Principles of Economics Chapter 1

Human Action

“Economics is not about things and tangible material objects; it is about men, their meanings, and actions. Goods, commodities, and wealth and all the other notions of conduct are not elements of nature; they are elements of human meaning and conduct. He who wants to deal with them must not look at the external world; he must search for them in the meaning of acting men.”

— Ludwig von Mises

Ludwig von Mises’ magnum opus, Human Action, offered an explicit redefinition of the field of economics as the study of human action and choice under scarcity. Mises found it essential that proper economic reasoning and analysis of economic phenomena must be based on analyzing human action, rather than analyzing material objects and their properties, or analyzing collectivist and abstracts units. While this might initially seem pedantic, I hope this chapter helps convince you otherwise.

Mises argues that philosophers had long attempted to analyze humanity’s evolution and destiny based on an understanding of what History, God, or Nature had intended for humans. Such analyses dealt with humanity as a whole, or analyzed collectivist concepts like nation, race, or church, and sought to find laws to explain the behavior of such entities and their consequences, as if history had ironclad laws to be discovered, akin to the natural sciences.

But the emergence of the classical economists, and their discovery of the inescapable interdependence of market phenomena overthrew the traditional and collectivist analyses and conceptions of human society. Rather than analyzing history based on the will of god, nature, or through nation, race, or church, economics showed that human society is far better understood by analyzing its prime driving forces: individual human choice and action.

  • Action, purpose, and reason

Mises defines human action as “purposeful behavior”, so as to distinguish it from instinctive, impulsive, or emotional acts. “Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful response to stimuli and to the conditions of its environment, is a person’s conscious adjustment to the state of the universe that determines his life.”

Mises’ student, Murray Rothbard defines human action as “purposeful behavior toward the attainment of ends in some future period which will involve the fulfillment of wants otherwise remaining unsatisfied.” For action to take place, it requires a human to have “a current state, an imagination of a more satisfactory state, and the expectation that purposeful behavior can alleviate uneasiness.”

Action is a quintessentially human quality that distinguishes humans from other animals. Humans act purposefully because we are endowed with reason, and are able to direct it to the meeting of our ends. Human cognition is capable of recognizing causal relations in the world around us, and acting upon this understanding to bring about a more favorable state of affairs. As Mises puts it:

“Man is not a being who cannot help yielding to the impulse that most urgently asks for satisfaction. Man is a being capable of subduing his instincts, emotions, and impulses; he can rationalize his behavior. He renounces the satisfaction of a burning impulse in order to satisfy other desires. He is not a puppet of his appetites. A man does not ravish every female that stirs his senses; he does not devour every piece of food that entices him; he does not knock down every fellow he would like to kill. He arranges his wishes and desires into a scale, he chooses; in short, he acts. What distinguishes man from beasts is precisely that he adjusts his behavior deliberatively. Man is the being that has inhibitions, that can master his impulses and desires, that has the power to suppress instinctive desires and impulses.”

A useful mental image to explain the primacy of human action is to think of the physical world around us as inert play-dough we can mold with our hands into different shapes and objects based on what our mind reasons and imagines. Inanimate objects are dead matter, and it is human reason shaping humans’ actions that rearranges this matter and gives it value, meaning, and purpose. One understands the material world far better if they study it as the product of human reason and action. Attempts to explain social phenomena through reference to physical objects, abstract nouns, or collectivist entities are ultimately futile, and decidedly inferior to thinking in terms of human choice and action. It is not the stars, nor abstract nouns and entities that act, but individuals. If you want to understand the conditions of the material world, it is most useful to study the actions of the humans who mold it.

