Tag Archives: economics

Poll: The Poor Are Turning Against Obama

May 04, 2013   Shaun Connell   No comments
joblessmen

joblessmenPresident Obama’s failed economic policies are causing his support to nosedive among the poor and middle class. While Mitt Romney was characterized as the candidate of the rich during the 2012 election, new polling data shows that the rich actually favor Obama’s policies most of all.

A new poll from The Economist and YouGov says that 54 percent of rich Americans favor President Obama’s policies. His approval rating is lower among middle class voters and lowest among the poor.

While President Obama campaigned for tax increases on wealthy Americans, his policies have favored the wealthy. Unaccountable subsidies for companies — including the bankrupt solar company Solyndra – take money from American taxpayers and give it to wealthy investors. These subsidized business owners were among Obama’s biggest campaign donors during the 2012 election.

Over 51 percent of those earning less than $40,000 per year disapprove of President Obama’s policies, while only 45 percent approve. Half of middle class voters — those who earn between $40,000 and $100,000 per year — disapprove of the Obama administration’s performance.

The president’s failed economic policies have led to slow job growth, putting greater pressure on middle class voters who are struggling to make ends meet. And while the president has expanded welfare programs for the poor — like food stamps enrollment increasing by 70 percent during just four years in office — it is tougher than ever for the working poor to find good jobs that will help them rise to the middle class.

Wrong Direction?

Disapproval from poor and middle class voters has many convinced that the country is heading in the wrong direction. Nearly 60 percent of adults believe the United States is on the wrong track. Only 27 percent support the current direction of the country.

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The Real Unemployment Rate is Worse Than Reported

February 27, 2013   Shaun Connell   No comments

not hiringThere are lies, big lies, and then there are statistics. Perhaps worst of all, there are government statistics. Trusting the government to be honest about the economy is like trusting the fox to be honest about guarding the hen house — it’s a recipe for eventual disaster.

When Obama took office, the unemployment rate was 7.8%. When Obama took his oath the second time, it was 7.8%… still. So did we have roughly the same labor market during both times? Heck no.

Millions upon millions have lost full-time work and have been pushed down to part-time work — this inflates the numbers of employment while drastically hiding those who are suffering.

There are 3 reasons we shouldn’t trust federal unemployment estimates:

  • Conflict of interest. The people reporting statistics have an interest in making them look rosy. Considering nearly all statistics can be misleading — especially economic statistics — that immediately makes all positive news suspect.
  • They stop counting. The unemployment rate doesn’t count students, people forced into early retirement, or people who have run out of unemployment insurance. In other words, a huge portion of the unemployed are ignored. The real rate is nearly double what’s reported. If the “official” rate was believed, it would only be a little harder to find a job — most people know it’s several times harder at least, and wages are even more difficult to acquire.
  • Not all jobs are equal. A job created by government isn’t the same as a job that actually provides a service the economy has a demand for. Some government jobs are understandable — military, police, etc — but many are created that achieve nothing – bureaucrats, regulators, etc.

So how can we determine if the economy is getting worse? Read below.

 The “Real” Economy: More People Can’t Afford Food.

To see how many people have seen substantial cuts in their income to the point of not being pushed into poverty, just look to food stamps as a percentage of the population. Over the last three years, the number has essentially skyrocketed. In 2011, unemployment dropped by .5%.

But the main reason for the drop is that so many people have taken early retirements or have been pushed to part-time work — not that they’ve actually gotten back on their feet.

The “recovery” is always a delusion. It is false hope for individuals who want to believe things will get better.

Meanwhile, use of food stamps is essentially skyrocketing. For the first time in the history of the United States, over 15% of Americans are on food stamps. That means Obama’s solution to “fixing” the economy is essentially increasing spending by creating a dependent class of people.

This isn’t just up compared to Bush. Food stamps are drastically higher for 2011 than for 2010. That means even after Obama’s first two years, food stamp usage is still increasing while unemployment is supposedly “decreasing”.

And no, this number won’t drop in just a few years. Since food stamps were created as a program, their use has gotten larger essentially every year. This means an important part of the economy will come to rely on welfare as an important part of their income.

How many people rely on a check from the federal government? According to Investors Business Daily, roughly 49% of home get benefits. This is a huge political move — essentially nobody who gets a check is going to vote against the guy who’s giving them checks in the mail.

Meanwhile, the national debt is skyrocketing. Our national debt is now bigger than the US economy as a whole.

Meanwhile, the senate hasn’t passed a budget since Obama acquired office. We’re literally spending money so fast, we don’t even have a budget any longer.

This insanity can’t continue. Over the next 5 or so years, we’ll be hitting an important point in our history. We’ll be getting into so much debt — unless something stops the increase — that we’ll have to either default on the debt or just print our budgets in the first place.

That’s bad. That’s a big deal. And you should be prepared for both recessions and inflation going forward.

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Ignorance: The Government Is Causing Gas Shortages In NYC

November 03, 2012   Shaun Connell   No comments

The ultimate politically-incorrect “evil” business practice is “price gouging”. The idea is that some wicked small businessmen raise prices during a crisis, and that this is horrible because they make extra money. Why is that horrible? Because nobody should be able to make money when things are rough, claim the politically correct camp. This outrage, of course, ignores essentially everything about economics.

