Free market economics vs. Keynesian economics

Which is better ?
Did free market policies give us the current mess or was it the fault of the evil government and interventionist policies?

 

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the free market is worse. no check on certain power sources and encourages greed and abusive behavior

 

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Who says Keynesian economics is not free trade? Keynesian economics has nothing to do with free trade. It has everything to do with money supply and controlling aggregate demand to create price stability in markets.

 

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True....let me remake my question
would our economy be better off with government spending and regulation or no spending and complete faith in a free-market

And is government spending necessary in a down economy?

thanks for the comments so far

 

Morally speaking, the second is unethical and immoral.

 

Are you refering to bailouts Norsefire?
Please explain if you will

 

Government spending is unavoidable unless you live in a state of anarchy, and as noted Keynesianism says nothing about the level of industry regulation a government should impose.

I think clearly the correct answer is neither of the options you suggest, but rather government spending and limited regulation.

Economics is very clear that no regulation, laissez-faire policies will leave us facing market imperfections, externalities and certain degrees of monopoly power that are not ideal. The question then is, in which of those circumstances where we are facing such a market failure will government intervention lead to a better outcome that the market alone? (In other words, even when the market has a inherent problem, it may not be that government is the solution, it may be that government intervention will be even worse.)

I think it is clear that there are many such circumstances, but regulation still needs to be approached cautiously to ensure that it is cost/benefit justified. That is the mission of the Office of Information and Regulatory Affairs, led by Cass Sunstein--to conduct studies to ensure that regulatory programs are justified on a cost-benefit basis.

I myself am skeptical of whether or not shocks in aggregate demand are the root of recessions rather than just a symptom (and whether stimulus of aggregate demand--whether by increased spending or by tax cuts--is the solution to them), but government spending does seem to have the ability to ease some of the worst privations that result from recessions, and I am not opposed to that. I rather just wish that Keynesians were actually Keynesians--which none of them are. Real Keynesians would try to run surpluses in the good times, and deficits in bad times. Instead we run deficits all the time.

 

I think the problem right now is their is little demand and so their is little production.
If Obama could give people jobs and boost consumption then companies would hire and be more busy wouldn't they?

Or would it be better for the government not to spend ?
thanks for the comments

 

Government interference in the economy in a manner not clearly outlined in a Constitution is immoral; also, government should be small. Any government which is not small is immoral, and the supporters of Keynes and the socialists and any sort of people which are for large government are evil and immoral.

 

So I am evil am I?

Because I support Government Control over certain sectors of a Nation?

You can still have your capitalistic convenience store if you want.

But when it comes to my damn health or where I save my money Fuck yeah I support socilism, at least I will get serviced even if i go broke.

Un Like a profiteering capitalistic corporations who would throw you out in the streets to die..

 

Price stability? That's laughable. The Fed and monetary policy is the primary culprit in the boom and bust cycle. The manipulation of interest rates sends false signals throughout the economy, causing malinvestment fueled by easy credit (bubble). When the malinvestments finally collapse (bubble pops), these malinvestments need to be liquidated, capital needs to become more expensive (rising interest rates) so that people will be more careful with their investments and malinvestment will fall as capital moves into areas where it earns a positive return and grows the economy. This is how market mechanisms work to stabilize the economy - the free movement of interest rates allows the economy to adjust to supply and demand the same way prices of goods do, which I think most people will agree the market does a good job of making prices efficient.

However, the market cannot restabilize in this manner because the government artificially manipulates interest rates. As the bubble starts to collapse and a bust cycle approaches, the Fed lowers interest rates to induce people to continue borrowing and spending, further propping up the original malinvestment caused by the easy credit, when that malinvestment needs to be liquidated and the money directed towards productive investments.

If interest rates (price of money) were actually determined by the supply and demand of money like other prices, the economy would be stable. Interest rates send signals. If a lot of people are saving their money in banks, stocks, bonds, etc., the supply of loanable funds is high, and thus the price (interest rate) is low. Low interest rates encourage borrowing, so companies borrow and invest in preparation for increased demand for their products in the future when the people withdraw their savings to spend it. On the contrary, when people are spending money and not saving it, the supply of loanable funds is low, so the price is high and interest rates rise, discouraging companies from borrowing money to finance risky projects in the future and instead to focus on current production.

This is just a very short summary of some of the key tenets of the Austrian School of Economics, at least as I interpret it. The charade of Keynesianism will soon be revealed and it will collapse, and Keynes (along with his adherents like Krugman) will go down in history as the biggest destroyers of the economy the world has ever seen.

