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The Free Market Isn’t Stupid

President Obama continues to espouse liberal thought in all areas. Recently, he remarked, in regards to government cuts “These cuts are not smart. They are not fair. They will hurt our economy. They will add hundreds of thousands of Americans to the unemployment rolls.” This is the same Keynesian propaganda we have heard since his first election campaign. Yet Keynesian thought has failed time after time. Government cuts will not negatively affect our economy. Government is the problem, not the solution.

Before a detailed discussion may commence, we must define President Obama’s economic philosophy: Keynesian economics. The Keynesian school originated from the British economist John Maynard Keynes. Keynes based his economics heavily on mathematics and the idea that the government must regulate a bumbling free market. Employment is key to Keynesian thought, as well as viewing saving as “unnecessary.” Also vital to Keynesian thought is government spending. Keynes believed that governments should not try to balance their budgets, but tax and spend, adjusting the latter for the economy’s condition. Additionally, the government should intervene during depressions by instituting massive public spending projects. Keynes also believed massive wars and natural catastrophes are good, as they force more production, spending, and investment.

This very brief overview of Keynesian thought describes the Obama economic policy well. But if Keynes and Obama are wrong, then what is the solution? Let us answer this question by examining an economic philosophy of the free market and historical context.

Broadly, there exist many free market economic philosophies and thinkers. Some of the most well known thinkers are Milton Friedman, Adam Smith, Frederic Bastiat, and David Ricardo. While all of these men advocated for the free market, there is another economic school that provides a comprehensive, valid, and completely free market philosophy: the Austrian School. Some of the Austrian School’s most famous thinkers include Ludwig von Mises, Carl Menger, F.A. Hayek, Henry Hazlitt, and several others.

Austrian thought, simply put, bases itself not off complex mathematical calculations and statistics, but on reason and human action. From this point, the Austrians build up, yet still maintaining simplicity. Just as the English philosopher John Locke started with a basic idea, eventually producing a political philosophy that inspired the Founding Fathers, the Austrians find themselves at a philosophy built upon completely free markets, property rights, and sane currency.

Now that we have very basic definitions established, we may review these economic philosophies in history’s light.

Currently, the great economic event we continually refer back to is the Great Depression.

Due to Progressivism’s far-reaching influence in nearly all levels of education, the “accepted” view of the Great Depression is that of the Keynesians. Less spending trigged the Depression, resulting in unemployment. Roosevelt’s solution, massive government spending and public works projects, eased the Great Depression, but he didn’t take the policies far enough. It was not until World War II, according to Keynesians, that the economy completely recovered, due to massive government spending and great employment (either in military service or moving the war effort forward). The United States needed tyrannical economic controls, behemoth government spending, and a military draft to bring the United States out of the Great Depression.

On the other hand, the Austrians argue that the government is to blame for the Great Depression. Austrians argue that their business cycle theory, amply ridiculed by most mainstream economists, explains the Depression: the Federal Reserve’s policy of expanding the money supply led to the credit market expanding. The widely available “easy credit” could not be sustained though, as its origination was artificial. The fake economic prosperity (i.e. the Roaring Twenties) had to “crash.” This was the Great Depression. Further government intrusion into the economy only made the Depression worse. In regards to World War II, the Austrians do not look to the high employment rates and booming production in American industries, but the more than 400,000 dead Americans, the 670,000 wounded, and government forcing its way further into lives and the economy.  The Austrians also point out that immediately following World War II, a recession occurred. (Only repealing some of FDR’s New Deal policies stopped the recession.)

While the reader ultimately judges these viewpoints for himself, it is worth noting the Keynesian view’s fundamental flaw. As noted, Keynesian thought relies heavily on mathematics and statistics, contrasting to Austrian thought’s reliance on reason and deduction. As Ludwig von Mises noted “The mathematical method must be rejected not only on account of its barrenness. It is an entirely vicious method, starting from false assumptions and leading to fallacious inferences. Its syllogisms are not only sterile; they divert the mind from the study of the real problems and distort the relations between the various phenomena.” Mathematically based economics treats the market and individuals as if they were numbers, with all the same predictability and probability. Although, this is not the case. Humans act out of their own free will, against the predictions of all the mathematicians and scientists. This is the fundamental flaw with mathematically based economics. Rather than realizing its own boundaries of knowledge, it presses on and badly attempts to “know” what it cannot.

