Austrianism vs Keynesianism – flaws of both theories

Austrianism vs Keynesianism – flaws of both theories
by Whigswin

The difference in doctrine between Austrian and Keynesian economics is not clear to most people. However the main difference between both economic theories is their beliefs on supply and demand. Keynesian economists claim that the government can directly influence the demand for goods and services by altering tax policies and public expenditures.. Austrian economist are more on the supply side believing that the Price of a commodity determines the demand thus regulating the value of it's purchase. They believe that when the price of something is greater the demand for that product will be much lower. However others would argue that if the demand for a product were greater than the price of that product the price would also go up. I would also argue that if the supply of the product were greater than the demand because of the private or public regulated price than the price of that product or commodity could be made to be artificial. A good example of this is is the value of diamonds, which are more valuable when less of the supply is mined thus creating artificial scarcity. Diamonds are actually much more plentiful than their value suggests as they are barely even semiprecious stones. This contradicts the marginal utility theory ( that supposedly resolved the Diamond-water paradox) that assumes that since Diamonds are scarce they are much more valuable than bread or water which are essential for life. In actuality diamonds are much more plentiful than these economists observed and their value depends on artificial scarcity caused by mining less than is actually available.

The difference between 19th century Austrian economics, and the 20th century's Keynesian economics. Is mainly where their theories are drawn from. The opponents of Austrian economics are mostly history buffs. While Austrian economists, and the like, are more focused on monetary theory based on mathematics. History and mathematics are both very important factors for economists, but excluding one over the other is what creates flaws in both theories. While Austrian Equationites see an economy like a giant math equation of people products and commodities, Keynesian Historicists, on the other hand, base their theories more on past events rather than mathematics. So while Austrian economics is mostly based on the deduction based on numbers and variables, Keynesian economics is based on prediction of future events based on past events. The economic history that Keynesians use is only reliable when it is relevant to the times, but today we face a situation that is very different from history, although similar in some ways. Both views, thus, leave a huge gap in perspective on how to determine the value and sustainability of monetary systems by leaving out either the perspective of history or the perspective of mathematics out of their theories. So one could argue that since their perspectives on economics systems are narrowed that they are both holding half of what could create a truly be a prosperous economic system, which is the American system of competition between public and private systems.

.So as to show the flaws in this two party, capitalist, paradigm I have suggested that both systems are fundamentally flawed. I suggest that the the fight between 19th century and 20th century economic ideas is an old paradigm based on a debate of ideas that don't even begin to address a solution to current crisis. While Keynesian economics allows for some Government intervention such as spending on infrastructure and changing tax laws, Austrian economics has the belief that the state (government) should stay 100% out of the economy. This idea is based on the invisible hand theory, of the 18th century, that emphasized the role of individuals over that of the state and generally attacked mercantilism. .However claiming that this is an American system is fundamentally flawed when you consider George Washington's history ( http://american_almanac.tripod.com/earlyinf.htm#washington ) of dedicating himself to infrastructure projects as president as well as Article 1, section 8 of the constitution. Of course 100% government involvement in the economy is not an American system either, but when you consider the idea that American capitalism is based on competition you shouldn't assume that government cannot compete with the private sector.

If you assume that any form of competition with the private sector is “socialism” than you are denying the American tradition of competition. In addition we now have people in government that are inclined to subsidize nonwork over work that is valuable. To assume that this is the fault of government alone however is ignorant of the influence the market has on the the government. It is true that the government does pass laws that regulate the market occasionally, but it is also true that in past decades government has deregulated the market and laxed laws against usury as well as legalized derivatives. The subsidies given to these nonwork jobs in past decades have typically been given because the corporation claims that they will use the money to create more jobs. How it is spent though is typically making less jobs. This is mostly because the parts of the market that are subsidized create nothing of value for the market. Most of these corporations are speculative banks that hoard money, rather than lend money to industry, and media moguls that are all controlled by few corporations,.(Viacom and Disney being examples) Although these subsidies have been called a “spending plan”, today it is nothing of the sort. Because the money isn't being spent in places of value, but are rather being used to pay for CEO's vacation time or it is used to make do nothing jobs more valuable than jobs that would that would create higher employment. What should have been done was what Franklin Roosevelt did, which was the seizing of do nothing, bum, corporations under chapter 11 of the US code.This made FDR's spending plan much different than Herbert Hoover's unpopular subsidies (bail outs.) Using a chapter 11 to convert the parts of the market that has been called the “zombie banks” into something useful that creates jobs is something the US code demands. Although this is the opposite of what Obama has done because he has completely ignoring the possibility of a chapter 11. Many other bum corporations today would be eligible to be reformed under chapter 7 of the US code as well. Of course the seizing of these corporations by the government in FDR's Administration was only temporary and it only reformed the policies and spending of those corporations..To Free market economists though this is socialism and it goes against all their values. I would argue that since the seizure is only temporary it is not soccialism. I would also argue that it it gives people more jobs because industry would be converted for more modern uses (like maglev trains and tractors). Whether your for this or not, the point is that spending has to go to places that make jobs rather than places that take jobs and even spending has it's limits.

The only other alternative I see besides Industrial spending is "balancing the budget", which historically has caused a recession shortly afterward. Just look at this graph of what balancing the budget does.

http://wealthmoney.org/budget.html

Even a Digitized money system, as an alternative appears, to be fundamentally flawed. This is mainly because Digitized money would be predisposed to be regulated by a private party. It would also create an artificial “supply” and make demand (consumerism) oven more important to society. I would also argue that interest rates would be unpredictable by economists in a digitized money system. Interest rates in a digitized money system could be high or low depending on the choice of the private distributor. I think that this would be unethical and against the general welfare of the people. I also think tha congress would not be able to regulate digitized money. That may not matter though because congress does no currently regulate any of the money In the United states like it should

I hope this essay gives people an entirely new perspective on American capitalism as well as the two party paradigm of economics . (Austrianism vs Keynesiansism and capitalism vs marxism)

If anyone is interested in solution to the economic crisis I would suggest you read my previous articles for my take on solutions.

http://www.dailypaul.com/node/104200

http://wizardofoswald.com/forum/world-economic-takeoever/a-h...