KEYNESS VS AUSTRIAN SCHOOL
PART 3
Hugo Adan , Nov 27, 2014
Before we go to the 3rd part, we want to resume
that we said in part 1 and 2.
In Part 1, we
derived different models of capitalism from the degree of competition, role of
intervention and regulation, and scope of public ownership. These models
include laissez-faire capitalism (or nascent capitalism
from the commercial stage), welfare capitalism (typical of mature
industrialism), and crony capitalism (or decadent capitalism). We also
talked about state
capitalism, that is transitional capitalism to either settled dawn the
nascent capitalism or transition to socialism in the case of Russia and China
post revolutions.
Mixed capitalism is
the 2nd largest type of capitalism seen in European countries (Nordic
capitalism is called: Germany, Denmark, Finland, Iceland, Norway and Sweden) in which
the state represent the interest of both labor and capital, but no one interest
in particular. Some scholars said that this type of capitalism was born in France
during Bonaparte era; this why was called bonapartism
(or corporativism in other views)
Another type of
capitalism –quasi similar to Bonaparte’s
though this time coming from democratic elections- occurred when the State, the unionized workers, and big corporations
(the owners of the state) merges to solve domestic problems. The most brutal
of them was called fascism in Italy and Nazism in Germany. The same merge occurs in the democratic US experiment
of FD.Roosevelt (1933-45) and in Russia
with Stalin’s dictatorship of the “proletarian Bolshevik party” since 1923. The difference in these
merges is the class interests that the State represents. In the U.S case, the
whole nation was united to confront the great depression; in Russia the whole
nation was united under the lead of the working classes’ Party, to confront the
economic and military sabotage to socialism from European countries. In Germany
the whole nation was united under the lead of big corporations supporting Hitler. They reject the heavy
burden imposed by European countries who win the 1st WW and to
recover the land stolen to Germany during this war. In all of these experiments,
statism was the common solution, but the class interest defended, was the
difference.
According to Lenin there is another type of capitalism –the
so called “monopoly capitalism or
imperialist-capitalism”, named also “the last stage of capitalism”. In the opinion
of professor James Petras in the U.S and Atilio Boron in the South, the imperial capitalism lead by the US is now processing a transition toward
neo-fascism or neo-nazism. The evidence argued to support this thesis is the suppression of constitutional rights
and freedoms stated by the Universal declaration of Human Right and the
expansion of neoliberalism abroad via
wars and nuclear blackmails in favor of big transnational corporations.
In Part 2, we
talked about Adam Smith philosophy and main economic tenets. We said that he
was inspired in the utilitarian view of Bentham & J.S.Mill. According to them individuals are motivated
by rational-self-interest, seeking pleasure and happiness and avoiding pain
& unhappiness, that was the basic
ideology of the emerging capitalism. They coined the myth that capitalism will bring the greatest good for the
largest number of people. Adam Smith
brought this false promise to the realm of economics. To him the brutal
competition among entrepreneurs will assure goods and services in abundance for
everybody. At the end, all people will benefit from this abundance and they
will pay the price they are willing to pay, so consumer sovereignty will
prevail. All that we have to do is to take out the State hands from the market competition.
The market don’t need state regulations, the rough competition can bring
instabilities, but at the end all will benefit from them, it was his main
message.
The stock market crash of October
29, 1929 (known as Black Tuesday) was the end of Adam Smith myth. The recession started in the US and spread
worldwide as great depression. Personal income, tax revenues, profits and prices dropped so
much that companies burned their products, dumped into rivers, while
international trade plunged by more than 50%. Unemployment in the U.S. rose to
25%, and in some European countries rose as high as 33%, just the rate we have
it today again.
It was Franklin D Roosevelt (FDR) –inspired or not by the
letter from Keynes to him- who introduced the correction to the “free-market”
cannibalism of Adam Smith with the New Deal and the Glass-Steagal Act in 1933. With FDR the State became a State-facilitator of a deal between the
labor, the industrial companies, traders and Bankers. Unions got recognition of their
rights and strong welfarism was introduced, bankers were forced to inject liquidity to companies
providing work to the labor, union’s strike were rid off from the map until economic recovery is reached. At the end of
FDR rule, in 1944, the IMF was set to help the reconstruction from this crisis.
Thanks to this deal known as 1st Breton Woods (1944) the world system got 25
years of prosperity after the 2nd World war.
Love of convenience between U.S and Saudis. In 1971 the OPEC countries demanded fair price
for their oil. The US made a deal with the Saudis to get a special price in
return for military protection to the Muslim kingdom. Since then the conversion
of dollars to gold was rid off and the
fiat dollar or petro-dollar was installed worldwide as dominant currency for
bank deposits and international trade.
The failure of the
Austrian school. Since 1985 a savage imperialism was set with
Reagan and Thatcher who dismantled the Glass-Steagal Act and imposed the neoliberal
policies inspired by the Austrian school. Neoliberalism was imposed brutally
in central American and in the South (fascism in Chile, Peru and Argentina).
