Bad Choices, Good Outcomes

Adventures in Austrian Economics

Have you ever failed a test for being right?

The economics question seemed simple enough:

Gasoline prices in Oregon suddenly rose by 20 cents per gallon following a refinery shutdown. Prices next door in Washington remained stable. What happened immediately following the price increase?

This was before gas price apps. Back when you had to hear about the refinery shutdown on the radio, see it on the evening news, or read it in tomorrow’s paper. The desired answer was probably along the lines of “Heaps of peeps drove their Jeeps to fill up in Washington.” Or “Washington gas stations raised prices to match Oregon.” Or something like that.

But I don’t think so simply. The test didn’t give enough information. How far did people live from the state border? How high were prices to begin with? Was the difference big enough to justify the drive? I knew the Columbia River separates the two states near Portland. There are bridges, but traffic is brutal. Worse than fording your oxen on the original Oregon Trail.

Therefore I wrote what seemed the safest answer: probably nothing happened immediately. Information takes time to spread. And crossing state lines to save 20 cents a gallon may not be worth the effort for most people. Give it a few days, I wrote, and then maybe behavior shifts: some people will drive north for the savings, and those Washington gas stations will start to raise their prices close to Oregon’s, seeking to maximize profits while still keeping a competitive advantage.

I jimmied that response, in wandering prose, into every available inch of the test’s response box. It was all-encompassing, logical, careful, realistic, and dead wrong. I got zero points. The correct answer was, in fact, what I feared: everybody started driving across the border for cheaper gas right away, according to Le Professeur. In economics, assuming people react instantly with perfect knowledge and geographic flexibility is the default.

At the time, I didn’t realize it, but I was approaching the problem like a budding Austrian economist.

What is Austrian economics? And does it have anything to do with strudels, schnitzels, and skiing?

Despite the name, Austrian economics isn’t about budgeting for beer in Baden. It’s a school of thought that originated in 1870s Vienna. While it’s now more popular in the US than in Europe, Austrian economics echoes with the ideas of local greats Carl Menger, Ludwig von Mises, and Friedrich Hayek.

A central idea of Austrian economics is subjectivity. Meaning, how someone perceives something’s value is far more important than empirically proving its “actual” value.

Unlike other economic traditions that use elegant math to model equilibrium price points, supply and demand curves, or labor value, the Austrian school believes that human behavior can’t just be reduced to formulae. They argue that economic outcomes arise from individual decisions based on preferences, emotions, and personal knowledge, not from top-down dictates.

Here’s a real-world example, similar to that test question and swapping out Oregon for Austria. In 2024, Hungary slapped price controls on petrol (or gasoline, if I want to stay consistently American) and prices suddenly dropped to the east. Austrians were paying around 1.60€ per liter; Hungarians, just 1.20€. Never mind that I reckon in dollars and gallons, and Hungary uses forints, but the gap was big. Now, plenty of Austrians have a low opinion of Hungary and wouldn’t drive over for cheaper petrol no matter the discount. But others see Hungary as an affordable paradise, usually for restaurant meals and cheap dentists. When news broke that petrol was cheaper too, bargain-hunting Austrians crossed over en masse over the next few days. Hungary eventually tried to stop them, which is sort of illegal under EU law, but that’s another story. Meanwhile, those who dislike Hungary grumbled, “Nein. Ich will not drive to Ungarn to save a few euro-cents. Ich will tank up here in Österreich, danke.” Presumably in thick Viennese dialect.

To Austrian economists, this sort of subjective decision making is what economics is. Many people made the rational economic decision to save money, but they didn’t all do it instantly. Even with gas apps and instant news, it took several days to build up. Also, others seemingly irrationally chose not to save money, simply based on personal preference. Market forces arise from millions of tiny decisions like this, not central planning. Choices, good or bad, make the outcome—not math and models. Because people are unpredictable, especially when watched or nudged, the Austrian school is deeply skeptical of government intervention. Spontaneous order arises when humanity is left to its own devices.

This is what top-down Marxist economic planning creates. Public housing, former Yugoslavia.

