Keynesian vs Austrian Economics
This Debate is one between the two most prominent economic theories: Modern Keynesian Economics and Austrian Bisuness Cycle Theory.
**NOTE** Arguments should presented in the affirmative of either side should be chararcteristics that are universally accepeted as characteristics of that argument. The same applies to rebuttals (no straw man arguments).
I realize that there is a sligt overalp between the two theories; however, they are two very distinct philosophies.
Side Score: 34
Side Score: 28
It's all about the aggregate demand.
I believe Austrian economics is obsessed with self-regulation. The whole concept of lowering business taxes and regulation is to is to give businesses ore free capital to reinvest in the company. The only problem: corporations have more free capital than ever before. WE DON'T HAVE A SUPPLY PROBLEM.
WE HAVE A DEMAND PROBLEM. Consumer spending is, in my uniformed opinion, the most important economic statistic. C+I+G (X--M). It's all about the demand. Keynesian economics realizes that.
Asserting that "corporations have more free capital than ever before", therefore "we don't have a supply problem" is vast oversimplification which neglects the obvious goal: increasing living standards.
Human society has always had "supply problems", or simply a need for greater production. To deny this is to state that we have enough consumer end-products (towards the goal of increasing living standards), and we no longer need to produce more or better houses, electronics, furniture, vehicles, and so on. Of course we want more supply and production, as much as we can reasonably get. Who wouldn't mind having a spare car or two? The demand is always there, once more important needs have been met.
Keynesians fixate on demand as if the only way to get consumers to buy is to give them more currency to spend (or alternatively, go into debt). Lost on them is the concept that (absent central bank inflation) the reverse may also happen - a drop in prices, which unleashes held back demand. Price drops (via more capital, more supply, more production, more productivity) solve the supposed "insufficient demand" problem.
Moreover, the currency manipulation (endless credit expansion) Keynesians advocate for causes additional unintended problems, such as acting as an "inflation tax" on savers and the working class, as the additional credit devalues existing currency (and slow rising worker pay rates). Naturally whoever is first to receive the benefits of the credit expansion (in the form of artificially lower mortgage interest rates, for example) is benefiting disproportionately from others who responsibly save & invest for the future. Those who sacrifice consumption today--for the promise of greater consumption tomorrow--are penalized for their more responsible behavior instead of being rewarded for not wastefully consuming today's resources.
Also, Fed interest rate price controls disproportionately harm the capital-intensive early stages of the structure of production (such as mining & raw materials refinement), making it difficult for entepreneurs to forecast future economic conditions, as it creates the familiar "boom/bust" cycle of recessions and depressions.
The largest "depressions" all took place after the creation of the largest central bank of all time (Federal Reserve) - not before - and this is no coincidence. Those who point out similar crashes before the Fed as negating evidence fail to realize that US currency was not under free market controls during the pre-Fed period either, and was often being artificially manipulated. It's also important to realize the role that fractional reserve banking (considered fraud by Austrians) plays in further destabilizing the economy, creating panics, and allowing for even more credit expansion.
I can argue against most of Austrian Economics better than for most of Keynesian, but let me try arguing for Keynesian( I would normally advocate a different heterodox economic than Austrian).
Demand is what drives society, while you can not isolate demand from supply and make effective economic decisions it seems clear that demand is the more weighted of the two. A supply of houses will sit useless and effectively valueless without demand, they will not be made as much if at all, etc.
Investment in houses would thus not be profitable, and not be done, everything appears to come back to demand. When the economy declines and demand goes down within, the government may be able to compensate enough for the lost that its efforts will be multiplied by private forces; possibly enough to stop the decline and likely lessening it to some degree. It is the only entity capable of this compensation. You can think of it as Loaning demand, the higher taxs in later times (or in previous times to hedge) and other forms of financing is a type of demand financing where a little less demand over the long run is better than a lot less in the short run.
Demand is what drives society, while you can not isolate demand from supply and make effective economic decisions it seems clear that demand is the more weighted of the two
Did Microsoft or Apple exist prior to 1975? If demand is what drives society, wouldn't this mean that Microsoft and Apple are in a constant state of existence? How did Microsoft and Apple come into existence? Did the demand create Microsoft or Apple? No, because it did, it would have already existed.
Supply is just as important if not more important because it leads to entrepreneurship, and it creates supply, and demand will meet the supply with an equilibrium.
The notion of demand being more important only leads to creating artificial demand as does Keynesian economics constantly does.
A supply of houses will sit useless and effectively valueless without demand, they will not be made as much if at all, etc.
If there is no demand, why would there be supply? That is what a market is. Entrepreneurs take the risk in building homes because they think that there is a demand for people to live in structured buildings instead of the hot or cold weather. The building of homes is known as division of labor.
