Principles of Economics 1

Introduction and Course Rationale

Saifedean Ammous introduces his online course and textbook Principles of Economics, explaining that he wrote it to address a fundamental problem: university economics education is confusing, tedious, and uninformative for intelligent students. Having taught at university for ten years, he observed that even students excelling in engineering, physics, and mathematics struggled with economics—not because they lacked intelligence, but because "the economics is not useful."

Ammous argues that university textbooks are "steeped in Keynesian high time preference and ignorance," teaching irrelevant models with little real-world relevance. By contrast, Austrian economics provides genuine value. While classic Austrian texts like Murray Rothbard's Man, Economy, and State and Mises's Human Action are monumental, they are geared toward academics rather than learners. Ammous aimed to create "the book I've always wanted to teach"—a clear, concise Austrian treatment accessible to the layperson and university student alike.

Course and Book Structure

The course (equivalent to two university semesters, possibly three with extended readings) and book are organized into five parts:

• Part One: Fundamentals — human action, value (subjective vs. objective), and time
• Part Two: Economy — labor, property, capital, technology, and energy/power
• Part Three: The Market Order — trade, money, markets, and capitalism
• Part Four: Monetary Economics — time preference, credit, banking, monetary expansion, and Austrian business cycle theory
• Part Five: Civilization — economics of violence, defense, and the concept of civilization itself

Notably, energy and power are included as explicitly economic topics, which Ammous says is unusual but essential for understanding modern economics.

The Core Concept: Human Action

The lecture centers on "Human Action," the foundational Austrian concept from Mises's magnum opus. Mises redefined economics as "the study of human action and choice under scarcity," focusing on how humans act rather than analyzing material objects or abstract aggregates.

Action is purposeful behavior—deliberate, reason-directed conduct toward ends—not impulsive reactions or instinctive responses. As Mises defined it: "Action is will put into operation and transformed into an agency. It is aiming at ends and goals." Rothbard adds: "Action is purposeful behavior toward the attainment of ends in some future period which will involve the fulfillment of wants otherwise remaining unsatisfied."

A critical distinction: humans act; animals do not. Animals yield to instinct; humans use reason to supersede instinct. "Rational" in the Austrian sense means "product of reason," not "correct"—the deliberation matters, not whether the outcome is objectively right.

Austrian Economic Methodology

Hans-Hermann Hoppe explains Austrian economic theory as consisting of three elements:

1. An understanding of the meaning of action
2. A situation described in terms of action categories
3. A logical deduction of consequences

The goal is understanding—not quantification. Austrian economics employs logical deduction, thought experiments, and common-sense familiarity with reality to comprehend economic phenomena.

Critique of Quantitative Economics

Ammous identifies four fundamental problems with quantitative analysis in economics:

1. No constants: Unlike physics (with the seven SI base units: second, meter, kilogram, ampere, kelvin, mole, candela), economics has no measurement constants. Value is subjective and can only be measured ordinally (comparing preferences) not cardinally (assigning numerical values). You cannot say you value a child as "2.3 cars."
2. No replicable experimentation: Humans cannot be studied in controlled laboratory conditions that translate to real-world complexity.
3. Conflating measurable factors with causal factors: Economists focus on what they can measure (GDP, spending, consumption) rather than what drives economic phenomena—individual action and subjective valuation. Ammous compares this to "dropping your keys in the dark" but searching "under the light" instead.
4. Conflating accounting identities with causality: Macro-economists mistake tautologies (spending equals output) for causal relationships (raising spending raises output).

The result: "After a century of aping physics, economics has failed to produce one quantitative law or formula that can be independently tested and replicated."

The Phillips Curve: A Case Study in Failure

The mythical trade-off between unemployment and inflation exemplifies quantitative economics' failure. Keynesians treat this as a physical law: raise inflation, lower unemployment; lower inflation, raise unemployment.

Reality "stubbornly refuses to abide by this fiction." Plotting 50–60 years of US data reveals "a blob"—no clear relationship. The 1970s stagflation (high inflation + high unemployment) should have falsified the theory. In true science, one counterexample destroys a law. Instead, Keynesians invented "supply shocks" to preserve their belief—"what pseudo-scientists do." They still advocate raising unemployment to fight inflation today.

Minimum Wage: Austrian vs. Quantitative Analysis

Ammous contrasts approaches using the minimum wage example:

Mainstream quantitative approach: Build models showing that raising wages increases spending, which creates jobs and boosts GDP—based on John Maynard Keynes's authority rather than verifiable relationships.

Austrian human action approach: Analyze how actual humans respond. A worker takes a job only if wages exceed their subjective valuation of alternatives. An employer hires only if the worker's return exceeds their wage. If a worker contributes $5/hour but the minimum wage becomes $10, the employer fires them—losing $5/hour is unsustainable.

Key insight: Minimum wage laws criminalize employment for the youngest, poorest, and least experienced. They don't just create unemployment; they create a permanent unemployable class by denying people the experience needed to raise their productivity above the mandated wage. Businesses respond by raising prices (counterproductive) or automating.

Austrian analysis predicts patterns of human action, not precise quantities. Historical evidence from Forty Centuries of Wage and Price Controls supports this: 4,000 years of government wage/price manipulation consistently fails because "you don't magically change economic reality"—you only force adjustment.

Conclusion: Human Action as the Foundation

Collectivists view economic transactions as an "inhuman process" they can manipulate like machine levers, assuming humans will adjust to satisfy bureaucratic mandates. The reality: "The driving force of economic phenomena is human action." Humans optimize for their own well-being, not bureaucratic targets. Markets always reestablish themselves—the only question is speed.

Modern textbooks' pseudo-scientific quantitative approach creates confusion because students encounter physics-like formulas that fail to match observable reality. Ammous's course and book offer an alternative grounded in understanding how humans actually act.