The Economic Theory of the Leisure Class - Example

Contents Austrian School 2 Background 2 First Waves 3 Second Wave 3 Third Wave: Contemporary Austrians 4 Key principles in Austrian Schools 4 Methodological Individualism 4 Methodological Subjectivism 5 Processes Versus End States 6 Subjectivisms 8 Austrian Economic Theory 10 Disorganised Competitive Market process 10 Utilisation of Information by Price Systems 11 Austrian Business Cycle Theory 12 Production Possibilities frontier 12 Loanable-Fund Model 13 Classical Liberalism 13 Antitrust Behaviour 14 Macroeconomics 14 Money 14 Microeconomics 16 Austrian School Background The inception of Austrian school in 1970s sparked the revolution of the critical modern mainstream economics. Austrian School of Economics refers to a particular economic approach, notably to economist around the globe who subscribe to it. Austrians hold the economic events particularly stemming from the choice and values of particular individuals and the prevailing circumstance at the time. Questionably, Austrian school attests that “mainstream economist” is misguided in viewing the relationship between divergent economic phenomena. As such, value and individual based approach are instrumental in elucidating economic events typified by bust and boom. As such, this retrospect paper seeks to analyse the Austrian School of thought about the economic theories and analysis The history of Austrian economic thought is a consolidation of thoughts typified by various schools of ideas. In essence, this methodology concentrates on divergent thinking in the preference of certain school; while sidelining significant differences. Socialism and Marxism, under classical economic thought, followed1. The German Historical School based its economic truth through an incorporation of the economic history at different levels of study. This monograph attempts to showcase the fundamental ideas advocated by the Austrian School – under Carl Menger’s advice. Menger incorporated a theory of value that responded to solve the questions emanating from classical economists; the Subject of Value. Intrinsically, it asserts that the value of an object is a measure in the goods. Economic goods were valued on the basis of user satisfaction, derived from its incremental use. First Waves Value formation was based on a circular process, subjecting Menger’s gap to the subjective theory of value. In this regard, Wiser’s law of cost affirmed that the competing offers of producers are the reflective cost of producing a good in question. Cost is a mere payment done in such a manner to attract resource away from the proceeding remunerative utilization. Böhm-Bawerk furthered Menger’s approach through an application in phenomena of capital and interest. He advocated that interests rates are a reflective value of the particular inference of humans; time preference. Humans are inclined to have particular goods in the present as opposed to the future. Accordingly, this belief was the major cornerstone of Böhm-Bawerk’s derivation of the theory of capital, production and investment. Second Wave The second wave consisted of Fredrich Hayek and Ludwig von Mises, whose collaboration in 1930s sparked the business cycles in various dimensions2. Evidently, they advocated that business cycles were as a result of the injection if bank credits3. Cheaper borrowing rates compel entrepreneurs to invest more on production while the consumers buy products from the shops. Reality reasserts itself ones the credit stimulus is worn off. As a result, the entrepreneurs realise the overproduction of wrongs things, over ambition in production and business slumps in the long run. Third Wave: Contemporary Austrians The third wave comprises of the Austrians from America. Contemporary Austrian’s reflections sets pace on the intellectual traditions, and while many are hesitant to be called Austrian and others admit having been influenced by the Austrian School of thought. In this reverence, Murray Rothbard linked the fall of the business cycle directly on the central banks, prompting the development of a rigorous liberation critique on the affected state4. Secondly, Israel Kirzner realised the essential role entrepreneurs played in boosting the economic progress5. Consequently, Lawrence showcased banking performance against the governing body’s control and regulations. Nonetheless, Austrian school has much to replicate in the modern society with respect to making choice regarding economic approach. Key principles in Austrian Schools A number of key principles have been divulged in the distinguishing the Austrian School of economics from those of mainstream economists. However, Austrian School has contributed significantly to “mainstream economics”. Principally, the Austrian economic ideas rest on three imperative aspects that present its approach. Methodological Individualism Individual actions and not a collective approach is the cornerstone of Austrian economic. In essence, economics is a representation study of human actions in a wider array of affiliated aspects; since individuals are a resultant effect of their actions. In essence, the individualistic paradigm emanates from the fact that all social interactions are a result of individual interaction. An individual in the economy is likened to an atom in chemistry such that whatever