 

The Austrian school has been widely discredited and is now only used by the extremist right wingers in the US to justify their positions. If you think that science and scientific method are important, then you cannot support any of this nonsense from the Austrian School.

http://www.sciforums.com/showpost.php?p=2583920&postcount=81

 

Actually in theory capital becomes more expensive when malinvestments are made--before they are liquidated, and less expensive post-liquidation. Imagine there is a certain supply of capital, the more investment opportunities there are, the more there are competing for that capital. If I want you to loan your capital to me for use in my investment, I need to offer you a better interest rate than competing entrepreneurs, or you will take your money elsewhere. It doesn't matter whether my project is "malinvestment" or not, the additional competition for capital leads to a higher price.

That said, while I believe Keynesianism is flawed, I agree with joepistole that the Austrian School is also flawed. There is more empirical support for Keynesianism (or at least the New Keynesian synthesis, and not the original theory) than there is for the Austrian School's theory. That evidence is empirical and statistically based, though, and Austrians reject both empiricism and statistics (which is convenient for them, but leaves them with no way to test theory theory against reality in a rigorous way). Still the problems with current macro theory is that it makes limited useful policy prescriptions. If you do use it to set policy, its like trying to conduct heart surgery with sword rather than a scalpel. (To carry the analogy further, that would make using the Austrian School to set policy akin to doing a heart surgery with a club...and occasionally mistaking the lungs for the heart.)

It is also worth noting that certain Austrians, like Hayek, did have valid criticisms of Keynesian theory--and that those criticisms were incorporated into later versions of Keynesianism by the Neo-Keynesians (not to be confused with the New Keynesians, who built on the work of the Neo-Keynesians).

 

No use at all

Cartoonist Barry Deutsch notes that this was crafted in consideration of Paul Krugman's "How Did Economists Get It So Wrong?"

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November 9, 2009​

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Notes:

Deutsch, Barry. "Regarding the Ongoing Irrelevance of Keynesian Economics". Ampersand. November 9, 2009. LeftyCartoons.com. July 16, 2010. http://www.leftycartoons.com/wp-content/uploads/keynes.png

Krugman, Paul. "How Did Economists Get It So Wrong?" The New York Times. September 6, 2009; page MM36. NYTimes.com. July 16, 2010. http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html

 

Good analogies!

 

The Austrian School is outside of the mainstream because Keynesianism is just so much more attractive to poiliticans, business exectutives, and economists.

For example, yes, I acknowledge that lowering interest rates leads to a short term boom in economic growth, as it encourages borrowing and spending. Before election season, the politicians always push for interest rate cuts to make the economy seem better and improve their re-election prospects. And of course, with the leaders of the Fed being appointed by the president, they will want to play ball to ensure reappointment. Similarly, corporations like the easy credit that Keynesianism provides them with, as well as the injection of money into the system when were in a recession.

again, how's this for evidence?
http://www.youtube.com/watch?v=2I0QN-FYkpw

And again, what is so crazy about looking at behavior, economic principles, and incentives when studying the economy? We can not use solely math to model the extremely complex economy which fluctuates based on the behavior of billions of people every second. Mathematical models make too many assumptions and treat people like robots. You need both. Economics is not physics. In physics or math, repeating the same experiment gets the same results, and this is simply not true in economics, so you can not rely solely on math and models, you need to look at the underlying incentives and what economic and behavioral principles dictate.

So if you want to turn a blind eye to the fact that individual people's behavior affect the economy and continue to stick to just math, fine. I bet you think that by running regressions on the market, calculating the betas and variances and covariances and all of that we should be able to predict what will happen. Well guess what, we can't, and the vast majority of money managers don't beat the market.

So stop treating the austrian school like it's the blind-faith crystal ball of the economics world. It simply studies the economy from a behavioral and sociological view and treats it like a living breathing thing, as opposed to treating it like a machine we can just wind up and expect it to act exactly as planned.

Finally, is it just your personality to be extremely scathing towards other people? Can't you combat my opinions with reason without calling them nonsense? I do not believe in Keyenes' theories but am I calling you an idiot or a "left wing nutjob" for following him? Am i assuming you belong to a particular group or party, or assuming what commentators i like? (by the way I hate all of them - nobody in the mainstream media has any clue what is going on).

This is your argument:
I ascribe to the Austrian School
The Austrian School is not in the mainstream
Anybody not in the mainstream is wrong and a nutjob
I am a right wing nutjob and have wet dreams about beck and limbaugh
I am wrong

Very impressive argument.

