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The study of Austrian economics

March 10, 2013

Austrian economics has helped me understand what happens in our economy and the excuses of the establishment economists/politicians as to why we are not achieving the paradise.

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By Medecci Lineil

My introduction to Austrian economics came when I was studying Public Management (Public Administration) at Universiti Utara Malaysia. I came across a copy of FA Hayek’s The Road to Serfdom.

For your information, Friedrich Hayek was jointly awarded the Nobel Prize in Economics in 1974 and accepted as the leader of the Austrian school of economics. I studied governmental operation, governmental economics, taxes, law and public policy.

I read, applied and argued Austrian economics principles in all student assignments. I was determined to read whatever I could find on what I thought was this new school of economic thought especially the work of Ludwig von Mises.

I did not know how a free market accomplished its work and so the study of economics showed me this and how to build a case for it.

The Austrian economics came to me; I was into it, so many good things happen, that is, by accident rather than by design. And now I am an observer of the contemporary scene, an Austrian libertarian rather than a theorist or pure economist by training.

The study of Austrian economics has helped me in many ways to understand what happens in our economy and the excuses of the establishment economists/politicians as to why we are not achieving the paradise if only their legislation were passed.

No historical of Austrian economics will be told here; I should only attempt to affirm its fundamental and principles.

Human action

There are advantages to the approach taken by Austrian economics. Austrian theorists conceive economic science as a theory of action (in which Ludwig von Mises clearly defined as praxeology) rather than theory of decision. According to him,

“Human action is purposeful behaviour. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful response to stimuli and to the conditions of its environment, is a person’s conscious adjustments to the state of the universe that determines his life” (Human Action)

In simple terms, human action is a process involving billions of social interactions and acts of coordination in different time and location. This regularity emerged without being planned by anyone on Earth.

All men act e.g buying a book, selling a book, investing, reading a book, voting for Barisan Nasional, voting for Pakatan Rakyat, doing your homework, praying, playing football, watching football, quitting a job, eating, drinking and driving.

You must believe that your action can cause an effect in your world. These are conscious behaviour. Along the way of this line of thinking, they are later known as preferences (deals with exchange).

An action is anything you do on purpose and satisfying some desires. Another Austrian economist Bohm Bawerk described human action as naturally self-developed, strive for pleasant and averting those known to be unpleasant.

Action must be done deliberately. The very fundamental with ‘done deliberately’ which derived from the human action such as (selecting and applying) what is means, what is end, what is success, what is failure, what he likes more, what he likes less, what is his profit and what is his loss. He thinks and acts.

Ultimately, these exclusive elements only present in the mind of the man concerned.

By human nature no man is never failing or making a mistake. I deal with many failures in my life too. I do not quit and I am not dead yet.  One thing I know and must admit that failure serves a purpose.

It is a learning process as the times passes. Austrian economics also does not attempt to decide whether we are wrong if we value a certain action like turning down a high paying job to become a housewife.

Methodological individualism

Another matter of key importance to Austrians is methodological individualism. In the work of Carl Menger, he emphasized the nation as a whole is not equivalent to one large decision maker, but it rather composed in of a complex collection of individual decision makers. He also said one of the major tasks of economics

“Language, religion, law even the state itself, and, to mention a few economics and social phenomena, the phenomena of markets, of competition, of money, and numerous other social structures are already met within epochs of history where we cannot properly speak of a purposeful activity of the community, as such, directed at establishing them”

In simple terms, the subject matter of economics is human plans and the actions resulting from those plans. Whenever we analyse a situation where we would say that “a group of people has chosen…” I see more than one individual made up their minds. Still, the decision occurred first in the minds of individuals.

The attempt to make economics as a study on hard, objective data, statistics, and physical quantities of goods misses the essence of the subject. They do not explain how, in practise, in real human beings actions are come about.

For example, despite much discussion on prices, I have not seen that leading to how prices are come about. Or everyone thinks the firm is just a one man entrepreneur but the fact is the firm is a collection of cooperating individuals with specific tasks, mindsets and objectives and carry out the firm’s policy.

What about human experimental (e.g reality show) in empirical economics? Human acts differently when they know they are being watched. If the person running the experiment is liked by the subjects, they will often try to figure out what results he wants and act to bring it about.

What is important here of course is that people differ with respect of knowledge, interpretations, expectations and cultures. The government and policy makers have failed to relate the actions taken by these organisations to the preferences, expectations and plans of their members – Naïve and impracticable.