The economic rules of Milton Friedman with the authoritarian design of Kissinger
prevailed at the cost of many thousands of lives. A new way of laissez-faire or brutal competition to take control of the market
was unleashed, thanks to the fundamentalist ideologies of neoliberalism. Ten
years later those fascist experiments of the Chicago School of economics were demolished
in the south by popular uprisings and regular “democracy’ was restored in the
whole continent, though the division north-south was totally damaged. In the
South the 1980 experiment was a lost decade, in the North, neoliberalism open
the door to the current mess of derivatives, hedge funds, speculation and
corruption. Huge amount of Capital flow outside, tax evasion became rampant and
the explosive inequality started rapidly.
Neoliberal policies
of the Austrian school came hand on hand
with genocidal wars of plunder worldwide. After the collapse of the
USSR (1989) and especially since the 1990s, a 2nd round of cold war
was initiated via NATO militarism: Yugoslavia was destroyed and East European
countries from the ex USSR were assimilated to NATO. Before leaving, Clinton
destroyed totally the Glass Steagal Act. Since the year 2000 imperial
terrorism became open against Muslim countries under the pretext of fighting terrorism, entire countries and
cities were wiped out (Faluya among them). After Bush neoliberalism came
Obama’s with similar militaristic tones: Muslimg countries continue being destroyed,
this time he added drones.
The dangers of a new
world recession came back after the crash of 2007-8. Keynesian economics
provide the temporary solution to avert the new world depression. However, the chances of a big depression are
still on, the level of volatitlity (booms & busts) is every year higher
than before. The “confidence” factor was crushed by the 2008 recession. Obama’s Keynesianism in
the 1st term –it is said today- was defeated and the Austrian school of Hayek mixed
with Friedman’s monetarism is about to be installed again, after the Democrats
defeat in Nov 4,2014.
The fact is that a
new great depression similar to the 1930s was averted with the formula of
Keynes and is also a fact that the debate on causes and solution to the current
crisis is on. Is it possible that the mix of Austrian school with the Chicago
monetarist school be installed democratically this time, as the Akerlof and
Shiller suggested in the debate with Posner?
Or, is coming back the Keynesian
model with more QEs when the situation demanded, while an alternative to
decaying neoliberalism is designed?
This debate is the
topic of this 3rd part: Keynes vs Austrian school. The problem
is how to avoid a new depression and how
Keynesians and members of the Austrian
school are addressing this issue. We are
going to summarize the main tenets of each school and then we will revise the old debate (2010-11)
between Posner and Akerlof and Shiller in this regard. They suggested a mix of
both schools, though not clear lines on
the uses of State was set, nor is clear the model to which the US economy
should go, as Posner stated.
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PART 3
KEYNES vs AUSTRIAN SCHOOL
Comparative approach
By Hugo Adan
Sources used:
http://theaustrianinsider.com/wp-content/uploads/2014/09/Economics-Infographic.jpg or open: The
Illustrated Guide To Keynesian Vs Austrian Economics ...
According to the
Austrian insider there are 5 issues that summarize the differences between both
schools. Hay 5 temas que hablan
de las diferencias entre las 2 escuelas. Van en spanglish
What factors define economic growth vs recession?
1- DE
QUE DEPENDE EL CRECIMIENTO ECONÓMICO? y/o
SUS CRISIS
KEYNESIAN ANSWERS AUSTRIAN
ECONOMICS ANSWERS
Spending drives econ growth Saving & production drives
econ growth
Savings cause decrease Savings
available in the Econ depends on:
The formula of growth: Demand for debt &
supply of saving
C+G+I+NX To
get equilibrium betw these 2 factors:
C= consumer expending Interest rate is the key: since
it determine
I= Business investment the amount of saving
available to ec-growth
NX= Net of experts
G= Government expending
2- GDP is determining factor Interest
rate is the key for econ-growth
in strength of an economy why?
Why? Because
“capital goods come into existence
Because whatever the amount of by saving. A part of the
goods produced is
savings one get have not significant withheld from immediate
consumption &
influence on income & the amount employed for processes the
fruits of which
of consumption of others in a market. only mature at a later day” LV
Mises
Is impossible for all individuals to
simultaneously save any given sum.
3- BUSINESS CYCLE THEORY
Agregate demand is the key Interest rate
is the key
a-“animal spirits” drive consumer confid a-the
FED sets interests rates lower than
down causing a decrease in spending & market would, causing
currency creation
an increase in savings b-New currency is
borrowed into econom.
b-Layoff & “stickky wages” cause spendg Low rates & Govt policies
direct funds
to drop & can spiral the econ into
depress into areas they would not otherwise be.
c-The Govmt must step in with spending c-The econ experience artificial boom
and reduced interest rates in order to as expanding companies hire
spark the rest of the economy into d-Interest rate rise as
everyone grasp for
doing the same. few resources
and savings available
d-The Govmt boost aggregate demand e-The econ turns to “bust” as is revealed
d-The Govmt boost aggregate demand e-The econ turns to “bust” as is revealed
by increasing the Govmt section of GDP
through public works & national
projects demand was base on inflation, not saving
e-The new spending circulates causing
increasing demand and companies to
hire.
