Keynesian… Again
By Pete Lester, Sr.
February 5, 2009
In Microeconomics we will not discuss, in any great detail, the three primary schools of thought that drove US Economic Policy in the 20th Century. I would like to do a little of that here.
Why? We are living in extraordinary times, economically, and I think it is important for students of economics and informed citizens generally to develop an ability to understand where economic policy is coming from. More importantly, it is important to be able to discern where it might lead.
The three primary schools of thought for the last 75 years are:
By Pete Lester, Sr.
February 5, 2009
In Microeconomics we will not discuss, in any great detail, the three primary schools of thought that drove US Economic Policy in the 20th Century. I would like to do a little of that here.
Why? We are living in extraordinary times, economically, and I think it is important for students of economics and informed citizens generally to develop an ability to understand where economic policy is coming from. More importantly, it is important to be able to discern where it might lead.
The three primary schools of thought for the last 75 years are:
- Keynesian,
- Monetarist, and,
- Austrian.
Keynesian School:
Named after John Maynard Keynes, the Keynesian economists believe that economies can be “managed”. They believe that economists can model behavior and they focus on wages, prices, and other macroeconomic factors to stimulate the economy. They believe that a primary role of government is to stimulate economic growth.
During the Great Depression, Keynesian economists suggested that governments invest in public works projects (TVA, road construction, improvements to national parks – all of these came from this era) to encourage economic growth. They suggest that a certain amount of public debt is a good thing, and in some instances, public spending is needed to stimulate growth. The goal of this stimulation is full employment.
Austrian School:
Austrian economists maintain that it is impossible to accurately model human behavior (subjective theory). Additionally, many would say that the role of government should be very limited (laissez faire) and that, in the past, governmental interference has actually prolonged economic cycles (Austrian Business Cycle or "trade cycle"). The school’s proponents do adhere to logic and believe that through its application, fundamental economic laws can be proven, and should be applied.
While the school has never been “main stream” in terms of its influence, because of its logical strength, the school rarely goes into total disfavor. It can also be said that the school can be very active in pointing out flaws in economic policy as it is applied.
Monetarist (Chicago) School:
For the last 30 years, in my opinion, the Monetarists have had the greatest influence on US economic policy. While the Keynesian’s would try to “micro manage” an economy, and the Austrians would take a “hands-off” approach – allowing the free market to find its efficiencies, the Chicago School economists believe that the government can stabilize a country’s economic growth (minimize downturns, maximize periods of growth) through properly managing the money supply. This school of thought holds that while the free market will eventually find its way, governmental interference in that process should be minimized. When Milton Friedman said “money matters” what he was saying is: general prices are determined by money. For this reason, a government's fiscal policy (deficits, tax policy, etc.) and monetary policy (easy credit through expanding the money supply, Federal Reserve Policies, etc.) can have a major impact on a nation’s economy.
As you read articles, listen in class, watch the news, you will hear a resonance in the discussion. This “resonance” or basic presupposition (their starting points/the basis for their economic recommendations) will most likely be founded in one of the three schools of thought described above.
Presently, our congress is debating a “stimulus” package. The hope is that by the government increasing its spending, economic activity will be encouraged. The velocity of business (people getting hired rather than fired, consumers who are hired will spend, etc.) will increase. Given the level of spending that is being discussed, it would be easy to say that the Keynesians have control of the current economic debate.
Now, I have oversimplified all of these economic philosophies for the sake of brevity. If you would like to know more here are a few authors in each school:
Keynesian - John Maynard Keynes, Paul Krugman, Joan Robinson, Peter Bofinger
Named after John Maynard Keynes, the Keynesian economists believe that economies can be “managed”. They believe that economists can model behavior and they focus on wages, prices, and other macroeconomic factors to stimulate the economy. They believe that a primary role of government is to stimulate economic growth.
During the Great Depression, Keynesian economists suggested that governments invest in public works projects (TVA, road construction, improvements to national parks – all of these came from this era) to encourage economic growth. They suggest that a certain amount of public debt is a good thing, and in some instances, public spending is needed to stimulate growth. The goal of this stimulation is full employment.
Austrian School:
Austrian economists maintain that it is impossible to accurately model human behavior (subjective theory). Additionally, many would say that the role of government should be very limited (laissez faire) and that, in the past, governmental interference has actually prolonged economic cycles (Austrian Business Cycle or "trade cycle"). The school’s proponents do adhere to logic and believe that through its application, fundamental economic laws can be proven, and should be applied.
While the school has never been “main stream” in terms of its influence, because of its logical strength, the school rarely goes into total disfavor. It can also be said that the school can be very active in pointing out flaws in economic policy as it is applied.
