The state of modern economics – as seen by a non-economist

I have an undergrad degree in Economics (and Electrical Engineering) – but I don't think that makes me an economist by today's standards.  So here are my two cents about the state of economics:

In the first half of the 20th century Keynes' economic theories dominated mainstream economic thought.  In the later part of the century, the Chicago School made serious inroads into mainstream thinking.  Behind all this, the Austrian theory was kept alive by a set of devoted followers (the biggest influence of this theory is in money management and trading, where Austrian theories have stayed popular).  That's all the background you're getting.

The recent crisis revealed that the Chicago/Friedman School is dead.  Yes, Friedman was influential.  Yes, a lot of people at U of C won Nobel Prizes.  But, when push came to shove, virtually none of their followers remained principled defenders of free markets.  When times got tough, Chicagoans turned into watered-down Keynesians.  (The few that didn't basically sounded like watered-down Austrians).

So, there is only one theory of economics that is acceptable in mainstream circles.  The Austrians are keeping-it-real in the background, but they have no mainstream influence.

Let's discuss these two theories based on the assumption that the current policies of USG (US government) have gotten us out of the recession.  (Note: I do not believe this is true and neither do many Austrians.  Nevertheless, let's cede that argument to the Keynesians and see what happens).

Keynes' theory – having USG print and spend incredible sums of money in a recession to get us out of recession – seem to have worked in this recession.

Austrian theory has been predicting the imminent destruction of USG and the US economy for a long time.  To oversimplify, the Austrian believe that economies that print so much money cannot survive

From my perspective, Austrians need to realize that the economy is much more stable than they give it credit for.  Nevertheless, in the end I think the Austrians are still correct.

USG went into this recession with $8-9 trillion of debt.  It will be lucky to leave the recession with $13 trillion in debt.  So, let's assume that for Keynes theory to work and for the economy to get out of recession, USG will have to increase it's debt by 50%.

I believe Keynes suggested that in good time, USG should run surpluses and pay down its debt.  The problem with this idea is that USG has never, ever done such a thing.  This idea is ridiculous.  Broad-based democracy basically prohibits it.

It's safe to assume that when the next Great Recession comes, in say 20 years, USG will have a debt that is well above $13 trillion.  Let's assume that another recession comes in 20 years and at that point, USG's debt is $20 trillion.  Let's further assume that Keynes' suggestions can get us out of the recession with printing $10 trillion – leaving the debt at $30 trillion (after monetization).  This process can be repeated indefinitely.

How long can this go on?

In the end, the Austrians – who may underestimate the resilience of the economy – will eventually have to be correct.  Clearly, some level of debt is too much for USG to maintain.  The only way my argument can be wrong is if USG can pay down some of its debt in good times.  I don't see that happening – our political system is set up to virtually guarantee that debt reduction is impossible.

Enjoy.

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