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Macroeconomics – Austrians Vs. Keynesians Is Ken's Third Book MACROECONOMICS Austrians vs. Keynesians CLICK FOR BRIEF TABLE OF CONTENTS Kenneth E. Long Austrian Economics Press Macroeconomics - Austrians vs. Keynesians Copyright © 2016 Kenneth E. Long ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced, transmitted, stored, or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, web distribution, information networks or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written consent from the publisher. Austrian Economics Press Austrianeconomicspress.us Cover graphic by Shutterstock Cover design by Bambang Suparman Ibrahim ISBN 10: 0996332707 (print) ISBN 13: 978-0-9963327-0-5 (print) ISBN 10: 0996332715 (ebook) ISBN 13: 978-0-9963327-1-2 (ebook) To my wife Kay and my son Peter who have both spent countless hours editing the manuscript, and to Steven Macon for his help and publishing expertise. I dedicate this book to the millennial generation. Freedom is not strong and enduring but weak and fragile. ACKNOWLEDGMENTS I would like to thank my wife, Kay, who has been supportive in my endeavor to write this book over the years. She has been my best critic, which I appreciate. To my son, Peter, with a degree in technical writing, who was a great asset with his editing skills. To my friend, Steven Macon, whose expertise and experience in editing and publishing has been most helpful. I would have never written this book without the support of so many people at New River Community College: to Dr. Jack Lewis and Dr. Pat Huber who have fostered an atmosphere of creativity and given moral support to chase after dreams; to Jose Melendez in Media Services who has made possible the videos of my lectures; to Pam Hanks who has helped me with Blackboard; Candy Mady for help with so many details; Linda Claussen in Distance Education for her online support; Margaret Bryner and Brian Bolling in Technology Services for their technical support; Mark Rowh was helpful with legal and publishing advice; Debbie Bond was most helpful with the intricacies of working with Word, Joyce Taylor for help with InDesign and Yvonne Maute with research; and to Lindsey Kamerer, an English professor at Radford University was very helpful in proofreading the manuscript. This book has its roots in a macroeconomics textbook I wrote for D. Van Nostrand published many years ago. The staff in the Word Processing Center retyped the whole book from the hard copy so that I could work with the soft version. So a great many kudos to Betty Gordon, Shirley Mann, and Letitia Fox who continue to spend hours helping me with the manuscript, and without whom I could have never completed this project. Without my students, I would have had no reason to write this book. There are too many to mention by name, but the feedback, both positive and negative have been invaluable. I have copied several comments from the Rate My Professor web site below. Even the negative feedback has been beneficial. In particular, I would like to thank Jaeo Han, who has been invaluable to me as an intern during the later stages of the book. Without his helpful comments, suggestions, and general input this book would be lacking. Also Tina Hosey and Jonathan Migan for their constructive inputs. Preface The Austrian School derives its name from its founders who were citizens of the Austrian Empire in the mid-1800s, including Carl Manger, Ludwig von Mises, and Friedrich Hayek. Austrian economists believe that the free market, not the federal government, can best allocate resources. Keynesians get their name from John Maynard Keynes (1883-1946), who had a book published in 1936 called The General Theory of Employment, Interest, and Money. Keynes made the argument that if we can manage demand, we can manage the economy. The principles of economics do not change and so Austrians and Keynesians speak the same language, but these two schools of thought differ on how to apply the principles to economic events. This book presents the principles of economics as a debate between two opposing economic philosophies. I highlight and discuss forty books; many of them have been on bestseller lists. I have found these books to be educational, enlightening, entertaining, thought provoking, and challenging. However, most of them are preaching to the choir. How many sophomores in college will read lofty books on economic thought? My hope is that students will gain an interest in economics and the world around them. If some students become active participants in our political and economic system, the book will have accomplished its purpose. Student engagement should be the ultimate