Comparing the Modern View on Keynsian and Austrian Economics

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Austrian economics vs Keynesianism and Kaletsky
Anthony J. Evans
6 May 2009
Recently in The Times Anatole Kaletsky attacked the “many financiers [that] have been calling… for a ‘market solution’ based on the so-called Austrian school of economic analysis.” I am surprised that a prominent commentator deems it necessary to write such a piece. Very few politicians, commentators, or indeed “financiers” are familiar with Austrian economics, and those that are dismiss it as outdated without even understanding it.

Kaletsky does little to address this ignorance, writing “one does not have to go into economic details… to see why it makes no sense”. Sadly his argument is not only misrepresentative, but also downright disingenuous.

For example, he repeats the customary false-attribution when he suggests that Andrew Mellon utilised Austrian theory when urging Herbert Hoover to liquidate during the Great Depression. In a recent article for the Journal of Money, Credit and Banking Larry White refutes this myth – it was the real bills doctrine that governed their thinking, and Mellon in fact called for monetary and fiscal expansion.

Kaletsky goes on to provide two reasons why Austrian “austerity” does not work. First, he argues that cutting spending and raising taxes would compound the effects of a recession and destroy public finances. Aside from the absurd notion that Austrians advocate tax rises, his logic is flawed.

He is right that “the only way to reduce deficits it to restore economic growth” but this is a technical argument about what constitutes economic growth. Paul Krugman argues that World War II provided the boost in government spending necessary to restore GDP. An Austrian would reply that a military draft is not full employment, and war spending is not economic prosperity. The fact that government spending raises GDP is an accounting identity, not economic theory. Our goal should be...