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THE AUSTRIAN SCHOOL OF HUMAN ACTION STUDIES


I might be wrong, you know.



The Austrian School is that school of study (-logia) that uses the methods of praxeology and catallactics to arrive at statements of fact about human action in response to the incentives and disincentives that the world puts in front of us in the course of our many various lives.

This makes the Austrian school one of philosophy as much as economics, not to mention sociology and political science. So we have one school that takes in both the Humanities and the Social Sciences! So why not try to describe the various things about Austrianism that make it different from say, Keynesianism or the Chicago School?

Chocks away!



PRAXEOLOGY

Praxis means action in Latin. So, study of action. This is a method used to explain only the action of humans. You are doing praxeology if you assert that humans act - that is, do something in the present to achieve a goal in the future, whether immediate or remote.

You are methodical in hashing out how a course of human actions will play out, and you acknowledge that zeroing in on universal, that is, economic and social laws, is very difficult, as different people react to the same stimuli in different ways, thus invalidating empirical data as a way to glean laws of human behaviour. In fact that's why you can't use subjective experience or empathy to justify a body of ethics in philosophy. But more on that another time.

You'll notice that this method makes the Austrian economist into a scholar not far removed from some kind of ancient East Asian or Indian sage, exploring inwards to arrive at the great truths about human actions and the intercourse of humans as they act upon each other.

This is in stark contrast to the natural scientist, who formulates a hypothesis and then works in the external world to test it to destruction. We Austrians have to test our ideas to destruction internally. It's not hard to learn at all.

I realised recently, when I learned the meaning of praxeology, that we all do praxeology on a basic level in normal human conversation. In fact, looking around at how humans resolve minor disputes through words, hashing out successions of events that will take place to convince their peers of their point, the method behind their assertions is entirely praxeological, it is entirely a priori.



METHODOLOGICAL INDIVIDUALISM

Building on the points above, methodological individualism is the simple point that the individual must be the atomic unit of understanding in Austrian economics, not a population of a geographical area,  or a demographic, just a human-being. A society, corporation or government exists only insofar as a forest exists.

You might see a forest, but what you're looking at is a plurality of trees. We create the label forest and attach it to pluralities of trees when they're close together. Methodological individualism inevitably leads to another Austrian assertion that I find most agreeable.



PRICE DISCOVERY

If you use praxeology to try to figure out how humans arrive at the prices at which they trade then hurrah! You just engaged in the Austrian exercise called catallactics! I recommend an example for this section.

Prices are arrived at through trial and error. In real life the trial of seeking the right price never comes to completion (this contrasts with neoclassical economics). A good is offered at a price by a vendor, Mrs Adams, and at another price by another vendor, Mr Smith.

If we assume a veil of ignorance, then these two vendors, Adams and Smith, are coming to the market cold, with no established prices to work from. When they each open for business they will each enjoy different results - absent marketing, which we are not dealing with here - if they offer at different prices.

The cheaper product will initially get more patronage. Let's say Mrs Adams charges half of what Mr Smith charges. Mrs Adams will get more customers, and so engage in more exchanges. Now two possibilities beckon - remember, we are not dealing with marketing in this example.

A: Mrs Adams is charging too little and goes out of business. She could raise her prices, but this may hurt her since people don't like to see the same good from the same vendor increase in price, since the unaffordability of her own business model is not their problem.

B: Mr Smith is charging too much and bids down to gain more custom. This is a preferable way to enter a market assuming a veil of ignorance, because bidding one's price downwards is far easier to justify to one's customers than bidding the price up.

In both cases the price is discovered by all parties at the intersection of supply and demand. The big difference with other schools of thought is that the agent of prie is at the heart of everything. If you take nothing else away about catallactics, just remember it's the study of how we discover price. And that neatly feeds into...



VALUE

The Austrian School cleaves, surprise surprise, to the subjective theory of value. This means that value is determined by the repeated interactions of buyers and sellers until a price that satisfies all parties is reached. According to the Austrian School specifically, that point is never actually reached, the market is simply perpetually self-correcting towards it.

This means in practice that the price charged represents the subjective value placed on whatever is being exchanged by the buyers and sellers. So what influences that price? What drives it up and down? Well the sections above make clear that the intersection of supply and demand does this.

But what might move them?



MARGINALISM

This feeds into pricing. Diamonds cost more per pound-weight than water not because it's more useful than the same weight of water. It must be the satisfaction, or marginal utility, that feeds into how much a person will value different things

We respond to incentives precisely because of the utility we perceive we will get out of what we do. We are most incentivised with regards to things that come with trade-offs and opportunity costs. Time is always scarce, of course, but often money will be a factor.

Ordering a Dominos? Going to a cinema? Buying a new shirt? All of these activities come with the opportunity cost that you may be unable to do the others. So humans make choices about how they act to satisfy their present wants.

There is more to marginalism than this, but the simple case of choosing between desirable goods and services serves to show in general what it is about. Austrians also cleave to ideas about what government factors that can influence people's value judgements about what will bring the most utility.



