Thread by @eriktorenberg

0/ Musings on difference between Austrian and Keynesian schools of thought .

Reply with your edits, what's missing, etc.

1/ Simply put, economics is the study of how we use resources & respond to incentives.

Humans (and thus, economic phenomena) are inherently complex, which makes it challenging to test ideas by performing controlled experiments.

2/ In hard sciences like physics or chemistry, you’re evaluating things that don’t have motivation of their own. However, humans have complex motivations stemming from psychological phenomena that we can’t fully observe.

3/ Unlike other disciplines, economics has splintered into incompatible schools of thought (i.e., Marxist, Chicago, Keynesian, Austrian).

This didn’t used to be the case. Austrian econ *was* mainstream econ in 1800s/1900s, as popularized by Hayek, Mises, & Rothbard. That was it

4/ Austrian school focuses on first principles (e.g deductive reasoning) + derives implications from there.

Keynesian economists, OTOH, use data + empirical evidence (inductive reasoning) to make decisions.

As scientific method took off, Keynesian approach gained in popularity.

5/ To reiterate the differences in approach:

Keynesians rely on the validity and applicability of empirical evidence. Austrians rely on their ability to make the right assumptions about human nature.

This explains much of the differences between the camps’ proposed policies.

6/ Keynesians believe in spending to stimulate the economy in response to economic cycles. This leads to more consumption, which leads producers to invest more to make more widgets, thus employing more workers.

In other words, Keynesians believe gov’t intervention is necessary.

7/ Austrians claim that gov't intervention is the cause of market distortions & misallocation of capital.

It distorts the natural rate of interest, leading to distorted spending & investment rates, which leads to the booms & busts of biz cycles.

Believe gov’t is the problem.

8/ Keynesians would argue that government-issued money is necessary for a functioning economy. They would argue that the Austrian sound-money ideal doesn't make sense in today's globalized world, and would lead to volatile currency fluctuations.

9/ Austrians would argue that we would all be better off with hard money, outsourcing monetary policy to whatever backs the currency (e.g., not tied to policy objectives of state).

10/ Austrians argue that if a money supply is fixed, then economic growth will cause prices of real goods and services to drop. This would discourage present-day consumption, but encourage saving and investment (for future consumption).

11/ The theory goes that such a 'low-time-preference' society would be better off in the long-run (more investment + less consumption today —> more income + more consumption in the future).

12/ Most nation-states today employ Keynesian economics. When growth slows, central banks print money, pushing interest rates down. And when that loses its effectiveness, we rely on deficit spending to jumpstart the economy.

13/ But cryptoeconomies are different than nation-states. Bitcoin doesn’t have to consider maximizing employment or even maintain stable prices (like the Fed). This, among other reasons, is reinvigorating the Austrian vs Keynesian debate.

14/ In closing:

Austrian economics was mainstream in a different time (i.e., 19th century, gold standard, limited globalization) vs. Keynesian economics (20th century, post-Bretton Woods, globalization).

15/ Austrians would argue that we need an entirely new system (human nature hasn’t changed, system is broken), while Keynesians would argue that the world has changed and economic theory needed to adapt in response.

/fin