The result? Huge gas lines and gas shortages all over NY City. Price “gouging” makes it more profitable for gas station owners to pay a little extra to order tons of extra gas — meaning there won’t be shortages. Prices going up also is a way of rationing gas so that only people who actually need it will buy it during the disaster.

The price controls by the governors of New York and New Jersey are economically insane. They’re threatening small business owners with huge penalties if they raise gas prices. The result of this? Less gas shipped in, and the gas that’s left isn’t rationed correctly… gas shortages. This isn’t rocket science, but the politicians couldn’t care less about economics. They’re more concerned with power, breaking stuff, and doing what sounds good to the ignorant. Ridiculous.

The problem is that the politicians are wrong once again. There’s nothing wrong with “taking advantage” of a situation if it’s with your own property, and especially not if it helps as many people as possible. And price gouging actually does that — though don’t expect to see the following explanation on a bumper sticker.

Why Prices Go Up: The Key To Understanding The Economy

Prices are essentially the entire market’s way of telling us which good and services we should focus on, in accordance with supply and demand. Prices could be seen as the invisible hand’s message to us, to help guide us when it comes to picking and choosing which projects we’ll work on next. If businesses just “follow the money”, the market becomes a tremendously efficient machine, connecting demand with supply in record time.

People generally get upset at prices, which is similar to “shooting the messenger”. We shouldn’t get upset at prices going up — we should understand why they are, and work to fix the underlying supply and demand issues that lead to higher prices. Don’t ban doctors from charging “too much; just train more doctors. This isn’t complicated if we just read through a textbook or two.

If prices are too high, then people who want it less will consume it less and suppliers will start to create more supply to make money. The end result is that the market works efficiently. Ignore this and you’ll have shortages.

Gasoline Price Gouging: More People Get Gasoline

Let’s say a hurricane is suddenly coming into New Orleans. The people then all rush to leave the city, and since gas is as cheap as usual, they fill up their tanks, and the gas station quickly runs out of gas — leaving people at the “end” of the line without the ability to leave town with a full tank of gas.

Let’s replay the scenario with the wicked “price gouging”. The prices go up because people are willing to pay more, and the people “first” in line are less likely to fill completely up — and are more likely to ration the gasoline, leaving more people with gasoline so they can make it to the other gas stations an hour or two away.

Price “gouging” is really just rationing. That’s what prices are. They ration who can get what — in the most efficient manner possible.

So when people talk about trying to force gas prices to stay the same as before or the same as places without the sudden surge in demand, just remember: those are the people causing the shortages.

Price controls NEVER work. Increases in demand should lead to an increase in prices because, well, of economics. When politicians revolt against this because it sounds “mean” or something, they’re just waging war on the laws of economics, and that’s one war they’ve always lost.

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Peak Oil Theory: When Will We Run Out Of Oil?

September 27, 2012   Shaun Connell   No comments

There’s only so much oil. This means we can’t keep producing and consuming more of it every year forever — there has to be a point where we produce less of it than the year before.

Some people take this to mean that eventually the world economy will go off a “peak oil” cliff, and then there will be economic hell to pay. These people are popular. I just finished reading an energy economics textbook that had sections which sounded like they were ripped off a cheesy, low-budget film about the end of the world.

Other people, like myself, think we’ll see some bumps in the road, higher oil prices, but then we’ll transition to better long-term energy sources like natural gas and electric vehicles. Let’s talk about why this is the most likely scenario in this article.

Peak Oil: Different Definitions And Different Views.

There are two basic things people mean when they use the expression “peak oil”. Some people exploit the confusing two definitions to turn an obvious fact (we can’t just infinitely consume more oil than the year before) with a loopy economic theory (the transition from oil to alternatives will cause economic chaos and everyone suffers).

So for the purpose of this article, we’ll be focusing on just one concept of peak oil: the idea that production will necessarily fall because we just “can’t” produce as much as the year before. In other words, people will stop traveling and consuming as much energy as the year before — not stop consuming oil because they switched to natural gas or electric vehicles or something.

Will We Ever Completely Run Out Of Oil?

Economically speaking, we’ll never run out of oil. Eventually, the price of drilling for oil will make the oil too expensive to drill, meaning we’ll completely replace our consumption before we consume the last barrel. We’ll replace oil drilling with biofuels, electric cars, natural gas consumption, liquid coal fuels, or something else.

The question, however, is what that replacement will look like. Will we replace to a lower energy fuel, and experience our economy grind to a halt? Will people have to stop driving vehicles and go to bikes or walk to work? I think not, as I’ll explain immediately below.

Innovation Changes Economically Recoverable Oil Supply

Every year, innovation makes more oil reserves “appear”, because we can afford to drill to get the oil. Using 1920 technology, we’d already be at the end of our rope — but technology gets better every year.

We’re talking about the energy sources of human civilization. Untold billions are going toward research, development, and technological innovation. This buys us time, though this alone can’t “save” us from eventual peak oil. It’s the next two problems with peak oil that does that.

Higher Prices Change Economically Recoverable Oil Supply

This is very similar to the above. When the price goes up, say, 25%, this makes tons of oil that wasn’t economically recoverable suddenly available for drilling. It doesn’t happen instantly, but the price definitely frees up more and more oil.

