Learning How the World Works

Appreciating an enlightening book that everyone should read.

Auburn, AL

September 16, 2023

Whenever I’m asked which book someone should read as an introduction to economics, I’ve always suggested Henry Hazlitt’s Economics in One Lesson.

For its brevity and clarity, I still do. Mises’s Human Action and Rothbard’s Man, Economy, and State are masterful treatises offering thorough treatments. But they can delve too deep for anyone who hasn’t begun to swim. 

Principles of Economics by Carl Menger is another great option. The foundational text of the Austrian School, it revolutionized the field by explaining the characteristics of a “good”, the nature of money, and how valuation is subjective and derived on the margin.

This terrific book was written in 1871, and is the one that pulled me into the water. And it remains essential reading. But a new book with the same title expands its points, expounds new ones, and applies their implications to issues of our day.

Austrian Economics is an elegant edifice. In his latest release, Principles of Economics, Saifedean Ammous takes us inside. With persuasive examples and compelling prose, he enhances the layout one room at a time. 

Ammous reminds us that economic science is the study of human action, “understood through logical deductions and thought experiments, not equations and quantitative analysis.”

He reiterates Mises’s criticisms of mathematical “economics”. Unlike the physical sciences, human action is immune to replicable experiments because there’s no defined unit by which inconstant phenomena can be measured or expressed.

Each person has different preferences, which constantly change across space and time. It’s impossible to recreate specific conditions at certain moments to affirm assumptions about how people will act.

Yet that doesn’t stop conventional “economists” from aggregating human activity as if it were scraps of iron, atoms of gas, or clumps of clay. Individual action is lost in heaps of abstractions, averages, and indices that conceal more than they reveal.

Yet Court Economists dump these statistical jumbles into their complex “models”. Then, with an armada of decimals and fleets of false precision, they provide recommendations remarkably consistent with what the people who pay them already wanted to hear.

This is analytical witchcraft, not genuine economics. Real economics is descriptive, not prescriptive. More deductive than inductive, it’s a branch of philosophy, not of math.

Economics depicts how the world really works, not the way social engineers and technocratic hucksters think it should. It describes how people interact with resources and each other to satisfy evolving desires under constraints of scarcity.

But why do humans act? They do so to improve their lot; because they think (even if they’re eventually proven wrong) that they’ll be better off after an action than they are before.

This answer seems almost patronizingly obvious. Yet perhaps because it’s so basic, most “economists” overlook the implications of this important insight. Like repeatedly ignoring historic precedent before invading Afghanistan, this usually leads to disastrous results.

After reviewing what motivates action, Ammous returns to Menger. He reminds us that value is subjective, and is unrelated to the physical attributes of any particular item. Goods or services attain value only from “our assessment of their suitability for meeting our needs.”

Ammous uses the example of oil. The black goo was a blight before people realized it could be burned to power industrial machines. With no change in its physical properties, oil went from a liability to being lucrative. 

Ammous accentuates the Austrian insight that time is the key component of human endeavor. It’s time, not natural resources, that is the ultimate source of scarcity. Opportunity cost, not a dearth of minerals or materials, is what constrains us.

History affirms this. As population and demand multiplied last century, proven resource reserves rose even faster. In real terms…during a century of exponential industrialization and technological advance…prices of commodities continued to plummet.

They still do. Measured in real money, a barrel of oil costs half today what it did in 1971. A bushel of wheat is ten times as cheap. 

Human time, based on how much it’s able to buy, is the only resource that’s continuously risen in price. Despite endless warnings of food shortages and mineral exhaustion, no natural resources have declined in quantity or risen in (real) price during the tripling of population the last seventy years. This should be no surprise in light of economic laws and the size of the earth.

With these resources man mixes his labor to meet his needs. As he matures from a high time preference infant into a mature adult, he economizes to increase the quantity and quality of his time on Earth.

Using human reason to assess his subjective needs at particular moments, he exchanges leisure for labor (or vice versa) to satisfy inter-temporal desires.

Ammous dismantles the myth that unemployment is inherent in a free market economy. Unemployment arose as intervention increased. Idle labor is a function of inflationary credit and the minimum wage. 

A minimum wage outlaws employment for anyone willing to work for less than the required rate. Inflationary price increases compel workers to request higher wages. 

But employers don’t obtain additional resources simply because the government decides to counterfeit the currency. Employees’ expenses increase, yet their productivity doesn’t rise to warrant higher wages. Fake money provides employers no real resources to meet worker demands for higher pay.

Artificial credit also produces the boom-bust business cycle, which encourages unsustainable investments that are inevitably liquidated in the subsequent collapse. This decimates large swaths of the economy, bankrupting businesses and causing lay-offs.

In an unhampered market where money is sound and wages freely fluctuate, involuntary “unemployment” isn’t an issue. The notion was absent from economic literature before the twentieth century, when central banking and wage restrictions ran rampant.

