Battle Royale 3/2/09

Lots of talk lately has focused on the relative merits or demerits of President Obama’s stimulus plan. People have gone back and forth saying it is too much or not enough, that it will destroy America or save us. In essence this conversation comes down to pitched battle between two of the primary modes of economic thought of the 20th century, Neo-Keynesian economics and Monetary economics as favored by Milton Friedman and the Chicago school.

To oversimplify, Keynesian economics is a demand side philosophy and Monetary economics is a supply side philosophy. Another overly simple explanation of these somewhat opposing schools of thought is that Keynesian economics offers that in times of economic hardship demand must be created by the infusion of cash into the populace by government, creating the ability to purchase, thus creating demand where there was once none, due to lack of available capital in the marketplace. Monetary policy as roughly defined by Friedman advocates that government stay out of the market and that it can be kept solvent by a steady and measured influx of capital from a source outside government.

Another simplistic way of understanding these theories is that Keynesian economics favors government intervention in the market and Monetary policy favors a totally free market. Although Friedman himself was primarily a libertarian his economics have been most recently advanced by conservative republicans such as Reagan and both Bushes. Keynesian economics has been used by most Democrats since Franklin Roosevelt.

The dramatic difference of opinion on the role of government in our economy between these two schools of thought is at the crux of all of the discussions about our current financial crisis. It is like a championship bout is being fought between those who feel government must regulate the market and be active in it when it falters and those who think the market will adjust very well all by itself thank you.

In its extreme Keynesian economics can lead to a socialist state with the government controlling business and in its extreme Friedmanesque economics can lead to a fascist state where business controls the government. Neither extreme is particularly attractive for a democratic republic such as America. Both of these economic systems were designed for the nationalist political systems of the 20th century not a modern global economy. This is why both have struggled in the last 40 years.

Hopefully from the ashes of this battle both of these 20th century modes of economic thought will be adjusted and modified to the degree that a new, 21st century appreciation of economics will emerge that has neither the roller coaster up and down markets that are the hallmark of Keynesianism nor the bankrupting, failed, trickle down, unregulated fiasco that has resulted from our latest venture into Chicago style economics.

It has been said one should trust but verify. Perhaps it is time for a new economics that will do the same, a regulated but otherwise free market for a 21st century global economy. Where are the Keynes and Friedman of this century?

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