In Life, people like to take sides. Whether talking about sports or politics, human beings like to associate themselves with other like-minded humans. When it comes to the theories of economics, this is no different. When you look at 2 popular schools of Economic thought, Keynesian vs Austrian, the most important debate is related to the role that the Government should play in society.
The Keys to Keynesians
Keynesians believe that the government should intervene whenever the economy isn’t doing well. It does this through fiscal policy such as government spending on infrastructure (putting in new roads, building bridges, etc). The government can also get involved through monetary policy, by reducing interest rates or even creating more money. Keynesians believe that markets are not always efficient and when the private sector stops spending due to fear, the state needs to step and fill that gap.
The Austrian Side of the ‘Coin’
Conversely, Austrian Economics revolves around the assumption that markets are very efficient, and that government intervention does more harm than good. Austrian economists believe that when the private sector stops spending, it does so because imbalances in the system need to be corrected. An Austrian economist wouldn’t necessarily consider a ‘financial crisis’ something that needs to be stopped with government intervention. Instead, they believe the ‘financial crisis’ is similar to bitter medicine (maybe Pepto Bismol). It’s won’t taste great, but at the time it is good for you.
Austrian Economics Basic Idea
Austrian economics believes that the business cycle is driven by supply, and not demand. If interest rates are too low, it will cause over-investment. This could lead to overproduction, which could also trigger a crisis. The main challenge in Austrian Economics is not inflation, but over-investment because of too much money. When there is too much money, it means the growth of the money supply is much higher than the growth of goods and services available. This leads to inflation, which is an increase in the average prices of all goods because there is more money available.
Austrian Economics = Free Market Economics?
Austrian economics often gets lumped in with Free Market Economics, and this is not really accurate. It is a set of claims about how markets work, how economies work, and even how the social world works. You can think of the Austrian school of economic thought as a framework for economic analysis rather than a set of policies.
Deep Dive Austrian Economic School Principles
Let’s get into a couple underlying principles of Austrian economics.
First, Austrian economics preaches that Only Individuals Choose. However, when you examine this on a macro level if you have a company deciding to change pricing or policy, or you have government enacting new regulations. What that really is is members of those entities coming together as shareholders or elected officials to make a decision that is for the good of the group.
Another claim Austrians’ make is that understanding the economic world comes down to Understanding the Role of Exchange and the way in which institutions and rules condition those exchanges. To expand, Trade is one of the basic principles of economics. People trade goods and services with one another to gain a mutually beneficial reward from the agreement. What Austrian economics points out is that markets are not only about the ‘Exchange’ itself. It is also important that those Exchanges go well, and this is controlled by policies and controls put in place by institutions.
The Third principle of Austrian economics is that Cost and Utility and Subjective. This means only the chooser can know how valuable a good is or what the cost of their actions is? A Basic principle in economics is Opportunity Cost, meaning if you chose one thing the cost is losing out on the next best thing you gave up. Austrian economists emphasize that opportunity cost is both subjective and expected. What this means is that only the person making the decision can know what they imagined they would have got out of the choice they didn’t make. To give a real-life example: If you go to Restaurant A over Restaurant B, the cost is what you thought you would have gotten by going to Restaurant B. This is a cost that is hypothetical and never truly experienced.
Austrian economics believes that the pricing system provides knowledge to people about resources. If you consider a scarce resource, typically this would be something you want people to use less of. As the resource becomes more scarce the prices should start to rise from the source all the way to the end customer. At this point, the consumer may adjust their lifestyle, find an alternative product, useless, etc.
As important as the role of the pricing system is in providing knowledge to people. The principle can only be put into place in a regime where Private Property is Significantly Protected. In order for the pricing system to work, there have to be real exchanges from real people. In order for people to take place in these types of transactions, they have to be able to own private property so that they can exchange it with others.
Lastly, Austrians argue Markets are Spontaneous Orders. This means that Markets are the result of human action, but not human design. No one invented the ‘Market’, no one can really control markets, markets are evolving processes that are continually emerging based on the choices of individuals over time. Austrian economics on a Macro scale is an understanding that markets are self-organizing, adaptive systems, and not something that human beings invented.
I started off by talking about how people, in life, take sides no matter what the issue is. Economics can be used as a guide for decision making, and it seems important to consider many schools of thought when trying to reach your conclusion. Personally, as a student of blockchain technology and an advocate for the cryptocurrency, Austrian economics makes a lot of sense. The approach seems to be proactive, put the right systems in place ahead of time to avoid a crisis. To give a relevant sports analogy, Austrian economics reminds me of the Phil Jackson style of coaching. In professional sports, when a team is struggling for a period of time, a common strategy is for the coach to call Timeout. Timeout is Keynesian economics, its the Coach/Government interjecting to try to and make things right. However, Phil Jackson’s’ theory was to let his players play through bad stretches. His belief was that the game was cyclical, and not predictable. He also felt it was important for his players to learn how to play through the tough times together.