In the Misesean and Austrian tradition, human action is understood and defined as being rational. The word rational in this context does not refer to the correctness of the action according to some objective criteria, nor does it refer to the suitability of the action in achieving the ends of the acting man, nor does it pass moral judgment on the action. Rather, rationalism here is defined as being the product of deliberative reason. Whenever man reasons and acts, he acts rationally. Whether such an action is conducive to achieving his goal or not, and whether such an action meets the approval of another party assessing it are irrelevant to the term rationality, as understood and defined by Mises. A person may regret an action and realize it was counter-productive to achieving their ends, but that does not change the rationality of the act, in the sense that it was the product of deliberative reason, correct or faulty. Other individuals may pass judgment on this individual’s actions, and no matter how wrong they find it, that would also not detract from the rational nature of the act. It is only the acting individual’s value judgments that matter to determining the rationality of an act, not that of observant individuals. Value being subjective means that nobody is in a position to substitute their own value judgments on other people’s actions and aims.

The Austrian conception of rationality becomes clearer when Mises explains that the “opposite of action is not irrational behavior, but a reactive response to stimuli on the part of the bodily organs and instincts which cannot be controlled by the volition of the person concerned.” Further, “An action unsuited to the end sought falls short of expectation. It is contrary to purpose, but it is rational, i.e., the outcome of a reasonable—although faulty—deliberation and an attempt—although an ineffectual attempt—to attain a definite goal.”

This is the first chapter in Saifedean’s forthcoming textbook on economics. Subscribe to receive all forthcoming chapters, as well as chapters from The Fiat Standard, and full access to Saifedean’s four online courses.

  • Economic Analysis

Thinking of economics as the study of human action allows us to define the most important terms in economics based on their relation to human needs, how human reason treats them, and how humans shape them. When explained, defined, and understood through the lens of human action, economic terminology becomes clearer and economic analysis more fruitful.

Hans-Hermann Hoppe explains:

“All true economic theorems consist of (a) an understanding of the meaning of action, (b) a situation or situational change-assumed to be given or identified as being given-and described in terms of action-categories, and (c) a logical deduction of the consequences-again in terms of such categories-which are to result for an actor from this situation or situational change.”

At the heart of the Austrian approach to economics is the goal of understanding the causal processes of economic activity, and their consequences. Logical deduction and thought experiments are employed to understand the logical implications of economic processes. Initially, this approach might appear banal and fruitless compared to the dominant approaches of mainstream economics today, which rely on mathematical analysis. But a closer look shows us why quantitiative analysis is unsuited for building an economic theoretical framework, and that quantitative analysis is meaningless and mute without logical deduction and conclusions to motivate it and understand its results. In keeping with the Austrian critique of quantitative approaches to economic analysis, this book will present and analyze economic acts in plain language, not with mathematical equations. Human action will be understood through logical deduction and thought experiments, not equations and quantitative analysis.

  • Quantitative Analysis

The Austrian critique of quantitative analysis was summed up in Mises’ critique of the application of quantitative methods to economics in Human Action:

“The fundamental deficiency implied in every quantitative approach to economic problems consists in the neglect of the fact that there are no constant relations between what are called economic dimensions. There is neither constancy nor continuity in the valuations and in the formation of exchange ratios between various commodities. Every new datum brings about a reshuffling of the whole price structure. Understanding, by trying to grasp what is going on in the minds of the men concerned, can approach the problem of forecasting future conditions. We may call its methods unsatisfactory and the positivists may arrogantly scorn it. But such arbitrary judgments must not and cannot obscure the fact that understanding is the only appropriate method of dealing with the uncertainty of future conditions.”

This is a profound criticism of the methods of modern economics. To illustrate this, let us examine how a natural science utilizes quantitative relationships, using the example of the ideal gas law in thermodynamics, which states:

PV =nRT

Where P is pressure in bars, V is volume in liters, n is the number of moles (where each mole is 6.022 x 10e23 atoms), T is temperature in Kelvin degrees, and R is the Regnault constant of 0.083145 L.bar/mol.K

Establishing such a relationship is possible in the natural sciences due to several factors which are not present in the study of human action. Most importantly, measurement are made in units that are constant, and clearly defined by the International System of Units, which has defined seven base units on which all scientific measurements are based: the second, meter, kilogram, ampere, kelvin, mole, and candela. From these seven units, many other units can be derived.

