Table of Contents
An opening
Evaluation of Philosophies
In conclusion
Cites
Opening
Original: In conclusion
Paraphrased: To summarize
Both the Keynesian School of Economics and the Austrian School of Economics have different views on how the economy should run. Austrian economics is based on a laissez faire approach to the economy, which believes that the economy should be free to regulate itself to an equilibrium point. Keynesian opposed this view and believed the government should intervene. John Maynard Keynes who founded Keynesian economics, and Friedrich Hayek the renowned Austrian economist are both examples of the conflict between opposing philosophies. In this essay, I’ll share my thoughts on which economic philosophy I consider more appropriate for managing the long-term economy.
Evaluation of Philosophies
A country’s fiscal policy refers to the use of tax rates and government expenditures to manipulate them. Fiscal policy is a government intervention that can help the economy grow and stabilize. Austrian economics was the basis of the economy’s operation in 1930. “All government expenditure should financed by taxation,” was the belief. The Great Depression saw an increase in unemployment, which led to increased government spending. Despite this, by cutting other expenses, the government maintained a trade balance. The economy suffered further from the refusal by the government to declare a trade surplus. Keynes believed that increasing government expenditure would increase the economy’s productivity and decrease unemployment. The government spends money on the economy which creates more jobs and leads to higher consumption. This consumption drives up aggregate demand which leads to higher income. This phenomenon is called the multiplier effect. Keynes suggests that the trade deficit should be avoided, as it can result in substantial economic growth. This is a long-term sustainable economic strategy. The United States of America’s economy is the largest and strongest in the entire world. The US continues to have a trade surplus, but it is still stable. Keynes’ theory that fiscal policy can create a trade deficit and grow an economy is strengthened by the US’s dominance in global markets. Keynesian economics fundamental beliefs are that markets cannot move because wages or prices are stuck. Wage cuts that slow down the market are not well received by workers. Austrian economics assumes prices and wages will rise or fall and that the market will eventually clear. Although this seems absurd, it is possible to see the market long-term. Fixed costs like wages are flexible and not as sticky. This will allow the ‘invisible arm’ to regulate wages and prices until they reach a new equilibrium. Wages are not always sticky. The market could take quite a while to adjust. The economy is likely to be more benefit from an expansionary fiscal policy than waiting for the invisible hand of regulation to control the market. The economy could benefit from a quicker recovery in the long-term.
Keynesian’s economic goal is to increase aggregate consumption and, in turn, economic growth. Inflation is possible if aggregate demand rises too quickly. Inflation could lead to a decrease in investment. Inflation can also result in the economy exporting less goods to other countries that are more competitive. This can negatively impact the economy’s export balance and make it less attractive. Austrian economics believes that supply creates demand. Austrian economics believes that demand is the only thing that can cause inflation.
In summary
After considering both Keynesian philosophies as well as Austrian, Keynesian seems to me the best way to manage the economy for the long term. It uses fiscal policies to manage growth. This allows it both to adopt expansionary and inconsistent policies. Austrian’s laissez-faire philosophy causes stagnation and hinders growth. Because you don’t have control over the market, it would be hard to manage. Keynesian will be a better economic strategy for managing the economy if inflation is properly controlled.
