Posted on Jan 3, 2015
Keynesian or Austrian-School economics, or don't you care?
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Edited 10 y ago
Posted 10 y ago
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I think a combination! You need both the government and central bank to play a role. The central bank is much quicker than the government at times and the government can provide more stability with taxes, spending, and regulation.
Anyways from what we see in the economy now, you can't have one without the other or else the govt can shutdown and/or the economy will slowdown, inflation, and unemployment.
Anyways from what we see in the economy now, you can't have one without the other or else the govt can shutdown and/or the economy will slowdown, inflation, and unemployment.
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SSG Gerhard S.
LTC David S. Chang, ChFC®, CLU® Thank you for your comments, I would respectfully ask you though: Where does inflation come from, if not from government? Only government can cause widespread inflation, and it does so through a Centralized banking system telling the Treasury to print more, and more paper dollars. This glut of dollars makes every dollar we have saved, or invested, in our homes, retirement, and savings worth that much less. So, while we have the illusion that our home is worth more, it is actually not, because our dollars buy less as we have more inflation. The problem with the Keynesian approach, which is the only approach you described above, is that it values inflation, and government borrowing, as well as individual borrowing en masse. This debt gives the illusion that there is more capital in the market, while, in-fact, doing so creates inflation, and worse, inflation bubbles as we've seen in the housing market up till 2008 when we saw a huge correction when the bubble burst.
Were not for the distortions in the market signals caused by the government driven interventions you suggested above, the bubble would have not been allowed to grow as large it did, and the bubble would have not been blown so large, and the correction would have come much sooner based on market forces.
In short, HUGE governmental interventions in the economy, like keeping interest rates artificially low to hide inflation, does NOT stop inflation, it only hides it until it becomes too large to keep contained any longer... then it bursts, causing a long period of adjustment..... namely deflation, (which is not a bad thing if taken in small doses), but as most of us have experienced, it is quite painful when the bubble pops suddenly causing landslide deflation that leaves people with large loans on, property that now is worth much less than what is owed.
The Austrian school would say we do NOT need a central bank, that hundreds of millions of individual people know far better what their wants needs, and desires are, than a few, or a few hundred economists, or politicians. The Austrian school bases economics on "human action", that is the (mostly) rational decisions made by hundreds of millions of individuals, rather than a few, politically minded governmental types trying to predict what is best for each of those hundreds of millions of people as the Keynesians believe.
Additionally, I would ask you, if a Central bank, and a huge, and ever-growing government are so quick to respond, how stable have been our: taxes (they don't go down, and the ACA has added a whole new layer of taxes), spending (it never goes down either $18 trillion in debt proves that), stability (look at the housing bubble, the student loan bubble, and the countless other bubbles caused by distortion of the markets) are you also suggesting that with government control and central banks the economy won't slow down, and there will be lower unemployment? I would point to the late 1970's and early 1980's, and to the great recession of 2008 as arguments that the government and central banks making HUGE decisions based on ideas that go against Human-Action HAVE caused these maladies, and that their softening of the blows of the corrections only prolong the slowdowns, hide the inflation temporarily, and do little to prevent unemployment.
In short, the Austrian School believes we'd all be better off if our government were smaller, and more agile, that it would leave individual decisions up to individuals, and that the banks should be where people go to keep their money safe, and to borrow what they need based on competitive interest rates that serve to keep the money supply stable, instead of through a central banking system that prints money to make politicians look good for the next election, and ALSO keeps interest rates low to hide inflation and encourage more borrowing and discourage savings. Who wants to save at 1% interest rates?
Were not for the distortions in the market signals caused by the government driven interventions you suggested above, the bubble would have not been allowed to grow as large it did, and the bubble would have not been blown so large, and the correction would have come much sooner based on market forces.
In short, HUGE governmental interventions in the economy, like keeping interest rates artificially low to hide inflation, does NOT stop inflation, it only hides it until it becomes too large to keep contained any longer... then it bursts, causing a long period of adjustment..... namely deflation, (which is not a bad thing if taken in small doses), but as most of us have experienced, it is quite painful when the bubble pops suddenly causing landslide deflation that leaves people with large loans on, property that now is worth much less than what is owed.