Monetarist (Chicago) School:
For the last 30 years, in my opinion, the Monetarists have had the greatest influence on US economic policy. While the Keynesian’s would try to “micro manage” an economy, and the Austrians would take a “hands-off” approach – allowing the free market to find its efficiencies, the Chicago School economists believe that the government can stabilize a country’s economic growth (minimize downturns, maximize periods of growth) through properly managing the money supply. This school of thought holds that while the free market will eventually find its way, governmental interference in that process should be minimized. When Milton Friedman said “money matters” what he was saying is: general prices are determined by money. For this reason, a government's fiscal policy (deficits, tax policy, etc.) and monetary policy (easy credit through expanding the money supply, Federal Reserve Policies, etc.) can have a major impact on a nation’s economy.
As you read articles, listen in class, watch the news, you will hear a resonance in the discussion. This “resonance” or basic presupposition (their starting points/the basis for their economic recommendations) will most likely be founded in one of the three schools of thought described above.
Presently, our congress is debating a “stimulus” package. The hope is that by the government increasing its spending, economic activity will be encouraged. The velocity of business (people getting hired rather than fired, consumers who are hired will spend, etc.) will increase. Given the level of spending that is being discussed, it would be easy to say that the Keynesians have control of the current economic debate.
Now, I have oversimplified all of these economic philosophies for the sake of brevity. If you would like to know more here are a few authors in each school:
Keynesian - John Maynard Keynes, Paul Krugman, Joan Robinson, Peter Bofinger
Austrian - Ludwig Von Mises, Friederick Hayek, Hans Sennholz, Henry Hazlitt
Monetarists - Milton Friedman, Edward Prescott, Myron Scholes, James Heckman
Someone will read this and say what about Supply-Side Economists, Marxist Economists or Neo Keynesian economists (the list is actually quite long)? They would be right to do so, and to be clear, they have had their day, and will continue to play a role in shaping thought and economic policy (the supply-side economists were particularly influential when Ronald Regan was President). But again – I am trying to be brief.
Lastly, I have had professors who were so consistent in their thought and logic, that they were scary, even “evangelical” in their zeal to be in one camp or the other. While there is “some truth” revealed by each of the schools described above, eventually, we should all pick one and be comfortable living with that economic philosophy.
I only hope you all pick the RIGHT ONE!
QUESTIONS for STUDENTS of ECONOMICS:
1) Based on the brief descriptions above, how would you describe your personal view of economics? What “economic school of thought” do you see yourself being a part of? Why?
2) Which school of thought do you have the strongest disagreements with?
3) Based on current economic policy, which school of thought do you think is driving the discussions in your home state? The Nation? Provide observations to back this opinion up.
Someone will read this and say what about Supply-Side Economists, Marxist Economists or Neo Keynesian economists (the list is actually quite long)? They would be right to do so, and to be clear, they have had their day, and will continue to play a role in shaping thought and economic policy (the supply-side economists were particularly influential when Ronald Regan was President). But again – I am trying to be brief.
Lastly, I have had professors who were so consistent in their thought and logic, that they were scary, even “evangelical” in their zeal to be in one camp or the other. While there is “some truth” revealed by each of the schools described above, eventually, we should all pick one and be comfortable living with that economic philosophy.
I only hope you all pick the RIGHT ONE!
QUESTIONS for STUDENTS of ECONOMICS:
1) Based on the brief descriptions above, how would you describe your personal view of economics? What “economic school of thought” do you see yourself being a part of? Why?
2) Which school of thought do you have the strongest disagreements with?
3) Based on current economic policy, which school of thought do you think is driving the discussions in your home state? The Nation? Provide observations to back this opinion up.
2 comments:
1.The theory that I like and the one that in my opinion is the most idealistic is the Austrian school of thought. However, the one that seems to be used in our economy is the Monetarist. I do agree that with minimal interference from the government that the Monetarist school of thought can work.2. the theory that I do not agree with much is the Keynesian school of thought. I do not think the government should be overly involved in how the the economy is ran. It takes away from the free market and at times can resemble communism.
3.The school of policy that I think is running the economy at the moment is 70% Monetarist and 30% Keynesian. The reason why is because the Federal Reserve is constantly doing things at the moment to help the economy speed up. For example lowering interest rates, and increasing or decreasing the money supply. The Federal Reserve is lowering interest rates to get business to to lend money to each other and in return to consumers. With the economy the way it is the government is coming out with programs coming TARP. This is one of ways the government can try to help put restrictions and try to stimulate the economy at the same time.
Liliana: Nice comments. In past years I would have said the Monetarists were in control of the Federal Reserve too. Today, I think the Keynesian School is in charge of the debate.
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