Economics in Action
By Brian Balfour
Thales Press, 2022; 306 pp.
“Public” high schools are for the most part rotten to the core, and it is widely recognized, if not quite “a truth universally acknowledged,” that they need to be replaced. But what should students in private schools or homeschooling programs be taught? If we wish to rescue our young people from the socialist and “woke” propaganda inflicted on them in government institutions, it is essential that they have sound textbooks and other programs of learning. In the effort to provide these, no one has done as much as the renowned entrepreneur and friend of the Mises Institute Robert Luddy, who has established the Thales Academies, which are based on a classical curriculum.
One of the key subjects high school students ought to learn is economics. As Ludwig von Mises pointed out in Human Action, “All present-day political issues concern problems commonly called economic. . . . Everybody’s mind is preoccupied with economic doctrines.” Students must possess the basic concepts of economics that will enable them to understand the benefits of the free market and the errors of socialism and interventionism. But an obstacle stands in the way. Economics is commonly taught as a technical subject, putting it beyond the grasp of most students of high school age.
Brian Balfour, the senior vice president for research of the John Locke Foundation, has found the way past this obstacle, and the result is Economics in Action, the textbook he has written for the Thales Academies. The solution is to teach Austrian economics, which is based on simple, readily graspable concepts and has the additional advantage of being true. As Balfour explains, “Before discussing what economics is, it is important to point out a couple of things that economics is not: It is not a complex web of mathematical models. . . . Instead, economics is a social science studying the implications of human acts of choice. Properly understood, economics utilizes deductive logic to arrive at timeless ‘economic laws’ to provide an intellectual framework to understand the world around us. Indeed, this course will not involve the use of long math equations or countless and complex graphs. Economics begins with the basic axiom (a self-evident truth) that humans act, and employs deductive logic to construct the implications of that truth into many ‘economic laws’ which enable us to understand how the economy works” (emphasis removed).
The concept of action may be simple to grasp, but spelling out its many implications in a way high school students can understand is no easy task. Balfour ably accomplishes the job through patient exposition accompanied by judicious repetition; in doing so, he shows clear mastery of the relevant Austrian concepts. The book contains three sections: “Introduction to Economics,” “How an Economy Works,” and “Why Economics Matters.” In what follows, I’ll discuss a few key insights contained in the book.
Balfour is fully alive to the deductive character of Austrian economics, best brought out by Mises and Murray Rothbard. We grasp immediately that we act; we know it “from the inside” and it is immune from doubt. “The fundamental axiom—or self-evident truth—that provides the foundation upon which much of the science of economics is built is: Humans act, and do so with a purpose in mind. More specifically: humans employ means according to ideas to accomplish ends. This is known as the action axiom” (Emphasis removed).
Balfour rightly says that to deny the axiom is self-refuting, since saying “It’s false that human beings act” is itself an action. It isn’t the case, though, that self-refutation is always the way to identify a self-evident truth, as Balfour claims: “But how do we know if something is a self-evident truth, or undeniable fact? When any attempt to refute it must prove it to be true.” It’s self-evident that 2 + 2 = 4, but saying “2 + 2 5” doesn’t show that 2 + 2 = 4.
Probably the most remarkable feature of Austrian economics is the great amount of vital material that can be derived from the action axiom. For example, action arises from felt uneasiness; each person is trying to bring about an improvement in his situation. If so, a trade (i.e., an exchange of goods or services) will take place only if the parties involved expect to benefit: “We can say that voluntary exchange is mutually beneficial. A mutually-beneficial exchange is one where both parties are better off than they were before the exchange. When the trade is made, both parties can achieve an end they value more.” And from this, we can deduce something else that has crucial importance for policy. If an exchange is not voluntary, those coerced to make it would not have engaged in it of their own volition. We cannot, then, say that government measures that are enforced coercively make people better off.
