Austrian Economics: One Person’s Trash Is Another Person’s Treasure

Austrian Economics is often associated with free market economics, however, isn’t a point of view that advocates certain government or private actions; the “Austrian School” merely explains individual economic (and other) behavior from which we reach our own conclusions.

I will be discussing bite-sized principles of free markets, liberty and Austrian economics on this blog, and I start here with an introduction to the economic philosophy.

“One person’s trash is another person’s treasure.” 

The Austrian School of Economics posits that goods don’t have an inherent value.  Individuals place their own value on goods, and so prices cannot be centrally planned; rather, they evolve through free trade. Prices naturally are set as individuals buy and sell goods based on the value each person places on the good, establishing demand.  This is not just true of goods, but also of time.

Just as with a garage sale where your neighbors are willing to give you cash for things they will find useful but are of no value to you, time and its various qualities are of different value to individuals.  This is why you may choose to trade forty hours of demanding work each week for $1,000, while someone else might trade eighty hours for three times that, because you value your leisure time more than the additional income.  On the other hand, a teenager might be happy to trade ten hours of babysitting a week for $50.  On the flip side of each of these scenarios is someone to whom your productivity is worth more than the $1,000 or $50 they give you.

The Austrian tradition holds that all economic activity is individual or human action, where other veins of economic thought tend to focus on macroeconomics, or cumulative, geographic or industry-wide activity.  But the individual is unpredictable; we each make our own choices.  So while central planners may attempt to turn the dials and throw switches, tinkering with interest rates and subsidies, they failed to see the housing bubble or predict its inevitable bust.  Even now they have attempted to keep interest rates artificially low in an effort to reinflate that bubble, and while their extended efforts have blown more hot air into a problematic market, the results will not be good.

Because interest rates are prices too, they cannot be centrally planned with good results.  An interest rate is the price of “time preference;” in other words, you’re willing to pay a certain price to have the goods money can buy now instead of later or vice versa, and the value of that time preference also varies by person and situation. In a free market, interest rates would not be set by a Federal Reserve, but would adjust incrementally based on activity.  When many people want to borrow, the demand for credit goes up, and the price, or interest rate, goes up.  This is a signal or incentive for others to save or invest and earn the higher interest.  As more people save or invest, the interest rates go down.  Because this is happening on a transaction-by-by transaction (individual!) basis in a free market, fluctuations are minimal, and it’s easier for people and business to plan future actions.  Central planning or artificially low interest rates send false signals to the market, telling people to borrow or buy when, in fact, market conditions might not warrant such action…

…leading to false economic bubbles and their inevitable busts.

If the above seems at all obvious, this is merely a foundational introduction, and future posts will delve deeper into specific topics related to market economics and how we live better when we live free. In the meantime you may investigate more about Austrian economics on Mises.org, a vast wealth of essays, videos, audio and free e-books hosted by the Ludwig von Mises Institute.  (Mises was the American father of the Austrian School of economics, an emigrant from Austria in the early Twentieth Century, although Carl Menger, Frédéric Bastiat and earlier philosphers predated Mises in Europe.)