Economics For Real People

Economics For Real People
by Gene Callahan

I picked up this book on a recommendation from Barons book review as it proposed one side of an argument on government intervention in medicine and was pertinent to current discussion of the day. I thank Jamie Murphy and Jim Meloche for the spurs to bring me round to read the book. I thank TJ for his continuous challenge to the way this are. While the book is primarily an introduction to the Austrian School of Economics, it did indeed dedicate three specific pages to the above-mentioned argument. The book puts forth the simple theory that Economics is the study of patterns in human behavior, where the central variable is Value. As long as value remains variable, most economic theories and models are subject to flaws. Thus any intervention has a flaw. Simply put: Economics is the study of the consequences of choice. Not being an economist the following is my attempt to share the value found between the covers.

In the value equation, cost is a consideration. In that consideration one must include the measure of the foregone alternatives to the choice made. The review was a refreshing alternative traditional neo-classical economics and does two things. First he helps break the paradigm that economics is a study of calculated models for which to form our society. Second Callahan illustrates in very practical terms our economy with an elementary break down of the higher to lower order of goods and services enabling the reader with confidence to freely and plug into any level with a clear understanding of the choice he or she is making. He starts with Rich (the first survivor) who actually gets left behind on the island, adds a girlfriend and then somehow a society appears. Along the way he applies suitable Austrian Theory of Economics to glue it all together.

The Individual
At the core of human behavior is a study of the notion of value. An idea that can be thought of by looking at the relationship between means and ends and how each can become the other. Trading the preference of one for the other is to economize. The degree that we economize is a matter of personal choice and therefore there is no wrong answer. The law of diminishing marginal utility is a series of value decision based on what item is next to be acquired as compared to what will be given up for that acquisition. Valuation as a matter of choice is subjected to the uncertainties of the future and therefore errors in choice may become apparent only after the choice. You must have uncertainty in order to cause actions derived from choice.

Society
In the hierarchy of goods from low to high order, saving represents the accumulation of goods towards a future satisfaction. This gives definition to capital stock. The value of the capital stock is subjected to human desire. The value of capital stock may also be associated to the existence of complementary capital stock, which also results in a horizontal arrangement of capital goods. The material benefit to cooperate could be considered a cornerstone to a working social economy. Thus a mutual division of labor and voluntary exchange process would exist in its primary form. This continues until the law of diminishing utility where the exchange ratio of cost/benefits takes over. Because market exchange is voluntary, it allows every participant to express the urgency of his/her demand. It allows humans to cope with scarcity of means through cooperation. In Callahan’s theory, free markets allow for a natural determination of needs for a society with negotiated price being the facilitator. Once price fixing comes in to the economic equation your society is exposed to gluts and shortages due to the fact that a fixed price ignores human behavior.

In the Austrian School there are fundamental roles played out by actors. They are entrepreneur, landowner/capitalist, worker, and consumer. Each of us, depending on the business we are currently engaged in, would play one of those roles. While we all appreciate the roles of worker and consumer, I am once again happy to hear it described in a book an entrepreneur as someone who anticipates the needs of the futures and makes plans to fulfill them. Of course he should realize a profit. The Austrian School views society's capital as pieces of an interlocking structure of an individual(s) plan. Capital Structure is an interlocking structure of higher order goods complementing each other in support of eventual consumer goods. There is no individual sum to be placed on the capital goods. The sum is an only an aggregate of all the entrepreneur's business plans which represents a potential for the future. It is the current of consumer desire that determines the shape of society's capital structure. The capitalists’ profits are in effect a measure of their ability to align their capital with the demands of the consumer. This gives birth to the notion of consumer sovereignty.

Government Intervention:

After economic principals are covered from an individual on a deserted island to a free flowing free choosing economy, Callahan spends the next half of the book studying cases of government intervention and their consequences. His basic premise to contrast any kind of intervention is that: Market price is the locomotive that enables society to figure out the correct supply of goods and services. A good deal of the 1990 stock run was attributed by economist to the FED increasing liquidity in the economy in preparation for Y2K. That capital entered into the market through the .com fad stocks. In the chapter "Times are Hard” Callahan uses a metaphor of a bus trip across a desert with the passengers free to choose comfort over speed. In the journey he introduces a fictitious set of parameters. This causes the passengers to choose differently yet, are unaware of the erroneous outcome in their future. The metaphor makes it simple to understand the FED role in adjusting interest rates as a method to smooth out radical swings in our economy. This seems to be a required byproduct as a result of moving from a gold standard to fiat money. So to that degree we are committed to our government partner, yet there is paradoxical concern.

Knowledge is the mothers’ milk of science. All discoveries and break throughs have a basis in an order of knowledge. However in the study of Economics, there is a large body of unorganized knowledge in our society that is dependent on the individual's proximity to place and time to express his free will in a decision that is not known to others until the moment of the decision itself. Socialism is the absence of such phenomena. Entrepreneurial decisions under socialism are reduced to planning decisions of the State; decisions that are made without the benefit of knowing what the people would bid for a good or service. Making economic decisions without prices is akin to doing mathematics without the benefit of the equal sign.

