Thursday, February 5, 2009



There are three major schools of thought when it comes to Economics.

The Keynesians
The Chicago School (Friedman)
The Austrian School (Hayek)

They Keynesians think that government spending can be an economic stimulus. One stimulates the economy by getting money moving again. The phrase “velocity of money” comes from the Keynesians. The argument against this is that it is simply robbing “Peter to pay Paul”, it can appear to help in the short run, but it makes things worse in the long term. - (Many Democrats appear to be either devout Keynesians or Keynesian with Chicago leanings)

The Chicago school will say that government spending destroys just as many jobs as it creates. Paying 10,000 people to build roads means you have to generate enough taxes to put 10,000 other people out of work. If however, you pay those folks to build actual infrastructure, then you create jobs in the long term, as the infrastructure creates new opportunities and efficiencies.

The Chicago school basically says that building the Interstate Freeway system created zero net jobs directly. Remember, if you create a job through government spending you have to remove enough money from the private sector to destroy a job to pay for it. On the other hand, it did create jobs in the trucking industry, because the infrastructure left over afterward provides new opportunities and efficiencies. (Many Republicans, and a few Democrats follow this school)

The Austrians (think Ron Paul) say that basically all government spending makes the economy worse. Economic growth can only be caused when capital is accumulated so that it can be invested in either new business ventures or in capital equipment, since government spending must be paid for either through taxes or inflation, it prevents the accumulation of capitol, thus hurting the economy. (Libertarians, and a handful of Republicans follow this school)

So if one “knows” the stimulus will fail, then one should vote against it. It's not a matter of "wanting" or "not wanting" it to work. To an adherent of either the Chicago or Austrian school there is no “risk that they Keynesian approach might work”. To them, it is self evident that it has to fail, it can do nothing but fail.

It’s almost like the three schools form an orthogonal basis set. They can’t overlap by definition. Thus a person is either in one state or another, but can't be in two at the same time.

Now any sufficiently large system (and 3-million people counts as large) will display behavior that is a combination of basis states, so real economic behavior is bound to be a combination of all three schools of thought. Though I think history has shown that the Austrians are right on a lot of things.

I just realized that I have now written a quantum mechanical approach to economic theory. This probably means I need more sleep.

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