The Austrian school would say we do NOT need a central bank, that hundreds of millions of individual people know far better what their wants needs, and desires are, than a few, or a few hundred economists, or politicians. The Austrian school bases economics on "human action", that is the (mostly) rational decisions made by hundreds of millions of individuals, rather than a few, politically minded governmental types trying to predict what is best for each of those hundreds of millions of people as the Keynesians believe.
Additionally, I would ask you, if a Central bank, and a huge, and ever-growing government are so quick to respond, how stable have been our: taxes (they don't go down, and the ACA has added a whole new layer of taxes), spending (it never goes down either $18 trillion in debt proves that), stability (look at the housing bubble, the student loan bubble, and the countless other bubbles caused by distortion of the markets) are you also suggesting that with government control and central banks the economy won't slow down, and there will be lower unemployment? I would point to the late 1970's and early 1980's, and to the great recession of 2008 as arguments that the government and central banks making HUGE decisions based on ideas that go against Human-Action HAVE caused these maladies, and that their softening of the blows of the corrections only prolong the slowdowns, hide the inflation temporarily, and do little to prevent unemployment.
In short, the Austrian School believes we'd all be better off if our government were smaller, and more agile, that it would leave individual decisions up to individuals, and that the banks should be where people go to keep their money safe, and to borrow what they need based on competitive interest rates that serve to keep the money supply stable, instead of through a central banking system that prints money to make politicians look good for the next election, and ALSO keeps interest rates low to hide inflation and encourage more borrowing and discourage savings. Who wants to save at 1% interest rates?
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The problem is that most people don't understand Keynesian and it's never implemented properly. If done right, I would support it over others. The problem however is that they miss the second half of the theory - you SPEND during economic downturns, but you SAVE during upturns. That latter part never seems to happen. But we can look at Europe now and it's pretty apparent that austerity was not a good idea. The countries that implemented the most austerity and doing the worst.
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SSG Gerhard S.
MAJ (Join to see) You are correct on everything, except, I would argue, for the idea that Keynesianism would be successful if ONLY it were implemented properly. The reason it cannot be implemented properly is twofold.
The first, is the obvious one. Political considerations. Regardless of the advice of the Keynesian economist, political pressures cause distortions in where the Keynesians believe the dollars should be allocated. As we see all too often, regardless of who is in power in DC, hundreds of millions, even billions of taxpayer dollars end up going to dead-end political contributors, their corporations, and their pet projects, (many of which end up bankrupt after only a few months or years), or go to "research" projects that end up going nowhere. This factor, along with an ever-expanding government leads to out of control spending that far exceeds the revenues, as you correctly pointed out, in both good economic times AND bad.
The second factor though is Keynesianism's fatal and inherent flaw. Namely the fact that a few, or a few hundred economists, or politicians can't possibly know what is best for over 300 million individual consumers who all have their own unique wants, needs, desires and requirements. So, creating HUGE programs inherently leave at best a minority, at worst a large minority (49%) with choices that don't fit their needs, wants or desires. Additionally, both Keynesians, and more-so politicians almost ALWAYS look only to the FIRST, and visible, and publicized result or beneficiaries of their decisions. They spare no cost telling us how great things will be for this industry, or that group of people when they bring out a new program, or inject money here, or there to "stimulate" things, and are mute when their programs fail to have the desired results, or when their HUGE distortion causes an unintended or unplanned problem a few months, or years down the road, that is likely both widespread, and diffuse. In short, huge mistakes lead to huge consequences.
For these reasons I favor the Austrian School, which is founded on the idea of individual liberty, and market economics where hundreds of millions of people decide what is best for themselves, where Federal spending is kept at a Constitutional level, where small mistakes lead to small consequences, and good decisions lead to profits and success. The Keynesian approach means a confluence of business and government where success is measured by favorable legislation, and subsidies.