There are those who would wish for any destiny they desire and find them looking to the political process as their means. The Austrian School advocates that indeed there are unlimited ends but scarce means for which only unfettered human action of choice can resolve properly. At this cross road there appears a self admitted paradox as Callahan concedes when he writes that the inter relationship of politics and economics has existed since the first hints of economic thinking arose in human history. I would entertain any ideas from the Austrian School to begin the disentanglement of the two.

A Couple Relevant Current Issues:

While the book provides a basic view of economics with anecdotal stories, the reader can’t help but to simultaneously while reading transpose those stories into any of today’s discussion on the economy and make sense of it. For instance: Inflation is when there is too much money chasing too few goods. Whenever we hear that the GDP is growing at a fast pace the "talking heads" cry a fear of inflation. But prices for goods rise in response to an increase in the value of money relative to other goods. Some people mistake this illusory prosperity for real growth and recommend constant inflation as a means to continue prosperity. However, this current policy of low interest rates comes in to question since the FED sets rates artificially low must it increase the supply of money to keep them low. It comes to the same thing sending too much money after too few goods. Is this policy prudent on a world stage? Is this a viable strategy to level the playing field with emerging economies like China? Will this enable Americans to maintain their nominal standard of living while the rest of the world catches up? If so I applaud President Bush, his administration and mostly Allan Greenspan for being a good bridge partner, as he was with Clinton. Or have we miss-led ourselves by not recognizing the propensity of human action/desire and to meddle with our ideal world of academia?

Medical Crisis:

I was awakened by the book to a few historic events in our American history that caused me to ponder a simple shift in the way I view our medical care situation and a dramatic shift in my view on insurance companies. Free choice in price for health care does not exist due to a series of interventionist events. Consider the following unintended consequences of government intervention:
· Licensing of the medical practice
· Wage controls during WWII cause employers to offer free health insurance to lure the low supply of workers
· The subsidy of demand of Medicare and Medicaid

These simple government programs appear responsible yet they unconsciously removed the essential ingredient to a market place freely to choose (human action). As a result specialist organization such as HMOs have popped up primarily to address the induced costs to manage through the welter of market distortions on the true costs of medical care. In my view (not the authors’) an issue with giving free choice to the people is the people do not know how much they value a medical service until they really need it. This prompts a call for medical insurance and an attitude shift for myself. Being that it is not possible to plan for medical needs are not known; it is plausible to plan and budget for health care insurance. What if we take the privilege of this away from our employers in exchange for the commensurate wages? What if we subject Insurance Companies to pricing wars of the masses as opposed to Corporations who offer packages best suited to the company bottom line. Would the real exchange of goods and services and associated price induce a domino effect of efficiencies in the system?

All the theories stories of the book compel the reader to take more personal responsibility for his or her own economic stature. We must recognize that State intervention is the beginning of your slippery slope journey to unconscious surrender to the whims of another man. While the book motivates you with basic fundamentals of human nature using simple life scenarios and metaphors to prove theory by theory; you become a student and practitioner. There are areas where the student may raise questions due to over simplistic examples. For me this begins with the chapters on government intervention in issues that are not isolated to the economics of money. For me a student in aviation safety, I could think of more complex arguments in support of regulation that outweighed any of his simple metaphors against regulation as a proponent to increased cost. The book is vulnerable to experts in other areas as well where reader could become justifiably suspicious. But keep in mind the central argument is against the State as a regulator, not against a regulator appointed by free choice of the marketplace. As his story gets more complex he actually employs the anecdotal words in my head, which are "We are not faced with the task of reconstructing human society from scratch.” “Society...must best decide how to use the current array of resources” (and liabilities) “going forward.”

Considering Callahan’s notion of The Fluttering Veil Of Money as a concept named to illustrate that underneath every transaction; of any sort, at any level you can drill down to the simplest lowest level of goods or services and discover the core foundation and central theme of Austrian economics. This theme describes the human behavior to trade one thing for another to improve what is to what ought to be on an individual level as well as Community/National level. This book did not solve any specific economic problem. It left you the reader inspired to get up and to more actively discuss with those around you the consequences of your free choice. It inspires you to play the role of Investor, Entrepreneur, Worker, and Consumer with conviction. Saving and Investing are synonymous. Saving is not just a function of money. Investing your time into future development of your career is a form of investing. Spending time on your financial plan is a form of investing. Today you can invest through a bank or on your own. You can express your demand today as a consumer; you demand for tomorrow as an investor in companies you feel critical to economic success. The .com bust story illustrates the FED role in its promulgation. The FED left the real remedy to economic growth to further capital expansion possible only if additional savings increases the amount of capital goods. This, in my opinion, unfortunately is not a common trait of today’s American individual. What goes around comes around. Get in the game arrest it from the FED.