Keynes and Libertarianism, Part 2

The question that we left hanging at the end of the first part of this article is: how can traditional Keynesian economic theory be a better companion to libertarianism than Austrian theory?

As mentioned in the first part, both Keynesianism and Austrian theory are built upon a microeconomic foundation of free markets. That foundation is more pronounced in Austrian literature - or, to be exact, less pronounced in Keynesian literature. The reason for this is that most modern Keynesians are of some sort of some kind of American liberal conviction, which by illogical implication also means that they regard the free market not as a virtuous institution, but as a necessary bad.

Again for illogical reasons they disregard much of the free-market related components of Keynesian economics, giving many modern readers of economic literature - and especially economic-policy material - the impression that Keynes was some kind of collectivist.

Keynes and Libertarianism, Part 1

There are only two Keynesian libertarians in the world (the other is in Australia). This scarcity of our breed is easily explained by conventional wisdom, according to which both Keynesians and libertarians adamantly refute the idea that Keynesianism can be mixed with libertarianism. It is almost written in stone that if you are a Keynesian, you are either a social liberal or an outright socialist; on the other hand, if you are a libertarian you adopt Austrian theory as your guide through the world of economics. 

However attractive conventional wisdom can be as a guideline through the world of ethics, politics and economics, it does have its strict limitations. One of them is that while it may help you explain conventional phenomena, it is the unconventional parts of reality that tell real analysis from - yes - conventional wisdom. 

This is very much true in economics.

Money, Liquidity and the Gold Standard, Part 2

As I explained in the first part of this article, the theory of money is an essential part of macroeconomics. Just like economic theory in general, monetary theory provides a systemic understanding of:

• how the economy works; and
• the consequences of economic policy.

Without a systemic understanding, solidly founded in economic theory, our policy recommendations will sooner or later fail. History is filled to the brim with ill-founded fiscal and monetary policy endeavors that have hit the proverbial iceberg because its navigators had not studied the map well enough. In some instances these failures have caused major problems for the economy where the policies were applied.

Money, Liquidity and the Gold Standard, Part 1

Money and monetary policy are among the "hotter" topics in economics. The one man to thank for this in good part is Milton Friedman, the de facto founder of monetarism as a sub-theory of economics. 

Friedman's career, long and worth every ounce of respect, brought monetary thinking and the policies of central banks to the forefront of economics. He was certainly known for much more than monetarism, but his contributions there alone are enough to count as lifetime achievement. Yet partly because of the field he chose, he also became a politically controversial figure. 

That, however, was not entirely because of his work.

Austrian Economics and the Real World

I have really tried to give Austrian economics a fair chance. My libertarian friends are without exception dedicated followers of Austrian theory, and since I highly respect them and their scholarship and research I have really tried to take Austrian economics seriously. 

In fact, I wrote favorably about it in my book Industrial Poverty, one reason being that I do indeed find some promising elements in Austrian economic theory, and I wanted to give those elements a fair chance. However, the more I look into the works of Carl Menger, Ludwig von Mises, Murray Rothbard and other Austrians, the less useful the theory seems to get. 

It seems as though the pieces, which are well defined in and by themselves, do not form a coherent, workable system. Maybe it can be used at the microeconomic level, but since we already have a well-working mainstream theory for the analysis of individuals, markets and industries, I do not see much room for Austrian theory to distinguish itself there. 

Recessions and Economic Theory

Few real-world circumstances are as challenging to economists as recessions. First of all, economists are notoriously unable to predict recessions, a fact that became glaringly obvious when the Great Recession began eight years ago. The reason is their over-confident reliance on one kind of forecasting tool and their weak, even non-existent reliance on economic theory for their analytical work. (Some of my peers would protest here by challenging the meaning of "economic theory"; for the record, I do not consider a recursively soluble equation system "economic theory".)

Beyond that, you will also find a surprisingly large number of practitioners of macroeconomics who are simply uninterested in the business cycle. They tend to specialize in a small area of macroeconomics, such as the labor market, monetary theory and policy, or public economics. Nothing wrong with that, but for every specialist there should be a macroeconomic generalist out there who can analyze and explain the entire macroeconomic system. We are too few and too far in between to be heard when it really counts...

Keynesianism: The Real Story

Ask any mainstream, modern economist about Keynes and his contributions to economics, and chances are you will be told that “he’s the guy who said you should expand government in recessions”. This is such a well-established story that the very question in itself would motivate the economist to raise an eyebrow or two and carefully examine you for signs of delusion.

Depending on political leaning, economists will either say that Keynes was a socialist/statist (conservatives, libertarians) or a liberal (socialists, statists).  Both will agree, though, that Keynes’s contributions were all about expanding government. Austrian economists, who are often libertarian by political leaning, will confidently say that their theory is the one that preserves limited government and free markets. In fact, most economists would habitually tell you that Austrian economics is the free-market theory and Keynesian economics is the “grow government” theory.

Time for Economists to Wake Up

Last year I had the privilege of meeting one of America's best governors. This man has decades of experience with government budgets, fiscal policy and economics - or, more appropriately, with economists. 

When I told him what I do for a living, he said: "You know God invented economists to make astrologers look better". I chuckled and had a good few minutes conversation about the federal budget and the case for a balanced-budget amendment. 

The governor's tongue-in-cheek attitude may cause a few good laughs, but there is more than a grain of truth behind it. When I started as a measly undergraduate in economics back in the 1980s I learned theory, reasoning, methods of analysis and even some history of economic theory and policy. And then we learned the mathematical and statistical methods.