• Gene Callahan: Economics for Real People: An Introduction to the Austrian School by Ludwig von Mises Institute; 2002; 299 pp.; $11

Gene Callahan’s stated objective is to introduce the intelligent layman to the main ideas of the Austrian School, and I know of no close substitute for the book he has written. Logically organized and written in a witty and entertaining style, the book consists of four parts and two brief appendices.

Part I focuses on human action. Callahan uses the Robinson Crusoe model of an isolated individual alone on a desert island to explain basic economic concepts — including value, saving, time preference, capital, and uncertainty.

Part II describes the market process. When another person joins the island, the law of comparative advantage leads to specialization and the division of labor and exchange. The author then expands the simple island economy to show the importance of money in exchange and in economic calculation. He emphasizes the role of the entrepreneur, explaining why entrepreneurship plays little role in mainstream theory, which emphasizes equilibrium analysis where all decisions are perfectly coordinated and there are no profit opportunities.

The distinction between mainstream and Austrian views of inflation and deflation comes out in the discussion of pitfalls in using price indexes to measure the price level. The author explains why inflation is best viewed as a rapid increase in the money supply rather than an increase in CPI (or other price index), even though a price index is useful as long as it is taken as a rough approximation of changes in the value of money.

In Part III, Interference with the Market, Callahan, in describing the calculation problem, explains why socialist planners could not do what they purport to do, even if all citizens were properly motivated as perfect socialist citizens. A race of saints would still be unable to perform economic calculation in the absence of market prices for the factors of production. Even though they all desired to fulfill the most urgent needs of society, without prices, they could not determine what means should be used to fulfill those needs.

The conclusion follows because there cannot be market prices without markets, and there would be no resource markets if the government owned all resources. Planners in a market economy attempting to improve the use of land and other resources confront information problems similar to those facing socialist planners.

Frederic Bastiat contended that in economic matters we should not judge solely by what is seen but also by what is not seen. Callahan follows Bastiat’s dictum in explaining the effects of price fixing, including minimum wages and price ceilings, and drops in the stock market. He has the clearest explanation I have seen for why a fall in the stock market, as in 2000-2001, is best viewed as a change in relative prices rather than a reduction in wealth.

The pitfalls of using “efficiency” criteria for resolving legal disputes and to justify interventionism are often ignored in economic analysis. The author shows that attempts to maximize “social utility” through nonmarket approaches, including the legal process, fail to recognize the importance of market prices and secure property rights in achieving the most productive pattern of resource use.

Callahan uses an ingenious metaphor involving a bus driver at the edge of a desert — too long to describe here — to explain the Austrian business cycle theory. Credit expansion by the central bank and erroneous entrepreneurial expectations are the critical factors in explaining why modern economies tend to swing through boom times and recession.

Part IV focuses on the political economy of the Austrian School. The author contrasts views of Lachmann, Hayek, Mises, and Rothbard to show the wide range of views held by key Austrian figures concerning the appropriate role of government. This discussion is closely related to the first appendix, which provides a short description of the history and development of the Austrian School.

The second appendix contrasts praxeological economics with mathematical economics. Callahan explains why the latter approach, though useful in certain situations, is unable to capture the logic of economic events.

I recommend this book to anyone interested in a highly readable, nontechnical presentation of the basic ideas of Austrian economics and an explanation of how it differs in a number of important ways from “mainstream” economics. Although some of the topics could have been explained more completely in a longer book, the available space is used quite effectively.