The liter, for instance, is simply the volume of a cube with 10cm sides. In the modern world, there are many measurement devices that can be used to reliably measure length and volume consistently. The bar is defined as the atmospheric pressure on earth at an altitude of 111 meters and a temperature of 288.15 degrees Kelvin, and it is divided into 100,000 Pascals of pressure. Barometers are produced and sold worldwide to reliable and consistent standards for measurement of pressure using this unit.

In the past, the kilgoram and meter, and indirectly, the Kelvin, were defined in terms of specific artifacts kept in Paris. Each degree on the Kelvin scale corresponds to a change in thermal energy by 1.380649x10e-23 Joules. The Joule is in turn defined as the energy transferred to an object when a force of one newton acts on that object in the direction of the force’s motion through a distance of one meter. The newton is defined as the force needed to accelerate one kilogram of mass at the rate of one meter per second squared in the direction of the applied force.

The second itself was defined as one 86400th of a day, but in 1967, a new and more precise definition was adopted by the International System of Units, relying on the Caesium standard, the most accurate and precise time and frequency standard to be discovered so far. According to this standard, the second is defined as the duration of 9,192,631,779 periods of the radiation corresponding to the transition between the two hyperfine levels of the ground state of the caesium-133 atom at a temperature of 0 Kelvin. Since 1983, the meter has been defined as the length of the path traveled by light in vacuum during a time interval of one 299,792, 458th of a second. This measurement can be determined, demonstrated, and verified through experimentation.

By 2019, with the redefinition of the kilogram, all of these units have been redefined in terms of fixed fundamental constants of nature. The kilogram itself is now defined in terms of the meter, second, and the Planck constant, which is defined as the quotient of a photon’s energy divided by its frequency, and has a value of 6.62607015x10e-34 Joule*second.

These clearly defined and inter-personally and internationally agreed-upon units for measuring physical phenomena have no equivalent in the economic sciences. There are no clearly defined units to measure economic value or utility, and any assessment of these metrics is done by the individual, subjectively, and ordinally, not cardinally, because the raw material of economics, value, is not a physically defined quantity, but a psychologically experienced judgment, as will be discussed in the second chapter of this book. Prices cannot be considered scientific units because they themselves are expressed in terms of units of currencies whose value, supply, and demand is oscillating and not constant.

Beyond just the units, scientific relationships can uncover constants of nature. The International System of Units also lists seven SI defining constants, whose values are used to derive all units: hyperfine transition frequency of caesium, speed of light, Planck constant, elementary charge, Boltsmann constant, Avogadro constant, and luminous efficacy.

In the ideal gas law, we also find the Regnault constant, which is measured at 0.083145 L.bar/mol.K. This relationship and this constant is repeatable and demonstrable. What this law shows is that any person can put any gas in a container, and measure its pressure, volume, temperature, and mole number, and from that, determine the Reginault constant and verify that the relationship holds. Should any person find a different relationship, with a different value for the constant, the ideal gas law would be disproved and it would stop being a scientific law.

All of these units and constants are defined in terms that are acceptable and comparable across the world, verifiable and testable by any skeptics. Thanks to this uniformity, it becomes possible for people from all over the world to engage in the division of labor and the undertaking of sophisticated engineering projects. The reliability of these units is reflected in the number of workers and technicians from all over the world who use the same tools and equipment with commonly agreed upon standards. When an Argentine purchases a German-designed refrigerator manufactured in China, a very large number of people all over the world had to have agreed on the definition of all of these units in order to communicate their preferences for one another and ensure the satisfactory production and delivery of the fridge.

The existence of these reliable physical units for measurement makes it possible to engage in systematic, reproducible, and quantifiable scientific experimentation. With these constants and measurements, it is possible to conduct systematic experimentation with gases at different volumes, temperatures, and degrees of pressure. From these observed measurements, the relationships between these physically defined categories are established. In the case of the ideal gas law, a mathematical relationship is found between the pressure, volume, and temperature. This relationship is scientific not based on the word of anyone, but because anyone can replicate it and test it. It has achieved the status of a scientific law only because a large and growing number of people have tested it and found it to hold. Since it was first stated by Benoît Paul Émile Clapeyron in 1834, nobody ever tested this relationships and found it not holding.

