by Dr. Richard Paul, D.D.
What is the differences between Keynesian, NeoClassical, and Austrian Economics, besides the names? I am going to take a little bit of time, in this blog, to explain the differences because its important to know if we are to determine just how dangerous the free market can be when discussing the overall economy of the US, and more importantly why its a serfdom theory. Keynesian and neoclassical theories aside, Austrian Economic theories are not all bad, as modern economists borrow a little from some of that theory.
The Austrian School of Economic Thought can best be explained as a total laissez faire, or hands off, approach to businesses. It says that the economy can best be explained through the use of human action as in a free market, interest rates, and profits are determined by three factors: monetary gains or losses from a change in the consumption of a good or service, additional output that can be produced by additional inputs, and the valuation of consumption nearer in time versus more remote consumption. It also purports that human decision making affects the free market and not economic models, or statistical mehtods. There can be no compromise bewteen those factors. To be firm in the understanding, it relies on micreconomics to evaluate macroeconomics in general, as in if a bad investment is attained, its because of bad decisions of one party in that decison process, rather than looking at the economy as a whole. This can be expressed in looking at the 2008 investment banking collapse and the immediate response of the Federal Reserve Bank and the Department of Treasury. Rather than looking at the whole of who was going to be hurt the most, when the banks collapsed, the Fed and TD looked at the decisions of the investment firms themselves as the root cause thereby ignoring the vast majority of what many people were unable to express as the problem.
Keynesian Economics is in contrast to Austrian Economics in that it believes that government has a firm role in balancing the economy. It assertains that markets go through periods of highs and lows that can be revealed through models and methods. It says that when economic downfalls occur, and they will always occur, the Centralized Unit must respond through the use of injecting money within the markets to stabilize said markets. Keynesian Economics is a highly valuable, ever chaging theory. It adjusts itself rather than is stagnant, unlike the Austrian Theory. For example, in the 1970's the US underwent stagflation.
What is stagflation, and how does it relate to the topic of Keynesian Economics, you ask? Good question, and here is the answer. Classic Keynesian Economics maintained that only the supply-demand model was relevant. Neo-Keynesian Theory says that stagflation can be understood by distinguishing factors that affect aggregate demand from those that affect aggregate supply. Stagflation itself is when demand and supply are imbalanced. The problem with stagfation is that any government involvement can hinder economic growth. When government does nothing, however, stagnation often flourishes, The simple way out of a stagflationary perios is to temporarily decrease government controls, and then only until some movement occurs. However, if left to their own devices, without any regulation once movement away from stagflation has occurred, the government must tighten its regulatory responsibilities in order to not create an inflationary, or even a deflationary period which can, and often does, result in a recession. This is evidenced in 1980 when Reagan rightly loosened the grips of regulations on businesses, then refused to reimplement those regulations once movement occurred, resulting in the 1982 deflationary period which led to the 1989 recession.
This leads to the neoclassic economic theory. Its based solely in micreconomics concerning demand and supply. Together with Keynesian Economics, that is the micro and macro economics, it creates what is known as the neoclassical synthesis. To put it another way. A person buys anything based on two primary factors: 1) Money and 2) desired items availability. It is explicitly the primary means through which households or companies determine what and when to buy anything. This itself is opposed to Austrian Economics.
This is another brief blog to begin to understand why the Republican mandate of moving towards Austrian Economics towards a lesser control and underregulated system is undesirable for the US Economy, and the Global Economy as a whole. Next we begin to look more in depth at why Milton Friedman and Ronald Reagan's insistence on perpetuating this economic theory is flawed and undesirable for economic growth as pertaining to the populace.