Human Action

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Reckoning about finance and economics is endlessly fascinating. There is always something to ponder. There are actions and reactions, and more reactions. The market twists and turns. It never rests.

But reckoning on a day like today, after seeing the devastation the Queensland floods have brought about, seems futile, or even callous.  Possessions and wealth cease to be important when lives are on the line.

And lives are on the line. Some of the stories are heartbreaking. Once again, we just want to let all those affected, in any way, know that our thoughts are with you.

Separating what happens in financial markets from what’s actually happening on the ground isn’t really possible though. One influences the other, although you wouldn’t know it sometimes – especially in the modern era of activist central banking.

Ben Bernanke seems to think you can create wealth simply by buying government bonds with money that didn’t previously exist. He doesn’t realise that wealth is created from the bottom up, not the top down. In good time, he will find out otherwise.

One man who really understood economics and markets was the great Ludwig von Mises. He called his magnum opus ‘Human Action’. The following is from the foreword to the fourth edition:

Mises’ contribution was very simple, yet at the same time extremely profound. He pointed out that the whole economy is the result of what individuals do. Individuals act, choose, cooperate, compete and trade with one another.

In this way Mises explained how complex market phenomena develop.

Mises did not simply describe economic phenomena – prices, wages, interest rates, money, monopoly and even the trade cycle – he explained them as outcomes of countless conscious, purposive actions, choices and preferences of individuals, each of whom was trying as best he or she could under the circumstances to attain various wants and ends and to avoid undesired consequences.

Hence the title Mises chose for his economic treatise, Human Action.

That the market is simply the collective ‘human’ action of millions of individuals is lost on most economists. But that’s hardly surprising given Mises doesn’t even get a mention in undergraduate education these days.

Not long ago I was speaking to an economics student at the University of Sydney. One of his subjects was Economic Theory. I asked whether Mises popped up in the text. Nope. Nothing.

That one of the giants of one of the most insightful schools of economic thought (the Austrian school) can’t make it into a history of economic theory textbook is disturbing.

But they’re churning out thousands of these economists and analysts every year. If you’re handy with a spreadsheet and have solid ‘quantitative skills’, you’ve got a job with an investment bank.

Most of the finance world believes all of human action can be reduced to equations, numbers and spreadsheets.

Good luck with that.

By the way, if anyone knows of any ‘mainstream’ university that actually teaches anything related to Austrian economics, we’d be glad to hear of it.

Here’s something to ponder for today. Could falling unemployment in the US be bad for the stock market?

That sounds a little wacky but let’s think about it for a minute.

The US stock market has strongly outperformed the Aussie market (and many others) over the past year. Yet their unemployment rate is roughly twice as high as ours.

One of the reasons for the strong market performance is the decent earnings numbers of US corporates. Of course, when you’ve cut your largest cost – labour – big time, it’s going to do wonders for margins and profitability.

And with analysts expecting these fat margins to last into perpetuity, no wonder US stocks are on a tear.

But with the global economy ‘recovering’ (or juiced up on stimulus, more to the point) won’t US firms need to start hiring again? And when they do, won’t this start to chip away at profit margins?

We think yes.

But on the other side of that coin, you will obviously have more wages and purchasing power floating through the economy. This will be the initial bullish interpretation of better employment numbers.

The market hangs on the non-farm payrolls number every month. We’re in a situation now where the market considers any number to be good news. Weak employment data (which is the post-credit-crisis reality) means lower interest rates for longer and more stimulus measures. Better numbers mean higher wages and more spending. It’s all good!

But won’t this mean the stock market will have to wean itself from artificial support? After all, Bernanke is buying government bonds with money that wasn’t there in the hope that this will boost employment.

If jobs are somehow created from this hare-brained scheme, he will have to turn the monetary taps off. The market will have to learn to operate without constant injections of ‘liquidity’.

How will it cope?

Anyway, the whole discussion may be fruitless. The US labour market is in a deep ditch because the US economy is structurally flawed. Years of excess credit has created mal-investment on a grand scale.

Dumb investment decisions create high unemployment. Dumb stimulus programs wont solve the problem.

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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5 Comments on "Human Action"

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Troy Lynch
Do not even think of doing Austrian economics in Australia if you want an academic job at the end of it. Even Frank Shostak concurs. What you need is graduate advanced micro- macro-economics and econometrics, as well as a decent thesis. I completed a PhD in Austrian capital and interest theory, focusing on Menger, Böhm-Bawerk, Mises and Hayek – real intellectual champions. You can’t beat the subjective theory of value; wins hands down on the labour theory of value. However, the whole econometric approach seems to be just glorified statistics to me, though it seems to have its use. Multivariate… Read more »
The deafening silence from the many responses (!) to my post, to me at least, indicates a couple of things: (1) how unaware the public is of what passes for mainstream academic economics in Australia (or elsewhere) (though some of the microeconomics can be useful, as can some of the forecasting tools, applied commercially); and (2) how utterly detached the academic profession is from the general public. The whole thing passes as a black box. I recall that Ron Manners of does sponsor a couple of undergraduate Austrian units at The University of Notre Dame (WA), taught by a… Read more »
John Haney

Appreciate the article. Check out,

Austrian economics professors located at two US universities, and growing:
George Mason University, Fairfax, Virginia
Auburn University, Auburn, Alabama


Well done on promoting Mises. A true intellectual giant.
I recently began ‘Human Action’. The incites in the first chapter alone are fantastic.

Keep it up as the ground swell will occur. Truth has an advantage.

Troy Lynch
I reckon one should begin with Rothbard’s Man, Economy and State before Mises’s Human Action. Mises, you see, continued on with the great philosophical debates (in the first few hundred pages of Human Action, and in his Theory and History). I recall an article by Shostak, who also noted that he understood Mises better after reading Rothbard. If you want to avoid methodology, read Rothbard’s Man, Economy and State, which has more economic analysis than method (though he still has a great deal of the latter). If you want a broad spectrum of economics, it is Mises’s Human Action. If… Read more »
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