Since the collapse of the United States economy in 2007 and 2008, there has been a growing interest in the world of economics. There have been two instrumental economic schools of thought that have become more ubiquitous as the years have gone by, but only one of these is practiced in government and taught in universities and colleges across the country.
For supporters of retiring Texas Republican Congressman Ron Paul, Austrian Economics is the prevailing theory that has proved time and again that its economic adversary is a total failure. Meanwhile, adherers of the status quo and those who disdain the free market abide by Keynesian Economics.
Which one is the correct economic thought? Well, there is no defining answer, but there is historic, economic and political history to showcase how many times the Austrian Theory has been correct, while Keynesianism has gotten the U.S. into the mess it is currently in.
“Despots and democratic majorities are drunk with power. They must reluctantly admit that they are subject to the laws of nature,” wrote Ludwig von Mises in an anthology of Austrian Economics. “But they reject the very notion of economic law . . . economic history is a long record of government policies that failed because they were designed with a bold disregard for the laws of economics.”
Here are 11 reasons why Austrian Economics is superior to Keynesianism.
1. Independence vs. Dependence
It is easy to become dependent on the federal government, especially when you feel there is no economic justice. Let’s face it. There are numerous social programs that can make you reliant on Washington – welfare spending now accounts to more than $1 trillion of the budget and is the No. 1 expenditure.
A Keynesian will argue that social programs are needed as a social safety net, while an Austrian will put forward the idea that humans are generous and will help the poor, the needy and those unable to take care of themselves. Essentially, friends, family, churches, charities and the private sector will do a much more efficient job than a bureaucrat pushing papers.
Furthermore, those able-bodied and still believe the government must take care of them would actually begin to become independent individuals and contributing members of society. Although Nobel laureate Milton Friedman was not an Austrian (he was a follower of Chicago Economics), his “Free to Choose” series featured welfare recipients that received the same amount of checks from the government that they would have earned if they were working.
2. Human Intelligence vs. Human Stupidity
Sure, a lot of humans make really bad decisions in their day-to-day lifestyle. Eating McDonald’s, not exercising and doing drugs are only some of the horrid decision making. However, humans are quite capable of knowing what’s best for them and their family, while the Keynesians would have you believe that the government must dictate the good and bad traits of society and implement prohibitions on products, such as fast food, drugs and alcohol.
An Austrian believes that humans have the freedom and right to do whatever they like as long as they don’t impose their will on others and also suffer the consequences of their negative choices. A Keynesian would say only the government knows what’s best.
3. Prosperity vs. Artificial Wealth
Savings and investments are what grows an economy. What has the U.S. been doing? It has been spending like drunken sailors, acquiring unaffordable housing, establishing dot-com and credit card bubbles and taking the easy way out to supposed prosperity. But this is a good thing, according to Keynesian economists, because if consumers don’t spend then the government has to!
Austrians promote the idea that you can never spend your way to economic success. It takes a number of factors, most that are contradictory to what John Maynard Keynes promoted during World War II, including enhanced savings, an accumulation of large capital, sound investments and no government intervention.
4. Freedom to Fail vs. The Ban on Failure
For some reason or another, the federal government has concluded that businesses cannot fail and that they must also be subsidized. Both of these were seen during the financial collapse when banks were bailed out, automotive companies were given loans and energy companies were provide with large subsidies backed by the taxpayer.
If you head into a classroom studying Austrian Economics, you will learn that you have the freedom to try, succeed and fail. If a company is incompetent and it is not generating money then it will lead to bankruptcy and closure. If a company is competent and is making money from creating products the market likes then it will succeed.
5. Saving vs. Spending
Nobel prize-winning economist Paul Krugman believes President Barack Obama’s stimulus wasn’t enough and that the Federal Reserve’s quantitative easing should be exacerbated. In essence, spending is the only way to economic recovery, which was the absolute theory put forth by Keynes himself.
Not so, says many Austrian theorists. The savings rate in the U.S. is at four percent, while household debt is at $11.38 trillion and the federal budget is nearing $4 trillion. Is the U.S. economy in any better shape? No.
6. Peace vs. Destruction
Following the devastation of Hurricane Sandy, a lot of economists have said it will form an economic boom because it can rebuild and thus create jobs and businesses will be making money. Heck, even Krugman himself thinks destruction leads to prosperity.
