If you ever read anything by Austrivangelist Ron Paul and Keynepologist Paul Krugman (I refer to both of them in humor because of Ron Paul's preaching of the Austrian school and Krugman's tireless defense of Keynes theories), it's obvious that one economic school resents the other. However, I give credit to both -- Paul is well versed and educated in Austrian theory and Krugman has won a Nobel Prize on Economics.
Most of you probably don't really know about the Austrian theory or the Keynesian theory, at least by name. However, nearly all of you know some form of it colloquially.
Austrian theory champions free markets, tying the money supply to the gold standard, believe credit cycles fuel business cycles, believe that inflation only comes in the form of monetary supply growth, and a rejection of math as a form of economic analysis. In Layman's terms, respectively: its that lassiez-faire concept you learned in U.S. history, its exchanging money for gold, it's securing loans and credit cards to buy more shit, it's things costing too much because there's too much money, and it's math being unable to predict what humans can do. Give credit where credit is due to the Austrians -- Hayek was screaming bloody murder about the prospects of a financial collapse early in 1929. You probably have read about what happened in October of that year. Paul raised red flags about the housing bubble as early as 2002.
On the other hand, Keynesian theory (even if it somewhat deviated from Keynes original theories as time went on), is the advocacy of government involvement in the economy, in the form of fiscal policy from the central bank, a large public sector to complement the private sector, and through government investment (spending) in the economy. A better way to put it is government stimuli, government banks, government stimulus programs, and government bailouts. The reasoning behind government intervention, according to Keynesians, that pretty much the free market can't do everything by itself. A cornerstone to Keynesian thought is the belief that aggregate demand is the preeminent driver of the economy. In the course of U.S. history, Keynesian economics seen its effect in the New Deal programs of the Great Depression, the post-World War II era, and the omnibus stimulus programs of the Bush and Obama administrations.
I believe that aggregate demand drives the economy, that the public sector is actually a valuable asset to the economy, that government can be good to promote economic stability, and the free market has the propensity to fuck up. I guess I can put on my Keynesian hat.
I believe that yes, access to credit can fuel demand, that loose credit is disastrous, that the free market side of the economy is what really puts our food on the table, and unbridled confidence in the government to act as an insurance agency for an economy can prove extremely damaging to government fiscal policy. Well, I guess I can put on my Austrian hat as well.
At the same time, before the era of the Federal Reserve and the American mixed economy, there were still bubbles, recessions, and depressions. Railroad bubbles, fueled by unstable financing, set off economic depressions in 1873 (which, lasting until 1879, remains the longest period of economic contraction in U.S. history and was the first economic event to be called "The Great Depression") and again in 1893 (which was actually seen as worse than the event of 1873-79). The United States actually had three severe recessions in the 20th century before the Great Depression (in 1907, in 1918-1919 after World War I, and then the second part of that post-World War I recession in 1920-1921). In a demonstration of how bad things were -- it was J.P. Morgan himself that bailed out the U.S. Treasury in 1893 and Morgan inspired New York bankers to rally to reestablish confidence in the economy in 1907.
By the way, it was Panic of 1907, along with the numerous bank runs that had been taking places intermittently in the years previous, that gave birth to the Federal Reserve in 1913.
So taking history into consideration, it should be recognized economic booms and busts are standard, no matter what economic theory we subscribe to. There will still be economic bubbles that will plateau and then burst. There will still be credit bubbles because throughout the course of the past few centuries of human history, we've proven that no matter how hard we try, not everything can be paid up front and the acceptance of deferred payments will always be a cornerstone to an economy. There are winners and losers and capitalism; it can be argued its a mathematical outcome; but those that are "losers" in the capitalist economy can bring socioeconomic chaos.
There has to be a stabilizing check and balance on the free market -- of which government serves that role. I am not one to have total blind faith in the free market. Governments do make mistakes; we've seen plenty of them and thus I won't have total blind faith in the government, either. However, I'd rather have government involved in the economy than not be involved in it.
The Keynesian hat stays. I'll always err on the side of the mixed economy.
My apologies, Dr. Paul.
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