I recently listened to the Lex Fridman podcast with Javier Milei. Milei is the current President of Argentina, and the podcast was heavily focused on Argentina’s economy and the measures Milei has taken to positively transform it. I’m not super familiar with Milei’s public policies and views, but I resonated with his economic stance and appreciated his identification as an Anarcho-Capitalist (a Minarchist in practice).

Milei explained that his economic views stem from the Austrian school of economics. I wanted to learn more, so I purchased “Principles of Economics” by Carl Menger, which is known as the foundation for this school of thought. I found a lot of Menger’s arguments novel and thought it’d be fun to try to formalize what I found most interesting. Also, by no means do I claim to be any sort of economist; I’m just a software engineer who took Economics 101 in university, read a bit of Smith and Menger, and listened to the All-In podcast one too many times. That being said, maybe someone else will find these points novel, so I’ll do my best in sharing them.

Value is subjective

This is the core principle underlying all of Menger’s arguments, and it’s arguably the only way to devise a correct formal methodology to explain how humans behave in the economy. Goods do not have an inherent value; their value is determined by people, and not everyone values a good equally.

It’s obvious but easily forgotten.

Goods being exchanged are not equal in value

Since a good’s value is subjective, exchanges between individuals or organizations happen when each side values the other side’s good more highly than their own. To prove this, it’s pretty easy to come up with examples where two parties willingly enter an exchange but will refuse to reverse the exchange, which wouldn’t be the case if the goods being exchanged were truly equal.

For example, take an ex-artist turned aspiring musician and an ex-musician turned aspiring artist. The former is willing to exchange their art utensils for the latter’s guitar, and vice versa for the latter. Both parties benefit from the exchange, as they value the other party’s good more highly than their own. We can also easily see why neither party would be willing to revert the exchange, as this would mean they’re both acquiring a good of lower value to them.

One could argue that returns of goods happen all the time in retail. This is true, but it usually reflects a shift in the nature of the exchange. Now, the company isn’t simply getting the item back; it’s also regaining your trust, something they may value more than the original payment.

When working through examples, this principle also becomes very clear, yet it’s still highly overlooked.

Division of labor is not everything

Adam Smith championed the division of labor as the main boon to economic growth and the progression of society, and Menger acknowledges this and partially agrees with it. However, Menger argues that higher order goods are the other, and perhaps more important, key factor.

In case you’re not familiar with the ordering of goods, a first order good is something that directly satisfies a human need, while a higher order good (second, third, fourth, etc.) is a good that aids in the production of a lower order good and ultimately a first order good. For example, calories are a human need, and a medium rare ribeye steak would be a first order good that directly satisfies this need. In this scenario, some second order goods might be the raw steak, the chef who cooks the steak, and the salt that gets put atop it. Among many others, some third order goods might be the cow which provides the raw beef, the butcher, the butcher’s knife. Fourth order goods would be the farmer who takes care of the cow, the wood and the metal that comprise the knife, etc.. A near infinite order of goods can be extrapolated.

It is truly this early human recognition of higher order goods coupled with the division of labor that led to the rapid progression of our species and to the advancements of almost all aspects of society. With only the division of labor, early humans become hunters and gatherers, but not effective ones. They solely gather first order goods: berries, roots, bird eggs, seeds, etc., and they hunt with the most primitive tools, such as stones and wooden spears. It was only once humans started to recognize the importance of higher order goods that they were then able to effectively capitalize on this division of labor. Hunters move from using a wooden club to bow and arrow and to eventually a rifle, fishermen move from spear to fishing pole, and chance gathering of fruits and seeds progresses to advanced forms of agriculture. Division of labor without higher order goods is like an orchestra with no instruments: without any “instruments,” the “players” can’t effectively perform their specialized tasks, so the potential benefits of specialization never fully materialize.

Higher order goods derive all of their value from the first order good(s) they support, not the other way around

Though we now recognize higher order goods as being of the utmost importance to our society’s progression, it is only from the associated first order goods that they derive their value.

If the only use of the bespoke sewing machine (higher order good) is to aid in the production of a winter jacket (first order good - satisfies warmth), but winter has receded permanently (blame global warming or whatever you want, this is just an example), the winter jacket has no value, and hence the bespoke sewing machine also has no value. The same goes for the operator of the sewing machine, as the labor itself is also a higher order good aiding in the production of a useless first order good. One might argue that the operator must have value because of the tremendous effort they invest in producing this first-order good. But once again, if the first order good has no value to consumers in the perpetual summer, the associated higher order goods also have no value.

