Keynesian vs. Austrian economics made simple – Good analogy?

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  • Sun, Jun 20, 2010 - 05:49am

    #1

    Travlin

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    Keynesian vs. Austrian economics made simple – Good analogy?

If you have been confused about the differences between the Keynesian and Austrian schools of economics, may I humbly propose an analogy that may help your understanding.  If you don’t think this is accurate or helpful then please let me know.  I’m new to this myself.

Fire policy — In the early 1900s the US Forest Service implemented a new policy to aggressively suppress all forest fires.  Citizens didn’t like to see trees burn and the lumber companies saw profits going up in smoke.  Over the years they obtained equipment,  trained men, and worked out elaborate plans.  With a lot of time and money they reduced fire damage considerably.

Over the years the forest management experts began to notice problems.  Without periodic small fires the undergrowth became thick.  It ignited easier, acted as additional fuel making the fire hotter, and sent it up into the crowns of the mature trees.  This spread the fire faster and farther, killing more of the forest.

With further study they found that in the pasts forest experienced periodic small fires which cleared the undergrowth and burned up the deadwood.  They usually did not reach the crowns and burned themselves out without doing great damage.  They triggered the tree seeds to sprout and start a healthy new generation.  The mature trees also grew better.  The old policy of trying to manage nature was counter productive.  The policy was changed to allow the natural cycle to return.

Keynesian school – All recessions are bad and must be suppressed by government actions.  This protects established businesses and jobs.  The methods are elaborate and costly, but a benefit to the public overall.

Austrian school – When markets stray too far from reality they must be purged by adversity.  This clears unneeded or failing enterprises so capital is not allocated wastefully, and new businesses can emerge.  Periodic small recessions are the price of a healthy economy.

Recent situation — Unfortunately, after decades of total suppression many forests were overgrown tinder boxes.  At Yellowstone National park the “hands off” policy let a fire get completely out of control before they used aggressive suppression.  36% of the park burned and much of this area is still black 20 years later.  At Los Alamos a “controlled burn” to clear undergrowth ran away from them and destroyed 400 houses. 

Yellowstone – Bear Stearns, Lehman Brothers, current economic predicament.

Los Alamos – Recognizing the problem and the perils of trying to make up for past mistakes.

I have often found a good analogy helpful to understand or explain a concept.  It is easy to push one too far, but if used properly it can be a good tool.  Is this one accurate or helpful?  What do you think?

Sources

http://en.wikipedia.org/wiki/Cerro_Grande_Fire 

http://en.wikipedia.org/wiki/Yellowstone_fires_of_1988

 

  • Sun, Jun 20, 2010 - 01:13pm

    #2
    Peak Prosperity Admin

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    Re: Keynesian vs. Austrian economics made simple – Good …

Travlin, 

I think your analogy is great. Especially helpful for newbies like me.  I am constantly struggling to calmly and politely educate friends and family–I am going to use this!!

  • Mon, Jun 21, 2010 - 02:04am

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    Re: Keynesian vs. Austrian economics made simple – Good …

OK forgive my still struggling to understand here.  I get the flaw in the Keynesian school.  But, the Austrian school as it has been applied (supposedly) has been a version of pretending to let nature take its course while really interfering in extreme ways – I encourage laws that force people to let the forest burn except in areas that I lumber in which case I force the local farmers to pay for my fire suppression system.  Then when my land does catch fire I let it burn out all of your land,  tax you for the fire damage and take your land because you cannot manage it.

Mostly the reason it seems to me that the “schools” and ideologies don’t seem to work is because of the number of people who tout one plan,  but then do something completey different!

  • Mon, Jun 21, 2010 - 03:10am

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    Re: Keynesian vs. Austrian economics made simple – Good …

Land

You may well be right.  My understanding of the Austrian school is elementary.  I’m not saying the Austrian school is a good thing.  In practice people always find reasons to work things to their own advantage.  I was just trying to illustrate the difference in fundamental principles.  Do you think this analogy does that? 

 

  • Mon, Jun 21, 2010 - 02:11pm

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    Re: Keynesian vs. Austrian economics made simple – Good …

It does work in one sense,  but it makes it seem like the Austrian school is “right”.    It is only my opinion,  but it is similar to the left-right political paradigm.  We need to get past ‘schools’ and parties and sound bites.  They are all man made inventions and we need something new.