happens can be individually described in divergent functions. Evidently, individual function separately. Although they respond to each, they act in a manner constraint to limited behaviour as well as by personal limits such as wealth or ability. To an economist, a market may appear as an illustration of a social interaction of individual; certainly, individual play a significant role in defining the market’s analysis and description. However, an army is composed of individuals whose functions and order replicate the functionality of the unit. Thomas Schelling has presented the wide view in the social interaction situation, whose social result is surprisingly divergent from individual motivation6. Contrariwise Adam smith proposes that an entrepreneur’s efforts for maximum profits result to the reduction of profits for all. Methodological Subjectivism This naturally implies that an individual actions are linked on the unique scale of value know to the individual. As such, economic value is subjected under the valuation of goods. As the second pillar in Austrian economics insists on the meaning and significance linked to human actions, with respect to the terms of subjective understanding. Rather an interpretation of knowledge is linked to the intention of the individuals. Kirzner defines methodological subjectivism as the recognition that an individual’s action can be comprehended by the reference of belief, knowledge, expectation and perception of these individuals.7 Consequently, value judgment arises as a result of existing relationship between the appraised object and the appraised mind. Simply put, this is the “means-end-structure” that outstretches the limits of economics that is validated in all the socio-economic situations. With repute to the Austrian School; competition is viewed as a discovery procedure which presents new individual knowledge. Processes Versus End States An individual’s action occurs through time with respect to actions of other individuals. As such the prediction of a certain number of action cannot be executed at the same time. An individual’s actions take place over time given the dynamics along which actions of a second individual is conducted. As such the accurate number of the exact outcome of a vast number of strategies cannot be easily comprehended. An individual’s choice on the desired end will choose the means of attaining it. More often than not, accomplishment of desired goals is not easily attainable due to differential in conditions of uncertainty of an individual’s actions and plans. An interrelationship between an individual’s actions is evidenced in its interference with another individual’s actions. The actual consequence of the action is noticeable after the occurrence of the action. Accordingly, the exact number of the outcome of a large number of plans conducted at the same time cannot be easily predicted. Notably Austrian economics is in direct conflict to the rational theory of expectation. Arguably, Austrians contend that the rational expectation of individual’s decisions relates to the available information, rational outlook and past experiences8. Contrastingly, Austrian economists do not believe in rational expectation theory in realisation of consistent utilisation. Austrians advocate that an inappropriate entrepreneur’s investment allocation occur in the case when interests rate are considerably low in the banks. In view of rational theory, it contradicts this view and argues that entrepreneurs are considerably rational such that they may not be attracted by low-interest rates. In the light of this expectation, they would not make unwarranted investments9. Austrian objection towards rational expectation emanated from the assertions that an individual’s intentions do not lead to coordinated actions10. In this reverence, Austrians incorporate time preference in description of the choice of consumers in the present and future prospects. Time preference is an imperative determinant in market interest rate. Individuals typified by a high time presence are more likely to spend more in the present situation as opposed to savings11. On the other hand, individuals with a lower time preference will save more in the present with the anticipation to spend in the future.12 It is argued as to whether a political implication arises from the method. Evidently, one might endorse methodological subjectivism, devoid of liberalism.13Jon Elster, for example, continuously to refer to himself as a Marxist, whilst his belief on the significance of individualism in social science.14On the other hand, he dismisses proven Marxist ideologies to be inconsistent with methodological individualism. It is evident that the Austrian economic approach appears to preclude the ideologies of liberalism. Hayek’s focus on, “The Counter-Revolution of Science” offers a historical and theoretical linkage with methodological individuals amidst the growth of socialism15. The wake of such laws has propelled the inception of social projects such as Marxism. Menger’s lack of incorporation of “state” and “nation” sets his difference with other thoughts of German’s ideologies16. Subjectivisms Austrian economics strengthens the emphasis on actions based on human beings17. The perpetual active role by each, with respect to the market process, is highlighted by the Austrian