BUSINESS CYCLE THEORY (ABCT)

The business cycle does not exist in nature. Booms and busts are not intrinsic market phenomena, but manifest as negative externalities of the monetary and fiscal policies of the government, in particular of the central bank and the state-controlled fiat currency.

Too much credit fuels a boom which begets a bust. Yin and Yang. Balance. The bust is nature's way of righting the wrongs which accumulated during the boom. And boy, what wrongs they are!

The Austrian school considers price to be the main information system when people make economic decisions. Over-production of money by the central bank feeds into the private banking system (who are all customers of the central bank by law) and in turn feeds into the work of the entrepreneurs that banks finance through loans and investments.

The decisions those bankers make will become steadily less and less sound the looser the easier it is to come into new money form the central bank. This is expressed as...



MALINVESTMENT

Malinvestment is, broadly, the kind of investment which looks legit when the money supply is expanding rapidly - for why see ABCT above, and for the consequence see Inflation below.

Investments and loans will be made to ever less and less safe recipients, and mortgages will increasingly be offered to people who are sub-prime, that is, on a knife's edge from being unable to pay the money back / actually unable to ever pay it back.

These are some of the insane decisions that are made as a result of the system becoming flush with credit. It is important to note here that fiat money is credit. Fiat money is debt. It's little better than the money you get with a Monopoly set.

The investments will of course be discovered to be bogus only gradually at first, and as more come to light, and people abandon bad investments, stock prices will go down rapidly, destroying a great deal of value and usually precipitating a recession in the real economy.

With that bust or financial crisis over the work begins to get rid of the unprofitable pap from the boom years. After all this though, what we actually see is a new boom take off within a few years, and a new bust a few years after that.

This also begs the question as to the consequences of all this overprinting of money, which neatly segways into...



INFLATION

Monetary inflation is the only inflation to an Austrian. This is because all of he greatest price rises over long period have been caused by increases in the supply of money. Now this also ties into statements in previous sections about fiat currency.

Fiat money is only one kind of money. Precious metals have been used and are used as a medium of exchange. Previously paper money was redeemable for gold, and so the amount of paper money that was useful was limited by the amount of gold it could be exchanged for.

The quantity of gold available for use as currency has not actually changed much over the centuries, and so there's been little room for governments to expand their size. With fiat currency the government becomes not just the issuer of some paper promises backed by a metal. Now it is the issuer of debt backed by its own capacity to use firepower purchased with that debt.

So, the fiat currency supply goes up. It always seems to do that. The lower the central bank interest rate, the more currency gets added over whatever time period you care to look at. Banks have ever more widgets of currency at their disposal, which they invest or loan out to the wealthy, leading not only to the benign effect of funding entrepreneurial activity, but also, since the currency is new, to a increase in income inequality.

If the government system creates more money and concentrates the new stuff in the hands of the rich, their relative wealth increases. And everyone who's not part of the system becomes worse off as each widget of their paycheque is worth steadily less and less.

So the government creates both business cycles and inflation. All it has to do is control the central bank of a nationalised currency. Now it can issue itself cheques to pay its security guards and bureaucrats, and beggar its population and make them dependent upon its largesse.

In response to this Austrians advocate free banking over the central kind, and many go so far as to recommend the denationalisation of money. The justification for this is that more factors of human social life are privatised, the more their providers will work to please their customers, as opposed to a monopoly who can sit on their laurels and watch the tax revenues roll in.



INTEREST

An Austrian would say that people charge interest because of the time it'll take to pay whatever amount is being paid. Time introduces uncertainty, and people work within that uncertainty to figure out an interest rate at which they can profit but not chase off business.

Again, unconsciously seeking the meeting point of supply with demand, that Yin and Yang at the heart of all social order. 



CREATIVE DESTRUCTION

The most vital process for creating wealth is entrepreneurs upsetting the established order with their productivity-enhancing innovations. This initially destroys jobs in large numbers and creates very few, since the whole point of the innovation was to make whatever it dealt with more productive / less labour-intensive.

Over time however the labour that is freed up finds new expression in new areas that are made more available by innovations, generally not the one that lost them their employment, but this process is plainly visible because if innovation did not ultimately create as many jobs as were destroyed then, working from the beginning of the innovation explosion in the 19th century to now, we would have near universal unemployment, and certainly no capacity for a state to create jobs for the idlers.

All this innovation is best facilitated by a neat and simple situation Austrians call...



SPONTANEOUS ORDER

All of those subjective individuals acting to get what they want do so by exchanging with one another, whether in material trade for goods and services, or non-economic exchange and gift-giving such as love, friendship, prayer, blessings, donations and so on.

All of this arises from the people in any given area being people, not from some set of instructions handed down to them by any authority figure. This is to say that the order of society is created by its participants. This means that the more ordinary people participate in society the more they are strengthening it. If a state entity lets them off the hook for this process then society as a whole is weakened, even destroyed in extreme cases such as the Soviet Union, early Communist China, and present-day North Korea.



So the Austrian school offers a very comprehensive toolset for the analysis of economics, politics, and political philosophy. I think we can agree that pluralism beats monoculture every time, so how about we give our ear to this pioneering academic enterprise and let a thousand flowers bloom!



On the next Ecomony Blogtime; run!

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