Fear the Boom and Bust
The Sensational Economics Video That is Taking the Hip-Hop World By Storm!
(Or, er, vice-versa.)
Background article here. Smooth Party Boy John Maynard Keynes throws it down in a rap battle versus Bookish Teetotaler F.A. Hayak. Keynes extols the virtues of government economic management, particularly in the boom and bust cycles, while Hayak eschews the stimulus packages that cause Keynesian hangovers to instead promote free markets.
The problem with Keynesian theory is that it largely ignores the elegant tools of microeconomics in providing the government an excuse to interfere with the markets. Politicians are given large amounts of money to spend in order to stimulate the economy. And spend it they do! Whether the spending is on useful capital projects or digging ditches, the result is the same – stimulus. The incentives of individual actors within the system are ignored, with political calculations causing widespread distortions in individual markets. Low interest rates then cause a de facto creation of money without value, leading to an illusion of real wealth and further misallocation of capital (i.e., housing) within an economy. When the bust hits, the previous misallocations generate less wealth than a more efficient use of capital would have generated, making the bust worse. But politicians don’t mind – the bust provides further opportunities to spend and enhance their own power.
Hayak takes the more humble approach – we are not gods, we do not know how the economy functions. We do know that economies function better with less government interference. Thus, the government should back off and get out of the way.
Unfortunately, following the Austrian School exemplified by Hayak would cause a loss of power for the government. So politicians promote Keynesian thinking while ignoring Hayak. And the media promotes Keynes, opting for a vigorous governmental actor in a compelling narrative rather than a tone poem.
Considering the apparent failure of applied Keynesian theory to revive the present economy, that is a real shame.
UPDATE: Allan Meltzer of Carnegie Mellon says Obama’s deficit spending to stimulate gets Keynes wrong (h/t Instapundit).