Summing: “The right
remedy for the Summing: to combat the depression by a
trade cycle is not to be found in forced credit
expansion is to attempt to
abolishing booms & thus keeping us cure the evil by the very
means which
permanently in a semi-slump; but in brought it about; because we suffer
abolishing slumps and thus keeping us from misdirection of
production” Hayek
permanently in a quasi-boom
4- DEFINING INFLATION DEFINING
INFLATION
Inflation is a general increase of prices Inflation is the artificial
increase in the
& a steady rate is needed for a growing supply of currency & credit an
is always
economy. harmful.
“Why is low inflation a problem? One answ Price
decrease is natural as production
is that it discourages borrowing &
spending capabilities increases.
& encourages sitting on cash. Since our Both expending and savings
increases
biggest econ problem is an overall lack of when purchasing power increases.
demand, falling inflation makes that problem “The inflation tax, while largely
ignored,
worse”. Paul Krugman (it creates deflation) hurts middle class & low income American
the
most. Simply put, printing money to pay
Deflationary spiral: for
federal spending difuse the value of the
Falling prices =>falling demand=>consumers dollar, which cause higher price for
goods
all wait for lower prices=>bankrupcies=> and services”. Ron Paul
layoffs & wage reduction => falling
prices
5- METHODOLOGY: STRUCTURING THE
ECONOMY
Keynisians:
Possitivism Austrian
school: Praxeology
Every rationally justifiable assertion can be Study of human action based on the
fact
scientifically verified or is capable of logical that humans engage in purpose behavior
or mathematical proof. as opposed to reflexive
behavior.
A free market without government Spontaneous order among
individuals
Supervision can lead to poverty. without intervention
creates the best
environment
for economic growth.
Lack of government regulation Monopolies are
impossible without a Gvt
creates monopolies.
Total utility principle vs money savings 1 first =>2 second=>3
third. Meaning:
The 1st dollar you own gives you
more utility
can only be measured ordinally.
utility than de million th you may save. What bring happines to 1, may
not to other
Therefore redistribution actually The desires of individuals
creates common
benefit the whole economy goods.
“Such consumption is not consistent Free market tend to lead to
abundance for
with the actual habits of the generality all of its participants,violent
intervention in
of capitalists. The great object of their the market and hegemonic
society tend to
lives is to save a fortune.. There must lead to general poverty. Murray
Rothbard
therefore be a considerable class of
persons who have both the will and
power to consume more material
wealth than they produce”. Malthus
FINAL THOUGHT: The ideas of economist and political
philosophers, both when they are right and when they are wrong, are more
powerful than is commonly understood. Indeed the world is ruled by little else.
Practical men, who believe themselves to be quite exempt from any intellectual
influence, are ususally the slaves of some ddefunt economist”.
John Maynard Keynes.
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SOURCES: Source: The Austrian Insider
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RELATED ARTICLES:
For Keynes main tenets
OPEN:
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For Austrian school of economics open:
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For comparative approaches:
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REGARDING THE DEBATE BETWEEN POSNER & AKERLOF-SHILLER
(2009-2011)
To read the debate
bet the Fed Judge Richard Posner &
the Nobel prize in economy Akerlof + Shiller we should start with the book summary of Alerkof done by Wikipedia.
In this book Akerlof tried to put together both schools by departing from a paragraph
of Keynes on “animal spirits” or subjective factor affecting the realm of economics. According to Postner Keynes was
misread and the possibility of putting together both schools is remote. Even if
Austrian scholars accept a limited intervention of the State to regulate the
unwanted freedom that big corporations have in current neoliberal economics, as
Frederick D. Roosevelt did it in 1933, there is not clear lines on what state intervention would be permissible from
them. The main critique of Posner to both Keynisians and Austrians is that none
of them are interested in designed a new post-neoliberal alternative, they
simply want to keep alive the current obsolete system. They do not have a model that could inspire real change.
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Here the source to get the summary of Akerlof + Shiller book “Animal spirits”
Animal Spirits: How Human Psychology Drives
the Economy, and Why It Matters for Global Capitalism : Animal
Spirits: How Human Psychology Drives the Economy ...
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Here Judge R. Posner
critique: http://www.newrepublic.com/article/books/shorting-reason
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Here the response to R.Posner critique by
George A. Akerlof & R. Shiller
http://www.newrepublic.com/article/books-and-arts/disputations-our-new-theory-macroeconomics
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R. Posner , the Judge
with a degree in economics and author of “A
Failure of Capitalism: The Crisis of ’08 and the Descent into Depression” comes back against Akerlof-Shiller with this article: "Disputations:
A Case of Misrepresentation". The
New Republic. Retrieved 2010-09-11. Open: http://www.newrepublic.com/article/politics/disputations-case-misrepresentation
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ENJOY AND HAPPY HOLYDAYS
Hugo Adan
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