To paraphrase Nobel prize winning economist F.A. Hayek, “John Maynard Keynes is a great man who knows very little about economics”. Unfortunately Keynes and his ideas have been the most influential ideas in American fiscal policy in the last century. High interest rates from central banks that forces capital into the market, central planners at the top that control prices, all the stuff sane people hate. If you pressed him on these issues long enough he would say, “We’re all dead in the long run”. He’s not incorrect, it’s just not a smart thing to say when asked for advice in crafting policy.
Why is Keynes so wrong and the Austrian school so correct? Can you name me one Keynesian Economist or other mainstream Economist that correctly predicted the 2008/2009 crash? I think not. I can name several Austrians who can. In fact the Keynesians caused the crash. In my opinion the Keynesians get it most wrong when it comes to injecting money in the market place. The idea is simple: If we are in harder economic times, we simply are spending enough money, have the banks lower interest rates and move that capital from the banks to the market, you should also have the Federal Reserve print extra money just in case. People will then spend that capital until the economy stabilizes. Once it’s better the government can then lower interest rates.
All of that looks good on paper, but once you put into play it falls apart. If the Federal Reserve prints money Willy nilly, it leads to inflation. If you make interest rates to low people will sit on their money. The biggest problem with this idea is that it doesn’t factor in the most important variable. Human action. Humans are wildly unpredictable, especially with their money. Sure some will go on a spending spree, but we can’t accurately predict that. Some might stick it in there mattresses, some might donate it, some might even sit through the high interest rates.
The problem with Keynesian economics, is that in whatever area of policy we are looking at, it fails to look at complexity. It tries to boil the planet’s most unpredictable creatures down to specific patterns, and we all know that is impossible. You can’t paint things broadly all the time, especially in macro, or even micro economics. That’s why the Austrian school has been the most consistently correct school for more than a generation. Business doesn’t rise and fall, economies don’t crash and rebuild every few years. F.A. Hayek new it, wrote the Austrian theory of the business cycle and won a noble prize for it. Ludwig Von Mises wrote his most famous work, “Human Action” about everything I covered in this column and more. If you are looking for sound economic education, thought or policy, ignore the Keynesians.