Someone might object to this that even if the person coerced doesn’t choose what the government forces him to do, it might still benefit him. Maybe people don’t always know what is good for them and the government knows better. The response to this brings out another crucial feature of the Austrian approach. “Good” and “bad” are subjective: people act to gain certain ends, and they shun other things according to their own views of what is good and bad. In other words, value is subjective. Whether “objective values” (i.e., things that people ought to want) do or do not exist, they are irrelevant to economics. As Balfour says, “From the action axiom, we have deduced that only individuals act, and the choices involved in acting imply that individuals have preferences. Thus, we can now deduce that preferences are tied to specific individuals, therefore they can be considered subjective. A subjective preference refers to personal values that are from the point of view of the actor. Goods and services derive their value from the subjective value assigned to them by the individuals considering using them.” But when he says that “an objective value refers to measures or observations that are inherent characteristics in an object and universal to all observers,” he is not altogether correct, as his examples—“the car is red, the table weighs 20 pounds, or the ladder is ten feet tall”—are not value judgments, subjective or objective, but straightforward facts.
Mutually beneficial exchange makes possible the division of labor, in turn enabling enormous gains in productivity and wealth, and Balfour does a fine job of explaining that such exchange is beneficial even if one person involved in the exchange is “better” than the other in producing everything. This is the famous “law of comparative costs,” expounded by David Ricardo in the early nineteenth century and later extended by Mises into a general law of association. “This law informs us that there are still gains to be made from the division of labor/specialization and exchange, even in cases when one producer is more productive than others in all lines of production. But how could the producer who is more efficient at producing all relevant goods (whether it be an individual or country) still benefit from trading with the less efficient producer?” To answer this question, Balfour turns to opportunity cost, which is the highest value you have to give up to get something you’ve chosen: he says that to produce all goods, the superior producer would have to give up more of what he values than he loses by trading what he produces best for goods that the inferior producers make.
Balfour ably brings out another aspect of the Austrian approach that is prominent in the work of Rothbard and Hans-Hermann Hoppe. In order to reap the benefits of the division of labor and exchange, people must have stable control over what they trade; they must, in other words, have the right to own property. “Private property is essential when it comes to interpersonal exchange and the formation of prices. Without clearly defined, stable and exchangeable private property, economic goods would be unable to acquire prices that reflect their relative scarcity. If people weren’t allowed to own goods and as such price them according to the quantity they own relative to the amount of demand there is for that good, then prices for goods would be arbitrarily set by a government agency and have little meaning.” Private property thus becomes a category of economics as well as of law and political philosophy.
Economists outside the Austrian school sharply separate demand, determined by individual preferences, from supply, determined by objective costs, but Austrians dissent. In their view, costs are also subjective. Demanders of a good will first endeavor to satisfy their most valued use for it. Each further unit will satisfy a less valued use—this is the law of diminishing marginal utility—and, as a result, the demanders will purchase additional units only at a lower price. And here is the Austrian insight: the supplier of a good operates according to a comparable rule. As he lowers the price of what he sells, he gives up higher-valued alternative uses of his productive activities and lessens the amount he offers for sale. Balfour terms this the law of increasing opportunity costs: “This law stipulates that when people must do without an additional unit of a good, they will forego their least valued end that good can satisfy. As a result, as the supply of a good decreases, a more highly valued end will be foregone with each successive marginal unit of that good that is reduced from the supply.”
I’ll close with one further strength of the book. In his account of the fallacies of socialism, Balfour is quite clear that two antisocialist arguments often conflated are in fact separate. One of these is the knowledge argument, most notably advanced by Friedrich Hayek. This holds that central planners lack the local knowledge, often tacit, that participants in the free market can transmit to others through their pricing decisions. “Knowledge about very specific and changing demands of consumers is vast and impossible for any central planning board to capture. Entrepreneurs involved in specific industries and in specific locations possess the unique information regarding their consumers and are far better positioned to try and profitably meet the needs of consumers in the most efficient means possible.”
But this argument, though entirely valid, is not the deepest and most fatal blow to socialism. Even more fundamental than the knowledge argument is Mises’s calculation argument, which holds that in the absence of the monetary prices of the market, socialist planners have no means to allocate resources efficiently. A fully socialist society will collapse into chaos. “Without prices that emerge from the exchange of privately owned means of production, there is no rational way by which to choose between the countless ways the available factors of production that could be utilized. Without this ability to calculate, planners and managers are completely in the dark and as such resources are wasted on a grand scale because they are not directed to their most efficient uses.”
There is a great deal more of value in the book, but I hope to have said enough to indicate its high quality. I highly recommend it not only to high school students but to all those who want to acquire a sound knowledge of the basics of Austrian economics. As usual, Robert Luddy has backed a winner.