Hi everybody,
I've been a lurker here for some time now, but this is my first time posting here. I'm a sophomore in college, and in my macroeconomics course, we've been discussing governmental policies designed to smooth out the business cycle. We've been approaching this concept from a classical vs. Keynseian angle, and I was wondering if anybody could provide some of their thoughts on the matter. I've been getting into Austrian economic theory, but so far my knowledge is very limited. I've just started reading Man, Economy, and State, and I only have a brief understanding of the ABCT and how it contrasts to other schools.
My question is: what exactly about Keynesian economics do most people disagree with? While I could not be more opposed to their conclusions such as high government spending and messing with the money supply being necessary, I have a hard time disagreeing with some of the assumptions that Keynesian theory makes to reach these conclusions.
Basically all of what we've talked about in class contrasts the opoposing views of classicals and Keynesians: classicals believe that prices adjust quickly and money is neutral, whereas Keynesians believe the opposite. I find myself believing that prices do take time adjust, and this results changes in output in the short-run (we've been using the IS-LM model).
What do Austrains have to say about this debate over price rigidity, money neutrality, etc.? What about the idea of the efficiency wage model accounting for some unemployment? Again, while I would never propose government solutions to correct these potential problems, I cannot say that Keynesians are wrong when presenting these arguments. Do these problems exist, but there is nothing we can do to correct the problems, or are the problems non-existent to begin with?
Sorry if I've asked too much in one post. Even a point in a good direction would be enormously helpful. Thanks in advance for your responses.
Hello MTEW
Here is a first pass.
Cutting through all the closed circle mumbo jumbo of Keynesian economics is the assumption that something can be created out of nothing, a kind of economic perpetual motion machine. Such a physical machine would of course contravene the Fist and Second Laws of Thermodynamics and indeed perpetual motion machines are something that that are thrown out straight away by the reviewers at the US Patent Office. Ironically, Keynesian economics believes that by virtue of its "scientific" approach, Demand can be stimulated by the Government and courtsey of the mysterious Multiplier Effect amplified throughout the economy. Of course, this increase in demand comes by taking away in taxes in the first place. There is no free lunch, and no perpetual motion machine.
Secondly, even if this was possible, Mises and Hayek have demonstrated that Government would not have the necessary information to do this. Mises has shown that in a Socialist economy where prices are arbitarily determined by the Government, the Government would not have the real price information upon which to make such demand stimulation decisions. Hayek, in his "Use of knowledge in Society" article demonstrates that even in a mixed economy information is continuously being used, and at all levels in society. Information use is too ubiquitous, in too constant a use and is used in such infinitesimally small increments that it would not be possible for a Government to use in this Keynesian demand stimulation method.
Hope this helps.
Remnant.
Here is one area in which we differ from the Keynesians. Hazlitt, Hayek, Rothbard and Hutt also all wrote devastating critiques of Keynesian economics, most of them available online at Mises.org.
The essence of keynesian theory is that it is possible to have something for nothing. This is the stated theory.
The truth behind it is that Keynes never believed in stated theory. That something is not coming about for nothing. It comes about through inflation only, and it will end in it's time, with a bang. But by that time, keynes hoped to be doing his virgins.
You can start pretending that you are rich by exchanging your dollar coins for pennies. Looking at the mountains of coins you will feel rich, and will start spending and hiring. You will actually get nice things to the extent that your bottom line will go down to zero and then into red. When the fun ends, you will find that you own less than the money you had initially, because of costs and depreciation, and not producing as actively as you otherwise would.
Money neutrality is none of govt business. Read Gary North on Mises.Employment is none of government's business. Keynes made it a gov business because he needed an excuze to propose a "solution".
Again, keynes wasn't a fool, just a smart con man.
Risks and external debts are not related to this. Former is a function of taxing profits, which pushes businessman to ever higher riss as efficiency is continually removed from the system, and latter is a function of our military force and gullibillity of foreigners or the incompetence of their governments.
Keynesian theory does not respect individual rights to Life, Liberty and the Pursuit of Happiness(Private Property Rights) that Austrian Economic Theory does. Austrian economic theory is based upon individuals exchanging goods and services through mutually beneficial exchange. Keynesian theory does not believe in these rights and therefore promotes any scheme to deprive individuals of their property for the collective good. The arbitrator of good is the state and the arbitrator of value is the central bank run by the state.
Using the logic of Keynes, you begin to believe crap like it is good to pay folks to dig holes and fill them up, Keynes' own phrase not mine. You also get fallicious ideas like war, destruction, mayhem and murder are economic pluses while individuals saving money (For future investment) is bad while taking on more loans than you can handle to purchase as much as possible is good.
Well, I'm pretty new here as well and by no means a "expert" on all things Austrian.
Most of the guys have talked about getting something from nothing and to expand they are talking about the increase in the money supply as a way to stimulate the economy by lower the interest rate (shift the LM curve to the right, yes i studied keynes in undergrad and grad school). However, there is a major flaw that I see here and it has to do with money. Keynes treats money as capital but in reality our money is merely a claim on capital. Under a free market the amount of capital saved and the capital demanded would determine the interest rate. However, keynes thought just by increasing the amount of claims on capital (money) you could "trick" the capital markets in lower its interest rates as if there were actually a real increase in capital savings. The problem with this is that now demand for capital has exceeded the supply of real capital at the new manipulated given interest rate. This causes bubbles as assets (homes, securities,etc) shoot up. As this new influx of claims on capital begins to circulate throught the economy it inflates prices, not equally across the board some areas more than others but always increases prices. Labor prices lag these increases. Keynes had some stupid notion that wages adjust preemptively because "expected inflation" keeps them ahead of things. That's retarded. Printing money is the biggest destroyer of the middle class. I believe it was Garet Garrett that said "With inflation, the middles class is murdered in their sleep". After the money has run through the economy and the game is up the market tries to readjust to get is capital savings to match the interestrate/ demand. This is a recession. We just print more money to stop this and rinse, repeat. Except the capital structure gets more and more out of whack so it takes more and more monetary intervention.
Furthermore, gov't deficit spending just encourages this process. When we deficit spend the treasury releases t-bills to fund it. This fucks up the fed equation of how many bills must be on the market for a given interest rate so the fed has to create money, monetize the debt to get the interest rate where they want it.
Anyway, thats a start. As I said, I'm rather new here as well and if I screwed anything up let me have it.
What did it for me was Bastiat's "What is Money?". After I read that it all just clicked.
Inquisitor:I forgot to mention - Hoppe has a great article in the reading list providing a basic refutation of Keynesian economics using Austrian principles. It's brief yet deep enough to provide the reader with an understanding of the issues involved. Even if I were not an Austrian, I'd reject Keynesianism. It is horribly flawed.
Thanks for all of the responses, everybody. I actually read this article immediately after I posted my original question. Great article. Even before I read the basic arguments against Keynes I found myself asking "but where does this extra output COME from?" I find myself having to just turn off my brain and go along with the illogic in order to complete assignments.
It is all very frustrating. In fact, I'm about to go take an exam on the subject right now. Time to power down, I guess.