The first, is the obvious one. Political considerations. Regardless of the advice of the Keynesian economist, political pressures cause distortions in where the Keynesians believe the dollars should be allocated. As we see all too often, regardless of who is in power in DC, hundreds of millions, even billions of taxpayer dollars end up going to dead-end political contributors, their corporations, and their pet projects, (many of which end up bankrupt after only a few months or years), or go to "research" projects that end up going nowhere. This factor, along with an ever-expanding government leads to out of control spending that far exceeds the revenues, as you correctly pointed out, in both good economic times AND bad.
The second factor though is Keynesianism's fatal and inherent flaw. Namely the fact that a few, or a few hundred economists, or politicians can't possibly know what is best for over 300 million individual consumers who all have their own unique wants, needs, desires and requirements. So, creating HUGE programs inherently leave at best a minority, at worst a large minority (49%) with choices that don't fit their needs, wants or desires. Additionally, both Keynesians, and more-so politicians almost ALWAYS look only to the FIRST, and visible, and publicized result or beneficiaries of their decisions. They spare no cost telling us how great things will be for this industry, or that group of people when they bring out a new program, or inject money here, or there to "stimulate" things, and are mute when their programs fail to have the desired results, or when their HUGE distortion causes an unintended or unplanned problem a few months, or years down the road, that is likely both widespread, and diffuse. In short, huge mistakes lead to huge consequences.
For these reasons I favor the Austrian School, which is founded on the idea of individual liberty, and market economics where hundreds of millions of people decide what is best for themselves, where Federal spending is kept at a Constitutional level, where small mistakes lead to small consequences, and good decisions lead to profits and success. The Keynesian approach means a confluence of business and government where success is measured by favorable legislation, and subsidies.
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LTC Stephen C.
Then, SSG Gerhard S., I'm sure you know that the Ludwig von Mises Institute is in Auburn, Alabama, across the street from Auburn University!
http://mises.org/
http://mises.org/
On this episode of Mises Weekends, Jeff Deist and Patrick Barron dissect the Fed's big announcement this past week not to raise interest rates.
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LTC Stephen C.
SSG Gerhard S., the Institute was actually located on campus until relocation in 1998. I left Auburn before they were there though!
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SSG Gerhard S.
Interesting perspective SGT (Join to see) , do you have another option in mind? Boiled down, Keynesianism is government controlling economics, that is, it is just a watered down means of Central planning that allows a market to function for the purpose of funding government interventions to shape social, and economic assets into the vision of a small group of ever-changing politicians and bureaucrats. The Keynesian system requires an ever-increasing amount of control exhibited by an ever increasing number of laws and regulations designed to shape an economy, or market into that vision. Unfortunately the evidence is clear that Centrally controlled markets simply don't work, and mixed markets ONLY work based on the amount of market forces that are allowed to exist. As the regulatory noose becomes ever tighter, we become closer and closer to those Marxist in nature politico-economic systems that have, without exception, failed under their own weight.
Boiled down, the only intervention an Austrian (Economically free) market requires is a government to protect us from criminals, foreign or domestic, and a government that "regulates commerce" to use a term used by our Constitution's framers. By the way, to "regulate" meant to keep regular, which is to say, it meant to keep impediments out of the way, not to put them in place as a Keynesian-governmentally operated economy is prone to do. Economic freedom, meaning free markets are self-correcting and do not possess the same bubbles that are inherent in an interventionist Keynesian economy.
So, I'm curious where your economics philosophy leads you.
Boiled down, the only intervention an Austrian (Economically free) market requires is a government to protect us from criminals, foreign or domestic, and a government that "regulates commerce" to use a term used by our Constitution's framers. By the way, to "regulate" meant to keep regular, which is to say, it meant to keep impediments out of the way, not to put them in place as a Keynesian-governmentally operated economy is prone to do. Economic freedom, meaning free markets are self-correcting and do not possess the same bubbles that are inherent in an interventionist Keynesian economy.
So, I'm curious where your economics philosophy leads you.
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SGT (Join to see)
SSG Gerhard S., the classical Austrian School believes that the least amount of government is most beneficial, and that the ideal would be no government involvement at all.
