The Independent Market Observer

8/15/13 – Learning About Economics

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Aug 15, 2013 10:25:03 AM

and tagged Politics and the Economy, Economics Lessons

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Looking for new news today is hard. There are a lot of good economic stories—Europe’s economy has started to grow again, initial unemployment claims have come in at a six-year low, consumer borrowing has picked up again, among other stuff—but I’ve written about that several times over the past couple of weeks.

I could talk about the drop in the stock markets this morning or the uptick in interest rates, but I’ve also covered those topics multiple times lately, most recently yesterday. No doubt I’ll return to them again in the next couple of weeks—maybe even tomorrow, depending on how the market closes today.

So let’s take this chance to learn a bit about economics in a fun way. Even if you don’t like rap, these two videos are very entertaining and surprisingly accurate:

From an economic perspective, policymakers have to decide whether to intervene in the economy (per Keynes) or let the market heal itself (per Hayek). The phrase “We’re all Keynesians now”—reportedly coined by Milton Friedman and often attributed to Richard Nixon—reflects the fact that the modern consensus around the world is for intervention, with governments spending in downturns to support demand.

The problem is that this is only half of Keynes’s prescription. The other half—to raise taxes and run a surplus in good times—is never implemented. You could therefore say that the full Keynesian program has never actually been tried. Hayek’s prescription—leave the economy alone—is never considered seriously nowadays and hasn’t been implemented in the West since the 1930s. In fact, the Great Depression is why Keynesianism became the default economic ideology.

As usual, there is truth on both sides. Government does have a role to play, as we saw in the Great Depression and Recession, yet, at some point, markets have to heal themselves. Each school of thought has merit and applies at different times. I’ll look more deeply at both in future posts.

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