Essential Austrian Economics: The Market Process
One of the distinguishing features of the Austrian School of Economics
is their evolutionary view of the economy.
For many people, including experts, there is a tendency to think about the economy as a machine.
And that the economic machine just needs tweaks here and there to operate smoothly.
But, the Austrian school has a fundamentally different understanding of the economy.
They understand the economy as complex and constantly evolving
as a result of countless individuals making choices based on their preferences and values.
The Austrians refer to this organic understanding of the economy as the Market Process.
For this process to work properly, the Austrians identified four requirements.
The first is property rights. People must be allowed to own
property as well as the fruits of their labour for market exchanges to occur.
Second, prices need to be set, not by government,
but in an open and competitive market that takes account of the scarcity of resources.
Third, entrepreneurs and businesses must be allowed to earn profits but
also suffer losses – including bankruptcy.
Prices, profit, and loss prompt entrepreneurs
and businesses to allocate scarce resources more effectively, and encourages innovation.
The final requirement is that the market process never ends.
As Austrian economist F.A. Hayek explained, the only constant in economics is change.
Understanding the constantly evolving nature of the economy
is key a reason why Austrians advocate only a limited role for government,
and avoiding trying to protect against losses and business closures.
The Austrians recognize that these four pillars support the market process,
which results in ever-improving living standards and well-being for societies that embrace them.
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