Ammous correctly identifies property ownership and capital formation as the essential elements of thriving civilizations. Facilitated by saving, it’s capital and property that create prosperity. 

Private property facilitates cooperation and is conducive to peace. It encourages future-orientation among its owners, who have incentive to preserve or enhance their property for later use.

Capital is what Mises called “labor, nature, and time stored up.” Poverty is man’s condition in a state of nature. It is capital that enables him to lift himself out. 

The quantity of capital accumulated and applied to a lengthened production process is what distinguishes “wealthy” societies from impoverished ones. “It is accurate to think of poverty”, Ammous says, “as the lack of capital.”

It’s why freer countries are “blessed” with an abundance of material wealth while also enjoying more leisure, cleaner air, purer water, and better health. 

It’s not unions, the minimum wage, state-sponsored pensions, mandated maternity leave, anti-discrimination laws, or tax-funded medicine that produced the bounty of free-market capitalism. Instead, it’s because of capitalism that countries are so prosperous they can afford to slowly impoverish themselves to fund such schemes.

Ammous clearly explains how time preference is the only constraint on capital, the price of which is inversely related to society’s value of time. The more people discount the future, the less they’re willing to forgo today. 

But as they delay gratification, savings goes up and capital accumulates. When it does, declining interest rates reflect the fall in time preference, which increases investment and advances civilization.

Capital facilitates technological advancement, which increases labor productivity. Historically, human muscle was the main means of accomplishing arduous tasks. 

Without capital, labor was extremely unproductive. From pre-history to the industrial revolution, slaves were the preferred resource to perform long hauls or heavy lifts.

The economics of slavery varies inversely with the accumulation of capital. In particular, fossil fuels were a death knell for chattel slavery. They powered the Industrial Revolution, which created machines much more productive than human brawn or animal might.

Capitalism, fueled by hydrocarbons, killed slavery. It was only after human bondage became bad business that most people could afford to acknowledge the practice as inherently bad.

But capitalism requires capital, the efficient formation and allocation of which requires unimpeded prices to convey accurate information. Without a market price mechanism, stewards of resources can’t know where their goods are most urgently desired. 

Absent these signals, even were administrators to have the best of intentions, wealth and capital are wasted and destroyed. This is why socialist economies can’t succeed. It’s less that incentives are distorted (tho’ they are) than that economic calculation is impossible. 

This applies to ideas as well as items. Contrary to conventional wisdom that maintains physical resources are the primary driver of economic growth, Ammous explains how technological advances are the motive force of increasing prosperity. 

Unlike physical property, ideas can be shared indefinitely without depreciation or diminishment. As Thomas Jefferson put it, “He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.”

Technological advances came not from academic symposiums or egghead professors. They descended from farmers, craftsmen, and entrepreneurs seeking more lucrative ways to ply their trade. 

Academic science was rudimentary when industrial society came of age. “Science”, as Ammous quotes Terence Kealey, “scrambled to catch up with engineers.” 

Theory changed to keep pace with reality. As Ammous said, “It is more accurate to say that the invention of the steam engine created thermodynamics, rather than the other way round.”

It’s no coincidence the Industrial Revolution began in Britain, “which had virtually no government support for science, and not in countries like France, which spent profligately on financing official science.”

Among the many blessings of this book is the repeated reminder of what most “economics” texts fail to acknowledge, which is that economic decisions are made at the margin. Ammous is at his best when he applies this principle to the discussion of energy.

How much of a resource exists in the aggregate means nothing. For the same reason diamonds are usually dearer than water, the entire amount of sunlight and total quantity of wind are irrelevant to their efficacy as sources of power.

An endless quantity of solar energy is meaningless if it can’t be converted to usable power whenever we need it. That the sun is “free” does nothing for the person shivering in the dark. In that instance, the marginal cost of solar power (as with that of wind on a calm day) is infinite.

To be useful, energy must be packaged as power and delivered where and when it’s needed. Power consumption is the best proxy for economic productivity and human prosperity.

It’s no coincidence that life expectancy, population, and affluence rose at such spectacular rates with the advent of coal, oil, and gas as industrial fuels. It was the harnessing of hydrocarbons that enabled the unprecedented abundance so many advocates of “alternative energy” take for granted.

Transforming energy to power requires time. As with anything else, because time is scarce and time preference positive, it’s opportunity cost that affects the marginal price of power.

The back half of the book applies these foundational concepts of time, energy, and marginal analysis to money, markets, credit, banking, and civilization itself. The coverage is  detailed and thorough, and includes analyses of detrimental effects when force interferes with voluntary exchange.

Suggesting anyone read a book about economics is a thankless task. But that’s because so few of us know what economics is. 

All of us should want to understand the origins and obstacles to prosperity, what motivates or mutes civilizational advance, and what interactions make the world work (or wilt).

Those who do should read this book.

JD