Mixing this with the innovation discussed above and it should be obvious what’s been keeping our production of oil for the last fifty years, even as the quality of our crude oil has dropped.

Higher Prices Automatically Cut Demand For Oil Products

This is important, because this will be where our oil consumption will eventually drop. Every time oil goes up a few dollars, the alternatives to oil look better. Here are examples of alternatives:

a) Electric vehicles. Electric cars are starting to hit the scene just like “regular” petro cars. Tesla Motors is making headway in this industry. If prices continue to increase for oil, this will be one answer.

b) Biofuels. There’s research in turning algae into biodiesel. This saves an incredible amount of money and resources if honed. The same goes for energy from sugar and other agricultural products. Some are better than others, but overall this will likely just be a supplimental fuel source.

c) Natural gas. Natural gas production facilities in the United States and around the world. There is still plenty of natural gas in the world, and it’s a natural fuel source already for trucks, buses, and even tractors.

d) Coal fuel. Liquefied coal fuel sources are being tested as a fuel source with success. If suddenly we needed to switch to another fuel source, this one would certainly work to some extent. Remember, this is still a “baby” technology. Going into the future 10-30 years, it’ll be much better developed and will be more energy efficient.

This is all just the start. There are many different fuel sources that could be used, ranging from electricity to other carbon fuel sources. Those claiming that “the end is near” because we’re “running out” of oil are simply off base. There might be higher prices going forward, but it’ll just help us transition to other fuel sources at worst.

What The Transition Will Look Like

As oil becomes more and more expensive, oil and car companies, along with other corporations, will continue dumping untold billions into new energy sources for the future. No “one” energy source needs to win. Cars can be electric, trucks can run on natural gas, and some people will stick with petroleum for a while. Gas stations will become more all-purpose fuel stations.

A good portion of the money spent overseas will build new technology and factories closer to home. Overall, the impact to the environment will likely even be better. The transition won’t be painless — oil prices will keep increasing for a while before the transition really begins. But in the end, the alarmists will be proven wrong and the market will guide us yet again.

Are we running out of oil? Technically, yes, but the market will simply transition us eventually to other fuel sources. A crisis averted with basic economics, once again.

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Debunking The Peak Oil Myth

September 01, 2012   Shaun Connell   No comments

I just finished up an article over at SeekingAlpha.com about the peak oil myth. I thought some of the Capitalism Institute readers might find it interesting. Essentially, the peak oil theory is the notion that because oil is finite, eventually we’re going to hit a point where we consume “half” of the oil, and then we’ll struggle to produce as much as before after that and we’ll have economic havoc and we’ll all die. Something like that.

Of course, these people have been predicting peak oil since the 1910s. They’ve always said that oil will peak within the decade. And they’ve been wrong for about a century. The reason is basic economics.

1. When prices go up, more oil is economically recoverable.

A lot of oil is “expensive” and needs higher prices to be harvest. An example would be shale oil. Once we begin to harvest shale oil, prices will begin to fall again allowing production to begin increasing yet again.

2. Innovation kind of exists.

If we’d never invented anything since the 1910s, then yes, those peak oil theorists would have been dead right. But of course, technology has been getting better and better, and eventually we’ll see it even better. That’s the point — production will likely continue, even with higher prices.

3. Higher prices fix the problem.

As prices gradually get higher and higher, alternatives will make more sense. For example, electric cars. In the meantime, don’t bet on peak oil — it’s a bad bet, and it’s a bet against economics and innovation.

You can, of course, read more about the peak oil theory here.

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Austrian Economics in Real Life

August 19, 2012   Jason Hughey   No comments

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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The 5 Basic Principles of Austrian Economics

August 09, 2012   Jason Hughey   No comments

What is the Austrian School of economics?  If you’re even slightly familiar with this school, you’ve probably heard of economists such as Hayek and Mises.  If you’ve done more than cursory research, you’ve also probably come across some thoughts by Murray Rothbard, Israel Kirzner, and Carl Menger.  You might be aware of some interesting insights into the Austrian theory of the business cycle, the study of human action, the concept of “deciding at the margin,” Austrian theories of banking, or the socialist calculation debate.

These names and ideas are great starting places for those who are interested in Austrian economics.  However, it’s always important to take a step back from the conglomeration of names and theories in order to better understand the comprehensive whole. 

Whether you are in the middle of attempting to dissect Mises’ most famous treatise on economics, Human Action, or you have a copy of Economics in One Lesson by Hazlitt sitting on your bookshelf, it is always important to go back and remind ourselves to ask: what is the Austrian School of economics?

Defining the Austrian School of economics

The term “Austrian School” is a label that we use to categorize a certain type of economic methodology.  Now, I understand that labels are often criticized for oversimplifying issues and lumping complex beliefs into broad categorizations.  Leaving aside the fact that this accusation refutes itself (since it labels all labels as being overly broad), this contention also overlooks the reason that we make labels.  We make labels because it helps us to distinguish between different viewpoints, methods, and presuppositional biases.  This clarification is significant because it helps us look for the most compelling reasons to separate various schools of thought from each other.

In the case of the Austrian school, what are the unique distinctions that separate it from other economic schools?  Without getting too technical, let’s look at five of the most basic fundamentals of Austrian economic methodology:

1. Austrian economics is deductive

2. Austrian economics presupposes the axiom that humans act

3. Austrian economics derives methodological individualism from human action

4. Austrian economics rejects empiricism as the standard for proof

5. Austrians economics does not endorse a political ideology

Without further ado, let’s briefly unpack the theory behind each of these principles in order to develop a comprehensive understanding of what Austrian economics is.

