Ludwig von Mises or John Maynard Keynes?

We are experiencing a fundamental debate about the economic policies the federal government should pursue. The title of this post summarizes the essential positions of the two main camps: do we follow the theories of Ludwig von Mises or the theories of John Maynard Keynes. These two theories are poles apart.

Ludwig von Mises wrote his seminal work "Theorie des Geldes und der Umlaufsmittel" ("The Theory of Money and Credit") in 1912. Unfortunately, it was not published in English until 1934.

Mises theorized that credit markets are essentially self-regulating. Left alone, supply and demand will determine both the amount of credit available and the interest rates charged for it. If, however, the government artificially expands the amount of credit (money) available or artificially lowers interest rates, borrowing increases to imprudent levels, spurring unsound investment. Eventually, the level of unsound spending and investment rises so high it causes the economic system to crash. Mises foresaw the economic collapse that led the Great Depression and took steps to avoid its effects. {See the excellent 'article by Mark Spitznagel at WSJ online).

Unfortunately for our country, our leaders in the 1930s (as well as today) have chosen to follow the teachings of John Maynard Keynes. He published "The General Theory of Employment, Interest and Money" in 1936. Keynes essentially argued that the government could and should spend its way out of economic slumps and depressions. His ideas are embodied in current programs such as the stimulus bills, cash for clunkers, and the bailout programs for everyone from financial behemoths to low-income home buyers. Vice president Biden has confidently asserted that the country can spend its way out of insolvency (there is a reason he is commonly called "slow Joe"). Our political leaders are even floating the idea of yet another "stimulus" bill.

A friend once sagely observed that most politicians know as much about economics as a horse knows about algebra. I'm still waiting for our solons to prove him wrong.

Nuphedrine