economics. Consumers are regarded as fixed consumption functions, but as a source of change18. Lachmann attests that the “arid formalism” consolidated in neoclassic economics presents the human mind as a formal entity, about the material resources constituted in the market19. In contrast, this stand point does not coincide with the neoclassical theory20. Austrian economics is cemented on aspects of alertness and resourcefulness of an individual’s activity, with respect to the entrepreneurial spirit. An active link suggests the importance of classical liberalism. In addressing the authoritarian thinking, the liberals centred on human beings as an imperative aspect in the dynamic world. As such, the derivation of the most concise liberal demands the possible approaches to individual freedom and decision making. Austrian individualist tends to influence the policy levels, with regard to the liberal direction. Austrians are not convinced by mainstream economist’s view, in their assumption of macroeconomics models. Essentially, they are sceptical with the facts that divergent global magnitudes affect various aspects.21 The violations of the principles of subjectivism are witnessed from theAustrian sceptical view on welfare economics. Contrastingly, the Austrians offer an analytical framework through the coordination of the individual plans in the market, which maintains the individuality of a person’s purpose. In contrast to the neoclassical approach, individuality rest on the logical connection of Austrianism, and diversity22. Likewise, it insists on the roles played in the economics diversity.23 It is evident that government actions must contain the difference abstract typified by high uniformity. The liberalism’s view of the human nature is strongly congruent with the Austrian’s assertion of man’s diversity24. Inequality evidenced in individuality is asserted by both liberal social philosophy and Austrian economy25. Austrian economist’s views man as highly unequal, typified by differences in the abilities and needs that effects market transactions. It is clear that the mythology incorporated in human inequality is linked to the liberal principle of wealth and income26. An elimination of wealth and income affects market development. Its subsequent elimination would imply the destruction of the market economy. Austrian Economic Theory It is evident that the economic theory has a significant impact in favouring the market. Its connection to liberalism is highly documented and closely associated to liberalism given the distinct relationship to economic theories27. Mises’ theoretical attacks have sustained the economic planning related to liberal doctrines. Criticisms to the market economy have suggested its vulnerability in the business cycle. Liberalism has received extensive support from Austrian economic theories in many ways. Market analysis impedes individual socialist move in expressing the total incomes of individuals and companies with preposterous rationality. Social inequalities evidenced in capitalism has subjected its validation in the market process28 Prices are regarded as surrogate information, given the attack on interventionism suggesting its destruction of the creation of information dissemination regarding economic circumstances. Disorganised Competitive Market process A product’s demand dictates the number of entrants of competitor in a given market. Inherently, the inception of new products in a dynamic market is based upon actors of trial and error, change of plans and a never-ending-process in taking advantage of the knowledge gained in such markets. Austrian economist contends on the importance of competitive markets in relation to the price systems in the organisation of a decentralised morass of the economics phenomena. As opposed to Marxian and Keynesian theories, the limited knowledge balances into harmonious orders.29 Most people are suggestively challenged with the coordination of plans of other individuals. The meshing of divergent problems, in a world typified by uncertainty, forms the basic economic problem. Compounded by the ambiguity in the decision-making process, as opposed to dependence in “Homoeconomicus”, uncertainty forms the underlying economic problem in any market. The lack of perfect knowledge constitutes the risks associated in any economic activity. Utilisation of Information by Price Systems The terms of exchange are summarised by the dynamic prices. Austrian economist asserts that, the price systems are linked to the market participants who are signalled on relevant information. Innately, it helps them grasp the mutual gains obtained from the exchange. Hayek’s describes this phenomenon to that the market value of tin (famous Hayek’s example)30. “When users realise that tin prices have considerably risen, they are not informed on the cause of price the increase. Either way, the increased price suggests the need to utilise available product.”31 Market conditions underplay market prices. In response, market participants are compelled to adjust to the fluctuating prices. Austrian Business Cycle Theory Business cycle is as a result of the excessive growth in the credits offered by banks–conducted at artificially low prices. An eventual volatile imbalance thrives between investment and savings. Increased borrowing rate is purported by