Keynesian Economics and Austrian School

Keynesian Economics

Founder: John Maynard Keynes (1883-1946)

Keynes argued that the solution to the Great Depression was to stimulate the economy ("inducement to invest") through some combination of two approaches: a reduction in interest rates and government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment. A central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards full employment levels. This conclusion conflicts with economic approaches that assume a strong general tendency towards equilibrium. In the 'neoclassical synthesis', which combines Keynesian macro concepts with a micro foundation, the conditions of general equilibrium allow for price adjustment to eventually achieve this goal. More broadly, Keynes saw his theory as a general theory, in which utilization of resources could be high or low, whereas previous economics focused on the particular case of full utilization.

Austrian School

Founder: Eugen Böhm von Bawerk (1851-1914)

Whereas mainstream economists generally use economic models and statistical methods to model economic behavior, Austrians argue that they are a flawed, unreliable, and insufficient means of analyzing economic behavior and evaluating economic theories. Instead, they advocate deriving economic theory logically from basic principles of human action, a study called praxeology. Additionally, whereas experimental research and natural experiments are often used in mainstream economics, Austrians generally hold that testability in economics and precise mathematical modeling of an economic market are virtually impossible. They argue that modeling a market relies on human actors who cannot be placed in a lab setting without altering their would-be actions. Supporters of using models of market behavior to analyze and test economic theory argue that economists have developed numerous experiments that elicit useful information about individual preferences. Austrian contributions to mainstream economic thought include involvement in the development of marginalism and the subjective theory of value on which it is based, as well as contributions to the economic calculation debate. From the middle of the 20th century onwards, the Austrian school has been considered outside the mainstream of economic thought. Its reputation rose in the mid-1970s, after Austrian economist Friedrich Hayek shared the 1974 Nobel Prize in Economics. According to Austrian School economist Peter J. Boettke, the position of the Austrian School within the economics profession has changed several times from mainstream to heterodox.

So which economic theory do you like better?

Also I made a poll: http://poll.pollcode.com...

I choose the Austrian one because that theory is easier to understand and doesn't require a lot of math :).

At 3/31/2012 3:09:06 PM, darkkermit wrote:
I choose the Austrian one because that theory is easier to understand and doesn't require a lot of math :).

less math! yes

At 3/31/2012 1:24:21 PM, 1Historygenius wrote:
Keynesian Economics

Founder: John Maynard Keynes (1883-1946)

Keynes argued that the solution to the Great Depression was to stimulate the economy ("inducement to invest") through some combination of two approaches: a reduction in interest rates and government investment in infrastructure.

Some don't stop to ponder the fact that the economic crisis of 1929 and onward was the first crisis in which a full array of Keynesian tactics were employed: deficit spending, unemployment insurance, jobs programs, price and wage controls, supply destruction (in an effort to raise prices), etc. and it was the most devastating economic crisis in US history. Even mainstream economics and economic model builders are beginning to accept that the Great Depression was caused primarily because of New Deal policies.

Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth.

Government spending never results in genuine economic growth. Look back to 1946, when government cut spending in the US and neutered many New Deal programs, a strong recovery ensued. The same can be seen when Finland cut government spending in the 1990's. There are numerous examples from around the world, and the reason for this is that a recession or depression is a time when economies purge themselves of bad businesses and credit bubbles (often stimulated by government in the first place) and the fact that government encounters the economic calculation problem to which all central planners fall prey, resulting in malinvestment.

The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.

This is closely associated with the fallacy of foreign aid. That, "If the chain of events doesn't start with capital injection, then these economies are stuck in a 'vicious circle.'" However, the creation of new money or the redistribution of money only stimulates the problems in an economy. This causes economies redesign themselves to agitate and accommodate for more government spending, instead of finding ways to creatively satisfy consumer desires. One only has to look at the financial sector for an example of repeatedly inflated bubbles.

A central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards full employment levels.

Yet, the examples in history when full Keynesian tactics are employed resulted in the highest unemployment in recorded history. The most free market countries in the world have relatively low unemployment: Hong Kong's 3.2% and Singapore's 2%.

