Ash Moran's Reviews > Economics for Real People: An Introduction to the Austrian School

Economics for Real People by Gene Callahan
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Oct 21, 11

bookshelves: own-a-copy, society, economics, books-i-read-in-2011
Read from September 18 to 20, 2011

I read this book as one of a list of 5, and I wrote a blog post to summarise it. This review is taken from my blog post An Economics Reading List by Ron Paul, so go there for more. The full list of books is: The Law, Economics in One Lesson, What Has Government Done to Our Money?, The Road to Serfdom and Economics for Real People.

Economics for Real People is the densest and most detailed of the economics books here. But like What Has Government Done to Our Money? it’s written with such clarity that it’s accessible to anyone with the patience to read it.

Rather than derive economics from a Robinson Crusoe environment, Callahan uses a more contemporary metaphor:

In our alternative universe, Rich is still the winner [of the first series of Survivor], but as the film crew packs up, they decide that they are fed up with his antics. Instead of transporting him home, they quietly slip off while Rich is getting in a last session of nude sunbathing.

Rich arises to find that he is alone. He is now facing the most elementary human problem, how to survive, in the most basic of settings. What can economics say about his situation?

Callahan takes his definition of economics from Ludwig von Mises: “Economics … is the theory of human action. 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”. Where the Austrian school’s definition of economics differs from the popular conception is that it has no basis in money (money is explained as emerging at a later point). If you have a sense of dissatisfaction, say you are “disturbed by a buzzing sound”, and you can determine a cause in your control, say “you look around … and see a mosquito”. You now “have to make a choice. Being rid of the mosquito would be grand, sure - but you’ll have to get up. And that’s a bummer. The benefit you expect to receive from being rid of the mosquito comes at the cost of getting up”. Human preference is subjective. “We take the thoughts and plans of humans as an ultimate given, and begin our investigation there.”

An astonishing number of concepts are introduced before even a second person appears on the island: economisation of means, preference, utility, marginal units (one extra bucket of water), the law of diminishing marginal utility, error and regret, consumer goods, capital goods, capital stock, complementary goods, time preference. All of which might sound overwhelming, but is actually told effortlessly in the story of Rich choosing to invest his time in making barrels (to collect water) and traps (to trap rats, which is the primary local food supply), all while deciding at which point he’d like to go back and sit in his hammock.

An economic community forms when Callahan introduces a second person to the island: Helena Bonham-Carter.

What does Rich decide to do? One possibility is that Rich might react like a bear does, [and] try to drive the intruder away. Now, he might refrain from doing so due to moral constraints or benevolent feelings. But there is another reason for him not to drive Helena off - as long as there are sufficient unused resources on the island, it will materially benefit both of them to co-operate rather than fight. They can initiate the vastly enriching process of the division of labour and voluntary exchange.

In Callahan’s version of this post-Survivor scenario, “Rich, the more dexterous of the two, will make traps, while Helena, the more cunning, will do the hunting”. From here we are taught the way direct exchange plays out, in terms of each of their subjective preferences for rats and traps. As more people join the island, we see goats and corn introduced, and a market start to form. But, notably, there is still no money on the island.

As the economy in “Richland” grows more complex we see the difficulty in economic calculation, and finally money emerge, but as the most marketable medium of exchange. No special status is granted to money, it’s merely an economic good that meets certain criteria, and is subject to the same supply and demand rules as any other.

It’s in this careful, step-by-step way that Gene Callahan works through a broad range of other economic topics, including: fluctuations in money supply, socialism, government interference, business cycles, externalities (for example pollution, which is connected to tragedy-of-the-commons situations), and a brief summary of political economics. With a couple of minor exceptions, everything is as clear and grounded as the foundations in chapter 1.

This was by far the most enlightening book in the list to me, although it took correspondingly the most investment in time.
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