low-interest rates that result to increased capital spending issued by new bank credits. Uncertainly, a credit-source boom causes widespread malinvestment32. Simply put, malinvestment occurs in the case when firms make faulty investments, as a result of the low-interest rates. Consequently, a “credit crunch” or “correction “unfolds after a realisation of credit creation. The money contracts are subsequently relocated to their formal owners. This cycle can be showcases through the Production Possibility frontier, Hayekian Triangle and Loanable-Funds market. Production Possibilities frontier Inevitably, the incorporation of the Production Possibility Frontier is pertinent in establishing a relationship between investment and consumption. Contrastingly, it deviates from Keynesian model that advocates the use of investment and consumption as additional components. In this regard, therefore, the investment represents a gross investment which consolidates replacement capital33. In principle, replacement capital is a fraction of gross investment that replaces previous capital used. Eventually, it does not expressively contribute to the expansion of the country’s economy. Loanable-Fund Model In a nutshell, a Loanable fund is a direct application that replicates supply and demand, against an interest rate. Thus, demand is a reflection of the business’s capability to borrow and perform various investments. Supply, on the other hand, is the people’s probability to save and consume the products in the foreseeable future. Through this model, the Austrian economics showcase an autonomous increase in the investment against the backdrop of the business cycle. A probable increase in the opportunities for investment, or rather an expected increase shifts the demand curve upwards. Hence, it implies that the borrowers are willing to pay higher interests rates in order to invest. A significant impact of technology, on the other hand, affects an entrepreneur’s decision-making process. Hayek contends that the technological innovation is central to the organisational process, through their spontaneous nature.34 Classical Liberalism Altogether, “the moral and ethical ideology” of Austrian economists and “Austrian’s ethical” position suggests a strong liberal implication in economics. Surprisingly, given its conflict in affirming value-neutrality theory, it conforms to Weberian ideologies35. In essence, major implications of Austrian economics is cemented in various political issues that are somewhat consolidated in its economic doctrines. Mises is thought to be the premier liberal thinker, shedding light in the connection between liberal politics and value-free economics.36Accordingly, Mises presupposed that economics presents that strategy in attaining the promotion of the values endorsed by people. The strategy comprises of a free market economy37. In this regard, the economics lack value judgment on affiliated political analysis. Questionably, the division between the liberal principles and Austrian theory is yet to be realised. Antitrust Behaviour Alternative cost theory emphasises on imputation resulting to the valuation of consumer goods. Nonetheless, Hayek rejected the “mainstream economist” ideology on competition theory stating that competition lacks in the neoclassic theory of perfect competition38. Simply put, Austrian economics defines competition as a rivalrous behaviour. Macroeconomics Money Money is defined as a common accepted medium for exchange. The distortion of money is constituted in the case when the government distorts the monetary unit. As such, the goal of any monetary policy aims at minimizing the occurrence of such distortions. Austrian economics advocates that an increment in the money supply that is not attributed by an increased demand for money, results to an increase in price commodity. An instantaneous adjustment of money is not experienced, given the difference in money adjustment. Some prices adjust relatively faster as opposed to other. As a result, the price fluctuations lead to the changes in production and exchange patterns39. This thought is significant in understanding the cost of inflation. The quantity theory affirms that printing money does not necessarily augment the wealth, rather decreases its value. Consequently, doubled the money supply by the affected government, will prevent the money holder’s value in the purchase of goods. While the quantity theory presented advancement in the economic thinking, an interpretation of this theory sidelines the cost of inflationary policies40. Inflation has presented its inherent social destruction at various levels. The anticipated inflation rate destroys the trust between the government and its citizens. This is accredited to the fact that the government employs inflation in confiscating the people’s wealth.41Tentatively, the unanticipated inflation result to the redistributive nature of the inflammatory effects, since debtors are subject to experiencing losses at the expense of the creditors. Money is linked to all the transaction of the modern economy. Thus its significance in monetary distortions is experienced at different market levels. In this repute, monetary policies should be created in such a way that reduces the monetary distortions in varied propositions. Capital structure moreover should be aligned in