Economic Flow of Money

Austrian Economics, also known as the Austrian School has nothing to do with the economics of Austria. Rather, it is a collection of ideas about economics whose origin can largely be traced back to a few key thinkers from the late 1800's to the early 1900's.

One of most important basic ideas of Austrian Economics is that all prices are determined by individuals choosing whether or not to buy a specific product at a specific price at a specific point in time. This idea overthrew the previous theory that prices were determined by how much it cost to make something, an idea which could not account for why antiques or art could have such high prices. The old ideas could also not explain why a given quantity of diamonds was thousands or millions of times more expensive the same quantity of water. This price theory is called "marginal price theory." The ideas of the Austrian School in price theory were quickly adopted elsewhere when it was clear they had solved this mystery. 

What decisions individuals make is the building block of how the Austrians see economic action. Austrian Economist Ludwig von Mises crystallized this in his book called Human Action. Everything an individual decides to do or not do factors in to what is happening in the microeconomic perspective of the Austrians.

Mises developed this into an approach termed praxeology. Deductions are made from human behavior in an a priori manner. A priori means something can be known without measuring or checking anything, simply performing a thought experiment is enough. It means something must be true. For example "all bachelors are not married." There's no way this statement can't be true. Thus in an example where a famer buys seeds at a store, it must be because he wanted to. Even if someone was forcing him to buy the seeds at gunpoint, or holding his family for ransom, either way he still had a choice, and chose to the buy the seeds.

This a priori thinking is another way in which the Austrians differ from their peers, and this is taken one step further in the theory of ordinal utility. What this means is that individuals rank their preferred choices as 1st, 2nd, 3rd, 4th, and so on. Utility is the amount of use, pleasure, or satisfaction an individual gets from a given choice. It doesn't matter if the choice is water, fruit, a new car, house, jewelry, or the decisions someone may make under duress as in the farmer example. All of these choices provide some level of satisfaction. With this model it is of course impossible to know how much more a person values their 1st choice over their 2nd choice. The person cannot know themselves, and thus this can never be measured. And even if it could be measured, this figure couldn't be compared between two different people. This would be comparing apples and oranges, and is known by its technical terminology of interpersonal comparison of utility, and is a huge no-no in the Austrian School.

The most highly recommended introductory book to economics!

A little more in-depth: Mises's Human Action

Human Action: The Scholar's Edition
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