Sunday, August 15, 2010

The Austrians

A fairly non-mainstream school of thought in economics is the Austrian School of Thought.  Austrians emphasise the price mechanism and its supremacy: Left unconstrained it leads to the best possible allocation of resources.  It may be that the market doesn't lead to be the optimal allocation, distortions are possible; but government intervention won't be helpful - the "dead hand" of government will always lead to a worse outcome.

As a result, an Austrian economist probably doesn't like very much the actual Austrian, or continental European, economic systems - social democracies with high taxes and heavy government intervention in markets.

Funny then that this Austrian economist, Don Boudreaux, seems to be gloating about strong growth in Germany vs the US.  Germany has just reported 2.2% GDP growth last quarter (which is impressive), while the US appears to be toiling towards a double dip recession.

Germany also has been embracing austerity recently, with significant spending cuts to address its large budget deficit, while the US, via Obama and the Democrats, is about the only major economy still attempting to pursue fiscal stimulus policies to encourage economic growth.

So the fact that the US, maintaining strong government intervention, is muddling towards a double dip recession, while Germany, cutting it back, has reported strong growth, is music to this Austrian's ears.

Of course, the story is so much more complicated than that.  Not least: You can't prove anything with one data point.  Then: How quickly do fiscal policies have any effect?  Finally, what is the impact of government intervention in the macroeconomy?  (the answer is it's quite slow with time lags, so the current numbers have nothing to do with recent decisions on austerity vs stimulus spending).

All these things you'll learn more about second term next year when we get to macroeconomics in the econ101 course.

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