The Evolving Economics Debate: Keynesian vs. Austrian in the 21st Century

The debate between Keynesian economics and the Austrian School, particularly through the works of Friedrich Hayek, has been a cornerstone of modern economic thought. Both theories offer compelling insights into economic dynamics but each has its own set of strengths and limitations. In the context of the 2020s, it becomes crucial to revisit these frameworks and understand their implications on the quality of life and economic stability.

Austrian Economics and the Frictionless Economy Myth

A cornerstone of Austrian economics is the vision of a frictionless economy, where markets operate without distortions or frictions. However, by the 1930s, this idealized view began to unravel. The widespread and powerful labor unions, along with the rigid civil service and 'built-in frictions,' challenged the notion of a frictionless economy. Market participants were not operating in a vacuum; instead, they were influenced by real-world conditions such as labor relations, government regulations, and psychological biases in valuations.

The concept of 'value illusion'—where a person is reluctant to sell an asset for less than what they paid—played a significant role in market dynamics. This perception froze debts and mobile capital, creating a more rigid economic environment. Furthermore, the condition of the money supply, which was already concerning, was not appropriately addressed by the Federal Reserve. While the Federal Reserve could have expanded the money supply to counteract the shrinkage of M2, the acknowledgment of the true extent of this shrinkage was lacking, leading to inaction.

Keynesian Economics: Valid Points and Limitations

Despite the limitations of Austrian economics, there are valid points in the works of John Maynard Keynes. Keynesian economics posits that during economic downturns, monetary and fiscal policies can be used to stimulate demand and revive economic activity. This approach acknowledges that economic systems are not always self-correcting and require intervention to prevent prolonged downturns. The famous aphorism, 'In the long run, we are all dead,' highlights the existential flaws in the Austrian theory, which overlooks the human cost of economic inactivity.

While Austrian theory offers valuable insights into long-term economic health, it may not adequately account for the 'stickiness' in prices and the need for short-term interventions. The Great Depression serves as a stark reminder of the real-world consequences of economic inaction. Roosevelt's decision to raise the price of gold could have mitigated the M2 problem and potentially hastened the end of the Great Depression. However, the sterilization of this policy by calling in privately held gold delayed the positive effects.

The Modern Economic Landscape: MMT and Fiscal Policy

Modern polities face a different set of challenges compared to the 1930s. The rapid procession of events, including the Great Recession, led many to advocate for more aggressive fiscal policies, such as Modern Monetary Theory (MMT). MMT suggests that governments can finance spending through the issuance of currency, alleviating the fear of fiscal constraints that often hampers conventional Keynesian approaches. However, the focus on monetary stimulus without corresponding adjustments to fiscal policy can have unintended consequences, such as the erosion of the middle class and the accumulation of household debt.

Comparing the 1950s to today, the quality of life has undergone significant changes. In the post-war era, it was common for families to live on one income, with the ability to purchase homes and send children to college. Today, the situation is starkly different. Two incomes are now necessary to maintain a household, and nearly half of American households live paycheck to paycheck. The erosion of the middle class is evident in the burgeoning population of homeless individuals and the high levels of student debt, which can last for decades.

Conclusion: A Return to Keynesian Economics?

Given the current economic landscape, it seems that a return to Keynesian policies might be more beneficial. While Austrian economics provides a valuable theoretical framework, it may not fully address the 'stickiness' in economic behavior and the need for short-term interventions. Keynesian fiscal policy, with its emphasis on government spending and monetary stimulus, can help address immediate economic challenges, thereby improving the overall quality of life.

However, this approach should not be pursued in a bubble. A balanced approach that combines the long-term insights of Austrian economics with the short-term interventions of Keynesian theory could offer a more sustainable path forward. It is crucial to remember that both theories have their merits and that the key to economic prosperity lies in understanding and integrating these insights.