a way that comprises of heterogeneous goods. Consumer placement on the value of produced products is significant in dictating the good’s production levels. The production strategy is aligned to the capital structure that produces the final product in the most efficient strategy. A homogenous capital good is instrumental in the production of final products; desired by all consumers. Austrian economics confers that because production mistakes are bound to happen; relocation of resources are effectively done at minimum costs with the aim of producing desirable final products. The realisation of the errors prompts a reshuffling of the investments, whilst the loss of resources. In the light of Austrian economics, individuals do not intend to create the complexity in the exchange arrays that consolidate a market economy. However, individual responses are aimed at the improvement of human livelihood. As a result, their behaviours constitute the market systems. Languages, money, science, life among others constitute a social phenomenon that is not related to human designs. Hence, these social phenomena are connected to the people striving to achieve better livelihood. Through the process, they significantly benefit the general public. Microeconomics Competitive market Replicates Entrepreneurial Spirit As opposed to the general view that competition is a state of affairs, rather it invokes an activity. The presupposition that competition is a state of affairs suggests that the entrepreneurs would not play any role in the market. Austrian economics suggests that given the nature of competition as an activity, it plays a significant role in the alteration of the market’s pulls and prods42. Unrecognised opportunities present an entrepreneur’s platform in achieving mutual gains. Through the recognition of such opportunities, entrepreneurs gain considerable profits. The mutual contemplation of the discovery of gains from the practices shifts that market towards a more efficient resource allocation. Entrepreneurial discovery propels the market towards a free and efficient market. The lure of gained profits necessitates that entrepreneurs pursue innovative strategies in increasing their productive capacity. Austrian economics recognises the present imperfection in light to the expected profits. Private Property Production is Requisite for Rational Economics Calculations Social thinkers and Austrian economists realised the significant role played by private ownership in incentivising scarce resources. Through an alteration of the human nature, individuals that sympathised with socialism can exceed the problems affiliated to such incentives. Mises demonstrates that whilst the occurrence of the assumed change in human nature, socialism is subject to fail given the inability of the economic planner’s to analyse the incorporation of the alternative resources.43Without the production under private ownership, Mises reasoned, a lack of market for the means of production will result to the lack of money prices in sustaining production. Consequently, an incapacitation on money prices will not adequately realise the relative scarcities in the means of production. It, therefore, compels the planners to calculate the alternatives for the production.44 Subjectivism in Utility and Cost The human mind is imperative in filtering economic phenomena. As opposed to mainstream economist presupposition that value is subjective, Marshall suggests that the objective conditions pre-determine the cost side of the equation. Social Science Fact Constitute People’s Thought Austrian economists assert that the decision-making process of individuals is oriented in the practices, things and people. Human science is focused on intelligence, as opposed to predictions. Austrian economics views economics as dissimilar to that of natural science. Though it is seemingly scientific, its incorporation can be used in predictions that are divergent to that of the scientific approach. In contrast to physical science, human science focuses on individual’s plans and purposes45. On the other hand, physical science suggests the purging of the plans and purposes, resulting to strategies that overcome anthropomorphism46. However, the elimination of plans and purposes results to the exclusion of human’s action in the affiliated subject matter. The world’s “facts” are what the actors believe and think. Conclusively, the implications of Austrian economics are rather radical. Contemporary Austrian spans orthodoxy and heterodoxy within the economics profession. As such Austrian economics presents a heterodox evaluation of economic theory, but significantly contributing to the policy consensus that has shifted the transformational approach of economics. Tentatively, its implication has resulted to a laissez-faire position in the contemporary domestic and international policy. Presently, the intellectual battleground is comparatively defined on the methodological frontiers as opposed to ideological approaches. Bibliography Birken, L, ‘From Macroeconomics to Microeconomics: The Marginalist Revolution in Socio-cultural Perspective,” History of Political Economy, Vol 20, no 2, 1988, pp 251-64. E März, Joseph Schumpeter. Scholar, Teacher and Politician, Yale University Press, New Haven, CT, 1991. 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