Question: After the financial crisis and the recession, which seemed to start with the housing market crash, everyone talks about the pros and cons of financial regulation. The Republicans don’t want regulation, and the Democrats say more regulation is needed.
What do you think in regards to the arguments being made?
Dustin Murphy, Oklahoma City
Answer: I feel much of the talk today is based on a false dichotomy. Let me explain.
Present-day conservatives like to link themselves with Friedrich Von Hayek and refer to themselves as followers of the “Austrian school” of economists. This, they believe, shows opposition to Paul Krugman and modern day liberal economists and opposition to the teachings of John Maynard Keynes.
Keynes is credited with founding the basis of macroeconomics by which governments use fiscal and monetary measures to minimize harsh effects of business cycles.
Both Von Hayek and Krugman received Nobel prizes in economics, in 1974 and 2009 respectively, while Keynes, having died before these prizes were first awarded in 1968, was awarded a title by the King of England for accomplishments during his lifetime. He was officially titled Lord (1st Baron) John Maynard Keynes. All three men are truly great economists.
Here’s what the pundits say: Keynes and Krugman want regulation and governmental control, while Von Hayek and the Austrian school want free markets rather than regulation. Krugman calls himself a liberal, and Von Hayek called himself a conservative. Both are great economists, so it’s evidently safe to choose one over the other. Right? This is the supposed dichotomy, but it is a false dichotomy.
The phenomenon Von Hayek didn’t like and didn’t want was central planning. Central planning is indeed very different from and detrimental to free-market capitalism.
Having lived a very long span of time, there was a point in his early life when he favored a mild form of socialism or central planning. This was after the First World War, when societies in Austria and Germany suffered dearly. After that point, he was fervently against any form of central planning, and he probably overstated his case in reaction to his earlier views.
Today, after the fall of the Soviet Union, there are few who seriously argue that central planning works, with the possible exceptions of Fidel Castro and Hugo Chavez.
What Krugman is worried about are the forces that can make for monopoly or oligopoly instead of competition, also different from and detrimental to free-market capitalism. To say that Krugman and Keynes want central planning, not a “level playing field” where businesses can thrive and compete of their own initiative, is a gross misstatement.
All three economists want free markets and are aware of the benefits of free markets, what Adam Smith called “the invisible hand” that made for countries’ industrialization.
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