Based on scientific laws similar to the ideal gas law, economists have spent the last century running down the blind alley of trying to find similarly precise and reliable scientific laws that govern economic relationships. The obstacles facing such a quest are insurmountable. First, there is no standard unit with which economic measurements of value can be made and compared. As discussed in Chapter 2, value is subjective. The utility that individuals get from goods is subjective and constantly changing based on the individual and the time at which they are making their valuation, as well as the relative abundance of the good. There is no possibility for interpersonal utility comparison, and therefore mathematicization of utility will always be hypothetical and theoretical, never precise and replicable.

Without a common unit for measurement and comparison of utilities, it is not possible to formulate a quantitative law around, for example, changes in demand and supply based on changes in price. It won’t be possible to quantify the impact of a specific change in price on an individual’s demand for a good because that happens through the causal mechanism of changes in utility, and that is a factor that is not measurable or quantifiable.

The second reason we cannot formulate quantitiative laws in economics is the impossibility of conducting replicable experimentation on economic questions. The subjects of the natural sciences are the material objects which can be isolated and tested repeatedly until regularities are found and laws established. But the subjects of the social sciences are the ideas and actions of humans, immeasurable and non-quantifiable. Experimentation with ill-defined units cannot yield comparable and reproducible results, and so experimentation will fail to turn up quantitative regularities and laws, because there are no units in which these laws can be expressed. Without measurement and repeated experimentation, it is not possible to find regularities, derive constants, and formulate scientific relationships and laws.

It is also not possible to create accurate experiments in economics as we can in the natural sciences because the subject of economics is the action of humans in the real world, and conditions in testing laboratories do not replicate the real world consequences of economic decisions. The real world is the only laboratory that can approximate the real conditions shaping economic decision-making, but experimenting on the real world is not possible.

A century after economics left is classical methodological foundations to attempt to ape physics, and it has still failed to produce one quantitative law or formula that can be independently tested and replicated. Macroeconomic equations come and go with the fashions of modern schools of thought, but none of them has been measured and replicated in a way that can allow it to be called a law.

Beyond the issues of measurement and experimentation, a deeper logical problem with quantitative approaches to economics is that they conflate the factors we can measure and observe with the causative factors that shape the world around us. The quantitative methods which establish relationships between aggregate measures place the aggregates as the driving causal forces. In the natural science, this is workable, because the complexity of the atoms that make up the gas can be reduced to basic aggregate measures of pressure, temperature, and volume without any loss in analytical prowess. The atoms have no will of their own, they have no mind, they cannot reason, and cannot act in response to surrounding conditions, like human being. Lacking reason and will physical objects’ behavior can be studied and accurately predicted. If you heat a gas container, then all other variables in the ideal gas law will change to keep the equation in balance, and the equation will continue to hold.

When examining economic questions, however, we are confronted with the unfortunate reality that the causative factors shaping economic reality are human beings and their actions, motivated by their own subjective considerations and personal preferences. Far from being inanimate objects reacting in mathematically predictable ways, humans react in irreducibly complex ways. Attempting to paper over all of the complexity of the actions of millions of humans by examining only superficial aggregate measures of some economic phenomenon is the core mistake of failed modern pseudosciences like macroeconomics and epidemiology, which ignore the real actual causative factors in the phenomena they study, and instead attempt to hypothesize based on whatever aggregates can be measured.

Just because we are able to construct measures of unemployment, gross domestic production, consumption, investment, and other economic parameters does not mean that these factors have to be causally related to one another in scientifically ordained relationships based on quantifiable and testable magnitudes. In fact, since the actual drivers of this relationship are the actions of the individuals, there is no reason to suppose that the aggregate measures are any more than superficial epiphenomena unrelated to the causal mechanisms driving the relationships examined. Attempting to formulate such relationships is akin to scientists studying gases and attempting to formulate laws based on the color of different containers, the number of containers used, brand of manufacturer, first letter in the name of the experimenter, and various epiphenomena with no causative effect on the experiment. A scientist can indeed formulate relationships between these parameters, but it will be impossible for any meaningful such relationships to hold after repeated testing by independent parties. Repeating the same experiment with an experimenter with a different name, or a container of a different color will still yield the same results, making the original experimenter’s theorizing pointless. It is the gas inanimate gas particles whose temperature, pressure, and volume are the control knobs for the gas system being studied, and the container’s color and experimenter’s name are irrelevant. Similarly, it is the action of humans which shapes economic outcomes, not the aggregate measures constructed in government statistical offices.