 

Your mistake is in bold there - the fed lowers interest rates (increasing the supply of money due to fractional reserve banking and the multiplier) and prints money outright, increasing the supply of available capital, so while tons of investments tying up capital should make capital more expensive, encouraging people to really evaluate the prospects of the investment to ensure they earn a return above the expensive interest rate, the Fed distorts this by increasing the money supply and keeping rates low, encouraging people to make bad investments they would not have made if that mistake had been more expensive.

So I am saying that more bids for investment capital should drive up rates, which serves as a check against malinvestment, but this rate increase is prevented by the fed who keep rates artificially low. So without intervention, higher rates make bad investments unprofitable, so these need to be liquidated, freeing up capital for productive investments. But with the Fed keeping rates low, the malinvestments are not punished, and so capital remains in unprofitable investments, and the wealth in those investments is destroyed (the way home equity was destroyed)

 

LOL, I am glad you think your representation of my arguement is impressive. But that is not my arguement. You have set up a strawman typical of those I have know on the right wing of the political spectrum and a tactic certianly engaged in on a daily basis by right wing proponenets like limbaugh, beck, hannity, levin , et al.

My arguement is that there is nothing about the Austrian school that allows it to be a good pedictor of economic behavior. That is why it is not used. If there were something about the Austrian School that was useful in forming economic policy, it would be used. You speak of economic principlals. How can you have econommic principals if you do not believe in verifiable evidence upon which those principals can be supported. The obvious answer is you cannot. Principals have to be supported my fact....evidence. And in the Austrian Schools little things like evidence and fact are to be avoided at all costs. It is far easier to make stuff up...pull it out of the aether.

The whole point of science and scientific method is to develop predictive models. The Austrian school has not ever offered reliable predictive models. The only thing the Austrian School offers us are unproven principals. And it is not wise to risk the fate of the world, on unproven principals especially when proven principals are known and well documented.

Your attacks on Keynesian economics is reduced to conspiracy theory and an over simplification and misuse of math and statistics...probably wrought about by a lack of understanding of both.

Math is important, but only in developing predictive models. And since the Austrian School ascribes to the notion that the economy is too complex and cannot be modeled nor predicted, any Austrian could predict anything based on nothing which is the equilavent of a crystal ball. By the way, human behavior is very predictable, that is why so much is invested in advertising. The human animal is not as complex as some would have us believe. We are animals like many others. We have our instincts and are slaves to our behaviors just as is any other animal.

One more point, politicians do not lower interest rates in this country as you seem to claim they do.

"Before election season, the politicians always push for interest rate cuts to make the economy seem better and improve their re-election prospects." -Jeff 152

Politicans have no control over interest rates or monetary policy...and wisely so. Those are functions of the Federal Reserve. And as much as a politician may want to influence monetary policy, they cannot do so. So you machinations with respect to political manipulation of monetary policy are totally unfounded like your economics.

 

First, are you really naive enough to believe that the President can not influence the Federal Reserve at all with his political muscle? There is also the fact that the president appoints the Federal Reserve board of directors. So you really don't think the president can influence the Fed at all? If you actually think that then I can't really help you. Yes, the fed is a private corporation, but for all intents and purposes it's another branch of the government.

Did you watch the video? I call that a good predictor. But you didn't mention that in your response, and I've now posted that link 3 times. Curious...

First of all, geez do you have that "limbaugh, beck, hannity, levin, et al" line like as a hotkey ready to paste into every response? You say it in pretty much every post and I don't ascribe to any of those people. I dont even know who levin is. But I'm sure he is an idiot like limbaugh beck and hannity.

Second, the strawman would be your characterization of the Austrian School thus far.

Haha it is useful in forming the economic policy of staying out of the way. I, like many people and not just "right wing nutjobs", believe that generally, the government should not intervene too much. The majority of Americans, along with the founding fathers believed this.

There's plenty of facts and evidence which support the economic principles of Austrian School - they are the same principles of microeconomics. Keynes decided that principles which apply to individuals and markets and prices don't apply to the government, which is why we have macroeconomics., and that's why he believes that governments can rack up debt when times are bad and this is a good thing, whereas obviously for an individual in debt, he should not go out spending on credit cards to help himself.

I majored in math and economics and was taught Keynesianism in school. I understand it, and I understand that it works...in the short term. And it would work in the long run if the government did the other half of Keynesianism -building surpluses when times are good to pay off for the deficit spending. However, good times or bad, the government racks up deficits, and it cannot continue forever. There is nothing mathematical about that - you are drinking the kool-aid if you think we can continue to rack up deficits with no consequences.

Refer again to the video - these are predictions based on simple observations of recognizing speculative buying, poor lending standards, and easy credit. You don't need math to put these simple pieces together.