Common Sense Economics

Here is a neat summary of the problem with Austrian economics:

The average person lacks the patience to read Human Action and Man, Economy, and State. How then can he acquire the rudiments of Austrian cycle theory and grasp why the theory is true? To set the question aside, on the grounds that it is unnecessary for the man in the street to bother with such matters, is a counsel of despair. If the public does not understand the economics of depression, there is little hope that we can avoid disastrous government policies. Unless the free market receives sufficient popular support, our economic future is bleak.

As I have often written, economics need be nothing more than the rigorous application of common sense. It’s the rigor part that people find difficult. You have to read a lot of difficult text to understand the proof of Austrian theory, but the everyday application of common sense shouldn’t be alien to most people. Consider this simplified explanation of the core idea of Austrian business cycle theory:

The basics of Austrian cycle theory fall readily into place once one considers a fundamental point: the economy can grow only by producing more goods. An expansion of the money supply does not suffice. Efforts to get something for nothing, by the government’s deficit spending or by an expansion of the money supply, cannot produce lasting prosperity.

The speed with which an economy grows depends on the extent to which people prefer present goods to future goods. Other things being equal, people always prefer satisfaction in the present; but the extent to which this preference prevails is crucial for economic development. In order to obtain more consumer goods than are immediately available, people must postpone satisfaction by saving, enabling a greater production of capital goods to occur.

You don’t have to understand the complexities of capital structures to grasp the essence and to be able to deduce from there.


One response to this post.

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