This is not to say that all statistical measures are worthless noise, as there can be value to be had from examining these aggregates as close approximations of economic phenomena. The Austrian objection is in treating these statistical artifacts as causal factors and assuming the relationships can be extrapolated to the future predictively.

The most egregious and harmful attempts to ape the methodology of the natural sciences in economics happen in macroeconomics, where physics envy has for a century made economists attempt to find a system of equations that can explain the dynamics of an economy in the same way equations can explain and predict the movement of objects, an example of what Friedrich von Hayek called “scientism”. With an accurate scientific system of equations to understand the working process of the economy, it becomes possible to manage economic activity to achieve desirable social goals. In the same way that chemists’ equations have helped engineers perfect and optimize the working of engines and pumps, economic equations can help economists improve the economic situation of an economy.

Macroeconomic aggregates are constructed from national accounts, and mathematical relationships are sought between them. To the extent that such relationships are established, they are established theoretically, based on some economist’s authority to declare how the causal mechanisms function, not based on experimentation. Keynes’ macroeconomic system is the most prominent example. For decades, economists have formulated equations based on Keynes’ theoretical hypothesizing. The state of the economy is primarily a reflection of the quantity of spending; if spending is too high compared to the quantity of outputs, then inflation is the outcome, but if spending is too low compared to the output, then unemployment and recession is the outcome. Should unemployment be too high, modern macroeconomic equations suggest how this can be fixed by increasing government spending or reducing interest rates.

But accounting identities do not denote real world causality. There are no mechanisms in macroeconomics to experimentally establish causality in the same way as in natural sciences. Keynes’ equations attempting to predict the impact of one aggregate metric to another bears no relation to the actual causes in the world, because there is no way of measuring, testing and verifying any of it.

There can be no studies done to test this hypothesis, because one cannot experiment on entire economies made of millions of people who have other plans for their lives. However, the theory persists to this day, in spite of decades of accumulated evidence it is not an accurate representation of how the world works. In the 1970s, as inflation and unemployment both increased at the same time, and the Keynesian trade-off was comprehensively refuted beyond a shadow of doubt. But the advantage of economics having no systematic and replicable method of experimentation and testing is that theories can always be adjusted after their failure in a way that can justify non-compliant real world observations.

Keynesians simply revised their theory to include a new terms called “supply shock” which is an incoherent term made as an after-the-fact justification to explain how an increase in unemployment and inflation can happen at the same time. Since then, the world’s economies have witnessed every imaginable combination of inflation and unemployment rates, and the Keynesians have successfully maintained the delusion that such a trade-off exists. Any diversion away from this relationship can be explained by invoking a “supply shock”, and so there can be absolutely no observation that falsifies the Keynesian theory of a trade-off between unemployment and inflation. The illusion of economics as a precise, quantitative and empirical science is only maintained through the exemption of its theories from empirical real world examination.

This is the first chapter in Saifedean’s forthcoming textbook on economics. Subscribe to receive all forthcoming chapters, as well as chapters from The Fiat Standard, and full access to Saifedean’s four online courses.

  • A Contrast of approaches

To illustrate the human action approach to economics, and to compare it with modern quantitative economic methodology, we can use as an example the question of government-mandated minimum wages, which impose a lower limit on what employers can pay their employees. A popular policy intervention in the majority of the world, the two opposing perspectives on it serve as an object lesson in the two different framework for thinking about economics: human action and aggregates.

