Tuesday, July 14, 2009

Personal Economics--Prelude to Austrian Rules--II

Personal Economics--Prelude to Austrian Rules--II
"I have shewed you all things, how that so laboring ye ought to support the weak, and to remember the words of the Lord Jesus, how he said, It is more blessed to give than to receive."
Most economists today are collectivist in outlook, as are most ordinary people, unfortunately. When we think about economics we do it in terms of collectives e.g. the rich, the poor, the employers, the working man, the middle class, etc. We measure national wealth, not as Adam Smith did, by looking to see how well off the individual worker is, but in terms of Gross National Product, or the unemployment rate, or the Dow Jones Industrial Average.
But the Austrians, starting with Carl Menger, returned the study of economics to its roots by making the study of economics the study of individuals and their actions in the marketplace. Everything boils down to the individual exchange. Indeed, "the economy" can be defined as the framework--physical, cultural, social, legal, moral--in which exchanges are made. A "good economy" is simply one in which exchanges are unhampered. A "bad economy" is one in which exchanges are regulated, controlled, or uncertain in their results. The worst economy is one in which the legal or moral or cultural climate is so unfavorable to exchanges that they become difficult, almost impossible, as for example, when criminals are in charge and stealing or fraud are prevalent, or when corrupt politicians control government so that the medium of exchange is being rendered increasingly worthless by the government pilfering we now call inflation.
Let us look at simple exchange from an Austrian perspective and see what we can learn from it before we get into the rules of personal economics that result from Austrian perspectives.
Suppose my wife sends me to the grocery store with instructions to buy five items. Convinced that I can easily remember so short a list I take off without bothering to put pencil to paper. I arrive at the store, go over the list in my mind, and realize that I have forgotten two items. I try various memory tricks, such as going up and down the isles mentally and recalling my wife’s actions as she was dictating the list, but nothing works. Two items have escaped me. I decide that rather than go all the way back home, I will simply use the pay phone outside the store to call my wife, I discover, however, to my chagrin, that it only takes change and that I have only bills. I, therefore, stop a fellow as he is coming out of the store and ask him if he can give me coins in exchange for a dollar bill. He very obligingly reaches into his pocket and announces that he can.
At this point we pause and examine this exchange about to take place. The first insight of Austrian economics is that exchanges are very much a function of time, place and circumstance, such as outlined above. This is indicated, in the example above, by the fact that as the fellow reaches into his pocket to see if he has enough coins, I may look into his shopping cart and the sight of what he has purchased may jog my memory so that I say, "Never mind, seeing the butter and eggs in you shopping cart reminded me that that is what I needed to buy. I don’t need the coins to make a call any more. Thanks anyway." The circumstances have changed and no exchange takes place. I could also look at my watch and realize that I have wasted so much time trying to remember what I was supposed to buy that I no longer have time to shop before I must be at an apointment and, therefore, I call off the exchange. The point is that every exchange is a function of time, place, and circumstances which no central authority can possibly foresee.
More important, however, is the actual exchange itself. If the exchange does in fact take place, an onlooker e.g. the banker, the beaurocrat at the mint, the politician regulating various exchanges, would say that the exchange was an exchange of equal values, i.e. four quarters for a dollar bill. Indeed, collectivists say that all exchanges are ideally exchanges of equal value.
For the Austrian, however, exhanges of equal value never take place. This is a crucial point. An exchange always involves some effort and some thought. If, therefore, I thought I would be exactly as well off after the exchange as before, why would I even bother to make it? The answer, of course, is that I wouldn’t. Of course, even the banker, the bureaucrat, the politician, would probably acknowledge that because of my circumstances, my need for coins, I really was better off after the exchange, but what of the other fellow? He didn’t come out of the store hoping to relieve himself of his coins. If he really wanted fewer coins, he could have used them in making his purchases in the store. In what way can he be said to have been better off for making the exhange?
In answering that question, we get at the wonder of the free market. Austrian economists, like Adam Smith before them, realized that there is a factor— a vital factor--in the market that transcends the material exchange. This factor, depending on the outlook of the observer, is labeled as moral, as spiritual, as psychic. But it is critically important. When exhanges are controlled, hampered, undermined, and freedom of exchange is violated in any way, men become increasingly materialistic. As exchanges become freer, men become less materialistic. Art, music, culture, religion and innumerable other non-materialistic aspects of life--what we sometimes refer to as "civilization" become increasingly important in our exchanges. The fellow who gave up his quarters came off better because his was a spiritual or psychic gain.
This is, in fact, the power of the free market. Both parties in an exchange feel like they were the winner in that exchange. Anytime we make a free exchange we can be confident that we gave more than we got. At the same time we got more than we gave. That is why free markets are so peaceful. Everyone who uses it feels he is a winner. In every exchange we feel that we have made not only a gain in some material item but we have gained a friend. Looking at the marvel of free and willing exchange, Austrian economist said that even so materialistic (or even "grubby", in common political terms today) as profit is really a psychic or spiritual phenomenon.

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