  • Mon, Jun 21, 2010 - 02:49pm

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    Re: Keynesian vs. Austrian economics made simple – Good …

Here’s my take in a most basic sense…

1.)  Austrian Economics – Actions of human behavior in changing conditions.  Hence…more dynamic and adaptive to external forces.   This makes modeling irrelevant since more a continuum versus yes/no.  Decentralization?

2.)  Keynesian Economics – Poorly defined role and benefits of government as a solution with arbitrary, incomplete, obtuse, unproven tenets.  Static and one dimensional to issues, forces and actions.  Simple cause…effect and solution.  Centralization?

Which of the two comes closer to the laws of nature?   Everyday life   As a scientist and everyday modeler for over 30 years, plus day to day life experiences…its number 1.  

Travlin: The next sentence by Lord Acton is also important.

 

Nichoman 

  • Mon, Jun 21, 2010 - 11:32pm

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    Re: Keynesian vs. Austrian economics made simple – Good …

[quote=land2341]

It does work in one sense,  but it makes it seem like the Austrian school is “right”.    It is only my opinion,  but it is similar to the left-right political paradigm.  We need to get past ‘schools’ and parties and sound bites.  They are all man made inventions and we need something new.

[/quote]

Land

Good point.  It does imply the Austrian school is better.  That was not my intention, as I don’t know that much about it yet.  This needs some thought.  I agree that both parties try to manipulate us to support them to the detriment of our country as a whole.  But lacking divine intervention, it is up to us to find better ways.

In Keynes defense, per Machinehead (post 3) https://www.peakprosperity.com/forum/rejecting-keynes-growth-ideas/40723, “deficit spending in recessions was supposed to be offset by fiscal surpluses during expansions.”  Looks like politicians mucked that up pretty thoroughly.

 

  • Mon, Jun 21, 2010 - 11:54pm

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    Re: Keynesian vs. Austrian economics made simple – Good …

[quote=Nichoman]

Here’s my take in a most basic sense…

1.)  Austrian Economics – Actions of human behavior in changing conditions.  Hence…more dynamic and adaptive to external forces.   This makes modeling irrelevant since more a continuum versus yes/no.  Decentralization?

2.)  Keynesian Economics – Poorly defined role and benefits of government as a solution with arbitrary, incomplete, obtuse, unproven tenets.  Static and one dimensional to issues, forces and actions.  Simple cause…effect and solution.  Centralization?

Which of the two comes closer to the laws of nature?   Everyday life   As a scientist and everyday modeler for over 30 years, plus day to day life experiences…its number 1.  

Travlin: The next sentence by Lord Acton is also important.

Nichoman 

[/quote]

Nichoman

Thanks for the further delineation of the two schools.  Seems the analogy is in line with your assesment.  I’m curious about what area of science you are in.

Regarding Acton did you mean, “History has proven that.”?  I dropped it for brevity.  If not, please enlighten us as I used a secondary source.  I also combined two quotes in my sig line.  Not technically kosher but this is not a scholarly publication. 

 

  • Tue, Jun 22, 2010 - 07:55pm

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    Re: Keynesian vs. Austrian economics made simple – Good …

Travlin…

I’m an Atmospheric Scientist.   Specific areas: Thermodynamics…Climate Change…electro-optics and electro-magnetism.

Referencing Lord Acton:  The next sentence in his Letter to Bishop Mandell Creighton, 1887…

“Power tends to corrupt and absolute power corrupt absolutely. Great men are almost always bad men, even when they exercise influence and not authority; still more when you superadd the tendency of the certainty of corruption by authority.”

Try Acton Institute link…

 

Nichoman

  • Wed, Jun 23, 2010 - 03:05am

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    Re: Keynesian vs. Austrian economics made simple – Good …

Nichoman

Thanks for the info on you and Acton.  Your work sounds interesting.  I bet if some misguided soul accused you of being full of hot air you could whip up a thermodynamic equation on temperature differentials and prove him wrong. 🙂  I’ll look into the  Acton site.  He had good insight into human behavior. 

 

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