The above cycle diagram is a map of the Austrian Economics Framework. This diagram attempts to capture all the aspects of the Austrian Economic view. Working as a cycle, an interruption as indicated by the red connectors, illustrates a blockage of the entire economic cycle. The implication of this cycle demonstrates reform of any economic system must involve this cycle as a whole. The following reviews each of this cycle's components:
Private property serves as the initial substance of the Austrian Economic Framework. Rothbard in Justice and Property Rights argues how private property is the root of all human economic activity. Without private ownership there is no incentive to gain more property and the whole economic system slows down.
Private property produces inequality. This inequality produces differential opportunity costs. Hayek writes in Social or Distribute Justice, "The greater productivity of [the Great or Open Society] rests on a division of labour extending far beyond the range any one person can survey." It is our inequalities that attract human beings toward enterprise and trade relationships.
Kirzner discusses in Uncertainty, Discovery, and Human Action how discovery of error and alertness to opportunities for pure profit inspire entrepreneurial activity. Comparitive advantage fosters errors and opportunites. If all prices were fixed their would be no opportunity to arbitrage. If all beared the same opportunity costs there would be no incentive to profit from the goods and services of others.
Entreprenuership inspires all manner of trade. Trade is the activity resulting from entrepreneurial awareness. They are inseparable. Without trade there is no incentive to entrepreneur. Trade capitalizes on the comparative advantage of two parties so that both can acheive greater together than the sum of their individual production.
Profit and loss discplines and teaches the entrepreneur the appropriate use of society's resources. Von Mises writes in Profit and Loss that the role of profit and subsequently loss is to reward the entrepreneur for their efforts in creating products and services that the consumer values.
Profit results in a creation of value of existing inputs of production. Society communicates to the entrepreneur that it agrees with the entrepreneur's use of existing resources. Losses, conversely, punish the entreprenuer for using existing resources in a wasteful manner.
Profit increases the ability of a party to acquire more resources for their welfare. Conversely, loss reduces this ability. Welfare is the end to the means of human commerce and economic activity. Increase in welfare incentavises a gain in more private property which feeds more into the cycle.
Modulators of the Economic Flow Cycle
Rule of Law:
Property right protection nurtures and protects the entire cycle. Without property right protection the entire system breaks down.
With common or state ownership, there is no incentive to utilize property for greater profit or value creation.
Tariff/Quota:Tariffs and quotas reduce previously existing comparative advantages.
Subsidies:Subsidies affect comparitive advantage. They communicate to society that certain products and services are more valuable than their real market appraisal.
Social Justice/Equality:Equalizing all members of a market reduces differential opportunity costs between potential traders. This reduction in differential opportunity costs reduces differences in comparative advantage which serves to reduce trade.
Taxation:Taxing profits reduces their value.