1. Austrian economics is deductive

The Austrian School’s economic methodology is an exercise in deductive reasoning.  The big, fancy way to describe Austrian economics is to call it axiomatic deductivism. This means that Austrian economists study human decision-making by starting with a set of fundamental axioms and then reasoning from those axioms to truths about economic principles.  Now, remember, an axiom is a presupposition that cannot be deductively proven, but is nevertheless self-evident and irrefutable.

In this sense, Walter Block says that Austrian economics takes a geometric approach to scientific inquiry.  Much like Euclid’s system of geometry, which builds itself upon fundamental axioms and necessary postulates using abstract theory, Austrian economics systematizes its understanding of human action before diving into the specific circumstances.  Why does this matter?  Because Austrian economics is a thoroughly systematic approach that provides us with a rigorous and robust framework for understanding economic issues.

This does not mean that Austrian economists agree on everything!

Just like there were many debates among Greece’s students of geometry, there are disagreements between Austrian economists over certain issues, including some aspects of methodology.  However, the point is not that Austrians always agree, rather, the point is that they attempt to construct their economic system based upon a generally shared and accepted deductive methodology.  This brings us to the question: what is the starting point for the Austrian methodology?  The answer is found in the second principle of Austria economics:

2. Austrian economics presupposes the axiom that humans act

The fundamental axiom for the Austrian is that humans act.  This is irrefutable because if anyone tries to disprove it, they have to in some way think, read, write, and speak in order to make their argument.  In other words, they have to act in order to prove that humans do not act.

A necessary assumption that is derived from this outcome is that humans act purposefully, given their limited knowledge and means in any given circumstance.  This does not mean that Austrians argue that humans necessarily behave rationally or that they always have good reasons for acting.  It also does not mean that the result of the outcome will align with the individual’s perception of desired results.  It simply means that humans do things because they perceive either a non-negative outcome or a benefit as a result of the action, given the constraints placed upon them.

Murray Rothbard clarified that the Austrian concept of human action, “contrasts to purely reflexive, or knee-jerk, behavior, which is not directed toward goals.”  Austrian economics is not meant to provide us with the tools of studying purposeless and random behavior.  That is left to the domain of other fields of study.

However, the irrefutable fact that humans generally act toward perceived goals remains–and it’s quite evident in the world around us.  People act purposefully and rationally to improve their conditions around them given the state of affairs they find themselves in and the incentives they perceive.  If this wasn’t true, then we wouldn’t have all of the advances of modern civilization.

Therefore, properly speaking, Austrian economics goes beyond the study of exchanges involving money, goods, and services.  Instead, as Mises said, it is a subset of the study of all human decision-making that is purposefully conducted.  The fancy word for this study is praxeology.

3. Austrian economics derives methodological individualism from human action

After having proven human action as a reliable postulate, Austrians move on to the notion of methodological individualism, arguing that individual human actors are the most important factors in understanding  observable causation in this world.  The ultimate question of methodological individualism is: who acts?

Think about it this way: ideas are not people, thus, they cannot act.  Moreover, since a group of people can only exist because multiple individuals are acting within the group, then the notion of a group of people is a helpful description of the concept of multiple people acting—i.e. a group of people is just a descriptive idea.  Therefore, since a group of people is nothing more than an idea, then a group of people cannot act since ideas cannot act.

Thus, businesses, governments, society, neighborhoods, etc. do not act.  Individuals forming associations in such environments are the stimulants of all action that occur within such group frameworks.  This is why Mises argued in Human Action that, “a social collective has no existence and reality outside of the individual members’ actions.”

Again, a clarification point is needed: the concept of methodological individualism as a method of analysis does not carry with it the value implications of a moral or philosophical advocacy of individualism.  By saying that individuals, not groups, act, Austrians are not necessarily saying that the individual is the source of reality or that the individual is the highest form of a moral being.  Regardless of what they personally believe about theology, ethics, and metaphysics, Austrian economists do not claim to answer these questions within their economic methodology, arguing that these issues lie outside of the scope of economic inquiry.

Instead, Austrians are simply saying that if we are to understand purposeful human behavior, we must seek to understand it at its most basic level: the individual human actor.  From this, we can extrapolate to different levels of social cooperation and community behavior, but the Austrian never forgets that the individual is the reason for and the source of action in society.

4. Austrian economics rejects empiricism as the standard for proof

The deductive approach of Austrian methodological individualism starkly contrasts with the empirical and mathematical approaches of much of the rest of economics.  Although Austrians do not contest the notion that economics is a science, they recognize that it is not a quantifiable science in the way that chemistry is a quantifiable science.  Thus, they do not believe that the primary means of understanding economics should come through models, graphs, formulas, and equations.

Because of the plethora of variables involved with each individual action, it is mathematically impossible to understand each variable behind each human action on an aggregate level.  There are literally hundreds of variables acting upon one individual as he faces the decision to make one action.  Multiply this by millions of individuals facing hundreds of their own specialized variables, and you can see why developing mathematical formula to rule and predict human behavior is ultimately futile.  This is why Mises said, “All authors eager to construct an epistemological system of the sciences of human action according to the pattern of the natural sciences err lamentably.”

