Keynes vs austerity

You asked why I didn’t believe in Austrian economics. Both Austrian and the various schools of Keynesian economics make very specific testable, measurable predictions about the economy. If X occurs, then Y will happen.

Austrian economics predicts that austerity in a depression will help the economy. Keynes predicts that it will hurt the economy. Both the historical record of depressions going back several hundred years, and the ongoing turmoil in Europe show that austerity in a depression actually makes things worse.

If your theory of gravity predicts things fall up, and experimental testing shows things fall down, it means your theory is wrong, not reality. No matter how much you wish it was true.  God may care about your personal beliefs, but the universe doesn’t (and I’ve found that out the hard way several times).

The ancient Greeks tried to explain the motions of the stars and planets in the sky.  But they started from a incorrect proposition (everything revolves around the earth, and all heavenly objects moved on perfect spheres called epicycles).

When the predictions of this theory failed to match reality, they started adding epicycles on top of epicyles, instead of simply accepting that the underpinnings of their theory was wrong.

Austrian economics (as well as some other economic theories) have a difficult time explaining things like economics depressions because one of their core assumptions is incorrect: that a perfectly free economy is always self-correcting.

Most of the time, this is actually a valid assumption, but in the specific instance of a  depression the economy doesn’t correct itself, it undergoes a negative feedback loop (called a debt deflation spiral) that exponentially wipes out the economy unless it is arrested (see the Great Depression for a textbook example of this).

Since one of Austrian economics core assumptions is that the economy is *always* self-correcting, it has a hard time explaining instances when it *doesn’t* self-correct, and proponents end up having to invent epicycles (like saying “people are voluntarily choosing not to work”) that are at increasing odds to common sense, instead of revisiting their core assumptions.

Given Occam’s razor, I have to believe the theory that explains the most with the least, and today that is some flavor of Keynesianism.  That doesn’t mean Keynes is “correct”, any more than Einstein was “correct”.   It simply means Keynes’ theory makes more accurate and rational predictions than Austrian economics.  It doesn’t preclude something better than either of them coming along.

http://www.nytimes.com/2012/04/27/opinion/krugman-death-of-a-fairy-tale.html

http://krugman.blogs.nytimes.com/2012/04/27/its-all-so-confusing

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1 Response to Keynes vs austerity

  1. Drew Bordas says:

    Great post. The more I learn, the more I think these things are impossible to control.

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