This conclusion conflicts with economic approaches that assume a strong general tendency towards equilibrium.

Keynesianism conflicts with economic reality in more ways than one.

In the 'neoclassical synthesis', which combines Keynesian macro concepts with a micro foundation, the conditions of general equilibrium allow for price adjustment to eventually achieve this goal. More broadly, Keynes saw his theory as a general theory, in which utilization of resources could be high or low, whereas previous economics focused on the particular case of full utilization.

Keynesianism also ignores the unseen and thinks a short-term boom is a decent tradeoff for a long-term bust.

Austrian School

Founder: Eugen Böhm von Bawerk (1851-1914)

Whereas mainstream economists generally use economic models and statistical methods to model economic behavior, Austrians argue that they are a flawed, unreliable, and insufficient means of analyzing economic behavior and evaluating economic theories. Instead, they advocate deriving economic theory logically from basic principles of human action, a study called praxeology.

With this they have predicted every major economic crisis of the 20th and 21st centuries.

Additionally, whereas experimental research and natural experiments are often used in mainstream economics, Austrians generally hold that testability in economics and precise mathematical modeling of an economic market are virtually impossible. They argue that modeling a market relies on human actors who cannot be placed in a lab setting without altering their would-be actions. Supporters of using models of market behavior to analyze and test economic theory argue that economists have developed numerous experiments that elicit useful information about individual preferences.

They also study market behavior throughout history to assess the nature of economics itself and how government policies distort markets and alter human behavior.

Austrian contributions to mainstream economic thought include involvement in the development of marginalism and the subjective theory of value on which it is based, as well as contributions to the economic calculation debate. From the middle of the 20th century onwards, the Austrian school has been considered outside the mainstream of economic thought. Its reputation rose in the mid-1970s, after Austrian economist Friedrich Hayek shared the 1974 Nobel Prize in Economics.

Now it is the fastest growing school of economic thought. Austrian economics runs very much contrary to the conventional wisdom, but in this day and age, that is the beginning of true wisdom.

According to Austrian School economist Peter J. Boettke, the position of the Austrian School within the economics profession has changed several times from mainstream to heterodox.

Austrian economics' position has not changed, the mainstream of economics has changed from sound to unsound.

So which economic theory do you like better?

This isn't the question you should ask. Economics isn't some popularity contest. These types of "opinions" have very serious consequences for the fate of humanity and humanity's quality of life. The economic theory that has worked time and time again in reality and is logically defensible: Austrian Economics. The economic theory that has been an abysmal failure as the root cause of the Great Depression, Stagflation, the Housing Bubble, the Dot-Com bubble, the Financial Crisis, government debt accumulation, warfarism, welfarism, and a hodgepodge of failed government programs that continue today onward: Keynesianism. The world will begin to grow to something like its full height once this inane, pseudoscientific Keynesian economic theory is put to rest and the world embraces genuine economics once again. Since I do not hate the human race, I choose Austrian economics as my preference. Good topic.

Also I made a poll: http://poll.pollcode.com...

Voted!

Carl Menger (1840-1921) was the founder of the Austrian School. [http://mises.org...]

At 3/31/2012 3:21:34 PM, Wallstreetatheist wrote:

At 3/31/2012 1:24:21 PM, 1Historygenius wrote:
Keynesian Economics

Founder: John Maynard Keynes (1883-1946)

Keynes argued that the solution to the Great Depression was to stimulate the economy ("inducement to invest") through some combination of two approaches: a reduction in interest rates and government investment in infrastructure.

Some don't stop to ponder the fact that the economic crisis of 1929 and onward was the first crisis in which a full array of Keynesian tactics were employed: deficit spending, unemployment insurance, jobs programs, price and wage controls, supply destruction (in an effort to raise prices), etc. and it was the most devastating economic crisis in US history. Even mainstream economics and economic model builders are beginning to accept that the Great Depression was caused primarily because of New Deal policies.