A few important clarifications are necessary at this point: although Austrians will not deny that there is a place for econometrics and mathematical modeling, the difference between Austrians and most other economists is one of emphasis.  Most mainstream economists place their emphasis on understanding human decision-making with statistics, graphs, GDP, indexes, etc.  Austrians believe that this is a hopeless endeavor and thus emphasize the discovery of economic principles through a deductive approach that incorporates the math, graphs, and statistics when it properly aligns with those economic principles that are established by logic.

The Austrian is not opposed to trying to measure and model economic phenomena; however, he does not believe we can learn the fundamental truths about economics through such empirical analysis.  While isolating variables in biology, physics, and chemistry can indeed tell us more about scientific truths, the inability to isolate variables in economics can potentially lead us to false knowledge if we continue to assume that we can hold “everything else equal.”  If policy and business decisions are enacted based on these false understandings, then there will likely be disruptions, inefficiencies, fraud, and cheating in the market system.

5. Austrians Economics does not endorse a political ideology

Ultimately, the goal of Austrian economics is to tell us both why and how humans act, make decisions, and conduct economic exchanges.  In other words, it’s a “nuts and bolts” explanation for economic transactions and human choice.

It is absolutely not meant to be a moral prescription for government policy.

Although the principles of Austrian economics help us to better understand the economic phenomena associated with modern circumstances and political realities, it cannot be emphasized enough that Austrian economists view their study as a science of inquiry, not necessarily a prescription for policy.

This distinguishes Austrian economics, which is an economic school of thought that attempts to describe the way things happen, from libertarianism, which is a political philosophy that tries to tell us what government and society should look like.  Now, often the two do seem to go together since most Austrian economists nowadays are libertarians.  Furthermore, most of the influential Austrian economists, such as Hayek, Mises, and Rothbard all held to varying degrees of libertarian political philosophy.  Much of the findings of Austrian economics, such as Hayek’s business cycle theory, do seem to mold very well with the ethical and policy prescriptions of libertarians.  Ultimately, however, applying Austrian economic methodology does not require an individual to be a libertarian and vice versa.

That said, many defenders of liberty have found the methodological analysis of Austrian economics to be an important tool in refuting advocates of big brother government.  Austrian economics helps bring the arguments back to reality, pointing statists to the facts that deficit spending creates inflation, that inflation creates unsustainable booms, that government stimulus programs cannot create employment, etc.  Yet, Austrian economic methodology never actually makes any statements about reality outside of what it deduces and observes in human behavior.  Prescriptions about what to do in light of the findings of Austrians are left to the area of political philosophy.

Lesson 1: Conclusion

There is a very deep and rich history behind Austrian economics, going all the way back to Carl Menger who pioneered the Austrian school with his elaboration of the principle of subjective value theory.  Although Austrian economics has unfortunately never been a mainstream viewpoint, its consistency and accuracy in helping us to understand the world around us is forcing scholars of the modern era to check their Keynesian premises and seriously consider the Austrian school.  It is these real-world considerations that will be considered in my next article in this guide to Austrian economics.

Additional Resources

Human Action by Ludwig von Mises (Online version accessible at: http://mises.org/resources.aspx?Id=3250&html=1)

“Praxeology: The Method of Austrian Economics,” by Murray Rothbard (PDF file accessible at: http://mises.org/rothbard/praxeology.pdf)

“Austrian Economics and Libertarianism” by Walter Block (Youtube video of lecture accessible at: http://www.youtube.com/watch?v=Xn6TXqgyj_M)

Economics for Real People (2nd ed.) by Gene Callahan (PDF file accessible at: http://mises.org/books/econforrealpeople.pdf)

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Land-Value Tax: Why It’s Immoral and Destructive

July 14, 2012   Shaun Connell   No comments

I just had a conversation with an angry “geolibertarian”. This Physiocrat inspired approach to libertarianism apparently supports a special land-value tax, or a tax on land that is held and not developed.

The general argument is that undeveloped land should be developed as soon as possible without people sitting on vacant land as an investment. Of course, like all tax arguments, this completely misses the point, is based on bad assumptions, and is immoral theft.

Calling it “libertarian” is completely backwards. They reject what libertarians believe about property rights, and that’s the entire foundation of libertarianism. They are not libertarians. They are not capitalists.

1. Government Shouldn’t Force “Lower” Short-Term Prices

Lowering prices in the short run as much as possible isn’t the goal of government. Protecting rights is the goal of government. And just because I have food in my pantry and you’re hungry doesn’t mean you can rob me of it.

2. Delayed Consumption Can Be Productive

The entire purpose of capitalism and savings is to delay consumption for some other production and consumption later on. Increasing land prices, for example, make some project unachievable and other projects achievable. Which do we pick? “We” don’t. The market does. Otherwise, we’ll have malinvestment.

3. “Evil” Speculator Profits Are Also Productive

Third, speculators in land are often the very people who are raising money for other projects, so the increase in cost funds many other investments, including — here’s the kicker — many new real estate developments. And that’s a good thing.

4. There’s No Such Thing As a Free Lunch.

It never ceases to amaze me that people think some new sort of tax or regulation won’t have negative consequences, or costs. It’s insanity.