Demand did not drive their creation, but it most certainly fueled their growth. If there as no demand for their products, they would have failed. The two (supply and demand) go hand in hand; however, of the two, I believe demand is far more important. Creation of a supply is only to create demand for that product. Producing more of that product (increasing supply) is done only to satisfy the high demand. Supply-side economics is a failure (see Bush Tax Cuts). Boosting supply WILL DO NOTHING if there is no demand for it to meet.
By saying "Demand is what drives society", it seems you are attempting to isolate demand from supply. Saying that "it seems clear that demand is the more weighted of the two" without valid reasoning to explain why is not very convincing. Keynesians attempt to isolate demand from supply to the best extent they can, but doing so is about as futile as trying to determine whether the chicken or the egg came first.
The example of "a supply of houses" being "useless and valueless" is similarly absurd. Of course there is some use and value - it may not be equal to that of your first house, but there is always demand for more--at the right price (in this example they'd likely be summer or vacation homes), and of course the price is set by the ratio of supply vs demand.
The only way an "excessive supply" would be a genuine problem is if you literally had produced too much of everything to the point that nobody would want a product, even if it were free - realistically, an impossibility. The reason we sometimes see a "surplus" of cars or houses is simply the result of economic miscalculation & resource/capital misallocation or "bubbles", and all this is caused by the boom/bust cycle which the Federal Reserve propagates.
Demand is nearly infinite, given sufficient supply to lower prices (creating such an abundance of goods that demand is overwhelmed is quite unlikely to happen, ever). Therefore I would argue that supply, the much more limited of the two factors (constrained by the reality of resource & capital scarcity) is a more relevant factor to ensure rising quality of life and economic growth. (Of course to have a stable non-bubble economy, you can't fixate on either supply or demand - they are inseparably linked.)
What brought us out of the Great Depression? Oh that's right, the War. What was the war an example of? Oh that's right, Spending Money. What does Keynes argue is the key to economic success? Oh that's right, Spending Money. Huh. That's weird, but it's not really is it? Keynesian is the way forward.
As a matter of fact, the great depression lasted until some time in 1947. Neither the New Deal or WWII solved the depression. A steadily recovering economy solved its own problems. The New Deal and WWII bringing an end to the depression is one of the most widely spread pieces of misinformation. http://www.thefreemanonline.org/columns/
Thanks for the comment!
But WWII? Rationed food, skyrocketing debt, and austerity? That is prosperity? War spending creates false, unsustainable growth. It's easy to have high employment when there's a draft.
Hoover tried a stimulus. Failed. Eisnhower. Failed. Bush. Failed. Obama failed. A monetary stimulus has only worked (loosely at that) once in American history. Is one data point really a correlation?
Obama is failing only because he didn't put ENOUGH in to make a difference, here in Britain we are doing so much worse than the Americans because our Government has been cutting, cutting, cutting. Now we're entering double dip. It certainly wasn't cutting that got us out of the Great Depression, that's for sure. Also, Keynesian theories are a way to get circulation up, if you spend then people have more money who then spend it, the cycle continues. If you cut, money is being taken out of the Economy at the time when it really needs it, this credit crunch was caused by a complete lack of faith in the markets, if governments spend then they also make the public think that it's fine to spend too! :)
This is a good/correct point, but we can expand even more. I'm not sure which monetary stimulus you reference which you're saying worked. But you omitted Roosevelt from that list of failures, and in many ways he was the worst failure of all.
Roosevelt's New Deal programs & expansion of Hoover's failed ideas are such great examples of failed stimulus, you have to wonder how modern economists and historians get away with marketing it as the complete opposite! (Many cynics credit government-run public schools which utilize text books that take this extremely biased and ignorant point of view.)
These policies had nearly a decade to start working, prior to the artificial (& unsustainable) employment boost caused by WWII. These programs were unprecedented in nature (similar to some of the failed "bailouts" tried recently), and they still clearly failed even to boost employment (which you correctly implied does not in itself equal prosperity).
They were actually burning crops (!!!) and trying to control prices rather than allow the economy to properly re-size what was possibly an over-allocated economic sector. (Done for political reasons & to buy votes, of course - here we see the result of political selfishness & special interest pandering.)
Contrast the "Great Depression" example (where the government not only took action, but one party had basically full control) with a little known depression that was arguably worse (but much shorter) - the 1920-21 depression. During this depression--which is interestingly completely omitted from many (most?) public school text books--the government did nothing to "fix" the problem, yet it didn't drag on. (Notably, the government likely didn't try to "fix" the problem because the president at the time was having medical issues, so we can't even fully credit the FedGov in this case.)
