Sunday, September 5, 2010

The Four Books You Need to Read to Understand Austrian Economics

Dr Eamonn Butler, Director of the Adam Smith Institute, is out with a new book, Austrian Economics: A Primer.

It would be difficult to overestimate how valuable of a book this is as an introduction to Austrian Economics. I now consider it part of a four-book set that one needs to read to develop a basic understanding of Austrian economics.

To get an understanding of correct economics, a beginner should start off by reading the first eight chapters of Andrew and Peter Schiff's  How an Economy Grows and Why It Crashes. Reading the first part of the book is the easiest way to get a quick grasp of basic economics from an Austrian perspective. (Note: I advise to read only the first roughly 100 pages because following that the Schiffs go on to explain monetary inflation in a confusing fashion that will only befuddle the reader.)

Following the Schiffs' book, the beginner should read Henry Hazlitt's Economics in One Lesson. This book is a tour de force of how proper economic thinking should be done.

This should be followed by Murray Rothbard's What Has Government Done to Our Money. This is the best introduction to money and how the government distorts money in ways that ultimately result in inflation. In fact, this slim book is the perfect substitute for the chapters on inflation where the Schiffs would leave you confused.

The final book of the four-book set is Butler's book. This book is as hardcore of an introduction to Austrian economics as you can get. Whereas the Schiffs and Hazlitt discuss basic economics, they do not identify the thinkers behind the theories they are using. Butler names the names. They all here, Menger, Böhm-Bawerk, Mises, Hayek, Rothbard, Kirzner and others.

Butler in a non-technical easy to follow fashion discuses and explains such original Austrian concepts as marginal utility, opportunity cost, the importance of time and ignorance and the business cycle. He also provides an important short history of the Austrian School of economics, as he explains the concepts the 'Austrians' have developed.

Thus, Butler's primer is a very important addition to understanding Austrian economics as it ties the basics to the various important Austrian players and the contributions they have made.

Butler's book can also be valuable beyond the role it plays for the introductory economics student. Often I find when running into graduate students in economics or MBA students, many are only being taught mainstream Keynesian economics and are, amazingly, unfamiliar with Austrian economics at all. These students may grasp parts of what the Schiffs and Hazlitt teach, so that for these students they may be directed directly to Butler's book. I'm sure that they will be quite surprised as to the role Austrian School economists have played in even such basic concepts as marginal utility and opportunity cost. (They may even associate the name Menger with the discovery of marginal utility, along with Jevons and Walars, but never realize that Menger was the founder of a school of economic thought that went well beyond marginal utility.)

Finally, Butler's book can play an important role as a reference guide for the student of Austrian economics who is just past the basics, but may need a quicker refresher on a specific topic. Butler's book is without question the most accurate and honest depiction, at the basic level, of Austrian economics and its theorists.

BONUS RECOMMENDATION: If you are looking for a complete explanation of Austrian school business cycle theory, there is nothing better than Austrian School Business Cycle Theory by Murray Rothbard.

SECOND BONUS RECOMMENDATION: After taking Federal Reserve economists head on when they said in 2004 that there was no housing bubble, I walked into the lion's den, the New York Federal Reserve Bank, after the housing market crashed and told them in no uncertain terms why their theories were wrong. My book, The Fed Flunks: My Speech at the New York Federal Reserve Bank, details how I forecast the housing bubble and 2008 financial crisis in real time and includes the speech I gave at the New York Fed that rocked the canyons of Wall Street.

 -RW