Keynesian vs Austrian Economists

View of how the economy functions

Keynesian economists believe, regardless of logic and data, that economies can be managed from the top down. In their world, economies are little different than machines. Change some inputs here, speed them up over there, add some lubrication, etc. and the machine will respond in the fashion desired. Output can be “managed” to whatever level needed purely by adjusting the parts of the machine.

Austrian economists on the other hand do not see a machine. They see millions of individuals all making decisions to improve their own lives. The price system provides the coordination among these separate pieces, performing a function no human, supercomputer or government could ever accomplish. For Austrians, economics is a bottom up approach. To effect change, you must change the incentives and disincentives that individual decision makers are afforded.

Full Article @zerohedge

Recession Suppression vs Recessions as part of a Natural Cycle

Keynesian school – All recessions are bad and must be suppressed by government actions.  This protects established businesses and jobs.  The methods are elaborate and costly, but a benefit to the public overall.

Austrian school – When markets stray too far from reality they must be purged by adversity.  This clears unneeded or failing enterprises so capital is not allocated wastefully, and new businesses can emerge.  Periodic small recessions are the price of a healthy economy.

Full Article @PeakProsperity

Aggregate Demand Driven vs Supply-Side Driven

Keynesian economic is a theory of total spending in the economy (called aggregate demand) and its effects on output and inflation. It was named after

John Maynard Keynes (1883 – 1946), a British economist whose ideas have profoundly affected modern macroeconomics and social liberalism, both in theory and practice.
Bottom line – it encourages spending

Austrian Economics is a school of thought that is associated with little government interference in the marketplace, the primacy of property rights and is generally associated with libertarian ideology. Austrians focus on the role interest rates play in balancing saving and investment activity.

Friedrich August von Hayek CH (8 May 1899 – 23 March 1992), was an Austrian-born economist and philosopher known for his defence of classical liberalism and free-market capitalism against socialist and collectivist thought.

Full Article @NobleCoins

Economic Thought Diverges

In Keynesian Economics, the argument is that private sector decisions lead to inefficient macroeconomic outcomes and advocates responses by the public sector (government) by using Monetary Policy and Fiscal Policy. Keynesian Economics believes that spending is what grows the economy. They say when consumers spend producers will be able to make more goods and services because of the demand from the consumers. So in a recession, the Federal Reserve will use Monetary Policy to lower the interest rates and pump/print money into the economy. As a result of low interest rates (cheap money), people can borrow easily to spend and make investments to grow businesses. This sends a false alarm for people to spend money and not save money, allowing the economy to grow in the short-term. Another way to get the economy to grow is by Fiscal Policy, which is by the government spending money doing projects such as building roads and bridges. This works if the government is doing productive projects and is using saved money. It does NOT work if the government is borrowing money it doesn’t have and/or doing worthless projects. The latter is the case for the U.S. economy for the last 50+ years. This Economics influences people to not be disciplined.

In Austrian Economics, the argument is that the free market achieves its efficiency with little or no government intervention. They believe savings is what grows the economy. When people save money, others will be able to borrow it to grow businesses but only with the saved money (not printed money). If there are a lot of savers, money will be cheap to borrow since there is more money supply than demand driving down interest rates. This is the time for businesses to grow. If there are not as many savers, the interest rates will be higher and so it’ll call people to save and borrow less. This is not the time for businesses to grow. In this Economics equilibrium is reached without any government intervention. This economy may not grow as fast in the short-run, but it’s grows faster and is sustainable in the long-run letting everyone prosper. It assumes you need to have money first before you consume. This means you have to produce value (money) by working or starting your own business and then you have money to buy goods and services. This Economics influences people to be discipline.

Full Article @iamageniuster

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