Austrian or Keynesian?

[rightwinger]

Two schools of economic thought battle to become public policy all around the world. Austrian economist believe in free markets and small government; that the market can regulate itself and government interference leads to inefficiency and waste. Keynesians believe in big government and planned economies; that the free market cannot regulate itself and that government needs to step in and deficit spend to even out the ups and downs in the economy. The question is, which works better?

 

[myp]

The question isn't that simple because those aren't the only options (nor are they perfectly defined options). When it comes to monetary policy, all modern Keynesians are basically monetarists for one.

 

[rightwinger]

The question isn't that simple because those aren't the only options (nor are they perfectly defined options). When it comes to monetary policy, all modern Keynesians are basically monetarists for one.

Of course other options exist. Much like modern political parties, not all proponents of one school of economic thought will have the same stances as others. For example, Keynesianism and monetarism are different but believed by many of the same people, like abortion and gay marriage are believed by most liberals even though they are two seperate stances. This thread focuses on the ideals of the majority of Keynesian and Austrian economist. The "mainstream" beliefs of these groups.

 

[myp]

You can't really clump monetarists and Keynesians like that though... I know the Austrians like to because of more similar methodologies when it comes to monetarism and Keynesianism vs. Austrianism, but that is hardly a good reason to clump the two together.

Anyway, my opinion on your question is that Austrians need to embrace science- it is way too much ideology right now. As for what works better, personally I am for a central bank that targets monetary stability and expectations (something like NGDPLT) and a Federal government that is more streamlined and focuses on the overwhelmingly obvious good spending and not much else- things like defense, infrastructure, and basic research. I am not a fan of fiscal stimulus, but like monetary stimulus in the right instances and according to a set plan like NGDPLT.

 

[rightwinger]

Fair point.

Do you believe that spending on programs such as infastructure or research benefits the economy through an increase in demand, or hurts it by reducing economic opportunity?

And on the point of monetary stimulus, what would stop these policies that expand the credit supply from creating inflation and mis-allocating wealth within the economy as to lead to a correction later on?

 

[myp]

Do you believe that spending on programs such as infastructure or research benefits the economy through an increase in demand, or hurts it by reducing economic opportunity?

My reason for supporting them is not the demand created (which may well be net demand lost in the short run aggregate) when government gives these grants or hires people, but instead the multiplier effect that these projects can have. The cost of government misallocation can often be overcome in this sort of investment through the benefits it brings the private sector over the long run. The private sector is not always willing to make these investments themselves, especially if the timeline of ROI is too long and that is where government has a role.

And on the point of monetary stimulus, what would stop these policies that expand the credit supply from creating inflation and mis-allocating wealth within the economy as to lead to a correction later on?

My reason for supporting monetary stimulus over fiscal stimulus is to avert excessive misallocation. We all use money- it impacts us all. Now certain groups might get greater benefits just because of the way these programs work (i.e. big finance), but in those instances you might be able to offset that partially through fiscal policy such as Pigouvian taxes if that misallocation is a net negative.

I think the thing with monetary policy that a lot of people don't understand and especially the Austrians is that there is no perfect system. Free banking, gold standard, whatever- you will never have a completely stable currency. So then we are left with imperfect options and the best solution is just relative to the other possibilities.