Over at the Liberty Conspiracy, Glenn Jacobs (AKA Kane from WWE) has posted an interesting article on the near future. In it he does a very good job describing the problems with non-Austrian economic models. Here's an excerpt:
Any analysis of economic conditions must begin with everyone’s favorite subject—money. Unlike Keynesians and Monetarists, Austrian economists view money as a commodity; granted, one that serves a unique role as a society’s medium of exchange. This is important because it means that like all products, money has a price. For example, an apple costing one dollar means that the money price of the apple is $1. However, it also means that the apple price of $1 is one apple. Attempts to artificially control the amount of money in a society will cause distortions in money’s equilibrium price, resulting in either a glut or a shortage of money in relation to other products.
Even as great a thinker as Milton Friedman did not recognize that the only way to correctly determine the needed amount of money in a society was to allow the free market to work. Dr. Friedman would have never advocated that a computer determine how many shoes a market needed; yet he did advocate that the money supply should be calculated in just such a manner. By trying to centrally determine the amount of money that a society needs, Monetarists (who believe that prices should be kept stable through regulation of the money supply) not only fail to recognize that money, like all other commodities, has a price, but they also assume that whoever issues the money has perfect knowledge.
As F.A. Hayek observed, perfect knowledge—unerringly knowing everything about a market at all times--is impossible in all but extremely small societies. Because market conditions change instantly and continually, even the world’s fastest super-computer are unable to compute the needed supply of money. The beauty of the free market is that the price mechanism automatically adjusts to market conditions and thus is able to do what no central planner can—instantly and accurately communicate supply and demand signals to market participants.
On the other hand, Keynesian economists, who make up the bulk of modern economists, view money as a quantitative instrument that can be manipulated to control the economy. Keynesian economists see their management of the economy as walking a tightrope between inflation and unemployment. As the economy picks up steam due to monetary stimulus, unemployment disappears. But as the economy picks up, price inflation also increases. That’s why you hear the phrase “the economy is overheating and causing inflation.” However, it is not economic growth which causes price inflation (indeed, true growth would result in lower prices due to increased productivity) but the increasing supply of money.
Thus, the seeds for every economic bust are sown in the previous bust. In order to “stimulate the economy” the government engages in an easy money policy. However, the economic boom is only one of the results of monetary inflation.
Read the entire article here.
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