Imagine a country with no minimum wage laws, and a politician looking to win an election. As in all times and places in human history, there is a natural variation in the wages earned by workers. The politician decides to center their campaign around improving the living standard of the poorest members of society by mandating a minimum wage which he imagines guarantees its recipient a decent living. Based on his aggregate-focused macroeconomist, the aspiring leader decides to mandate a minimum wage of $10 per hour. The fiat economist concludes that 20% of all workers, supporting 35% of all the population, currently earn less than $10 per hour. The aggregate effect of imposing the minimum wage would lead would lead to a rise in wages equal to $10 billion per year. Based on sophisticated historical and theoretical models, the fiat economist further estimates that the $10b increase in payrolls would translate to an $8b increase in consumer spending, which models estimate would result in the creation of 40,000 new jobs, a 12% increase in industrial output, a 4% rise in exports, and a $16b rise in Gross Domestic Product.

According to this collectivist approach to economic analysis by aggregates, the causal agents in economic phenomena are the aggregates, and they act according to the theoretical relationships established by fiat economists, in a way similar to how physicists and chemists establish scientific rules. These conclusions were arrived at using scientific-looking equations not very different from those used in the ideal gas law. Using the framework of collective economic analysis, the minimum wage law sounds like a great boon to society. The poorest workers will increase their living standards significantly, some unemployed workers will find work as a result of the extra spending, and all of society becomes more productive. What’s more, exports rise helping obtain foreign currency.

If this sounds too good to be true, that is because it is not true.

Things look very different through the lens of the sound economist’s Mises-tinted glasses. Knowing that human action is the real driver of human affairs, the sound economist does not analyze the world through aggregate numbers, but instead, he analyzes the decisions of the real humans who are affected by this new law. Employment is an agreement between two individuals, the employer and the worker. The sound economist understands that a business owner’s choice to hire someone is based on a simple calculus: they will hire him if his contribution to the firm’s revenue exceeds his wage. If the minimum legal wage exceeds the marginal revenue they bring, then hiring them costs the business money, and is akin to a donation from the business to the worker. Employers know that making such a hire is a costly mistake, and employers who do not know that will soon witness their business fail as it continues to hemorrhage money on wages it cannot afford. Only employers who understand this economic reality will remain as employers, and all those who do not will lose their businesses, and emotional blackmail by politicians can change nothing about this reality.

Wages, like all prices, are not just arbitrary numbers chosen by greedy employers, they are a reflection of the marginal productivity of the worker. As the law now stipulates that a worker must be paid $10, the employer now has to reconsider whether it is worth it for him to hire this worker. When government mandates a minimum wage, it does not magically alter the calculus of the employer, nor does it magically increase the productivity of the worker. The employer will still only hire workers whose productivity is higher than their wage. Thus, the minimum wage law makes it illegal for employers to hire anyone whose marginal productivity is less than $10 per hour. Any worker whose productivity is less than $10/hour will now become a drain on any business that hires him and pays him that amount. Either they get fired, or the businesses that hire them lose money and go out of business. In all cases, these jobs are eliminated, and everyone whose productivity is less than $10/hour is now not just unemployed, but legally unemployable.

Viewed through the lens of human action, the effect of a minimum wage law is to make it illegal for workers with a low productivity to get jobs, and many of these workers will lose their jobs. Continuing to look through the lens of human action, one would find that the workers who lose their jobs are the workers with the lowest productivity in society, and these are usually the poorest and the youngest workers. Making it illegal for them to work is effectively making it illegal for them to raise their productivity by learning on the job and acquiring the valuable on-site work experience. Minimum wage laws are thus particularly pernicious to the people who need work the most, and a causal factor in the emergence of wide-scale unemployment, as well as unemployability. Another possible implication is that some businesses, particularly the ones that depend on these low-wage laborers for their operation, would pay the higher wages but also raise the prices of their goods to finance the higher wages. Consumers would then pay the price through higher prices and lower quantities of good available.

All of these consequences of the minimum wage are deducible by the sound economists from analyzing the human action of the wage law, and the implications it will have on acting individuals. It turns out to be a far more useful and accurate assessment of the situation than anything that can be conjured from examining mathematical metrics.

