A Beginner’s Guide to Austrian Economics

Other important Austrian contributions to economic thought include the “economic calculation problem,” the theory of capital and interest, and the theory of money and credit:

• The economic calculation problem refers to the problem of socialism. In short, the problem of socialism is the problem of distorted prices. In a centrally planned socialist economy, intervention distorts prices and misallocates resources to the point that it becomes impossible for people to make rational and efficient economic decisions. Hayek addressed this in The Road to Serfdom and Mises in Economic Calculation in the Socialist Commonwealth. Apply this lesson to healthcare in the U.S. today, or consider the development of the early-mid 2000s housing bubble.

mice1

•Eugen von Bohm-Bawerk first developed the theory of capital and interest, smashing Marx’s labor theory of value and exploitation theory by illustrating that interest rates and profit are determined by supply and demand and time preference. Time preference refers to people placing higher value on present consumption over future consumption. The emphasis on the role of time to explain human action is a distinguishing hallmark of Austrian economics.

•Any understanding of Austrian economics must also include the understanding of the theory of money and credit. Mises wrote the book on it in 1912, aptly titled The Theory of Money and Credit.

Advertisements