The profits made in selling undeveloped land eventually require the development of said land. You’re assuming that current demand is all that matters, which is ABSURD. That’s why we use capital in the first place and have savings — it allows us to delay some consumption for future consumption.

People who sit on undeveloped property until someone is willing to pay a profitable amount provide a service because some projects won’t occur and others will. That’s literally the point. It absolutely can be -productive- for me to sit on some land and not sell it for 10 years, because that project in 10 years could be absurdly more important than setting up whatever current demand is.

That’s literally the point. Real estate prices don’t just reflect instant demand — but also possible future rents and such. Time is an important variable geolibertarians are trying to ignore.

It’s the time gap that is being turned into profit, and it’s profitable for a reason. Not all price increases are bad. Some are market functions that allow better production over time.

In the end, “libertarians” will always be tempted to make a little exception for taxes and force. Just a little tax on the rich to “level” the playing field, or just a little tax on the poor to get skin in the game, or just a little tax on important to “help” producers.

But they’re always broken. The only economic system that makes sense is this: liberty. To learn more about the economic system that best protects liberty, read our introduction to capitalism article here.

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Economics is Not a Zero-Sum Game

June 26, 2012   Jason Hughey   No comments

By Jason Hughey, Capitalism Institute staff writer

_____________________________________________________________________________

All around us, we are surrounded by competition.  One of the most obvious examples of this competition is in the sports world.  A couple weeks ago, the L.A. Kings just won the Stanley Cup finals in a surprising upset over the New Jersey Devils.  Even more recently,  the NBA world was focused on the Finals match up between the Miami Heat and the Oklahoma City Thunder.  The MLB is in full swing for those who are disappointed that hockey and basketball are over for the season.  Meanwhile, NFL and NCAA football fans eagerly await the start of the 2012 football season in the fall.  The key similarity in all of these sports is that they produce only one winner at the end of each season.

As a very competitive individual myself, I know what it’s like to be on both the winning and losing side of things.  Needless to say, I do not like to lose.  I really don’t know anyone who does.

Ok, so what does all this have to do with economics?

Most people perceive the economics of the free market as a competitive struggle for domination.  Much like Miami Heat’s smothering defeat of Oklahoma City in five games, leaving Lebron and Co. at the top of the world and the OKC Thunder grasping for their shattered egos, people think that the free market describes a system of “winners” and “losers” in which the wealthiest come out on top while everyone else is left behind.  The only way to succeed in this cut-throat system is to figure out how to thrive at the expense of others.

Some of this may sound familiar.  The Occupy Wall Street movement tells us that it’s the 1% vs. the 99%.  Marx once told us that it’s the laborers vs. the capitalists (the owners of production).  Labor unions tell us that it’s the employee vs. the corporation.  Protectionists tell us that it’s the United States vs. the rest of the world.  Socialists tell us it’s the rich vs. the poor.

There are few things that anyone could say to me that I would consider less depressing.  If my outlook on life was such that I believed that my material well-being depended upon the extortion and exploitation of others, I would be an extremely angry person.  I would literally hate everyone that partakes in the economic system.  I would be envious of those who had more money because I would feel like they got their money by somehow trampling me underfoot.  I would do everything I could to get someone to take their money and transfer it to me by whatever means necessary.

However, I don’t have an outlook like that.  Neither should you.  Unlike tonight’s game between the Cardinals and Rangers, the system of free markets is not a zero-sum game.  Everyone wins.  Unfortunately, this runs counter to practically everything that we learn from teachers, politicians, labor unions, and protestors on the street.  Society practically intuits the idea that economic success for some must come at the expense of others.

The Division of Labor: A System of Social Cooperation

The French economist, Frederic Bastiat, once wrote a brilliant treatise on the popular economic fallacies of his day entitled, Economic Sophisms.  In his book, Bastiat identified the nature of man’s economic condition.  In doing so, he paints a picture of what life would be like outside of a market system of production and distribution.  Individuals would have to face the ruggedness of nature on their own—unless they joined an economic order of market exchange.

“On his long journey through life, from the cradle to the grave, man has need to assimilate to himself a prodigious quantity of alimentary substances, to protect himself against the inclemency of the weather, to preserve himself from a number of ailments, or cure himself of them.  Hunger, thirst, disease, heat, cold, are so many obstacles strewn along his path.  In a state of isolation he must overcome them all, by hunting, fishing, tillage, spinning, weaving, building; and it is clear that it would be better for him that these obstacles were less numerous and formidable, or, better still, that they did not exist at all.  In society, he does not combat these obstacles personally, but others do it for him; and in return he employs himself in removing one of these obstacles which are encountered by his fellow-men.”

Bastiat continues to demonstrate how this system works in practice.  He explains that “The physician, for example, does not bake his own bread, or manufacture his own instruments, or weave or make his own coat.  Others do these things for him, and in return he treats the diseases with which his patients are afflicted.”

Thus, each individual in a free economy has the opportunity to specialize in the conquering of some obstacle or impediment that stands against human survival and flourishing.  He offers his specialized ability in removing this impediment to others in exchange for a profit.  They do the same for him.  In the end, by their collective efforts and the medium of exchange, each individual in society is better able to provide for his material well-being.  Note that in such a society, there are no losers.  Everyone benefits by the accumulated collective knowledge that occurs without centralized control.

