How refreshing to read a widely published economics book which casts the Austrian School in its proper light!
The Economics Book is part of DK’s popular series, Big Ideas Simply Explained. The series takes an historical approach to over a dozen subjects such as religion, psychology, art, science, history, and literature.
The Economics Book starts with the early Greeks and progresses through the 2008 Financial Crisis. Along the way, the Austrian School features prominently, sometimes heroically. The authors characterize Austrians as “vociferous defenders of the free market” who “have carved out a unique place within the discipline” and “trod an uncompromising path” in favor of free markets.
By the late 18th century, economists like Adam Smith still puzzled over the diamond-water paradox, a mystery that remained unsolved for yet another century, when finally Menger and Bohm-Bawerk set forth diminishing marginal utility and the subjective theory of value — both foundational economic concepts. Thus was born the Austrian School “which defends the free market against the ideas of socialism.”
Next up, Friedrich von Wieser elucidates opportunity cost in 1914, establishing another cornerstone of economics.
Mises is cited no less than eleven times and is highlighted in the section on Central Planning in which a large pictogram concludes, “Socialism is the abolition of rational economy.” Much of the section is devoted to Mises’s economic calculation argument, which provided an ironclad rebuke of Marxism.
Hayek vies with Keynes for the title of “the 20th century’s most influential economist”. Hayek’s works on perfect competition (Individualism and Economic Order), socialism (The Road to Serfdom), spontaneous order (The Fatal Conceit), central planning (The Use of knowledge in Society), and Monetary Policy ( Denationalization of Money) profoundly impacted both economics and policy.
Schumpeter is noted for his work on innovation and entrepreneurship, a critical addition to land, labor, and capital as factors of production.
Looking at the many Austrian contributions to bedrock economic theory, a reader wonders where economics would be without the Austrians. Similarly, in light of the bulwarks against socialism built by Mises and Hayek one wonders where civilization itself would otherwise be.
Of course, many famous economists (Marx, Keynes, Krugman) have spent their careers searching for flaws in the market and Economics duly catalogs their many complaints while noting, “The Austrian School does not accept the concept of market failure, or at least sees it as trumped by government failure.”
While the historical sections give full credit to the Austrian School and its many important contributions, the section on Contemporary Economics presents mostly mainstream views. Its explanation of the 2008 housing crisis points toward market failure as lenders adopted irresponsible practices, borrowers became overconfident, and the market went off the rails:
“In the 1970s and 80s the standard mortgage was sold in a way that made sure that the interest and capital could be paid off, in what Minsky viewed as hedge units. However, by the end of the 1990s a sustained period of growth had pushed house prices up, persuading an increasing number of people to use interest-only mortgages as they speculated that prices would continue to rise. The financial system then began to supply a whole array of “Ponzi”-style mortgage deals to borrowers who had incomes so low that they could not afford to pay even the interest on the loan...”
True enough, but consulting Tom Woods’s Meltdown and other Austrian works would explain what caused the sustained period of growth and why lending standards deteriorated. These “market failures” were actually the result of market interferences; below market interest rates, politically mandated lending requirements, liar loan purchases by Fannie Mae, and a host of other market insults. A sidebar on Austrian Business Cycle Theory would have fit nicely in this section.
Nevertheless, The Economics Book is a terrific addition to popular economics; it’s comprehensive, even-handed, and well written. Many readers who might otherwise never hear of the Austrian School find an accurate portrayal of a principled, uncompromising champion of free markets, anchored by a series of intellectual giants.
Well done!
