What is economics? To begin, let us hear a word from Lew Rockwell on economics and modern Americans:
The most common misunderstanding about economics is that it is only about money and commerce. The next step is easy: I care about more than money, and so should everyone, so let’s leave economics to stock jobbers and money managers and otherwise dispense with its teachings. This is a fateful error, because, as Mises says, economics concerns everyone and everything. It is the very pith of civilization
This is a confusion sown by economists themselves, who postulate something called “economic man” who possesses a psychological propensity to always behave in ways that maximize wealth. Their mathematical models, predictions, and analysis of policy are based on this idea.
In the real world, however, we know this not to be the case. The world as we know involves profit seeking but also extraordinary acts of charity, sacrifice, non-pecuniary giving, and voluntarism (though I dislike that term since all commercial exchanges are voluntary too!).
How to account for these? The Austrian approach to economics dispenses with the idea of “economic man,” or rather broadens the meaning of economics to include all action, which takes place in a framework of scarcity. Scarcity requires that we economize on something in all that we do, even when wealth is not the motivation. For this reason, Austrians analyze acting individuals, not maximizing prototypes.
Yes, it is acting individuals that we must analyze and we must analyze what they really do rather than what they say they are going to do.
Professor of economics Walter Block started a speech (dedicated to the tragic death of one of his students) with the following words:
For zillions of years, the human race lived in small groups of 25–50 people or so. We became hard wired to appreciate explicit cooperation: I scratch your back, you scratch mine; I’ll feed you when you’re hungry and/or sick; you reciprocate. Those who wouldn’t or couldn’t do this didn’t tend to leave their genes to the next generation. That is one of the reasons why the family is even today such a powerful institution.
However, in an economy of 6 billion, we can’t all cooperate this way. Rather, we can only cooperate through markets. That is, implicitly, not explicitly.
To illustrate this point, take the recent history of New Orleans. When Katrina struck, prices of oil, gas, milk, water, orange juice, batteries, candles and other such items catapulted. This was implicit cooperation in action. How so? Higher prices means that those first in line at the grocery don’t get everything on the shelves. Elevated prices have a rationing function; at normal costs, people would tend to stock up; if the prices are very much higher, they will in effect if not by benevolent intention leave something for others. This is part and parcel of Adam Smith’s “Invisible Hand” at work. Also, higher prices in post Katrina New Orleans would encourage, through greater profit margins, businessmen from outside of the struck area to bring these goods to those here who needed them the most. This embodies yet another aspect of Adam Smith’s “Invisible Hand.”
It comes as a shock, no doubt, to our friends (progressive friends especially) that rising prices in a time of great shortage is actually a good thing. They would have the merchant give away all his stock and go out of business; or at the very least sell all the stock at the normal price to the first customer so that man could hoard it all. The economically uneducated would wonder why tomatoes cost so much more in the dead of winter than in the summer time when the local crop comes in.
The great economist Murray N. Rothbard once wrote a short essay for the masses on what the “free market” really was. Rothbard wrote:
The Free market is a summary term for an array of exchanges that take place in society. Each exchange is undertaken as a voluntary agreement between two people or between groups of people represented by agents. These two individuals (or agents) exchange two economic goods, either tangible commodities or nontangible services. Thus, when I buy a newspaper from a news dealer for fifty cents, the news dealer and I exchange two commodities: I give up fifty cents, and the news dealer gives up the newspaper. Or if I work for a corporation, I exchange my labor services, in a mutually agreed way, for a monetary salary; here the corporation is represented by a manager (an agent) with the authority to hire. Both parties undertake the exchange because each expects to gain from it. Also, each will repeat the exchange next time (or refuse to) because his expectation has proved correct (or incorrect) in the recent past. Trade, or exchange, is engaged in precisely because both parties benefit; if they did not expect to gain, they would not agree to the exchange.
This simple reasoning refutes the argument against free trade typical of the “mercantilist” period of sixteenth- to eighteenth-century Europe, and classically expounded by the famed sixteenth-century French essayist Montaigne. The mercantilists argued that in any trade, one party can benefit only at the expense of the other, that in every transaction there is a winner and a loser, an “exploiter” and an “exploited.” We can immediately see the fallacy in this still-popular viewpoint: the willingness and even eagerness to trade means that both parties benefit. In modern game-theory jargon, trade is a win-win situation, a “positive-sum” rather than a “zero-sum” or “negative-sum” game.
How can both parties benefit from an exchange? Each one values the two goods or services differently, and these differences set the scene for an exchange. I, for example, am walking along with money in my pocket but no newspaper; the news dealer, on the other hand, has plenty of newspapers but is anxious to acquire money. And so, finding each other, we strike a deal.
Notice that Rothbard is talking about a free and voluntary exchange. If I am walking down the street and a rude lawyer pulls a gun and forces me to buy his services then that is surely not a free exchange that benefits both parties. I am coerced into dealing with an individual that I would not freely deal with. It is the same when one side of the “deal” uses fraud to have me participate: that is not the free market in action. The free market is simply the free and voluntary exchange of goods or services among groups or individuals.
Economics is the study of man dealing with his environment and the fact that nearly all of his wants and needs are in short supply. He deals with it through purposeful action, “Human Action” in other words. We deal with each other through exchanges: by trading with one another. Simply, economics is the study of human action.