If you’re interested in economics, and you haven’t seen this video yet, or seen this post, then you clearly need to replace your friends with more geeky ones like us.
”Fear the Boom and Bust” a Hayek vs. Keynes Rap Anthem (You may also want to check out the sequel)
The video illustrates the ideological battle between the Keynesian school of economics and the Austrian school of economics in the 20th century. If you’ve ever been curious about what each school represents, I hope to break that down for you today – while relating it to what you’ve learnt in your economics major.
The tide of the economic mainstream has oscillated over the past few centuries, much like a business cycle does. I’m no historian, but from hours of Wikipedia-ing over my five years at university, this is what I’ve gathered. (And my economics degree has helped too, I hope.)
Mercantilism (16th to late 18th century)
I’m going to start the narrative with one of the most primitive economic ideas in history: Mercantilism, which dominated in the 16th to late 18th century. In essence:
Classical economics (Late 18th century to early 20th century)
Not long later, and possibly skipping past some other minor paradigm shifts, Adam Smith published The Wealth of Nations in 1776, which also happened to be the year of the American Revolution. Adam Smith formed the basis of what is commonly referred to as classical economics. Basically, everything you learn in first-year microeconomics is based upon classical economics:
After more than a century of dominance as the mainstream economic thought (and once again skipping some minor additions again, though mainly to the classical school), when the 1930’s came around, the Great Depression struck. The lengthy periods of unemployment were seen to be a damning criticism of classical economics. If markets could really allocate resources properly, why was there a lingering excess of workers who could not find jobs?
Keynesian economics (1930s to 1970s)
This led to the rise of Keynesian economics. When you start off in first-year macroeconomics, you will generally learn a few Keynesian models. One of the big reasons why students who excel in first-year microeconomics sometimes struggle to grasp the concepts of macroeconomics is that Keynesian economics did not bother to build upon the classical model:
A Fork In The Road: Methodology vs. Ideology
At this point, economic academia progresses into the New Classical school, then the New Keynesian school. I will discuss these briefly, and then instead focus a bit more on the hidden Austrian economics.
What is next, if anything, will be interesting. There is a lot of dissent against the idea of an “equilibrium” to begin with, as markets are dynamic not static – but despite popular articles and books that are very fond of making this criticism, this has been largely addressed already by models that view economies as a time-series of static equilibria, thus building in a dynamic component to many models. If I knew what was next, I would be busy publishing that, so I’m not going to try and predict – after all, we know how good economists are at predicting!
The Austrian School of Economics
An oft-forgotten school of thought that followed the Keynesian shake-up of economic thought in the 20th century is the Austrian school. While the New Classical and New Keynesian synthesis display an enhanced sophistication in the academic rigor of economics, the Austrian perspective remains an enlightening collection of critiques of Keynesian economics, and perhaps more-so, an ideological critique against government interference in the economy:
To summarise some of their key ideas:
When combined, the Austrian school provides a skeptical lens to view Keynesian-based ideas of business cycle management. They believe that trying to prevent it with aggregated spending only covers up the fact that some of these businesses were supposed to fail, and not only that, but would only boost the economy into another illusory bubble which would culminate into a bust at some later stage again. This paints one side of the narrative put forward in the debacle about bailouts in the recent and ongoing Global Financial Crisis.
Collin Li is a sixth year university student, who studied a Bachelor of Engineering (Chemical) and Bachelor of Commerce, majoring in Economics and Finance. He is currently studying for an honours degree in Economics. He was introduced to Austrian economics after coming across some Ron Paul videos on YouTube in late 2007, and he identifies himself as a libertarian.
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