A Short Course in Economics

As we have seen, there is no economic justification for any acts of any intervention.  There is certainly no moral justification either for government intervention is by definition the use of force.  There is in fact no economic or ethical justification for the existence of governments.  However, there are a lot of well-regarded honest economists out there that do not recognize this truth.  They will try to justify government actions with economics theory, but nearly always, their analysis is flawed because they make one of the two central fallacies identified by Henry Hazlitt - that of looking only at the immediate consequences of an act or proposal, and that of looking at the consequences only for a particular group to the neglect of other groups.

Furthermore, mainstream economic theories are based on fundamental fallacies in basic economics teaching.  In particular, the following topics are widely misunderstood:

• Value – the subjective theory of valuation is often rejected in favour of an objective theory of valuation, which allows mathematical operations to be done in respect of value.  There is in fact no such thing as objective value; all valuations are subjective.
• Money – money is often poorly defined, and the creation of new money via fractional-reserve banking poorly understood.
• Business Cycles – the cause of the boom-bust effect - credit expansions under fractional-reserve banking – is often disputed and the subject of endless debate.  Often the free-market is blamed for the business cycle, when it can be shown that the cycle is a purely monetary phenomenon, caused by the existence of central banks and fractional-reserve banking.
• “Inflation” – the term inflation has changed meaning in modern mainstream economics, and now means price increases.  This severs the conceptual link between price increases and the money supply.  The inherent redistributive and distortionary effects of inflation (increase in the money supply) are not recognized, with many suggesting that “inflation at a constant rate” is the best policy.
• “Deflation” – likewise, the term deflation has come to mean price decreases.  Price decreases are widely feared, even though they represent either an increase in productivity or in savings.  Even during the recession stage of a business cycle, deflation is a sign that the economy is recovering.
• Profits and Losses – the role of profits and losses in maximizing productivity is misunderstood, with many believing that profits are wasted resources, which should have gone to labor, and many confusing profits with interest.  These are based on more fundamental misunderstandings relating to the nature and importance of time-preferences.
• Monopoly – it is not widely recognized that “evil” monopolies cannot occur and persist on the free market unless there is a government privilege.

In mainstream economics, there is an arbitrary distinction between “microeconomics”, the economics of the individual and isolated exchanges, and “macroeconomics”, the study of economies as a whole.  Microeconomic theory often contradicts macroeconomic theory and lead to paradoxical conclusions.  An example is the paradoxical idea that for each individual it is good for productivity to save rather than consume, while for the economy as a whole, spending and consumption are what is important.

Much of microeconomics is sound: for example, theories of prices and competition.  Most of macroeconomics is completely wrong and backward.  And it is macroeconomic theories that often lead government economists to recommend precisely the worst possible policies to governments. 

The underlying problem is that mainstream economics as a subject is mis-defined.  It is treated as if it were a science like biology, or an art like engineering, or as a branch of psychology.  It is treated empirically.  That is, “observations” are made, “hypotheses” are formed, “data” is gathered and analyzed in “models” and using mathematical equations, there is “testing”, theories are established.  Mainstream economics, in short, uses the scientific method.

In fact, the approach the Austrian School of Economists – Carl Menger, Ludwig Von Mises, F.A. Hayek, Henry Hazlitt, and Murray Rothbard – that is the true method of economics.  It is the axiomatic-deductive approach.  Economics is the study of the formal implications of the fact that humans use scarce means to achieve ends.  Logical deductions are made from this axiom of human action. 

The approach of economics is comparable with mathematics; it too uses logic – in this case symbolic logic, which is shorthand for the verbal logic used in economics – to derive unquestionable truths from an initial set of axioms.  Austrian economic theories are proved therefore in the mathematical sense.  Mainstream economic theories on the other hand, cannot only be supported by evidence (like theories in biology); they can never be proved in the mathematical sense.  So where a mainstream economic theory contradicts a theory from Austrian school economics, we know that the Austrian school theory must be the correct one; it is the one for which we have proof, the mainstream theory must be wrong.