Here is an attempt to summarize Austrian Economics. After outlining key aspects, I plan to create a 5-person scenario -- introducing Jackie, Jermaine, Tito, Marlin, and Michael -- illustrating how it is that human living standards could ever rise -- both relatively and absolutely.
Human life is precarious and conditional on value production and it is also not static, so its optimization requires periodic variation of activities in order to adjust the factors of production to best meet our needs. Let's say you needed coconut milk and had drilled a hole in a coconut and drank almost all of the milk. You could keep doing the same thing with the same coconut -- which becomes progressively empty of all of its milk -- trying harder and harder and harder to suck out the last drop of coconut milk, or, after realizing there's hardly any coconut milk left in that coconut, you could alter your activity by climbing the tree and grabbing another coconut.
The decision to alter your activity at this critical time (when the coconut is almost empty) is entrepreneurial. The function of an entrepreneur is to consciously mitigate maladjustments utilizing rational choice and the adjusted application of the factors of production which rational choice gives rise to. The alternative to making this decision is to go on as before, trying harder and harder and harder (until death) to get more milk from the same coconut. In retrospect, it is possible to compare the relative value of employed efforts at getting the last drop of milk out of a coconut, with the combination of rational choice and those altered methods which rational choice gives rise to. There is a greater "marginal productivity of labor" when you employ rationality and obtain another coconut -- instead of continuing on with progressively ratcheted-up efforts to obtain more milk from the same, dried-up coconut.
Key point: Because you chose to switch to that new method where there was a greater "marginal productivity of labor" -- you, in effect, gave yourself "a raise" (you improved your living standards without employing any extra labor overandabove the previous amount of labor you had been performing).
Now that you have benefited from entrepreneurial activity (your belly is now full of coconut milk), you have new-found energy. One of the things that you could do with that new energy is plan for the future. For instance, even though you don't need them right now, you could cultivate coconut trees, for an expected future need or desire. In doing so, you are accumulating capital goods -- goods not immediately consumed, but which increase the amount of consumable goods obtainable in the future. If you go so far as to utilize some of your new energy to build a ladder (to climb coconut trees), you have combined the activity of an entrepreneur with a capitalist -- and have developed an upgrade in the quality of capital via the judicious employment of science and technology.
Key point: Because you chose to switch to that new method involving funneling savings or accumulated capital into a new use of technology, there was a greater "marginal productivity of labor" -- and you, in effect, gave yourself another "raise" (you improved your living standards without employing any extra labor overandabove the previous amount of labor you had been performing).
When you accumulate capital -- or even simply the initial savings required in order to begin accumulating capital -- then you are acting like a capitalist, i.e., someone who acts for a future. If another person is around, then you have 3 choices: you can each either work together on projects (form a "corporation"), specialize efforts and trade with one another (engage in a market), or enter into an agreement where one of you works for the other but always for a set wage (utilize the activity known as: employment). A fourth option is to attempt to live like animals do, and to view the other guy as your "prey" -- taking his produced values and possibly his life in the process. A caution is that this is risky and it can only be performed once, after which -- assuming you survive the ordeal -- you may not only be lonely, but terribly destitute.
Key point: Because you chose to work together with others via at least specialization, there was a greater "marginal productivity of labor" -- and you, in effect, gave yourself yet another "raise" (you improved your living standards without employing any extra labor overandabove the previous amount of labor you had been performing).
If a third person shows up on the scene and it is discovered that they have previously engaged in both entrepreneurial and capitalistic activity -- i.e. they have tons of value to trade -- and that they plan to keep on doing this kind of rewarding activity, then a market is created by mankind ex nihilo and competition between producers may develop. If competition between producers develops, then extra attention is paid to the optimization of employed factors of production in order to best meet human needs -- and everybody wins.
Key point: Because you chose to enter a market with others by engaging in trade, there was a greater "marginal productivity of labor" -- and you, in effect, gave yourself yet another "raise" (you improved your living standards without employing any extra labor overandabove the previous amount of labor you had been performing).
It appears like there are 4 ways to improve your living standards without employing any extra effort than you had been employing before, the first 3 happening even before the origin of a marketplace. In other words, in the absence of destructive ideologies, it's really easy to raise the living standards of human beings.
(Edited by Ed Thompson on 1/01, 4:19pm)