top of page

Inflation and How to Tackle the Challenges According to the Austrian School of Economics


High prices in Central Europe, especially in countries like Slovenia and Croatia, are leading to decreased competitiveness and bitter experiences for both consumers and businesses. In this context, the Austrian School of Economics' perspective on demand-based pricing offers valuable lessons for improving economic efficiency and consumer satisfaction.



High Prices and Competitiveness in Central Europe


In recent years, Slovenia and Croatia have seen significant increases in the prices of goods and services. This phenomenon can be attributed to various factors, such as rising production costs, fiscal policies, and inflation. However, one of the most detrimental effects of high prices is the decrease in competitiveness in the global and regional markets.

  • Impact on Tourism: Croatia, known for its tourist appeal, has seen how high prices affect the influx of tourists who seek more affordable destinations. This not only reduces revenue in the tourism sector but also affects local businesses that depend on tourism.

  • Difficulties for Consumers: In Slovenia, consumers face high prices for essential goods, which reduces their purchasing power and limits their ability to spend on other products and services. This creates a bitter experience for consumers, who feel economically pressured.

  • Youth Dependence: Wages in Slovenia, based on current standards, do not allow young people to live independently. This causes prolonged dependence on parents, even into an advanced age, which in turn decreases the quality of life for retirees. This situation calls into question the minimum wage and highlights the need for employers to seek fair remuneration according to work and market demands. We will discuss this issue in more detail on another occasion.



The Austrian School of Economics Perspective


The Austrian School of Economics, represented by figures such as Ludwig von Mises and Friedrich Hayek, argues that prices should be based on market demand rather than production costs. This theory, known as the subjective theory of value, holds that prices reflect consumers' subjective valuations and preferences.

  • Subjective Value and Price Adjustment: According to the Austrian School, prices signal how much consumers value a particular product. Adjusting prices to better reflect demand can help balance the market, reducing excessive prices and improving competitiveness.

  • Coordination Function: Demand-based prices act as signals that coordinate the actions of producers and consumers. In times of high inflation and elevated costs, allowing prices to adjust according to demand can incentivize producers to improve efficiency and consumers to make more informed decisions.


Liberal Policies and Economic Reforms


To address these challenges and improve competitiveness, it is crucial to apply more liberal policies and reduce fiscal pressure. Reforms that incentivize work and productivity are essential, rather than benefiting only large monopolies. People deserve to receive fair remuneration for every hour of work. It is time to change course and seek to implement policies that empirically demonstrate real progress.


Practical Example: Application in Slovenia and Croatia


To illustrate how these principles can be applied in practice, consider the markets in Slovenia and Croatia:

  • Tourism Sector in Croatia: By basing prices on demand, tourism businesses can adjust their rates to attract more tourists, especially during low seasons. This can include personalized offers and dynamic pricing that reflect the preferences and purchasing power of different groups of tourists.

  • Retail Market in Slovenia: Retailers can use the subjective theory of value to adjust the prices of essential goods, ensuring they are accessible to a larger part of the population. This not only improves consumer satisfaction but can also increase sales and customer loyalty.


Conclusion


High prices in Central Europe, particularly in Slovenia and Croatia, underscore the importance of setting prices appropriately based on demand. The Austrian School of Economics perspective offers a useful approach to improving competitiveness and economic efficiency. By reflecting consumers' subjective valuations, prices can guide a more efficient allocation of resources and foster a more dynamic and adaptable market environment.

For businesses and policymakers in Central Europe, adopting these principles and applying more liberal policies can be a key strategy to address current economic challenges and enhance consumer experience. It is crucial to implement reforms that incentivize work and productivity, ensuring that all workers receive fair and equitable remuneration. Ultimately, it is time to change course and seek policies that demonstrate real and tangible economic progress.

This is our conclusion according to our latest analysis of the current situation and is a work conducted by the IVEJM Institute of International Cooperation.



Author: Econ. Jose Miguel Estigarribia Villasanti, May, 2024

8 views0 comments

Comments


bottom of page