Did you find yourself in your mandated micro and macro economics classes wanting to scream at the professor because what he was explaining to you as economics was clearly flawed? Could you see the economic bubbles forming all around us? I could. I just didn’t quite understand it all at the time. Things weren’t adding up and it took my discovery of Ron Paul in 2007 to set me on the path that I’m on today. The path toward understanding and applying Austrian Economic theory.

I am far from being an expert on Austrian economics, I learn more with every day and my opinions are evolving with my knowledge of the topic. I want to share some of the biggest differences between Austrian theory and the commonly taught Keynesian theory. These comparisons are drawn from my interpretation of the writings of Hazlitt, Bastiat, Mises, and Ron Paul, all proficient minds in the area of Austrian economics.

The broken window theory:  The idea that a shoemakers storefront window is broken by a hailstone and that this unfortunate event is in fact an economic opportunity for growth. Keynesians see this broken window and say, “Great! Now the window repairman has new business and he can prosper because of the hailstorm.” As Bastiat writes, that is what is seen, the unseen portion of the event changes the prospect of growth. The unseen is that the store owner now has to spend money repairing a window, money that he would have invested into growing his business. The opportunity for the window repairman was a missed opportunity for a potential new employee of the shoemaker, or a leather supplier who cannot sell his goods to the shoemaker because he now lacks the funds to purchase leather. This “newly created job” is in fact the robbery of another job.

To further show the Keynesian mindset: They would suggest that to lift the burden from the shoemaker the government should just offer aid to all shopowners who got broken windows in the hail storm. This will prevent them from losing the money toward repairs and allow them to purchase the leather they had on order, or the various other potential lost transactions among shopowners. “Great! The government has come to save us! No lost revenues! No missed business! Hooray!……wait what’s this? My property tax went up? There is an increase in sales tax? Income tax went up? Why is government making it so hard to do business and profit?” Remember how government works. Government operates off of tax dollars. The dollars that they hand to you to repair your shop are removed forcibly from the paychecks, properties, and transactions of all citizens. This includes you, as well as the recipient of the “aid”. Keynesians see the benefit of governmental aid but fail to see the consequences. 

Real life broken window: Joplin was devastated after the tornado, destruction of property was astounding. Government was slow to react. It was 2 days before FEMA had a contributing force on site. Within an hour of the tornado individuals from the surrounding area had flooded Joplin with supplies, helping hands, and prayers. FEMA tried to limit access to the devastation, the people of Joplin pushed them aside and took care of business themselves. Charitable organizations from around the country packed into the city, volunteers by the thousands took time off from work, school, etc, to come and help. No government mandate was needed, people helped people. Businesses (yes even “evil” corporations) donated millions of dollars to fund the effort, other businesses loaned equipment, employees, and time to the clean up. It was truly something to be proud of. But then the largesse of government entered and perverted the progress. FEMA declared that no building permits could be issued for 60 days, where would these people live or work? Lots of them moved away as evidenced by the dozens of empty lots with for sale signs in the destruction zone currently (6+ months later). The city government declared that all property owners must declare their intention for their property within a specified time or the city government would begin the procedure of taking the vacated properties for themself. The strict controls over building materials by FEMA have created material shortages in surrounding communities where they have deemed the demand to be less important than in Joplin. This type of intervention has created a situation where builders are claiming drastic increases in the cost to build structures in Joplin. The Federal government also sent large sums of money in “aid” to assist Joplin in its recovery. What is the future cost for accepting? Time will tell.

Keynesian: Government has the duty to control the economy through manipulation of interest rates, the printing of currency, bailouts of failed institutions, and injections of liquidity into struggling sectors of the economy. (Summary of the last 4-10 years of economic policy)

Austrian: The economy is directed by the free market. Interest rates set themselves based on the demand for credit and the supply of available cash. Cash available for credit is determined by the money in the banks reserves (deposits) that can responsibly be loaned (as determined by bank management), not by the Keynesian practice of fractional reserve banking (loaning $10 for every $1 in deposits). Artificially low interest rates lead to loose lending practices and malinvestment. (Ex: Housing market boom and subsequent collapse of 2008, as well as the failure of major auto producers)

When a bank or business fails due to malinvestment (such as fractional reserve banking) they should not be bailed out, regardless of size or involvement. Remember the phrase “you made your bed, now sleep in it” ? This applies to big business as well.

Dying portions of the economy do not require liquidity injections, this is false growth. These sectors are in decline because of the natural flow of the business cycle. They are either offering an unwanted/unneeded service or product, are offering poor service/products, or have engaged in poor business practices. These businesses are not college kids changing their major 5 times and mom and dad help them pay for the extra schooling. These businesses are dying, and innovation, foresight, planning, and adaptation are the only forms of life support for business, not corporate welfare.

Just print more money to give out, then we dont have to tax people for it! The printing of money that is not backed by any physical wealth is fraudulent and has failed repeatedly throughout history. Fiat currencies do not last. The printing of money and the quantitative easing of markets is as equally as fraudulent and ultimately leads to inflation, or worse, hyperinflation and the total collapse of the currency. (See USA during revolutionary war, Zimbabwe, Weimar Republic, China, Greece, Israel, Mexico, North Korea, Taiwan and at least 18 others)

As with anything, overproduction leads to decreasing value. Many charts exist showing the decreasing value of the dollar since Nixon finished removing the USA from the gold standard. The devaluation has been exponential. The same can be said for the rise in the price of gold versus the dollar. The mass overproduction of the dollar has led to less buying power versus physical wealth such as gold or silver.

I didn’t even begin to scratch the surface of the differences between Austrian and Keynesian economics in this post. In summary the Keynesian believes that free markets cannot exist because the self correcting mechanisms of free markets do not exist. Thus, the government has the responsibility to steer markets and intervene to help ensure the growth of aggregate demand and reach full employment in the macroeconomy.

The Austrian economist feels that the market will correct itself, the forces of supply and demand steer the market and the business cycle is what determines success and failure. The Austrian puts faith into the individual and into the forces of the market, maintaining that the governments role should be minimal, especially non intrusive. The demand for a product should decide winners and losers not the centralized government.

It is clear why politicians favor Keynesian economics, job security. But why do we play along with it? It is a vicious cycle of boom and bust economics that encourages deficit spending and war mongering. It is in our best interest to educate ourselves and oppose such oppressive and destructive policies for the future of our nation.

Suggested Reading:

Frederic Bastiat ” that which is seen and that which is not seen: the unintended consequences of government spending.”

Henry Hazlitt “economics in one lesson”

Ron Paul “the revolution”

  1. manmeetsblog says:

    I’m a Democrat turned Independent who loves Ron Paul. I love your blog and I love the points you made in this post.

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