188. HUMAN ACTION Principles of Economics Lecture 1
Sep 30, 2023
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Saifedean explains the Austrian approach to economics and the concept of human action. The podcast covers the motivation behind the author's new book on economics and the importance of rationality in economic analysis. It also discusses the limitations of applying quantitative methods in economics and the absence of constants in economic value.
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Quick takeaways
Quantitative economics lacks constants and replicable experimentation, undermining its reliability in measuring economic value.
Analyzing minimum wage laws from a human action perspective reveals the trade-offs and unintended consequences.
Understanding economic phenomena through individual human action provides a more nuanced and realistic approach compared to centralized control.
Deep dives
The Limitations of Quantitative Economics
Quantitative economics relies on constants and measures that are lacking in the study of economic phenomena. Unlike in the natural sciences, economics lacks constants with which to measure economic value, making it impossible to establish quantitative relationships. Furthermore, economics lacks the ability to perform replicable experimentation, as the complexity of the real world prevents controlled experiments. Quantitative analysis in economics often focuses on what can be measured, ignoring causal factors and conflating measurement with causality. Additionally, quantitative economics often mistakes accounting identities for causality, leading to faulty assumptions and predictions. These limitations undermine the reliability and effectiveness of quantitative economic models and highlight the importance of analyzing economic phenomena through the lens of human action.
The Flaws of Minimum Wage Laws
Analyzing the impact of minimum wage laws through the lens of human action provides insights that differ from the quantitative models used in mainstream economics. When considering the minimum wage, a quantitative approach focuses on aggregate relationships and attempts to predict the outcomes of raising or lowering the wage. However, analyzing minimum wage laws from a human action perspective highlights the trade-offs and incentives that come into play. Workers will only be hired if their productivity exceeds the minimum wage, while businesses aim to optimize their profitability by hiring workers whose contributions are worth more than the wage paid. Minimum wage laws criminalize employment for those unable to meet the minimum wage productivity threshold, creating unemployment and hindering skill development. Additionally, businesses may raise prices or increase automation to offset the higher costs imposed by minimum wage laws.
Contrasting Quantitative Economics with the Austrian Approach
Austrian economics focuses on understanding economic phenomena through individual human action, while quantitative economics relies on mathematical models and aggregates. Quantitative economics attempts to establish quantitative relationships and make falsifiable predictions, but lacks the constants and measurement tools of the physical sciences. In contrast, Austrian economics emphasizes understanding human action and the causal factors that influence economic outcomes. This approach considers how individuals make decisions based on subjective valuations, and how their actions interact in economic exchanges. The Austrian perspective rejects the idea of centrally planned quantitative control in favor of analyzing how individuals react and adjust in a complex economic reality.
The Limitations of Central Planning and Price Controls
Collectivist approaches, such as central planning and price controls, fail to consider individual human action and the complexity of economic reality. Attempts to control economic phenomena through centralized mandates ignore the natural optimization of individuals pursuing their own well-being. In practice, these controls lead to unintended consequences, as individuals adjust their actions to maintain their economic self-interest. For example, price controls result in market distortions, underground markets, and limited supply. Human action drives economic outcomes, and while central planning may believe it can manipulate economic behavior, individuals will always act to optimize their own well-being within given constraints.
The Importance of Analyzing Economic Phenomena through Human Action
Instead of relying solely on quantitative models and aggregates, understanding economic phenomena through the lens of human action provides valuable insights. Analyzing how individuals make purposeful choices and evaluate subjective valuations allows for a more realistic and nuanced understanding of economic dynamics. This approach recognizes the limitations of measuring economic value and the complexity of real-world interactions. By focusing on human action, economists can make informed predictions about how individuals will respond to changes in economic circumstances, helping to guide policy decisions and promote a better understanding of economic behavior.
Human Action is the first lecture of Saifedean's new online course, based on his latest book, Principles of Economics. In this lecture, Saifedean explains the Austrian approach to economics, how it differs from mainstream economic approaches, and why the concept of human action is so important to understanding economics. The course will have 18 lectures, with a new lecture every two weeks, running until June. Sign up now on saifedean.com, and get all the lectures and join the live discussion seminars!
Enjoyed this episode? Join Saifedean's online learning platform to take part in weekly podcast seminars, access Saifedean’s four online economics courses, and read his writing, including his new book, Principles of Economics! Find out more on saifedean.com!
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