Archives for Moneyisms category
2
Apr
Posted in Moneyisms by Roger, the Amateur Financier |
Welcome once again to another edition of Money-isms. This time we’re going to cover a philosophy that frequently arises when discussions turn toward the politics and monetary policy (which is to say, almost anytime you bring up government on a money website or money on a political website). That’s right, it’s time to discuss
The Austrian School
Founded By
Carl Menger was the first to express the principles that formed the foundation of the Austrian School. His Principles of Economics was one of the first works in economics to stress the importance of individual human actions rather than a broader, logical scheme.
The First Austrian of the Austrian School
The Theory
Austrian School philosophy emphasizes the importance of the individual and free choice in economic interactions. (The theory is sometimes called ‘Individualism’ as a result; I would have used Individualism as the title of this Money-ism, to keep with the pattern this week, but Austrian School is by far the more recognizable name).
This focus on the individual, and the fact that economic phenomena are caused by individual decisions taken in aggregate, rather than political action or the actions of big corporations. The consequence of this is the tendency of Austrian School economists to promote a very laissez faire approach from the government, stressing the enforcement of voluntary contracts. Beyond that, governmental interference should be limited, so as to avoid creating a coercive force.
The focus on individualism leads to the Austrian belief that economics is more art than science. Since it’s impossible to know how a group of individuals, with their own motivations and goals, Austrian economists tend to avoid using figures and calculations in their writings, a tact that sometimes causes problems with more math intensive economic theories.
Under Austrian School principles, economic benchmarks like the level of economic inequality in a country are the result of numerous individual actions taken in aggregate. As a result, it’s nearly impossible to use government actions to alter such economic measures; when government actions are implemented, the effects on individual motivations and actions are so varied and dependent on the individuals involved, that the end results are likely to be far different than desired.
Criticism of the Austrian School
The most common criticism of Austrian School economics is that it lacks intellectual rigor. With its emphasis on logically deducted conclusions and rejection of using numbers to support their conclusions, the Austrian School economists tend to be dismissed from economics journals due to an absence of supporting calculations.
Similarly, Austrian theories come under attack for not using empirically derived data in their theories. Frequently, these theories are also unfalsifiable, making it impossible to test them and determine whether they apply to the real world. This untestable nature of Austrian economics, and the aggressive attempts by some Austrians to incorporate any empirical data, put them at odds with the broader economic field.
Another criticism is that, while the Austrian School is quick to criticize other economic theories (including Keynesianism and Monetarism, our earlier Money-isms), it does not provide viable alternatives. Both Paul Krugman (a neo-Keynesian) and Milton Friedman (the founder of Monetarism) rejected the Austrian explanation of business cycles, one example of where alternate schools have rejected specific Austrian policies.
A Brief History
The Austrian School came into being in Austria during the late nineteenth century, as a result of Menger’s seminal work. The name ‘Austrian School’ was originally a derisive term used by the Persians to describe the unorthodox theory.
In the late nineteenth and early twentieth century, the Austrian School expanded rapidly, with some of its most dedicated and well-known members, like Ludwig von Mises and Friedrich Hayek making their mark on the theory. Their two different approaches to Austrian principles indicate some of the division within the Austrian School during the period between the two world wars.
Following World War II, Austrian School principles were held in low esteem. In the latter part of the 20th century, though, they began to make a come back, with several American universities providing significant Austrian presence and politicians like Ron Paul openly embracing Austrian principles.
Three Sentence Summary
The Austrian School stresses individualism and the individual’s unique motivations above the more statistical views of economics usually used. It’s been criticized for a lack of mathematical rigor, but serves as a valuable reminder that motivations can vary among individuals. Austrian theories seem to be enjoying a new life, in no small part to promotion from certain US politicians.
