A Test of Economic Schools

The reason I'm so excited about the proposed stimulus packages in the U.S. is because we'll finally have a speck of empirical proof to see whether Keynesian economics, Austrian economics, or any economics can explain how best to pull somebody out of an economic crisis.

Interestingly, I go to the University of Arizona and was taught (rather dogmatically) that the stimulus package was the way to go because an increase in aggregate demand leads to an increase in funds for the company leads to an increase in workers' wages leads to an increase in household income leads to an increase in total spending leads to an increase in aggregate demand, etc. The idea that markets were self-regulating took up about forty seconds of the lecture, in comparison.

The Ludwig von Mises Institute is a big proponent of Austrian economic thought. A recent article discussed the proposed economic stimulus package in terms of a baker and his goods. The analogy ran something along the lines as follows:

A baker produces bread and trades the bread for other goods, say, shoes. Both are "final goods" and both are what the baker is paying for. If the baker goes ahead and pays somebody to make a stove, then they probably will also pay in bread (seeing as money is only a facilitation of trade... something that the Keynesian economists time and time again fail to recognize, or so I feel like the Austrian school would allege). However, if the baker can no longer produce the final good, then the stove will not be created, because the final goods aren't there to be traded.

Similarly, government cannot stimulate the economy by creating false jobs and frivolous spending. Continuous spending and increasing monetary supply (through the Fed) is just a charade. Real people who exist outside the government would not think much of these false jobs that create false wealth and ensure a false healing to our staggering economy. Indeed, the funding -also- has to come from somewhere, and Frank Shostak (from the article) appears to be arguing that the money will come out of taxpayers' wallets. Money coming from taxpayers' wallets means they won't be able to do more (real) productive things with that money, so less and less "real" productivity would occur while more and more "false" productivity would occur.

Come to think of it, Shostak's article is all just an interesting treatise on Jean Baudrillard's ideas on simulation and simulacra, government spending becoming the simulation, and Keynesian economics being the simulacra-like ideas.

In any case, we will have to wait and see. Sadly, this might be the only time we'll get to investigate what could save us from an economic crisis, so we -still- wouldn't have enough evidence after we pull out to draw conclusions...