WorldSys: Austrian Home Study Course, Week 6

The World Systems Project is going to begin with a thorough examination of Austrian economics, starting with Robert P. Murphy’s outstanding “Austrian Economics Home Study Course”. The plan is to blog my answers to the weekly questions, with posts and book reviews tossed in as I go along. 

It should go without saying that the following contains ‘spoilers’, and if you intend on doing the home study course on your own you might not want to read further.

1 What is the division of labor?

It’s exactly what it sounds like — dividing labor up. People could subsist atomistically, each person growing their own food, making their own shelter, and producing their own clothing. Or each person could specialize in a trade like agriculture or architecture, produce more than they need, trade the surplus, and use the proceeds to buy whatever they want.

This latter option is the division of labor, and for a variety of reasons it is vastly superior to everyone trying alone to provide everything their survival requires. People in different parts of the world are better positioned to provide certain goods. Individuals also bring different talents and aptitudes to the labor market. And by focusing on one skill or a small number of skills people can get really, really good at making whatever they’re specializing in.

2 What is the law of association?

The law of association is the name given by Mises to what is usually known as the law of comparative advantage. The idea is that even if one person is strictly better at everything than another person, both are better off if they still specialize and trade. If the owner of a store is better at sales, running the cash register, and sweeping the floors than an assistant it does not follow that the store owner should try to do everything on her own. She should choose the handful of tasks at which she is most best at and do those.

3 Which party benefits from a voluntary trade?

If a trade is voluntary it’s exceedingly likely that both parties benefit. It’s of course possible that a person might regret a voluntary transaction because they do not derive as much joy as they thought they would from an item, but there is nothing inherent in voluntary transactions that means one party is exploiting another.

4 Should someone trade with a man who has a lower productivity in every good?

Yes, see the answer to question 2.

5 Give an example of a price formed in a barter economy.

One pound of butter = two loaves of bread.

6 For Austrians, what is the ultimate cause of market prices?

The subject valuations of marginal goods made by individuals. If I am making shirts to trade, I will continue to make shirts until I’ve arrived at a point at which no one can offer me anything I’d like more than I’d to possess a shirt. Every one else in the economy is also making subjective valuations of a similar kind, and the sum of these valuations determines the price of a good.

7 Do prices measure value?

Not directly. Value is a phenomenon occurring at the level of the individual — an individual values a car or a book. When multiple individuals in an economy value a good and begin to compete for it, a price is established from all their demand curves.

8 If someone thinks a TV is worth more than its purchase price (say $100), why doesn’t he keep buying TVs until he runs out of money?

Because he doesn’t value each new TV equivalently. The first TV might be worth greater than $100, but the second might only be worth $50, the third $15, and the fourth might actually be of negative utility because he has no way to transport or store it.

9 If value is subjective, does that mean market prices are subjective too?

Not if ‘subjective’ means ‘arbitrary’. ‘Subjective’ means ‘occurring in the mind of a human being acting purposefully’. There can be objective facts about subjective states — if you are hungry, for example, that is a true fact about your conscious experience. Likewise, if more people subjectively value oranges than apples, the market price will be an objective manifestation of that fact.

10 What is an equilibrium price?

The price at which supply and demand are equal. The equilibrium price for tires is whatever price allows everyone who wants tires, and can afford them, to have them.

11 What is the source or cause of prices for factors of production?

It is the same source of prices in consumer goods: subjective valuations. Each producer must weigh the cost of an additional piece of machinery against what could be done with the money. And each unit of the factor of production will be subject to the same diminishing marginal utility as a loaf of bread purchased at the super market.

12 In economics, what is the difference between desiring and demanding a good?

Demanding a good is more forceful. We all desire things we aren’t willing to pay for — like being in absurdly good shape. If you could snap your fingers and be 5% body fat with a 40” vertical and a deadlift of 500 pounds I’m sure you would. But if you’re not willing to spend a decade pursuing these goals, then you don’t demand them in an economic sense.

13 Why are demand curves downward sloping?

Because, as described with the law of diminishing marginal utility, each successive unit of a good does less to satisfy your desires. The demand curve for cheese slopes downward because you might really enjoy the first piece of cheese, somewhat enjoy the second piece of cheese, only mildly enjoy the third piece of cheese, and be nauseous at the thought of eating cheese after that.

14 Are supply decisions purely objective, or do they involve value judgements?

They involve value judgments. A factory owner can invest in more machinery to expand production, but that might not be worth the extra expenditure and effort.

15 Would we expect different prices for the same good to persist on the market?

In an idealized model, perhaps not. But consumers might favor one brand of toothpaste over another because, rightly or wrongly, they believe one brand to be more reliable than the other, even if both brands are chemically indistinguishable. In reality there are innumerable little factors such as this which can lead to long-term price differences for goods that are, for all intents and purposes, identical.

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