In actuality, this theory has been proven wrong by Frederic Bastiat who published his incredible 1850 piece “That Which is Seen, And That Which is Not Seen.” One of the chapters includes The Broken Window Fallacy: a person destroys a shop’s window and everyone is devastated by it, but concluded that it will stimulate the economy by giving work for the window repairman.
However, what is not seen is that the shop owner would have spent part of his profits to buy a new suit, go to the movie theater or have a nice meal at a restaurant.
The notion that we should break everyone’s windows, create endless chaos and provide unimaginable damage is fantastic for an economy is foolishness.
7. Freedom to Associate vs. Rules in Association
Is it anyone’s business if I want to work for less than minimum wage at any company? Isn’t it my personal choice to not join a union even if a company has one? The examples are endless, but the government only permits freedom to associate as long as your relationship with your employer or employee meets a bureaucrat’s necessary requirements. As Reason asked at a recent union rally, if workers want to have workers’ rights why can’t companies have the same thing?
8. Sound Money vs. Monopoly Money
Does anyone really think that the U.S. dollar is as good as gold? Since the inception of the Federal Reserve in 1913, the dollar has lost 90 percent of its value and inflation has been running rampant since the 1970s. This is a good example as to why the Keynesian models are wrong.
It is stated that inflation is needed, according to many Keynesians, but Austrians say that inflation can wreak havoc in an economy because increasing the monetary supply decreases the value of money, makes the costs of goods and services skyrocket and hurts savings that are held by average citizens.
9. Competition vs. Picking and Choosing Winners (mostly just picking losers)
Although 2012 Republican presidential candidate and former Massachusetts Governor Mitt Romney is certainly no friend to Austrian Economics, he made an excellent point in the first presidential debate against President Barack Obama. Romney stated that the government can’t pick and choose winners and losers, but noted that the president has been only picking losers.
He is indeed correct. Competition is crucial, while picking and choosing which businesses should get an upper hand is nothing but cronyism and corporatism. This also leads to a distortion in the market because companies who don’t rely on the government will eventually conclude that perhaps it should ask for subsidies and government help.
When a company spends its own money on its own endeavors, it sometimes prospers and it sometimes fails. When a company spends the taxpayers’ money on its own endeavors, it usually fails because, as Friedman said, it’s not their money to invest it’s someone else’s.
10. Slowdown vs. Depressions
“All recessions are bad and must be suppressed by government actions. This protects established businesses and jobs. The methods are elaborate and costly, but a benefit to the public overall.” – the mind of a Keynesian.
“When markets stray too far from reality they must be purged by adversity. This clears unneeded or failing enterprises so capital is not allocated wastefully, and new businesses can emerge. Periodic small recessions are the price of a healthy economy.” – the mind of an Austrian.
Hardly anyone ever talks about the recession in the early 1920s, which didn’t lead to a depression. Everyone remembers the Great Depression and most say the government saved everyone, but in fact it perpetuated and exacerbated the severe economic downturn.
Years later, the government has done the same thing with the so-called Great Recession. If the government allowed the banks to fail, the automotive companies to go under, the housing industry to collapse and let the market forces do its magic, the recession would have been over in a year or two.
11. Fun Lessons vs. Uptight, Hebetudinous and Angry Lessons
After studying Austrian Economics for an entire year in 2007 – an education in this theory can last for years, though – it became quite clear that this is a virtuous and fun economic model to learn. Meanwhile, after reading several books on Keynesian logic, it became prevalent that it’s rather dull, uptight and defies logic.
If you have ever read a book like Henry Hazlitt’s “Economics in One Lesson” and then compare it to Keynes’s “General Theory,” there is no doubt that the former is superior to the ladder.
When discussing “The Blessings of Destruction” in chapter three, Hazlitt writes: “Did Germany and Japan really prosper after World War II because of the bombing inflicted upon them? They had new factors, built to replace those that were destroyed, while the victorious U.S. had only middle-aged and old factories. Well, if this were all it takes to achieve prosperity, we can always bomb our own industrial facilities.”
In the introduction of “The General Theory,” Keynes writes: “I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium.”
That passage alone can put anyone to sleep, especially if you are a new to the world of economics.
In conclusion, the Austrians have been proven correct time and time again: the U.S. is broke, the dollar is nothing more than toilet paper, there is hardly any real economic growth, unemployment is in the low-20s and the country has become a nation of whiners (mostly anyway) because everyone wants something for nothing.
For any Keynesian out there that has a lot of confidence in government, here is a quote from Milton Friedman: “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”