Note that such an approach to generating prosperity is not in any way tied to an “us vs. them” mentality.  In fact, it runs contrary to all such notions.  Instead of accusing the economic system of trapping mankind in a zero-sum game, where we can only gain at the expense of others, it accurately portrays the market as a system of efficient social cooperation in which everyone wins.  The most successful in such a society do not trample people underfoot, instead, they serve them with their talents and knowledge.

Thus, the division of labor principle shows us one way how economics is not a zero-sum game.  Another way to understand how economics is not a zero-sum game is to remember the subjective theory of value.

Subjective Value Theory: It’s All In How You Look At It

At the end of a baseball game, the final score tells us who wins and who loses.  There’s an objective standard of determining the winner and loser.  However, in economics, all transactions are governed by the principle of the subjective theory of value.  This means that economic goods and services are not locked in some objective standard of value.  There’s no possible economic method that allows us to say that a horse and buggy should be valued today in the same way it would have been valued in the 18th century.

Each individual values economic goods and services subjectively, that is, no economic good holds any intrinsic worth.  The value of goods and services is based entirely on what individuals impute to that good or service.  That’s why a free market society produces so many options as opposed to state-regulated economies.  We value goods based on things like shape, feel, color, style, brand name, need, and a plethora of other factors.

The market exists as a response to this subjective value by providing us with options so that we are not restricted into a cookie-cutter system of production and distribution.  This is the beauty of the price system.  It exists in response to the subjective theory of value.  A free price system is allowed to fluctuate in order to match changes in people’s preferences over time.  This results in people’s subjective, changing preferences being satisfied in the most efficient manner possible.

How can we possibly believe that there are winners and losers when we understand that value is subjective?  I may not see a need to have a mansion with one-hundred rooms in it, but some business tycoons are able to maximize their utility by building such a mansion (they also provide a lot of jobs along the way too).  I may not see a need for a 60” flat screen television, but some people are willing to pay $1,000+ for a really nice television.  In the world of subjective value, that is fine.  Some people buy only specific high-quality suit brands.  I would like to be one of those people one day, but I realize others might not care to own even one suit.

In brief, the subjective theory of value should dictate how adults in a market economy function.  We should understand that everyone around us has different preferences and we respect those preferences.  We certainly shouldn’t complain or accuse them of benefitting at our expense.  Last I checked, if I did not own a Ferrari, and if some business tycoon buys one, then there’s no way to say that he has exploited me.  He’s simply satisfying his subjective value preferences.   If I don’t have the money to buy a Ferrari that he has, that is my fault, not his.  Even if I did have the money to buy his Ferrari, I probably wouldn’t, because my subjective value preferences would not incline me in that direction.

Conclusion

So the next time you’re tempted to look at the world of economics as a competition with ultimate winners and losers, think twice.  Economics is not the study of brutal competition where the rich guy stomps out the poor guy.  Sure, businesses may have competition for the privilege of selling to customers, but that is merely a healthy aspect of the ultimate process of social cooperation that a free market engenders (think about it: businesses are competing for the privilege of serving the consumer!  What other economic system produces a phenomenon where people compete in order to serve?).

Further, think about this: the only time when there are absolute winners and losers in an economic system is when the state uses its power of coercion to declare certain groups winners and other groups losers by an arbitrary, de facto ruling.

If you truly want to see society prosper in a manner that is harmonious and socially cooperative, then you cannot support political measures to favor or restrict one group at the expense of others.  Otherwise, you introduce a zero-sum game into the market when one was never there in the first place.  As Frederic Bastiat said in his book, The Law:

“As long as it is admitted that the law may be diverted from its true purpose — that it may violate property instead of protecting it — then everyone will want to participate in making the law, either to protect himself against plunder or to use it for plunder. Political questions will always be prejudicial, dominant, and all-absorbing. There will be fighting at the door of the Legislative Palace, and the struggle within will be no less furious…Is there any need to offer proof that this odious perversion of the law is a perpetual source of hatred and discord; that it tends to destroy society itself?”

Last season, the St. Louis Cardinals won the World Series.   The New York Giants won the Super Bowl.  Next season, things may turn out differently for both teams, but we will continue to win every day as long as we support a free economic system that engenders a genuine spirit of social cooperation instead of using the state’s coercive authority to produce a zero-sum game.

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The Truth About Trade Deficits

May 17, 2012   Leah Stiles   No comments

For centuries, the mercantilist perspective has had an unfortunately persuasive voice in policy discussions centering on international trade. Essentially economic nationalism, mercantilism ruled yesteryear’s economy with its advocacy of low imports and high exports to retain a competitive advantage in the war-like international market of zero-sums(Ewert, 1996).

Although now infrequently championed under the title of mercantilism, this philosophy lingers in the popular fear of trade deficits. Many are led to believe that a deficit in trade exists when one nation imports more than it exports, leading to a preference for more “balanced trade” over free trade. The natural consequence of this misplaced fear is the doctrine of protectionism which, like its mercantilist forbearer, advocates strict economic protection of domestic producers from ghoulish international competitors.

However, open markets lead to natural balances without the need of government intervention or harmful protectionism. Thus, rather than a threat to the vitality of the American economy, the perceived trade deficit is factually a misinterpretation of international markets and a flawed justification for truly harmful protectionist policies.