With all this evidence, it should be clear that President Obama is wrong. His argument that government cuts will harm the economy is utterly flawed. His Keynesian outlook views the economic problem as one of market failures and the necessity of government intervention. He believes the free market possesses inherent flaws.

NewChristianLopacIconNo rational person will deny that the free market is not a perfect system, but it is the closest thing to perfection and the most just system. Government intervention in the market is much more than just a bad policy, but a use of force. The free market built the American economy, not government.

Frankly, the free market isn’t stupid. If it were, we would all have been Communists out of practicality a long time ago. Take a moment and ponder all the wondrous things brought forth by the free market—inventions, innovations, cheaper goods of better quality, information technology, and many other things. Now ponder what government has given the world—despotism, collapsed economies, central banking, war, and genocide. Or, in the words of Ludwig von Mises, “The worst evils which mankind ever had to endure were inflicted by bad governments.” The choice should be clear, it is not the government that possesses even a remote to our economic troubles, and, in fact, it is the root cause. Rather, we must look to the forces that have had the most power to influence humanity in the most just and humane way: a market completely free of the government.

Christian Lopac | Wabash College | @CLopac

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4 Responses

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  1. Ernest Lane
    Mar 03, 2013 - 07:30 PM

    “Government cuts will not negatively affect our economy.” Certainly not cuts of this magnitude. In terms of the overall economy, they are almost insignificant.

    Reply
  2. Ceecee
    Feb 27, 2013 - 05:22 AM

    “Austrian thought, simply put, bases itself not off complex mathematical calculations and statistics, but on reason and human action.”

    Wow Christian that sentence says it all. If there is NO mathematical proof for the Austrian School of economics, then there is no way to measure/prove its effectiveness.

    On the other hand, Keynesian Economics has been mathematically proven over and over again. Keynes stipulates that when lower income people in a society have more money, most or all that money will be spent on daily living expenses. Thus, driving the economy from the bottom up. The opposite is true when the wealthy upper classes have more money. Wealthy money tends to sit in off shore account in Switzerland or the Cayman Islands. Very little money from the upper classes is reinvested into the economy. The exact scenario in present day America. It suits the 1% and corporations just fine.

    You are very young and do not remember the REAL Ronald Reagan who raised the debt limit 18 times, tripled the national debt and raised taxes 11 times. Thirty years ago, it was called “Trickle-Down Economics”, and was the beginning of the great redistribution of wealth to the upper class. Today, with the economy in ruins the top 10% control 2/3 of American wealth.
    Please try to understand that you are comparing a PHILOSOPHY (Austrian School) to a SCIENCE (Keynesian Economics).
    Please try to work on your critical reasoning skills and not be so gullible.

    Reply
  3. Fred
    Feb 26, 2013 - 03:33 AM

    A free market will works correctly when there is perfect information and rational consumers. We have neither.

    You blame government as it being immoral, but that’s like leftists blaming capitalism for being immoral. These are simply tools that can be used morally or immorally by human beings.

    Reply
  4. Christopher Rushlau
    Feb 25, 2013 - 06:32 PM

    You are taking refuge in an abstraction, a pair of magic words: free market.
    Ask your Austrians what the relationship between the government and the marketplace is. For example, do they reject central banking, the government provision of currency? I would deduce that a return to private specie–every bank printing its own banknotes–would introduce a massive dose of friction into the economy as people hesitate to take payment in such play money, as it were. Equally, a return to precious-metal-based currency would introduce friction–pour sand into the gears of buying and selling. “Sir, I have here a nugget of pure gold, which I will give you for the gasoline I’ve just pumped into my car.”
    But I’m only seconding your point that current national economic policy itself takes refuge in abstractions: as if the US-engineered and seemingly perpetual Global War On Terror is not a huge drag on the world economy, all for the benefit of undisclosed, heh, heh, policy ends. CBS Sixty Minutes segment title from yesterday: “Killing bin Laden”. Are they ready to ask if it’s good policy to allow (who allows?) designated persons to be rounded up and shot like a dog?
    “I had to shoot my dog.” “Were it mad?” “It weren’t too pleased.”

    Reply

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