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1
Apr
Posted in Moneyisms by Roger, the Amateur Financier |
Welcome back. After a short, pottery induced break (more on that in the next weekly round up), it’s time again to plumb the depths of the economics world. As always when exploring untold depths, there’s always the chance of finding something unexpected, like
Rogerism
Founded By
Roger Raby is quite possibly the greatest economic mind that has ever graced this little ball of mud we call the earth. In spite of being born in 1982, well after most of the ‘great’ economic minds of the past, Roger has proven himself equal to, nay, superior to them all. The dynamism and vigor shown by these new theories have rocketed Roger to the top of the economics field.
So mighty, even when not repairing the economy
Still, in spite of his amazing, phenomenal success, Roger has remained surprising modest. He has rejected the numerous and plaintive requests to join the top monetary organizations in the world, preferring instead to labor to educate the people through the use of mass media, particularly websites. Truly, he is a man of, for, and by the people.
The Theory
It’s hard to put one of the revolutionary principles every devised into words, but luckily, Roger’s skill as an economist is surpassed only by his skill with the written word. The Rogerism theory can be summed up with following principles:
1) Cats make better doors than windows.
2) Never put off until tomorrow what you can put off until yesterday or a fortnight from now, whichever comes first.
3) The egg always comes first; why was this ever an issue?
4) The greatest gift is a magic bag that keeps on giving.
5) Peanut butter and peanut paste do NOT count as two different uses of peanut butter, and don’t let George Washington Carver tell you any different.
6) There is no rule 6.
7) Something about supply and demand, with lots of figures and diagrams; honestly, we were kind of dozing off by this point.
And there you have it, a fool-proof set of economic principles for structuring your entire economy. If you don’t follow them, don’t worry; you’re just a Communist!
Criticism of Rogerism
There has been absolutely no criticism of Rogerism; it’s universally recognized as the greatest and most perfect economic theory ever.
A Brief History
It’s hard to express all the twists and turns of the Rogerism theory history in one short blog post, but hear goes. Shortly after his birth, Roger presented the basics of Rogerism to the world community (after working on them in utero). While the brilliance of the plan was recognized immediately, it still had a few bugs to work out, and sadly, unable to talk, Roger was unable to help for the first few years of the plan’s existence.
Luckily, through great motivation and force of will, the truth and glory of Roger’s theory was spread far and wide, leading to a complete and total economic utopia. (What, you say that’s not what happened? Who’s the world going to believe, you, or a writer on the internet? That’s what I thought.)
Three Sentence Summary
Rogerism is the greatest economic theory ever. Rogerism will solve all problems, past, present, and future. One last thing to know about Rogerism:
IT’S ALL A JOKE! April Fool’s!
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30
Mar
Posted in Moneyisms by Roger, the Amateur Financier |
Welcome back to our week of looking at different financial theories, to see what insight we can gain about the interaction of fiscal policy, political philosophies, and the economy. Yesterday, we looked at Keynesianism, one of the more interventionist money policies, so it’s only fair that we take a look at the policy that’s considered its biggest rival. That’s right, today’s economic theory is
Monetarism
Founded By
Milton Friedman is the founder of the Monetarism school of economics, much as Keynes created the Keynesian school several decades earlier (the two men never met, but Friedman noted that he received two correspondences from Keynes, both rejection letters). In his younger years, Friedman worked for the Federal Government and was an advocate for Keynesian policies.
Another Famous Economist, Another Time Cover
His most important work, A Monetary History of the United States, 1867-1960 (co-written with Anna Schwartz), set forth the principles of monetarism. During the sixties, his ideas came to prominence, winning him a Nobel prize in 1976 and inspiring numerous financial leaders over the past several decades.
The Theory
Monetarism, as you might guess, is primarily concerned with controlling the money supply. In contrast to Keynesian theory, where the government was viewed as having an important job stabilizing the economy, Monetarism tasked the government with simply maintaining the money supply, and allowing the rest of the economy to take care of itself. By controlling prices via the amount of money available, Friedman and other Monetarists maintained that most other aspects of the economy would take care of themselves.
Another major tenant of Monetarism is the need to fight against inflation. Inflation is viewed as a monetary phenomenon, the result of too much money being added to the economic system (frequently the result of attempts by government to increase the productivity of the system). The goal under Monetarism should be to keep the amount of money in the system from growing too fast, leading to inflation and causing a great deal of pain for the economy at large.
