Thursday, February 27, 2014

Economics as Medicine

It is interesting the way people react to various economic proposals on what should be done about the current economic malaise. The two most divergent proposals are those of the Keynesians and the Austrians, with most other proposals being somewhere on a spectrum between the two.

It is interesting because of the disaster that Keynesian economists predict were Austrian proposals to be implemented. If an analogy were to be made between economics and medicine, with the economy being a sick patient, it highlights the absurdity of some of the Keynesian predictions of doom.

Imagine a patient is brought to a hospital with a broken leg. The patient is in pain and unable to walk. Doctor Keynes wishes to give large doses of pain killers, while Doctor Hayek wishes to set the bone before applying a cast. Hearing what Dr. Hayek plans, Dr. Keynes interjects with "There will be a lot of pain while you set the bone. I am interested in treating the patient's pain, your proposals only cause more pain."

Or if a patient is brought in with operable cancer, Dr. Hayek would suggest surgery and a few weeks of recovery. Dr. Keynes would point out that there will be harm caused by the scalpel going in, harm caused to the skin and muscle covering the tumor, and great difficulty for the patient in recovering from the tumor.

These comparisons are absurd, because if the subject were medicine there would be no argument about setting a bone or operating to remove a tumor. But the comparison is also valid.

The Austrian method of ending a recession or a depression is to allow malinvestments to liquidate and to remove barriers to growth. The Keynesian method of ending a recession is to stimulate aggregate demand through fiscal policy, as well as by any other interventionist method since no Keynesian in practice is confined to fiscal policy. Therefore failing industries would be subsidized until theoretically they are no longer failing, and prices that need to fall would be propped up through loose fiscal and monetary policy to prevent the specter of deflation.

Every Keynesian proposal treats a symptom. But what of the actual cause of the ailment? It is the well known "animal spirits", which are not a rational explanation of the cause. Austrian economics, on the other hand, tries to do a diagnosis.

Yes, transition to sound currency and balanced budgets would cause economic turmoil during the transition, and yes some people - especially those who depend on unbalanced budgets and fiat currency - would be hurt. In the long term the short term pain would lead to long term health, like setting a bone.

1 comment:

Jerry said...

We could save a great deal of money by elimination of the monopoly that doctors current enjoy over access to medical drugs. As a libertarian I find this monopoly quite objectionable.