Austrian Economics is the far superior in economic thought because the fundamental principle is the Neutrality of Money Theory, and foundation is the Austrian Business Cycle Theory, both describe how the capital structure of an economy is built.
Austrian Economics advocates laissez-faire capitalism because it supports economic freedom, personal freedom, sound money, and limited government.
then please explain mises article: http://mises.org/mmmp/mmmp5.asp
There is no author.
Many economists maintain that money neutrality is a good approximation for how the economy behaves over long periods of time but that in the short run monetary-disequilibrium theory applies, such that the nominal money supply would affect output.
Thanks for the opinion!
Here's my objection:
Self-Refulation? Laissez-faire is over-simplistic. If we haw learned anything from this crisis, it is that massive financial instititions left alone by government will fail. I want sustainable growth, not a series of ever-worsening bubbles.
Reaganomics is a failure. Deregulation is clearly not working.
If we haw learned anything from this crisis, it is that massive financial instititions left alone by government will fail.
If you truly knew what the Austrian Business Cycle Theory was, then you would know that 2008 crisis was caused by the Federal Reserve's cheap credit in the housing market. The creation of the housing bubble.
I want sustainable growth, not a series of ever-worsening bubbles.
Well, then Austrian Economics is what you want, Keynesian economics is only about creating a series of bubbles.
Reaganomics is a failure.
Ok, how is this relevant, Austrian Economics is not Reaganomics.
Deregulation is clearly not working.
Have you flown on a airplane? Those relatively cheap rates and competition are due to deregulation.
Someone already pointed out that Reaganomics isn't the same (although most Americans seem to think his policies worked, the 80's are thought of as a prosperous time), but this idea that went around in 2008 that "deregulation" caused a housing collapse is a far worse over-simplification. There's a great book about exactly this called Meltdown by Thomas E. Woods. Basically it places the blame where it belongs, primarily Federal Reserve policy, although there's too much more to add in this space here.
To address "deregulation", yes the elimination of some rules did definitely worsen the problem. But saying deregulation was the cause strongly implies that the industry was not regulated at all, which couldn't be further from the truth. Even after the supposed deregulation, there was no free market, and there were still major non-free market government interventions. The Federal Reserve's artificially low interest rates are a major one. Fannie & Freddie contributed, by creating moral hazard - why would a bank care whether a lender can pay a mortgage when they're able to toss the hot potato to a 3rd party & be guaranteed to profit no matter what happens? I'll let others reference Meltdown for more.
So I'd argue that saying "Deregulation is clearly not working." is like turning off a RC hobby aircraft's remote control while the craft is stalling in midair and saying "That didn't work!!!" once it crashes. If we're going to let it (plane/industry) go on it's own power, you've gotta hit the reset button (land the plane / fully deregulate the industry) and give it a chance.
In my experience, most of the time someone is blaming the "free market" or Laissez-faire for something, it's an accidental straw-man: it wasn't actually a free market.
Yes. Most modern "economists" and analysts conflate "price inflation" with currency inflation. It's important to realize that when Austrians say "inflation" they are referring to increasing the volume of currency in circulation (in the Fed's case credit expansion, which has the same effect). Eventually of course, this will cause what most "TV analysts" really are looking for (rising prices), but only considering "price inflation" prevents you from fundamentally understanding what is happening.
Most of these supposed analysts on TV don't even seem aware that there are two schools of thought, so it's no surprise to see them literally laughing at an Austrian analyst like Peter Schiff, pre-2008, when he's in the process of warning about an upcoming housing industry collapse...
(Search Youtube for some clips vindicating Austrian analysis, which Peter utilizes, and humiliating the so-called analysts with Keynesian training. Apparently pre-2008 simply disagreement and mockery was enough to rebut an opposing viewpoint. Not so much anymore...)
Keynes was a homosexual (FACT, not opinion), and homosexuals don't invest. They borrow and consume and keep the party going as long as possible.
Why? because homosexuals do not have families to invest for, no children to offer an estate or inheritance.
Keynesian economics is designed for ONE lifetime. Not multiple lifetimes as a country lasts for.
Of course they invest. They intend to retire like everyone else, don't they? They grow businesses like everyone else, yes? Keynes' "preferences" have nothing to do with anything, and if you think it did play a role in the formulation of his theories, you're going to need to provide some serious evidence to back that up. Most people aren't investing for their children (maybe at advanced age), and generally nobody invests just to make their estate/inheritance bigger... that's just not the driving motivation.
Keynesian economics wasn't "designed" for anything (again, proof needed). It happens to greatly benefit people today at the expense of those who come later, but history has shown that this boom/bust cycle occurs much faster than a human lifetime.
These just aren't really arguments used to properly explain Austrian theory or to dispute Keynesian theory.