This seems to be a heavily misunderstood topic, and I think the problem stems from the conflation of value and price. It’s natural to think that if the price of a good is high, then the associated value is also high. This is blatantly false once viewed through the lens of subjective value. The high price of the good has the chance of correlating with value, but it’s not directly causal, as value is subjective to each individual and their circumstances. The fluctuation in price doesn’t change the value that someone places on a good, it just changes that person’s ability to buy it.

A related concept that I found interesting was Baumol’s Cost Disease, which explains how wages in sectors with little productivity growth still tend to rise when other, more productive sectors push overall wage levels higher. A classic illustration is a live concert: the orchestra can’t simply double its productivity without doubling its musicians, so if industries elsewhere in the economy are driving up wage expectations, the concert hall must also pay its performers more or else they’ll find higher paying jobs elsewhere. This raises ticket prices, even though the concert itself hasn’t become more valuable to attendees in terms of entertainment. The higher price of a burger or a laundromat visit doesn’t mean people value these things more than before; it just reflects wage growth outpacing productivity in those specific jobs.

Note: In this section, I’m mostly talking about “use value”, though this mostly holds for “exchange value” as well.

Money arises organically from human desires, not from government intervention

Money is a construct needing zero government intervention to be conceived. As exchanges become more prominent in a society, a good’s exchange value becomes more and more recognized, and the concept of a commodity starts to form. The exchange value of a commodity is mainly determined by its marketability or how easily one can exchange this commodity for some other good. This marketability is important, for if a commodity is highly marketable, one can use it as an intermediary between the good they’re selling and the good they truly desire. This highly marketable commodity is a means to an end; it’s money. In some civilizations, cattle acted as this intermediary good, and in others it was salt or cowry. Eventually, precious metals took over due to their ease of preservation and divisibility. Money is the commodity with the highest marketability inside of a specific market or region. Money can and will arise organically within an economizing society, not due to government intervention. Menger acknowledges that government intervention does indeed have the ability to create its own money, as a stamp of approval can act as an easy verification of the money’s validity.

The point here is that while government coercion can definitely create markets and money, it is by no means necessary or the natural course of an economy.

Aggregate statistics are not the final story

Over the past couple of years, I’ve started to feel a slight uncertainty for a lot of aggregate statistics presented. I don’t yet know how to feel about this distrust. I appreciate the skepticism I’ve developed, but it also sucks to not feel like I can trust a lot of the information I read online. Statistics themselves can be a very amazing and powerful tool, but these days it feels like they’re increasingly being used to coerce people who are numerically illiterate. Maybe I’ve just started to notice it more as I’ve grown older, but it feels dishonest and just frankly not cool. A rudimentary example is someone proclaiming, “Eating X increases your probability of getting Y disease by 85%,” without explicitly mentioning the perceived risk. There’s a huge difference between raising a 1% likelihood to 1.85% versus jumping from 1% to 86%. I do want to make it clear that I have immense respect for the other 99% of people using statistics for benevolence.

Aggregate statistics tend to leave out any trace of subjectivity. This is, by nature, their goal and purpose, yet it’s precisely why Menger criticized them. While pretty opinionated, I think this article does a good job of summarizing my thoughts (or maybe my thoughts are a summarized version of this article lol). It’s true that data collection has seen vast improvements over the past decades since the article was written, but data collection is still very prone to lazy/deceptive individuals and poor datasets leading to false conclusions and mis/disinformation. As Bezos said, “When the data and the anecdotes disagree, the anecdotes are usually right.”

Relating to present day economics, the poverty rate in Argentina is an example where aggregate statistics fall short. Shortly following Milei’s inauguration, the poverty rate in Argentina shot up from almost 42% to 53%. Yikes. However, as Milei explains in his interview with Lex, he merely revealed the real poverty rate. Prices before Milei took office weren’t transparent because price controls were in place, and therefore it seemed as if people had more buying power, when in reality those prices put perverse incentives on the supply of goods. As Milei succinctly explains, it doesn’t matter how large the discount on butter is at the neighboring store if they’re out of stock.

Again, I’m not an economist. These are just my personal opinions stemming from things I’ve read and experiences I’ve had, so please feel free to reach out and correct me if you have opposing views on any of this!!