Keynesian and Austrian
There are two kinds of economists in the Western world - Keynesian and Austrian. Almost exclusively, what is taught in American universities is Keynesianism - and virtually all the economists at the Federal Reserve, America's central bank, are Keynesians. In fact, pretty much every economist in the Western world is a Keynesian these days and the Austrian economists lead a very fringe existence.
The Keynesians are called that because the crux of their theory came from John Maynard Keynes, a British economist of the early 20th century. The Austrians are called that because their theory came from some Austrian economists who were active in Austria pre-W.W.II, but were Jews, and were smart enough (like Einstein in Germany) to get out of Austria before it was annexed by Hitler. They went to America and that is where they came to be known as "Austrian economists" (because to the Americans, it was more important that they were from Austria than that they were Jews). Their version of economics has been called Austrian economics ever since - but the reality is that it took them a while to get established at all in America (in other words, to get to the point where they got their academic qualifications accepted here and were allowed to teach at university) and by the time that happened (and, probably, even long before), the Keynesians were so well-entrenched in America that the Austrians have never really been able to compete against them for notice. Consequently, they have always been very much on the fringe (so far - I think that will change soon when their big-picture predictions come true in a big way and the modern Keynesians are proven dead-wrong in the big picture by actual circumstances).
The most basic lesson associated with Austrian economics is that economies go in cycles - and that is a fact (explained elsewhere on this website), but not one that modern Keynesian economists want to acknowledge. Modern Keynesians just want to avoid recessions at all costs. And that is what they have been doing ever since they could actually start doing so in the 1980's. The problem is that the cycles don't go away in the process - they just get postponed (explanation elsewhere on this website). So, when the Keynesian economists refused to let the economy go down after the 1987 stock market crash and throughout the 1990's, the system compensated in the only way it could - by letting the stock market go sky-high. That was viewed by most people as a very good thing - but it was actually a very bad thing (brief explanation next in this paragraph). Since the authorities kept supporting the economy, the pushing eventually resulted in the stock market going exponential - in the late 1990's, as it happened. Exponentials ALWAYS end badly (NO exceptions) - and so I expected both the stock market and the economy to go down hard in the early 2000's. The stock market did (although most people can probably hardly remember that anymore) - but the economy did not. It was when I was in the process of trying to find out, in the summer of 2001, why the Federal Reserve was fighting the economic downturn so thoroughly that it was doing so even in the wake of a big stock market exponential (the one that happened in the late 1990's), that I found out about the law against recessions (which is essentially modern Keynesianism enshrined in law). As soon as I found out about that law, I knew immediately (on the basis of what I had already learned before) that if the Fed saved the economy in the early 2000's - which it did - there would just about guaranteed be a BIG economic downturn along with a big stock market downturn sometime between 2007-2010. As it turned out, the downturn came just about in the middle of my anticipated time-frame (I can indeed be very confident in my big-picture predictions now that I know about the law against recessions!).
One basic concept, that is actually playing itself out in reality in a very obvious way lately, that the Keynesians just do not want to accept - but which is an inherent part of the Austrian economics theory, but is not part of the Keynesian theory at all (Keynes never addressed it - his focus was on avoiding and minimizing recessions, which the British economy was plagued by, just as the American economy was, the American economy being the closest economy to England in all the world, much closer to England than those of continental Europe, including Austria) - is that as economic upturns mature over the course of decades,they lose momentum in real terms over the later half of the cycle, they lose dynamism, they therefore have lower real economic growth over the course of time during the later part of the cycle. The Keynesians don't like that one bit - because it implies that recessions are inevitable from time to time - but the Austrians take it in stride and simply note that recessions are actually good for the economy in the long run and that the recessions should be allowed to run their course as quickly as possible and that the society and the system will be better off for it in the long run if one does that.
But the Keynesians think differently - their idea is to prevent recessions at all costs. A recession involves negative economic growth and one does not want that, of course not (from their point of view)!
The problem is that capitalist economies naturally go through cycles over the course of long periods of time - years and decades - and that was proven by a man outside of the Western system, Nikolia Kondratieff of Russia, who actually found it out in the 1930's when he was tasked by Stalin with proving that the Western economy would not come out of the Great Depression and that communism would emerge triumphant in the end. Kondratieff studied the Western system carefully - and came to the opposite conclusion, at least with regard to the West, namely, that the West would recover from the Great Depression and would, in fact, have a new extended period of growth. The story is that Stalin hated that conclusion so much that Kondratieff was exiled off to Siberia, where Kondratieff died - but it did not change the fact that Kondratieff was right.
The problem for us in current times is that Kondratieff did, indeed, prove that Western economies go in natural cycles over the long course of time - both up and down. At the time of Kondratieff, those cycles were working in our favor - because we were at the lows of the cycle at the time. Now, we are at the opposite end - at the highs.
It should also be noted that Keynesian economists are heavily mathematically-oriented - probably in response to an era in the early 20th century when it was thought that everything could be modeled mechanistically and also because modern Keynesians like to model everything on computers. They tend to reject any idea that can't be readily modeled on a computer. However, economics is a social science, not one of the hard sciences, and people cannot simply be reduced to a set of equations. Masses of people will often act in a certain way, but not always, and some people never do. That is one reason why the Keynesians could not see the downturn of 2008 coming. I could use my brain to figure it out quite easily - but I doubt I could have modeled it on a computer easily.
Austrian economists argue that mathematical models and statistics are an unreliable means of analyzing and testing economic theory and advocate deriving economic theory logically from basic principles of human action.
