilliant essays regarding the division of labor and the power of unregulated individuals pursuing their own economic interest. Through the story of the production of a single pencil, Read brings to life the power of the free market.
Basic Economics by Thomas Sowell – A very simple, but clear introduction to economics. It might not be necessarily Austrian, but much of it is highly compatible and complimentary to Austrian thought. Sowell covers the most basic concepts including the role of self-interest, prices, profit and loss, specialization, monopoly, etc.
Economic Sophisms by Frederic Bastiat – Although Frederic Bastiat was not, strictly speaking, an Austrian economist, he was a forerunner of many ideas that later Austrian economists would espouse. The great positive about Bastiat is that he is very simple, clear, and succinct. He paints vivid pictures and uses cutting logic that makes his positions very easy to understand.
Great Myths of the Great Depression by Lawrence W. Reed – One of the most misunderstood period of American history is the Great Depression. This is so because most individuals do not properly understand the economics surrounding the history of the Great Depression. Admittedly, statist historians have championed the policies of FDR so persuasively in our history books that they should bear the blame for most students’ inability to really know about what happened in the Great Depression. That’s where this essay comes in. In this brief work, Lawrence W. Reed shatters the crusty statist myths surrounding this era with irrefutable research and a sound knowledge of economic history.
The House that Uncle Sam Built by Steven Horwitz & Peter Boettke – Another area of history that Americans do not understand is the recent housing bubble. Despite the fact that Americans have lived through the recession that resulted from the housing bubble, they do not understand the economics behind it. In this essay, Horwitz and Boettke break it down to the basics, introducing the reader to a systematic understanding of Austrian business cycle theory while explaining the factors that produced the housing bubble.
Economics for Real People [Online PDF or at Amazon] by Gene Callahan – Callahan’s book provides one of the most basic introductions to the methodology of Austrian economics. If you are worried about diving into the methodological arguments of Mises and Rothbard, then this would be a much more reasonable starting point for learning the fundamentals of Austrian economics.
Economics in One Lesson [Online PDF or at Amazon] by Henry Hazlitt – Based to a large extent upon Bastiat, Hazlitt covers a wide variety of economic issues from an explicitly Austrian perspective. Some of the issues that Hazlitt devotes his work to include the fallacy behind the argument that wartime produces prosperity for a nation, the dangers behind wage and price controls, the contemporary attacks on savings, and much more.
The Foundation for Economic Education (FEE) – I had the privilege of interning with FEE during the summer of 2010. FEE’s website provides many great resources, including audio and video lectures of speakers on a wide range of economic topics. If you really are interested in economics, you should also look into applying for a FEE summer seminar.
The Ludwig von Mises Institute – The best part about the Ludwig von Mises Institute is that they publish daily articles from Austrian scholars who not only explain economic concepts, but also comment on modern-day issues. Plus, they have a wide variety of free PDF’s that you can download from past economic thinkers and a great online store!
Let’s be honest, in the information age, online videos can form a crucial part of informing and educating. Here are a few that do a great job of conveying basic economic concepts:
Hayek vs. Keynes: Fear the Boom and Bust – The groundbreaking rap video that pits John Maynard Keynes against F.A. Hayek in a discussion about the business cycle. This is an excellent introduction to one of the key differences between the Austrian and Keynesian schools.
Fight of the Century: Hayek vs. Keynes – Round Two – This rap battle picks up where “Fear the Boom and Bust” left off, treating the viewer to a more well-rounded understanding of the differences between Austrian and Keynesian economists.
Disastrous Economic Fallacies – Terror as Stimulus? – A brief explanation of Bastiat’s famous broken window fallacy.
The Morality of Profit – Some are very quick to condemn profits as evil, but this video forces us to face the reality of how profit is not only useful, but moral. Ironically, those who critique profit as immoral are much more hypocritical and immoral than are the individuals who generate profit.
Free Trade: The Great Prosperity Machine – This video will erode the misconceptions that many have about free trade. Often, people are scared of trade because it hurts American jobs, it enriches other nations, or it increases the trade deficit. This video demonstrates why free trade is ultimately beneficial for all parties involved.
Milton Friedman – Greed – Although Friedman was not an Austrian, his comments on “greed” in this video are very good for a basic understanding of the motives behind economic producers. He also reveals the hypocrisy of those who criticize free markets as being epitomized by greed.
If you are really interested in Austrian economics, I hope the resources above can help you expand your knowledge base. Ultimately, after perusing the materials above, you should be much more prepared to ignore the absurd fallacies that permeate much of the modern pseudo-economic analysis that we hear from experts and talking heads.
“The most frequent fallacy by far today, the fallacy that emerges again and again in nearly every conversation that touches on economic affairs, the error of a thousand political speeches, the central sophism of the ‘new’ economics, is to concentrate on the short-run effects of policies on special groups and to ignore or belittle the long-run effects on the community as a whole.” – Henry Hazlitt, Economics in One Lesson (p. 2)