Two Schools - One Crisis

After finishing two lessons based on Carl Menger’s Principles of Economics(1871), I have to pause for a while and read some recent articles. This is more fun and pleasurable to me than studying primary books like Principles. I think, the advice of a fellow minister is timely. He knows firsthand the struggle to attain understanding. I experienced it in my quest to understand the Austrian school of economics. My mind is wavering between two approaches: directly going to the primary books or reading existing articles. Again, I changed my decision. I will do both simultaneously.

Reading primary source requires more time and concentration. It requires greater hard work. Entering the world of ideas especially written in the past is more difficult to me than studying present-day articles. At least, one consolation is that you will no longer at the mercy of someone’s interpretation. Your questions in mind can immediately be answered by the original writer himself.

On the other hand, studying contemporary articles is more fun and pleasurable than hard work.  You are still in the world of ideas, but at least, they are now applied in the present setting. And it is fun to know what is really going on out there in the world of business and finance between the two major schools of economics: Keynesian and Austrian.

One example of such tension is reported by Chidem Kurdas last July 20, 2012 in his article, Uncertainty and the Keynesians.  The future of global economy is uncertain. Two schools of economics offer their distinct analysis. From the Keynesian school, we have Joseph Stiglitz and Paul Krugman. From the Austrian school, we have Allan Meltzer.

We have here one economic problem, two different analyses, and two distinct solutions. Which one is right? Which one is correct? If one school is correct, the other is wrong. They cannot be both correct at the same time. For the Keynesian, the solutions are “further monetary easing by the Federal Reserve” and “massive new federal deficit spending.” Based on a superficial analysis and as short-term solution, the Keynesian rhetoric makes sense.  On the other hand, the Austrian is against “monetary stimulus” and favors reduced government spending.

I am no economist and I am not familiar with the economic terms used by economic experts generally reported in the news. I wonder how many people out there share my lack of knowledge. To my mind, what the Keynesian calls “monetary easing” and the Austrian describes as “monetary stimulus” refer to one action – printing more money by the Fed, and that is how I understand inflation.

Basically, inflation means increase in money supply. Price increase of market goods is just an outcome of the decrease in purchasing power of currencies resulting from the increase in money supply. What most people do not know is that inflation is an “invisible tax.”

Economists’ use of words really matter in public discourse to convince society that their analysis and solution are correct. At face value, the Keynesian proposal appears harmless, but in reality, what they propose is more taxes. The problem is only few are informed, others are confused, and the greater majority are still living in the world of fantasy.

Note: Posted on July 23, 2012