Astounding, considering the Great Depression preceded the New Deal by about a four years, and the New Deal was a response by the government under FDR to the Great Depression. Mainstream economics and economic model builders must believe in mystical time travel, then. Each and every such proponent trying to blame the New Deal for causing Great Depression which started four years prior to the New Deal (and, in fact, the New Deal was actually a response to the Great Depression) should be singled out and identified as the revisionist quacks they are relying on magical time travel with effect preceding cause.

http://en.wikipedia.org...
http://en.wikipedia.org...

Astounding, considering the Great Depression preceded the New Deal by about a four years, and the New Deal was a response by the government under FDR to the Great Depression.

I understand what you're saying, but I'm referring to the common phrase, "FDR took the depression and made it great." If FDR and his advisers chose not to intervene economically and to allow the market correct itself from years of credit distortion due to the fed, then we would have come out of the depression in '33-'34, yet his policies took the depression, exacerbated it, and prolonged the duration until 1946. If you want to know my opinion on what created the depression, I refer to Ludwig von Mises who predicted the Great Depression that the cause was an artificial credit distortion from the central bank of America, the Fed.

Mainstream economics and economic model builders must believe in mystical time travel, then.

Again, took the depression (a worse one actually occurred in 1920), and made it far worse by intervening even more with his panel of "experts" into the economy greater than Hoover did.

Each and every such proponent trying to blame the New Deal for causing Great Depression which started four years prior to the New Deal (and, in fact, the New Deal was actually a response to the Great Depression) should be singled out and identified as the revisionist quacks they are relying on magical time travel with effect preceding cause.

I know this is debate.org, and we all try to sound like bombastic, pompous orators by deriding others constantly, but please try to understand someone else's actual point before the vitriol. The only revisionist qucks really left are central bankers themselves, their buddy at the New York Times, Paul Krugman, and Rachel Maddow on CNBC. The New Deals (there were two) were a response to the depression, which at that time was not reffered to as the Great Depression, the proper noun we all know.

http://hnn.us...
http://www.coordinationproblem.org...
http://online.wsj.com...
http://mises.org...
http://wiki.mises.org...
http://mises.org...

At 4/9/2012 2:16:37 AM, Wallstreetatheist wrote:

Astounding, considering the Great Depression preceded the New Deal by about a four years, and the New Deal was a response by the government under FDR to the Great Depression.

I understand what you're saying, but I'm referring to the common phrase, "FDR took the depression and made it great." If FDR and his advisers chose not to intervene economically and to allow the market correct itself from years of credit distortion due to the fed, then we would have come out of the depression in '33-'34, yet his policies took the depression, exacerbated it, and prolonged the duration until 1946. If you want to know my opinion on what created the depression, I refer to Ludwig von Mises who predicted the Great Depression that the cause was an artificial credit distortion from the central bank of America, the Fed.

That you derive economic religion from cliches created by right-wing revisionists speaks volumes. Government spending, especially deficit spending during a recession, is the only real way an economy pulls back. Economies do not self-recover from such crashes on their own ... never have, never will despite cliches and economic religions to the contrary.

The Depression of the 1930s was caused by the same thing that created the crash and recession of the past four years or so: Greed and excess by the wealthy at the expense of the majority.

Mainstream economics and economic model builders must believe in mystical time travel, then.

Again, took the depression (a worse one actually occurred in 1920), and made it far worse by intervening even more with his panel of "experts" into the economy greater than Hoover did.

Completely false. Massive government spending, especially the huge deficit spending of World War II, ended the Great Depression. Magical time travel delusional revisionism doesn't change that any more than revisionist claims that the Civil War had nothing to do with slavery have any real merit, either. There is no "crashed economies self-recover" actual laws of economics. The New Deal provided real jobs to real people who needed them.

Only a small minority of historians -- 6%, in fact -- believe the New Deal worsened or lengthened The Great Depression while a larger minority -- 27% -- of economists believe that it did. 74% of historians and 51% of economists disagree outright with that assessment. See: http://en.wikipedia.org...

It is dishonest to attempt to characterize the "worsened or lengthened" right-wing revisionist cliche as being widely accepted.

I know this is debate.org, and we all try to sound like bombastic, pompous orators by deriding others constantly, but please try to understand someone else's actual point before the vitriol.

