How Austrian Economics Made the Consumer King

“For Austrian economists, the central function of markets is to produce the relevant economic knowledge to coordinate human action in a world of uncertainty and constant change so that people can achieve their goals in an orderly manner.” – The Essential Austrian Economics

Kings who rule over their independent nations typically inherit their positions by the right of birth, and are renowned for their power, rank, and influence.  Americans, likewise, were born with their own birthright to life, liberty, and the pursuit of happiness.  They, too, are rulers for life.  These sovereigns are the core of American society.  And in the economic marketplace, their superpowers are their collective knowledge of their individual wants and needs.    

In the Fraser Institute's 2020 book, “The Essential Austrian Economics”, authors Christopher Coyne and Peter Boettke provide a history and primer on the practice of Austrian Economics.  It began with Carl Menger in 1871, and was later expanded by Ludwig von Mises, F.A. Hayek, and Murray Rothbard. Outside of mainstream economics, this book captures the core elements of the economic theory known as Austrian Economics. 

In economics, scarcity and resource allocation occur in an ever-changing and adaptive economy, reflecting that there are limited resources while at the same time adjusting to the constantly changing circumstances and preferences of consumers.  The core principle of spontaneous order occurs when consumers, each independently pursuing their own plans, produce a broader order.  Using profit and loss as a feedback mechanism, businesses compete with one another for sales.  As such, a focus on people, the incentives they face, and the limited knowledge each has, all work together for the good of society.

Carl Menger, the founder of Austrian Economics, believed that man himself was the beginning and end of every economy.  This methodological individualism posits that, since only individuals act and decide in society, economic activity should prioritize the purposeful planning of individuals to achieve their desired ends.  As a result, individuals must decide among alternatives, as scarcity necessitates trade-offs.  Another core principle, opportunity costs, occurs when one option is selected over another, and the cost of that alternative is no longer available.    

Menger, a professor at the University of Vienna, first challenged the Labor Theory of Value with his opposing Marginal Utility of Value, showing how value is based more on the usefulness of a product than the labor required to produce it.  Economic value, then, is subjective and based on units of satisfaction derived from its use.  The value that a product or service has for an individual is the demand side of the market equation. 

Ludwig von Mises, a new leader of the Austrian Economics movement following WWI, stated that socialism was impossible due to the lack of market prices or economic calculation.  To properly allocate resources, the market process of individual actions of cooperation and exchange, along with private property, allocates resources and determines market prices through profit and loss to guide production decisions.  Money prices emerge through these voluntary exchanges, coordinating marketplace activity spontaneously without planners, while competition among sellers mitigates fraud. 

Friedrich Hayek, the only Austrian economist to receive the Nobel Prize in 1974, introduced the knowledge problem.  Government planners cannot efficiently allocate resources without market prices and profits and losses.   One of the main reasons is that since knowledge is dispersed among individual consumers, no one knows what millions of individuals want and need.  Therefore, no single agent has information on all the factors that influence prices and production throughout the system and must rely on the cumulative choices of individuals.  As such, markets develop spontaneously as businesses and consumers sell and buy in voluntary exchanges. 

The opposite of the capitalism previously described is central planning (i.e., government intervention), a manipulation of the economy by bureaucratic planners.  Since there are no markets to determine prices based on supply and demand, and no profits or losses to determine how to best use scarce resources, economic calculation is impossible.  Instead, governments impose price ceilings and price floors, sending mixed signals to producers and consumers.  Governments then created business cycles of boom and bust by interfering in the money supply and interest rates. 

Central planning leads to power problems with control in the hands of a few, with winners and losers chosen based on politics.   The economic choice is between power in the hands of oblivious bureaucrats or freedom of choice by the consumer.