fsu editorials

KEYNESIAN VS. AUSTRIAN
by Andy Sutton
My2CentsOnline.com
April 13, 2007

As I sit here on Thursday afternoon looking at news reports I see that the dollar continues to shed its value, and more importantly, one of its primary guardians now feels that this is just fine as long as the descent is 'orderly'. It is now fine to go to hell as long as you do so in an orderly fashion. In looking at the other economic data, I see bad where Wall Street sees good. Why is this the case? It is a question I am asked now on a regular basis; especially when people hear where and how I received my education. It probably deserves a bit of explanation on my part.

I received my education from a small, liberal arts college. I attended the same college for graduate school as well. I would say that generally speaking the institution was mainstream, maybe leaning a tad to the left. In a word, it is your typical private college. The professors at this school by and large subscribed to the Keynesian school of economics. Without getting into a dissertation on Keynesian economics, essentially the bastions of Keynesianism are increased regulation and control over monetary policy, money and credit creation and deficit spending. The Keynesians have never seen a deficit they didn't like. In a nutshell, Keynesianism affirmed the economic policies of the 1930's and created a justification for spending beyond one's means on a national scale. Sound familiar?

The professors passed on this ideology to their students, teaching us that if we just tweaked this or controlled that a little bit more or less that everything would pretty much run fine. If it doesn't work, then we need more regulations. If the economy is slow, it must mean we haven't printed enough money or loaned it cheaply enough. Instead of being a passenger on the economic train, Keynesians want to be the driver. Instead of allowing free market forces to determine the fate of the economy, the Keynesians want to goose, cajole and hype the economy into doing sometimes unnatural things. I guess that to a certain degree this should be no surprise. They Keynesians are in office and want to stay there. It is to their benefit to be in control of things because they know they will likely to be blamed if things don't go as promised or planned. The biggest problem is that free market forces do exist, as does the law of averages, and occasionally the Keynesians get burned. The history books chronicle these scorchings rather nicely so I don't have to. These types of events, however, almost always roll downhill and it is the little guy who takes the eventual wallop.

I and a few others in my classes were always left wanting for a better justification of why things worked or didn't work the way they did. "That's just the way it is" never computed for me, and not long after finishing my degree I began to search for better information. At first I thought that maybe it was the professors not knowing, but after a while, it became obvious to me that something was lacking in the whole school of thought. You just can't utter Efficient Market Theory and hyper-regulation in the same sentence and have it make any sense. You also cannot blame the consumer, the economy or foreigners for the increase in general price levels, an argument that is being made today with increasing fervor in the mainstream financial press.

I came across a fantastic website www.mises.org and my journey into Austrian economics began. The Austrian School takes a completely different view of economics, the major tenets being free market, low taxes, minimal regulation and a laissez-faire approach to monetary policy. A heavy emphasis is placed on the actions and nature of the individual. The Austrian School believes in the market as the driver of an economy, not the Central Bank or the government. Spending within one's means on both a personal and national scale is advocated.

For many years in America, people were trained to approach their personal finances from an Austrian perspective. Underconsumption, savings and investment were promoted by the government. However, the government ran its own financial house in a Keynesian fashion, spending well in excess of its means and first borrowing from existing savings, then borrowing from foreigners to make up the difference. In fact, if you look at taxation from this perspective you will see that now the average American is punished for saving! Dollars invested are taxed the same as dollars kept and consumed with the two notable exceptions (IRA's and 40X plans) making the dollars unavailable for decades. Interest and dividends are taxed heavily, and this also creates a massive disincentive to save.

To be blunt, Keynesianism simply doesn't make sense. A country is no different from an individual in that those who produce will get to consume. In order to have capital formation, there must be savings. My weekly column seems to have attracted a large audience of individuals above the age of 50, many of whom are astounded at the fact that I myself am relatively young at 36. I attribute much of my financial insight to my upbringing. My parents ran their household in a very Austrian manner. I learned at an early age that if you want things, you need to save. If you produce, then you get to consume. Debt was abhorred in most circumstances, the family home being the notable exception. I have managed to avoid debt and the servitude that accompanies it my entire life thanks to the solid financial education I got before I ever set foot in a college classroom. The fact that I have the credentials I do would under most circumstances be a handicap in writing an accurate portrayal of economic events. The credentials allow me only to see and understand the fallacy of what goes on today and pass it on to those who are interested in hearing the other side. Because in most cases, the party line doesn't make sense to them either.

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© 2007 Andy Sutton
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Andy Sutton

My2CentsOnline.com
Laurys Station, PA, USA
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Andy Sutton holds an MBA in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics.

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