For Monetarists, the role of government in economic life should be fairly small. The control of the money supply, the basis for most Monetarist economic influence, should be left to independent central banks (with strict governing their behavior), rather than in government hands. These banks should pump more money into the system in the event of a downturn, to prevent deflation; in this view, the failure to do so in the 1930s was one reason that the Great Depression lasted so long and was so severe.
Criticism of Monetarism
Obviously, most of the principles of Monetarism are in conflict with Keynesian principles, as already mentioned. Keynes and others who followed his economic views downplayed the role of money supply in the economy, encouraged the government to take on deficits to spread money in the event of a downturn, and had a high focus on unemployment and economic growth as opposed to the less interventionist Monetarists. Some Neo-Keynesians have argued that demand for money is intrinsic to the available supply, in contrast to Monetarist principles.
There are also disagreements between Monetarists and followers of the Austrian School regarding several principles. Austrian School economists stress the individual’s subjective valuation of money, and reject the attempts of Monetarists to create an objective valuation of money. This disagreement between the ‘quantity of money’ thinking of the Monetarists and the ‘value of money’ views of the Austrian school provide one source of friction between the two groups.
Since the 1990s, there have been several events in the economic world that have called Monetarist principles into question. The separation of money supply growth from inflation in the 1990s, the economic trouble in Japan during that same period, and the inability of Monetarist policies to revive the economy in the wake of the 2001-2003 all have caused doubt for the once firm believers in Monetarism. Add in differing explanations from a variety of quarters regarding issues like the cause of the Great Depression, and the theory of Monetarism is far from unassailable.
A Brief History
The publication of Friedman and Schwartz’s book didn’t attract much attention at first, but during the 1970′s, it began to draw more attention. When Keynesian economics seemed unable to combat the economic stagnation and high inflation rates that dominated the latter half of that decade, Monetarism was embraced by politicians and economists alike. The message of fighting inflation, not unemployment was widely enacted.
During the Reagan years in the US (and with corresponding action in the UK and Germany), actions were taken to control the impact of inflation, causing inflation levels to drop and leading to other Friedman policies to be passed. Financial markets were allowed to operate more freely and inflation and money growth were slowed.
In the 1990s, as already mentioned, events started to occur that changed the perception of Monetarism, decreasing its popularity. Even among its followers, the monetary policies recommended by Monetarism are difficult to time correctly and put into policy. Add in the recent downturn and the potential link between some Monetarist policies and the downturn, and Monetarism is in considerable decline (as Keynesianism is on the rebound).
Three Sentence Summary
Monetarism suggests that the most important thing for the government (or rather, a central bank) to do to the affect the economy is to control the money supply. By restricting the growth of available money, the government can keep inflation under control and allow the rest of the economy to fall into place. Although very popular in the late seventies and eighties, the last two decades have raised some major concerns about Monetarist policies, though they still remain quite influential.
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29
Mar
Posted in advanced topics, Moneyisms by Roger, the Amateur Financier |
Welcome to a special week-long series where we take a look at some prominent economic theories. Don’t worry, it won’t be nearly as horrifyingly dull as it sounds; this is still the Amateur Financier, after all. Plus, it’s always good to have a little background when you’re reading about things like ‘monetarism’ or ‘Austrian school economics’, or as in this case,
Keynesiansim
Founded By
John Maynard Keynes was a British economist whose most influential book, The General Theory of Employment, Interest, and Money was written as a response to the Great Depression. He was involved in British politics before and during World War Two, and helped to create the International Monetary Fund and the World Bank before his death in 1946. He was also married to a Russian ballerina, Lydia Lopokova, a fact I mention just in case you ever need to defend the sexiness of economists.
Just Look at That Sexy Mustache
The Theory
Keynes’ major insight was that the government could have a impact on the economy, working to stabilize it. The results of private decisions and private enterprise could be inefficient, due in part to slow response of prices and wages to changes in supply and demand. He also viewed recessions and depressions not as regular parts of the business cycle, but as problems that needed to be solved, most readily via government intervention.