Prices are a reflection of underlying market reality driven by human action. Attempting to alter underlying market reality by altering its reflection is unworkable. Every attempt at passing price controls has backfired because it ignores the role of human action, and studies economics as if it were about material objects, and not about humans’ actions. Schuettinger and Butler have written a depressingly entertaining history of price controls in Forty Centuries of Price Controls, illustrating how this exact dynamic has repeated itself across cultures and nations throughout history. The kings, emperors, politicians, and bureaucrats look at the world of economic transactions as an inhuman process they can alter to suit their needs. They mandate that the observable epiphonemna associated with markets fall within acceptable ranges. They assume humans will just adjust their actions to ensure these laws are upheld, but in reality, humans adjust actions optimizing for their own well-being, not for adhering to the law. The merchant would rather not sell at all than sell at a loss. You will either see the free market price, or you will see no market price at all. In such an economy, underground markets become the markets where real prices are expressed.

Actual economists understand that observable economic phenomena and metrics are but manifestations of underlying actions by the humans involved. Humans are constantly seeking to improve their own situation in life, and it is futile to mandate that they act against their interest. The result of mandating laws against human nature is not to change human nature, but to destroy society’s respect for laws. This essential realization is an indicator of why the sound economist is in favor of individual economic freedom and against its restriction by governments. The human spirit is indomitable, and it will not act in a way that is harmful to itself.

The sound economist understands humans are constantly acting to improve their lot in life, and that imposing legal punishment on any peaceful economic activity they might choose cannot lead to an improvement in their life, as it will simply restrict their options and reduce the choice of actions available to them. Aggregate analysis blinds the fiat economist to the implications of these laws to the humans whose freedom it restricts. After formulating mathematical measures of social phenomena, the collectivist economist then assumes that these measures are causal factors in the determination of human affairs.

The world already has far too many economics textbooks written in the pseudo-scientific quantitative tradition, but this book will definitively not be one of them. It will not try to explain economics in the terms of the natural sciences, and it will have no sophisticated aggregate equations. Such an approach promises much but delivers little in terms of reliable, useful, and actionable insight. I have taught these textbooks for years and witnessed droves of intelligent students leave the class with more questions than they entered it, struggling to understand the significance of these equations, or see any convincing reason to believe their output, and incredulously try to convince themselves to undertake the astounding leaps of logic necessary to make Keynes’ ridiculous equations conform with reality. The Austrian method, in contrast, promises little in quantitative terms, but it does deliver a deeper understanding of economic concepts and phenomena which learners find far more insightful, actionable, and useful.

Instead of pretending to have the numerical certainty of the natural sciences, and leaving you with complicated and irrelevant mathematical models and exercises with little relevant to the real world, this book is unapologetically Austrian in its approach. It uses the English language to explain the important insights economists have understood over centuries of study.

  • An overview of this book

This book applies the human action approach to explaining the most important concepts and topics in economics, building on the work of the economists of the Austrian school. The book tackles the major economic concepts and topics independently, in a logical sequence. This chapter introduces the Austrian methodological approach to economics, and provides an example, as well as a comparison with the methodological approach of the natural sciences. The next chapter introduces the foundational concept of value, and explains its subjective nature, as well as the concepts of utility and marginal analysis, based on the work of Carl Menger, father of the Austrian school. Chapter 3 introduces the importance of time in economics, the unique nature of economizing time, and how all economizing acts can be understood as attempts to increase the quantity and subjective value of our time on earth. This chapter also introduces the pivotal concepts of opportunity cost, and time preference.

The second section of the book introduces the main actions humans carry out to economize individually. In each of the chapters of this section, a key concept is introduced and analyzed in terms of the reasons for humans to engage in it, the problem it solves, and how it helps humans economize on time. The first and most basic is labor, the topic of chapter 4. Chapter 5 explains the economics of property, why it emerges and the problem it solves, and applies it to the concept of self-ownership. Chapter 6 introduces a particular type of property, capital, which is used for the production of other goods. The cost of capital, its productivity, and its connection to time preference are discussed.