Compare this outlook to Marxism, which might call it structural inequality and stage a protest. Or Keynesian economics, which might want to give a stimulus payment to the public to help them cope with increased fuel prices (this is in fact what Austria’s government did, albeit under slightly different packaging). Or the Chicago school, which might model it with an equation showing something elegant and neatly curved about the marginal cost of petrol production per tenth of cent price decrease. Meanwhile, the Austrian school was the only one asking, “Well, how does the driver feel about it?”

Behavioral economics is important in the real world. Although the Austrian school was the first to formally address psychology, other schools have now joined in. You don’t have to be Freud to realize that Austrian economics, although having nothing directly to do with strudels, schnitzels, or skiing, has made a major contribution in considering the human mind’s vagaries on economic activity.

Subjectivity: Sips and Heart Surgery

Let’s walk through two stories that demonstrate aspects of Austrian economics. One in Europe and one back in Minnesota.

Because I have good taste and am of partial Portuguese heritage, I enjoy Portuguese wine. So for my last birthday, I asked people to bring, can you guess what? Yes, Portuguese wine.

Some purchased wine at local supermarkets, others went to specialty shops or ordered online. Living in the EU, the world’s largest free-trade and free-market zone, means there is no extra expense of Portuguese wine in Austria. Guests picked out what they thought I’d like, and we had a blast making vinho verde spritzers and port wine cocktails.

But one bottle stood out. It was scratched, yet beautiful. The label was in French and lacked those stern warnings about drinking too much. It was a vintage port from someone’s private collection, someone who once received it as a gift, but never drank it, due to not liking port! Not liking port is right up there with putting pineapple on pizza: an unforgiveable culinary crime. My party, my rules.

To my friend, that bottle had little value. To me, it was a treasure. The price someone once paid mattered less than the perceived worth each person assigned.

That’s subjective value as seen through sips of Portuguese wine in Austria.

Now, let’s cross the Atlantic and consider a tale of giving up the good things in life, not imbibing them: Ancel Keys and his Minnesota Starvation Experiment during World War II. Keys was obsessed with food—K-rations in the US military are named after him—and he wanted to look at its opposite, famine. He recruited conscientious objectors to basically be starved and observed. Keys became convinced at some point that taking saturated fat out of the diet was good for one’s health and adding partially hydrogenated vegetable oil was a lifesaver, a completely debunked point of view that has led to untold suffering. He was able to put his woefully wrong, self-serving subjective viewpoint into the minds of millions, and change consumer behavior as a result (while making himself rich and famous).

Keys personally pushed to get trans fats into the American diet, a trend which intensified until the 2000s when the dam broke and the government admitted that trans fat was deadly. Americans, wanting to be healthier, believed margarine was better than butter. Meanwhile, Europeans largely rejected this advice. Here in Europe, almost nobody wanted artificial fats. And so, there was almost no market for them. By the time Americans caught up with the rest of the world and rejected trans fats, the heart disease epidemic had already set in.

What explains this mass shift in preference, despite poor results? Austrian economics does. It shows how subjective value, not objective truth, drives consumer behavior. The same tub of margarine could be seen as heart-healthy salvation in the US and toxic sludge in Europe. Only when new information reshaped subjective beliefs did the market shift.

You Can’t Model What People Don’t Know They Don’t Know

That test I flubbed in college was supposedly about gas prices, but the key to getting it right was really assumptions. The textbook answer assumed perfect knowledge, instant access to information, and frictionless borders. It assumed we live in a world where people act like robots with gas price apps in their heads. I got it wrong by addressing subjectivity and human vagaries, like an Austrian economist would.

Human beings can be emotional, irrational, focused, frenzied, or just plain hangry. They can choose to eat garbage that they know makes them feel bad, or they can choose to buy port wine that they’ll never drink because the label was pretty. People might underreact, overreact, or not even think about reacting. Human behavior doesn’t fit onto neat little charts or flow along swooping curves. It’s bold, bright, beautiful, boring, banal, benevolent, and big. Anything can happen, and Austrian economics addresses that variability. People don’t even know what it is that they know or don’t know, so how can an economic model itself know?

Austrian economics doesn’t explain everything, but it reminds us of something we too often forget: people are weird. Value isn’t fixed. Consequences ripple in unexpected ways. Sometimes the best answer isn’t the one that fits on two lines, it’s the one that trespasses into the margins and admits we don’t always know what happens next.

Even if that answer gets you zero points on a test.