2025.03 Vol.1

Signals Over the Air

The Genesis Book has a great opening chapter on the basics of Austrian economics theory. I recap three of the points here, what is profit, what are prices, and what are interest rates.

Profit is someone valuing work. A product is a result of some raw, un-processed, resources combined with some know-how (labor). Technically, someone can always go get the raw resources directly and build their own version of a product. But they might not know how, so instead, they are willing to pay someone else to do it. Up to a certain point. This is where a producer can make a profit which captures how valuable their work is to others. If a producer cannot sell a product for more than the cost of the raw resources to make it, that is a signal that no one values their work (sad!). An assumption here, which I believe, is that value of a product is subjective to an individual.

The “signal” of profit is derived from the input and output prices. Prices are signals across space. They are decentralized spontaneous order, they do not depend on a central authority. When microchip demand increases in Taiwan, the rising prices signal to manufacturers in South Korea, Japan, and the United States to increase production or redirect shipments to meet demand. If steel becomes more valuable for constructing solar panels than for making cars, its price rises, causing car manufacturers to economize on steel usage while solar panel makers expand production, all without any central coordination. Prices are the interface between hubs of specialized knowledge and they allow resources to be efficiently allocated across space.

Space is just one dimension prices help order, the other is time. People prefer to get something sooner rather than later. How much more depends on their time preference. If Alice needs a car today for work, whereas Bob just wants to upgrade his beater at some point, Alice has higher time preference for a car than Bob. She might even be willing to pay a little bit extra to get a car today.

Time preference can be baked right into the price. However, time preference also appears naturally in isolation in the form of interest rates. Interest rates are the price to get money today. If someone is willing to pay a high interest rate, they have higher time preference. They had to really convince the person on the other end to give up there funds for the short term. If instead the interest rate is low, it shows that time preferences are low. A person is willing to part with their funds for now for even a small increase in future funds.

The government does a pretty effective job at distorting these signals with things like the Cantillon Effect. Signal distortion causes resources to be diverted away from their most effective destination.