Chapter 7 discusses technology as an economic concept, why it means higher productivity of labor, and its unique status as a non-material economic good that is non-scarce. The chapter concludes with a discussion of the concept of intellectual property, and why the non-scarce nature of makes them differ from other productive goods.

Energy, the topic of Chapter 8, is not a conventional topic in most economic textbooks, but it is the author’s consideration that understanding the economics of energy is essential to understanding all economics, particularly as the modern advanced capital-intensive and technologically advanced market economy would not be possible without the very large increases in modern humans’ power, or the ability to wield large amounts of energy in short periods of time. Moreover, approaching economics in the Austrian method, through marginal analysis, is essential to understanding the realities of energy production in the world today, and can correct many common misconceptions.

Whereas the second section of the book examined individual economizing acts, the third section looks at economizing in a social context, introducing other human beings into the analysis and exploring the implications. As soon as another person is present, trade becomes possible, and both parties have an incentive to engage in it, as it benefits them both. Chapter 9 explains the rationale of trade, the benefits from it, and the implications of the growing extent of the market in which division of labor takes place.

Chapter 10 introduces the concept of money, explaining the problems it solves, how these problems shape the characteristics that are desirable in money, and how money helps humans economize and increase the value and productivity of their time. The chapter explains how money is a product of the market, and not the state, as is commonly erroneously taught in economic textbooks. While this chapter introduces money, it will be left for Part V of the book to explore monetary economics in depth.

The social order in which individuals peacefully engage in all the aforementioned economizing acts is called a market order, and Chapter 11 examines how individual preferences and economizing acts result in the formation of prices, whose essential significance to the market process is explained.

Chapter 13 explains the term capitalism in the Misesean tradition, and how it is an entrepreneurial system inseparable from private property and economic calculation. We examine Mises’ litmus test for determining if a society has a market economy, and what it can tell us about economic prospects, and how it can help us understand economic history.

Chapter 14 concludes Part III on the market order by explaining human civilization and economic progress as the spontaneously emergent social order from a world in which a few simple abstract rules govern the behavior of all individuals, making them free to economize to improve their lives, while not infringing on the property and person of one another.

Having so far focused on free exchange and human relationships built on peaceful consent, the book’s Part IV introduces the topic of violence and its economic analysis and implications. We begin with an exploration of the economic rationale and implications of violence in Chapter 15, as well as the role the state plays in an economy. Chapter 16 examines the real-world application of violence to the conduct of economic affairs through coercive central planning, by examining one of the most pivotal concepts of the Austrian school: economic calculation. Mises’ century-old explanation of the economic calculation problem has proven a fatal blow to economic socialism, with socialists unable to solve the calculation problem intellectually, and witnessing the consistent collapse of all their economic plans in precisely the manner Mises’ analysis would predict.

Chapter 17 discusses the economics of security and defense, and examines how a market economy treats these goods, theoretically and in the real world. Even as governments are able to finance their security apparatus with taxes, there are more private security employees than there are policemen in the world. Similar to all other goods, there are no reasons to expect a coercive monopoly to provide security and peace reliably to its beneficiaries.

After having briefly and conceptually introduced money in the market process in Part III of the book, Part V focuses on monetary economics. Approaching this topic from an Austrian perspective, Chapter 18 beings by explaining time preference, the starting point for thinking of money. Chapter 19 explains the emergence of money as a market good, and the unique Austrian perspective that views any quantity of money as being sufficient for an economy. Chapter 20 discusses banking and credit, introducing the use of credit money and its effects. Chapter 21 builds on the concept of time preference, money, and credit to formulate the Austrian pure time preference theory of interest rates. With this foundation on how money works in the market economy, it becomes clear how to explain how money malfunctions in the centrally planned economy, through the Austrian theory of the business cycle, which is the topic of Chapter 22. Finally, chapter 23 discusses how a free market in money would handle investments, drawing on the rise of bitcoin as an explanatory tool.

This is the first chapter in Saifedean’s forthcoming textbook on economics. Subscribe to receive all forthcoming chapters, as well as chapters from The Fiat Standard, and full access to Saifedean’s four online courses.