I understand your points, and understand that they are not only false, but dishonestly presented. I get sick and tired, personally, of pandering to tea party crackpots who make absurd claims to support revisionism to excuse their reasoning. If you don't like being called out for absurdity in claiming "action X made in response to condition Y that preceded it actually created condition Y" then don't make such absurd claims. You are at fault for the harm you cause your own reputation when you make claims about support for economic theories that are, in fact, outrightly refuted by a majority of economists and while I can understand the motivations you have for grasping desperately for crackpot theories to excuse your factually unsupported (if still popular) notions.

You have no right to limitless demands of my respect. I define you by your actions and statements, and when you make claims that are absurd and/or false to support your position as you have and continue, you earn the labels warranted by your actions. If you do not consider it fair for you to be defined by your actions, I cannot imagine you will ever find much satisfaction in debate.

Would you be willing to engage in a debate as the Con on the resolution, "Resolved: The New Deal prolonged the Great Depression." ?

It will be part of the economics debate tournament I started and will replace the "War is good for an economy" resolution.

If so please say yes, and I'll challenge you.

Not really interested, no ... for a number of reasons, at this point in time I cannot commit to logging on regularly and dedicating the hours of work required to run an effective case. I really don't have the resources to dedicate to making cases in formal debates at this time.

Well, since you have taken the position of defending the state in obsequious obedience to your overlords, and I have taken the position of the efficient market system with relative freedom of contract, we are bound to argue this later. Please, debate me on any of the topics in which we had disagreement.

Topics I will debate:

1. War is not good for an economy.

2. High-frequency trading should be banned.

3. The minimum wage hurts the poor.

4. Socialism is inherently immoral.

5. Tariffs harm domestic and foreign economies.

6. Free trade makes everyone better off.

7. Capitalism raises the standard of living of everyone.

8. The United States should terminate all foreign aid.

9. The United States would be more prosperous without the welfare state.

10. The imposition of sanctions on states is not the best way to end child labour

11. America should privatize Social Security.

12. The government caused the great depression

13. Representative money is superior to fiat money.

14. Development programs hardly ever benefit the poor.

15. A freer economy results in a higher quality of life.

16. Good economics is bad politics.

17. The government should never bailout a failing business.

18. Mild deflation is preferable to mild inflation.

19. Saving and investing are superior to borrowing and spending.

20. Austrian economics is superior to Keynesianism.

21. The Austrian Theory of the Business Cycle (ATBC) is correct.

22. All intellectual property laws should be abolished.

23. The Federal Reserve should be abolished.

24. The United States should have no official currency.

25. A purely capitalistic system would be disadvantageous to the institution of slavery even if slavery were permitted to exist.

26. Austrian business cycle theory is correct.

At 4/10/2012 9:08:57 PM, Wallstreetatheist wrote:
5. Tariffs harm domestic and foreign economies.

I will debate this.

*I take pro on all topics.

Reasoning, would you care to be part of an economics tournament with this topic?

At 4/10/2012 9:23:40 PM, Wallstreetatheist wrote:
*I take pro on all topics.



Reasoning, would you care to be part of an economics tournament with this topic?

Sure.

Cool, you're in round one now. I'll post the debate in about three minutes. I'm glad to finally speed this debate tournament up. Economics is the least popular category on this site lol.

All hail the philosophy of total economic liberty and less state as possible. (Austrian School). :)

I myself am a Neo-Keynesian. For a few years I was an Austrian, but now I see far too many theoretical and empirical problems with the Austrian (read: Classical) explanation for deflationary recessions.

At 3/31/2012 3:20:29 PM, 16kadams wrote:

At 3/31/2012 3:09:06 PM, darkkermit wrote:
I choose the Austrian one because that theory is easier to understand and doesn't require a lot of math :).

less math! yes

Economists do not use math the same way that mathematicians use math. Those of us who use the neo-classical framework use math as a tool to symbolize the commercial relationships between persons and the economy. We do not treat our "equations" like axioms, but we do think that it is much better than the Austrian penchant for stories/narratives because it clears up ambiguities. Furthermore, the use of algebraic expression in economics can lead you to gain some really neat insights, like the Cobb-Douglas production function, upon which many testable and tested neoclassical theories rest.