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Economics for Real People: An Introduction to the Austrian School

By Pasour, E. C., Jr. | Freeman, January/February 2004 | Go to article overview

Economics for Real People: An Introduction to the Austrian School


Pasour, E. C., Jr., Freeman


Economics for Real People: An Introduction to the Austrian School by Gene Callahan Ludwig von Mises Institute * 2002 * 299 pages * $11.00 paperback

Gene Callahan's stated objective is to introduce the intelligent layman to the main ideas of the Austrian School, and I know of no close substitute for the book he has written. Logically organized and written in a witty and entertaining style, the book consists of four parts and two brief appendices.

Part I focuses on human action. Callahan uses the Robinson Crusoe model of an isolated individual alone on a desert island to explain basic economic concepts-including value, saving, time preference, capital, and uncertainty.

Part II describes the market process. When another person joins the island, the law of comparative advantage leads to specialization, the division of labor, and exchange. The author then expands the simple island economy to show the importance of money in exchange and in economic calculation. He emphasizes the role of the entrepreneur and explains why entrepreneurship plays so small a role in mainstream theory. Unlike the Austrians, mainstream economists emphasize equilibrium analysis in which all decisions are perfectly coordinated and there are no profit opportunities.

The distinction between mainstream and Austrian views of inflation and deflation comes out in the discussion of pitfalls in using price indexes to measure the "price level." Callahan explains why inflation is best viewed as a rapid increase in the money supply rather than an increase in consumer price index (or other price index), even though a price index is useful as long as it is taken as a rough approximation of changes in the value of money.

In Part III, "Interference with the Market," Callahan describes the calculation problem and explains why socialist planners could not do what they purported to do, even if all citizens were properly motivated as perfect socialist citizens. This is so because there cannot be market prices without markets, and there would be no resource markets if the government owned all resources. Government regulators in a market economy confront information problems similar to those facing socialist planners.

Frederic Bastiat contended that in economic matters we should not judge solely by what is seen but also by what is not seen. Callahan follows Bastiat's dictum in explaining the effects of price fixing, including minimum wages and price ceilings, and drops in the stock market. he has the clearest explanation I have seen for why a fall in the stock market, as occurred in 2000-2001, is best viewed as a change in relative prices rather than a reduction in wealth.

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