Trade Deficits – The Perceived Problem

The balance of trade argument primarily contends that trade is a battleground where the United States must remain competitive so that America never becomes a “debtor nation” (Ewert 1987, para 3). The argument suggests that if the United States continues in a pattern of importing more physical goods than it exports, then the nation becomes dependent upon other nations and ends in a net loss.

This trade deficit is particularly manifested in the statistic that foreign investments in the American economy surpass American investments in foreign markets. (Ewert 1987, para. 3). Perceived as particularly menacing because of the belief that over-investment in foreign markets lowers domestic production and job creation, the trade deficit problem is a popular villain.

As Mises explains, the trade deficit argument quickly criminalizes the “unpatriotic consumption habits” of private individuals who must be curbed by benevolent government officials who better know how dollars ought to be spent in the interest of domestic prosperity (Mises 1967, 199). If these “unpatriotic” habits are permitted to perpetuate, then jobs and manufacturing processes will cease to exist in the United States and, to survive, Americans will have to entirely rely upon foreign nations.

Unconvinced, Mises argues that these policies are truly oriented to avoid government culpability for inflation and to divert the blame for rising prices on luxury-crazed consumers (193). Mises, and other like-minded thinkers, has further qualms with the trade deficit argument because of the solution that is often offered – protectionism.

Protectionism – The True Problem

The logical solution to the perceived trade deficit problem is to use government force to lower imports and increase exports. This protectionism endeavors to shield domestic producers from competition and to ensure that desired industries remain in business within the United States. However, to achieve that end, the government coercively prevents individuals from accessing desired markets abroad. Such a direct intervention into the economic decisions of private individuals is a violation of the rule of law as well as a threat to the ordering power of unfettered markets.

Thus, these means are not only illegitimate but, as Mises explains, they are also ineffective as citizens consume domestically and consequently drive up domestic prices for goods that are in artificially high demand (1969, 193). If these goods were previously exported to foreign markets, higher domestic prices will likely remove the incentive to sell them abroad and thus lessen the valued export rate.

Similarly, Mises warns that forced and artificial reduction of imports accordingly diminishes the spending power of foreign nations on American products. Thus, already reduced exports are further curbed as foreign consumers lack the capital needed to purchase those American exports that successfully enter the international market (Mises 1969, 193). As such, protectionist policies intended to balance trade actually decrease the exports they are intended to encourage.

Additionally, protectionism harms the foreign nations that mercantilist, balance of trade, and protectionist arguments tend to ignore. As Mises reminds, foreign trade involves multiple parties that all benefit from the exchange and when said exchanges are altered or halted, the standard of living necessarily decreases in the nations whose trade has been restricted (1969, 193). Thus, Mises and others advocate free trade, not balance of trade, as the proper economic persuasion.

Free Trade – The Proper Solution

As W.M. Curtiss explains, free markets completely avoid both favorable and unfavorable balances by simply striking a balance (1996, 36). Open markets will naturally discover the optimum level of foreign trade as both visible and invisible goods are voluntarily exchanged (Curtiss 1996, 37).

This perspective also recognizes the “invisible” elements, including travel and money, which are ignored by deficit arguments that generally only consider physical goods (Curtis 1996, 37). With this in mind, free market perspectives recognize that capital flows are the oft-ignored other side of a nation’s total transactions (Polleit 2005, para. 6). These capital flows, when unfettered by government intervention, also contribute to a natural balancing of voluntary international exchanges.

These voluntary exchanges are, rather than warlike, generally amicable as all concerned parties agree to the terms and outcomes of a particular trade. As Curtiss elaborates, “If you’re out of gas, you don’t feel hostile toward the person who sells you some” (1996, 37). The assumptions behind balance of trade policies ignore the fact that sometimes individual American consumers import the proverbial gas and, at other times, they export it. Such a process is both natural and expected.

Conclusion

With all of this in mind, it is clear that the trade deficit argument, and the proposed protectionist solution, reflects an illegitimate and improper understanding of international trade. As such, as David Hume powerfully argues, the “strong jealousy with regard to the balance of trade” and according fear that “[wealth] may be leaving” is a “groundless apprehension” not unlike a concern that “all…springs and rivers should be exhausted.” (1742, para. 4). Truly, just as rain replenishes the water supply, unhindered “people and industry” replenish the market (1742, para 4).

About The Author:

The above was written by Leah Stiles, a student of government and history at Regent University. She has completed a Koch leadership program and an internship with the Foundation for Economic Education.

References

Curtiss, W.M. (1996). The Tariff Idea. Irvington-on-Hudson, NY: Foundation for Economic Education.

Ewert, Ken C. (November, 1987). “The Trade Deficit” in The Freeman 37:11.

Hume, David. (1742). On The Balance of Trade.

Mises, Ludwig von. (1967). “On the International Monetary Problem” in Economic Freedom and Intervention: An Anthology of Articles and Essays edited by Bettina Bien Greaves.

Mises, Ludwig von. (1969). Interview with Professor Percy L. Greaves in Economic Freedom and Intervention: An Anthology of Articles and Essays edited by Bettina Bien Greaves.

Polleit, Thorsten. (November, 2004). “The Trade Deficit: An Austrian Perspective” in Mises Daily.

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