One of the major parts of Keynes’ philosophy is the need for counter-cyclical economic policies, attempts by the government to counteract the excessive lows and the highs in the economic cycle. During recessions, for example, he advocated government spending to help prop up businesses and give a boost to the economy, while during boom times, the government should rein in market extravagances by increasing interest rates or decreasing government spending. In this way, the government would be a counterbalance to the business cycle, helping to stabilize it.
Two of the other ideas that Keynes helped to popularize are the multiplier and the paradox of thrift. The multiplier argument maintained that spending could have a bigger effect than the initial amount spent. If the government provides for $10 million in payments, for example, the benefits to the broader economy can end up being much more than $10 million. The initial recipients of the money will likely spend or invest it, with companies that will in turn spend or invest it, and so on. The initial $10 million may lead to many times the economic benefit, as the money works its way through the system.
The paradox of thrift, on the other hand, maintains that while saving is good for the individual, if done in aggregate, it can be harmful to the economy as a whole. Decreased spending leads to decreased demand, decreased demand can lead to lower economic growth and possible downsizing, potentially decreasing the total amount saved due to anemic growth and lower incomes. The paradox is, while saving is good for the individual, saving too much can be bad for the economy.
Criticism of Keynesianism
One of the major philosophies opposed to Keynesian economics is Monetarism, another school of economic thought (which we’ll cover in more depth tomorrow). Their major criticism has been that governments are, if anything, even worse at responding to fluctuations in the economy than the private sector. By the time the government recognizes the problem, formulates a response, and puts the response into practice, the problem may have become greatly exacerbated, or it may have disappeared. The monetarists lean towards a much less expansive role for government in economic policy, which is counter to the more interventionist Keynesian economic thought.
Keynesian policies also come under attack from Austrian School economists (again, more on them later this week), who denounce the Keynesian focus on the collective group rather than the individual. They maintain that focusing on broad government action rather than micro-economic factors leads to collectivism and mis-spending of capital. They also maintain that programs that start as temporary fixes to counterbalance an economic downturn can turn into permanent, expanding government programs that grow to consume larger and larger portions of government spending.
There’s also historical evidence (as noted below) that Keynesian approaches to boosting the economy are far from sure things. In a deflationary environment, such as during the Great Depression, putting more money into the system (which Keynes recommends), can serve to counteract the forces of deflation and boost the economy. However, in downturns with high inflation, such as the ‘Stagflation’ of the 1970′s, a further increase of money into the system will only aggravate the problem.
A Brief History
Keynes and his theories rose to prominence in the midst of the Great Depression, where the idea of the government ‘priming the pump’ to boost the economy was one already being taken up by Roosevelt, among others. The success of government spending (either in the form of New Deal programs or military spending during World War II) at lifting the economy was considered to be proof of Keynes’ concepts, and they were put into practice in America and elsewhere through most of the forties, fifties, and sixties.
As mentioned, though, Keynesianism was unable to cope with the economic stagnation and inflationary climate of the 1970s. From the Reagan administration (and its contemporaries in other countries) until 2008, Keynesian ideas and methods of dealing with the economy were pushed to the side, superceded by monetarism and supply-side ideals. Attempts to use government as a cushion against the rises and drops of the economy were curtailed in favor of a philosophy of letting the economy run with as little government intervention as possible.
However, with the economic downturn of 2008, there’s been a resurgence of Keynes and his approach to economics in public life. The great amount of spending by the US government over the past few years in an attempt to spur on growth is right in line with Keynesian monetary policy. (We’ll have to see how if Keynes is still in fashion when the recession abates and Keynesian economics dictates that the government should cut spending to slow down the economy.)
Three Sentence Summary
Keynesianism stresses the need for government to serve as a counteracting force to the excesses of private economy. The main thrust is that the government can counter the economic excesses of the private sector, spurring on growth when it’s slow and restraining over-zealous government expansion. Recently, such interventionist ideas have become more common, in wake of the economic problems of 2008.
Related Websites