There are two kinds of economists in the Western world - Keynesian and Austrian. Almost exclusively, what is taught in American universities is Keynesianism - and virtually all the economists at the Federal Reserve, America's central bank, are Keynesians. In fact, pretty much every economist in the Western world is a Keynesian these days and the Austrian economists lead a very fringe existence.
The Keynesians are called that because the crux of their theory came from John Maynard Keynes, a British economist of the early 20th century. The Austrians are called that because their theory came from some Austrian economists who were active in Austria pre-W.W.II, but were Jews, and were smart enough (like Einstein in Germany) to get out of Austria before it was annexed by Hitler. They went to America and that is where they came to be known as "Austrian economists" (because to the Americans, it was more important that they were from Austria than that they were Jews). Their version of economics has been called Austrian economics ever since - but the reality is that it took them a while to get established at all in America (in other words, to get to the point where they got their academic qualifications accepted here and were allowed to teach at university) and by the time that happened (and, probably, even long before), the Keynesians were so well-entrenched in America that the Austrians have never really been able to compete against them for notice. Consequently, they have always been very much on the fringe (so far - I think that will change soon when their big-picture predictions come true in a big way and the modern Keynesians are proven dead-wrong in the big picture by actual circumstances).
The most basic lesson associated with Austrian economics is that economies go in cycles - and that is a fact (explained elsewhere on this website), but not one that modern Keynesian economists want to acknowledge. Modern Keynesians just want to avoid recessions at all costs. And that is what they have been doing ever since they could actually start doing so in the 1980's. The problem is that the cycles don't go away in the process - they just get postponed (explanation elsewhere on this website). So, when the Keynesian economists refused to let the economy go down after the 1987 stock market crash and throughout the 1990's, the system compensated in the only way it could - by letting the stock market go sky-high. That was viewed by most people as a very good thing - but it was actually a very bad thing (brief explanation next in this paragraph). Since the authorities kept supporting the economy, the pushing eventually resulted in the stock market going exponential - in the late 1990's, as it happened. Exponentials ALWAYS end badly (NO exceptions) - and so I expected both the stock market and the economy to go down hard in the early 2000's. The stock market did (although most people can probably hardly remember that anymore) - but the economy did not. It was when I was in the process of trying to find out, in the summer of 2001, why the Federal Reserve was fighting the economic downturn so thoroughly that it was doing so even in the wake of a big stock market exponential (the one that happened in the late 1990's), that I found out about the law against recessions (which is essentially modern Keynesianism enshrined in law). As soon as I found out about that law, I knew immediately (on the basis of what I had already learned before) that if the Fed saved the economy in the early 2000's - which it did - there would just about guaranteed be a BIG economic downturn along with a big stock market downturn sometime between 2007-2010. As it turned out, the downturn came just about in the middle of my anticipated time-frame (I can indeed be very confident in my big-picture predictions now that I know about the law against recessions!).
One basic concept, that is actually playing itself out in reality in a very obvious way lately, that the Keynesians just do not want to accept - but which is an inherent part of the Austrian economics theory, but is not part of the Keynesian theory at all (Keynes never addressed it - his focus was on avoiding and minimizing recessions, which the British economy was plagued by, just as the American economy was, the American economy being the closest economy to England in all the world, much closer to England than those of continental Europe, including Austria) - is that as economic upturns mature over the course of decades,they lose momentum in real terms over the later half of the cycle, they lose dynamism, they therefore have lower real economic growth over the course of time during the later part of the cycle. The Keynesians don't like that one bit - because it implies that recessions are inevitable from time to time - but the Austrians take it in stride and simply note that recessions are actually good for the economy in the long run and that the recessions should be allowed to run their course as quickly as possible and that the society and the system will be better off for it in the long run if one does that.
But the Keynesians think differently - their idea is to prevent recessions at all costs. A recession involves negative economic growth and one does not want that, of course not (from their point of view)!
The problem is that capitalist economies naturally go through cycles over the course of long periods of time - years and decades - and that was proven by a man outside of the Western system, Nikolia Kondratieff of Russia, who actually found it out in the 1930's when he was tasked by Stalin with proving that the Western economy would not come out of the Great Depression and that communism would emerge triumphant in the end. Kondratieff studied the Western system carefully - and came to the opposite conclusion, at least with regard to the West, namely, that the West would recover from the Great Depression and would, in fact, have a new extended period of growth. The story is that Stalin hated that conclusion so much that Kondratieff was exiled off to Siberia, where Kondratieff died - but it did not change the fact that Kondratieff was right.
The problem for us in current times is that Kondratieff did, indeed, prove that Western economies go in natural cycles over the long course of time - both up and down. At the time of Kondratieff, those cycles were working in our favor - because we were at the lows of the cycle at the time. Now, we are at the opposite end - at the highs.
It should also be noted that Keynesian economists are heavily mathematically-oriented - probably in response to an era in the early 20th century when it was thought that everything could be modeled mechanistically and also because modern Keynesians like to model everything on computers. They tend to reject any idea that can't be readily modeled on a computer. However, economics is a social science, not one of the hard sciences, and people cannot simply be reduced to a set of equations. Masses of people will often act in a certain way, but not always, and some people never do. That is one reason why the Keynesians could not see the downturn of 2008 coming. I could use my brain to figure it out quite easily - but I doubt I could have modeled it on a computer easily.
Austrian economists argue that mathematical models and statistics are an unreliable means of analyzing and testing economic theory and advocate deriving economic theory logically from basic principles of human action.
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