Sunday, November 30, 2008

Comparing Keynes and the Austrians

First let us note that we labor under the ideology of the Keynesian school of economics. John Maynard Keynes is the system’s namesake and is the "highly revered" economist and intellectual who is credited with bestowing on us our current system.

We begin by comparing two facets of the Keynesian school of thought to the Austrian school of thought. Our first item involves the respective views of the “crisis”.

In the Keynesian view the current crisis should never occur because the central banking system, i.e. The Federal Reserve System, has the sophisticated tools necessary to prevent any such crisis from occurring. Consider Bernanke’s recent comments about the control the Fed has over the economy.
“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

(Ben Bernanke, “Deflation: Making Sure ‘It’ Doesn’t Happen Here” [Remarks before the National Economists Club, Washington, D.C., 21 November 2002])

And when things do break, the apologists have been trained to suggest that it would really be worse if the Fed hadn’t saved us.

“David Henderson and Jeff Hummel have managed to ruffle quite a few Austrian feathers with their recent Cato briefing paper, and no wonder: that paper claims not only that Alan Greenspan's Fed was innocent of any role in encouraging the housing boom but that Greenspan had actually managed to do something Austrian monetary economists have long claimed to be impossible, namely, solve the monetary-central-planning problem. Greenspan, by their assessment, managed to mimic the kind of money-demand accommodating money supply growth that would occur under free banking, thereby achieving (according to their paper's executive summary) ‘a striking dampening of the business cycle.’”

Guilty as Charged Mises Daily Article by George A. Selgin

Never mind the factors which systemically dampen the business cycle like JIT inventory, changing ratios of non-cyclical sectors in the broader economy, and foreign trade and dollar holdings. Any dampening of the business cycle is because of the stellar performance of the Fed, or so we are told.

Fundamentally the Keynesian view says there should not be any more business cycles and those in the past were caused by the Fed having inadequate “tools” to prevent the crisis. The answer has always been more power in the hands of the Fed.

The Austrian view, on the other hand, predicts, explains and offers solutions to the Business Cycle.

The Austrian view recognizes that Fractional and Fiat money, enjoying legal monopoly through the coercive power of government, causes money to be unrealistically cheap. Cheap money leads to malinvestment because the signal given by abundant, low cost money is that there are real savings present which will sustain longer term or lower margin investments. Because creating Fiat or Fractional money ex nihilo is not the same as creating real savings, the investments are overpriced and are not sustainable. In addition, the explanation shows how and why the cheap money primarily affects capital goods.

The solution involves several components, but in simplest form, one could say the Austrian view is that natural money as private property without government intervention essentially solves the problem.

Now we move on to our second comparison.

The Keynesian view begins with the primacy of the state and therefore seeks to justify state action, thereby rendering a fragmented and conflicting series of economic models. Suffice it to say; when one needs to justify actions in any context, something is amiss. In addition, the lack of a single, unified economic model suggests that earning the accolade of being a credible “school of thought” should be out of reach. Instead Keynesianism is glorified. Such is the world in which we live…

The Austrian view, on the other hand, begins with the primacy of the individual in economic and social affairs. As such, the effort is made to observe and seek an accurate and true explanation of economics and related social order. The result is a single, unified economic model at its core.

Foundations of Thought

On one hand there is Keynes who says the business cycle should never exist because the central bank has the "tools" to prevent a crisis and in all cases Keynesians begin by justifying state actions.

On the other hand there are the Austrians who predict, explain, and resolve the business cycle and, with a unified core model, rigorously explain specific realities of economic and social order.

Who should we believe?

The Keynesian school of thought which is constantly out of line with reality and is clearly destructive to liberty and private property?

Or the Austrian school of thought which matches reality and identifies principles which protect liberty and property...

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