After a long time, I have finally finished Ludwig von Mises' (English language) magnum opus, Human Action. It was, in a word, brilliant.
The tome is nearly 900 pages long (well over 1,000 if you include the introduction, forewords, and index), so typing up a comprehensive review of it would read something like study notes. It would be wholly uninteresting to you, the reader, and would be far too long to publish on a blog. I will opt out of writing such a review, but nevertheless, I would like to jot down a few words about the book; take-home messages, if you will. As I see it, these are the aspects of the Misesian approach that make it stand apart from mainstream economic theory.
The fundamental concept of economics as it is taught in modern schools is that price sold and quantity produced form an equilibrium where supply equals demand. While viewing the economy in this fashion makes some sense from the perspective of an introductory course, it varies widely from the economy as Mises understood it. This classic supply / demand model was something Mises refers to throughout Human Action as "the imaginary construction of the evenly rotating economy." In other words, supply and demand would form a perfect equilibrium if and only if conditions of the world never, ever changed.
Mises contrasted this to his own view, the idea that supply and demand tend toward an equilibrium, but never really get there since conditions in the world are always changing. At any moment in time, we have some idea (conceptually) of how many apples and tomatoes to bring to market, how many each person wants to buy. But the very moment one person buys apples and tomatoes, that person impacts both the supply of tomatoes and apples on the market and the total of each still demanded.
In other words, markets never reach a state of equilibrium. If they did, all needs would be satisfied and the gears of the economy would grind to a halt. It is disequilibrium that propels an economy forward. The fact that there are more wants to satisfy means that the economy is in disequilibrium.
One of the most profound points in Human Action (to me, anyway) is the idea that trade cannot occur unless the buyer and the seller value the good or service unequally.
Imagine I am selling you a hammer for $10. In order to part with my hammer, I must believe that the $10 is worth more than my hammer. If I felt that the hammer's value was exactly $10, then I would be perfectly ambivalent toward selling it. Having either that hammer or an extra $10 would be worth about the same to me.
On the other hand, you would never part with your $10 unless you believed that the hammer had more value than the $10 you're willing to pay, otherwise you would be unwilling to part with your $10.
This relationship of fundamental inequality is a prerequisite for any market transaction. I have never heard any other economist of any school of thought express this concept. At first it seems counter-intuitive, and then on further reflection, it is perfectly obvious. Yet, this fact is currently outside the mainstream of economic theory - or at least, it is never taught in modern courses.
The implications are profound. A person's disadvantages are indeed his or her greatest strengths. That which you value least in your own market transactions becomes the very products or services you are best able to sell to others. This is why lower-priced labor from developing countries is attractive to manufacturing companies eager to sell their wares for a more competitive price. That one person has a wealth of cash while another has a profound want for it is precisely what allows a poor man to become rich in a market economy. This, however, is a matter of comparative advantage, which is the topic of a future blog post.
The Austrian Understanding of Saving and Capital
While mainstream economists view capital as a mere production input, Mises conceived of capital as the source of production and innovation. We either invest the money we save ourselves, in hope of earning a higher return on our investment, or we keep our money in a financial institution that we believe will pay us an acceptable interest rate and trust that the bank will wisely invest its reserves in order to pay us that interest rate. Therefore, every act of saving money, in Mises' view, is an act of investment.
Capital itself is the money and production inputs saved for future use. We set aside a portion of our returns today so that we can apply them to our future desires. When we do this as individuals, we save. When a company or an entrepreneur does this, it is capital accumulation and investment.
In order to weave a fishing net, our caveman fishermen ancestors had to set aside a part of their day in order to abstain from fishing. Rather than satisfying their immediate desires, they trusted that their time would be well-spent increasing their capacity to catch fish. It was speculation - they had no guarantee that this would be the case. They gave it a try, and soon succeeded. The result was their ability to employ capital in the catching of more fish. They improved their chances of survival and caught more fish for everyone. This is capital investment in the Austrian sense of the term.
An oft-derided concept inn economics is that of the economic law. Many suggest that, because economics is not a laboratory science, no steadfast economic laws can actually exist. What seems true today may not be true tomorrow. It is a matter of "perspective" or "opinion." Mises rejected this idea entirely, and offered a superior explanation.
The Law of Diminishing Marginal Utility - also the topic for a future blog post - is inviolable. It simply states that the more apples we have, the less we value each additional apple. There is a hypothetical point at which we can make use of no further apples. The additional (marginal) apple is effectively useless for us. This may not be a law in the same sense as the law of gravity, but it holds no less true as the force of gravity keeps us on the surface of the Earth. While the specific number of apples that you personally would find useful may differ from my specific number, there exists a number for both us beyond which we no longer wish to have additional apples. Again, the law is inviolable.
So, in contrast to popular opinion and the words of at least my economics professors, and probably yours too, Mises described an economy in which inviolable logical truths hold fast against the ever-changing universe. It is the task of economists to uncover and describe these truths. We may not know all of them, but they exist and govern our behavior regardless.
The Austrian Business Cycle Theory is Basically Irrefutable
I have never read a convincing critique against the Misesian theory of money and credit, and I doubt I ever will. Once understood properly, it cannot be refuted. It is the single best explanation for business cycles, booms and busts, that exists in economic theory. And it is gaining ground (at last) for good reason. The competing theories are intellectually bankrupt. Mises' description of money and credit are his crowning economic achievements.