Economic Theory

John Maynard Keynes economic theories, which are so dominant in the present economic crisis, make some assumptions about government that are interesting to examine. In Keynes estimation, the business cycle is caused by the animal spirits of fear and greed and the cure for these fluctuation is for government to overspend when animal spirits turn toward fear (the bust) and for government to underspend during the boom. The bureaucrats of today hear the first advice and love it because it means that government will always go from growth to growth. They ignore the second advice because that would mean a shrinking of government during the boom. From their perspective, smaller government can never be good.

Austrian economic theories also make some assumptions about government: their intervention into the free market is the very cause of the business cycle and nothing they undertake will make things better. In times of economic crisis, the government should tax less, spend less and never prop up losers or inhibit the market from reallocating resources away from the failures and toward others more likely to succeed in satisfying the wants of consumers. Then without government intervention in the bust, there will be no unsustainable boom and the market will only swing due to natural factors such as innovations, weather, etc. not because of interventions by government.

In the simplest terms, which of these seems more likely to be true? And which one is the most self serving?

Economic theory has profound consequences, just look at the 100+ million dead because of the theories of Karl Marx. Today, the world is suffering the results of almost 100 years of the bad economic theory that government intervention is the cure for the business cycle.