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Hennings, K. New York: Macmillan, pp. Brookfield, Vermont: Edward Elgar. Hicks, J. Oxford: Oxford University Press. Klein, B. Knight, F. CrossRef Google Scholar. Kregel, J. London: Macmillan. Lachmann, L.
- Economics for Real People: A Readable Austrian School View.
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Foss, J. Oxford: Oxford University Press, pp. Lewin, P. London and New York: Routledge. Aldershot: Edward Elgar. Mathews, J. Economizing: Prolegomena to a Theory of Competitive Behavior. Manuscript draft 2. McCloskey, D. University of Wisconsin Press. Menger, C. Translated by J. Dingwall and B. Penrose, E. Oxford: Basil Blackwell. Ricardo, D. London: The Guernsey Press. Richardson, G. Oxford: Clarendon Press. Romer, P. PubMed Google Scholar.
Schumpeter, J. But because competition is an activity, the entrepreneur has a huge role as the agent of change who prods and pulls markets in new directions. The entrepreneur is alert to unrecognized opportunities for mutual gain.
By recognizing opportunities, the entrepreneur earns a profit. The mutual learning from the discovery of gains from exchange moves the market system to a more efficient allocation of resources. Entrepreneurial discovery ensures that a free market moves toward the most efficient use of resources. In addition, the lure of profit continually prods entrepreneurs to seek innovations that increase productive capacity. Money is defined as the commonly accepted medium of exchange. If government policy distorts the monetary unit, exchange is distorted as well. The goal of monetary policy should be to minimize these distortions.
Any increase in the money supply not offset by an increase in money demand will lead to an increase in prices.
But prices do not adjust instantaneously throughout the economy. Some price adjustments occur faster than others, which means that relative prices change. Each of these changes exerts its influence on the pattern of exchange and production. Money, by its nature, thus cannot be neutral. The quantity theory of money stated, correctly, that printing money does not increase wealth. But while the quantity theory of money represented an important advance in economic thinking, a mechanical interpretation of the quantity theory underestimated the costs of inflationary policy. If prices simply doubled when the government doubled the money supply, then economic actors would anticipate this price adjustment by closely following money supply figures and would adjust their behavior accordingly.
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The cost of inflation would thus be minimal. But inflation is socially destructive on several levels. Second, unanticipated inflation is redistributive as debtors gain at the expense of creditors. Third, because people cannot perfectly anticipate inflation and because the money is added somewhere in the system—say, through government purchase of bonds —some prices the price of bonds, for example adjust before other prices, which means that inflation distorts the pattern of exchange and production. Since money is the link for almost all transactions in a modern economy, monetary distortions affect those transactions.
The goal of monetary policy, therefore, should be to minimize these monetary distortions, precisely because money is nonneutral. Right now, people in Detroit, Stuttgart, and Tokyo City are designing cars that will not be purchased for a decade. How do they know how to allocate resources to meet that goal? Production is always for an uncertain future demand, and the production process requires different stages of investment ranging from the most remote mining iron ore to the most immediate the car dealership. The values of all producer goods at every stage of production derive from the value consumers place on the product being produced.
The production plan aligns various goods into a capital structure that produces the final goods in, ideally, the most efficient manner. If capital goods were homogeneous, they could be used in producing all the final products consumers desired. If mistakes were made, the resources would be reallocated quickly, and with minimal cost, toward producing the more desired final product. But capital goods are heterogeneous and multispecific; an auto plant can make cars, but not computer chips. The intricate alignment of capital to produce various consumer goods is governed by price signals and the careful economic calculations of investors.
If the price system is distorted, investors will make mistakes in aligning their capital goods. Once the error is revealed, economic actors will reshuffle their investments, but in the meantime resources will be lost. Many of the most important institutions and practices are not the result of direct design but are the by-product of actions taken to achieve other goals. A student in the Midwest in January trying to get to class quickly while avoiding the cold may cut across the quad rather than walk the long way around. Cutting across the quad in the snow leaves footprints; as other students follow these, they make the path bigger.
Although their goal is merely to get to class quickly and avoid the cold weather, in the process they create a path in the snow that actually helps students who come later to achieve this goal more easily. The market economy and its price system are examples of a similar process. People do not intend to create the complex array of exchanges and price signals that constitute a market economy. Their intention is simply to improve their own lot in life, but their behavior results in the market system.
Money, law, language, science, and so on are all social phenomena that can trace their origins not to human design, but rather to people striving to achieve their own betterment, and in the process producing an outcome that benefits the public. The implications of these ten propositions are rather radical.
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If they hold true, economic theory would be grounded in verbal logic and empirical work focused on historical narratives. With regard to public policy, severe doubt would be raised about the ability of government officials to intervene optimally within the economic system, let alone to rationally manage the economy. Adam Smith first systematized this message in The Wealth of Nations. In the twentieth century, economists of the Austrian school of economics were the most uncompromising proponents of this message, not because of a prior ideological commitment, but because of the logic of their arguments.
Peter J. Boettke is a professor of economics at George Mason University, where he is also the deputy director of the James M. He is the editor of the Review of Austrian Economics. Footnotes 1. Entrepreneurship can be characterized by three distinct moments: serendipity discovery , search conscious deliberation , and seizing the opportunity for profit. The search for solutions to this elusive goal generated some of the most innovative work of the Austrian economists and led to the development in the s and s of the literature on free banking by F.
Propositions 8 and 9 form the core of the Austrian theory of the business cycle , which explains how credit expansion by the government generates a malinvestment in the capital structure during the boom period that must be corrected in the bust phase.
In contemporary economics, Roger Garrison is the leading expositor of this theory. Not all spontaneous orders are beneficial and, thus, this proposition should not be read as an example of a Panglossian fallacy. Whether individuals pursuing their own self-interest generate public benefits depends on the institutional conditions within which they pursue their interests. Both the invisible hand of market efficiency and the tragedy of the commons are results of individuals striving to pursue their individual interests; but in one social setting this generates social benefits, whereas in the other it generates losses.
New institutional economics has refocused professional attention on how sensitive social outcomes are to the institutional setting within which individuals interact.
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It is important, however, to realize that classical political economists and the early neoclassical economists all recognized the basic point of new institutional economists, and that it was only the mid-twentieth-century fascination with formal proofs of general competitive equilibrium, on the one hand, and the Keynesian preoccupation with aggregate variables, on the other, that tended to cloud the institutional preconditions required for social cooperation.
About the Author Peter J. The Elgar Companion to Austrian Economics.