Keynesian Versus Austrian Economics

Keynesian and Austrian economics are similar in that they are two different ways to manage the economy. It is conveyed that in Keynesian economics, “spending drives economic growth, savings decrease it” (Aranda 1). Additionally, in Austrian economics, it is conveyed that “savings and production drive economic growth” (Aranda 1). By analyzing the contrasts, it is clear that Austrian economics is the right way to control the economy.

By looking at inflation, it is clear that Keynesian and Austrian economics both define inflation differently and Austrian economics is superior.

Keynesian defines inflation as “the general increase of prices and a steady rate is needed for a growing economy” (Aranda 1). Austrian defines inflation as “the artificial increase in the supply of currency and credit and [inflation] is always harmful” (Aranda 1). The infographic is saying that Keynesian economics vouches for inflation because it leads to a growing economy and Austrian economics claims that inflation is always harmful. After all, the price increase is artificial, which means that money is devalued as the price goes up.

Paul Krugman, explains Keynesian economics by saying “Why is low inflation a problem? One answer is that it discourages borrowing and spending and encourages sitting on cash. Since our biggest economic problem is an ovlesserall lack of demand, falling inflation makes the problem worse” (Aranda 1). Ron Paul, a politician, explains Austrian economics by saying, “the inflation tax, while largely ignored, hurts middle-class and low-income Americans the most, simply put, printing money to pay for federal spending dilutes the value of the dollar, which causes higher prices for goods and services” (Aranda 1).

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Krugman is saying that the problem with low inflation is that people do not spend money because they believe that they do not have enough to spend money for some goods and services, while Paul is saying that by inflating, the cost of goods increases because the value of the dollar has been lowered.

The issue with Keynesian economics is that if inflation does not occur, goods and services will still be purchased. People will still always buy necessities and luxuries whether they buy goods and services with credit or acquired money. Whether people have money or not, they will still make decisions where they are spending money for goods and services despite the financial consequences because they believe that a good or service (e.g. iPad or iPhone) will be marginally beneficial over the marginal cost (e.g. $200 in debt). While more money may be saved, there will not be such a great amount of money saved that it affects the economy greatly because necessary and excessive spending will always occur. On another note, Austrian economics defines inflation more logically because the value of the dollar will be devalued due to inflation; the more money put into circulation, the fewer the value because now it is easier to acquire a dollar bill. The lower and middle class suffer the most because the value of unrelated goods and services such as houses (which the upper class owns) will still have the same value since they are a necessity. Additionally, there is more money in the country that has been distributed differently than before, which means that consumers will have to pay more money to producers because the producers still need the same value for the house to benefit financially. In short, while the dollar bill’s value has changed, the house’s value has not changed since it is a necessity, not a luxury. The producer can increase the price to match the inflation rate because people will always save money to buy a house since it is a necessity. Also, people with dollar bills now have less money than they did before because money has been circulated differently and devalued. Thus, it is better to not have inflation, as Austrian economics communicates.

By analyzing government intervention versus non-intervention, it is clear that Austrian economics is more logical than Keynesian economics. Keynesian economics states that “a free market without government supervision can lead to poverty” (Aranda 1). Austrian economics states that “spontaneous order among individuals without intervention creates the best environment for economic growth” (Aranda 1). Keynesian economics states that completely free markets cannot exist because poverty will occur and Austrian economics states that completely free markets must exist because optimal economic growth will occur.

The issue with Keynesian economics is that a completely free market will not lead to poverty because necessities and luxuries will always exist. If producers are charging consumers too much money, then producers will not be able to get the necessities and luxuries that they need and want. Even if a producer can self-sustain themselves, it will be mutually beneficial to give consumers goods and services because, through trade, they will be able to spend less time on gaining necessities or spend more time gaining luxuries. For example, a producer may be able to sell some of their firewood for yo-yos (a luxury) or pears (a necessity). Also, when government intervenes through taxes, it is shown through economics that both parties are at a disadvantage because of the law of supply and law of demand. As the government taxes, one or both parties suffer the consequences because of deadweight loss. Taxes always result in deadweight loss, which is the reduction in economic surplus and results in fewer transactions in the market. Taxes decrease the willingness to produce because the maximum amount of money is not acquired; certain producers will not produce or produce as many goods and services because the marginal benefit does not equal the marginal cost. Also, prices will rise because the price must be higher to benefit from a good or service. Due to the price rise, some consumers will not consume or not be able to consume because the marginal benefit does not equal the marginal cost as well. Additionally, when the government enforces a price floor or price ceiling, both parties are at a disadvantage because deadweight loss always occurs; Thus, a completely free market must exist to get an optimal economic surplus, which means the Austrian economics is correct in saying that a completely free market will result in the best environment for economic growth.

Works Cited

Aranda, Sean. INFOGRAPHIC: Keynesian Vs. Austrian Economics. Digital image. The Austrian

Insider. The Austrian Insider, 18 Sept. 2014. Web. 15 Mar. 2016.