My opposition to the Austrian school is based on the fact that while I prefer limited government, I do see the need for taxation, the Federal Reserve System, and other government involvement. If I had to classify myself, I would say I'm a "moderate Austrian economist", although that's not a recognized term yet.
My opposition to the Austrian school is based on the fact that while I prefer limited government, I do see the need for taxation, the Federal Reserve System, and other government involvement. If I had to classify myself, I would say I'm a "moderate Austrian economist", although that's not a recognized term yet.
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SSG Gerhard S.
SGT (Join to see) I appreciate your thoughts on the matter. Though the Austrian school does not advocate anarchy, it does, as you correctly point out seek to minimize government intervention in the field of economics. They would like to see government's role as that entity that creates laws that protect us against perpetrators of violence, theft, and fraud, whether those forces be foreign or domestic.
Though I agree that taxation does have it's place, I have reservations about the size and multitude of taxes we are subject to. We are forced to pay ever more, while our politicians serially go on to spend even WAY more than are extracted from us. As evidence I point to the over $18 Trillion debt we've accumulated (mostly over the last 35 years) THIS is the legacy we have as a result of our Federal reserve, and our taxation system that somehow makes politicians, and Keynesian economists alike, feel empowered to spend us into debts that our children and grand children will be FORCED to repay in the form of ever greater taxes.
One of the key elements of the Austrian school is the idea that wages, and taxes, are prices, just like any other commodity's price, they should be set by the market, and not by a cabal of exclusive bankers in the Federal reserve, or by politically motivated politicians or bureaucrats who are always happy to spend OUR money on THEIR pet projects, or on their campaign contributors. I'm afraid the ideas of Free Markets where consumers make the decisions is not possible so long as there are interlopers in the Federal reserve, and in the Federal government intent on regulating every aspect of our daily lives.
Regarding taxes, I am not opposed to all taxes, but the income tax is particularly insidious. So much so that the framers of our Constitution forbade the Federal government from directly taxing the people of the many States. (The 16th Amendment changed that.) Many believe history has proven our Framers correct. In fact, our government existed until 1913 without an income tax. Excise taxes funded the Federal government prior to then. Of course Excise taxes don't allow politicians to mold us into THEIR idea of what a society should look like. So, today, I would favor the Fairtax, which eliminates ALL income taxes, and replaces them with a Federal sales tax to fund the Federal government.
As always, thank you for your thoughtful comments, and pleasant demeanor.
http://archive.fairtax.org
Though I agree that taxation does have it's place, I have reservations about the size and multitude of taxes we are subject to. We are forced to pay ever more, while our politicians serially go on to spend even WAY more than are extracted from us. As evidence I point to the over $18 Trillion debt we've accumulated (mostly over the last 35 years) THIS is the legacy we have as a result of our Federal reserve, and our taxation system that somehow makes politicians, and Keynesian economists alike, feel empowered to spend us into debts that our children and grand children will be FORCED to repay in the form of ever greater taxes.
One of the key elements of the Austrian school is the idea that wages, and taxes, are prices, just like any other commodity's price, they should be set by the market, and not by a cabal of exclusive bankers in the Federal reserve, or by politically motivated politicians or bureaucrats who are always happy to spend OUR money on THEIR pet projects, or on their campaign contributors. I'm afraid the ideas of Free Markets where consumers make the decisions is not possible so long as there are interlopers in the Federal reserve, and in the Federal government intent on regulating every aspect of our daily lives.
Regarding taxes, I am not opposed to all taxes, but the income tax is particularly insidious. So much so that the framers of our Constitution forbade the Federal government from directly taxing the people of the many States. (The 16th Amendment changed that.) Many believe history has proven our Framers correct. In fact, our government existed until 1913 without an income tax. Excise taxes funded the Federal government prior to then. Of course Excise taxes don't allow politicians to mold us into THEIR idea of what a society should look like. So, today, I would favor the Fairtax, which eliminates ALL income taxes, and replaces them with a Federal sales tax to fund the Federal government.
As always, thank you for your thoughtful comments, and pleasant demeanor.
http://archive.fairtax.org
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