Subjectivism

Austrian economists are subjectivists. It is essential to view human beings as creative actors of all social processes. We concentrate and recognise the economic phenomena emerged from what human beings believe, think and do and NOT from data, aggregates, averages or statistic that ordinary people may know nothing about.

It is not surprising even in football, though, to find the Tottenham Hotspurs manager Andres Villa Boas recently (his team won 3-2 against West Ham United last Monday) has declared that he has always been wary of the kind of empirical statistical analysis.

He also said the mind and how the players feel are much important to him rather than statistical data. Real Madrid manager Jose Mourinho concluded in an interview last December that football changes almost every day, every minute and every second.

Subjectivism is against the policy makers who seeing economy as a machine and government as its vital attendant.

That kind of thinking encourages social engineering/central control of economic life. That kind of thinking does not understand how millions of persons and companies trading freely among themselves can express their feelings and arrange their wants.

They do not appreciate self-adjustment processes like someone’s decision to forgo higher education, a house or a car in view of the ‘artificial ‘prices to be paid.

Some people choose to buy and appraise a smartphone as an essential item / a must item to buy while some people still think a smartphone as nonessential uses. Different people’s lives afford different scopes of consumption in widely differing degrees. Not all people value the RM10 note equally.

In Austrian economics, people are allowed for such differences.

Imperfect knowledge and market process

Austrian economics, in my imperfect knowledge is characterized as the process taking place over time and centred not only by lack of knowledge, lack of coordination but also dynamic learning processes and increasing coordination.

For this part, I would like to acknowledge and quote several paragraphs in The Star Sarawak Borneo Beats’s article “When a war is good for the people” by Andy Chua on June 19, 2012. The article is representing the realities of consumers who do not have perfect information in market economy.

“Two Saturdays ago, I bought a pair of slippers for RM4.90 at a well-known supermarket. To my horror, when I shopped at another outlet which is just 1,000m away, the same item was offered for just RM2.60”

No human being possesses a complete knowledge. People are lack of knowledge about how tectonic plates work, how democracy and socialism work and how price controls work. These lacks of knowledge restrict our ability to act and create uncertainty.

In this case, we are not without solutions or means to overcome our inability or uncertainty. In the real world, people are not perfect, market are not perfect. Errors in market economy are inevitable. Market prices are never competitive and we must appreciate the meaningful exchange of social value of prices.

Because of market are not perfect, this fact does not suggest government intervention/politician intervention as a policy prescription to restore market optimality or something close to it.

In Austrian view, different people know different things, different skills, different level of alertness and unpredictable actions. Reaching equilibrium is deemed impossible because of constant modification (market process) of individual preferences in particular time and place.

The term of human action that refers to an individual as decision maker equipped with the power not only to act to avert the unpleasant but also to exercise such entrepreneurship.

Entrepreneurs respond to some lack of coordination in the market. Profits which previously existed and earned because of unnoticed opportunities are now completed away because of market competition.

“Welcome to a place where the prices conscious public has pushed businesses to be customer conscious”

“Sibu people are extremely price conscious. They are not loyal to any particular outlet unless they can get good prices”

Consumers are king and paramount under the market process.

“No business can survive long in Sibu if they stick to their hands and fast rule of doing business without constantly looking at the buying trend of the people. The closures of some big retail outlets over the years are proofs why businesses must adjust to the situation on the ground or they will die a natural death”

“Retail business in Sibu is simply too competitive. You need to constantly monitor your competitors especially their prices. You can’t be selling the same items at higher prices as doing so will result in you losing customers, she said”

Market competition will disrupt someone’s existing plan and force him to revise it. The Schumpeterian concept of “creative destruction” begins as the business must reinvent itself to attempt to meet demand.

“Another retail outlet proprietor said they could save a lot of money by not advertising. Why is this so? According to him, is not necessary to advertise in local newspaper because consumers in Sibu do very well with word of mouth….words would spread around like wildfire”

Austrian thinking provides a new insight into advertising. Consumers do not always know what products are available and even if they know their existences they are not always aware of their properties.

If consumers had perfect knowledge about the products available, it was not clear what role of advertising could be.

Medecci Lineil is a young Austrian Libertarian who lives in Kuching, Sarawak. He is also a registered voter for Stampin Parliamentary constituency.


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