goal for any textbook. If the younger generation does not engage themselves in the affairs of this country and the world, our democratic republic will suffer. One comment I receive repeatedly from students is that current events have come alive for them upon reading the book. There are student-learning materials at http://www.austrianeconomicspress.us. For each chapter there are PowerPoint slides and PowerPoint tutorials, and a list of internet videos corresponding to each chapter. The book also comes with a test bank of more than 2,400 true/false and multiple- choice questions. If you are a professor and you wish to preview the test bank, email Austrian Economics Press at [email protected] (please use your college email) and you will receive the test bank as a Respondus File. Respondus is a powerful tool for creating and managing exams that you can print to paper or published directly to Blackboard, ANGEL, Desire2Learn, Pearson eCollege, Canvas, Moodle, and other learning systems. Friedrich Hayek Friedrich Hayek (1899-1992) was an economist whose ideas greatly influenced the Austrian school of economics. He favored free market capitalism and opposed socialism. Having been born in Vienna Austria, Hayek witnessed the horrors of Adolph Hitler and his Master Plan. Hayek wrote two books, The Road to Serfdom, 1944, and The Fatal Conceit in 1988. In Fatal Conceit Hayek states, the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. Hayek makes the case against central planning in The Road to Serfdom. He recognized that planners often have a noble purpose, but in order for the plan to work, the plan needs the full cooperation of everyone. Each government intervention in the workings of a free society leads to problems that give rise to more interventions as politicians try to deal with messes they have caused. Artificially low interest rates ultimately lead to malinvestments and economic decline. Ultimately, these interventions lead to centralized authority. At this point, the road to serfdom is complete. Hayek worried that thinking of economics as a science might fuel what he called the pretense of knowledge – the idea that anyone could know enough to engineer society successfully. He believed that a powerful government would serve powerful interests. John Maynard Keynes John Maynard Keynes (1883-1946) was a British economist whose ideas have fundamentally affected the theory and practice of macroeconomics. Keynes wrote his core beliefs in his book The General Theory of Employment, Interest, and Money, published in 1936. His ideas propelled Keynesian economics. Keynes argued that aggregate demand (total demand) determined the overall level of economic activity, and that inadequate aggregate demand could lead to prolonged periods of high unemployment. According to Keynesian economics, government intervention is necessary to moderate the booms and busts of the business cycle. In The General Theory, he states the ideas of economists and political philosophers both when they are right and when they are wrong are more powerful than is commonly understood, indeed the world is ruled by little else. Practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist. BRIEF CONTENTS INTRODUCTION: MACROECONOMIC PRINCIPLES … page 1 CHAPTER 1: THE ECONOMIC PROBLEM … page 9 CHAPTER 2: CHOICES … page 23 CHAPTER 3: GROWTH … page 47 CHAPTER 4: DEMAND AND SUPPLY … page 75 CHAPTER 5: MONEY AND BANKING … page 93 CHAPTER 6: GOVERNMENT … page 123 CHAPTER 7: FISCAL POLICY … page 147 CHAPTER 8: INFLATION & DEFLATION … page 163 CHAPTER 9: UNEMPLOYMENT & STAGFLATION … page 185 CHAPTER 10: INTERNATIONAL TRADE … page 199 CHAPTER 11: BUSINESS CYCLES … page 217 CHAPTER 12: FINANCIAL CRISIS 2007-2008 … page 231 INDEX … page 255 LEARNING MATERIALS … page 260 ABOUT THE AUTHOR … page 323 QUOTATIONS … page 324 Table of Contents BRIEF CONTENTS ............................................................................................................9 INTRODUCTION: ..............................................................................................................1 MACROECONOMIC PRINCIPLES ..................................................................................1 ECONOMIC PRINCIPLES and KEY TERMS ............................................................. 3 Baltic Dry Index .............................................................................................................. 3 Gross Domestic Product (GDP) .................................................................................. 3 Price, Cost, Revenue, and Profit ................................................................................
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