Does Anybody Understand This Stuff?: Part 8, Modern Economics – A Thumbnail Sketch of 4,000 Years of Economics

Read Part One Here

Read Part Two Here

Read Part Three Here

Read Part Four Here

Read Part Five Here

Read Part Six Here

Read Part Seven Here 

Key Points For Modern Economics

Our brief look at modern economics covers key concepts only to provide you with a starting point regarding prominent economic ideas of the modern age.  We have divided this last post into three sections:

A – Interventionists

B – Neo Liberals

C – Austrian Economics

Interventionists

One of the first Interventionist economists is Alfred Marshall.

He is best known for his work leading to the development of the Demand and Supply curves and the concept of Elasticity.

He introduced a more extensive use of mathematics in economics than anyone before him.

He promoted the idea of Public Goods, or that things too costly for individuals should be paid for by the government including such things as the military, schools, roads, hospitals, parks, etc.

The “godfather” of modern economics is John Maynard Keynes. His influence on economics has been compared to that of  Adam Smith and Karl Marx.

The essence of his economic philosophy incorporated these basic concepts:

1. The goal of the modern economy was to use economics to support the welfare state.

2. Develop macroeconomics into a primary course of study, morphed economics into Econometrics in order to preserve the field, and developed the language of economics for the experts only, effectively excluding the lay reader.

3. Lead the movement to use government to intervene in the economy.

4. Convince national leadership that government should keep income and employment stable. This of course, is Marxist in content and philosophy, and is basically the way economics in the US has worked since 1932.

5. Promoted the Fiscal Policy that government was responsible to spend money to “prime the pump” during economic downturns.  This was to be accomplished by running up a budget deficit during economic downturn and as needed reduce taxes and enlarge the deficit even more.

Keynes goes on to say that when all of this stimulus creates the desired economic upturn, the previously incurred debt must be paid off.

I guess the experts didn’t read that far.

Anyway, Keynes achieved his goal.

He made economics unfathomable to all but mathematicians and “experts”, and put the government in charge of the entire economy.

In spite of the fact that much of the free market was destroyed, it continues to attempt to right itself, with no help from a meddlesome and interventionist government that seems hell-bent on destroying itself.

The next economist of renown is Gunnar Myrdal.  He advocated the continuation of all of Keynes’ methods, emphasizing more redistribution of wealth and increased the popularity of the economic trend.

John Galbraith was a strong Keynesian who believed that government should control everything. He advanced big government by working for:

• Nationalization of transportation, health care, housing, etc.
• Government prices controls
• Government guaranteed income for all the unemployed
• Government support for the arts
• Government agency to oversee all private business

It is amazing to realize that all of these things, and many more, were not that long ago, enjoyed private management or were managed at the state level. What would life be like without all of this government intervention?

Paul Samuelson had huge impact in mainstreaming Keynesian economics into the American economy and government application.  He had significant influence on President Kennedy and government in general during the 1960’s and 1970’s.

Neo-Liberal Economics (the Chicago school)

Key Economic Points

Milton Friedman almost single-handedly fought the battle to counter the Interventionists.  He invented the monetarist school of economics, which taught that:

• Keynesianism is false; the free market must be allowed to work
• Government must remain limited and small
• Economic freedom is necessary for political freedom
• Emphasized the Quality Theory of Money (money acts like any other commodity.  The more there is of it, the less each unit is worth.)
• Stable Prices are the key to a free enterprise system (stable money supply makes stable prices)
• Instead of the federal government adjusting the money supply, they should have a set level of increase in the money supply, proportionate to the increase of production (gold found, donuts made, fruit picket, etc…)

Austrian Economics

Key Economic Points

The Austrian School of economics picked up where the liberals left off.  (the neo-liberals were tainted by pragmatism and the Austrians were able to focus more on the “pure” science of it.)

After Bastiat, Mill began the break that lead mainstream economists toward Keynes. Carl Menger took off right where Bastiat ended and continued the progression of those economic ideas.  His work led directly to Austrian economics.

The genealogy of the Great Austrian economists is:

Menger

Mises

Hayek

Hazlitt

Rothbard

Ten main points of Austrian Economics are:

1. Economics is really centered around the role of entrepreneurs (enterprisers) and risk, personal investment, individual choice, consumer actions, producer actions and savings.

2. Economics is based on Human Nature and Human Action.

If human action always aims at a purpose, which by definition it does, then human action must be rational, that is, consistent with reason or guided by one’s will and intellect. It can never be termed irrational.

In making this point, Mises in Human Action (p. 19) writes “Human action is necessarily always rational. The term ‘rational action’ is therefore pleonastic and must be rejected as such. When applied to the ultimate ends of action, the terms rational and irrational are inappropriate and meaningless. The ultimate end of action is always the satisfaction of some desires of the acting man.”

Seemingly irrational action is rational, that is, has an aim. To appraise it as irrational, the appraiser merely imposes some other external source of value. Mises writes (p. 104): “However one twists things, one will never succeed in formulating the notion of ‘irrational’ action whose ‘irrationality’ is not founded upon an arbitrary judgment of value.”

Nor does irrationality characterize the means selected to achieve ends. Erroneous judgments that involve badly chosen means are not irrational in Mises’ analysis: “When applied to the means chosen for the attainment of ends, the terms rational and irrational imply a judgment about the expediency and adequacy of the procedure employed … It is a fact that human reason is not infallible and that man very often errs in selecting and applying means. An action unsuited to the end sought falls short of expectation. It is contrary to purpose, but it is rational, i.e., the outcome of a reasonable — although faulty — deliberation and an attempt — although an ineffectual attempt — to attain a definite goal.”

What then is irrationality? According to Mises, irrationality is not the opposite of action or purposeful behavior, that is, it is not willed behavior without a purpose. All willed behavior has a purpose. Irrational behavior is behavior induced by response to stimuli, behavior that lies beyond the control of a person’s will or volition. Furthermore, Mises uses the term “irrational” to describe facts or situations that lie beyond reason (p. 21): “The ultimate given may be called an irrational fact.”

3. Praxeology as methodology.

4. Totally Free Market with government in proper role.

5. Economics is a social science first and only a mathematical science second.

6. A free market maximized the quantity, quality, and variety of goods and services

7. People make choices based on utility and value (What they think will give them satisfaction)

8. Commodity money is best

9. Each individual is different…

10. The triumph of persuasion over force is the sign of a successful economy and a civilized society.  To the extent that force is required, the society is either more or less civilized.  The most civilized societies would allow the invisible hand and cooperation to run the bulk of the political economy of the society; and because of a proper mix of incentive, initiative, drive, profit motive, charity, love, education, voluntarism and brotherly kindness class conflict, crime, apathy and other factors of the kind would not be recurring problems.

This ends our very brief overview of the last 4,000 years of economics.  For more, visit Monticello College.